Semtech (NASDAQ:SMTC) reported first-quarter financial results on Tuesday. The transcript from the company's first-quarter earnings call has been provided below.
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Summary
Amundi Smart Overnight Rtn UCITS ETF Acc reported record quarterly revenue of $291 million, reflecting a 6% sequential and 16% year-over-year increase, driven by strong performance in data centers and LORA.
The company is in the final stages of divesting its cellular module business as part of its portfolio optimization initiatives.
Amundi Smart Overnight Rtn UCITS ETF Acc anticipates a 35% sequential revenue growth in Q2 for its data center segment, supported by accelerating shipments of 800G and 1.6T components.
Management highlighted successful strategic engagements and design wins with major hyperscalers and module manufacturers, contributing to strong bookings and backlog.
The company plans to invest in R&D to drive growth and deepen solution differentiation, specifically targeting coherent light, CPO, LoRa, and sensors.
Full Transcript
OPERATOR
Welcome to Semtech Corporation's first quarter 2027 earnings conference call. At this time, all participants are in a listen only mode. Following our prepared remarks, there will be a question and answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mitch Hawes, Senior Vice President President of Investor Relations for Semtech. Please go ahead.
Mitch Hawes (Senior Vice President of Investor Relations)
Thank you and welcome to Semtech's first quarter 2027 financial results conference call. Participants on today's conference call are Hong Ho, President and Chief Executive Officer, and Mark Lin, Executive Vice President and Chief Financial Officer. Today, after the market close, we released our unaudited financial results for the first quarter ended April 26, 2026 which are posted along with an earnings call presentation to our investor relations website at investors.semtech.com Today's call will include various remarks about future expectations, plans and prospects which comprise forward looking statements. Please refer to today's press release and see slide 2 of the earnings presentation as well as the Risk Factors section of our most recent annual report on Form 10-K for a number of risk factors that could cause our actual results and events to differ materially from those anticipated or projected on today's call, you should consider these risk factors in conjunction with our forward looking statements. We will refer primarily to non Generally Accepted Accounting Principles (GAAP) financial measures during today's call and we will also be referring to results for first quarter of fiscal year 2027. Unless otherwise noted, please see today's press Release and slides 3 and 4 of the earnings presentation for important information regarding notes on our non Generally Accepted Accounting Principles (GAAP) financial presentation. The press release and earnings presentation also include reconciliations of our Generally Accepted Accounting Principles (GAAP) and non Generally Accepted Accounting Principles (GAAP) financial measures. With that, I will turn the call over to Hong.
Hong Ho (President and Chief Executive Officer)
Thank you, Mitch Good afternoon to all of you joining today. Semtech is off to an exceptional start in fiscal year 2027, delivering record quarterly revenue supported by very strong bookings and backlog. We drove strong sequential and year over year revenue and earnings growth, expanded our data center and LoRa Design WIN pipeline, all while advancing our R&D and strategic initiatives. We believe we have built a robust foundation to solidify and expand our presence in key markets. My strong conviction in Semtech's positioning is rooted in the transformation we have seen across Semtech employees, motivation to engage and partner across the ecosystem, and appreciation for the benefits of collaboration. The time I have invested has been energizing and I have appreciated opportunities to join my Semtech colleagues in meeting with hyperscalers, device designers, end customers, module manufacturers and our technical partners to understand their technology roadmap firsthand. Those conversations shaped our R&D priorities and gave us first insights into where the industry is heading and how Semtech can remain at the forefront. My team and I spent time with the key suppliers and distributors to round out our understanding of how Semtech can partner with our customers to win from design to Delivery looking at Q1 revenue was $291 million, up 6% sequentially and up 16% year over year, driven by continued outperformance in both Data center and Alora. Adjusted diluted earnings per share were 51 cents, up 34% year over year. In addition to delivering strong revenue and earnings growth, we laser focused on executing our portfolio optimization initiatives. We are pleased to report that divestiture process for our cellular module business is at its final stages. Discussions which are transition and integration in nature are progressing well. We remain confident this business is a compelling opportunity to for the right acquirer and we look forward to bringing this process and transaction to a successful close. Now let me move on to a discussion of our end markets for Q1 Infrastructure. Net sales were $98.8 million, up 14% sequentially, up 36% year over year, strongly supported by our growing data center business. Our net sales for Data center in Q1 were a record $71.6 million, up 14% sequentially and up 39% year over year, benefiting from strong demand across our broad portfolio, the result of sustainably increased customer engagement, portfolio alignment and supply assurance. The strength is anchored by our strong position in our 800 gig fiber edge portfolio. Demand for leading PIA solutions is exceptionally strong, growing across a wide range of transceiver programs. Based on our differentiated technology and ability to supply, both established and emerging module suppliers have qualified us on several new sockets, some on a sole source basis. We understand this module suppliers are winning shares in key mega data center deployments on 800 gig linear pluggable optics or LPO. Our fiber edge, linear TIA and driver solutions are deployed by several leading hyperscalers across both the US and in China, which contributed to sequential LPO revenue growth, a trend we expect to accelerate over time. We remain confident our foundation in 800 gig will continue to drive revenue growth throughout this year, further augmented by significant opportunities at a 1.6T shipments launching in Q2 and gaining momentum in the second half of the year. On 1.6T optical we generated significant design wins with the major optical module makers for their 1.6T transceivers incorporating the latest generation DSPs. This contributed to exceptionally strong bookings and backlog to support module ramps in the second half of the year. We're also seeing increased convection from hyperscalers around 1.6T linear receive optics or LRO and LPO as a preferred solution for a first layer scale out fabric due to the substantial power savings. Looking further ahead, we are participating in the development of the Multi-protocol Optoelectronic (MPO) or near package optics MSA and to see NPO as a meaningful content expansion opportunity for Semtech at 800 gig and 1.6T. Successes in LPO and LRO gave hyperscalers confidence in the next evolution of high density and low power optical solutions. We're also developing derivative components with the same core IP in different form factors to support several Multi-protocol Optoelectronic (MPO) projects for leading hyperscalers. We are actively participating in and support External Package Optics (XPO) MSA and the many External Package Optics (XPO) module designs incorporate our fiber Edge chips as they do in On-Silicon Optical Platform (OSOP) modules. We believe External Package Optics (XPO) provides a very compelling alternative to Co-packaged Optics (CPO) scale out by leveraging liquid cooled capabilities, proven technologies and components and establish the innovative optical module ecosystem. External Package Optics (XPO) can provide significant rack space savings along with improved serviceability and better reliability. On the copper side, we are very enthusiastic on copper edge deployment. Active Copper Cable (ACC) continues to gain meaningful traction. Customers evaluating Active Copper Cable (ACC) against incumbent solutions are seeing compelling advantages in link margin versus direct attached and power savings versus DSP based solutions consistent with our expectations in in Q1 we started shipping copper edge 1.6T ICs to our cable partners for deployment at a US hyperscaler in onboard integration applications including active backplane. Copper Edge linear equalizers are gaining momentum. Just as we were confident of Active Copper Cable (ACC)'s acceptance and ramp in the market, we have increased the confidence this engagement will convert into design wins and widespread market adoption. Based on our engagement across different sectors of the industry, we believe we are creating a multi year pipeline of copper edge opportunities, design wins and revenue. Looking forward, we are excited by the opportunity from the HIFO acquisition we completed in March. HIFO is reported in in our signal integrity product segment and its indium phosphide photonic products are reported in the data center end market. This product are a strategic building block in 1.6T and 3.2T optical modules and a key pillar in our strategy to support next generation data center requirements. We believe our GAIN chips has become the industry standard providing higher power and serving as reliable building blocks in tunable lasers for coherent modulation applications in Metro and data center interconnects. GAIN chip demand currently exceeded our supply but our capacity expansion plan is on schedule. We believe our continuous wave of CW laser design is uniquely differentiated to deliver higher conversion efficiency, superb far field beam profile and over temperature performance and narrower len width. These lasers have been sampled to and evaluated by several major module manufacturers for coherent light modules in scale across applications. Concurrently, we are optimizing our laser drivers and TIAs for coherent light applications. We plan to provide a comprehensive suite of photonic and electronic component solutions for this emerging high volume applications. In addition, we are also working with key customers to make dense wavelength division multiplexing of Dense Wavelength Division Multiplexing (DWDM) lasers optimized for emerging Co-packaged Optics (CPO) scale up applications based on the newly established Open Compute Interface MSA. This is exactly the kind of strategic investment we believe creates durable and compounded value. Not just a single product win but a platform capability that strengthens our position across a broad spectrum of optical architectures. Our customers are building to work. Semtech is uniquely positioned at this intersection with a portfolio that spans scale up, scale out and scale across, addressing the full hyperscale interconnect stack across both near term deployment and next generation architectures at 800Gig, 1.6 T3.2T and beyond. Finally, given the strength and the depth of our backlog, expanding design win momentum and the 1.6T fiber edge and copper edge inflection building into the second half, we are targeting 35% sequential revenue growth in Q2 for data center which would represent 85% growth over the same period last year. Based on the current order trend, we expect accelerating demand throughout fiscal year 2027 and beyond. Now moving to the high end consumer end market. Net sales for Q1 was $38.4 million, up 5% sequentially and up 8% year over year. Our TVS business continues to demonstrate impressive resilience and momentum with revenue growth outpacing underlying handset volumes. We continue winning shares and expanding content at premium brand handset manufacturers. Our differentiated technology is aligned with the right customers and the alignment is translating into consistent design win momentum that we expect to continue beyond handset. We are actively expanding the TVS franchise in into higher value applications. Our newest surge switch solution is the industry's first circuit protection device to deliver near constant clamping voltage for high voltage power delivery applications, addressing a meaningful protection gap as more demanding power standards extend into rugged mobile devices and high performance portable systems. These are environments that require consistent reliable protection across extreme temperature range and operating conditions and our solution is purpose built to meet that bar. We see this as a natural and incremental content expansion that broadens the TVS opportunity beyond our core handset market, we continue to expand our per se. Capacitive sensor design wins in specific absorption rate and smart variable applications. The addition of the force sensor business enriches our high end consumer portfolio, expand application verticals and pull through some cap and TVS sales with the same customer base. The synergies have played out as we planned for the high end consumer end market. We expect sequential revenue growth driven by improving seasonality layered on top of the share and content gains that are becoming a defining characteristic of this business. Moving to our industrial end market, Q1 industrial net sales were $153.9 million up 2% sequentially and up 8% year over year driven by another great quarter for LoRa. LoRa enabled net sales were $44.5 million up 12% quarter over quarter and up 14% year over year supported by continued expansion across several application verticals such as smart utilities, smart building, smart city and asset management. As edge AI transitions from concept to deployment reality, LoRa is emerging as a key enabler. Our fourth generation LoRa platform delivers dual band capability while dramatically expanding Data throughput to 2.6Mbps, a step change increase that unlocks a new AI application classes at the same time, LoRa maintains the best in class sensitivity, multi protocol flexibility and ultra low power consumption that defines a LoRa advantage. Preserving the extended reach and the long battery life our customers depend on, we are seeing LoRa gaining traction across a broadened set of use cases.
Hong Ho (President and Chief Executive Officer)
LoRa connected public safety sensors can now transmit high fidelity audio and AI verification rather than simple alert in healthcare. Fall detection systems can relay visual confirmation before dispatching responders in industrial environments. Predictive maintenance sensors can analyze vibration, thermal and acoustic profile with a level of detail that legacy low power sensors could not support. We have established three distinct and complementary pillars of low power connectivity platforms. LoRawan for industrial and commercial deployments, LoRa with multiple protocol flexibility for smart home and security market and Amazon Sidewalk for mass market consumer applications. Together these growth vectors give rise to accelerated growth in our LoRa business as we target LoRa revenue at an all time high with greater than 15% sequential quarterly revenue growth for Q2, our Internet of Things (IoT) systems and connectivity business recorded Q1 net sales of $88.3 million down 2% sequentially and up 2% year over year.
Hong Ho (President and Chief Executive Officer)
Our newly released AirLink RX400 and EX400 routers are generating strong industry reception. These are industry Leading low power 5G cellular system purpose built for mission critical applications and the feedback from customers has been consistently positive. I recently attended our annual AirLink Partner Summit alongside National Carriers Integration Partners and Value Added Resellers and the enthusiasm for both router performance and our upgraded AirLink management software was clear.
Hong Ho (President and Chief Executive Officer)
The close collaboration with our channel partners positioned us to scale successful use cases from regional to national deployment and accelerate this high margin business. We are off to a strong start and the momentum is building. Our data center business is firing on all cylinders. LORA is entering a new chapter of growth and the strategic decisions we have made in prioritizing key R&D efforts, enhancing supply assurance and portfolio optimization are all translating into tangible results and the financial flexibility to pursue strategic opportunities.
Hong Ho (President and Chief Executive Officer)
Our priority for fiscal 2027 are straightforward. First, accelerating growth by supporting customer ramps with the availability and operational excellence required to compete in this capacity constrained environment second, intensifying R& D investment to add new growth drivers and deepen our solution differentiation, specifically in component offerings for coherent light, CPO, LoRa and sensors and third, continuing to transform Semtech by strengthening our culture and completing the initial steps of portfolio optimization.
Hong Ho (President and Chief Executive Officer)
We are just getting started and the opportunities ahead have never been more compelling. With that, I will turn the call over to Mark for additional details on our financial results and our second quarter outlook.
Mark Lin (Executive Vice President and Chief Financial Officer)
Mark thank you Hong for Q1 we recorded our ninth consecutive quarter of net sales growth with record net sales of $291 million above the high end of our Outlook range. Net sales grew 16% year over year while adjusted diluted earnings per share of $0.51 increased 34% year over year. Net sales trends by end market, reportable segment and geographic region are included in the accompanying earnings presentation. Adjusted gross margin was 53% 20 basis points above the midpoint of our Outlook and Total Semiconductor Products gross margin was 60.7% 30 basis points above the midpoint of our outlook, both reflective of a favorable mix from our Data center
Mark Lin (Executive Vice President and Chief Financial Officer)
and LORA portfolio for our Signal integrity products segment Q1 gross margin was 62.7% compared to 67.4% in Q4. Q1 is the first quarter of operating our recently acquired Indium Phosphide facility. This facility is in ramp mode to meet very strong customer demand and I'm pleased with the integration Team's progress in meeting its operating and financial targets. We continue to expect gross margin contributions from our 1.6T data center portfolio to be accretive to both our Total Semiconductor Products and Signal Integrity Products.
Mark Lin (Executive Vice President and Chief Financial Officer)
Gross margin gross margin for IoT systems and connectivity was 35.8% up sequentially from Q4's 31.6%. Adjusted net operating expenses were $95.1 million, slightly favorable to the low end of our guidance range. Selective of timing on project related expenses demonstrating the operating leverage in our business. A number of metrics were favorable to the high end of our guidance range, including adjusted operating income of $59.3 million, adjusted operating margin of 20.4%, adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of $66.4 million and adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization
Mark Lin (Executive Vice President and Chief Financial Officer)
(EBITDA) margin of 22.8%. Reflective of capital structure changes, Semtech remained at a net interest income position in Q1. We recorded adjusted diluted earnings per share of $0.51 above the high end of our guidance range. Operating Cash flow for Q1 was $36.2 million sequentially, down 41% from $61.5 million and up 30% from $27.8 million a year ago. Free cash flow for Q1 was $28 million sequentially, down 53% from $59.1 million and up 7% from $26.2 million a year ago.
Mark Lin (Executive Vice President and Chief Financial Officer)
Q1 operating and free cash flow reflect fiscal year 2026 annual bonus payments. In addition, net acquisition consideration of $29.2 million is reflected in our Q1 ending cash and cash equivalents. Balance of $163.3 million. Principal amount of debt was $503 million, unchanged from last quarter. Now turning to our outlook for the second quarter of fiscal year 2027, we currently expect net sales of $328 million plus or minus $5 million, up 13% sequentially and up 27% year over year.
Mark Lin (Executive Vice President and Chief Financial Officer)
At the midpoint, with growth expected across each of our three segments. We expect net sales from our infrastructure end market to increase sequentially with projected sequential data center growth of 35% supported by accelerating shipments of 800g and 1.6g components. We expect net sales from our high end consumer end market to increase benefiting from improved seasonal trends, market share gain on our TVS products and contributions from our sensing portfolio. We expect net sales from our industrial end market to broadly grow with accelerating contributions from LoRa IoT systems and connectivity and industrial TVS. Based on expected product mix and net sales levels, we expect adjusted gross margin to be 54% plus or minus 50 basis points midpoint. This equates to an increase of 100 basis points sequentially and 80 basis points year over year. Our gross margin outlook for our total semiconductor products is expected to be 62.1% plus or minus 50 basis points at the midpoint this equates to an increase of 140 basis points sequentially and year over year, reflective of stronger data center and LORA mix.
Mark Lin (Executive Vice President and Chief Financial Officer)
Adjusted net operating expenses are expected to be $105.2 million plus or minus $2 million. Included in this outlook is increased R&D spend to accelerate time to market on key data center projects along with SGA that declines as a percentage of revenue. We have demonstrated strong returns on our R&D investment and believe we remain prudent on SGA spend. This results in adjusted operating margin at the midpoint of 21.9%, up 150 basis points sequentially and up 310 basis points year over year.
Mark Lin (Executive Vice President and Chief Financial Officer)
Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is expected to be $79.2 million plus or minus $2.3 million, resulting in adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin at the midpoint of 24.2%, up 140 basis points sequentially and up 230 basis points year over year. We expect adjusted interest and other expenses net to be approximately half a million dollars. We expect an adjusted normalized income tax rate of 17%, consistent with last quarter's outlook. These amounts are expected to result in adjusted diluted earnings per share of $0.61 plus or minus $0.02, up 20% sequentially and up 49% year over year at the midpoint, based on a weighted average share count of 97.7 million shares.
Mark Lin (Executive Vice President and Chief Financial Officer)
Thank you, Mark. We can now turn the call back over to the operator for the question and answer session.
OPERATOR
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two to remove yourself from the queue. For participants using speaker equipment, it may
Rick Scaffer (Equity Analyst)
be necessary to pick up the hand tip before pressing the star keys. One moment, please. While we poll for questions, our first question comes from the line of Rick Scaffer with Oppenheimer and Company. Please proceed with your question. Thanks, guys, for letting me ask a question. Congrats on another good quarter.
Hong Ho (President and Chief Executive Officer)
As long as I could. Maybe my first question. I didn't hear you mention it on the call and I'm sorry if I missed it, but where do we sit now with ACC, you know, MSA specs and. And when do you expect that we'll get those specs finalized? Because I'm really curious if you think interoperability is holding back the ACC ramp at all, and if you think ratification,. I mean, does that create Sort of that dam burst moment with some of the other CSPs. So that's my first question. I'm just curious what you think about that. Yeah, Rick, thank you. That's a good question. I did not mention in my prepared script, but that's a good point. So MSA, they announced right around the design count time, they're still working on finalizing the specification. You are right. When every industry participants, they are on the same page, it will help to accelerate the adoption of the acc. Currently they are working on the common denominators, as you can imagine from different cable manufacturers. There are some related to the cable design, there's some performance related to the manufacturing processes. They just wanted to segregate those different impacts and define a standard and specification that every cable manufacturer can go with and sign up for. So yeah, that can be a catalyst for more accelerated adoption of ACC adoption. Thanks Song.
Rick Scaffer (Equity Analyst)
And for my follow up, you know, just on a supply side, I mean you guys are clearly seeing a step function, you know, that step up in growth in 2Q.
Hong Ho (President and Chief Executive Officer)
And I heard you loud and clear talk about acceleration through the year on the top line. So my big question is, I mean do you see any curves on your ability to capture some of that upside that's coming through? You know, capture some, continue to capture share like you're doing. I mean and maybe if you could level set us on what, you know, what top line, you know, basically what top line currently your current capacity actually supports. Thanks. Yeah Rick, that's a great question. This is a time capacity is king. So we anticipated that we started working on the capacity and availability. You hear me like a broken record, talk about making it available over the past quarters and we started about 18 months ago. I am so happy to say that in this very supply constrained environment, we're doing quite well. We have the availability, we have the right product, we have the right customer engagement. We can support even the drop in orders. That's why our momentum is building so fast going forward, looking into the visibility, the booking and outlook opportunities. Clearly the capacity we have put in place is not going to be serving us well going forward. And we have already started effort lining up with our foundry and Outsourced Semiconductor Assembly and Test (OSAT) partners, adding capacity in testing. So we are building capacity further, double or triple the current capacity. And that's how our conviction is supporting our current planning process.
Rick Scaffer (Equity Analyst)
Thanks Feng.
OPERATOR
Thank you. Our next question comes from the line of Sean O. Laughlin with Cowan and company. Please proceed with your question.
Sean O. Laughlin (Equity Analyst)
Great, thanks. Gentlemen, good afternoon and thanks for letting me hop on and ask a question here. Congrats on obviously the really solid results and guidance.
Hong Ho (President and Chief Executive Officer)
Hong, one of the things that I perked up at during your prepared remarks was you mentioned the narrow line with CW lasers in the context of coherent light. But then you talked about Dense Wavelength Division Multiplexing (DWDM) and the Open Compute Interface MSA in the CPO scale up side and I thought that was interesting because I think that the CW and ultra high power lasers is kind of how we're going about CPO for scale up today. But maybe you're anticipating a shift in how we're going after that in the future and I was just wondering if you could expand on that and talk about sort of where you know, the HIFO (Hyperscale Infrastructure Foundation) business is investing their time and where they're, you know, is this a organic investment that's coming out of the asset that you acquired or is there still more to go on either the hiring front or the CAPEX front to make this a reality? Good Sean, thank you. That was very good question. Well, good questions.
Sean O. Laughlin (Equity Analyst)
First, the coherent light clearly is going to be a major application as data center right now consume a lot of power. You cannot build this mega data center in isolation in more a cluster of data centers. So scale across to be able to interconnect with high bandwidth the different data centers is very very important applications. I mentioned about my customer sensing trips and talked to 10 different leading module manufacturers. They all supporting our conviction and vision of the coherent light is going to be ramping up in the mid-2028 in production we through the acquisition of HIFO have the right product. Our Digital Front End (DFE) laser CW lasers has a narrow line width well below 300khz that is so perfect for coherent light applications. As I mentioned we have sampled to some key module manufacturers and getting great feedback. So we're in a qualification process for that building upon the acquired product from HIFO. As for CPO that clearly is going to be high density, low power high bandwidth transport solutions right for future scale out and scale up. As I mentioned in the past, just the current way of the cpo our fiber edge product is going to be. It's not going to be. It's not an opportunity for fiber edge product because they the customers will be using integrated solutions. So we have to be developing application to participate meaningfully in this huge emerging opportunities. This so happened that the HIFO acquisition, the lasers we buy about and also the gain chips and semiconductor optical amplifiers can really serve the part of the light sources for CPO scale up applications. So we're working internally we're also working with the partners to provide high power DWDM CPO laser source solutions. This is more for 2028 opportunities. So you see our pattern. We not only investing in the current generation, not only investing in the growth driver for the immediate next year but a year after that as well. So we got a very healthy pipeline of new products and broaden our portfolio serving the high bandwidth AI data center connectivity space. Awesome. Thanks for all that color on it's very clear wanted to ask Mitch, I mean guiding for I think more than $10 million sequentially in OPEX. Presumably that's you know not necessarily all going to operational necessities but maybe you could just talk about. You mentioned R and D spend and SG&A was coming down as a share of total sales but where are your focus points? Is it going to hiring? Is it going to. You know are there, are there maybe non capex type expenses, prepayments, anything like that?
Mitch Hawes (Senior Vice President of Investor Relations)
That'd be helpful. Thanks Sean. You know we expect to continue to invest in the business. We've said that that's kind of our number one use of capital for capital allocation and the vast majority of the incremental spend is going towards high conviction R and D programs largely in data center but also supporting Laura and it's not an sga so maybe just allow me to add some percentages to that color. Right. So R and D in Q1, the Q1 that we just closed, R&D was 17.6% of net sales. That's 20 basis points higher than a year ago and up 17% year over year. But when I compare that to SGA in this Q1 that we just closed SGA was 15.1% of sales. That's a decrease of 200 basis points. So an SG and A as a percentage of sales has been in a steady decline and we project this decline to continue in Q2. So our OpEx growth is really grounded in organic investment in our core products data center and Laura in terms of the composition of spending there's hiring and there's product spend as well but really I think the key is that we see some very good returns on this R and D investment. If I may double click on the 15% SG&A. Exactly. Sales and field application engineering are increasing sequentially so what gets squeezed getting more operational leverage is a DNA cost.
Sean O. Laughlin (Equity Analyst)
Thanks guys, really helpful and congrats again. Thank you.
OPERATOR
Thank you. Our next question comes from the line of Christopher Rowland with Susquehanna. Please proceed with your question.
Christopher Rowland (Equity Analyst)
Thanks guys. And I want to echo my congrats as well. I did want to double click on optical Perhaps a question for you Hong, if you could talk a little bit more about the contributors to growth there. In particular, how much of this is LPO? How much of this is a single module maker versus a broad 1.6T deployment? And any update on timing for CW and SIFO chips would be great as well. Great. Thank you Chris. Thank you for your questions. For Q1 the predominant data center revenue is 800G FRO and LPO. We do see a clear trend of sequential increase FROm a mid single digit reported in Q4. For LPO we're seeing sequential increase and the 800 gig is the main driver for the revenue for Q1 into Q2 we're going to be having the early the Q1 we also have the early ramp of the copper edge revenue to support the second half of significant ramp in the cable demand. So in Q2 we are going to be seeing the continued strength of 800 gig fiber edge for both FRO and LPO. We're going to be continuing to see the ramp of 1.6 t copper edge to support ACC for the second half and we're going to be for the first time seeing the fiber edge revenue to support 1.60 optical transceivers in the new DSP designs. As for the revenue source, it's very broad based. We as I mentioned have qualified with almost all module manufacturers established and emerging ones and we were able to serve some drop in demand even in Q1 because they were not in the forecast and they are very important strategically for us to go forward and we wanted to support their initial volume even within. Well within the lead time. Excellent. Yeah, sorry, go ahead. Huh. No, no, no. Hopefully that answers your questions for those. Yeah. Yep, that did. Maybe switching to the copper side. I think you answered a bunch on accs. I guess my only question there is maybe diversification beyond your main customer. How is that progressing? And then in your presentation you mentioned linear equalizers. I think on PCB about active backplane applications. If you can speak a little bit more there and the opportunity, that would be great.
Hong Ho (President and Chief Executive Officer)
Yeah, thank you. So on the Active Copper Cable (ACC) diversification we continue to having samples being evaluated by multiple hyperscalers and enterprise customers and that reception has been going well and as Rick early on asked, you know the Multi-Source Agreement (MSA) for Active Copper Cable (ACC) is going to help as well and we actually also see the exciting opportunities from multiple customers on the linear equalizer onboard. Those are for the real programs and we have the hyperscaler engagement, we have their manufacturing partner ODMs close engagement as well. So this really going well. We do expect as I said from linear equalizer onboard on the backplane and also Active Copper Cable (ACC) cables additional design wins in coming quarters. You know, early on people have some doubt of speculation on Copper is to the end of the life. We need to put a terminal value on it. Just not yet. It is going not only strong, it's very strong on higher data rate as well. Beyond 224Gig, we engaging with customers who support higher data rate as well. So we're very optimistic about Copper Edge product for its growth potential in the future.
Christopher Rowland (Equity Analyst)
Thanks Hong. Congrats again. Thank you. Thank you Chris.
OPERATOR
Thank you. Our next question comes from the line of Quinn Bolton with Needham and company. Please proceed with your question.
Quinn Bolton (Equity Analyst)
Hey guys, I'll also offer my congratulations on the nice results and outlook. I just wanted to follow up on Chris's question there on the onboard linear equalizer opportunity. You mentioned hyperscalers, but I was going to ask kind of from a signaling perspective, are you guys seeing demand for linear equalizers for both unidirectional serdes on those backplanes as well as bidirectional serdes?
Hong Ho (President and Chief Executive Officer)
Can you. Can you just talk about your ability to support both unidi and bidirectional serdes on those backplanes and then I've got a follow up. Yeah, thank you Quinn for that question. Yes, we did get request for Bi-Directional (BIDI) linear equalizer as well. So our current Copper Edge portfolio can only support unidirectional and whether our engineers have been put on the drawing board. We have a preliminary architecture formulated to be able to do Bi-Directional (BIDI) on one chip and to support the future more compact interconnect topology. Any idea when that might be ready? Would that be ready? Calendar 27th so once the process, once we define the product definition will go through the simulation stage. Clearly BIDI integrated in one package need to be very carefully balanced so that they don't have the crosstalk and introducing additional noise. But it's totally doable and we just looking at the different competing priorities and getting that defined. So we are in a state of engaging with the customers and trying to sync up with a model. And therefore after that we'll allocate resources and start doing the development. The good news is the key building blocks of ip we already have that in existence the Copper Edge product. We have three generations in going for different noise suppression and different frequency domain equalization schemes and we have rich building block IPs available to drag and drop and getting a Product put together pretty quickly. Thank you, Hong.
Quinn Bolton (Equity Analyst)
And then I guess either for Mark or Hong just you talked about expecting data center growth to accelerate. If I've got my numbers right, looks like with the 35% sequential growth in the July quarter, your data center business in 1H27 will be up about 62% versus 1H26. Would you care to give us some sense? Do you think the entire data center business could that grow 70, maybe 75% year on year in fiscal 27? I think last quarter you had expressed confidence in 50% year on year growth for data center.
Hong Ho (President and Chief Executive Officer)
Yeah, Quinn, so you're right. In last quarter that floor number certainly created some confusion. I will not let our growth potential or aspiration, I will not cap that for the year over year. As I said Q2 to Q1, we are very comfortable about sequential 35% quarter over quarter growth. And based on the visibility, the backlogs and the booking we have, we can comfortably say in that second half the growth rate is going to be accelerating because of the additional growth drivers in 1.6T copper etch and fiber etch, 1.6 T and HiFO optical components. So it's going to be an exciting year in FY27 and we'll be having the unprecedented year over year growth.
Quinn Bolton (Equity Analyst)
Excellent. Looking forward to it. Thank you.
OPERATOR
Thank you. Thank you. Our next question comes from the line of Cody Acree with the Benchmark Company. Please proceed with your question.
Cody Acree (Equity Analyst)
Hey guys, thanks for taking my questions and congrats on a very strong quarter outlook. Maybe Hong, can you maybe just talk about your Linear Pluggable Optics (LPO) and 1.6T optical expectations, whether that be through module partners or is that more Hyperscale driven? Yeah. So Cody, thank you. The 1.6 T the current design wins we have from multiple major module suppliers and serving different end markets. They're either Hyperscalers or the GPU company providing the system solutions. So the initial ramp is going to be fro fully retined optics and we do have the linearized drivers and TIAs provided to the module customers. They're in an evaluation to do LRO all Linear Pluggable Optics (LPO) at 1.6t but the initial volume ramp is going to be fro and we do have the right product in the pipeline to be evaluated by our module customers. And Hong, can you maybe help us reframe the total available addressable market for both HCCs and Linear Pluggable Optics (LPO)s as you exit this year and look into next year? Yeah, so Cody, I think you know, we will probably when we think the portfolio cleaned up we're going to be having a tech day or analyst day and at that time we'll be providing more comprehensive TAMS projection and for our broad product portfolio. So at this point we are just aggressively attacking the opportunities ahead of us. We will be having more quantitative information provided in the future. Excellent. Thank you guys. Thank you.
OPERATOR
Thank you. Our next question comes from the line of Tristan Jarrett with Baird. Please proceed with your question.
Tristan Jarrett (Equity Analyst)
Hi, good afternoon. Given the commentary about Broadcom CPO ramping in main volume not until 2029 and the potential for ACC to be at 800 gig per lane, how should we look at the duration of the double digit growth that you see in acc? Obviously the business is very strong now, but do you think that that business continues to grow three, four years from now and how well positioned you are from a technology standpoint? Particularly as we get new waves of switches that have stronger serdes.
Hong Ho (President and Chief Executive Officer)
Yeah, Tristan, thank you for the information for the question. So yeah, Broadcom clearly they're industry leader. They provide outstanding serializer/deserializer (SERDES) quality and with a good signaling integrity that has been the essential performance enabler for the linear read driver. And because if the signal come out not very good linear read driver cannot make it whole a lot better. So we are the pure beneficiary of the Broadcom good Serdes rather than a victim their 100g, 200g and going to 800 gig per lane in the future they can go for certain distance the so called bump to bump linked budget. The RE driver linear equalizer can only make it better to stretch the reach to improve the signal integrity compared to the cables or trace without it. So this is really complementary capabilities, not like their battery serializer/deserializer (SERDES) would not need a linear equalizer in a way as you know that the current ACC cable customer they are using Broadcom serializer/deserializer (SERDES) as well. And we have our linear equalizer in ACC cable to support the interconnects. And their Co-Packaged Optics (CPO) is primarily my understanding the current roadmap is support Co-Packaged Optics (CPO) scale out. They're the leading switch provider anyway without a Co-Packaged Optics (CPO) or with cpo. So motivation for them to do Co-Packaged Optics (CPO) could be a little bit different from the the other leader in the industry. That's for 800 gig per lane and that is two generations ahead. And in general as the data rate goes up and transmission distance is shortened and the rack on the other hand is going to be going bigger. So the topology will have to require longer length. So you can do Co-Packaged Optics (CPO) to have the optical scale up, but you always have some traces. It's just too overkill to use optical scale up. And by putting a reed driver in between, you may as well just extend your reeds well long enough to allow the copper scale up. So this is a complementary capability. I think it's going to be there for a long while.
Tristan Jarrett (Equity Analyst)
Okay, thank you, that's very useful. And then could you talk about your medium term views on Lora? Clearly it's rebounding. We're past the inventory accumulation that we saw a year and a half ago. You know, where could this business grow in the next few years? How does that improve the mix? And also any update on whether the deployments that you see this year and next year are primarily driven on the base station side or the actual sensor side. And I don't know if there's any numbers, you know, to back up
Hong Ho (President and Chief Executive Officer)
versus base station product on Forlora. Yeah. So yeah, there are several questions. Let me try to address a couple of them. First of all, the growth potential we see is really exciting. As we mentioned, the three things we did and increasing the bandwidth and increasing the LoRa capability by adding other Radio Frequency (RF) protocols to unlock new application verticals like a security, like a smart building and the mass market like Amazon Sidewalk, those are all bringing new growth drivers to LoRa. The second question really a good one. Tristan, you know this market well and we see if a year ago, Laura, growth has been primarily on the end nodes. So we are increasing the end node right now to what, 150 million endnotes and but started from last nine months, 12 months ago. And our integrators has been commenting, oh, they are adding new gateways. That means they have more sensor devices and they need to improve the coverage and capacity so that with the gateway increase and they will be just pulling in more capacity for end user endnote applications. So that's why we see this LoRa growth driven by the three pillars is going to be sustainable. One wildcard is the Edge AI application. So it's exciting opportunity and we're just starting. So we have been helping the market and generating a lot of collateral and making the market enablement effort to accelerate the growth on that. Thank you, Tristan. Great.
Tristan Jarrett (Equity Analyst)
Thank you very much.
OPERATOR
Thank you. Our next question comes from the line of Kyle Smith with Stifel. Please proceed with your question.
Kyle Smith (Equity Analyst)
Hey everyone, this is Kyle Smith on for Torres Fonberg at Stifel. I'll also echo my congratulations on the really strong print and guide. I think in your prepared remarks you mentioned that gain chip demand currently exceeds your supply. So a bit of a two parter one, it would be really helpful if you could kind of quantify the degree to which that demand exceeded the supply. And then secondly, I know you mentioned that your capacity expansion plan is well on track, but maybe when do you kind of expect your increase in capacity to intersect with the demand that you're seeing from the market?
Hong Ho (President and Chief Executive Officer)
Thank you, Kyle. The GAIN chip, as you know, HiFO and its predecessor Emcore has been a leading supplier of GAIN chip integrated into the tunable laser for Matro and coherent applications. We have a solid customer base and after the acquisition of HiFO by Semtech, we have a lot of inbound interest from the customers that HIFO has not been able to serve. So you aggregate those demand will probably outpace the capacity by about 3x also. So we clearly are adding capacity by adding more shift, by adding more manufacturing space, which primarily clean room, and by adding more process equipment. So we are doing very creative ways to expand the capacity. We expect by the end of this year we can get the capacity increase by about 3.4x and end of next year and it's going to be another 3.4x. So to serve the high end coherent market,
Kyle Smith (Equity Analyst)
that's really helpful. Color. Thank you. And I guess pivoting over to LPO and lro, I mean it's pretty clear that the market is growing and the opportunity just continues to expand. So I guess from your position today, based on the outlook kind of that you provided on the call, so what degree do you feel that that raised guide is coming from potential market share gains and then to what degree do you feel it's more so coming from just the market as a whole expanding meaningfully as we kind of see these deployments take shape.
Hong Ho (President and Chief Executive Officer)
Yeah, Kyle, I think you know the LPO lro, we see the growth is primarily driven by the customer customers shift from FRO to the LPO lro. The reason for that is that they evaluated their connectivity topology and to see where they can save power. And we do expect in a year or two time frame the linearized solution will account for 25% plus minus of the total transceiver mix.
Kyle Smith (Equity Analyst)
Thank you and congratulations again. Thank you,
OPERATOR
thank you. And our final question comes from the line of Craig Ellis with BYU Securities. Your line is now live.
Craig Ellis (Equity Analyst)
Yeah, thanks for sneaking me in. And guys, congratulations on the strong results. I wanted to start off just with a clarification. So clearly we're seeing much higher growth here than we were expecting three months ago. With the business seemingly tracking in the 70s range now versus a floor of 50% earlier the question is this where across TIAs, LPOs and ACC, are we seeing the greatest acceleration versus what we were expecting three months ago?
Hong Ho (President and Chief Executive Officer)
Yeah, Craig, that's a great question. We were on the road right after ofc. The dynamic has picked up pretty dramatically. The demand across the board, not on just one product across the board for fiber edge, car, upper edge, 800 gig, 1.6 t, LPO, LRO and lasers, they all have demonstrated such a strong demand. So it's broad based.
Craig Ellis (Equity Analyst)
That's very helpful, Hong. Thanks.
Hong Ho (President and Chief Executive Officer)
And then one of the things that's clear from your prepared remarks and here in the Q and A is just the significant visibility you have in the back half of the year. Can you characterize across the different product groups to what extent does that extend? Are you actually getting visibility into fiscal 28 or is it really at different points into the back half of this fiscal year? Thank you. Yes. Back half of this year into the first half of fiscal 28.
Craig Ellis (Equity Analyst)
Thanks guys. Thank you very much.
OPERATOR
Thank you. And we have reached the end of the question and answer session. Therefore, I'll now turn the call back over to Mitch Hawes for closing remarks.
Mitch Hawes (Senior Vice President of Investor Relations)
That concludes today's call. Thanks to all of you for joining us today and we look forward to seeing you at various investor events over the coming weeks. Good night.
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