Semtech's Inflection: 1.6T Ramp, Photonics Expansion, and a Pivot to High-Margin Core

Record data center revenue, an accelerating 1.6T ramp, and a decisive exit from cellular modules signal a structural shift in Semtech's profile.

SMTC · Earnings Call · 2026-08-25

The 1.6T Inflection

Semtech's fiscal Q2 2027 results, reported on August 25, 2026, are a genuine inflection point. Revenue reached $342 million, up 33% year-over-year, with adjusted EPS of $0.71, up 73% — more than twice the revenue growth. The engine is unmistakably the data center, where data center revenues hit a record $100 million, up 91% year-over-year, driven by the 800G portfolio and the early ramp of 1.6T CopperEdge and FiberEdge. As CEO Hong Hou put it:

We are at the center of one of the most significant infrastructure build-outs in history, and our portfolio plays an essential role.
Hong Hou, President and Chief Executive Officer · 2026-08-25

Indeed, the company is now designed into every module provider in its target markets, often on a sole-source basis. In the Q&A, Hong Hou added: “So Q3 will be the first quarter for us to really have a pretty significant revenue, as I said, between 1.6T FiberEdge and 1.6T CopperEdge, we will have -- they will be surpassing 50% of total data center revenue.” — Hong Hou, President and Chief Executive Officer · 2026-08-25 This is not just a gradual uptick — it's a step-function acceleration. The guidance for Q3 implies data center revenue up 45% sequentially and 160% year-over-year, with the 1.6T mix exceeding 50% of total data center sales. The backlog is unprecedentedly strong: “So the backlog for the remaining of this fiscal year, I would say, for our target is all booked. And for the next year, we probably over 70% there.” — Hong Hou, President and Chief Executive Officer · 2026-08-25 That visibility extends well into fiscal 2028, and the company is actively securing incremental capacity with foundry and OSAT partners, including acquiring clean room space and quoting prepayments.

A Structural Margin Shift

The most consequential strategic move is the announced divestiture of the cellular module business, which is now recorded as held for sale and expected to close in the fourth quarter. This is a deliberate portfolio optimization that reshapes the company's margin profile. CFO Mark Lin explained: “Excluding the cellular module business, Q2 adjusted gross margin was 59.7% or 520 basis points above consolidated gross margin, reflecting the magnitude of the structural shift.” — Mark Lin, Executive Vice President and Chief Financial Officer · 2026-08-25 This structural change is visible in the fundamentals: Gross margin had dipped to 46% in fiscal 2024 before recovering to 52% in fiscal 2026, and the Q3 guidance of 58.3% consolidated (63.9% ex-modules) shows a dramatic acceleration. The mix shift toward high-margin data center and LoRa products is the driver. As Mark noted, the 150 basis point sequential improvement in Q2 is mix-driven, and the 380 basis point jump in Q3 is again mix. The divestiture itself adds over 500 basis points of structural margin improvement. The company expects the transaction to be EPS neutral, and the balance sheet remains comfortable — net leverage at 1.1x. This gives Semtech the financial flexibility to invest in capacity and R&D without overlevering.

Photonics: Building a Solution Provider

The photonics expansion, anchored by the HieFo acquisition, is a multiyear growth driver. Semtech is broadening its portfolio from gain chips to high power CW lasers, semiconductor optical amplifiers, and soon photodiode arrays. The company sees content per transceiver growing from high single-digit dollars to high double-digit dollars as the industry transitions from 800G to 3.2T. Hong Hou explained the timing: “So to answer your question, really the significant content increase in one optical transceivers will be coincide with the 3.2T transceiver cut in.” — Hong Hou, President and Chief Executive Officer · 2026-08-25 This is a long-lead bet that positions Semtech to benefit from NPO, XPO, and CPO architectures, where its co-optimized TIA, driver, and photonics solutions are critical. The momentum is already visible in the company's keyword trajectory, with "high power CW laser" and "gain chip" trending sharply in the latest quarter. This is also a theme that resonates globally — the tape history shows AI data centers as a top advancer over 360 days, and photonics-related keywords like "high bandwidth memory" and "co-package optics" are surging. Semtech is riding that broader wave, and its decision to invest in 3.2T serves as a future-proofing move.

LoRa: A Third Growth Engine

While data center consumes the spotlight, LoRa continues to deliver incredible results. Net sales for LoRa-enabled products reached $58 million in Q2, up 58% year-over-year. The company expects another record in Q3, with about 15% sequential growth and 65% year-over-year growth. The three pillars — LoRaWAN for industrial, LoRa+ for smart home/security, and Amazon Sidewalk for mass-market consumer — are now all contributing. Amazon's Ring has launched LoRa-based sensors, and Sidewalk is expanding internationally. As Hong said: “We certainly matched the 20% ceiling with Q3... I do expect year-over-year growth is going to be better than 20% going forward and it's sustainable.” — Hong Hou, President and Chief Executive Officer · 2026-08-25 This diversification reduces reliance on any single end market and supports the gross margin story, as LoRa carries higher margins than the divested module business. The call highlights a company in transformation. The combination of a record backlog, capacity expansion, and a cleaner portfolio sets up a fiscal 2028 with potentially 50%+ growth in data center and structural gross margin of 64%. The stock has pulled back 18.5% from its June peak despite a 39% gain over the last 90 days, suggesting the market is still digesting the magnitude of this inflection. With the analyst day on October 15 approaching, investors will get a deeper look at the multiyear model. From a prior call, the evolution is clear: in May 2026, Hong spoke about the broadening engagement but with qualifications pending. Today, those engagements have converted to volume. The pace of change is what makes this quarter notable — the company has moved from "design wins" to "ramping" in a matter of months, and the financials are confirming it.