Semtech Q2 FY2027 Earnings: Data Center Ramp Drives Record Revenue and a Sharper Margin Outlook

Semtech reported record fiscal second-quarter revenue of $342M, up 33% year over year, while adjusted EPS rose 73% to $0.71. The quarter was led by accelerating data center demand, particularly for 800-gig and emerging 1.6T connectivity products, while LoRa also reached a record revenue level.

The most consequential change was the outlook. Management guided fiscal third-quarter revenue to $410M at the midpoint, implying 54% year-over-year growth, with data center revenue expected to increase 45% sequentially. Semtech also expects a substantial step-up in gross and operating margins, aided by product mix and the planned divestiture of its lower-margin cellular module business.

As Reported on the Call

The Bigger Story

Semtech’s investment case is becoming increasingly tied to the scale and durability of its data center connectivity franchise. Data center revenue reached $100M in the second quarter and is projected by management to rise 45% sequentially in the third quarter.

The near-term ramp is being driven by products already in volume deployment, including 800-gig optical connectivity, 1.6T FiberEdge and CopperEdge solutions. But management is also investing to broaden its role in the optical stack through gain chips, high-power continuous-wave lasers, semiconductor optical amplifiers and, eventually, photodiode arrays.

That broader portfolio could increase Semtech’s content per optical transceiver over time. However, management indicated that the more meaningful content opportunity is tied to the eventual 3.2T transition rather than the current 1.6T cycle. It expects design activity for 3.2T to begin in roughly 12 months, with early deployments around 18 months from now and broader deployment potentially beginning in about two years.

The immediate execution issue is capacity. Management said its currently secured capacity should support near-term customer ramps, but may be insufficient for the second half of fiscal 2028 if bookings remain strong. The company is pursuing more front-end and back-end manufacturing capacity, including additional testers, more manufacturing partners and potential prepayments or capital commitments.

Revenue and Operating Performance

Infrastructure revenue was the largest growth contributor, increasing 69% year over year to $124M. The data center business accounted for $100M of that total, up 91% from a year earlier and 39% sequentially.

Management attributed the data center strength to continued 800-gig demand, volume deployment of 1.6T CopperEdge products and the start of the 1.6T FiberEdge ramp. It said FiberEdge TIA and driver solutions are designed into every module provider in its target markets, with several reportedly sole-sourced. Those are management statements rather than independently verified market-share figures, but they help explain the company’s confidence in continued optical connectivity growth.

The biggest upside versus Semtech’s earlier internal expectations appears to have come from faster qualification and demand for 1.6T FiberEdge products. Management said it had been conservative on the timing of that ramp because customer qualification schedules were uncertain. By the second-quarter call, it said backlog had built and customers were seeking product more quickly.

For the fiscal third quarter, Semtech expects data center revenue to rise 45% sequentially and 160% year over year. Management also said combined 1.6T FiberEdge and CopperEdge revenue should exceed 50% of total data center revenue in the third quarter. That marks a material shift in mix toward higher-bandwidth products, even as 800-gig demand remains strong.

Industrial revenue rose 25% year over year to $179M, supported by another record quarter for LoRa. LoRa revenue increased 58% year over year and 31% sequentially to $58M. Management expects another record in the third quarter, guiding for roughly 15% sequential growth and about 65% year-over-year growth.

LoRa’s growth is no longer framed solely around traditional industrial LoRaWAN deployments. Management identified three growth pillars: LoRaWAN for industrial and commercial applications, LoRa Plus for smart-home and security uses, and Amazon Sidewalk for consumer devices. LoRa Plus represented roughly 20% to 25% of LoRa revenue, according to management, while Sidewalk revenue remains nominal today and is expected to be only high single-digit millions this year.

High-end consumer revenue remained the weakest end market, declining 5% year over year to $39M despite modest sequential growth. Semtech cited resilient TVS circuit-protection demand and expanding sensing design wins, but the business has not yet returned to year-over-year growth.

Profitability and Margins

Semtech generated significant adjusted earnings leverage in the quarter. Adjusted EPS increased 73% year over year, more than twice the revenue growth rate, while adjusted operating margin reached 24.4% and adjusted EBITDA margin was 26.6%.

Adjusted gross margin increased 150 basis points sequentially to 54.5%. Management attributed the improvement largely to product mix, particularly stronger contributions from 1.6T FiberEdge and CopperEdge products and LoRa. Semiconductor products gross margin was 62.8%, up 210 basis points sequentially.

The larger margin change is expected to come from portfolio restructuring. Semtech has agreed to sell its cellular module business, which is now classified as held for sale. Excluding that business, second-quarter adjusted gross margin was 59.7%, 520 basis points above the consolidated result.

Management expects the divestiture to close in the fourth quarter of fiscal 2027 and to be neutral to non-GAAP EPS. Its third-quarter gross-margin outlook is 58.3% at the midpoint on a consolidated basis, or 63.9% excluding the cellular module business. The latter figure provides an initial indication of the gross-margin profile management expects from the continuing portfolio, although actual results will still depend heavily on data center mix, pricing and manufacturing costs.

Third-quarter operating expenses are expected to increase to $112M at the midpoint from $103M in the second quarter, driven partly by additional R&D spending for data center projects. Still, management expects revenue growth to outpace spending, guiding for adjusted operating margin of 31% and adjusted EBITDA margin of 32.8%.

Demand, Customers and Pricing

Management characterized data center demand as strong across copper, fiber and photonics products. The company cited record backlog and said remaining fiscal 2027 demand is effectively covered by booked orders. It also said it has visibility to more than 70% of its fiscal 2028 target, though it did not disclose the value, composition or cancellation terms of that backlog.

That backlog supports near-term visibility, but it also raises the importance of capacity expansion. Management said it could potentially secure enough added capacity to support between 50% and 100% more demand, though this was not presented as a formal forecast.

Pricing commentary was constructive. Management said it is not seeing meaningful erosion in 800-gig optical pricing and expects little near-term erosion on orders already in backlog. It also said that rising manufacturing costs are generally being passed through to customers. This combination supports the gross-margin outlook, but investors should watch whether supply conditions and pricing discipline persist as industry capacity expands.

Semtech is also positioning for next-generation networking architectures, including linear pluggable optics, near-packaged optics, co-packaged optics and externally pluggable optics. Management said it is engaged in roughly 10 to 15 programs related to NPO and related technologies. These opportunities are strategically relevant, but they remain design-in and qualification activities rather than current material revenue contributors.

What is Semtech’s guidance and outlook?

For fiscal Q3, Semtech expects:

• ·Revenue of $410M, plus or minus $5M.
• ·Adjusted EPS of $1.05, plus or minus $0.03.
• ·Adjusted gross margin of 58.3% at the midpoint.
• ·Adjusted operating margin of 31% at the midpoint.
• ·Adjusted EBITDA of $134M, plus or minus $4M.
• ·Adjusted EBITDA margin of 32.8% at the midpoint.

Management expects growth in all three end markets. Data center is expected to remain the primary driver, while consumer revenue should benefit from seasonal demand, TVS share gains and sensing contributions. Industrial growth is expected to be led by LoRa.

The company plans to provide a longer-term financial framework at its October 15 investor event. Investors will be looking for more detail on data center revenue composition, expected market shares, photonics revenue timing, capacity needs and the post-divestiture margin structure.

Balance Sheet, Cash Flow and Capital

Semtech ended the quarter with $204M in cash and cash equivalents, $503M of debt principal and a net leverage ratio of 1.1x. The company remained in a net interest income position during the quarter, according to management.

Cash generation improved with the earnings ramp. Operating cash flow was $69M, while free cash flow reached $61M. Capital expenditures were 2% of sales and included investments to expand fabrication capacity for gain chips and CW lasers.

Management expects CapEx to rise as a percentage of revenue as it adds photonics capacity, but generally remain below 5% of sales. That target could be exceeded in individual quarters depending on construction and equipment timing. The company also indicated it may use a mix of prepayments, direct CapEx and manufacturing-partner arrangements to secure additional capacity.

What Investors Should Watch

1. Data Center Growth Beyond the Q3 Ramp

Management expects 45% sequential data center growth in Q3. Investors should watch whether demand remains broad across 800-gig, 1.6T FiberEdge and CopperEdge products, rather than becoming concentrated in a single customer or product category.

2. Capacity Additions for Fiscal 2028

The company’s backlog and customer demand appear to exceed currently secured capacity for the later part of fiscal 2028. Progress in qualifying manufacturing partners, adding tester capacity and expanding photonics fabrication capacity will determine how much of that demand Semtech can convert into revenue.

3. Post-Divestiture Margin Delivery

The cellular module sale is expected to remove a significant drag on gross margin, with management pointing to a 63.9% Q3 gross-margin outlook excluding the business. Investors should assess whether that margin level proves sustainable after the transaction closes and whether data center mix continues to provide incremental upside.

4. LoRa Growth Durability

LoRa is becoming a larger contributor to industrial revenue and margins. The key question is whether growth can remain above management’s prior 20% benchmark as LoRa Plus and Amazon Sidewalk expand, especially since Sidewalk remains a small contributor today.

5. Photonics Commercialization

CW lasers and semiconductor optical amplifiers are expected to begin contributing revenue in the first half of fiscal 2028, while the larger 3.2T content opportunity appears further out. Customer qualification progress and early production ramps will show whether Semtech can translate its portfolio expansion into meaningful incremental revenue.

AlgovestIQ Takeaway

Semtech’s second quarter showed that the company’s data center strategy is moving from a promising growth narrative into a material financial driver. Revenue growth accelerated, adjusted EPS expanded more than twice as quickly as sales, free cash flow improved, and third-quarter guidance points to another substantial step-up in both revenue and margins.

The quality of growth also improved. Data center revenue rose 91% year over year, while LoRa delivered another record quarter and is expected to continue growing rapidly. The planned cellular module divestiture should further increase the weight of higher-margin semiconductor products in the portfolio.

However, the central question has shifted from whether Semtech can participate in the data center buildout to whether it can scale supply quickly enough without compromising returns. Management’s backlog commentary and fiscal 2028 visibility are constructive, but capacity constraints could limit upside if front-end and back-end expansion does not keep pace with customer demand.

Margin expectations are also strong, particularly after the module business is sold. Yet the outlook depends on sustained favorable mix, limited pricing erosion and continued ability to pass through cost increases. Those conditions appear supportive today, but they should not be treated as permanent.

The evidence that would strengthen the thesis is continued growth in 1.6T products, successful capacity expansion, sustained LoRa momentum and initial photonics revenue conversion. Evidence that would weaken it would include delays in capacity additions, a slower-than-expected 1.6T ramp, price pressure in optical connectivity products or a failure to translate photonics design activity into production revenue.