Executive Summary / Key Takeaways

• Semtech is executing a strategic pivot focused on high-growth markets like AI data centers and IoT, alongside disciplined portfolio optimization and balance sheet improvement, following the transformative Sierra Wireless acquisition.
• The company's differentiated analog and mixed-signal technologies, including CopperEdge, FiberEdge, Tri-Edge, PerSe, and LoRa, offer quantifiable advantages in power efficiency, latency, reach, and performance, creating a competitive moat against larger rivals.
• Recent financial results demonstrate positive momentum, with Q1 FY26 net sales increasing 21.8% year-over-year, driven by strength in Infrastructure (especially Data Center) and Industrial markets, and overall gross margin expanding to 52.3%.
• Management's Q2 FY26 outlook projects continued sequential and year-over-year growth in net sales, gross margin, operating margin, and EPS, underpinned by Data Center strength and growth in the IoT cellular business, despite expected moderation in LoRa.
• Significant debt reduction in FY25 has substantially improved the balance sheet, reducing interest expense and enhancing financial flexibility, positioning the company for focused investment in core growth engines and potential further portfolio rationalization.

Setting the Scene: A Focused Pivot in High-Performance Connectivity

Semtech Corporation, a company with roots tracing back to 1960, stands today as a provider of high-performance semiconductor, Internet of Things (IoT) systems, and cloud connectivity service solutions. Operating across three key segments – Signal Integrity (SIP), Analog Mixed Signal and Wireless (AMW), and IoT Systems and Connectivity (ISC) – Semtech serves the global infrastructure, high-end consumer, and industrial end markets. The strategic acquisition of Sierra Wireless, completed in early 2023, significantly expanded Semtech's reach into the IoT domain, adding hardware and managed services to its traditional semiconductor strengths.

This period post-acquisition has been marked by a deliberate strategic pivot under new leadership, focusing intensely on stabilizing the financial foundation, optimizing the portfolio, and accelerating growth in identified high-potential areas. The core strategy revolves around three pillars: portfolio optimization and simplification, strategic investment in R&D, and driving margin expansion. This approach aims to leverage Semtech's deep technical expertise and operational excellence to capitalize on favorable market trends, particularly the burgeoning demand for high-speed, low-power connectivity solutions in AI-driven data centers and the expanding universe of IoT applications.

Technological Edge: Powering Next-Generation Connectivity

Semtech's competitive position is significantly shaped by its differentiated analog and mixed-signal technologies, which offer tangible performance advantages in critical applications.

In the realm of high-speed data communications, particularly for AI data centers, Semtech's CopperEdge™ technology stands out. This portfolio of linear equalizer/redriver ICs enables Active Copper Cables (ACCs) that provide signal integrity and reach beyond traditional Direct Attached Copper (DAC) cables. Crucially, CopperEdge reduces power consumption by over 90% compared to DSP-based options and enables significantly longer reach. Demonstrations have shown the technology running 1.6T traffic over 3-meter cables and 800 gig over 5-meter cables connected to advanced switches, highlighting its high-performance capabilities. The company is actively engaged with hyperscalers, switch vendors, and cable manufacturers, delivering ACC cables for testing and qualification.

Complementing its copper solutions, Semtech's FiberEdge™ portfolio, including Transimpedance Amplifiers (TIAs) and laser drivers, is a cornerstone of its optical communications business. Semtech's TIAs are regarded as a gold standard in the industry, crucial for high-speed optical modules (400G, 800G, and 1.6T). The company is also actively developing solutions for Linear Pluggable Optics (LPO) and Linear Receive Optics (LRO), which represent opportunities for low-latency, low-power optical deployments. Initial TIA orders for LPO test and qualification have been received, with meaningful net sales contribution expected in the latter part of FY26.

The Tri-Edge™ PAM4 products, including CDRs integrated with PMDs, further strengthen Semtech's data center offering, contributing meaningfully to revenue and supporting active optical cables.

Beyond data centers, Semtech leverages its analog and sensing expertise in the high-end consumer and industrial markets. Its PerSe™ proximity sensing products offer meaningfully lower power, improved sensitivity, and best-in-class noise rejection. Utilizing novel packaging, PerSe enables smaller footprints, valued in smartphones for meeting stringent Specific Absorption Rate (SAR) standards and in wearables and smart glasses for advanced user interface and gesture control. Smart glasses are seen as a potential next-generation AI interface platform, presenting a growing field of opportunity for PerSe.

In the industrial sector, LoRa® Technology is a key differentiator, featuring industry-leading, longest-range radio frequency capabilities. This enables lower total cost of ownership and increased reliability for machine-to-machine and IoT applications. New developments like LoRa Gen2 (smaller footprint, lower power) and Gen3 (improved radio, simplified development) enhance its appeal. The introduction of LoRa Plus, a single-chip solution supporting multiple protocols alongside LoRa, further extends its applicability into areas like robotics, UAVs, safety, security, and smart buildings.

Semtech's TVS (Transient Voltage Suppressor) devices provide high-performance protection against voltage spikes. The increasing density and lower voltage tolerances of advanced silicon nodes amplify the need for robust off-chip protection, a trend where markets are moving toward Semtech's differentiated solutions like SurgeSwitch, which integrates system-level protection.

While competitors like Analog Devices (ADI), Texas Instruments (TXN), ON Semiconductor (ON), and Microchip Technology (MCHP) offer broad portfolios in analog and mixed-signal semiconductors, Semtech positions itself by focusing on performance-critical niches where its technology provides a quantifiable edge. For instance, while TXN and ADI may offer greater scale and cost efficiency in some areas (TXN with 15-20% lower cost per unit in power management), Semtech's solutions can provide superior performance metrics (e.g., CopperEdge's >90% power reduction vs. DSPs, PerSe's lower power/higher sensitivity, TVS's enhanced surge protection). Semtech's R&D focus aims to maintain this lead, although its overall R&D spend relative to revenue is higher than some larger peers, and its ROIC trails market leaders. The strategic intent is that these technological advantages translate into market share gains and support higher gross margins in its core segments.

Competitive Positioning and Market Dynamics

Semtech operates within a competitive landscape populated by large, diversified semiconductor companies and more specialized players. Its competitive standing is influenced by its technological differentiation, operational execution, and responsiveness to market shifts and geopolitical factors.

Against broad-line analog competitors like ADI and TXN, Semtech competes by offering highly specialized, high-performance solutions in specific niches. While ADI and TXN benefit from immense scale, broader customer bases, and superior financial metrics (e.g., ADI's ~65% gross margin vs. Semtech's 52.3% in Q1 FY26, TXN's ~70% gross margin), Semtech's focus on areas like high-speed data center connectivity (CopperEdge, FiberEdge) and differentiated IoT/sensing (LoRa, PerSe) allows it to capture specific design wins where performance is paramount.

In the IoT space, particularly cellular modules, Semtech's IoT Systems and Connectivity segment faces competition but is currently benefiting from significant tailwinds. The inclusion of a major China-based competitor on a sanction list and the exit of a Europe-based participant from the cellular IoT market have substantially increased Semtech's pipeline and bookings activity. This geopolitical dynamic is driving customers towards Western suppliers like Semtech, providing a tangible boost to this business, which saw a 31% year-over-year increase in IoT Hardware sales in Q1 FY26.

Semtech's operational excellence, highlighted by management, is another competitive factor. The ability to deliver high quality and on-time delivery is crucial in dynamic supply chain environments and contributes to customer supply chain resiliency, making Semtech a preferred partner in critical applications. This operational strength helps offset some of the scale advantages held by larger competitors.

While Semtech's overall gross margin (52.3% in Q1 FY26) is respectable for the semiconductor industry, it trails the higher-margin analog leaders. However, the significant year-over-year improvement in Q1 FY26 (from 48.3%) demonstrates progress towards its strategic goal of margin expansion, driven by favorable mix shifts towards higher-margin segments like Signal Integrity (65.5% gross margin in Q1 FY26) and Analog Mixed Signal and Wireless (62.3% gross margin). The lower gross margin in IoT Systems and Connectivity (34.4% in Q1 FY26), influenced by product mix and occasional inventory impacts, acts as a drag on the consolidated margin but is expected to see improved profitability going forward.

Financial Performance and Balance Sheet Transformation

Semtech's recent financial performance reflects a business inflecting towards growth and improving profitability, underpinned by significant balance sheet strengthening.

In the first quarter of fiscal year 2026, net sales reached $251.1 million, a robust 21.8% increase compared to $206.1 million in the first quarter of fiscal year 2025. This growth was broad-based across end markets and reportable segments:

• Infrastructure net sales grew 30% year-over-year to $72.8 million, fueled by a 143% surge in Data Center sales to a record $51.6 million, partially offset by a decline in telecommunications.
• High-End Consumer net sales increased 3% year-over-year to $35.4 million, driven by proximity sensing products.
• Industrial net sales rose 24% year-over-year to $142.8 million, led by an 81% increase in LoRa-enabled sales and a 31% increase in IoT Hardware sales.

Gross profit increased significantly to $131.3 million in Q1 FY26 from $99.6 million in Q1 FY25, resulting in a gross margin of 52.3%, up 400 basis points year-over-year. This expansion was primarily driven by higher volume and favorable product mix in the Signal Integrity and Analog Mixed Signal and Wireless segments.

Operating expenses, net, decreased slightly year-over-year to $95.3 million, reflecting lower SG&A and restructuring costs, partially offset by increased R&D investment ($47.5 million in Q1 FY26 vs $41.6 million in Q1 FY25) aimed at accelerating new product introductions and supporting growth opportunities. This resulted in a significant improvement in operating income, which rose to $36.0 million in Q1 FY26 from $3.1 million in Q1 FY25.

A major highlight is the dramatic reduction in interest expense, falling to $6.6 million in Q1 FY26 from $23.2 million in Q1 FY25. This substantial decrease is a direct result of the company's focused debt reduction efforts in fiscal year 2025, including the extinguishment of approximately $188.1 million of 2028 Notes for common stock and significant repayments on the Revolving Credit Facility and Term Loans. By the end of FY 2025, net debt was reduced by 68% from the end of FY 2024. This improved financial structure significantly lowers the cash interest burden and enhances financial flexibility for strategic investments.

Net income for Q1 FY26 was $19.3 million, or $0.22 per diluted share, a substantial improvement from a net loss of $23.2 million, or $0.36 per diluted share, in Q1 FY25. Adjusted diluted earnings per share were $0.38 in Q1 FY26, up from $0.06 a year ago.

Liquidity remains adequate, with $156.5 million in cash and cash equivalents as of April 27, 2025. The company also successfully amended its Revolving Credit Facility, increasing total borrowing capacity to $455.0 million, with $452.1 million available undrawn capacity as of the end of Q1 FY26. Operating cash flow was positive at $27.8 million in Q1 FY26, reflecting improved profitability and working capital management, although impacted by increased bonus payments and inventory spend. Future cash flows are expected to fund ongoing operations, strategic R&D investments, capital expenditures (which increased slightly in Q1 FY26 to update production capabilities), and further debt repayment.

Outlook and Forward Momentum

Semtech's management provided guidance for the second quarter of fiscal year 2026, projecting continued growth and operational improvement.

For Q2 FY26, net sales are expected to be $256 million, plus or minus $5 million. At the midpoint, this represents a sequential increase and a 19% increase year-over-year. This outlook is based on expected sequential growth in the Infrastructure end market, including continued growth in Data Center, and a slight sequential increase in the High-End Consumer market due to typical seasonality. The Industrial end market is expected to be flat to slightly down sequentially, with moderation in LoRa sales offsetting growth in the IoT cellular business.

Adjusted gross margin is guided at 53.0%, plus or minus 50 basis points, a 260 basis point improvement year-over-year at the midpoint, driven by expected product mix. Adjusted net operating expenses are projected to be $87.5 million, plus or minus $1 million, supporting an adjusted operating margin of 18.8% at the midpoint, a 460 basis point improvement year-over-year. Adjusted EBITDA is expected to be $56 million, plus or minus $3 million, resulting in an adjusted EBITDA margin of 21.9% at the midpoint. Adjusted diluted earnings per share are guided at $0.40, plus or minus $0.03.

Management's commentary provides further color on the trajectory:

• Data Center is expected to be a sustainable growth driver, benefiting from hyperscaler CapEx growth and Semtech's innovations. Meaningful design wins and volume ramps for CopperEdge ACCs from customers beyond the anchor are expected before the end of FY26. LPO deployments are also anticipated in the second half of FY26.
• The IoT cellular business is expected to see continued growth and improved profitability, supported by a stronger pipeline and bookings, partly due to competitive dynamics.
• LoRa is expected to maintain a comfortable quarterly run rate, with strong year-over-year growth anticipated for FY26, driven by new applications and ecosystem enablement, despite some near-term moderation.
• The company continues its portfolio rationalization review, aiming to divest non-core assets to further align with its strategic vision and margin profile, although macroeconomic uncertainty may impact timing.

Analysts following the company project continued margin expansion in the coming years, with non-GAAP operating margins potentially reaching 18.9% in FY26 and 20.2% in FY27. Revenue and earnings are also projected to see double-digit growth in FY26 and FY27.

Risks and Challenges

Despite the positive momentum and strategic focus, Semtech faces several risks and challenges that could impact its performance and outlook.

Macroeconomic uncertainty, including market volatility, inflationary pressures, elevated interest rates, and geopolitical tensions, continues to create uncertainty in end customer demand and can lead to elevated channel inventories. The cyclical nature of the semiconductor industry means demand can decrease rapidly.

The imposition of tariffs and other trade barriers, such as the additional U.S. tariffs on goods from numerous countries that began in Q1 FY26, could adversely affect the business, particularly if higher costs cannot be passed on to customers. Changes in export restrictions also limit the ability to sell to certain regions.

Supply chain concentration is a persistent risk. Semtech relies on a limited number of third-party subcontractors and suppliers, many located outside the U.S. (including China, Japan, Taiwan, and Vietnam). Disruptions to these sources could cause delays and materially adverse effects.

The company is involved in various legal proceedings, including intellectual property, contract, and product liability matters. The outcomes of these are inherently unpredictable and could potentially have a material adverse effect on financial condition and results of operations, although management currently believes any ultimate liability is not expected to be material. Specific ongoing matters include a complaint in Germany related to modules delivered before a business divestiture and putative class action and derivative complaints related to CopperEdge product disclosures. Environmental liabilities related to a former facility also remain, with an estimated range of probable loss remaining.

Finally, the success of the investment thesis hinges on the execution of the strategic priorities, including the successful development and ramp of new products like CopperEdge and LPO in the data center market, continued growth and profitability improvement in the IoT segment, and the ability to effectively rationalize the portfolio. Any delays or setbacks in these initiatives could impact the projected growth trajectory and financial performance.

Conclusion

Semtech Corporation is undergoing a significant transformation, leveraging its core analog and mixed-signal expertise to capitalize on high-growth opportunities in AI data centers and the expanding IoT landscape. The strategic pivot, initiated following the Sierra Wireless acquisition, is yielding tangible results, as evidenced by the strong revenue growth and margin expansion demonstrated in Q1 FY26 and projected for Q2 FY26.

The company's differentiated technologies, such as the power-efficient CopperEdge for AI connectivity, the high-performance FiberEdge optical solutions, and the versatile LoRa platform for IoT, provide a competitive moat in targeted niches. While competing with larger, more financially scaled players, Semtech aims to win through technological leadership, operational excellence, and focused investment in areas where its solutions offer distinct advantages.

The substantial debt reduction achieved in FY25 has significantly de-risked the balance sheet, freeing up cash flow for strategic R&D and potential portfolio adjustments. Although macroeconomic uncertainty and supply chain risks persist, and specific product ramps like CopperEdge at the anchor customer face temporary headwinds, the broader engagement pipeline and tailwinds in the IoT cellular business provide confidence in the company's ability to continue its growth trajectory. For investors, Semtech represents an opportunity to participate in the growth of critical connectivity markets, driven by technological innovation and a management team focused on improving profitability and shareholder value.