Quarter 1
Q4 2026 Earnings Call — March 16, 2026
Sean O'Glockman (TD Cowan): Congrats on the solid results and continuing to execute on your strategy. I wanted to ask a question on the hypo acquisition. I think you know the strategic rationale you laid out is pretty straightforward, but wondering if you could expand on the initial applications you're targeting. Sounds like mostly transceiver side, and then maybe more importantly, where are you for the indium phosphide-based products in the qualification or design cycles at some of your customers? And what should be our expectations for when some of that starts to fold into the model in a material way?
Management: Thank you, Sean, for the question. So the hypo initial product right now in production is a GaN chip using tunable lasers. Those are the high-end lasers to support a transmission over 80 kilometers, 40 kilometers for metro and data center interconnect applications. By leveraging about four decades of laser design experience, they have been the leading supplier for GaN chips for ITLA. This is a product already in volume production and demand is increasing, and right now it's capacity limited. So this product for 2027 probably will be contributing roughly about a high teen level of revenue. But, you know, we are adding capacity as we speak in the second week as a proud owner of this asset. We have also demonstrated, we'll showcase tomorrow at the OFC, the intensity modulated direct drive lasers are CW lasers used in optical transceivers. This laser is really well designed to support high conversion efficiency. For example, wall plug efficiency at a room temperature of 42 percent. That is much higher than a typical about 25 percent. Then our temperature performance is outstanding, and the far-field beam profile is outstanding.
So that makes it much easier to couple into single-mode fiber our silicon photonics waveguide. And we do not have enough capacity right now to support the industry demand. After the announcement, you can just imagine we got multiple customers reaching in and asking for samples. So we will be able to provide samples to the key customers to support the evaluation when we are building capacity to support the future yields. As for putting in the model, probably once we have a better understanding on the equipment lead time and the capacity in the future periods, we will provide more guidance on the revenue contribution from CW lasers. Right now, we're planning to intercept at a 3.2T transceiver; of course, it can support a 1.6T transceiver as well.
Sean O'Glockman (TD Cowan): If I could just ask a real quick follow-up maybe for Mark on that topic, you know, how should we be thinking about the CapEx line as you talk about those capacity expansions at Alhambra? And, you know, I guess maybe Hong alluded to the answer to this question in his previous comment about understanding equipment lead times, but, you know, how everybody in the indium phosphide industry seems to be ramping capacity. And, you know, are you guys, I guess, for lack of a better term, at the back of the line there?
Management: Yeah, so the CapEx intensity is moderate and, you know, they already have the key capabilities. Right now, we just need to selectively add in capacity in some areas. So they, I know the whole industry is ramping up and equipment and test equipment, fab equipment in high demand as well. But, you know, we will be very creative in combining with the new and used market and to look at the FAP and test equipment. The intensity, I would say, of the CapEx can be easily supported with, say, for example, one quarter of the free cash flow, as we have demonstrated in the past quarter. Yeah, Sean, and the RAP is over multiple quarters, but I think Semtech's world-class operations team is on it. We already had the planning during diligence. And the other good news is, you know, all of this CAPEX, I believe, qualifies for, you know, Section 48D investment tax credit, 35%. And there's some additional government grant programs, you know, that are available, especially, you know, to strengthen U.S. semiconductor manufacturing capacity. Thanks, guys.
Torres Vonberg (Stifel): Yes, thank you, Hong, Mark. Congrats on the results. So my first question is on CopperEdge. So as that business now starts to ramp in fiscal 27, can you give us any sense for, you know, how big that could be? You know, maybe tens of millions of dollars. And if you can't give us the size, perhaps you could at least give us the mix between actual ACC cables versus linear equalizers.
Management: So, Terry, thank you for the question. So, we are supporting the REMP. We're getting forecast, and we're getting the materials ready as we give the guidance in our prepared remarks towards the end of this fiscal year. Well, this fiscal quarter in April timeframe, we'll start shipping to the cable manufacturers who are our direct customers to support the rack level volume ramp in the middle of the year. So everything is on schedule. As for the mix between DAC and ACC, it's still, they are in the process of right now doing this rack level testing system validation. So we will be getting better idea probably by in a month or two on the support but we are getting the long range forecast so that we can get a wafer start in the fab and prepare the material readiness as I indicated that's a very key focus for our operations so at this point it's still too early to tell but as for linear equalizer on board there are multiple customers supporting our activities and I do believe that some of those based on the level of engagement, it will be getting qualified within the coming quarters.
So just on the Leader Equalizer, the ACC side, the MSA establishment with the 11 or 12 founding members are tasked and at work already start drafting the specifications. You know, this is still the early stage of the ACC and some customers experiencing the different, different customers experiencing different performance. It is very important to have this MSA and to draft the specification and educate the industry that what to expect with a certain level of that reach and gauge and, you know, and data rate. So with the common understanding of MSA, I do believe this technology is going to be proliferated much faster. So we have already seen some other hyperscalers lining up to getting their rack designed by using ACC.
Torres Vonberg (Stifel): That's very helpful. Thank you. And as my follow-up and maybe more of a clarification question, you talked about lower growing 20% longer term, but then you talked about a 35 to 45 million quarterly run rate. You just did 40. So what exactly is that 35, 45 range? I mean, are you expecting some volatility this year? Or yeah, if you could just clarify what you meant by that. Thank you.
Management: Yeah, thank you, Tori. So historically, we have been seeing, you know, overall trend of lower revenue has been increasing. But quarter to quarter is a little bit bumpy due to the project-based deployment of demand. That's why we give a range of plus minus $5 million. But you see that sliding scales continue to go up with the center point. I feel like I have never been this excited about our LoRa strategy. It's really with the dual band to increase the bandwidth to address edge AI applications with a LoRa Plus to really get multiple applications in one SKU with the software and hardware all supported by us. And with the Amazon, you know, the sidewalk and the mass market, so adding the value-added market, whether to add the mass market, really we got multiple growth drivers. So I think that's why they're giving us conviction that, you know, 20% growth rate is very doable. When we can help the ecosystem to adopt a LoRa Plus protocol faster, we expect the growth rate to accelerate.
Christopher Roland (Susquehanna): Hey, guys. Thank you for the question. I guess my first one is on the Indian Fossilized Laser Acquisition. I guess first a clarification. This is all going to be internally manufactured materials. Just wanted to clarify that. And secondly, if you could talk about maybe your go-to-market strategy here and maybe even some revenue synergies with some of your other parts. Are you going to kind of bundle this with FiberEdge? Are you going to perhaps go direct to hyperscalers? How are you going to approach this market?
Management: Yeah, thank you, Chris. That's very good questions. To answer your first question, yes, the FAB we acquired is vertically integrated. Namely, we do the epi growth of epi wafers. We process wafers. We test it internally. And we do use the ecosystem on backend packaging to increase the capacity. That part, you know, we are doing really well. This lasers, because of the amount involved that regrows process, so we do internally, that's how we are able to get the superior performance in conversion efficiency and over temperature performance. As for your second question, go-to-market strategy. You are absolutely right. We know that 100 gig per lane in transition to 200 gig per lane, they already put so much stress into the ecosystem. So we're really challenging the device designers with a performance margin. And when we evolve the data rate to 400 gigs per lane, they really not hold a lot of margin to give out. So the code development and code optimize is so key in order to get the best electronic component with the best auto electronic components. So now we own two sides of the equation. So we'll be able to mix and match to provide the best integrated solution.
And when we have that, we will provide the chipset with a reference design to our customer base. This way will help to accelerate the time to market for them. And in return, we make our components more sticky, right? So if you use this kind of electronic component, like a TIA, a laser driver, modulator driver, using our optical components, you will pretty much get a guarantee to work to deliver 400 gig performance. That's why we're saying, we anticipate the major cut-in point is 3.2T transceiver modules. It could be earlier than that.
Christopher Roland (Susquehanna): That's great. That's a fantastic strategy. One question I get from investors is around the eventuality of CPO, particularly for scale-up. Genshin here at GCC was talking a little bit about the coexistence of both copper and optical in the rack. But some pushback I get from investors is around the role of copper, the closer that optical moves to the ASIC. Obviously, you're expanding your market with lasers here into the CPO world. But perhaps you could also address that kind of pushback on copper, where you see copper playing a role not only in the next two years, but all the way through 2030, for example, even as you move CPO to the ASICs.
Management: Great. Thank you, Chris. I listened to Jensen's call as well. So basically, what I was trying to say over the last year, but he clarified it so well. So copper scale up. It's always going to be there. And CPO scale-up is only making more sense in the multi-rec systems. For example, he was talking about Alboron NVL576 across eight recs. That way, because you're using active copper cable, it's very hard to get eight recs all point-to-point interconnected. So you use the first opportunity the signal out of the XPU to convert into optical. Optical not only be able to interconnect within RECs, but it can also interconnect between RECs. The same thing for the Kyber platform. It was talking about NVL 1152. That's also an eight REC system on the NVL 144. And that the CPO scale up makes sense. So in general, I think the copper scale-up is going to be the mainstream, is going to be primarily used for within a rack. The CPO scale-up is going to be used in multiple racks. So don't put a terminal value on the copper yet. And industry also are formulating an MPO, Near Package Optics. It's a complement to CPO.
So this way, CPO is one company thing, right? But MPO can define a specification to have specific geometry, the IO pin out and keep out zone to leverage the entire ecosystem's innovation to make it more scalable, more affordable. So in a CPO, we may not have much content in there, except for lasers, but in MPO, we will be all over the place with the laser drivers and TIAs and lasers and even silicon photonics modulator, as I mentioned, that is a very natural expansion of our portfolio by the internal development.
Tristan Guerra (Robert W. Baird): Hi, good afternoon. You've talked about the rising interest from hyperscalers about LPOs. Could you talk about the recent ARISTA XPO announcement and what it does to the LPO ecosystem and, you know, any way to quantify, you know, what the ramp is going to look like medium term and when you expect a big inflection point in LPO revenue?
Management: Great. Thank you, Tristan. So XPO, Arista just released that MSA. We are a very active member of the MSA. XPO defined high density, low power, and provide high reliability MSA for front panel switch, for example, to keep the same relics, but they will be able to collapse the form factor from essentially four RU into one without giving out any capacity. So it basically removes the packaging overhead. Because liquid cooling is available, they can develop the cold plate so that get in between the optical transceivers and that is just great and really a that build upon the confidence on LPO and build upon the innovation from the entire ecosystem with multiple module manufacturers. MPO on the other hand is a little bit more involved because that's involved in the development of common specification on, say, geometry, keypods, the IOs, and the shoreline configurations. So essentially, MPO is, in a way, XPO on board. XPO is this high density package on the front panel of the box. In both configurations, we're going to be having a lot of content in there. Again, the lasers and the modulator drivers, the modulator itself, and TIAs. And so we welcome this type of MSA. It's really going into our direction.
Tristan Guerra (Robert W. Baird): OK, that's great, Carlo. And then for my follow up, you've mentioned in the past some ACC opportunities on board. Provide maybe a little bit more feedback on what that is, you know, what exactly is the use case for that and how meaningful that could get over time?
Management: Yeah, the Copper Edge Linear Equalizer onboard, our customers are defining five, six different use cases in order to utilize the Redrive capability to extend the link and improve the link budget. So it can be on the switch, can be on the merchant CPU board, can be on the ASIC board of hyperscalers. It can also be on the backplane, in an active backplane by our cable partners.
Robert (Needham & Company): Hi, this is Robert on for Quinn here. Congrats on the quarter. Just one on you've been doing active, you've been active in doing acquisitions and have expressed intent to increase R&D with some of your capital up into this point. But any updates on potential divestitures? Last we heard, I think, you know, ongoing and, you know, roughly in the third or fourth inning. So any update on that process would be great.
Management: Yeah, Robert, thanks for calling in. I'm not really good at sports analogies, but I think that we're making good progress. I'm optimistic and a good conclusion. At this point, I'd say that maybe incremental from last quarter, the interested parties are spending some dollars on external consultants, so financial due diligence and on legal costs. So we're at that stage. And, you know, when there's additional kind of skin in the game, I think, you know, that does point towards a successful conclusion with the cellular module divestiture in the near term.
Robert (Needham & Company): And just as a follow-up, you know, it sounds like there are many tailwinds coming across for LPO as well as copper. And I think, you know, last week we kind of heard them ramping kind of in a similar timeframe this year. Can you just refresh that for us as it sounds like ACC's could be ramping a little earlier now? And then which do you see as the larger revenue opportunity over kind of the coming 12 months?
Management: Yeah, Robert, so we gave the timeline ACC ramp. It's on time, on schedule. And then the 1.60 fiber edge product. And then beyond that, as I said, could be linear the ACC with other hyperscalers, linear equalizer on board, and the lasers, and 400 gig. We like them all, and at this point, it is too early to call which one is the bigger opportunity, but we like them all and are going to be contributing pretty significant ways.
Joe Moore (Morgan Stanley): Great. Thank you. You talked about 1.6T starting to grow in your business and other places. Can you talk about the line of sight that you have to 800 still growing? I assume it's still growing for now and you're layering in the higher speeds on top of it. You know, how long will that persist and what point does it start transitioning over more?
Management: That's right. So Joe, we did mention in the prepared remarks to 800 gig is a foundation. The growth is strong, demand is strong, and broad-based. So that's the given. That goes very strong, at least throughout the FY27. And as for the industry, rolling out new XPUs and then all the IOs goes to 200 gig. So they're going to be evolving into 1.60 and in a low-power 1.60 optics. We are actually very well positioned, even better than 800 gig.
Craig Ellis (B Reilly Secure): Yeah. Thanks for sneaking me in. And, guys, congratulations on both the execution and a really strategic-looking acquisition. Hong, I think near the end of your prepared remarks, commented that you thought data center year-on-year revenue this year could be up around 50%. One, just confirming that I heard that right, and two, can you help us understand what the biggest growth drivers are or rank the growth drivers that you see driving that degree of growth?
Management: Yeah, thank you, Craig. Yes, you heard it right. Year-over-year, we expect the data center revenue to grow 50%. So, the driver is ACC with a hyperscaler, 1.6T fiber edge, second half of the year, and then there might be even linear equalizer onboard contributing to the growth.
Craig Ellis (B Reilly Secure): That's helpful. Thank you. And then, Mark, congratulations on the strength and you too, Hong, on the strength in semis gross margin. And what we're seeing in signal integrity, it's really nice to see those mid-high 60s levels reattained. The comments on accretive second-half products, are we signaling that gross margin for the segment could start with a seven handle later this year or next year, or would you still expect to be in the 60s?
Management: The new products that we introduced do have accretive gross margins, so I'm very pleased with that. It's a great return on the R&D that we put into the products, and they do contribute to growing gross margin. But we still also have other products, so at 800 gig, right? So I'm not expecting it to be in the sevens, but firmly in the zip code.
Cody Ackrey (Benchmark Stonehouse): Thanks, guys, for taking my question. Maybe just following up on Craig's question, you didn't mention LPOs among the drivers of that 50% data center growth. Any reason for leaving that out? And maybe can you just talk about the breadth of expansion of your engagements with ACC and LPOs over the last few months and how you expect those to progress over the course of the year?
Management: Thank you, Cody. So, yes, the LPO continued to grow, and as we said, the Q4, we delivered just as we gave the guidance, mid-single digit, and signal the first ramp. And it continued to ramp on the LPO, you know, but we got in the fiber edge product category, so we included in there. The LPO adoption is proliferating, and that's also built the confidence for this XPO and MPO strategy. Then ACC is also getting more and more accepted by the industry. I mentioned that the hyperscalers, one hyperscaler started ramping mid-year, and then more hyperscalers are embracing this ACC as well. Linear equalizer with multiple customers the engagement has been going really strong so I do believe that we not only have drills drivers lined up for this year and have multiple drills drivers lined up from future periods beyond FY27.
Cody Ackrey (Benchmark Stonehouse): Great, thanks for that color. Mark, any thoughts on your opex trends for the year?
Management: Yeah, so you know, I'm pleased that we're able to have the flexibility to invest in the business. Our outlook for next quarter in OPEX growth is really R&D. So I believe we demonstrated strong returns on investment. And our investment in R&D certainly yields stronger returns than interest expense, for example. But we do remain disciplined in our R&D investments, focusing on our core data center portfolio on LoRa and Per Se. And the two recent acquisitions do have some incremental R&D, but these are in our core portfolios.
Scott Searle (Roth Capital Partners): Hey, guys. Thanks for sneaking me in under the wire. Just real quick on lower out, wondering if you could provide a little bit more color in the past. China was such a big percentage in the mix. I'm wondering how it was in the quarter and the pipeline of opportunities there. We continue to diversify away from the Chinese marketplace. And as part of that, you know, sidewalk is cropped up from time to time as being a large opportunity. It's been, I think, slow to date. I'm wondering if you could calibrate when we might start to see that contributing in a more meaningful fashion. And as a follow up, just on the protection and sensing side, I think you indicated that there was a large wind that kicks into the first quarter. I'm wondering if you could just clarify that and provide any additional color.
Management: Okay. Thank you. Laura, right now the growth is broad-based across multiple regions. China certainly is a good driver. And in Europe and in North America, the growth is equally strong. And it's all benefited from multiple growth drivers out there. So Sidewalk, you know, certainly it had a little bit of a false start several years ago, but at OFC, not OFC, CES in January, they had over 10 product demos all embedded with LoRa chips inside. So they're going to be start deployed in March in North America, had a clear plan to proliferating into other countries. So we'll see this time, but that can be a pretty significant opportunity for Semtech. So I would let Mark address the TVS question.
Management: So TVS, we're seeing growth above, let's say, a proxy of handset, handset volumes, unit volumes. So we have a number of good design wins in TVS. And also there's a little bit of a geopolitical tailwind that we believe is sustainable over a number of quarters. That's leading to our better than seasonal guide for Q1.
Management: Thank you. I would now like to hand the call back over to Mitch Haas for any closing remarks. That concludes today's call. Thanks to all of you for joining us today. We look forward to seeing you at various investor events over the coming weeks and at OFC starting tomorrow. Thank you.
Quarter 2
Q3 2026 Earnings Call — November 24, 2025
And
our first question comes from the line of Rick Schaefer with Oppenheimer and Company. Please proceed with your question. Thanks, and congrats, you guys. My first question, I guess, is really on CopperEdge. It sounds like it's ramping with your lead CSP this quarter. And I'm just really curious, I mean, that's breaking the ice. I mean, how does that set you up with other CSPs next year? You know, basically, does validation from this lead customer speed deployments or wins with other CSPs? And is there any sense that you have today, or maybe it's just too early to know, but any sense of how many ACC or Copper Edge customers you expect to ship to next year? Yeah. Hi, Rick. Thank you very much for your questions. So for the CopperEdge in the ACC to supporting our leading hyperscalers, they have the product designed into three programs and then anticipate the ramp to start in the mid of 2026. But we supply our CopperEdge ICs to cable manufacturers So they certainly need the product earlier than that. And we right now having all the things ready to go and based on the forecast they provided, so we need to make capacity available to support their very rapid ramp.
And in our Q4, our revenue, it's just a starting for that customer, but the substantial ramp is going to be throughout the year. fiscal year 2026. As for you mentioned about, yeah, this is an ice-breaking adoption, definitely we view this as a catalyst because the benefits of the ACC over the competing technology is very obvious, especially in the power savings. And so when we engage with the different hyperscalers, we sense that ACC is typically adapting the platform design. So certainly now we see the broad-based awareness of this advantage, and deployment by this hyperscaler certainly will provide a strong reference point for other hyperscalers to use in their future platform design. As for how many, we have been working with our cable partners and engaging pretty much with every hyperscalers out there. I do expect more design wins in the coming quarters. Thanks, Hong.
And maybe for my follow-up, you know, it's just a question I think we all get a lot, and you do too, I'm sure, is just sort of how do you approach sizing the ACC opportunity? I mean, is a good proxy sort of the roughly $100 million opportunity you know, that cable market or, you know, I guess just sort of a starting point, some way to kind of size that market. And as part of your answer, I'd be curious just to understand better where we clearly see the benefits in terms of latency and power of ACC, but where, like, what kind of workloads or what kind of designs, where does ACC win versus AEC? Like, where's some of the lowest hanging fruit, you know, for Syntec there? Yeah, so what we see, the ACC is positioned in a sweet spot between DAC, which has a signal limitation, signal integrity limitation for transmitting over a longer distance at a high speed. Then AEC, which certainly can transmit with a longer distance, but with a significantly higher power consumption. So certainly, if you look at it, the AEC plus DAC is a huge TAM. And ACC, as I said, is so uniquely positioned. We'll chip away a substantial portion of it as we start deploying the hyperscalers.
So over time, we'll have a better idea how do we quantify the opportunity in the future. Thanks a lot. Thank you. Thank you. And
our next question comes from the line of Sean O'Loughlin with TD Cameron and Company. Please proceed with your question. Hey, thanks, guys. Thanks for letting me ask a question, and congrats on the solid results here. You mentioned, Hong, you mentioned Q4 growth and data center. I think you used the word meaningful contribution from LPO in the quarter. Maybe you could just either talk about that, you know, deployment specifically, or if you can't get into the details on that deployment, but in general, how do you envision LTO coming to the market? Is it sort of like on the ACC side where it's very project-specific and therefore kind of concentrated and lumpy, or do you sort of envision it to fold into the mix over time like a CPU server chip of all would have been into the new generations? Yeah, Hesham, thank you for the question. So we see a strong sequential growth opportunity in Q4 for a data-centric business. As we mentioned, we anticipate approximately 10% over quarter growth. That's on top of 8% sequential growth from Q2 to Q3. And the majority of the growth is going to be on the fiber edge product. In LPO, we are gaining more hyperscalar design wins.
We anticipate a meaningful contribution for LPO for Q4. If I have to say meaningful, you know, mid-single-digit level. And ACC contribution on Q4 is still going to be very nominal. As I mentioned early on, that the hyperscaler ramp in volume on their racks for the interconnects is going to be starting in the mid of 2026. We'll probably be three to four months prior to that. getting the ramp going to supply to cable manufacturers to get the ACCs ready. Great. Thanks for that, Hong. And then I just had a quick question for Mark. On the gross margin side in Q4, you know, understood on the mix shift within IoT, I guess sort of two questions around that. Is this sort of a permanent mix shift that you're anticipating, or is this just sort of a temporary, you know, Laura was strong in Q3, going to dip a little bit in Q4, and so that'll balance out, you know, longer term. And then, well, I guess maybe this part is, I don't know if this is a soft question or a marked question, but one of the suppliers on the foundry side in your space talked about, you know, some significant capex that they were anticipating on the silicon photonics, but especially the silicon germanium side.
And just wondering if you anticipate any sort of headwinds on that side as, you know, as you mentioned, the entire market goes through a bit of a capacity constraint environment here. Yeah, thanks for your question, Sean. Let me try to address gross margin first and clarify there. On the positive side, semiconductor gross margins driven by data center and LoRa was 61.4% in Q3, up 140 basis points year-over-year, up 60 basis points quarter-over-quarter. SIP gross margin signal integrity products, which encompasses data center, the gross margin for Q3 was 65.1%, up 270 basis points quarter-over-quarter, 200 basis points year-over-year. And the reason I'm providing these statistics is what we've delineated as our core portfolio of data center, lower per se, those are our faster-growing markets. And those gross margins, hopefully you can see, are above the corporate gross margin averages. So as those businesses, we believe, will continue to ramp, we believe they'll be accretive to gross margins. On the... the IoT systems and connectivity side. We mentioned that we're going to have growth in cellular modules, where gross margins is less than a third of our semiconductor products.
And we also have normally lower sales from LoRa. In terms of where that's heading, we've talked about what's in our core portfolio and what is not in our core portfolio. And I think from what Hong mentioned, one of the top priorities is We're looking at portfolio rationalization there, partially to remove the margin disparity. On your question on Foundry, maybe I can answer that one. Yeah, Sean, you are right. The silicon germanium technology platform right now is widely used in making physical media devices, the TIAs and drivers, but also in silicon photonics. That is why My first priority over the next few months is to make capacity available. That foundry is our close partner. We have a longstanding relationship over the last decade and a half, and they have been providing excellent support to us. Another nuance related to the component availability is the co-planning process with our customers and with our customers' customers sometimes. And that is a process we have implemented a few quarters ago. It has been working extremely well. So even they share their visibility even in the business development stage.
And the way based on the understanding and based on our triangulation, we have the way first start in the FAB. And typically, the lead time is six months plus minus. But with the planning process, we gain the visibility. We can start earlier. And we have never really let our customers down with our key components. Great. Thanks, guys. Congrats again. Thank you. Thank you. And
our next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question. Yeah, hey, thank you, Hong. Hong, last call, I think I was giving you a little bit of a hot time on lack of sequential growth in the data center business, and I think suffice to say you've pitched that going forward. But I did have a question on that. My question is LPO seems to be a little bit earlier than ACC, and it seems to be coming on. You're excited about it. But almost everybody I know struggles with the scope and size of that market. So maybe if I can ask you again, or not again, but if I can ask you to just help us understand how big can LPO be as a business and maybe what is your positioning in the LPO business? And then as a follow-up on the ACC side, I wanted to ask you, for ACC, are you seeing applications that replace ACC, I'm sorry, EC, or just brand new applications? Yeah. Thank you, Harsh. So, first of all, on the data center growth, yes. So, we're seeing very strong momentum, and the booking and outlook and forecast is very strong throughout the 2026. And the LPO, we're pretty excited about the first meaningful ramp in our Q4.
And as I mentioned before, the LPO gave us an incremental opportunity to bring more content in the transceivers. So we benefited from a strong backdrop of the transceiver demand with the real-time solutions where we provide market-leading TIAs. By offering LPO, we have opportunities to offer drivers in addition to TIAs, so that will increase TAM by 150%. So we certainly welcome that transition, and definitely the rollout of LPO will cannibalize the DSP-based solutions, but will they do it any day with the increased TAM? ACC, on the other hand, is a net gain. So, right now with the air pocket we were experiencing from the early adoption in the RAC interconnects, the ramp with this hyperscalers is going to be giving us an acceleration of a data center revenue. The adoption dynamics for LPO and ACC is a little different. LPO tend to be gradual. because in their switch fabric, they can, as soon as they, as long as they have the confidence in the signal integrity on the host they plug into, they can use LPO. ACC, on the other hand, is more the platform-based.
When they design the new rack platform, and they will have the power consumption envelope And ACC provides 90% of power saving compared to AEC. That is a huge amount. When you look at the rack design right now, any rack, they probably have anywhere from 100 to 200 cables inside. So each connector, each cable have two connectors on each end that you can translate into significant power savings. So ACC is encroaching into the established AEC market, but also the AC market. And because the short connects are predominantly DAC-based, but with the ACC availability, especially for 200 gigabit per line, and ACC is expected to be mainstream for longer than meter reach in the future. This is very helpful as always. And my next question was the force sensing acquisition. I don't know much about it. Maybe you could tell us just really quickly, given this is an earnings call, just really quickly what the product does and how you intend to use it and how much revenue and kind of OPEX you had because OPEX jumped up quite a bit. Yeah. So the force sensing is a capability. You know, you need to touch it and to activate it.
We have the capacitive sensing that basically when you have your human body close to the sensors, you change the dielectric constant, you can activate the sensing. But with the force sensing, you need to apply the force and to activate it. It combines with capacitive sensing very nicely to offer broader capabilities for smart wearables and computing and automotive platforms. The asset we acquired from Quovo was originally as a company called Next Input. They were founded in 2012, and about four and a half years ago, it was acquired by Quovo. And the technology is very differentiating. They have over 175 patents issued and their applications. When we were looking at how to grow the core asset and how do we fill the gaps in capabilities, the force sensing was on our roadmap. And just optimistically, we found this asset available. So we got them acquired and got them nicely integrated. The acquisition happened slightly less than a month ago, but as I mentioned, the integration already been very successful. So we made the first shipment of the product with our fulfillment infrastructure last week.
As for the incremental R&D increase, It's still a lot better to buy this asset than otherwise internally investing. And so it's largely a technology tuck-in. The revenue contribution at this point is immaterial, but we do project a very healthy synergy and a very healthy contribution of this technology and asset to our future revenues. And Harsh, just to double-click on OpEx, while there is incremental OpEx from our sensing portfolio, including this force sensing product, we're also increasing R&D and data center. So the areas where we're investing, the core areas and these core assets isn't changing. And we've been able to deliver some pretty good returns in data center, LoRa, and sensing. with some nominal increases in OpEx. We expect it to be doing the same in Q4. Thank you so much. Thank you. And
our next question comes from the line of Christopher Rollin with Susquehanna International Group. Please proceed with your question. Hi. Thanks for the question, guys, and congrats on the results. I guess first a clarification and then a question. The first clarification is you talked about a customer integrating linear equalizers on PCB in the coming quarters. If you could talk a little bit about that. Is that a high volume win or more of a test case? And then just a clarification, you said that you are ramping LPO with several leading U.S. hyperscalers. Are those the same two that you were talking about last quarter, or are there additionals for LPO? Thank you. Yeah, thank you, Chris, for the questions. First, the customers are evaluating the linear equalizer in the PCBs or connectors. Those are for the high volume applications for the high speed traces and some customers are planning to do it in the PCBs and so some other customers are seeing the marginal loss of signal integrity from the host, from the ASIC to the port. So they are evaluating to use a linear equalizer to bridge the signal integrity. And it's pretty exciting.
So there's a pretty broad base and more than three, four customers, those type of applications. As for the LPOs, we stopped counting how many hyperscalers are planning to use it. I would say at this point, the conversation almost saying, you know, when I was talking to the teams and when I was engaging with our customers doing the optical modules at the CIOE in Shenzhen and ECOG in Copenhagen, and we were joking, it's more like, who are not planning of using LPO and why? So I would say this technology at this point It's not if, but more like a when and what platform they're going to be using it. And we're really excited about the Q4 mark, the starting point of the ramp, but we do expect acceleration throughout 2026. That's fantastic, Hong. And then secondly, I'll leave it up to you, a dealer's choice, either... pawn in China and when we should get confirmed tenders and what you're hearing there, or Laura, kind of your outlook there. It seems like this Gen 4 has some new use cases, which is pretty cool. You can answer either or both. Laura, one question on Laura. So, yeah, Gen 4 is gaining tremendous momentum And the multi-protocol is really very exciting.
So we plan to provide SDK and software stack to enable WISEN first and to enable a security application combined with LoRaWAN. Thank you. Very cool. Thank you. Thank you. And
our next question comes from the line of Tim Arcuri with UBS. Please proceed with your question. Thanks a lot. Hong, your tone on divestiture has definitely changed versus what it was three or so months ago. It was sort of put on hold a little bit, and now it sounds like you have another advisor and you have some folks who are interested. And so can you just, like, what changed and Was it you weren't getting the price you wanted and now these buyers are more interested in engaging at a price that you're happy with? Can you just walk through like the evolution of what sort of change there and maybe how close are you to, do you think, executing something? Thank you for the question, Tim. So the simple answer is nothing has changed. So this time around, you know, we definitely have more dedicated mind share from customers potential acquirers and because the geopolitical situation is a little bit more settled and also they're seeing some of the tailwinds playing into the reality and into the new business opportunities, the backlog, and also what projected Q4 sequential growth. So, you know, to the right acquirers, this really representing a pretty significant synergistic value to them.
And as for the timing, we really cannot predict, but rest assured, this is my top priority. Okay. And then just on the RAC, so it sounds like you're semi-promising Kyber in 2027. And I just want to make sure, do you have a lot of visibility on that, just given what happened this year with with the black ball racks, I just want to talk through how much confidence that you actually have on that, that you would be ramping on Kyber in 27, because it does sound like you're kind of semi-promising that. Thanks. Tim, I was shy away from the specific platform, but to go back to the fundamentals, so there's really not a whole lot of different ways to improve the signal integrity, especially when you get a high-speed signal launched into very thin metal trees. So you're going to lose the signal strength, you're going to distort the signal, and you need to condition it. And there's no better or more seamless way than getting linear equalizers integrated on the board. If they have other ways to do it, they would do it as well. So that's the fundamental belief we have, and that's the use cases we've seen with multiple customers who are interested in incorporating linear equalizer on PCBs.
Okay, thank you. Thank you. And
our next question comes from the line of Torrey Sponberg with Stifel. Please proceed with your question. Yes, thank you, Hong. Thank you, Mark. Hong, my first question is on ACC. You mentioned the three programs there with the lead customer ramping in 26. I know you can't talk about specifics, but could you at least confirm that all three programs are either cable or PCB board? And are they all based on the same speeds? And if so, what are the speeds? Hey, Tarek, thank you for the question. Our three programs are for 200 gigabit per second trees, and they are all in the cable forms, these three programs, and none of them are the chip on board. Yeah, thank you for confirming that. And as my follow-up, and sort of back to the Sierra Wireless gross margins, they've been under quite a bit of pressure. I mean, I understand the mix of modules versus services and so on and so forth, but You know, we're also hearing about, you know, component costs going up, whether it's memory or, you know, modem chips or anything like that. So how should we think about that gross margin, not just next quarter, but, you know, over the next few quarters? Yeah. So, Mark, you want to? Yeah.
So on the gross margin for the ISC business, so you mentioned memory. Maybe I'll just get to the point. In terms of, let's say, inflationary costs on the BOM, we're not experiencing that, especially in memory. We have a few choices there in terms of suppliers. So there, for ISE, it really is mixed. That's the primary driver of gross margins. As cellular modules, as a higher percentage, the gross margin goes down. And if we have more in terms of services or our router business, the gross margin of that business goes up. But at this point, as we're guiding next quarter, we're seeing really, really strong orders and expectations for customer delivery ramps into Q4. So, Mark, this is basically 5G modules that are ramping this quarter, and because they're lower margin than services and software, that's basically what's weighing on it. That's right, but it's both 4G and 5G. But, of course, 5G is definitely a tailwind, correct. Great. Thank you very much. Congrats. Thank you. Thank you. And
our next question comes from the line of Quinn Bolton with Neom and Company. Please proceed with your question. You guys, thanks for taking my question. I want to follow up on that last question. Just, Mark, maybe you can level set us. I think you said the semiconductor gross margin for the fourth quarter would be 60.5%. I don't know if you gave an ISC gross margin, but it looks like it's got to be pretty materially below the 36.6 that you did in the third quarter. So I'm just wondering if you could give us some range where you think that ISC gross margin comes out in the fourth quarter. At this point, I'll just say that the ISC gross margin will be lower, primarily due to the drivers we talked about with cellular modules. But again, on the positive side, semiconductor gross margins was 60.5%, plus or minus 50 basis points. So still quite healthy. And we expect that to continue to grow. Well, we're only guiding on one quarter, right? The drivers of gross margin between data center, LoRa, and Per Se, our sensing business now, is expected to be accreted to that gross margin. Got it. And then I'm not sure if it's for Mark or Hong.
It does sound like you may be getting closer to a potential divestiture based on your comments in the script. I think in the past you described a divestiture of non-core assets as being non-dilutive to EPS because you would take deal proceeds and pay down high interest rate term loan debt. Well, you've now done that interest expense annually is less than $3 million. So I guess I'm hoping you could comment now without the balance sheet would a divestiture of non-core assets be dilutive to EPS? At this point, we're looking at the lower gross margin portions of our business. So that would be something that, at this point, without naming all the specific assets that we're looking at, let's say it's nominal impact to immaterial impact. Okay. Thank you. Thank you. And
our final question comes from the line of Cody Acree with The Benchmark Company. Please proceed with your question. Cody Acree Yeah, thanks, guys, for taking my questions. Bong, if we can maybe go back to the ACC opportunity for a minute. Can you talk to some of the market's concerns around reliability of ACC in earlier testing? Is that contributing to any of the hyperscaler, what it looks like to be maybe incremental delays in the program ramp that I believe was expected to begin here in Q4, and now looks like it's more into next year. Cody, yeah, thanks for the question. I'm not aware of any reliability you were mentioning about the ACC. There's some chattering. This is more like a couple years ago by not really the players no longer active in the industry, and there's some false start. But there are no any issue we are aware of, and we have deployed you know, significant amount of ACC in the industry. So, I mean, we haven't heard anything bad. And then with the hyperscalers, they have gone through months of qualification and reliability testing system validation process. They're very careful and very technically capable. We haven't heard anything bad. any concern about that.
All right, great. Thanks for that clarification. Can we go back to your discussion of ensuring capacity and availability? Can you just talk about some of the strategies that you might be able to employ specifically on the wafer side that you mentioned earlier? Yeah. So, you know, when we talk about silicon photonics, silicon germanium semiconductor platform, to support silicon photonics and also our PMD physical media devices. And there are more than one FAB, one location. And we try to make more capacity available by engaging and qualifying manufacturing from other sites and other countries. So that not only unlocks some additional capacity but also make it more robust from the geopolitical point of view. So that's what I mean. That's the focus for the near term. Would you look at anything like dedicated capacity commitment or investment on your part? So the capacity, you know, certainly we have been increasing the CapEx investment in the back end, for example, testing. But for the foundry capacity, we are primarily working with our partners to qualify their foundry from different locations. All right. Great. Thank you, guys. Thank you. Thank you, Cody. Thank you.
And with that, there are no further questions
at this time.
I would like to turn the call back over to Mitch Hollis for closing remarks. That concludes today's call. Thanks to all of you for joining us today. We look forward to seeing you at various investor events