Earnings Exceed Expectations Amid Margin Improvements
Semtech Corporation (NASDAQ: SMTC) delivered another strong quarter, surpassing both revenue and EPS forecasts. Non-GAAP profitability and margins improved, demonstrating solid operational momentum.
Q2 revenue reached $257.6 million, a 20% increase from last year and slightly above analyst estimates of $250 million. GAAP gross margins expanded to 52.1%, while non-GAAP margins climbed to 53.2%. Although a $42 million goodwill impairment pushed the GAAP operating loss to $16.2 million, adjusted operating margins remained healthy at 18.8%. EPS losses came in at -$0.31, better than the projected -$0.37 and a notable improvement from last year’s $2.61 loss.
Looking forward, Semtech expects roughly $266 million in Q3 revenue, with adjusted gross margins around 53% and operating margins near 19.6%. EPS is projected at $0.44, indicating management’s confidence in continued growth and efficiency improvements.
Data Center Business Emerges as Key Growth Driver
Semtech’s data center segment stole the spotlight this quarter, posting a staggering 92% year-over-year increase in net sales. The segment now accounts for about 36% of total revenue within the signal integrity division.
Unlike the company’s IoT-focused LoRa products, the data center business is directly linked to hyperscaler capital spending rather than cyclical trends. With cloud giants like AWS, Microsoft, Google, and Alibaba increasing investments in AI infrastructure, Semtech is well positioned to ride the AI spending wave.
The company’s Linear Pluggable Optics (LPO) solution is central to this growth. By removing the need for DSPs, LPO lowers both latency and power consumption while cutting deployment costs. This technology enables hyperscalers to scale to 800G and 1.6T interconnect speeds, critical for AI workloads. Design wins are already in place, and revenue contributions are expected to start in Q4 2026, with the potential to grow the segment from its current $50 million run rate into a multi-hundred-million-dollar business.
CopperEdge Expands Connectivity Options
Beyond optics, Semtech is advancing CopperEdge active copper cables (ACC), which target shorter-range interconnect applications. ACC extends reach beyond traditional passive copper cables, up to 5–7 meters, while maintaining high signal integrity and low power consumption, making it ideal for intra-rack data center connections.
Currently, the company has roughly 20 active customer engagements, including top hyperscalers, with product launches aligned with 100G and 200G lane speeds expected in 2026. Together with LPO, these solutions position Semtech to capture a meaningful share of hyperscaler spending across both optical and copper technologies.
Analysts Upbeat on Semtech’s Potential
Following the earnings announcement, sentiment around Semtech has improved. The stock, trading near $52, remains below the early-year highs of $65, indicating potential upside as AI-driven data center spending accelerates. Analysts highlight the company’s rapid data center growth, improved margins, and innovative product portfolio as reasons to upgrade the stock to a “buy.”
While GAAP results were impacted by higher operating expenses and the goodwill impairment, management continues to focus on growth, debt reduction, and smooth integration of acquisitions. Strong demand for AI infrastructure, coupled with a diversified product lineup, positions Semtech for continued momentum heading into 2026.