Semtech

I know everyone’s watching $NVIDIA(NVDA.US) earnings right now…

But did you know Landmark signed a 4 year CW agreement with US customer to ensure “sufficient supply”?

So now you have:

- $Lumentum(LITE.US) (capacity gone)

- $Coherent Corp.(COHR.US) (capacity gone)

- Landmark (capacity committed)

- $Applied Optoelectronics(AAOI.US) (capacity for transceivers)

- $Macom Tech(MTSI.US) (not online)

- $Semtech(SMTC.US) (limited)

I remember saying earlier this year CW lasers would be the next optical shift and heavily bottlenecked by Nvidia?

So fun watching this play out, with players signing LTAs already to 2030 (signaling less availability for other players).

Implications for $SIVE / Win Semi are very material as one of the few remaining CW merchant suppliers with capacity (+ CPO-grade lasers).

Let’s see how they execute.

All right back to $Semtech(SMTC.US) movie: "The bottleneck go Brrr":

My favorite quote was: "availability currently matters more than pricing".

In the current market for optical products.

- No near-term erosion is expected on booked optical orders, which signals they're passing cost increases through fine.

- I was actually curious most about Semtec's CW laser products after the HieFo takeover:

Semtech expects CW-laser revenue for transceivers to begin H1 FY28. Explicitly said capacity is limited.

They still seem materially further behind compared to the laser leaders, but they're making progress for 2027 ramp.

- TIA and driver solutions remain in exceptionally strong demand (confirmed from $Applied Optoelectronics(AAOI.US) earnings).

Continues to deepen engagement across all the leading hyperscalers.

"We are now designing to every module provider", expected 50%+ market share for 1.6T FiberEdge (TIA + driver) by years end.

Very strong statement to make about being majority market share.

- 1.6T FiberEdge qualifications finishing earlier than expected (good read through for your pluggable makers eg. AOI)

q: "quick thoughts on how long into 2028 does that backlog extend?"

a: The backlog for the remaining of this fiscal year, I would say for our target is all booked. For the next year, we probably over 70% there.

Management said current capacity may not be enough for fiscal 2028, especially in the second half (great demand visibility)

Q2 revenue:

- $341.9M vs. ~$329M expected

- adjusted EPS was $0.71 vs. $0.61

Q3 guidance was most exciting:

$410M revenue vs. ~$360M revenue

$1.05 EPS vs. $0.73 EPS.

yeah... just look at that beautiful revenue inflection Q/Q.

So gigantic beat, great read through on 1.6T ramp. I don't own Semtec, but these were amazing earnings.

Just some of my notes from $Semtech(SMTC.US) Q2 earnings:

TLDR: Like $Applied Optoelectronics(AAOI.US), it's all about Semtech expanding capacity - CEO said the capacity they've secured "may not be enough" for FY28...

1. Q2 upside is from 1.6T qualifying early

- Pretty shocking (in a good way) how compressed the qualification timelines have become.

- Hyperscalers and everyone upstream are pulling timelines forward so quickly rn.

- We saw with $Lumentum(LITE.US), $Coherent Corp.(COHR.US), $Applied Optoelectronics(AAOI.US) especially that demand is just bulldozing any qualification barriers. Now seeing the same with Semtech.

2. FiberEdge is quite underappreciated

- I agree w/ mgmt that people are "overindexing on CopperEdge" - the better business is probably TIA/driver.

- 800G TIA share has gone from ~18% two years ago to well over 50%, and they expect >50% share at 1.6T by January.

- Impressive...

- Industry 800G units: they entered the year on a ~50M forecast and are now hearing 80-90M vs. ~20M two years ago.

- Impressive again...

3. Content per transceiver

- goes from high single digits to $80-90 at 3.2T.

- Quite funny - one analyst assumed that "high double digit" content meant teens. CEO corrected him with $80-90 lol. That's ~10x!

- Photonics fab capacity goes 3-4x by year-end (they picked up a fully facilitated fab next to the existing one).

- I don't think the market has modelled any of this. Even at half the claimed content, DC revenue stops scaling w/ transceiver units + starts scaling w/ units times content.

- And every merchant InP line being tripled is another pointer that InP demand is way ahead of supply.

- Which is the same signal $Applied Optoelectronics(AAOI.US) sent by clearing its HQ building for InP wafer expansion.

4. More capacity needed (obviously)

- Secured capacity "may not be enough" especially 2H FY28.

- Semtech are negotiating prepayments + joint capex with front/back-end partners, and qualifying additional OSATs to spread geopolitical risk.

- Pricing: no erosion expected near term and none in the booked backlog. Cost increases are being passed through. Just what you wanna see :)

5. Gross margins are pretty insane

- 54.5% in Q2 -> 58.3% guided -> 63.9% excl. the cellular module business being divested (closes Q4).

- CFO framed ~64% as the post-close starting point.

- I actually think 64% is the margin floor, not the target. Pretty sure they know they can do more lol. No reason to send out such a high target to the market otherwise.

CEO also said that "we have the financial capability" to fund the FY28 capacity push":

Looks like that's the case based on quick napkin maths:

- FCF was $61M in Q2

- Q3 EBITDA guided to $134M

- I'd say roughly $300M+ annualized FCF exiting the yr

- Add $204M cash + $62M coming from Compal for the cellular module unit closing in Q4

So would be surprised to see any more dilution on top of what they already did a year ago.

Overall though - pretty good earnings.

Photonics notes after $Lumentum(LITE.US), $Coherent Corp.(COHR.US), and $Applied Optoelectronics(AAOI.US) earnings:

TLDR: Earnings were bullish for photonics. The entire sector is sold out and LTAs are removing cyclicality.

1. Everything is sold out

Every single CEO highlighted that demand is strong and growing, with current revenues/margins mainly gated by limited capacity.

- $Lumentum(LITE.US): “Lasers will remain effectively sold out for the foreseeable future despite our rapid capacity expansion.”

- $Coherent Corp.(COHR.US): “The demand is robust across almost every single product across data center and comms, and it is really just a matter of whether we can sell as fast as we can ramp production.”

- $Applied Optoelectronics(AAOI.US): Revenue “bounded almost entirely by our production capacity and key component availability”

Very nice and very expected. But good to have confirmations from the horse's mouth.

I also wanted to remind everyone that historically, optics has been a deflationary business mainly due to ASP erosion over time. Similar to memory.

However, everyone being sold out completely flips that with Lumentum saying that they’ve “been surprised at our ability to price up” on CW lasers, holding a premium on spec tightness because of better transceiver yields.

Filtering down onto margins, when ASPs go up, gross margin rebuilds organically without any product mix help at all.

For example, Lumentum crossing to over 50% non-GAAP GM is a pricing power story instead of one “artificially” inflated by selling more pricey products.

At a high level, that’s a good sign of further margin expansion further down the line.

2. LTAs

Lumentum has customer LTAs extending through to 2030 with minimum demand guarantees and set pricing. AAOI is similarly negotiating three year laser LTAs with 2-3 large customers.

TLDR: These LTAs are critical for the longer term durability of the optics sector.

Ultimately, customer-funded capacity is negative working capital expansion, which highlights that the optics buyers are the ones bidding up for scarcity.

The Lumentum and $AXT(AXTI.US) deal from a couple of weeks ago is a pretty clean example where $87.5M of Lumentum deposits applied as shipment credits, reserving substrates through to 2031.

We're now seeing this pattern is everywhere e.g. hyperscalers pre-funding supplier capex in exchange for allocation, transferring volume risk onto the buyer. This is the same dynamic at a higher level with $NVIDIA(NVDA.US)’s $500B financing announcement to support “independent compute financing platforms”.

So, the whole AI buildout is shifting capex risk onto customers and capital markets. In optics that means suppliers get to expand capacity with someone else's balance sheet and a contractual demand floor.

That’s the best terms any capital intensive company can get and, as we're seeing, acts as a huge incentive to ramp capacity as fast as possible.

3. 1.6T ramp

Lumentum: 1.6T is “ramping incredibly fast. In fact, we have seen the 1.6T ramp only pull in, be stronger, demand increase. That ramp is even faster than what we thought, say, three months ago.”

With ~80% YoY laser output feeding it, Lumentum guided data center growth “to exceed 80%” this quarter. They initiated 1.6T production as planned and the CEO stated that “we appear to be first to market in many instances, ahead of larger competitors” with a signal-integrity team “widely acknowledged as the best in a competitive field.”

AAOI is the fourth supplier qualified for 1.6T at a major hyperscaler, qualification finishing “within the next couple of weeks” and a >$200M order book which looks to be just the start with the $471M monthly transceiver revenue by mid-2027 maintained from last quarter.

At 800G the laser was the binding constraint. At 1.6T it's the 3nm DSPs and the 200G TIAs and drivers. AAOI's management specifically said that the bigger constraint now is DSP and TIA supply, not lasers, because they make their own lasers (“good news, they are making our laser. Otherwise, laser is the biggest bottleneck”).

Does this then make $MRV and $Broadcom(AVGO.US), plus the TIA/driver suppliers $Semtech(SMTC.US) and $Macom Tech(MTSI.US), the kingmakers of the 1.6T ramp??

I think that'd make sense because allocation at the DSP and analog front-end seems to be the new share battle given how constrained the laser makers are. And it then decides which module houses ramp on schedule and grow earnings fastest.

So in my opinion, if you want to know who ships 1.6T in volume in 2027, DSP and TIA allocation is the real signal/alpha.

Looking at AAOI specifically now:

- Q2 800G revenue was $12.8M.

- The guide is ~5x sequential in Q3, then more than $70M of 1.6T in Q4.

- Building to roughly $471M/month month by mid-2027 - of which management pegs $217M monthly from 800G and $164M from 1.6T.

- That’s a roughly 12 month path from a ~$36M monthly DC run rate to a $471M one.

- Requiring capacity to climb from ~200,000 units/month now to >650,000 by end of 2026 to >930,000 by end of 2027, every qualification to land on time, and DSP/TIA allocation to be there at each step.

Essentially, that’s several consecutive flawless quarters of capacity, qualification and third-party allocation with zero slip ups. Personally, I’d be modelling the mid-2027 exit meaningfully below $471 million/month and treat the target as the ceiling rather than the base case.

Whether you want to trust AAOI’s management is up to you, but so far so good.

And just touching on the CW/EML mix:

This is basically a margin event for the laser owners whichever way the pendulum swings.

Lumentum is closing the CW vs. EML margin gap by shrinking CW die, 200G EMLs are already over 25% of EML revenue heading to a majority by mid-2027, with over 50% EML unit growth targeted by the December 2026 quarter. The CEO expects SiPh viable at 1.6T but EMLs “come back in a meaningful way” at 3.2T.

Ultimately, in a constrained environment, wherever a laser can be sourced will be used to support the buildout.

While everything is sold out, customers take whichever laser they can get, so EML vs. SiPho is a margin-mix question for the supplier, not a demand question.

4. NPO = TAM expansion

Lumentum’s CEO framed near-packaged optics as pure additive TAM: “The NPO opportunity is completely additive for us, significantly increasing the optical TAM” and noted even “our largest CPO customer is looking at NPO for specific new use cases, further increasing the optical TAM at that account.”

I actually think “additive” TAM holds quite well here with NPO:

- NPO and CPO first displace copper scale-up links inside and across racks, not front-panel pluggables on scale-out.

- That means pluggable/scale-out demand and integrated-optics/scale-up demand stack rather than substitute, at least through 2028.

- The TAM claim stops being true only if scale-out itself ever moves onto the substrate which doesn’t seem to be the case for the next few years at least.

In my opinion, this is a rare case where the bullish management framing survives various mechanism checks.

This is why the content-per-XPU maths is the entire point, and it is why the laser makers sound indifferent to the specific form factor of CPO or NPO etc. Moving from a shared front-panel module to per-package light sources multiplies discrete laser count and optical power per accelerator.

That’s the mechanical reason Coherent can say NPO and CPO carry “comparable content” - in both, Coherent is selling the laser, the external laser module, the isolators, the polarization-maintaining fiber it makes in-house, and the fiber-attach.

On standards: optically these are converging on OCI/MSA-based interfaces at 200G/lane, but the form factors are proprietary per customer (Wupen Yuen). That cuts in the incumbents' favour, because it raises qualification lock-in per socket even as the optical layer standardizes.

Ultimately, the CW laser supply names and VCSEL optionality matter here. Coherent is pushing a 200G VCSEL for NPO-type applications, which widens the playing field. In terms of who loses - retimed pluggable-only franchises see their share of the optical $ shrink in relative terms as integrated optics adds a new dollar pool on top.

After looking into it a bit more over the past few months, I do believe that NPO wins the first wave because it trades power and cost for simplicity around time to market.

That, in the end, doesn’t matter to whoever owns the lasers because they’re selling comparable content into whichever one customers pick.

—

Just a few of my personal notes which I filtered down into some of the main points.

There’s other things to be aware of too like the ongoing InP chokepoint, memory bottleneck, scale-across at Lumentum, and OCS type stuff.

But don’t want this post to become longer than it already is.

GF Securities: Optical

> Strong Demand Projections: Total demand for 800G/1.6T is expected to reach 80 million units each in 2027, driven by ramping accelerator demand from Nvidia, Google, AWS, and other ASICs, as well as rising GPU/ASIC scale-out bandwidth and optical module ratios.

> CPO/NPO Adoption Timelines: CPO and NPO are being developed side-by-side in next-gen infrastructure, with CPO acting as the long-term design for lower power and latency, while NPO offers better short-term manufacturability and deployment flexibility starting around 2H27.

> Nvidia Architecture Shifts: Each Rubin GPU is equipped with two CX9 NIC chips (doubling scale-out bandwidth versus Blackwell), and Rubin Ultra is estimated to adopt four CX9 chips per GPU, shifting the 1.6T optical module ratio from 1:2.5 up to 1:5.

> Google's Scale-Up and Scale-Out Transition: Google is expected to fully transition to large-scale clusters in 2026 where the scale-up layer adopts optical interconnects, resulting in an overall TPU-to-optics ratio of approximately 1:4 (1.6T equivalent).

> Supply Chain and Component Value Impacts: NPO shifts signal conditioning to system designs, lifting the value of TIAs and laser drivers to tens of dollars per 3.2T optical engine, benefiting supply chain players like Marvell and SMTC.

$Applied Optoelectronics(AAOI.US) $Marvell Tech(MRVL.US) $Coherent Corp.(COHR.US) $Lumentum(LITE.US) $Alphabet(GOOGL.US) $NVIDIA(NVDA.US)

Mirae Asset Securities: AI Bottleneck Issue

Power Bottleneck

> The Moment for Analog Semiconductors: The value of the analog domain, where Moore's Law does not apply, is exploding, giving suppliers overwhelming pricing power. Major players like TI, NXP, and Infineon are proving this dominant supplier market by executing synchronized price hikes in 2026.

> The Physics of 12,500 Amperes and 800V DC: In ultra-high-density AI racks of 600kW to 1MW, sticking to traditional 48V power distribution causes the current to skyrocket to 12,500A, making operations impossible due to heat loss. Therefore, shifting the architecture to 800V to reduce the current to 750A and cut copper requirements by 45% is a physical inevitability.

> Vertical Power Delivery (VPD): To prevent loss and voltage fluctuations during the "last inch" of stepping down to the GPU core voltage (around 0.7V), VPD—essentially the "CPO of the power world"—is emerging, which places the power converter directly beneath the GPU die.

Signal & Photonics Bottleneck

> Distance-Based Redistribution of Copper and Optics: The simplistic narrative that "optics will completely wipe out copper" is incorrect. A distance-based redistribution is intensifying, where copper and analog handle short distances (the scale-up domain) and optics take over long distances (rack-to-rack connectivity).

> Semtech’s Analog Magic: In 200G/lane high-speed communication, Semtech's technology is garnering massive attention by completely eliminating DSPs (Digital Signal Processors)—which consume heavy power and cause latency—and correcting signals using only Analog Equalizers. This reduces power consumption by tenfold and slashes latency from nanoseconds (ns) to picoseconds (ps).

> The Real Bottleneck in Optical Tech is the 'Light Source': While Co-Packaged Optics (CPO) is the correct long-term direction, the realistic winners for the next 2 to 3 years are Near-Packaged Optics (NPO) and 1.6T pluggable modules. The true bottlenecks in optical communication lie below the finished optical module layer: InP (Indium Phosphide) substrates, Continuous Wave (CW) laser sources, Photonics-SOI wafers (monopolized by Soitec), and SiPho foundries.

> Network Reliability and 'Link Flap': The "Link Flap" phenomenon, where an optical link momentarily blinks, disrupts the synchronization (all-reduce) of the entire AI cluster and leaves GPUs idling. In massive clusters, solutions that guarantee reliability rather than just bandwidth (such as Credo's Zero-Flap) become the ultimate bottleneck determining economic viability.

$Tower Semicon(TSEM.US) $Coherent Corp.(COHR.US) $Lumentum(LITE.US) $Applied Optoelectronics(AAOI.US) $Marvell Tech(MRVL.US) $Lumentum(LITE.US) $Taiwan Semiconductor(TSM.US) $Intel(INTC.US) $GlobalFoundries(GFS.US) $Fabrinet(FN.US) $Semtech(SMTC.US) $Macom Tech(MTSI.US) $Amphenol(APH.US) $Credo Tech(CRDO.US)