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.