MACOM Technology Solutions Holdings Inc (MTSI) 2026 Q1 法說會逐字稿

Welcome to MACOM's first fiscal quarter 2026 conference call. This call is being recorded today, Thursday, February 5, 2026. (Operator Instructions)

I will now turn the call to Mr. Steve Ferranti, MACOM's Senior Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Olivia. Good morning, and welcome to our call to discuss MACOM's financial results for the first fiscal quarter of 2026.

I would like to remind everyone that our discussion today will contain forward-looking statements which are subject to certain risks and uncertainties as defined in the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that result in those differences, we refer you to MACOM's filings with the SEC.

Management's statements during this call will also include a discussion of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related Form 8-K, which was filed with the SEC today.

With that, I'll turn over the call to Steve Daly, President and CEO of MACOM.

Thank you, and good morning. I will begin today's call with a general company update. After that, Jack Kober, our Chief Financial Officer, will review our Q1 results for fiscal year 2026. When Jack is finished, I will provide revenue and earnings guidance for the second quarter of FY26, and then we will be happy to take some questions.

Revenue for the first quarter of fiscal 2026 was $271.6 million, and adjusted EPS was $1.02 per diluted share. Demand for our products is strong across our three end markets, and our backlog continues to build. Our financial performance improved across most key metrics in Q1.

At quarter end, we held approximately $768 million in cash and short-term investments on our balance sheet. Our Q1 book-to-bill ratio was 1.3:1, and orders booked and shipped within the quarter was 23% of total revenue. Our Q1 turns business was higher than recent quarters due to strong early quarter bookings. Our current backlog remains at record level.

Turning to other recent trends. Q1 revenue performance by end market was as expected, and all end markets grew sequentially. Industrial and Defense was $117.7 million, Data Center was $85.8 million, and telecom was $68.1 million.

Data Center was up approximately 8% sequentially, Telecom was up 3% sequentially, and IND was up 2% sequentially. Both IND and Data Center revenues were at record levels. As we review our full fiscal year forecast, we are gaining confidence that our Data Center revenue could achieve 35% to 40% year-over-year growth.

Hyperscalers capital investments are robust, which is driving demand for our 800 and 1.6T optical and high-speed analog products. To capitalize on this opportunity, we have been expanding, and we will continue to expand, our data center product portfolio.

As a reminder, our portfolio currently supports NRZ and PAM4 in coherent modulations, and we provide products that support VCSEL, EML, and silicon photonic-based optical transmission technologies as well as electrical connectivity solutions over copper.

Revenue growth inside the data center is robust, primarily in pluggable optical modules and optical cables with our 800G and 1.6T PAM-4 products. We support our customers with DSP, LPO and LRO module architectures.

We also support customer requirements for coherent DCI hardware, including ZR and ZR Light. MACOM's coherent light solutions, designed for shorter-reach coherent applications, enable higher bandwidth performance with significantly improved power efficiency compared to traditional coherent systems.

Interest in LPO continues to spread, and we are further supporting customers as they leverage the benefits of a low-power and low latency 400G and 800G optical interconnect solution. In addition, we see interest in enabling a similar value proposition at 1.6T using LRO or LPO implementations.

In this case, a 200 gig per lane solution would be used. We're also supporting LPO use in PCIe and NPO implementations as the industry strives to optimize interconnects for both scale up and scale out. And notably, we are starting to see interest in LPO from telecom fronthaul applications. Demand for our 200 gig per lane photodetectors continues to grow supporting 800G and 1.6T connectivity.

As I highlighted on our last earnings call, we are adding manufacturing capacity to keep up with our customers' forecasted demand. We have indications that demand will remain strong in calendar 2027 into calendar 2027. Further, MACOM is positioning itself to support next-generation optical receiver platforms at speeds beyond 200 gig per lane.

Part of our near-term and long-term growth strategy is to expand our photonics portfolio with higher speed photodetectors and new CW lasers. We are also seeing renewed interest in our linear Equalizer products that help extend the reach of copper interconnects in 800G and 1.6T.

Linear equalizers enable longer reach active copper cables or ACCs, and can enhance signal integrity when used in backplane applications. We are working closely with multiple customers to address their program-specific requirements and various use cases. MACOM's road map extends to 3.2G technologies and we have aligned our product road maps and resources with our customers' needs to ensure we deliver the right technology at the right time.

Our future products are increasingly optimized for co-packaged and highly integrated architectures like CPO and NPO. We can differentiate in this market based on our strong customer relationships, IC and system design expertise as well as our unique photonic materials and product design expertise. And finally, we have successfully launched a PCIe 6 optical chipset that supports sideband data streams over fiber, and we have expanded the portfolio with a new PCIe 7 equalizer.

These ICs provide new exposure to the compute side of the data center network. These products and associated solutions will be on display at the design can show in Santa Clara, California later this month. Similar to the data center, we see many growth opportunities across the industrial and defense markets, but primarily in the Defense segment.

Advanced radars, electronic warfare and new communication systems are using higher frequencies, higher RF or microwave power levels and higher levels of integration. These requirements play to our strengths, and we offer our customers turnkey support from custom chip design to subsystem solutions.

We are a supplier of choice among many of the large US defense OEMs and we continue to work to expand MACOM's presence and brand in Europe. The pace of innovation in the defense market is accelerating by both the traditional defense primes and the newer, more nimble defense companies.

As an example, new risks from drone attacks are driving the need for an entirely new platform to detect, identify, track and respond to these threats. MACOM has a portfolio of products and system engineering capabilities to support our customers' fast design and manufacturing time lines. Our defense customer base is large and very broad, and we typically support radar systems, missile and missile defense systems, drone and drone defense systems and wideband electronic warfare systems.

I'll illustrate four examples where our products have a competitive advantage in the defense market. MACOM has developed a family of industry-leading, high-efficient wideband game mimic amplifiers that significantly reduce the transmitters heat dissipation. This is critical for small form factor applications.

Our GaN technology supports directed RF energy solutions, our 7-kilowatt devices lead the industry. Our RF over fiber products enabled distribution of RF and microwave signals over long distances using linear photonics. Our products are typically used in phased array radars, remote antennas and tow decoy applications.

And when it comes to receiver protection diodes, whether in a radio or a radar, MACOM is the golden standard in the industry for performance and quality. We like to combine our proprietary core technologies with microwave systems engineering capabilities. This enables us to engage much earlier in our customers' project design cycles and presents the full scope of MACOM's capabilities to help solve the customers' technical challenges.

Within the telecom end market, satellite-based broadband access and direct to sell opportunities remain robust with numerous LEO networks in the planning stages. The number of LEO satellites planned to be launched continues to grow as more companies compete to provide commercial broadband data, voice and video communications by satellite. These networks typically use microwave or millimeter wave frequencies and free space optics or FSO, communications for satellite to satellite or satellite to ground communications.

LEO and MEO constellations have many key areas where MACOM can contribute, including large phased array antennas with active beam steering, direct-to-device links operating at UHF or S-band, backhaul links operating at Ka, CV and E-band data center-like electronics with high-speed optical links transferring data within or across the satellite, free-space optics for satellite to satellite communications and ground terminal and gateway linearization for high-power transmitters.

Ground stations and gateways are a key part of the LEO networks. MACOM specializes in designing products and solutions that overcome nonlinearity of RF, microwave and millimeter wave signal transmission for satellite communication systems. In many cases, ground to satellite links prefer linearization of SSPAs or TWTAs to boost the linear power efficiency of the link. I would like to update investors on the status of our $55 million satellite contract that we were awarded and announced previously.

Production is planned to start in the second half of calendar 2026. The schedule delay is primarily driven by satellite system changes flow down from our customer, which impact the design of the hardware we deliver. Overall, we view this as a positive because the system changes can add new functionality, which broadens the application space for the Constellation.

Turning towards the 5G segment we serve. Our global team continues to secure new business in the macro base station market, driven by the need for high-performance amplifiers and multi-band radios. We are making good progress improving the overall performance and competitiveness of our base station portfolio with major improvements in the 2.7 and 3.5 gigahertz bands.

Our RF power team is sampling products using our new GaN 4 technology, which will further improve our competitiveness. We recognize the two major European base station OEMs expect global -- the global RAN market to be flat in 2026 with regional variations. Both companies recently commented on a significant potential upside from the EU's high-risk vendor replacement initiative, and this might provide MACOM upside growth over the long term.

Future base station demand is supported by additional 5G rollouts, growing AI-driven connectivity needs and emerging mission-critical defense markets. We believe the cable infrastructure market segment is also improving. Cable Networks are in transition from DOCSIS 3.1 to DOCSIS 4.0, and we have been releasing new products and working with customers on design wins to support this upgrade. We expect the cable TV market will be a modest contributor to our telecom revenue growth in FY26.

Next, I'll quickly summarize progress on our five goals for FY26 and which we outlined on our last earnings call. First, take advantage of the data center opportunity. We continue to enhance our design teams and expand our presence in the data center and we are raising our data center year-over-year revenue growth base case from 20% to 35% to 40%. Second, to expand our 5G market share.

We are excited to be sampling our next-generation GaN 4 products to our customers. In addition, we see that one of our competitors is exiting the 5G RF power GaN market, and we hope to benefit from this competitive landscape shift. Related to this event, we recently hired a team of experienced engineers to complement our existing RF power team. Third, extend leadership in A&D.

Our defense business continues to grow, and our team continues to win large IC module and subsystem programs. Fourth, continue to develop advanced 35 semiconductor technologies. Our technology teams are making progress developing advanced GaN on silicon processes while also installing new equipment to modernize and expand manufacturing capabilities. And last, to manage our capital and investments.

As Jack will note, our return on capital metrics and trends continue to improve, and we plan to manage investments to achieve superior returns. In summary, our strategy is to continue to build a best-in-class and diversified semiconductor portfolio that will enable MACOM to capture a larger share of the three markets we focus on.

Our agility and strong teamwork across our organization helps us address opportunities and ultimately beat our competitors that are often larger and have more resources. Jack will now provide a more detailed review of our financial results.

Thanks, Steve, and good morning, everyone. The results from our first quarter were solid and MACOM achieved a few new quarterly records associated with our financial performance. Our teams continue to focus on executing our strategic plan and driving increased revenue and profitability. Fiscal Q1 revenue was $271.6 million, up 4% sequentially and up 24.5% year over year, driven by growth across all three of our end markets.

We have seen continued strong bookings across all of our end markets, resulting in a book-to-bill which increased to 1.3:1. This was one of our strongest quarterly bookings in the company's history and our highest quarterly book-to-bill ratio since Q3 2021. On a geographic basis, revenue from US domestic customers represented approximately 45.6% of our fiscal Q1 results.

A slight increase over both the prior quarter and Q1 of fiscal year 2025. Adjusted gross profit for fiscal Q1 was $156.5 million or 57.6% of revenue. Through the diligent and consistent hard work of our dedicated operations team, we have continued to increase our capacity and improve yields and we expect to see ongoing incremental progress across all four of our fab operations during fiscal 2026.

The increase in product demand across our internal fabs has resulted in improving utilization and associated incremental gross margin improvement. As a result, we continue to expect sequential quarterly gross margin improvements of between 25 to 50 basis points as we move through the remainder of fiscal 2026. These improvements include any potential offsets to cost increases, such as gold and other precious metals, depreciation and labor costs.

Total adjusted operating expense for our first quarter was $82.5 million, consisting of research and development expense of $55.8 million and selling, general and administrative expense of $26.7 million. The anticipated sequential increase in adjusted operating expense compared to Q4 was primarily driven by ongoing R&D investments and employee-related costs.

As our business continues to grow, we expect associated OpEx growth, primarily related to higher R&D and higher variable costs. Consistent with our practice, we will remain very focused on managing our OpEx to balance long-term revenue growth and profitability with continued investment in the business.

Depreciation expense for fiscal Q1 2026 remained stable at $8.7 million, the same as the prior quarter. Adjusted operating income in fiscal Q1 was another record coming in at $74 million, up 10.4% sequentially from $67 million in fiscal Q4 2025 and up 33.5% year over year. For fiscal Q1, we had adjusted net interest income of $6.7 million, a slight decrease of less than $100,000 sequentially from $6.6 million in Q4.

Our adjusted income tax rate in fiscal Q1 was 3% and resulted in an expense of approximately $2.4 million. As of January 2, 2026, our deferred tax asset balances remained at $208 million. We anticipate further utilizing our deferred tax asset balances, including R&D tax credits, through fiscal 2026 and beyond, helping to keep our cash tax payments relatively low over these periods.

We expect our adjusted income tax rate to remain at 3% as we continue through fiscal 2026. Depending on the jurisdictional mix of our income, we expect the US government's recent tax legislation to support a low to mid-single-digit adjusted tax rate for the next few fiscal years.

Fiscal Q1 adjusted net income increased approximately 9.6% to $78.2 million compared to $71.4 million in fiscal Q4 2025. Adjusted earnings per fully diluted share was $1.02, utilizing a share count of 76.7 million shares compared to $0.94 of adjusted earnings per share in fiscal Q4 2025. I'll note, exceeding $1 per share of quarterly EPS is a milestone for the company.

Our team continues to optimize the business' performance which has resulted in sequential increases in our adjusted operating income and EPS over the past 10 quarters. Now on to operational balance sheet and cash flow items.

Our Q1 accounts receivable balance was $160 million, up from $148.6 million in fiscal Q4 2025. The increase in our accounts receivable balance was driven by sequential quarterly revenue growth as well as timing of customer shipments and payments.

Our days sales outstanding averaged 54 days compared to the previous quarter at 52 days. Inventories were $238.9 million at quarter end, up sequentially from $237.8 million, largely driven by additional work in process inventory at the RTP and (inaudible) as well as higher balances to support anticipated future demand across the business.

Inventory turns remained steady at 1.9 times the same level as the preceding quarter. Fiscal Q1 cash flow from operations was approximately $42.9 million, down $26.7 million sequentially. The sequential decrease was primarily due to the typical timing of supplier and employee-related payments as well as other changes in working capital balances during the quarter.

We expect that our Q2 cash flow from operations will be in excess of $60 million. Capital expenditures totaled $12.9 million for fiscal Q1. We continue to estimate fiscal year 2026 CapEx to be in the range of $50 million to $55 million as we upgrade and enhance our production and engineering equipment, facilities and expand capacity where needed.

Moving on to other balance sheet items. Cash, cash equivalents and short-term investments for the first fiscal quarter were $768 million. We are in a net cash position of more than $268 million as of January 2, 2026, when comparing our cash and short-term investments to the book value of our convertible notes.

In mid-March, we anticipate retiring our 2021 convertible notes by paying out $161 million of principal value in cash and settling any conversion premium with shares of our common stock. Shares associated with this settlement have been included in our fully diluted share count as well as our guidance for Q2.

Our remaining debt balance is approximately $340 million of convertible notes, which mature in December 2029. I would like to highlight that over the past several years, we have been focused on growing our profitability and carefully managing our operating asset base, resulting in an improving return on invested capital.

We feel this ROIC improvement demonstrates the effectiveness of our business strategy and furthers our goal of building long-term financial strength for the company. Thanks to the entire MACOM team for their contributions to help make this another quarter which included the achievement of additional record results. Now back over to Steve.

Thank you, Jack. MACOM expects revenue in fiscal Q2 ending April 3, 2026 to be in the range of $281 million to $289 million. Adjusted gross margin is expected to be in the range of 57% to 59%, and adjusted earnings per share is expected to be between $1.05 and $1.09 based on 77.7 million fully diluted shares. We expect sequential revenue growth in each of our three end markets.

We expect that data center will achieve low to mid-teens sequential growth, and we expect telecom and industrial and defense will achieve low single-digit sequential growth.

As Jack highlighted, we expect to make incremental progress improving our profitability and financial performance in Q2. And last, I would like to welcome Brian Ingram, who joined our Board of Directors on January 12. Brian's industry experience and strategic acumen managing large, multibillion-dollar businesses will be an asset to our management team and the Board.

I would now like to ask the operator to take any questions.

(Operator Instructions) Quinn Bolton, Needham & Company.

Congratulations on the nice results. Steve, I wanted to ask, obviously, a nice uptick in your annual outlook for the data center business from 20% to $35 million to 40% this year.

I wonder if you could just spend a minute talking what gives you the confidence to raise that outlook. Is it just the rising tide you now have better visibility as orders have filled in? Is it driven by share gains? What's driving the improved outlook in Data Center?

Thanks, Quinn, for the question. And to some degree, it's a little bit of all of the above for your question. But the key underlying driver is 1.6T. That's where we see the most activity, the most design wins transitioning into production runs.

So I would just highlight 1.6T is really the long term or near -- I would say the long-term trend that will be very favorable to MACOM. And you're correct that as we look at our data center business today, we have a very healthy backlog. We think our second half will be stronger than our first half. in terms of the overall absolute dollars of revenue shifted.

So we are in a very good position. We have programs that are ramping that gives us confidence to, as a base case, hit 35% to 40%. There is also upside to that number, which is a bit unquantifiable right now. And we'll update everybody certainly on our next call as to more specific guidance for Q3 and Q4.

Excellent. And Steve, you mentioned -- I mean, there's been a lot of talk about CPO in the past couple of weeks and months, I guess. You mentioned NPO maybe even CPO in your prepared script, but maybe just spend a minute talking about how MACOM could benefit to the extent we start to see a shift more towards either near packaged or co-packaged optics.

Yes. And the product set that we would sell into a CPO or NPO platform is very similar to what we sell into pluggable modules. So it's the same drivers, TIAs, photodetectors and possibly lasers. I will highlight that a lot of these platforms are moving quickly to silicon photonic-based solutions, which is putting heavy demand on the optic -- certainly the CW laser and the photo detector optical chips.

And so we have a very competitive photo detector today. It's ramping in production, primarily for pluggables and we're making very quick progress on our CW lasers. We now have two customers that have confirmed that our CW lasers are meeting their requirements electrically.

And so now we are going through a qualification phase, which will last some number of months and also looking at the production readiness of our fab. These are 75-milliwatt lasers. These are not what I would consider the higher power 400-milliwatt class lasers. Those are not the type of lasers that we make today.

But we do think that the CPO and the transition is a benefit to MACOM. I'll also add that from an overall architecture, you see many, many channels in a smaller form factor. So a lot of the traditional chips that we sold into pluggables are becoming more complex for NPO and CPO.

There's far more channels per chip. And this is a change that we have a lot of strength and in terms of a design capability. And then the last thing I'll add is some of these systems are actually moving towards coherent modulation and coherent light specifically.

And so in this case, we have a very strong design capability given the history with our metro long-haul chips that we've been shipping for years.

Vivek Arya, Bank of America Securities.

See, you were nice enough to give us the prospects for data center growth this year. I was hoping you could give us some similar growth potential in your other two segments also.

And I'm particularly interested in the telecom side because of this RF power exit that NXP announced, I think they had close to $300 million or so business last year, which is larger than your entire telecom segment. So I'm curious, when do you think you can start to gain some share? When does it start to really become accretive to your base telecom business?

Yes. So it was certainly a fortunate stroke of serendipity that one of our competitors is exiting the business. I can't really comment on how much market share this will translate to, I think it will take one or two years for that to play out.

And so our goal is to strengthen our design team, accelerate product development, go to the market with more intensity to try to maximize the opportunity. But I think it's premature today to put a dollar value on that. I think the 5G market space is a relatively slow-moving market where it might take one year to get a design win and then after that, you have a ramp.

And so we want to basically engage the same customer base that we have today with more intensity. And we also want to let them know that we're going to be there not only for the current 5G generation, but also the next-generation platforms.

And as they move to different architectures, some of which will include more fiber right up to the remote radio unit, we want to be there and offer the full suite of products and so we do find this to be a very exciting time to be addressing the market. Now with that said, the market is flat, as I mentioned in our -- my prepared remarks, so the overall number of radios being manufactured per year is relatively flat, but we believe we can grow through share gains.

And so that is certainly front of mind for us. The other important area that we focus on in the telecom space is SATCOM. And as I mentioned, we have a very large backlog. We have a LEO program moving into production in the second half of calendar '26 and we have many, I would say, significant opportunities that we're working on, which will really provide growth in our 2027 and beyond time frame.

And what we basically see is an incredible amount of investment going into LEO constellations for direct-to-device applications. And we think that there's certain structural reasons why the market wants space-based direct-to cell connectivity.

And we want to make sure that we offer the full suite of products to these different satellite systems. And every customer is doing something a little different. Our content varies dramatically from customer to customer, but we have just a really rich treasure trove of technology we can offer our customers here.

And anything on the overall segment growth for this year? And if I could just squeeze in my second question there on the gross margins.

If your mix shifts to data center and more optical components, several of your peers tend to have somewhat lower margins, but I don't know what is the right way to do apples-to-apples margin comparison between several of your optical there because they sell complete transceivers and modules as well, which you don't -- so I'm just curious if the mix shifts to data center, what that does to gross margins and if Steve, if you could help us with just the overall growth prospects for IND this year.

Sure. And why don't I start with the first part of that question, and then Jack can address the second part. So we don't give full year guidance, and I think you're asking what is the rest of our fiscal '26 look like. And as you know, last year, we grew by 32% and in fact, that was driven a lot in part by our telecom business that grew over 40% last year.

This year, we don't expect the same level of growth. It's more likely going to be high single digit, maybe low double digit, but we'll have to wait and see on the timing of some of the programs that I've talked about. But it is growing, as I talked about, the market opportunities for us not only in 5G, but also the SATCOM and of course, cable improving is providing us with those growth opportunities.

And then the last segment, just for completeness, I'll talk about is our IND. IND last year also did very well, close to 20% year-over-year growth. And as we look out into the second half of the year and our look at the tea leaves, again, we probably are unlikely to hit 20% growth.

It's probably somewhere between 15% and 20% if we look at our backlog and all the different moving parts. So collectively, MACOM should grow and we have internal targets that put us somewhere in the 20% range, plus or minus.

But of course, all of this is dependent on booking orders, ramping successfully, executing on various programs. But there are fundamental growth opportunities that are intact, the movement to higher data rates inside the data center, the movement to more optics in the data center. This is a tailwind for us.

And our IND more and more again on silicon carbide, and we're providing more modules and subsystems to our customers. And then in the telecom space, as I talked about, we see opportunities with LEO in 5G. So these are really the primary pieces that we get excited about. And then on the profitability side and (inaudible) further.

And back to the root of your question, Vivek, with regard to our profitability versus some of our other peers. We're going to be different in terms of how those peers may look, whether it's within the data center end market or within IND and telecom.

So the mix of fabs that we have versus things that are maybe fab externally, may create a different answer. As Steve had mentioned that 25 to 50 basis points of sequential quarterly increases on the gross margin side, is comprised of a number of different items that we've got, which we think are working in our favor, including some volume increases as well as some new product introductions across the business that is supporting that expected gross margin improvement as we work our way through the remainder of the year.

Tom O'Malley, Barclays.

I just wanted to dive a little bit more on the gross margin line. You pulled in the RTP fab in-house. You talked previously about bringing more products into that fab that they can use to run externally. Can you maybe give us an update on how that's going so far?

And then you've guided that 25 to 50 basis points of incremental improvement. Over time, do you think that RTP could contribute a little bit more to the upside on that gross margin profile? Any update there would be helpful.

Thanks for the question, Tom. Just to highlight, since we closed that acquisition of the RTP fab, our team in North Carolina has been incrementally improving the profitability ever since we purchased the fab. So almost every quarter, we have seen positive movement in terms of cost of manufacturing, improving yields, lowering the scrap improving overall efficiencies throughout the building and removing costs.

And so the team has done a phenomenal job there. The improvements that we're seeing this year and going into next year for gross margins, well, I think, primarily revolve around improving the utilization of our Massachusetts-based fab and to some degree, our French-based fab. We do see increased demand, and that is improving the overall gross margin and operating margin models.

And that's being driven by the market. I will say that there's significant more work to do at our North Carolina fab. One of the primary goals there is to increase output. We have a very aggressive plan to increase output by 30%. We have bought some amount of equipment to support that.

But a big part of that added capacity will be reducing the cycle times. That is that site's number one corporate priority is to speed up not only development wafers but also production wafers. And that just has so many benefits to the business.

So that is a key focus for that particular fab. As it relates to in-sourcing some of the components that we currently outsource, those benefits have not hit the P&L. They won't those items will really come on, most likely into 2027 and beyond because you're talking about taking IPDs or capacitors from a third-party vendor and replacing it in new products with MACOM content.

And so that has to go through a design cycle and those benefits will come on incrementally over time. It's not -- you're not seeing that shine through today. The last thing I'll highlight is our French fab is doing a phenomenal job with the transition of their technology from a 3-inch wafer to a 6-inch wafer.

And we are just about ready to wrap up that work and release to production all of the different processes. We have a goal of -- by June of 2026. Everything will be fully qualified and released to production. And so as we go into '27, that will also provide a benefit not only from a quality point of view and efficiency point of view, but just -- we're also seeing improved performance of some of our chips in the processes as we migrate to newer equipment.

In our low fab, I'll just add one other item. It's a high mix fab. So we're running gas, and silicon, indium phosphide. And we continue to -- the team here does a phenomenal job balancing all of the different technologies. So you're starting to see that come through now, Tom, is a conclusion.

And Jack, I know that was a long-winded answer. Do you want to add to that?

I think the short answer, Tom, is it's not any one specific item that we have that's helping to drive the improvement that we see in front of us. It's a combination of a lot of things happening across the entire organization, where we're looking to take out costs where it makes sense, try and be more efficient, work with our suppliers. So there's a lot of contributing factors to this as we go forward from a gross margin standpoint.

Super helpful. Just as a follow-up, I'm going to cheat here and ask two at once. But two growth drivers where people are really focused this year, SATCOM and then also ACCs. It's difficult to get the relative sizing of these given they live within larger buckets. Historically, you haven't really broken that out.

But any help on the relative sizing of those two drivers? And then as you look into the out year, I think you talked about strong telco growth and pointed to SATCOM specifically. You spent most of your time on the data center talking about 1.6T modules and optical side. Maybe a little bit on the ACC market and how that can contribute to data center growth as well.

Sure. And certainly, I tried to address the ACC question in my prepared remarks. I'll just add to that, that as we look at our revenue for Q1, there was no ACC revenue in there. In terms of the SATCOM market, it is a growth market, not only on the commercial side, I'll add, but also on the military side and the DoD side. And so we do expect our SATCOM business to grow very nicely as we move into 2027.

We have multiple SATCOM LEO programs in the design phase today. And by the way, I'll also highlight that the telecom revenue last year, growing by 40%. One of the drivers, not the only, but one of the drivers was some of our LEO business. We don't -- and then last time, we don't typically size product lines or market segments. We have our own -- I mean, we do it internally, but we don't typically share that externally.

I know there's certainly a lot of very good information in the industry about peeling the onion back on those market sizes, and we would deflect the answer to maybe having you look at those -- that other information. But we don't typically give out Sam's by product line or market segment.

Karl Ackerman, BNP Paribas.

Yes. Two for me as well, please. Steve, going back to SATCOM, if I could, for a moment. You indicated that satellite system changes can support more functionality than before. Is it fair to assume the size of the satellite program is the same or larger than your previous view? And as you address that, could you also speak to the breadth of seat programs that you are engaged on.

So we think that if you're referring to the large contract that I mentioned, we believe our customers adding functionality that will bring new customers to that constellation, which is a positive for the long-term prospects of that platform. And so I hope I answered that particular question. And what was the second part -- second question?

Just the breadth of satellite programs that you have engaged on?

Yes. So we have multiple, as I mentioned. We are addressing not only on the microwave side, which would be either a backhaul link ground to satellite. Also, we're engaged with satellite to satellite communications.

We're engaged with optics we're pretty much -- it's probably fair to say that we are engaged at some level with all of the major LEO constellations today. Some of that is narrow support, maybe it's direct-to-device or direct to sell circuitry or electronics. Some of it's on the optics side. Some of it is on the microwave side.

Some of it is on the ground station side. But it's fair to say that we have blanketed the major players as well as the up and coming companies that are trying to produce their first satellites. So it's a strategic focus for the company. we have a lot to offer.

And I think over time, the business will grow. And just maybe more specifically on that larger contract. I think we said previously it was a $55 million contract with the potential of an additional $25 million add-on. And in our minds, what we think will happen is once we're in steady-state production, will be turned on for additional orders that will dovetail onto the back end of the contract.

David Williams, The Benchmark Company.

Let me add my congratulations to a really solid progress and demand here. I guess maybe first gentlemen, thinking about your demand across the data center. Is there a way to think about that from a regional perspective? And are there transitions or maybe the pace of transition that's happening in terms of the speeds between the different regions you service?

There is. There is certainly a geographic spread, but I would highlight maybe more one area that we focus on and the way we look at the data is also by data rate. And so a significant portion of our data center revenue is 400 gig and above with the fastest-growing portion of the market being the 1.6T applications.

Now we do, as you know, still service a lot of the other traditional older-style data centers. For example, we still sell today 25 gig per lane NRZ chips with CDRs. That business is hanging in there and doing reasonably well. our 50 gig per lane PAM-4 business is also, I would say, flat, not really growing.

Our traditional 100 gig per lane PAM4 business is solid, both in multimode and single mode fiber. And then, of course, the real actions at 200 gig per lane PAM4 and also some of the next-generation coherent systems is an area of intense focus for us. I would also just add that it's fair to say that we are supporting all of the hyperscalers here in the US as well as international hyperscalers.

So we typically find our products being sold into people building modules, AOCs or cables, and they are disseminated across the various hyperscalers.

Great. And then maybe just secondly, in terms of shortages and pricing environment. Can you talk maybe about just what you're seeing in terms of your supply on the IMP side? And anything that's impacting there? And is pricing -- how is the pricing environment as we think about going through the rest of the year?

Yes. I think on the pricing side, I think our competitors in MACOM are being rational. So I don't think there's any news there. It's certainly -- all of our markets are very competitive. The customers are price sensitive.

We try to balance our pricing with the value we're offering. But I would say we're in an environment where there is scarcity in some areas. And in that case, one would generally not be lowering their prices, but that's not always the case.

And then on the supply side, we are absolutely in ramp mode in various programs, and there's always stress on the supply chain as well as on the execution side and our global supply chain management team does an outstanding job making sure we have what we need when we need it.

So it's certainly a key area of focus, especially as it relates to, as you mentioned, indium phosphide, but also other exotic materials. We're always keeping an eye on availability and potential constraints around those areas.

Harsh Kumar, Piper Sandler.

Congratulations on very good results and possibly even better guidance. Maybe, Jack, one for you, housekeeping, and then I'll ask my real question. the 1.3 book-to-bill is very strong. I think you mentioned, Steve, that it's the strongest probably in the last four, five years. Is that primarily driven by data center? Or are there other components that you're seeing within that?

And then I wanted to -- for my main question, I wanted to go back to the one that Vivek asked about gross margins on the data center business. Is it fair for me to assume that your margins on the data center business are below your corporate goal of 60%.

Yes. Thanks for the question, Harsh. And with regard to the book-to-bill we generally don't break it out by end market. But obviously, based on the guide that we put out there and some of the other items, we did see a fair amount of strength within the December quarter as it relates to the data center book-to-bill.

So things are definitely going in the right direction there. In terms of the data center margin profile, as I said, we manage a portfolio of products; and gross margins will vary across the business. And Steve, I don't know if there's any other commentary that you'd like to add on that.

That's a perfect answer, Jack.

Okay. Great. And maybe one thing that you can get touched upon on the call is the LPO business. So I think you -- you mentioned in one of the earlier quarters that you were expecting revenues, I think, maybe last quarter already. If you can just update if you already have commercial revenues?

And then also, I wanted to ask about how you're thinking about the OPO business. You talked about it in your commentary. It seems like a lot of exciting things going on. what market size do you think LPO can deserve for your company or TAM or however you want to scope it in the next two to three years?

Thanks for the question. So we are very bullish on LPO. In fact, we now have three hyperscalers embracing LPO and we are in various phases of production with those three hyperscalers. Just to remind everybody, these are typically or in all cases, 100-gig per lane for generally 800 gig modules.

And so we also see that LPO will evolve to NPL and CPO or XPO, if you want to include everything. And so we're following that trail into different form factors. So we like to -- we're finally getting success here I think it's still a small part of the market and some -- we get various data points from various resources about how big the market could be.

But I think today, it's small, I would expect it will remain relatively small in the next one to two years and maybe over time, it grows. But it is a -- you have to be careful with the use case it is certainly compelling. The power savings that you're getting with LPO is compelling for the end users.

But we, again, as I mentioned earlier, we're a little hesitant to size the market because we really have to wait and see. But we do have a full suite of products here and the fact that we have three hyperscalers in production or at various stages is great.

And I think the one thing maybe that I should highlight in my answer is -- we're also seeing our customers investigate LRO at 1.6T using 200 gig per lane chips. And so that is exciting for us, and that is an area of focus currently.

Blayne Curtis, Jefferies.

I just want to go back to the strength in the data center. Obviously, 1.6T is ramping. The market is very strong. I'm just curious for you, in particular, whether there's a share aspect as well to the growth you're seeing in 1.60T for the analog components, which I'm assuming is the bulk of that growth.

I'm not sure it's so much share growth per se. I mean, as we look at our dashboards and where we have content and where we don't have content, we see competitors on all sides. And so I wouldn't necessarily say that this is a share gain.

I think it's -- the market's growing. We're winning designs. We always go up against the same competitors. And it's -- it's a combination of timing and support and having new products. I mean, one of the key growth drivers for MACOM, of course, is the 200 gig per lane portfolio, but also on the optics side.

And we do see significant opportunities with our photodiodes. And as I mentioned, we have I think, arguably one of the best 200-gig PDs in the market today, and we are working on higher speed PDs to support higher data rates.

And then last, as I mentioned, we have two customers that are very excited about our CW lasers for their silicon photonics solutions, and this would certainly be picking up market share because today, we don't sell lasers into 1.6T applications.

Perfect. And then maybe just some housekeeping with Jack. I just want to understand the impacts, I would say modeling converts. So when you look at March, and maybe just comment on -- I think you said the shares to settle are already in the share count.

What's the impact positive or negative on OI&E? Just trying to triangulate how the rest of the P&L and OpEx is guided. And then -- maybe you could just also talk about capital returns. I think you had signaled maybe you'd do some share buybacks, but I'm assuming the debt retirement takes precedent in March. How are you thinking about it for the rest of the year?

Yes. Thanks for the question, Blayne. Yes, with regard to the share count, yes, there's a number of factors that can contribute to share count as we go forward.

Part of it is just our normal employee equity that's awarded, and we've kept pretty well control over that in terms of adding to our outstanding share count over the past number of years. And then the convert is another piece. And we've been adding some of the additional shares to the share count as we work our way through the year and leading up to the final settlement, which we expect to be in mid-March.

And then with regard to your capital allocation question. Yes, I think our primary focus is getting through this debt repayment, which is $161 million in the mid-March time period.

And I'll just add to that, that -- as it relates to share buybacks, that is not something that we're contemplating, and you should not expect that in the future.

Tore Svanberg, Stifel.

Congrats on the record results. Steve, I wanted to come back to a comment you made on growth in telecom for this year? I mean, I know it wasn't guidance per se, but it just feels like high single digit, low double digit for telecom growth this year.

Seems quite conservative, especially given your position in SATCOM, 5G coming back and so on and so forth. So I mean, is that just like a really base case number? Anything you can add that would be great.

Yes. I think also keeping in perspective that last year, we had about 40% growth. So we're coming off a pretty high base there. I highlighted that the RAN market is relatively flat with us having potential to pick up market share.

We have a great position in the SATCOM market. And these are generally long design cycle complex builds that take time and a lot of the growth in SatCom, I would say, is more of a late '26 early '27, which makes it difficult for us today to settle in on, let's say, a best case number. So I think thinking below 10% is a good way to think about it today.

That's fair. And then as my follow-up, I believe last year at OFC, you guys were sampling a 1.6T LPO solution. Now when you talk about LP with 1.6%, there's more references to LRO. So I'm just curious, based on your conversations -- are we going to see 1.6T LPO? Or is the thinking now that LRO is probably the better way to go specifically for 1.6.

Yes, I would have to go back and check on that. I know we certainly were demonstrating 1.6T ACCs and AOCs, but I have to go back, Tore and check on the at the LPO version of that. Certainly, we were demonstrating 400 and 800 gig modules in the booth from our customers.

I think that the answer to your question is the customers are evaluating both right now, but there's significant benefits even with LRO, and it gets down to the specifics around really the DSP, the power budget, the link length.

And so it's really TBD. And so there's a higher probability of LRO working than LPO working because there's just more capability from the ASIC itself, let's say, to support the interface. So we would -- from a probability point of view, I would say LRO is more likely to happen first. and then LPO and there's still more work that needs to be done there. But we see that work happening at our customers.

Sean O'Loughlin, TD Cowen.

Congrats on a nice set of results. I had a quick question about the CW laser customer commentary. Just wanted to clear up, are those customers if you're able to disclosed. Are we talking about module maker customers? Or was that a reference to more hyperscale-type customers?

Yes. I mean I would say that we're engaging with more of the former. So it's really the module customers that are our first line of entry. So we want to make sure that they are able to use our laser. They're getting good module level results.

The next step is to collect a large body of reliability data and when our customer is happy with that data set, then they go to the hyperscalers and run through a PCN process to get us on the approved vendor list, let's say. And so we're early in that phase.

But it is a watershed moment because six months ago, we were not in a position where we had compliant laser today we do. And so that -- we're excited about that. Now we also recognize there's a process to get into production, and it's -- we're in the early stages of that.

Great. Yes, it's great to hear on the progress there. And then just a blue sky question, I was interested to hear you mentioned front haul as an application for LPO as you've often reminded us that LPO is typically suited for short-reach applications within the data center.

Typically, I don't think of front haul as a short-reach applications. So I'd love to hear just any more details on that application potential for a linear pluggable option?

Yes. And I think your question speaks to the fact that the -- our customers are critically looking at the network connections and where they use optics. For their next-generation systems and how do they reduce cost and complexity. And LPO in brings that benefit.

So we have to -- so yes, we are going through design and trials with various customers to see if it works in system. The benefit they see, quite frankly, is that it is a low latency solution. So there's it's more of a real-time transmission, let's say, than a retime solution.

So we'll have to wait and see as AI starts to creep into the networks and as things move towards the edge a lot of the optical interconnect becomes more relevant. And then the other tangent I'll add is we are engaged also to help customers rearchitect remote radios where you bring fiber right to the radio, and we want to be involved in that part of the network as well.

Christopher Rolland, Susquehanna.

I guess my question here is around linear equalizers. I think on PCB, which you mentioned in your prepared remarks, if you could talk a little bit more about that, the growing interest there. Do you think this could be a bigger product than ACCs, linear equalizers and ACC and what is that -- what do the economics here look like for you versus the ACC approach?

Yes. So adding the linear equalizers to various back planes is of interest to lots of customers, not only in not only, let's say, in the traditional AI construct but also closer to the -- as you get into the compute, we see opportunities to eliminate retimers and various compute connections. That's number one.

Number two, as things move to 400 gig per lane having equalization on these boards is going to be very important. And so customers recognize there's trace losses and interface issues, and they're going to need something to compensate.

And so the use case at a 400 gig lane speed is compelling. Today, though, with our 200-gig per lane, you're looking to augment passive DAC is something we're looking at. But I don't think all of those things combined will be as big as the ACC opportunity where it becomes architectural and there's lots of cables, and we just see that as a bigger growth opportunity.

So the volumes that some talked about on the ACC side are quite large compared to, let's say, the back plane applications. And then the last thing I'll add is we also have customers looking at AECs and asking themselves, do I can I convert this to an AC and we're trying to help them with those -- answer that question as well.

Very helpful. And then I was wondering if maybe you could just provide a big picture answer here. You have such a diverse product set. You also have new products coming on to your road map. What are the -- in your opinion, like biggest needle-moving new offerings that you think is really going to make a difference on the top line for MACOM over the next couple of years.

Well, I think that's a great question. And I'll just highlight that this management team in about six years has doubled the size of the company. Our fundamental focus has been on high power, high frequency and high data rate. When we look ahead, we want to double the size of this company and not take six years. We want to do it faster.

So we're trying to execute our strategic plan that gets us to $2 billion with a reasonable CAGR, and we want to double the share price. The earnings per share.

And so -- that is our focus, and that means noncommodity differentiated products stay with the large growing markets, but also diversify and that is a big part of our story here, and that differentiates us, I think, from a lot of the companies that are very focused on, let's say, indium phosphide components for the data center.

These are structural organizations that do not have diversity. And our approach to these large opportunities is to bring the diversity. So when you look at our fabs, as an example, they're running lots of different technologies, and there'll be periods where some technologies grow very quickly in periods where they don't. So fundamental to our business model is diversification in product lines and geography end markets.

Tim Savageaux, Northland Capital Markets.

Congrats on the results and good timing here given you just mentioned indium phosphide. That's my question. Actually, as you mentioned capacity addition. I wondered -- I'm really looking for magnitude and timing for that capacity addition, say, from the beginning to the end of the fiscal year, what are you targeting there?

And as a quick follow-up, how material are those optical devices within the overall data center unit right now? And where do you expect that to go?

Thank you. So we're not going to really disclose the amount of capacity we're adding for competitive reasons. I can tell you that our Indium phosphide PD business is growing rapidly. It's primarily focused on 200 gig per lay. But we -- I don't really want to talk about the number of wafer starts or where we started the fiscal year, and we will end the year.

I will say that there's -- it's a major focus to bring on capacity, and we've been doing that. And so the results of that will be reflected in the guide in our general comments. In terms of -- and again, akin to that, the materiality of that business, we really don't disclose the revenue by product line or by technology.

Again, I would just highlight that we -- as I just mentioned, we do have a diversified business. And when we look at our data center revenue, today, it consists of TIAs, drivers, combo chips that are basically TIAs and CDRs. We've now added photo diodes or photodetectors.

The next step is to add lasers. We also have in the back room, we're working on EML lasers, and we have various versions of that in test right now. So I think you should think of our data center business as diversified by end customer by data rate and by product family, both on the optical side and on the electrical side.

And we do recognize, as an example, there's opportunities for us on the compute side of the network, and we're investigating and designing products for things like PCIe 6 that will also add new growth vectors.

William Stein, Truist Securities.

Great. Two quick questions. First, on the LEO satellite business. Can you talk about average dollar content per satellite and the duration between your rev rec and the satellite launch. Is that like a quarter or like a year? Any color there would help.

Sure. Well, we recognize the revenue when we ship our products to the customer. It's hardware deliverable. So that it's a hardware shipment. We don't wait for the customer to launch the satellite to take our revenue.

And then in terms of the dollar content per satellite, it varies quite a bit. As I mentioned, there's a lot of variation in the construct of these satellites. Some of them have very large beam steer to raise. Some of them have very complex optics.

Some of them have data center-centric electronics, so moving high-speed data across the bus of the satellite. Some are using linear risers to communicate back to the ground. So it would be very difficult to put a dollar value on that. So it varies quite a bit.

And I'll also argue that as I mentioned earlier, we're dealing with all the major constellations in different ways. Some -- as an example, some customers want to buy wafers from us. They want to be a foundry customer. And we have other customers that want us to design an entire subsystem. So we have the full gamut.

To clarify the first part of my question, I fully understand that you rev rec when you ship, but we don't necessarily get alerts to that, whereas we do get alerts as to launches. And so I'm just trying to line up when we see a launch happen what that relates to in terms of your revenue.

Is that revenue that you would have recognized a quarter ago, a month ago, a year ago so we can try to align the parts of the market that are visible to us with your revenue generation?

Yes. I mean, I think those are dots that it would be difficult for us to connect here on the call, but I understand. Certainly, it's measured in many months. And beyond that, we would have to do work, and it would be very situational. Jack, did you want to add to that?

Even though it will be situational probably wouldn't be accurate either just based on the ebbs and flows of this end market.

And I'm showing no further questions at this time. I will now turn the call back over to Mr. Steve Daly for any closing remarks.

Thank you. In closing, I would like to thank all of our employees for their continued hard work and dedication which has made these results possible. Have a nice day.

This concludes conference call. Thank you for your participation. You may now disconnect.