Q1 2026 Earnings Call — February 5, 2026
Analyst Quinn Bolton (Needham & Company): Hey, guys. 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% to 40% this year. I'm wondering if you could just spend a minute talking. What gives you the confidence to raise that outlook? Is it just sort of the rising tide? Do 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?
Executive Steve (Title): 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 as 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, you know, absolute dollars of revenue shift. 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, you know, more specific guidance for Q3 and Q4.
Analyst: Steve, you mentioned 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?
Executive Steve (Title): 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, photo detectors and possibly lasers. I will highlight that a lot of these platforms are moving quickly to silicon photonic based solutions, which is putting a heavy demand on the optic, certainly the CW laser and the photo detector optical, you know, 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 NPO sort of transition is a benefit to MACOM.
I'll also add that from an overall architecture, you see many, many channels and a smaller form factor. So a lot of the traditional chips that we sold into plugables 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 in 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.
Analyst Vivek Arya (Bank of America Securities): Thanks for taking my question. Steve, you were nice enough to give us the prospect for data center growth this year. I was hoping you could give us kind of 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 the NXP announced. I think they had close to a 300 million or so business last year, which is, you know, 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, you know, really become accretive to your base telecom business?
Executive Steve (Title): 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, you know, 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 and to try to maximize the opportunity. But I think it's sort of premature today to put a dollar value on that. I think, you know, the 5G market space, you know, is a relatively slow moving market where it might take, you know, 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, you know, 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 sort of a very exciting time to be addressing the market. Now, with that said, the market is flat, as I mentioned in 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 26th. And we have many, I would say, significant opportunities that we're working on, which will really provide growth in our 2027 and beyond timeframe. 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.
Analyst: And anything on the overall segment growth for this year? And if I could just kind of squeeze in my second question there on the gross margins. If your mix shifts to data center and more optical components, you know, several of your peers, you know, 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 peers because they sell, you know, 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 kind of the overall growth prospects for IND this year.
Executive Steve (Title): Sure. And why don't I start with the first part of that question, and then Jack can address the second part. So, you know, we don't give full-year guidance, and I think you're sort of asking what does 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 are not only in 5G but also the SATCOMs. 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 look at the tea leaves, again, we probably are unlikely to hit 20% growth.
It's probably somewhere between 15% and 20%. if we, you know, sort of look at our backlog and all the different moving parts. So collectively, you know, MACOM should grow, and we have internal targets that put us, you know, 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. In our IND, more and more GAN 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 as Jack mentioned, we do expect incremental improvements during the course of the year, and I'll let him comment further.
And back to the root of your question, Vivek, with regard to our profitability profile 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 and market or within IND and telecom. So the mix of fabs that we have versus things that are maybe fabbed 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.
Analyst Tom O'Malley (Barclays): Good morning. Thanks for taking my question. 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 MACOM used 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.
Executive Steve (Title): 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've 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 in going into – next year for gross margins will, 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 insourcing some of the components that we currently outsource, those benefits have not hit the P&L. 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. 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 sort of 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, an 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. And our low-fab, I'll just add one other item. It's a high-mix fab, so we're running gas, gas, 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 the – is a conclusion. And Jack, I know that was a long-winded answer. Do you want to add to that?
Executive Jack (Title): 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.
Analyst: Just as a follow-up, I'm going to cheat here and kind of ask on two at once, but two growth drivers where people are really focused this year, SATCOM and then also ACC's. 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 1.6 modules and optical side. Maybe a little bit on the ACC market and how that can contribute to data center growth as well.
Executive Steve (Title): Sure. And certainly, I tried to address the ACC question in my prepared remarks. I'll just add to that that, you know, 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 projects. 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. 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 sort of peeling the onion back on market sizes, and we would deflect the answer to maybe having you look at that other information. But we don't typically give out SAM's by product line or market segment.
Analyst Carl Ackerman (BNP Paribas): Yes. Good morning, gentlemen. Two for me as well, please. Steve, going back to that comment, 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 the satellite programs that you are engaged on?
Executive Steve (Title): So we think that if you're referring to the large contract that I mentioned, we believe our customer is 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.
Analyst: And what was the second question?
Executive Steve (Title): Just the breadth of satellite programs that you have engaged on.
Executive Steve (Title): Yeah, 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-cell circuitry or electronics. Some of it's on the optics side. Some of it's on the microwave side. Some of it's 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, we'll be turned on for additional orders that will dovetail onto the back end of the contract.
Analyst David Williams (Benchmark Company): Hey, good morning. And let me add my congratulations to the really solid progress and demand here. I guess maybe first, gentlemen, thinking about your demand across the data center, is there a way to kind of think about that from a regional perspective? And are there transitions or maybe the pace of transition is happening in terms of the speeds between the different regions you service?
Executive Steve (Title): There is. There is certainly a geographic spread, but I would highlight maybe more, you know, one area that we focus on in 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 PAM4 business is also, I would say, sort of 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 U.S., 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.
Analyst: Great. Thanks for the color there. 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 I&P side and anything that's impacting you there? And is pricing – how is the pricing environment as we kind of think about going through the rest of the year?
Executive Steve (Title): Yeah, 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, you know, 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.
Analyst Harsh Kumar (Viper Sandler): Yeah. Hey, guys. 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 or five years. Is that primarily driven by data center, or are there other components that you're seeing within that?
Executive Jack (Title): Yes. Thanks for the question, Harsh. And with regard to the book to bill, you know, 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.
Analyst: In terms of, you know, 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.
Executive Steve (Title): That's a perfect answer, Jack.
Analyst: Okay, great. And maybe one thing that didn't get touched upon on the call is the LPO business. So I think 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 kind of how you're thinking about the LPO business. You talked about it in your commentary. It seems like a lot of exciting things going on. What kind of 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?
Executive Steve (Title): 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 NPO and CPO or XPO if you want to include everything. And so we're following that trail into different form factors. So we like the – you know, 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.
Analyst Blaine Curtis (Jeffries): Hey, guys, thanks for taking my question and nice results. I just want to go back to the strength in the data center. Obviously, 1.6 is ramping. The market is very strong. I'm just kind of curious for you in particular whether there's a share aspect as well to the growth you're seeing in 1.6T for the analog components, which I'm assuming is the bulk of that growth.
Executive Steve (Title): 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, you know, 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, you know, and 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. 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 a market share because today we don't sell lasers into 1.6T applications.
Analyst: Perfect. And then maybe just some housekeeping with Jack. I just want to understand the impacts. I always hate modeling converts. So when you look at March, 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, you know, kind of 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 this debt retirement takes precedent in March. How are you thinking about it for the rest of the year?
Executive Jack (Title): Yeah, thanks for the question, Blaine. Yeah, with regard to the share count, yeah, 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, yeah, 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.
Analyst: Now, next question coming from the lineup.
Executive Steve (Title): Yes, thank you, and congrats on the record results. Steve, I wanted to go 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, you know, high single digit or low double digit for telecom growth this year. It seems quite conservative, especially given your position in SATCOM 5G coming back and so on and so forth. So, I mean, is that kind of just like a really base case number? Yeah, anything you can add, that would be great.
Executive Steve (Title): Yeah, 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 RAND market is sort of 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 sort of settle in on a, let's say, a best case number. So I think thinking below 10% is a good way to think about it today.
Analyst: 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 LPO with 1.6, there's more references to LRL. So I'm just curious, based on, you know, your conversations today, are we going to see 1.6 LPO or is the thinking now that, you know, LRO is probably the better way to go specifically for 1.6?
Executive Steve (Title): Yeah, I would have to go back and check on that. I know we certainly were demonstrating 1.6T ACC's and AOC's, but I'd have to go back, Tori, and check on 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 length, and so it's really TBD. You know, 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, you know, we would, you know, from a probability point of view, I would say LRO is more likely to happen first.