Quarter 1
Q2 2026 Earnings Call — May 7, 2026
Analyst Blaine Curtis (Jefferies): Hey, good morning, and great results. Maybe I want to start on gross margin. Obviously, there's a lot of revenue drivers, but 100 basis points in the quarter. Can you just talk about volume and then mix? And obviously, data centers outperforming, so that must be a driver. I just want to see how to think about it, particularly as you go through the rest of the calendar year.
Executive Name (Title): Yes, thank you for the question, Blaine. So certainly, volume is contributing to the improvements in the gross margins. We are seeing that our LOLFAB as well as our North Carolina FAB have been increasing outputs. And so that's certainly having a positive effect on gross margins. The other thing I'll add is you're correct to notice that our data center revenue as a total percentage of our revenue is increasing. In some instances, that's contributing to the improvements in gross margins. In other areas, it isn't. So in all of our market segments, we have a normal distribution of gross margins. But generally speaking, the team has been very focused on yield enhancement, efficiencies, cost reductions, as we're scaling across a whole wide range of technologies, some of which I talked about in the prepared remarks. So generally speaking, a lot of great work. As Jack mentioned in his commentary, we expect continued improvements in gross margin. A few quarters ago, we had said publicly we were setting a target of to exit the year around 59%. And I think today we're updating that number to be most likely closer to 60%. And Jack, maybe you can comment further.
Executive Name (Title): I think you covered off on it, Steve. There's definitely multiple factors that are helping to drive our gross margin improvements that we've seen here in the March quarter, where we're up 90 basis points. And then if you look to the midpoint of the guide being up 100 basis points, it does become a bit more challenging as the gross margins go up to squeeze more savings out of it, but our teams are continuing to work hard, and as Steve had mentioned, we expect to see further gross margin improvements as we work our way through this year and into next year.
Analyst Tom O'Malley (Barclays): Hey, guys. Thanks for taking my question. My first is on the SATCOM business and LEO. Through the earnings period here, you've heard companies talk about 7,000 to 10,000 launches over the next three years. Would you agree with that number? And then maybe if you could spend some time talking on the content per satellite, if that's possible. You mentioned a lot of the different products, the phased array antenna, the optical electronics, et cetera, but just some framework for thinking about the upside that could offer you. And then on the timing of that, it looks like telecom's up low single digits in June, but you mentioned it improves in the back half of the fiscal year. Do you see a substantial step up in the September quarter there?
Executive Name (Title): Thanks for those questions, Tom. There's a lot there. Let me try to address as many as I can. I think it's important to put in perspective that MACOM has been servicing the space market for decades. And so we are a known entity, not only on the defense side, but more and more so on the commercial side. I think you're correct to highlight that there's growth in terms of the pure number of LEOs being launched. And these are typically smaller satellites going on affordable launch vehicles, and whether it's servicing broadband, direct-to-sell, or even future talk about data centers in space, we want to participate in those. So we don't necessarily want to comment on what the absolute quantities are. I think there's a lot of information in the market about how much this market is growing. So I think there's good information out there that's probably more accurate than ours. But I would just highlight that we are absolutely engaged with the major players across the market. And as I mentioned in my commentary, it really plays to our strengths. So yes, there's certainly huge demand, and we're trying to focus on getting wins as best we can.
In terms of the timing of our various programs, I would just say that we have active LEO production programs today. We have more that are in the sort of LRIP phase. One of the larger programs that we've talked about in the past is in the phase of delivering what we call EM modules, so basically our customers sort of finalizing their system design, and we do expect that to go into full-rate production later this year or early next year, which is consistent with what we've said in the past. I don't think you should expect a step-up. You're going to see a ramp-up, and that will happen during the course of calendar 2027. And just
as a reminder to everybody, we're involved in really three pieces of the puzzle for these networks.
The first is on the satellite, what people refer to as the payload. The second is the gateways. And then the third is that we are seeing opportunities in the terminals with some of our components. And so very exciting time for MACOM to be participating across so many different customers, and our module and our chip design team is very busy satisfying the requirements in this market.
Analyst Sandvik (Stifel): Yes, thank you, and congratulations on the strong results. I had a question on the data center growth now basically targeting more than 60%. You know, just curious, above and beyond just higher capex from some of your end customers, you know, what's some of the delta here, some of the new revenue that's layering in?
Executive Name (Title): Very much the expansion of our product portfolio. And we've talked about really over the last 12 months, the ramp up of some of our optical components. And so that has certainly helped drive some of the growth. But I would say generally speaking, our focus is on 1.6T, 800 gig. These are areas where we're seeing a lot of strength. We expect that strength to continue. And in fact, we're seeing more and more demand as we sort of enter our second half. In terms of the new revenue or the new categories of revenue for our fiscal 27, certainly the higher data rates, so 3.2T, possibly some coherent light ramp-ups, and also depending on the work that we're doing with our laser portfolio, we may be able to add some revenue to our fiscal 27 or even fiscal 28 on CW lasers. So a lot of good activity there. We have been also, as everybody knows, engaged with people that are deploying copper and providing equalizers not only on board, you know, the PC boards, but also cable-based. So very excited about those opportunities as well.
Analyst: And as my follow-up, Steve, you talked more than usual on this call about, you know, team collaboration, you know, making sure capacity is in place, you know, sounds like, you know, your operations executions is allowing you to gain some share. You know, just curious why, you know, why you brought that up on this particular call. Are you seeing competitors perhaps not have enough capacity and not good planning to keep up or is there, you know, something else that's driving that inflection point?
Executive Name (Title): Thank you. Well, I think, you know, Jack and I are just, you know, privileged to be able to represent our employees. And so I think it's important to highlight the work that they're doing in collaborating to make these results happen. And so, as you know, last year the company grew by over 30%, and this year we're on a path certainly to be in that range or higher. And we have a lot of different technologies ramping at the same time, and that absolutely requires coordination, collaboration, good, clean discussions with customers to set proper expectations. So we just wanted to highlight that. In terms of, you know, sort of opportunities, I'll just note that because there is certainly some constraints within the data center market, we believe that's opening up interesting opportunities for MACOM, including, by the way, what I would consider the legacy class of lasers. As many customers are and competitors are pivoting to more, let's say, the higher power or CW lasers to support silicon photonics, that's creating a little bit of a gap in DFB lasers. And we have a very strong, broad DFB laser portfolio that can support what I would consider legacy data center 100 gig modules. And so, you know, that could be a great business for us over the next one to two years. And those products are ready today.
Analyst Quinn Bolton (Nehan & Company): Thanks for asking. Let me ask a question. I guess just wanted to follow up on the laser question. I think in the past, you said you had a couple of customers that were evaluating your CW lasers. You thought it would still sort of be a 6- to 12-month eval process, but could you give us any update on how you're feeling about the CW laser opportunity? Are you more confident that those could ramp and contribute to fiscal 27 growth?
Executive Name (Title): Yeah, I don't think too much has changed in the last three months. We have excellent optical performance of our 75-milliwatt class lasers. Customers have tested and validated performance. What our fab is doing today is dialing in a process of record. That work is not complete. So we continue to tweak the process to optimize really reliability. It's all about reliability. Typically in these systems, the weakest link is the laser. And so you need to make sure you have a very robust laser system. So there's a lot of qual work running in parallel with developing a process of record. And so that work continues, and that's all Macom internal work. When we're ready and we feel like we have a reliable product, then we'll start working with module customers so that they can start their module quals. And then after that comes the hyperscaler qualification. So when you add all that up and look at the timeline, you're really talking about potentially, and this is assuming everything goes well, and oftentimes it doesn't, you know, a fiscal 27 or 28 timeframe of contribution. We are absolutely getting pull from the market. We know there's demand.
And so we just have a lot of work to do to convince ourselves that we're ready to ramp this kind of a product into high volume. So I would at this stage not put your CW laser in your models, certainly not for fiscal 26 or I would say even 27. I think there's going to be a lot of other great things happening that will allow us to perhaps not only do as well as we've done this year in terms of growth, but maybe even exceed it next year because we have a lot of other irons in the fire.
Analyst: And then I guess, wanted to come back on the utilization rates. I think, you know, over the past couple of years, you had mentioned the Lowell utilization rate was sort of suffering from, you know, some puts and takes in a couple of the larger defense programs. And I think, you know, lower demand on the industrial side, MRI in particular. Has that utilization rate come back with the IND business recovering, or do you still feel like there's further room for improvement in the utilization rates of Lowell? Obviously, that could be a margin tailwind as utilization increases.
Executive Name (Title): I think you're correct in those comments, and we are seeing increased utilization on our traditional Lowell-based defense business. And our defense business this year is trending to certainly over 20% full-year growth. And much of that, not all of it, but much of it is coming out of our low fab. So that is beneficial to the gross and operating margins. Your commentary about our MRI business, which we categorize as industrial, is also improving. And we have a very strong franchise for high voltage, non-magnetic, really kilovolt level diodes that are used in these MRI coils. We are seeing positive trends on that business, and we expect those trends to continue. So yes, those two things are definitely helping the Lowell utilization. There's two other important things going on in our Lowell fab as well. The first is developing the advanced GAN that I talked about in my prepared remarks. And the second is the ramping up of our optical product line within the Lowell, which is an indium phosphide-based product.
Analyst: Great. Hi, guys. Thanks for letting me ask a question, and congrats on the really solid results and momentum. First question, I just wanted to get... maybe an update or offer you the opportunity to update some of your comments on the fiscal 26 segment growth other than Datacom. You know, we got the 60% growth, but I think last quarter we talked about high teams growth in IMD. You kind of just alluded to maybe over 20 and the high single digits in telecom. Any updated thoughts there? Is that still what we should be thinking about?
Executive Name (Title): Yeah, I'll make some comments, and then maybe Jack can also talk about sort of P&L-related items. So I do think we have a solid plan for 2026. As I mentioned, our revenue growth is going to be driven by data center and defense. Today, we're definitely trending towards top line in that sort of 30% range. I can tell you that last year we did about 32%, and it would be nice to beat that. And we also ideally would like to exit the year with at least 60% margin. We're not sure if that's going to happen. We still have a lot of wood to chop between now and the end of September, which is the end of our fiscal year. But we do see a path to having strong revenue and earnings growth. Earnings growth should be quite nice this year, certainly coming from the second half. In terms of your commentary specifically about IND and telecom, I think we're thinking above 20% today for IND, and we're going to try to push telecom to be low double digit. I think the only other item I would add, and obviously the defense piece has been quite strong for us over the past year plus, industrial, we've been working our way through that.
We touched upon the medical piece of industrial with the last question, but more broadly within industrial, and it is a fairly broad category, we have seen a bit of an uptick there that's helping out with our low utilization. It's also driving some of that revenue or top line improvement that we see in that combined industrial and defense end market. And really, as we look at filling out the rest of the P&L with some of that revenue growth, we are very much focused on improving those earnings and improving the leverage and the drop through from an operating income and also from an EPS perspective as we work our way through the remainder of 26 and then focus more on 27 as well.
Analyst: That's a helpful cover. Quick follow-up, just on the input side, I know that indium phosphide is one of the materials that you use, and so I don't want to over-index to these comments, but we've had some comments from public substrate suppliers about price increases and just maybe generally across your manufacturing footprint. Is that something that you're either having to absorb and there's a timing mismatch, or is the pricing environment for a lot of these products such that you're able to sort of pass those through, or is that not really something that you're seeing outside of the DMPOP site?
Executive Name (Title): Thanks for the question. I'm not sure. We want to get into the cost basis of any materials we buy. We're constantly buying gases, precious metals, gold, you know, indium phosphide substrates, silicon carbide substrates. And we have a very strong supply chain that works very closely with our partners to make sure we're getting what we want when we need it at a fair price. Although I will mention maybe one thing. You may have seen recently where Macom announced a small investment in a company called IQE. We put out a press release on April 27th, and this is sort of somewhat related to your question. And people may not be familiar with IQE. So they are a UK-based company that provides epitaxial services, and recently they went through a fundraising event where Macom participated. They raised 80 million pounds. We participated with a 45 million pound investment. And just to break that out very quickly, it was 30 million in equity for about 11% ownership and a 15 million pound convertible note.
And ultimately, what we did as part of this transaction is put in place a long-term supply agreement to make sure that we have adequate supply of the technologies that we're currently acquiring from them and from others. And so the why we did it really revolves around your question, which is, you know, what is MACOM doing to ensure we have strong supply chain security and resiliency? And I think this is a great example of a strategic transaction, which is going to sure up not only our business regarding indium phosphide, but also the silicon carbide. And so where we stand right now with that is it's going through regulatory approval, there'll be a shareholder vote, and it's expected to close in the next 30 to 60 days. And so this is sort of an example of MACOM proactively looking at risk and retiring risk. And so this will backstop our expected growth, not only as it relates to indium phosphide-based products, but also silicon carbide-based products and some other technologies as well.
Analyst: Great thanks for taking my questions congrats on the very strong outlook. The main thing I wanted to ask about was Stephen your prepared remarks you talked about addressing the user terminal market within the Elliot satellite industry. And this is, I believe, a pretty big change in strategy, at least relative to what I've heard the company talk about. We had the message previously that your focus was going to be essentially in infrastructure, the satellites and the gateways. User terminals, of course, look more like it's customer premise equipment, right? It's sort of a consumer market. That's sort of uncharacteristic for you. So can you talk about what changed, what makes you want to address that market, what products you're selling, and sort of timing to ramp there?
Executive Name (Title): Yes, and I think that's a great question. And to be clear, when we look at that market, we're looking to be opportunistic. And so we are seeing some AESA technology basically using a wide range of control products, which would fit very nicely into our Algas diode-based portfolio. So you're correct to conclude we're not chasing SOCs or receivers or highly integrated customized chips for user terminals. That is not the case. But we are seeing inbound requests for some of our control products, and so we will opportunistically look at that.
Analyst: Great. Thanks. And then as a follow-up, I guess the big picture question is you had a huge book to build this quarter. Obviously, that's not all for delivery and fiscal Q3. Can you talk about the spread across end markets and the duration of that? What's changing there?
Executive Name (Title): Well, certainly, as I mentioned, the strongest portion of our new orders was in the data center. But I will say that all three markets had a very strong booking event. Typically, these orders will be spread out over multiple quarters. And so, you know, don't really want to get into any more detail than that. We typically, just as a practice, only recognize bookings that are within a 12-month period as well. So, you know, this 1.5 book to bill really reflects that orders that would be delivered within 12 months.
Analyst Christopher Rowland (Susquehanna): Thanks so much for the question, guys, and congrats. I wanted to drill down on data center, particularly in June. So it's just absolutely inflecting. I don't think we've seen this kind of growth before. And so my question is, why now? It sounds like a lot of it is optical. When it comes to discrete components, I'm just trying to figure out kind of why the inflection. Is it just a units play? Is there something here like new DSPs that don't contain TIAs and drivers? Or is it really this move to 1.6? What's really driving that over 30 million inflection in data centers sequentially? Why now?
Executive Name (Title): Yeah, thank you for the question. And so if we pull back and look at the general trends of our data center business over the last three years, in 2024, we grew our data center business by 35%. In 2025, we grew it by 48%. And now we're in 26, you know, forecasting over 60%. So the trend is there to see in terms of a long-term growth. And clearly, we're investing in a variety of technologies that would be suitable for this market. We tend to gravitate towards the highest data rate type products. We were one of the early suppliers to the 1.6T rollout, and that is paying big dividends right now as that use case expands across the data center in various hyperscalers. And so we're able to solidify strong positions there. And of course, we're overlaying our optical components. We talked about the PDs, the photodetectors, we're working on the lasers. They're not quite there yet. So I don't know that there's an inflection point rather than a trend. And the trend is that our portfolio is broad in nature and we're gaining traction at a wide range of customers selling a variety of functions. And as part of our strategy, we want to be diversified.
So as you know, we don't sell DSPs just for the record, but we want to support module manufacturers that are, for example, using LPO, or if a particular customer wants to electrify copper, or maybe they want to experiment with coherent or coherent light. So these are all things that we're very focused on. These are long-term activities that are now starting to pay dividends. So it's not really an inflection point. I would say it's consistent with really the unit growth within the market as well. And so we're just trying to keep up with the growth. And that's some SAM expansion as well as portfolio expansion. The only other item I would add, Steve, is yes, the higher speeds are definitely helping to contribute to the growth that we've seen, but also some of the lower speeds, 100G and below, have continued to hang in there over the past number of quarters and would expect that trend to continue as well.
Analyst: Excellent. Perhaps as a follow-up on copper this time, if you could talk about engagements, particularly on kind of large-scale architectures, whether they're trending towards ACC or LE, and kind of your outlook for this market, do you think this is kind of the next big thing or this is, at this point a little bit more of a TBD?
Executive Name (Title): Yeah, I would put it in the category of a TBD and we are seeing real demand, real hardware, real production ramps on the optical side. And that is certainly the vast majority of our revenue today. So, you know, the Electrify cable is a great opportunity for us and will be additive in the future. And, of course, as I mentioned, we are going after equalizers not only for sort of traditional high-speed, you know, 1.6T, but also PCIe and other applications that are closer to compute, let's say. So we are very active with our equalizer portfolio at various accounts. And there is a wide range of use cases that we're chasing.
Analyst Tim Sabatum (Northland Capital Park Markets): Hey, good morning. And I'll add my congrats on that guide. Pretty spectacular. My question, or at least first, is just trying to understand more about the size of your photonics or optical device business, which we're talking about more and more here. And I don't know what kind of color you're able to provide. Does that business get to 10% of data center revenue in any one of these quarters in the second half? That seems possible, or is it already there? And or as you look at your sequential growth here in Q3 and heading into the second half of the year, is that a meaningful proportion coming from the optical device side?
Executive Name (Title): Great. Thanks for the question. And just to highlight that we don't typically break out revenue by product line. And that would be mainly for competitive reasons. What you're asking is a very specific question that we would prefer to not answer so directly. I will say that we have a very strong product. I think our PD has definite advantages over what we're seeing in the market in terms of our ability to mass produce these with industry-leading dark currents, self-hermetic chip, you know, lens integrated onto the device. We have developed in our Ann Arbor fab a very strong epi recipe that is providing the industry with very high levels of sensitivity. So all of those things are certainly playing into some of the successes we're having with the PDs. The other thing I'll note is we demonstrated, I think a year ago at OFC, the idea of stacking the PDs on our TIAs. And so that has certainly been beneficial in terms of supporting not only TIA growth but also PD growth. But we do have a diversified portfolio. We're not going to break out, you know, how much is concentrated on any one product at any one time because it's constantly changing.
Analyst: Okay. But it sounds like it's getting to be material. Maybe we can get a binary answer on that. Either way, I do have a follow-up about, you know, kind of the inflection. And
the question is about within data center customer diversification, right? I mean, you know, you have a very big customer in China is doing extremely well, and that could be a lot of it. But could you address maybe your reach throughout other major module suppliers and other places and to what extent is that a big factor versus growth in your current major module customers?
Executive Name (Title): Right. And I think embedded in that question is really what's your exposure to the hyperscalers because that, and so it really starts there in understanding what their needs are and understanding who they're using within their supply chain. And then we try to align ourselves with both and, depending on the hyperscaler, the platforms, the technology they're working, we try to align ourselves either directly to their roadmaps or to their vendors' roadmaps. I will say that from maybe a year, two years ago, our diversity today is far stronger. And so we see revenue today in scale up, scale out, and scale across. So we are actively positioned in each one of these different areas. And that exposure varies by the module manufacturers, certainly varies by the hyperscaler. But at the end of the day, a lot of this is 1.6T. That is sort of the main event. Today, it's going to continue, as I mentioned, throughout the course of our fiscal 26, calendar 26, and even into 27. And if we pull back and we look at the work that we're doing there, as I mentioned earlier, I think we have potential to do really well in our fiscal 27, where, you know, obviously we'll have to wait and see how things go. But we are getting large orders that go out in time that support real production programs.
Analyst Carl Ackerman (BNP Paribas): Yes, thank you. I have two, if I may. Steve, your book to bill of 1.5 appears to be a record, certainly multi-year record anyway. Should we expect meaningful capital investments in FABs to support this backlog, or do you have the necessary capacity and assurance of supply to address this growth?
Executive Name (Title): So we are investing in our fabs, and I think that's a very interesting question to ask, and let me just very briefly talk about that. So about a year ago, we talked about increasing the wafer production capacity in our North Carolina fab by 30%. We said that would take 15 months. That work should be done by the end of this calendar year, and so we invested less than $20 million. It was about $15 to $16 million. We had the opportunity to buy heavily discounted fab equipment from the market. So that's baked into our numbers and the capital numbers. When you look at our Massachusetts fab, we are investing in equipment for advanced GAN. We're investing in equipment to expand Indian phosphite capacity and production. And we're doing general modernization. And then in our French fab, we're moving the entire product line from three inch to six inch. That equipment is already in place. There's been very little money spent to do that. However, we are installing a new MOCVD reactor in France to support some of the volumes that we anticipate in the next couple of years. So there is definitely moderate investments. As we think about our business and being diversified, you will not see us greenfielding, building a new fab, building a new factory. We think...
Quarter 2
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.