MACOM Technology Solutions Holdings, Inc.

Welcome to MECOM's third fiscal quarter 2026 conference call. This call is being recorded today, Thursday, August 6, 2026. At this time, all participants are in listen-only mode. I will now turn the call to Mr. Steve Ferranti, MECOM Senior Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Olivia. Thank you. Good morning and welcome to our call to discuss MACOM's financial results for the third 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 could result in those differences, we refer you to MACOM's filings with the SEC. Management 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 8K, 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 Q3 results for fiscal year 2026. When Jack is finished, I will provide revenue and earnings guidance for the fourth quarter of FY26, and then we will be happy to take some questions. Revenue for the third quarter of fiscal 2026 was $342.2 million and adjusted EPS was $1.40 per diluted share. Demand for our products is strong across our three end markets and our backlog continues to build. Our sequential financial performance improved across most key metrics in Q3, including gross and operating margins. Our Q3 book to bill ratio was a record 1.6 to 1, and orders booked and shipped within the quarter were 11% of total revenue. All three end markets had exceptional bookings with notable outperformance in the data center. Our record backlog reflects market strength as well as our progress that we are making to expand our product portfolio and better address our customer needs. We are pleased with the customer order trends. Our strategy of strengthening our core technologies and expanding our product portfolio around three central themes, highest power, highest frequency, and highest data rate, is proving to be effective. We believe the breadth in our technology and product portfolio, coupled with our unique manufacturing capabilities, enable a strong and durable business model. MACOM is well positioned in three large markets, namely data center, Industrial and Defense, and Telecom. In total, these markets contain thousands of potential customers with a combined SAM that we now estimate to be in the range of $15 billion in 2027. To address the large SAM opportunity we have then and will continue to invest in R&D and expand our engineering and manufacturing teams. We continue to align and expand our engagements with customers that are industry leaders. Two years ago, we had approximately eight customers with 10 million in revenue. Today, we have over 20 customers above 10 million and a few in the range of 50 to 100 million. While we are growing revenue by over 30% per year, our year-to-date top 10 end customers still represent less than 40% of our total revenue. Our customer base continues to grow and remain diversified. Now turning to recent market trends. Q3 revenue performance by end market was as expected, with all end markets growing sequentially. Data center revenue was $137.6 million, industrial and defense was $133.4 million, and telecom was $71.3 million. Data center increased approximately 40% sequentially, IND increased 11% sequentially, and Telecom increased 2% sequentially. Both data center and IND revenues are at record levels. Next, I'll take a moment to review each of our three core markets in more detail, starting with the data center. Our data center business is growing due to increased demand for high-speed connectivity using our 800G and 1.6T PAM4 products. As a reminder, our portfolio is highly diversified, supporting NRZ, PAM4, and coherent modulations across EML, silicon photonics, and Vixel-based architectures. Our connectivity solutions include IC and photonic semiconductors, with the photonic products being produced in our internal fabs. We see multiple trends in the industry, including the proliferation of optical links as hyperscalers are moving from passive copper to fiber connectivity in scale-up applications. This trend represents a large SAM expansion opportunity for MACOM as we currently do not promote passive copper solutions. Another contributor to our SAM expansion is the need for higher density interconnects that support both fast and slow data rates. In many cases, our newest products are designed for highly integrated architectures like NPO and XPO. These applications typically require smaller chips, more lanes of data, and lower power consumption compared to pluggable modules. These architectures often include LPO and LRO using single-mode or multi-mode modulation. We practice the be-first, be-fast approach. We also strive to provide options including lower power, smaller chip size, and multiple channels using flip chip, bump chip, or through silicon via technologies all to ensure our customers meet their size, manufacturability, and performance goals. Additionally, we are constantly innovating and improving our products to achieve better performance. As an example, Today we are sampling our latest generation of 200G and 400G per lane TIAs and driver products for various advanced interconnect applications. Interest in our indium phosphide products is growing as optical connectivity expands inside the data center. Our near-term and long-term growth strategy is to gain market share with new lasers and higher-speed photodetector products and to install necessary manufacturing capacity to meet demand. Our team is having strong results with our 200G photo detectors, which are ramping in volume production and becoming a meaningful contributor to our overall data center growth. In addition, our 400G photo detectors are receiving very positive customer feedback. Our 75 milliwatt CW laser qualification efforts continue. Our laser team is actively working to lock down a production process. And while we cannot declare success yet, we are gaining confidence in our ability to meet our customers' reliability and performance requirements. Customers have been providing us with positive feedback on our product's performance, and there is intense interest and customer pull to get us into production. We are developing plans to support a potential start to production in late calendar 2027. This includes scoping modest capex investments and fab space requirements to support a rapid, high-volume ramp for a few strategic customers. I will provide an update on the CW laser activities in the coming quarters. On a related note, we are seeing increased demand from our 25G DFB laser products, which serve the 100G QSFP, CWDM4, and LR4 applications. These products launched a few years ago and in some cases were previously qualified by customers. Customers are coming to us with urgency due to the general supply shortage of Indian Phosphide DFB lasers. We believe our Indian Phosphide Photonics product lines represent a large growth opportunity for MACOM and we expect to gain meaningful market share over the next three years. We continue to promote linear equalizer products that help optimize copper interconnects at 800G, 1.6T, and beyond. We are working closely with customers to address their program-specific requirements and various use cases. This includes copper cables and onboard equalizers. We are also seeing growing interest in coherent light solutions as coherent modulation can enable higher bandwidth and better link budgets In summary, we see many new large opportunities in the data center. High-speed connectivity is growing in complexity, and in the future, systems will operate at data rates above 1.6T. Our strategy is to collaborate with the leaders in the industry to and support their connectivity needs whether it's scale up, scale out or scale across. Turning to our IND business, we see many growth opportunities across the industrial and defense markets, primarily in the defense segment. 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, communication systems, and Wideband Electronic Warfare Systems. Last year, our defense business grew by 19%, and this year we expect it to grow by approximately 25%. The U.S. defense electronics market is projected to grow significantly over the next few years, and we are in a great position to benefit. In addition, we believe European countries will spend more on existing and new defense systems. We have a growing team of application and design engineers that can support our defense customers and offer the full scope of MACOM's capabilities. Our primary focus is providing unique solutions that improve overall system performance to give our customers an advantage. As an example of the type of products we develop, at this year's International Microwave Symposium, also known as IMS, in June, we showcased an X-band front-end module which utilized a combination of Macom's GaN ICs in a highly integrated multi-chip module assembly. The X-band frequency is ideal for precise target detection and discrimination and is often used for defense radar applications. Our product can deliver 16 watts of transmit power and over 40% power added efficiency. The receive side features industry-leading recovery time and exceptional linearity and noise figure. This product's small footprint can support compact, high-volume radar systems. Our R&D team works to push the limits of our semiconductor technology, and in recognition of our efforts this past quarter, we received incremental funding from the Air Force Research Labs, or AFRL, to support millimeter-wave GaN on silicon carbide production maturation. This effort is directly in line with our high frequency and high power strategy and further aligns MACOM with the needs of the defense industry. Over the past few quarters, we have also seen an increase in demand from our industrial market segments, including test and measurement, medical, automotive, and general multi-market products. We believe our test and measurement customers are seeing increased demand from the market primarily driven by expanding microwave SATCOM and AI-related engineering and production facilitation. Notably, our automotive business, which is one of our smaller submarkets, is expected to double its revenue this year, primarily driven by market penetration and increased design wins. Now moving to telecom. Within the telecom end market, satellite-based broadband access and direct-to-device, or D2D, Opportunities remain robust with numerous LEO networks in the planning or production stages. These systems support consumer, enterprise, government, and defense requirements. Today we are supporting a variety of these LEO networks and we expect our revenue in this market segment to continue to grow. I'll note that our commercial RF power team, which is traditionally focused on 5G base station opportunities, is now targeting the LEO market given the significant similarities and requirements. Our 5G technology is directly applicable to LEO D2D systems. LEO networks typically use microwave or millimeter wave frequencies and free space optics, or FSO, communications for satellite-to-satellite or satellite-to-ground communications. Notably, on the business development side, this quarter our team was selected to support a next-generation satellite optical communication platform. This new award establishes Macom as a strategic partner and will contribute to our growing LEO business. Why did this customer select Macom? Because we are capable of solving their technical and production problems and because all the critical ICs for the system could be sourced from Macom. This win exemplifies how we continue to penetrate the LEO market with our unique technology. Ground stations are a key part of LEO networks. In many cases, ground-to-satellite links prefer linearization of SSPAs or TWTs to boost the linear power efficiency of the link. At this year's IMS exhibition, we demonstrated how to linearize a high-power V-band TWT. The demonstration showcased how to improve linear power and efficiency for microwave transmitters used in satellite communications, defense, and other ground and space-based applications. At IMS, MACOM also demonstrated a complete WBAN transmit and receive signal chain. LEO satellites are increasingly turning to WBAN frequencies, which is approximately 75 GHz, as this spectrum enables multi-gigabit communication links, higher resolution imaging, more precise sensing and improved spectrum reuse. A few more highlights to share. First, in Q3, we began installing our new G10 epitaxial reactor at MECOM's European Semiconductor Center, or MESC, to support future growth in technology development. MESC, being located in France, is well positioned to support the European continent's commercial and defense markets. Recently, our engineering teams demonstrated how AI can be used to support the chip design process. We are aggressively developing AI capabilities to accelerate our time to market and to make Macom a more formidable competitor. Third, last week, over 50 summer interns presented the results of their summer projects. Our talented interns were recruited from top universities across the U.S. and Europe. Special thanks to our HR team and everyone who has been involved to support another successful internship session. We view this program as a core activity directly tied to growing our talented workforce. And last, in mid-July, the management team published its 2026 to 2030 growth strategy plan to our board of directors. Like prior years, we refined and updated our plans based on lessons learned, market dynamics, Thank you, Steve, and good morning. MACOM again achieved multiple new quarterly records associated with our financial performance during our fiscal third quarter.

Benefits from ongoing customer demand and operational improvements across the organization have again increased revenue, profitability, and cash flow. Fiscal Q3 revenue was $342.2 million, up 18.4% sequentially and up 35.8% year-over-year, driven by growth across all three of our end markets with data center leading, followed by IND and telecom. The strong bookings across all our end markets resulted in a book to bill of 1.6 to 1. As a result, we continue to have strong visibility across the business, and Q3 marks our highest quarterly bookings ever. Adjusted gross profit for fiscal Q3 was $204.2 million, or 59.7% of revenue. This represents a gross margin increase of 120 basis points over the prior quarter. We have and continue to expand our manufacturing capacity to meet growing customer demand. We expect to add new capacity across our operations during the remainder of fiscal 2026 and into fiscal 2027. These expansion actions will help ensure that we meet our operational and financial growth plans. The product demand increases across the business have resulted in enhanced utilization of our fabs, helping to drive higher gross margins. As we move forward, we expect ongoing quarterly sequential gross margin improvements through the remainder of fiscal 2026 and fiscal 2027. Total adjusted operating expense for our third quarter was $96.5 million, consisting of research and development expenses of $65.3 million and selling, general, and administrative expenses of $31.2 million. As anticipated, the sequential increase in adjusted operating expense compared to Q2 was primarily driven by ongoing R&D investments and employee-related costs. As our business expands, we expect to continue to leverage our existing OpEx functions. We will efficiently manage our SG&A and prioritize future R&D investments to support our growth objectives. Adjusted depreciation expense for fiscal Q3 2026 remained relatively stable at $9 million in line with the prior quarter. Adjusted operating income in fiscal Q3 with another record coming in at $107.7 million, up 33.9% sequentially from $80.5 million in fiscal Q2 2026, and up 69.6% year-on-year. This increase in adjusted operating income further reflects the leverage in our operating model as the business continues to scale. I would like to note that our Q3 fiscal year 2026 adjusted operating margin was 31.5% and over the past year has increased from 25.2% in Q3 fiscal year 2025. We expect our adjusted operating margin to be approximately 37% for the fourth fiscal quarter. For fiscal Q3, we had adjusted net interest income of $5.5 million, a decrease of approximately $1 million sequentially from $6.5 million in Q2. This lower interest income was partially due to the planned repayment of our 2026 convertible notes in March 2026, as well as our $61 million investment in IQE during the June quarter. Our adjusted income tax rate in fiscal Q3 was 3% and resulted in an expense of approximately $3.4 million. We expect our adjusted income tax rate to remain at 3% for our fiscal Q4 2026. I would like to highlight that due to the increasing profitability, we currently estimate our adjusted income tax rate will increase in fiscal 2027. Depending on the jurisdictional mix of our income, we anticipate our adjusted tax rate will begin to rise from our current 3% to mid-single digits as we progress through fiscal year 2027. And to close out our fiscal Q3 2026 income statement discussion, I am pleased to note our adjusted net income increased 30.2% to $109.8 million compared to $84.3 million in fiscal Q2 2026. Adjusted earnings per fully diluted share was $1.40, utilizing a share count of 78.4 million shares compared to $1.09 of adjusted earnings per share in fiscal Q2 2026. We strive to optimize the business's performance, which has contributed to sequential increases in our adjusted operating income and EPS over the past 12 quarters. Now, on to operational balance sheet and cash flow items. Our Q3 accounts receivable balance was $179.1 million, up over $19.5 million compared to our fiscal Q2 2026 balance. Our day sales outstanding averaged 48 days compared to the previous quarter at 50 days. Inventories were $281.5 million at quarter end, up sequentially from $252.2 million to support increasing demand across the business. Inventory turns increased to two times, up 0.1 from the preceding quarter. Fiscal Q3 cash flow from operations was approximately $80 million, up $1.3 million sequentially. We expect that our Q4 cash flow from operations will be in excess of $100 million. Capital expenditures totaled $20.8 million for Fiscal Q3. We estimate fiscal year 2026 CAPEX to be in the range of $60 to $65 million. MACOM has been disciplined with its CAPEX in recent years, investing $22.4 million in fiscal year 2024 and $42.6 million in fiscal year 2025. The majority of this CAPEX has been focused on expanding capacity at our production facilities and enhancing our R&D capabilities in support of customer demand. I would like to highlight that our capital plans are focused on expanding existing fab manufacturing capacity and capabilities. Typically, our new capacity CapEx is installed and online in less than one year from the start of each project. We believe this approach will support all of our growth objectives, minimize financial risk, while maximizing profitability and shareholder value. Next, moving on to other balance sheet items. Cash, cash equivalents, and short-term investments as of the end of the third fiscal quarter were $663 million. We view our cash balance as a strategic asset that can be used to help fund ongoing investments to support our growing business. An example of this can be seen in the $61 million investment we made in IQE during the third quarter. We believe this investment will strengthen our supply chain resilience and competitive positions. I would also like to note that this investment resulted in a $41 million non-cash gain associated with the GAAP accounting fair value remeasurement of the investments from the investment date through the end of our fiscal quarter on July 3, 2026. This non-cash gain was excluded from our non-GAAP results. We are in a net cash position of approximately $322.5 million as of July 3, 2026 when comparing our cash and short-term investments to the book value of our remaining $340.5 million of convertible notes, which mature in December 2029. As we move into our fiscal fourth quarter of 2026, and into fiscal 2027, we remain confident in our ability to keep building upon our strong and diversified foundation to deliver continued financial improvements for MACOM. We acknowledge and appreciate the ongoing hard work and dedication of the MACOM team who make these results possible. I'll now turn the discussion back over to Steve.

Thank you, Jack.

MACOM expects revenue in fiscal Q4 ending October 2nd, 2026 to be in the range of $415 to $425 million. Adjusted gross margin is expected to be in the range of 60 to 61%, and adjusted earnings per share is expected to be between $1.97 and $2.03, based on 78.9 million fully diluted shares. We expect approximately 35% sequential growth in data center, approximately 20% sequential growth and Industrial and Defense, and low single-digit sequential growth in telecom. I would now like to ask the operator to take any questions.

Thank you. Ladies and gentlemen, to ask a question at this time, you will need to press star 1-1 on your telephone and wait for your name to be announced. As a reminder, in the consideration of time, please limit yourself to one question and one follow-up per person. One moment for our first question in queue. Our first question coming from the line of Tom O'Malley with Barclays, Helene Smallton.

Hey, guys. Thanks for taking my questions, and congrats on the really good results. I wanted to ask specifically the VIN data center what's driving the strength. You mentioned across the PAM4 portfolio, is it TIAs and drivers? Is it the PDs getting better in the near term? And what's driving the increase book-to-bill in that portfolio? I just want to get a little flavor of where the strength is coming from specifically in the quarter and the guidance.

Sure. Thanks, Tom, for the question. And just to remind everybody, our data center business has been growing quite rapidly over the past three years. In 2024, we grew by 35%, in 2025, 48%, and now we are, looks like we're trending towards about 74% this year. So there's been a lot of moving parts, a lot of new products coming into production. If you pull back and look at our Thank you very much. Other data rates, sort of slower data rates, 100 gig per lane, not only multi-mode but single mode, all very strong, high double-digit growth. And some of our legacy products are 25 gig per lane products that support 100 gig FR and LR4 type platforms also exhibiting very strong growth. So what you're seeing is tremendous growth across all of the different data rates and really hitting all of our different product lines. Book-to-Bill 1.6 and 800-Gig Platforms

Thanks. And then, you know, good results bring questions on future good results. Traditionally, you've given a little bit of a sneak peek as the fiscal year closes. Just curious if you have any color for where you see the business kind of trending next year. It's been two really good years in a row of about 30% growth. I know you're very much execute as time goes along, but any peek into the growth trajectory into fiscal year 27. Thank you very much.

Right. Thank you, Tom. So a few things there. You're right. It's a little early to talk about our fiscal 27. We're still very much focused on closing out Q4. With that said, if you were just to take the midpoint of our Q4 guidance and annualize that into our fiscal 27, you're going to see numbers that are in the mid-20s, 27, 28 percent as a company. If you drill down and look at, you know, our highest growth market, which is our data center business, That number then trends to 50% year-over-year growth. So for us, you know, sort of from where we stand today, that's very much a base case. When we look at our business, our book-to-bill, as you highlighted, has been quite strong this year. Q1, it was 1.3. Q2, it was 1.5. In this past quarter, it was 1.6. So when you look at those numbers, it certainly suggests that We are starting our fiscal 27, or should start our fiscal 27, in a very strong position for growth.

Thank you. Our next question in the queue coming from the line of Blaine Curtis with Jefferies. Yolanda Smallton.

Hey, good morning, guys, and I'll just congratulate you on the results. I wanted to ask on telecom, I mean, I feel bad asking because everything seems to be firing on all cylinders. Just kind of curious, I mean, you highlighted the LEO opportunity. I'm just kind of curious when you think that telecom business may accelerate into next year and how to think about that Leo driver layering in.

Yes, you're right. The telecom segment, which is today our smallest segment, is forecasted to grow by sort of double digits this year. We would expect similar performance or better performance next year. We do have, as we've talked about in the past, Two or three major LEO programs that will start production at the end of this calendar year and at the beginning of next. I talked about in my script picking up a really nice optical product position at a large satellite OEM that's a leader in the industry, and we feel like that's going to drive growth for the next two to three years. And we also see several other programs coming online. There's probably... Four or five major customers within the LEO market that we're servicing. In some cases, it's direct-to-sell, which is the lower-frequency, high-power products. In some cases, it's the millimeter-wave backhaul links. We're getting more and more involved in the optics, including free-space optics. And I'll remind everybody, about a year and a half ago at a SATCOM show, we demonstrated a very high-power optical amplifier. and we are getting a lot of interest from OEMs that want to build high-power optical ground stations. So we're very excited to see that product generate some revenue over the next one to two years. And then the last thing I'll say is we continue to offer these customers the full suite of our manufacturing capability. So they look to us not only as a chip supplier but also as a module and a subsystem supplier.

Excellent. And maybe one for Jack. Just how do you think about – you said growth margins should increase sequentially all next year. How do you think about the incremental growth margins in the business?

Yeah.

Thanks for that, Blaine. Yeah, we've been pleased with the growth margin improvement. I think we've been having some conversations throughout this fiscal year with regard to those sequential improvements. Obviously, looking back over the past quarter, 120 basis point improvement in growth margins is something we've been pleased with. That's been supported through some of the increases in volumes that we've seen, but also a lot of hard work in terms of trying to improve yields and other efficiencies along the way. So as we look out into the future, if you look at the midpoint of our guide for the fourth quarter, that has us increasing about 130 basis points, once again supported through the volume increases on the revenue lines. As we look further out, it's hard to tell, but we would expect to see some of those sequential improvements on a quarterly basis similar to what we had seen during 2026. But we try to be a little bit more measured as our gross profit gets a little bit higher, our gross margins get a little bit higher. It's harder to get things out at such a larger rate. So we think in the 25 to 50 basis points per quarter range going forward.

Thank you. Our next question coming from the line of Vivek Arya with Bank of America Securities. Your line is now open.

Thanks for taking my question. Steve, there was recently something in the news about the proposed ban on the Chinese module makers for pluggable transceivers. We don't know whether there is anything more to it, but assuming there are those kind of restrictions, how does that impact MECOM in either direction when there are restrictions on some of your potential customers, but then also opens up more opportunities for other U.S.-based customers?

That's right, and thank you for the question, and we're also reading the same news you're reading. I'll sort of make a few points here. First, our data center business and our growth is really driven by U.S. hyperscalers, as well as the enterprise and compute OEMs here in the U.S. These end users are typically directly involved in supply chain decisions, in selecting chips for their hardware. And as you know, Macon is selected due to the performance of our products, the uniqueness, our ability to scale, the quality, cost, things like that. Our thinking is that if the hyperscalers have to shift the market share from their supply chain between different transceiver companies due to new regulations, then we would expect to follow that business to those other manufacturers. And so from our point of view, I think we would see a customer mix shift. And I'll just highlight, we have relations with all of the transceiver companies in the industry, including companies that in some of our business areas we actually compete with. So where the transceivers or the NPO or XPO engines are designed and built is a little bit out of our control. As you know, it could be China, Thailand, Taiwan, Vietnam, or here in the U.S. But I think it's important to highlight that the hyperscalers recognize Macon as a strategic supplier. We have compelling products and manufacturing capability. So we'll continue to monitor this, but at this point, We're keeping our head down and it's business as usual. So that's sort of the first point on that. And then the second I'll just highlight, which is pulling back a little bit and looking at our overall exposure to China. We have no manufacturing today in China. We have about 85 employees. They are primarily focused in the application sales and some logistics areas. And the team really is focused in two areas. The first is servicing a few Scandinavian telecom companies that have very large design centers in China that support a lot of the 5G base station infrastructure build-outs globally. And so our teams support those locations with application support. It's primarily RF products and high-power products. And then the second, of course, is our team focuses on the optical industry. And to your point, there's numerous – Chinese transceiver companies, as well as US and European transceiver companies in China. And so that team is supporting all of those accounts. So the last point I'll make just regarding our overall China exposure is the vast majority of what we sell into China for products is exported out of China in systems which are typically headed to the US. It's the vast majority of our business.

Thank you for that, Steve. The second question is, you gave us a number for your served addressable market, or SAM, for 27. And I'm curious, what is that SAM equivalent number for 2026? And do you expect to gain share in 27? Thank you.

Right. It's a great question, and really our numbers for 2027, and really we have numbers out through 2030, came from the work we did over the past four months, you know, developing and updating our strategic plan. I would say we did a bit of a reset on some of our market-based numbers. We brought up our industrial and defense numbers for obvious reasons. You know, there's a lot of spending going on right now. We talked about that in the script. and we also brought up our data center business. So we sort of have sort of a six billion number pegged to the industrial and defense and the six billion in data center and then the balance of about three for telecom. I would say that's up about 20 to 30 percent from 26 to 27. We've seen a lot of new and exciting platforms coming our way. We are absolutely expanding our Portfolio to address the market. So our SAM by definition is growing. And I'll just give a few examples. And really these examples are what I would consider the accelerators for the next three to five years, which is number one, more 200 gig per lane products for PAM4. We're adding capacity for our indium phosphide products. We talked about that. There are new programs we're involved in that are both scale up and scale out and to some degree scale across. And we think NPO is going to start to grow significantly starting in 2028. We've talked in the past about coherent light. And then there's other interesting applications including PCIe 6 and also, you know, some of the equalizers that we talked about. So those are all very much specific to the data center on the defense side. It's our exposure to the defense systems, primarily radar-based. So you see big programs like Golden Dome. You see lots of refreshing and rebuilding of the U.S. armaments and missile systems. There's been a lot of discussion about stockpiles coming down. And then the last sort of really game changer is the work that we're doing with drones and anti-drone technology. So those sort of in aggregate are reasons why we decided to bump up and our fan.

Thank you. Our next question in the queue, coming from the line up, Finn Bolton with Neat Humming Company. Your line is now open.

Hey, guys. Thanks for taking my question. Steve, you mentioned NPO several times on the call, and I think we're hearing this from others in the industry, and so maybe can you spend a minute talking about MECOM's position In NPO, what you're supplying, is it TIA driver arrays? Are you looking at other types of solutions? Would you ultimately provide a full optical engine for NPO, but maybe just a little bit more color on your efforts there?

Sure. Thanks for the question. So I can tell you we are not going to be building engines and supplying engines to the market. So in the case of a data center, we are a chip supplier. Thank you very much. Those architectures still need, as you pointed out, drivers and TIAs. And what's different here is the density that's required to bring all of this interconnect to bear. So, as I said in my script, customers want smaller parts. They want more channels. They want lower power. They want these products in different form factors some customers want. to use wire bonds. Some want to use bumped devices. Some use flip chip devices. And so we're engaged with pretty much, well, I wouldn't say all, but probably most of the OEMs that are developing NPO solutions. And what we're finding is these solutions are becoming very specific to the architectures that the hyperscalers are driving. And so those flow downs are coming directly to us. So we have numerous, I would say, somewhere between 10 and 20 active NPO development projects that are servicing various customers and use cases. And so I think that's the general trend. A lot of this revenue will kick in, in our estimation, sometime in 28. Some of these programs will never make it to production. Some will. We'll have to wait and see. Thank you.

And then just looking at the acceleration in the data center business kind of coming out of Fiscal 26, I guess. Any thoughts about, you've got three years of accelerating data center growth. Certainly looks like fiscal 27 is going to be a good year, but what would it take to see a further acceleration in data center revenue in 27? Is it just continuation of trends, market share gains, kind of what are the puts and takes looking into next year?

Right, and I think we will Answer that question probably more completely next quarter at the end of our fiscal year in the beginning of 27. We'll probably follow the same methodology we did this year where we'll talk about sort of a base case level of business. And then as we move into the year, as we bring on capacity, as we see these design wins go to production, we will modulate up or down our data center business. I suspect it will be going up. There's more good things happening than, let's say, negative things happening. But we'll really just have to wait and see. I'll also highlight that something that's very important to our data center business and overall MACOM growth, which is the amount of R&D spending we're doing as a company. And if you go back just three years in 2023, we were spending as a company about $132 million in R&D. This year, we're going to spend almost $250 million. So we've doubled the amount of R&D spending in about three years. And as we look ahead and as we try to grow into this $15 billion SAM, we will continue to build out and staff our design centers with the best chip designers we can. And we've been very fortunate to be able to really bulk up on our chip design capability, which is really going to pay dividends over the next two to three years. So we'll follow the market dynamics. I'm not sure I'm really completely answering your question, but we do have a lot of projects in the works. We talked a lot about the PDs. We are thinking, as I mentioned, that the CW laser activity is quite positive right now. We are well into the back half of a high-temperature Operating Light Test and H-Tall Test, which typically is 5,000 hours, and the data looks exceptional. So we are building our confidence that we have a winner.

Thank you. Our next question, coming from the line-off, Tori Sandberg with CFO, Yolanda Salvin.

Yes, let me echo congratulations. Very strong results. Steve, in your prepared remarks, you sounded much more positive on some of the Indian classified projects that you have, including new lasers and high-speed PDs. Can you maybe rank order which ones you're more excited about over the next couple of years? Thanks.

Well, that's a great question, and if you're asking specifically about the PDs or the lasers, the PDs right now are ramping, and we're seeing tremendous demand, and we expect that demand to continue, and we've been adding incremental capacity to support that demand. That has been a great door opener to other strategic relationships with major accounts, so we're very pleased about that. If we're able to bring a CW laser into production in 2028, that's a watershed moment. That'll be a big number that will really drive tremendous growth. You can put the laser market in the billions of dollars of revenue. And so if we can get a fraction of that to start and then grow into it over time, I think we'll be quite happy.

Yeah, that's a great caller. And you also mentioned that you are now basically installed with some capacity in Europe to support that market. I'm just curious, you know, when do you expect to, you know, for especially EU defense revenue to become, you know, more material revenue?

Probably sometime in 28, that defense number will start to grow. We are, as an example, This year, finishing up the conversion of the production line from 3-inch to 6-inch. So we've completed the transition of one process set. We have two more to go, which should be done in the next, I would say, four to six months. A lot of the defense contractors that we engage with today are waiting for us to do that. And so the reason why that's important to those customers is our quality goes up, our cost goes down. and our capacity doubles. So we're very excited to sort of bring that to bear to the European market. Most of the business that we do with the European defense contractors are custom design related, whether we're doing those designs or whether it's a foundry relationship. And I think over the next month or two, I'm told we're going to get one of the largest orders in MESC's history for a UK defense company that's working on Airborne Defense Systems. So very excited about the prospects of that business and that technology. And just to remind everybody, our strategy is the highest power, highest frequency, and highest data rate in the MESC technologies, which in some cases are sub-100 nanometer gate lengths, checks the box at the highest frequency. So we will leverage that into the U.S. market, the European market, and the satellite market. And those markets are growing and need that technology, so we do expect good things in the future. And just one last point on that. When we acquired that site, we acquired that site from the French government. We paid about 38 million euros. The land was worth about 25 million, and they had about $100 million of capital equipment installed in their fab, and they had a broken business. And so it was really, from our point of view, a fixer-upper, that we've been working on over the past three years, and it will start to pay dividends probably in about a year from now.

Thank you. Our next question coming from the lineup, Sean O'Blackman with C.D. Cowan. You're on the phone.

Hey, good morning, guys, and congrats on the very solid numbers, and thanks for letting me on. I also wanted to ask about telecom, but I wanted to see if there was a way to understand telecom The growth drivers outside of LEO, whether it's 5G, the RF power opportunity from your competitor's exit, wired or even cable TV, I think investors have been keenly interested in the LEO business for obvious and good reasons, but we've been seeing some solid numbers coming from others in the cable TV industry from the DOCSIS transition and just Are we maybe underappreciating the non-LEO growth drivers in telecom as an investor base? And maybe brief thoughts on how we should size those buckets within the business?

Yeah, I think that's a very good question. And certainly we are very focused on the LEO platforms because there's a whole wide array of optical, RF, microwave products. Thank you very much. I'll highlight that our GAN4 technology, which is the latest technology suite that our team has developed, is directly applicable to 5G massive MIMO platforms. And today we actually have very little business on the MIMO side. Most of our 5G business is on the macro side. So we see a huge opportunity to actually perhaps more than double our 5G revenue as we start to win these MIMO sockets over the next few years. That market is a bit slow moving. In aggregate, it's probably not growing. But our strategy there is to take market share with a combination of picking up new programs that perhaps a competitor may have had in the past or bringing in new technologies like our GAN4. You mentioned cable infrastructure. Our cable infrastructure business is doing quite well this year. It's actually... will be around 40% growth. So that has been a very strong piece of our telecom business. And then the other sort of bright spot inside of telecom is our metro long haul business, which is over 50% growth this year. So there is a lot of work we have to do to really capture some of these other applications. As I talked about R&D spending, I think that's a big part of it. The telecom market is a very focused market. In some cases, or in many cases, they're SOCs, or system on chips, or highly integrated silicon, either CMOS or by CMOS, or SIGI products. And we tend to shy away from those applications. And so that is an area, as we get bigger as a company, we will start to address more of those applications.

Thanks, Steve. That's all... and maybe even related to that as a follow-up, if I could just quickly ask on fiscal 27, not on the revenue side, but any early plans on the expense side, whether OPEX or CAPEX. I know Jack mentioned potentially related to the CW Laser business towards the end of the year, but any early benchmarks we should think about for expenses next year?

Yeah, I think that's a fair question. So the one thing I'll highlight, and Jack mentioned this, and I think it's worth repeating, we're exiting the year over 60% gross margin. We'll have operating margins that are just below 40%, and so you can imagine that our target for next year is to breach operating margins or breach the 40% operating margin level. So that is certainly something we're excited to do. When we think about the expansion, and Jack mentioned this, and especially adding capacity to our fabs, we are very focused on spending the least amount of capital to get the maximum amount of producibility. So when we look at our capital spending for next year, it won't be too dissimilar to this year, sort of in that $60 million range, and that includes stepping up some of the Stepping up some of the infrastructure to support a laser ramp. So we're very judicious. Some people call Jack Scrooge. I don't know, but I can tell you that we are very careful with the capital spending. Related to that, I'd just like to highlight one other point. So if you remember back in January of 2025, we actually issued a press release saying that we had signed a PMT with the CHIPS office. and we had developed an investment plan for the North Carolina and the Massachusetts FABs where the total investment over five years was going to be about $345 million and half of that was going to be paid for by the U.S. government and the other half MACOM. Well, that plan was written actually in early and mid-2024 and so it's been almost three years, two and a half, three years. We have completely updated that Project Plan, and we have resubmitted it to the CHIPS office because a lot of things have changed regarding our capabilities. And we've taken our own actions to support the market. For example, when Wolfspeed decided to shut down their Durham Fab, we were able to get a significant amount of equipment at pennies on the dollar. So we took advantage of that, and that equipment is now being put into service. We also have been spending a lot of money here in Lowell. to expand the capacity in our FAB. So with all of those various moving parts, as well as a fresh look at what our needs are over the next three to five years, we are now reengaging with the CHIPS office with a completely rewritten project plan. And so we will continue to work with them and see if we can close the deal. We still have a lot of work to do. There's terms in what they call their DFA, Definitive Agreement, which are sort of non-starters for us. So we're continuing to negotiate a deal in this regard. And I mention this only because that will certainly be a huge benefit to MACOM as it relates to saving capital money, capital spending. Did you want to add anything?

Just to build upon your, I think, operating expense question, Sean, we've added some operating expenses over the past year. It's been at a much lower rate than the revenue growth that we've seen over that time period. will continue to be very disciplined in terms of how we look at our operating expenses. I think in my prepared remarks I made reference to looking to leverage our optics where we need to, but also making sure that we're putting the investments in place where we think it's needed, more specifically from an R&D point of view. And as you look out into the future, and I think we've talked about this, adding a couple $3 million per quarter as we go forward, all dependent upon how the business continues to grow and scale. It can be a rough order of magnitude in terms of where OPEX would be as we look out into the future.

Thank you. Our next question, Hugh, coming from the lineup, Christopher Rowan with Susquehanna, Yolanda Smallsons.

Hi, guys. Thanks for squeezing me in. I guess my first question is on copper. If you guys could perhaps talk on the opportunity for linear equalizers, both in ACC cable form and then also on PCB, what you kind of see for the rest of the year and into next year would be great.

Great question. Yes, we definitely see opportunities with equalizers that can be, as you highlighted, can be used in a cable environment or a copper cable environment. Some people refer to those applications as ACC's, as well as on PC boards. And so we are absolutely seeing opportunities there. There is one large hyperscaler that is looking to deploy That type of a solution is cable solution. The volumes are quite large and we would expect to be part of that when that moves into production.

Excellent. And then on the cash situation, you have strong cash flow generation for sure. I was wondering what Scrooge would like to do with his growing cash pile.

Yeah, and by the way, I don't think he's Scrooge, Jack. You're one of the best CFOs in the industry, and we are, and he and I are like-minded in being very conservative as we think about making investments, right? In terms of the cash, you know, our philosophy is you can never have enough cash, and we want to build that, and we've been making strategic investments, including the one he made in IQE about a quarter ago. And with that, I'll see if you want to continue that.

Yeah, I mean, we've also looked to utilize our cash to pay down some of our debts as we go forward. We still have some debt to repay, internal investments, both from a capital and from an operating expense perspective as we grow the business are top of mind. We've done a number of tucking type acquisitions over the past number of years. That seems to suit us well in terms of how we round out our portfolio. So I think you'll see some of the same as we go forward from a capital deployment and cash utilization standpoint.

Thank you. Our next question, coming from the line-up, William Stein with George Security, Salem, Melbourne.

Great. Thanks for taking my questions. Congrats on the good results and the great guidance. I'm hoping you talk a little bit about input cost inflation, whether you're seeing this influence your need to spend on cost of goods and whether that's met with easy pass-through to customers or... or whether it's a bigger fight or any color around that, please.

Yeah, we definitely are seeing input costs increase, whether it be labor, electricity, general utilities, raw materials. Costs are absolutely going up, and our supply chain and operations team, I think, do a very good job managing to optimize and minimize our costs We try to pass those costs on to customers when possible. That's not always possible, as you highlighted. And the good news is even during the last year or so, as we've seen inflation increase, we've been able to expand our gross margins. And so if we continue to launch products that have strong pricing, are best in class, are non-commodity, Thank you for joining us.

Industrial Demand and Utilization at Lowell. Can you maybe update and level set me on that? Going forward, is this driven more by mix or utilization? Any color would be helpful. Thank you.

Sure. Our utilization at our RTP North Carolina in Lowell, Massachusetts FABs continues to increase, and all during a period where we're adding capacity. And so The good news is we have ample room to grow to meet our targets. Utilization rates are definitely driving some of our lead times out, so we are quoting longer lead times for products that are manufactured inside of MACOM. But generally speaking, we have these things under control. The mix here in the Massachusetts fab is a combination of telecom, Defense, and now Data Center. This is sort of a new trend as we're really ramping up our indium phosphide products here. And yes, that mix will have a bearing on our overall profitability. You know, these PD devices, as an example, are quite small. And so we're able to, you know, produce a lot of devices with not so many wafers, let's say. So we are cognizant of the mix shift. We're managing that. We actually think during 27 it will improve and continue to improve. And then when we bring the lasers on board, things should get even better. Jack, do you want to add to that?

I think just in terms of us being able to leverage some of the existing costs that we have in our existing manufacturing facilities as the top line grows, you're seeing that come through on the gross margin side. So we're pleased with how we've been able to leverage those costs.

Thank you. Our next question coming from the lineup, Carl Ackerman with BNP Pro. The ceiling is now open.

Yes, thank you. I'm sure if I may. Steve, your datacom business is certainly breaking out. You're well exposed to address all merchant trends for suppliers, but are you beginning to see a meaningful ramp of orders of optical components and lasers from hyperscalers designing their own in-house

Yeah, so we are not a high-volume manufacturer of lasers today. So that is, right now we are developing CW lasers primarily for silicon photonic applications. The type of lasers that we are producing today are for LR4, the 25-gig DFB lasers, also for CWDM4, so the classical lasers 100 Gig Module Market is more of a merchant market where we're selling those lasers into, let's say, the merchant market with companies that do not make their own lasers. That is today our business. What happens in the future is TBD. We'll certainly service any company that wants to buy our laser, whether they make their own or not.

Yep.

Steve Hisorko, you suggested that Datacom might be the smaller portion of your segment with more volatility than Telecom or IND. But given your commentary that Datacom could grow 50% or so next year and you've got growing R&D investments in this area, do you think Datacom could be, in fact, the largest opportunity for you over the next few years? Thank you.

Yeah, I'm not sure you got my commentary quite right in your question, but I'll say that when we look at the STAMs, The I&D and the data center SAMs are about the same at approximately $6 billion. So that's the opportunity we're chasing. And our ability to capture that market share will very much depend on timing of our successes, the design wins, our ability to beat competition, time to market, and things of that nature. But the growth opportunity in both of those large markets is quite big. Clearly, the data center market moves very fast, so one would expect that that, in the near term, will potentially outgrow the IND. But, you know, we would expect, over the long term, those markets and our revenue to double in those markets. There's no doubt about it. That will happen. It's just a matter of when.

Thank you. Our last questioner in queue will come from the line of Tim Savageman with Northland Capital Markets. Your line is now open.

Okay, good morning and double thanks for squeezing me in and congrats on the results. My question is about optical contents in data center on the module front. You know, lasers and detectors relative to what you see currently on your TIA and driver ICs, it seems like that content could be larger, maybe significantly larger. and given your, you know, what I think is a pretty meaningful change in tone here, relative to the laser opportunity, I'd be interested in kind of your estimate of what kind of content you're chasing and I'll have a real quick follow-up.

Yes. I'm not sure I would agree that the laser and detector opportunity is larger than the driver and TIA. We've not made that statement and I don't want you to think That's what we're thinking. And we haven't specifically sized those product line categories and how big their stand is. That's something that we have internal numbers and we have our thinking about that, but we've never said publicly which one we think is bigger. At the end of the day, they're both classes of products or, in our mind, multi-billion dollar product areas that we can service and we have unique technology, whether it's our chip design capability or our internal indium phosphide manufacturing capability. So we're sort of equally excited about both. We have different teams working on those technologies. The indium phosphide teams are primarily material scientists, fab engineers, process engineers and very experienced optical designers. The TIAs and Drivers is very much a different set of talent. These are chip designers that have very good experience, long experience working with high-speed interconnect and highly integrated devices that has various attributes including programmable memory, digital content, high-speed analog, very high FT SIGI processes. and those chip designers have an expertise with the various protocols. So whether it's multimode, which has historically been a strength of Macom, and now single mode, and then, of course, coherent and coherent light. So those chip designers need to speak that language to develop the type of parts that our customers want, and it's a completely different capability. And we're very fortunate to have very strong teams in both areas, and we would expect both product areas to grow significantly in the years to come.

And just to follow up, you know, the photo detectors is where you've gained your current foothold. Are we at a point, as you look at the second app, either the results you just reported and or the guide, Where PDs are making a material impact in your growth currently and maybe by material, you know, tens of millions type thing or are we not there yet?

Yeah, we just want to be a little careful breaking out revenue by product line because of the competitive nature. So I don't really want to comment on that. I did say in my script that it's a more meaningful number and that number will grow significantly in the quarters ahead. So, yes, I think it's an important part of NACOM. It's certainly helping drive growth here in our Massachusetts fab. Not only do we have what we believe to be one of the industry's best 200-gig PDs, but we've also launched higher data rate PDs, including a 400-gig PD, which is now in the hands of perhaps a dozen customers as they think about the next generation, you know, So we are on the very front edge of the market as it relates to photodiodes. And the genesis of that is our Ann Arbor, Michigan facility has been building the most sensitive photodiodes for over a decade. They have an MBE. They grow their own epitaxy. They understand the science around light emission and light detection. And that team has done a phenomenal job spending close to a decade perfecting this product, which today has industry-leading sensitivity, amazing dark currents, extremely reliable, and the customers certainly are enjoying the performance of those products.

Thank you. And that's all the time we have for our Q&A session. I will now turn the call back over to Mr. Daly for any closing comments.

Thank you. In closing, I'd like to thank the MACOM team for making these results possible. Have a nice day.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.