MACOM Technology Solutions Holdings, Inc. (MTSI) Q4 2026 Earnings Report, Transcript and Summary

Welcome to MACOM's Fourth Fiscal Quarter 2026 Conference Call. This call is being recorded today, Thursday, November 5, 2026. [Operator Instructions] I will now turn the call over to Mr. Steve Ferranti, MACOM's Senior Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, operator. Good morning, and welcome to our call to discuss MACOM's fourth quarter and year-end results for fiscal year 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's statements during this call will also include discussion of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related Form 8-K, which was filed with the SEC today. With that, I'll turn over the call to Steve Daly, President and CEO of MACOM.

Thank you, and good morning. I will begin today's call with a general company update. After that, Jack Kober, our Chief Financial Officer, will review our Q4 and year-end results for fiscal year 2026. When Jack is finished, I will provide revenue and earnings guidance for the first quarter of FY '27, and then we will be happy to take some questions. Revenue for the fourth quarter of fiscal 2026 was $424.8 million, and adjusted earnings per diluted share was $2.09. Our full year FY '26 revenue was $1.3 billion, and adjusted earnings per diluted share was $5.60. On a full year basis, we achieved 37% year-over-year revenue growth and 61% year-over-year adjusted EPS growth. In Q4, our book-to-bill ratio was 1.4:1, and we ended the fiscal year with record backlog. Orders were strong across all 3 end markets with data center outperforming. Orders booked and shipped within the quarter were 7% of total revenue, reflecting our strong backlog and extended manufacturing lead times for certain products. Q4 revenue performance by end market was as expected, with all markets growing sequentially. Data center revenue was $188.1 million, Industrial and Defense was $164.6 million and telecom was $72.1 million. Sequentially, data center increased approximately 37%, I&D increased 23% and telecom increased 1%. Data center and I&D revenue both reached record levels again this quarter. In total, these markets contain thousands of potential customers with a combined serviceable addressable market, or SAM, that we now estimate to be in the range of $15 billion in 2027. To address the large SAM opportunity, we have invested and we will continue to invest in R&D and in expanding our engineering and manufacturing teams and capabilities. In FY '26, our team made meaningful progress across many strategic focus areas. Three noteworthy accomplishments, which we expect will support FY '27 and FY '28 revenue growth include: first, our fab engineers recently made significant progress improving the quality of our indium phosphide lasers facet, allowing our lasers to better address CW applications. These results support MACOM's strategy to enter the multibillion-dollar CW laser market, which we are targeting for 2028. Second, we are upgrading 2 of our existing millimeter wave GaN on silicon carbide processes to improve performance and enable advanced nodes. We believe this will make MACOM more competitive and help us better address the growing SATCOM and defense markets. And third, we are on plan expanding manufacturing capacity at 3 wafer fabs in 2 U.S.-based hybrid manufacturing sites to support our future growth. Our fab, advanced technology and operation teams are doing an excellent job collaborating to develop new technologies for future products while also increasing production capacity for existing products. We believe these activities will enable MACOM to provide our new and compelling products at scale and meet our customers' growing demand during 2027 and 2028. Turning to recent market trends, starting with data center. Based on our current outlook, we believe that FY '27 will be another robust year. We now believe our data center year-over-year revenue growth will exceed our FY '26 growth rate of 74%. MACOM has a strong position in the market. Notably, we believe the combination of growing 1.6T volumes with increased content opportunities provides a strong tailwind for our data center business. In FY '27, we will continue to expand our high-speed analog portfolio to support PAM4 and coherent systems across EML, TFLN and silicon photonic-based platforms. As data center architectures evolve, we expect new optical implementations with higher I/O density, known as near-packaged optics or NPO, will be deployed. NPO architectures can vary by end customer, but what is common across all NPO customers is that they require smaller IC footprints, more lanes of data and lower power consumption compared to pluggable optical modules. We believe NPO provides a tremendous growth opportunity for MACOM, and we are actively pursuing high-volume opportunities with multiple hyperscalers. Our indium phosphide photonics product lines also represent a large growth opportunity for MACOM. Today, we manufacture 200G photodetectors and a wide range of lasers, including 25G lasers for 100G LR4 and 100G CWDM4 applications. As we look ahead, we expect to produce significant volumes of 200G PDs as well as 400-gig PDs and as I previously mentioned, CW lasers for 800G, 1.6T and 3.2T applications. Customer interest remains high, and we are excited to bring these products to market as quickly as possible. I'll highlight that at this year's CIOE and ECOC trade shows, we introduced a full front-end chipset solution for 3.2T optical modules, combining transmit and receive technologies optimized for PAM4 optical links. This chipset consists of 2 400G per lane quad linear TIAs, 8 400G photodetectors with high coupling efficiency as well as 2 modulator drivers. Our 3.2T chipset solution was designed to help our customers accelerate development of their next-generation optical interconnects for AI infrastructure across thin-film lithium niobate, silicon photonics and EML-based architectures. Turning to our I&D business. Our I&D business continues to strengthen, driven by our talented teams designing and manufacturing best-in-class IC, module and subsystem solutions. In FY '26, our I&D revenue grew 27.8% year-over-year, and we are targeting even higher growth in FY '27. We see multiple favorable trends, including the expansion of U.S. and European defense budgets, which are supporting increased development and production of radars, drone and counter UAS systems, communication systems, electronic warfare systems and hardened optical electronics for a wide range of applications. Since 2019, we have been focused on improving the quality, performance and breadth of our products for this market. We actively engage customers, large and small, on long-term programs and work together as partners to help ensure their success. The I&D market remains a critical portion of our business, and we are pleased that our franchise and brand continue to strengthen every year as we grow. We win because we offer customers in this market unique semiconductor processes, a broad product portfolio spanning high power, high frequency and high data rate functions and the ability to design and manufacture complex customized multifunction solutions. These solutions often combine best-in-class ICs with bumped or copper pillar flip-chip technology in LGA packages to achieve the smallest possible form factors. Two examples include a receiver protector module that shields an RF or microwave receiver or radar from high-power jamming or interference signals and the second, a transmit receive module used in digital beamforming antenna array systems. Our primary focus in the I&D market is providing unique solutions that improve overall system performance and give our customers a competitive advantage. Over the past 6 months, we have been awarded numerous development programs from both large defense primes and newer neo primes, which we believe will lead to meaningful long-term business. These platforms include microwave and optical EW systems, missile and drone electronics and next-generation tactical mobile radios. All these wins have one thing in common. They utilize unique MACOM semiconductor content. And finally, during Q4, we received follow-on orders to support continued long-term production of hardware we manufacture for shipborne radar systems and air-to-air missile systems. Now moving to telecom. Telecom revenue grew approximately 11% year-over-year in FY '26, driven primarily by 5G and SATCOM. We expect similar growth in FY '27 with potential upside as we capture and execute new business during the year. The most significant growth opportunity we see within the telecom market today is the low earth orbit or LEO satellite segment. We are a supplier to a variety of these LEO networks today, and we expect our revenues in this market to grow in FY '27 and FY '28. MACOM supports our LEO customers at various levels, including wafer foundry, standard and custom IC products and multichip module solutions. We support this market with high-power and high-frequency RF products, optical components and analog and mixed-signal ICs. We draw on our heritage in space and Hi-Rel product screening and system engineering know-how to support our customers' designs and time to market. We were pleased to learn that one of our customers was recently awarded a new contract to support a large constellation. We anticipate this could represent approximately $20 million of new business for MACOM beginning in early 2028. I'll note that LEO satellite constellations require thousands of ground stations, which contain uplinks and downlinks that communicate with the satellites. The links often utilize microwave frequencies, for example, V-band frequencies between 40 and 52 gigahertz. MACOM has successfully designed and is manufacturing and delivering V-band analog linearizers to be used with V-band TWTAs for these uplinks. We see this as a growing opportunity within the telecom market. As some satellite network operators move to provide D2D services, we are seeing a new opportunity. Our medium and high-power 5G technology is directly applicable to D2D systems as there is significant similarities in the requirements. We also continue to see market share gain opportunities in the terrestrial 5G, although the overall RAN market demands remain flat. In wireless infrastructure, our teams are advancing our new GaN products for macro and massive MIMO applications. We are making steady progress, and we believe our relationships with the 2 leading Western telecom OEMs has never been stronger. Investors should be aware that we remain focused on executing a long-term strategy to provide differentiated semiconductor solutions for the highest data rate, highest power and highest frequency applications in noncommodity markets. We believe this strategy will create a superior business model and produce strong long-term financial returns for our stockholders. Our strategy relies primarily on organic growth driven by internal product development and R&D investment. However, we also recognize that strategic M&A can play an important role by expanding our management team and engineering teams, our technology portfolio and market exposure. We believe our recent M&A activities and investments have made MACOM a stronger company. We maintain an active pipeline of opportunities and continually evaluate potential targets. Our approach has been and will continue to be highly selective and disciplined. In summary, we will continue to build a best-in-class and diversified company. Based on our long-term strategic plan, we believe we have the opportunity to double our revenue and profits over the next couple of years. Jack will now provide a more detailed review of our financial results.

Thank you, Steve, and good morning. Before getting into our fourth quarter results, I'd like to summarize a few items regarding our full fiscal year 2026, which ended on October 2, 2026. Bookings were strong across all of our end markets, resulting in a full year book-to-bill of 1.5:1 and marking our highest bookings year ever. We achieved record revenue of over $1.3 billion, which grew more than 37% over fiscal 2025. Our annual adjusted operating margin grew by 660 basis points to 32%. Adjusted earnings per share grew by more than 61% to $5.60. Cash flow from operations continued to strengthen and increased by approximately 52% to $357 million. We have continued to invest in the organization by expanding our production capacity and our research and development capabilities to support our growing business. Now on to our fourth quarter fiscal results. Fiscal Q4 revenue was $424.8 million, up 24.1% sequentially and up 62.7% year-on-year, driven by growth across all 3 of our end markets, with data center again leading, followed by solid growth within I&D and telecom. Adjusted gross profit for Q4 was $260.3 million or 61.3% of revenue. This represents a gross margin increase of 160 basis points over the prior quarter, primarily as a result of revenue growth, product mix and factory utilization. Total adjusted operating expense for our fourth quarter was $98.1 million, consisting of research and development expense of $67.5 million and selling, general and administrative expense of $30.6 million. As anticipated, the sequential increase in adjusted operating expense compared to Q3 2026 was primarily driven by ongoing R&D investments and employee-related costs. Adjusted depreciation expense for fiscal Q4 2026 grew modestly to $9.2 million, up 2.4% from the prior quarter. Adjusted operating income in fiscal Q4 was another record coming in at $162.3 million, up 50.6% sequentially from $107.7 million in Q3 2026 and up 142.2% year-over-year. I would like to note that our Q4 2026 operating margin was 38.2%, reflecting the leverage in our financial model as the business continues to scale. I'll also note that we expect our adjusted operating margin to continue to increase and exceed 40% as we move through fiscal 2027. For fiscal Q4 2026, we had adjusted net interest income of $6.1 million, an increase of approximately $600,000 sequentially from $5.5 million in Q3 2026. Our adjusted income tax rate in Q4 was 3% and resulted in an expense of approximately $5.1 million. As discussed on prior calls, as a result of the growth in our profitability, combined with the utilization of our remaining historical deferred tax assets, we anticipate our adjusted income tax rate to increase from 3% to approximately 6% for fiscal year 2027 beginning in Q1. And to close out our fiscal Q4 2026 income statement discussion, I am pleased to note our adjusted net income increased 48.8% sequentially this quarter to $163.3 million compared to $109.8 million in Q3 2026. Adjusted earnings per fully diluted share was $2.09, utilizing a diluted share count of 78.3 million shares compared to $1.40 of adjusted earnings per share in fiscal Q3 2026. Now on to operational balance sheet and cash flow items. Our Q4 accounts receivable balance was $209.5 million, up $30.4 million compared to our Q3 2026 balance. Our days sales outstanding averaged 45 days, down 3 days compared to 48 days in the previous quarter. Inventories were $284.3 million at quarter end, up $2.8 million sequentially from $281.5 million. This increase was to support the demand across the business. Fiscal Q4 cash flow from operations was approximately $155.5 million, up $76.6 million sequentially or an increase of 94.5%. Capital expenditures totaled $17.5 million for fiscal Q4, down from $20.8 million in Q3 2026. Our total CapEx for fiscal year 2026 was $64.4 million, in line with our projections, and we anticipate fiscal year 2027 CapEx to be between $100 million and $110 million. A majority of this CapEx will be focused on expanding capacity at our existing production facilities and enhancing our R&D capabilities in support of customer demand. Next, moving on to other balance sheet items. Cash, cash equivalents and short-term investments as of the end of our fiscal fourth quarter were $792.4 million. These strategic assets provide us with increased flexibility to fund ongoing investments and respond quickly to new opportunities. We are in a net cash position of approximately $451.7 million as of October 2, 2026, when comparing our cash and short-term investments to the book value of our remaining $340.7 million of convertible notes, which mature in December 2029. In closing, I'd like to recognize that the results we have achieved during fiscal year 2026 were due to continued successful new product introductions, disciplined execution and strong contributions from the entire MACOM team. I will now turn the discussion back over to Steve.

Thank you, Jack. MACOM expects revenue in fiscal Q1 ending January 1, 2027, to be in the range of $450 million to $460 million. Adjusted gross margin is expected to be in the range of 62% to 63% and adjusted earnings per share is expected to be between $2.21 and $2.29 based on 79 million fully diluted shares. We expect approximately 15% sequential growth in data center revenue, single-digit sequential growth in Industrial and Defense revenue and flat to slightly down revenue in telecom. As we look ahead, we believe our strategic plan positions MACOM to become one of the most profitable companies in the semiconductor industry. We are pleased that the midpoint of our Q1 guidance represents a 40% operating margin. I would now like to ask the operator to take any questions.

[Operator Instructions] Our first question comes from Harsh Kumar of BMO. Your line is now open.

As usual, phenomenal execution. Steve, I'm going to do you a little unfair question. So humor me with this unfair question. You're the first company in my universe that plays in data center to report after the midterm. When we talk to investors, they are very comfortable with 2027 data center outlook, but really uncertain about what happens in 2028 with all these changes in the midterm, whether these data centers will get built to full capacity or not. I'm curious if you have -- as you talk to your large customers, if you have any window or viewpoint into what they're thinking or saying about not outlook, but just viewpoint into 2028. And then I've got a follow-up.

Thank you, Harsh, for the question. And certainly, the results of the election this week are very fresh. But I can tell you a lot of the work we're doing as a company revolves around installing and launching products, not only for 2027, but also 2028 and 2029. So we're keeping very much a long-term view on the market. My personal opinion is the elections and the results aren't necessarily going to derail a lot of the work that will be done over the next 5 years inside this industry. So from our point of view, we're staying focused on executing our long-term plan.

And then maybe one for Jack. The gross margin is going up a lot more than I would have thought. I would have thought you guys would have put up 50, 60 basis points of gross margin increases sequentially, but you've sort of hit a new trajectory of 100-plus basis points of gross margin improvement. Curious what is happening, why it's being driven the way it's being driven, if it's mix or something in manufacturing that we need to think about?

Yes. Thanks for the question, Harsh. There's a number of factors, obviously, that are contributing to the improvements that we've seen in our gross margin over the fiscal year 2026 time period. Some of it is driven by the top line growth that we've seen, being able to better utilize some of our existing manufacturing facilities has been a contributor. The new products that we've introduced, we've been talking about new product introductions for a long time, and those generally have higher gross margins. So that's helping to support the improvements and also a credit to our operational teams. They've been doing a lot to make sure we're more efficient in terms of reducing waste and getting yields up and things along those lines. So a number of different moving pieces that we've seen that have contributed to those improvements. And as we go forward, we would expect to try and continue to grow our gross margins, but it becomes a bit more challenging as you go forward, but we still think there's more room there to continue to grow at the gross margin level.

Our next question comes from Tore Svanberg of Stifel. Your line is now open.

Congratulations on the very strong results. Steve, as I sort of consider your segment comments for fiscal '27, it looks like you're going to approach at least -- well, you're going to approach $2 billion in revenue. I'm just curious, based on where we stand today, are you thinking about that sort of as a base case? And where could potentially there be some upside to that potential $2 billion number?

Thanks, Tore. So as you know, we don't give full year guidance, and it's very early in our fiscal year, but we are very pleased that we're starting the year with record backlog. And based on the backlog and some of the order trends, as I mentioned in my script, we think we can exceed the growth rates inside the data center. We think our base case today is about 80% year-over-year growth. So we're pretty excited about that. We also believe we're going to beat last year's year-over-year growth in I&D, which was just around 28%. Our goal is to push that over 30%. And then telecom, low double-digit growth and also very early in the year to sort of really lock that number down. I think we're going to start the year in telecom a little bit on the light side, and it's going to accelerate as we move into the year. But I think your math is correct. If you just annualize the midpoint of our first quarter guide, you get to sort of that $1.8 billion level, which represents 37% year-over-year growth from our fiscal '26. And frankly, we would expect to do better than that. We think the second half of our fiscal '27 will be stronger than the first half. And there's structural reasons why we are bringing capacity online. We have programs that will really ramp in production. And we have new programs coming online in really all 3 of the different markets that we serve. So I think while we don't give full year guidance, I think, certainly, we're looking at that $2 billion target and trying to scratch our way there. But there's certainly a lot of work to be done. It's early and there's risk associated with execution and, of course, market risk. But we're feeling very confident that our fiscal '27 is going to be a record year.

Yes, that's great color. And as my follow-up, you mentioned 1 of the 3 areas where you've had some meaningful progress in fiscal '26 was on the CW laser side of things. I think you've always been a little bit cautious on the company's opportunity, but you sound much more upbeat on this particular call. So anything else that you could share with us as far as design wins? I think you did mention you expect to start shipping CW lasers in fiscal '28. But yes, any other color you could share with us on the traction for CW lasers would be really helpful.

Sure. And I think we've talked about on the last few calls that we have a CW laser that's meeting customer requirements. So from an optical performance point of view, we have a very solid product. What we've been focused on over the past 2 to 3 quarters is the quality and the reliability of the laser. And that battle is won or lost on the quality of the facet. And so over the past 6 months, our team has really had some nice breakthroughs on the quality of the facet. And we use a very MACOM-specific approach when we create the facet. We do that in our fab using ion beam technology. And that has some pros and cons. But at the simplest level, it can leave the facet being rougher than you want. And recently, we have made significant technology improvements, which effectively take a facet that looks like it was cut by a chainsaw and now it looks like it was cut by a sushi knife. It is absolutely unbelievable. And we think that will directly translate into an incredibly reliable facet. And that's where -- that's the hottest point in the laser. The other thing I'll highlight is we will be a merchant supplier of lasers, and we will be one of the few U.S.-based manufacturers of this technology. So as we make progress on improving the quality of the facet, it will open up new opportunities, not only at the lower 75-milliwatt power levels, but also the 100-milliwatt power levels. And we have other interesting technology development behind that to push ourselves to even higher powers. And certainly, that's further down the road. So the team has done a great job. We think that we still have a lot of work to do. We're not declaring success today, but I can tell you that we have some meaningful technical progress that the team is very excited about. And I congratulate them for all the hard work they're doing.

Our next question comes from Tom O'Malley of Barclays. Your line is now open.

First one is on the linearity of telco. You're saying the full fiscal year grows faster than fiscal year '26 kind of a starting point, but you're saying kind of a slower start to the year. So you guided down 1% for December, let's just keep it flat in March. That kind of implies strong mid-teens growth in the back half of the year to kind of get there. So can maybe you explain a little bit that dynamic? Is there a program that's ramping on? What's a little weaker in the first half of the year? And why does it step up so much?

Yes. And just to highlight that the target is to get our telecom business over $300 million in our fiscal '27. And that will be the fourth or fifth consecutive year of sequential growth. So our product lines and our business units are doing a great job of growing the business. As you know, it's not linear. And so timing of orders matters, especially when you're at this level of revenue. I will highlight that our book-to-bill for telecom during fiscal '26 was greater than 1. So we have pretty good backlog there. But we are seeing softness. We see some softness in PON. We see some softness in some of our broadband business. And while we're doing some great work with securing new 5G sockets, those programs are going to kick in later in the year. So due to all of this, we think things should be stronger in our second half. And I also think during the course of the next 12 months, there's going to be lots of new opportunities that maybe allow us to sort of exceed these numbers. As you know, we include LEO business, LEO constellations in our telecom segment. And our LEO business is doing quite well right now. We are building large backlog. A lot of that backlog will ship through in fiscal '27 and also in fiscal '28. So generally speaking, things are going well in the telecom market. We're moving as quickly as we can to keep it on a reasonable growth pace.

Great. And then just as my follow-up, just a broader market question. So you had an acquisition in the space earlier this week or last week, I don't remember. And you've seen other companies in your space like Astera Labs talk about their TIA and driver portfolios. So I just wanted to ask, when you move from TIAs and drivers in pluggable modules and you look at NPO solutions, could you maybe talk about the competitiveness of your portfolio there? You're obviously handling more channels, but then you're going to go up against players with more integrated solutions. So maybe walk through if that means that you're going to see some share shift there and just the quality of your product as you move to handling more channels? Is there any sort of competitive dynamic on the technology side as well?

Yes. Well, certainly, the product lines we sell into the data center are very competitive. And the companies you've listed are certainly -- have been and will continue to be competitors from our point of view. I think it's critical that we bring our best game to the market every day. And when we look at the technology we have and the opportunities with NPO, specifically, you've seen this migration, as you know, from LPO over to sort of XPO and now NPO. Our technology is perfect for that application. When you start to get into more highly integrated advanced silicon CMOS-based fully integrated solutions, that's not an area we play in. So we are more of a multifunction or single-function SiGe high-performance solution. And we think the size of the opportunities that we're seeing in NPO are significant. We think the hyperscalers are going to do market share across multiple vendors regardless of -- the data rates are regardless of the form factors. And I can tell you that we're right in the fight. So we're dealing with the major hyperscalers. We're dealing with their supply chain. We're actively sampling and developing products for NPO. And we frankly look at this opportunity as a multibillion-dollar opportunity. And I would imagine MACOM is going to get some piece of that.

Our next question comes from Blayne Curtis of Jefferies. Your line is now open.

Maybe I'll follow on behind Tommy on the NPOs. Just kind of curious, you have engagements. This seems like the Wild Wild West, everybody pursuing different flavors. Now you're starting to hear some concrete wins. So I'd just be curious, when you look at the engagements you have, when do you think those things are awarded? And then any thought on timing? It's probably not fiscal '27, but I'm curious what you're seeing.

Yes. As you know, Blayne, we keep our cards close to the chest when it comes to customer engagement. So we can't really comment on the wins and engagements or the agreements and contracts and things like that. What I can tell you is we are right in the middle of supporting these opportunities, and we'll have to wait and see how things shake out over the next year.

Got you. And then I wanted to ask a big step-up in CapEx, obviously, seeing another strong growth year, so it makes sense. I'm curious, just as you look out, you mentioned this is a multibillion-dollar opportunity, might even be more. Scale-up is a 10x multiplier, scale in is even bigger. So I'm just kind of curious versus your fab footprint, like how much runway do you have to expand your capacity here?

I think that's a great question. And so when we think about expanding our fabs to support our data center business, that work is primarily here in Massachusetts. And so we have a 2-phase program that we're rolling out. We're about 2/3 the way through Phase 1. That program will provide equipment and space to support the ramps in 2027 based on existing business and new business coming in. And then we will have a Phase 2 event, which will support a lot of the CW laser business, and we will kick that effort off probably in mid-2027 based on how things shake out with the performance of our CW lasers. When you look at the $100 million to $110 million, I would say about 60% of that is going into the fabs. Remember, we have a fab here in Massachusetts. We have the RTP fab, and we have a fab in France. Those are our 3 primary fabs. And so most of the dollars are going into modernization or adding capacity. As you remember, last fiscal year, we talked about adding 30% capacity at our RTP fab. Our RTP fab right now is producing more wafers than they ever have and the outlook for that facility is extremely strong, primarily driven by defense, then second, telecom and even some future D2D business. So I think the health of our fabs and the spending we're doing in the fabs is quite targeted. And then the other thing I'll highlight is because it's related, we are still actively engaged with the CHIPS program office. As you know, we announced -- we signed a PMT in January of 2025 to make major investments in our Lowell and RTP facilities. We are probably 1 or 2 quarters away from signing a DFA. That will provide significant funding to MACOM to do a lot of the things that we need to do to stay on our growth trajectory. So the team has done a really nice job aligning the CPO program with the needs of the business. And so it's a huge opportunity for MACOM to leverage some of the support from the government. So I think we have capital under control. I will say that since 2019, the first 2 to 3 years of running the business, this management team was underspending on capital. And I would say, in the last 3 years, we've started to be very targeted. And we like to spend the money when we have the business. We don't typically lean in, build the factory and then hope the business comes. So we sort of are very careful as we spend this money.

Our next question comes from Quinn Bolton of Needham & Company. Your line is now open.

Let me add my congratulations on the nice outlook for 2027. Steve, I just wanted to follow up on the production capacity. You kind of went through the company's internal CapEx plans. I think a lot of your data center business, certainly the SiGe part is largely outsourced. You're talking about a base case growth for data center up 80%. How are you feeling about your external foundry relationships in terms of capacity support for SiGe as you look to fiscal 2027 and beyond?

I think that's a great question. And I think some of the capital spending that we'll be putting in place supports scaling the back end, being assembly and test, a lot of times, that is done offshore. So I just want to sort of highlight before we get into the relationships with our foundries that some of the capital spending is supporting the back-end work. And as we talked about some of these volumes going up by orders of magnitude, we want to make sure we have enough infrastructure to support that on the back end. You've seen many companies in the last 4 or 5 months put out press releases that they've signed long-term supply agreements with various companies like GlobalFoundries, ST, Tower, TSMC. That is not our style. We don't do that. We engage very privately and confidentially with our supply chain. We make sure that we are getting the wafers we need. I will say that some of the behaviors of the SiGe fabs is more rather than sort of target-based commitments. They are looking for firm commitments. And MACOM won't be shy about signing up and make sure that we are securing the supply that we need to make sure we hit our growth targets. The other thing I'll highlight is our HPC and Lightwave teams that are providing these high-end products have a very strong experience not only at Tower, but ST and GlobalFoundries. And so we're keenly aware of those technologies, the strengths of those technologies, and we align the best technologies with our product road map. We're very good at that. And so we have a very nimble and experienced team that is not only looking at the technology road maps of our suppliers, but we also look at their capacity as well. So when we think about the next 5 years, that is something that will be well managed by our supply chain staff. What we are primarily focused on is out designing the competition. You have to beat the competition with a better product and then the volume will come.

Excellent. And then just for Jack, as we think about the gross margin progression going forward, do you think we're back to sort of a 25 to 50 basis points a quarter progression as you look through '27?

Yes, that's our current view. really haven't changed that view. We've been fortunate that we've been able to exceed it during fiscal year '26 as the top line grew quite nicely. But yes, that 25 to 50 basis points on a quarterly basis as you step your way through '27 feels appropriate.

Our next question comes from Gary Mobley of StoneX Group. Your line is now open.

Given all the inflationary pressures in your supply chain, given your high utilization rate at your own fabs, I'm curious to get your thoughts on the pricing environment on a like-for-like product basis.

Yes. So I think our sales and business unit leadership is very good at optimizing the pricing so that we're providing value to the customer, but also covering our costs. And when our costs go up, we study whether it's possible to pass those costs over to customer. So I would say that while our overall costs are going up across the board, whether it's raw materials, energy, labor, we've been able to manage those increases quite well. And as you can see, over the last few years, we've moved our gross margins from the mid-50s now to the low 60s. And quite frankly, as Jack mentioned, with our new products coming out that have even higher margins, we see a path to having gross margins in the mid-60s in the not-too-distant future.

As my follow-up, I want to ask about some development earlier this week. It appears as though we might see a terrestrial build-out, 5G build-out, 6G build-out by Starlink to complement their satellite network, essentially adding another operator in North America. I'd love to get your thoughts on how that might eventually impact the RAN market.

Well, that's a great question. And so we think that's an opportunity for MACOM. And as I mentioned in my prepared remarks, a lot of our 5G technology is applicable not only to D2D, but also for those that want to build out their own RAN network. And so yes, I think you're thinking about that the right way that that's an opportunity for MACOM. I'll highlight that we are the only domestic 5G power amplifier supplier -- so if it's important for a network operator to have U.S. content in their equipment, they will turn to MACOM.

Our next question comes from Karl Ackerman of BNP Paribas. Your line is now open.

One of your competitors had an Analyst Day earlier this month and noted interconnect revenues could advance at a 65% CAGR through 2030, in part driven by higher demand for analog components using your package optical applications. You happen to address several of these areas. I'm curious if you would also underwrite that industry growth outlook.

We don't typically comment on the size of markets or the growth rates of any particular market. So I wouldn't want to necessarily endorse your comments specifically. But what I will say is we are -- as we approach our customers, hyperscalers and their supply chain, we are seeing very large opportunities for scale up, and we are directly engaged in designing chips or providing samples of chips to meet those needs. And the volumes for scale-up look significant, larger than what we've seen in our past.

Our next question comes from Sean O'Loughlin of TD Cowen. Your line is now open.

Congrats on the results. Steve, I wanted to lean into the comments you made in the prepared remarks on the V-band and the analog linearizers are -- let's just pretend I know what those words mean. And as we think about the base or the ground station opportunity for LEO, especially in the expanding V and W bands, they sound a lot like sort of MACOM's wheelhouse. Maybe if you could just talk about the competitive landscape on that front? Like who are you -- or is it almost a MACOM-only market? Are there other competitors that we would know about? Or is that just a sort of greenfield growth opportunity for you guys?

Yes. When you look at the SATCOM market and the ground station market, there's an annual trade show in Washington called the SATCOM Show. And what you see is hundreds of companies producing uplinks and downlinks. Some of those companies are designing their own power amplifiers. Some are using TWTs. Almost all of the TWTs are linearized, and there's only one company that's here in the U.S. that produces this type of linearizer and that's MACOM. So we do have some other international competition. But generally speaking, whether it's a military uplink or a high-volume uplink, our team is very good at supporting this market. It's not a huge market, but I would say we're #1 in this space. If you remember, we purchased a company called Linearizer Communications Group about 3.5 years ago. We purchased this company for 3 reasons. One, they were very strong at SSPAs, so power amplifiers. Second, they had analog microwave linearizers. And third, they had RF over fiber technology. And we embraced all 3. We felt those technologies were very complementary to the work we were doing. And so as the SATCOM market has grown, we've been the beneficiary of supporting the growth and a lot of the chips that are going inside these V-band linearizers are MACOM components. So high level of MACOM content, high dollar value, very sticky business. We form very close relationships with the various TWT companies that produce these high-power devices. We're seeing these not only on the ground station, we are actually -- we have won some linearizer business for satellite-based linearization as well. So it's a great business. It's classic MACOM, as you pointed out.

Great. I'll look up a lot of those words later. As a follow-up, I wanted to maybe ask, I guess, both of you, Steve or Jack, I actually got a question intra-quarter about buybacks or dividends for MACOM, which I think is quite a milestone and reflects sort of the strength of the balance sheet and really the cash flow statement. So just wanted to get your thoughts on the capital allocation priorities. Obviously, the CapEx is stepping up, but maybe is there any shareholder return or maybe you just want to gloat about the cash flow generation?

Well, yes, thank you. So we don't have any plans at this point to do buybacks or start a dividend program. And as you highlighted, we believe cash is king, and we're accumulating cash. Certainly, in the next year, we're going to generate a lot of cash. That will be used for internal R&D and some modest expansion, but it will also be used to make sure we execute our long-term strategy. And if you think out to 2027, let's assume for a minute, we can achieve $2 billion in, say, $10 of earnings. But if you go out to 2030, it's we want to be a company that's $5 billion. And so when we think about how to get to $5 billion, we recognize that we're going to need additional technologies, more staff. We're going to need to enter some other markets. A core part of our strategy is we like running a diversified business. So today or in fiscal '26, I&D was 40% of our business. Data center was 38% and telecom about 20%. And you might argue that these 3 markets are disassociated and not correlated, and we like that. We think that's good for business. It protects our customers. And so when we think about achieving $5 billion in revenue, we think, okay, we want to start accumulating cash. We want to make sure that we have optionality as we move ahead. And certainly, today, we're in a great growth environment. All the markets are strong. 2, 3 years down the road, that may not be the case. And we want to make sure that if the bottom falls out from the markets that we have a lot of dry powder. So we do keep a long-term perspective on our growth strategies. And I think Jack and I are like-minded that more cash is better. And Jack, I'll turn it over to you for additional.

No, I think you did a good job summarizing everything there, Steve.

Our next question comes from William Stein of Truist Securities. Your line is now open.

I'd like to follow up on an earlier question about profitability that's coming in better than previously expected. And when you were going through the reasons behind that, one that you didn't talk about is mix by end market. And I was just hoping you can remind us among the 3 end markets or maybe you could say even 4, if you break up industrial and defense, which of these tend to be richer in profitability? And if mix is part of what's driving this upside?

Yes. Mix will always be a part of the ultimate gross margin answer, and that could be at product levels or even across some of the 3 different end markets. And we -- when we look at our end markets from a profitability standpoint, they usually fall within a bell curve and don't deviate much from that over time. So we don't necessarily break it out by each of those end markets. But obviously, the volumes are increasing over the past number of years, and that's supporting some of the improvements that we've seen in the gross margin. And then we're also seeing, as I had mentioned earlier, some of the newer products that we're introducing that are going into these end markets and those newer products tend to have higher gross margins. So those are some of the contributing factors that we have with regard to that gross margin growth we've seen over the past year.

And then as a follow-up, you guys have done a great job, very efficient job on investing in R&D for new product development, as you've highlighted on the call. Some companies that I cover in semis have talked about using AI tools to improve the efficiency of R&D. And I wonder to what degree you've adopted that? Or are you still evaluating it? Any early successes or direction you can talk about in that regard would help.

Thank you for the question. And you're right, our spending in R&D is really the future lifeblood of MACOM. And we've been increasing our R&D spending by about 20% a year over the past few years. In 2027, we should spend somewhere around $300 million. And if you just go back to 2023, it was about $130 million. So significant growth in R&D spending over the past few years. We absolutely are evaluating and utilizing AI in the business today. I won't get into the details as to where, but I can say that, yes, our engineering organization is absolutely looking at AI to support the design process. In fact, we have established a dedicated group to only use AI in the design process because we want to push ourselves and push the limits. And so we'll see how that goes. Using AI is not free. And so at the end of the day, we'll do a cost-benefit analysis to see if we're getting a better result and a more efficient and faster result. The other thing I'll highlight is we've partnered recently with one of the CAD tool providers, and they have given us an incredible -- we've worked together to create an incredible transaction where we have almost unlimited simulation capacity to run some AI activity, which this capacity would have cost perhaps tens of millions of dollars if we were just buying seats. And so we have developed a very nice strategic relationship with a leading CAD supplier. And over the next year or so, we're going to see if we're able to use AI in a way that really is meaningful to the design process. So early days, but I can assure you that, yes, we are evaluating that. We're trying to properly resource this activity, and we'll have to see how it plays out.

Our next question comes from Christopher Rolland of Susquehanna International Group. Your line is now open.

Mine is around copper and if there are any other developments around either ACCs or copper linear equalizers on PCB and kind of the outlook for next year for these products as well, would be great.

Thank you for the question. Excellent progress over the past 4 months regarding our equalizer products getting traction and very, very positive results there. If you may remember, we refreshed our linear equalizer products early in FY '26. And we're starting to see the fruits of those -- that effort, and we're starting to get very, very good results from various cable companies and even one particular hyperscaler that is essentially telling us we're meeting requirements. So we'll have to see how things shake out in this year. But right now, the team is doing great. So our latest 200-gig equalizers, to be clear, seem to be meeting system requirements. We also have multiple versions of that same equalizer that we think are even better, and we have higher data rate equalizers that we'll be providing customers as well. So from our point of view, it's a great opportunity. It is absolutely part of the scale up application, which means there could be some significant volume there. So yes, we would expect to see some business from all this effort in our fiscal '27, most likely in the back half. But generally speaking, I think we've recovered our position in the market, and we're on track.

Excellent. And Steve, as a follow-up, data center 80% growth is pretty enormous next year. Obviously, you're selling more of what you sold in '26, but any kind of further conversation about how composition changes, how new products roll into that portfolio and bookings for the year just as we contrast '26 versus '27 in data center for that growth?

Yes. I think when we look back on 2027 and compare it to '26, I think you're going to see MACOM will have shipped more 200-gig per lane drivers and TIAs. You will see that we have more capacity to manufacture indium phosphide products, and we're shipping more there. We may be seeing early revenue in NPO. We'll have to see if it falls into this year or next fiscal year. Coherent lite is meaningful. We think that you'll start to see coherent lite kick into gear. We just talked about the equalizers coming online in the back half. We're also -- and we don't talk about this a lot, but we're very active with PCIe. And so we have a very strong solution there. We've been demonstrating it over the past 6 months. We're getting traction there, and we feel like there may be some opportunities in our fiscal '27. And then the last wild card, as we talked about, is the CW laser, which is more of a 2028 opportunity. However, as I mentioned, we are seeing big demand on our 25G DFB lasers as a lot of laser manufacturers are sort of shutting that business. And so that 100-gig per lane business is picking up for us, and that will grow year-over-year as well. And maybe the last thing I'll mention is LPO is doing quite well, and the business is growing significantly year-over-year.

Our next question comes from Harlan Sur of JPMorgan. Your line is now open.

Great job on the quarterly execution. The team is doing just an awesome job on the innovation front, bringing your standard products to the market. That being said, I mean, more and more of your customers are building their own internal chip design teams. They want access to your technology. They want access to your design IP, advanced packaging capabilities. Foundry and custom design services has always been a part of the MACOM strategy, right? You guys offer the most diverse set of III-V compound semiconductor processes in the industry. I think like something like 15 to 20 different process types, different device architectures, PIN diodes all the way to pHEMTs. How big is the foundry and custom products business? Is it still a focus area for the team? And your view on the growth outlook there?

Yes. Foundry is a portion of our business. We would always rather sell a product. But if customers would rather design the chip themselves, we open up our fabs for them. I would say about half of our business coming out of our French fab is foundry business from European defense contractors. In the U.S., our RTP fab, the foundry business is a shrinking portion of the business, primarily because our product sales are taking off, but we have some major U.S. defense customers using the RTP fab. And here in Lowell, we have probably about 3 or 4 major foundry customers, mostly on the defense and test and measurement market. We have recently engaged a company that wants to use our fab for LiDAR applications. So we've done a sort of a special deal supporting some of their indium phosphide work, which could turn into some interesting volume in the future. But so yes, we embrace foundry. We think that's important to engage customers at any level they want. In fact, one of our largest LEO customers has really, over the course of 4 or 5 years, you've seen that relationship move from basically a module -- complex module product sale to a foundry relationship. And so yes, we embrace foundry. We consider ourselves having open foundry, and it is a strategic activity for us.

And then on the manufacturing footprint expansion, you mentioned expansion at 3 fabs, one being Lowell. I believe you said that the other 2 are going to be Europe and your RTP fabs. Are you guys still doing manufacturing in Ann Arbor and California? And I assume that most of the spend is just equipment buys and that you already have cleanroom space facilitized and already stood up at these locations?

Correct. And just I'll very quickly walk through some of the various activities. So first, we still have our Ann Arbor facility. They are doing a significant amount of R&D on next-generation products. They are really geared towards, I would say, low and medium volume indium phosphide. They have an MBE reactor, and they are able to develop their own epi, and that's really one of the key technologies that we bring to our PD product line. Our RTP fab is primarily GaN on silicon carbide. We have no plans to expand beyond the 4 walls of that facility. There's plenty of room inside the facility to expand. And so we're adding equipment in that fab. Our French fab is primarily moving, again, multiple buildings, plenty of space. We have no plans to build more buildings. Instead, what we're doing is we're migrating their technology from 3-inch to 6-inch wafer sizes. We just recently installed a brand-new G10 reactor so that we'll be able to scale up and support the high-volume production that they're moving towards. And then here in Lowell, our Phase 1 and Phase 2 plans will also be executed within the 4 walls of our building. We do not want to build another building. So we will add more capacity and we'll remove office space and maybe the cafeteria, if that's what it takes to make more wafers. So very efficient use of space, not greenfielding a fab, basically taking advantage of the market and installing capacity as quickly as we can.

I am showing no further questions at this time. I would now like to turn it back to the President and CEO, Steve Daly, for closing remarks.

Thank you, Amber. And just to be clear, we'll leave the cafeteria alone. We have no plans to convert that to production space yet. So in closing, I'd like to thank our employees, our supply chain partners and customers for making these results possible. Thank you.

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.