MACOM Technology Solutions Holdings, Inc.MTSINASDAQ
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Operator: Welcome to MACOM's Fourth Fiscal Quarter 2025 Conference Call. This call is being recorded today, Thursday, November 6, 2025. [Operator Instructions] I will now turn the call over to Mr. Steve Ferranti, MACOM's Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.
Stephen Ferranti: Thank you, Olivia. Good morning, and welcome to our call today to discuss MACOM's fourth quarter and year-end financial results for fiscal year 2025. 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 is 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.
Stephen Daly: 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 full year results for fiscal 2025. When Jack is finished, I will provide revenue and earnings guidance for the first quarter of fiscal 2026, and then we will be happy to take some questions. Revenue for the fourth quarter of fiscal 2025 was $261.2 million and adjusted EPS was $0.94 per diluted share. For the full year, FY '25 revenue was $967 million, more than a 32% increase year-over-year, and EPS was $3.47, more than a 35% increase year-over-year. We generated $193 million in free cash flow, and we finished the year with approximately $786 million in cash and short-term investments on our balance sheet. Q4 book-to-bill ratio was just over 1.0:1. In our turns business, or orders booked and shipped within the quarter was 14.5% of total revenue. For the full fiscal year 2025, our book-to-bill was 1.1:1, and our current backlog remains at a record level. Turning to our recent booking trends and end markets. Q4 revenue performance by end market was as expected, with Industrial & Defense at $115.6 million, Telecom at $66 million and Data Center at $79.6 million. For the quarter, I&D was up approximately 7% sequentially. Data Center was up approximately 5% sequentially and Telecom was slightly down sequentially. Both I&D and Data Center revenues were annual and quarterly records. A few years ago, we set a goal to achieve $1 billion in annual revenues, and I'm pleased to report that with our Q1 '26 guidance, we expect to achieve this goal based on trailing 12-month performance. Congratulations to all our employees as we near this milestone and more importantly, for building upon our strong foundation to enable continued growth and improved profitability. New products are the lifeblood of future growth. In FY '25, we launched over 200 new products, which was a record. In addition, we executed numerous custom design projects across our 3 core markets. Our ability to provide competitive new products in a timely manner ultimately drives our financial performance. Metrics show our new product introductions or products less than 3 years old as a group have outpaced MACOM's overall revenue growth and are accretive to MACOM's gross margins. We continue to focus on technology and product differentiation across our portfolio, which often leads us to the development of IC products that operate at the highest frequency, highest power or highest data rates. The secular growth trends across our end markets, coupled with our expertise in IC design and manufacturing are driving an increased number of revenue opportunities. To capitalize on this, we have been increasing R&D spending, hiring more engineers and acquiring companies that have specialized complementary design capabilities. In keeping with this trend, over the next couple of months, we plan to open 2 additional IC design centers, one in Southern California and the other in Central Europe, where we were able to secure specialized talent and teams. Hiring best-in-class engineers with complementary skills will help enable us to increase our SAM and execute on the growth opportunities ahead. I'll note that we prioritize recruiting designers with advanced silicon design expertise and experience. On Tuesday, we announced an agreement with HRL or Hughes Research Laboratories to transfer their 40-nanometer GaN on Silicon Carbide process known as T3L to MACOM. As part of this agreement, MACOM will be an exclusive licensee with rights to manufacture the T3L process. T3L is an industry-leading high-frequency GaN on Silicon Carbide process, and it was developed with DARPA, DoD and HRL funding. T3L was engineered to achieve exceptional high-power performance at very high frequencies. HRL recently completed long-term reliability studies and qualified the process, and it is now ready to transition to production. The T3L 40-nanometer process perfectly complements our existing GaN portfolio because it allows us to address applications at higher frequencies than our 140-nanometer GaN process. We anticipate that licensing this technology will also accelerate our ability to launch other sub-100-nanometer GaN processes, including 90-nanometer. We believe this transaction is a win-win because HRL, primarily a research organization, will be able to commercialize the process technology they spent years developing and MACOM can industrialize and ramp the process into production. Many of our mutual customers in the defense and space markets want to see T3L process in production -- in a production wafer fab in order to address their volume needs. This strategic transaction supports one of our core tenets, which is to produce the industry's highest frequency semiconductors. We believe this part of the GaN MMIC market is growing, and we are seeing new requirements at Q,V,E and W-band driven by both commercial and defense applications. We believe the T3L process will help us capture significant market share over time. And finally, related to GaN on Silicon Carbide, over the past few quarters, we were awarded several new and add-on development programs for advanced GaN on Silicon Carbide process technologies. Across the DoD agencies, MACOM is recognized as a leader in developing advanced compound semiconductors and our pipeline of funded technology development contracts is growing. I'll note, in the defense, radar and electronic warfare markets, our GaN-based components and products experienced over 50% year-over-year revenue growth. This growth leverages our high-power GaN portfolio, where we maintain a competitive position in low and mid-band applications. Our goal is to expand into the higher frequency airborne radar market, where we believe share gain opportunities exist. To support this strategy, we recently upgraded the RTP Fab's G28V5 150-nanometer GaN on Silicon Carbide process to include atomic layer deposition passivation or ALD. ALD is a hermetic coating process that enables MMIC products to pass moisture and HASS tests. This process is one of the most reliable and rugged processes in the market, and it is ideal for ground-based radar systems and SATCOM links and is now ready for airborne radars. Across the defense market, the trend for new systems is toward higher frequencies, higher power levels, wider bandwidth and higher levels of integrations, factors that all play to MACOM's strengths. We collaborate with most major U.S. defense contractors across a wide range of applications. For example, we have been collaborating with a customer that produces a drone defense system, and we look forward to their expected production ramp-up in 2026, utilizing our high-power GaN technology. We also continue to build new relationships with major European defense contractors who are increasingly focused on securing a European supply of critical semiconductors for their systems. We believe our manufacturing facility in France can play an important role in enabling MACOM to win market share with these customers. Generally speaking, the industrial markets are stable and beginning to improve, although we do not expect significant growth in the near term compared to the data center, defense, 5G and SATCOM sectors. Within the telecom end market, satellite-based broadband access and direct-to-sell opportunities remain robust with numerous LEO networks in the planning or development stages. These networks typically use microwave or millimeter wave frequencies and free space optics or FSO communications for satellite to satellite or satellite to ground communication links. In some cases, the satellite transmitters require analog microwave linearization to boost the transmitted signal and improve link margin. I'll note the number of LEO constellations continues to grow and more companies compete to provide commercial data, voice and video communications by satellite or defense intelligence and functionality. Almost a dozen different companies are now planning to launch LEO constellations supporting direct-to-cell or direct-to-device communications. Again, these LEO constellations have many areas where MACOM can contribute, including direct-to-device links operating at UHF or S-band, backhaul links operating at Ka, Q, V and E-band, high-speed optical links transferring data within the satellite and free space optics for satellite-to-satellite communications and gateway linearization for high-power transmitters. Depending on the customer preferences and capabilities, we position ourselves to support them at any level in the supply chain from foundry services, custom IC design, standard products and even full module and subsystem design and manufacturing. Demand from our cable TV infrastructure market is also improving. Cable networks are in the early days of a transition from DOCSIS 3.1 to DOCSIS 4.0. We've spent the last 2 years releasing new products and working with customers on design wins to support this upgrade. We are beginning to see new orders on our DOCSIS 4.0 products. Our portfolio today includes amplifiers, baluns, couplers and filters for line amplifiers and nodes in these new deployments. We expect the cable TV market to be one of the contributors to our Telecom revenue growth in fiscal year '26. We continue to see strong demand from our Data Center portfolio, particularly within 800G and 1.6T applications. We expect the ramp of 1.6T optical solutions to continue to support both scale-up and scale-out interconnects, and we believe demand is growing rapidly. Within these solutions, MACOM provides drivers and TIAs that support EML and silicon photonic architectures. In addition, over the course of FY '26, we expect year-on-year demand for our photonics semiconductor products to significantly increase. As an example, we are pleased with the growing traction of our 200-gig per lane photodetector products that support advanced 800 and 1.6T optical connectivity. MACOM's 200-gig PD has industry-leading sensitivity and dark current performance, enabling our customers to achieve better manufacturing margin and optical receiver sensitivity performance. We believe we have had a breakthrough where our cloud customers and their supply chain recognize the strategic value of MACOM's proprietary indium phosphide technology and high-volume manufacturing capabilities to produce photonic products. We are pleased to have PD design wins at all major module manufacturers supporting 800G and/or 1.6T applications. A few quarters ago, we initiated a transfer of the 200-gig PD process from our smaller Michigan fab to our larger Massachusetts fab to ensure we could support the forecasted demand. Today, our Ann Arbor fab is approaching maximum capacity and our Massachusetts fab is qualified and ramping volume production. In addition to our focus on ramping PDs, we have intensified our CW laser development efforts as customers and the industry look for strategic suppliers that have CW laser technology and high-volume manufacturing capabilities. We also see a steady adoption of single-mode LPO 100-gig per lane solutions. Today, we have multiple customers in production and we expect to transition more customers into production in fiscal '26. Additionally, we continue to support new architectures, including near-packaged optics or NPO, utilizing non-retimed LPO solutions. As data centers continue to disaggregate memory and compute, we believe the adoption of PCIe 6 solutions will create an opportunity for MACOM. At this year's ECOC trade show in September, we demonstrated our latest linear optical PCIe chipset consisting of a VCSEL driver and TIA that support sideband data streams over fiber. We also continue to expand our portfolio in the area of electrical high-speed connectivity. As data speeds move to 200-gig per lane and beyond, copper-based solutions such as direct attach cables begin to reach their functional limit. MACOM provides a family of linear equalizer products that can help extend the reach of copper interconnects at 1.6T. Over the course of FY '26, as 1.6T deployments expand, we believe these solutions will be of interest to some of the major cloud vendors who are deploying next-generation solutions. Additionally, we are seeing opportunities for these products in backplane applications to enhance onboard signal integrity. As we turn our attention to FY '26, our priorities include: first, taking full advantage of the data center growth opportunity and servicing our customers with differentiated solutions. This includes expanding our portfolio into new product areas such as PDs and lasers where we can add value. In the near term, we will seek to increase market share in 800G and 1.6T high-speed analog solutions, expand our customer base for linear equalizers and PCIe solutions, ramp photonic products and support customer LPO launches. We will also continue the design work to establish a leadership position in 300 and 400-gig per lane connectivity ICs for future 1.6T and 3.2T systems. Second, we will seek to expand our market share in 5G applications by leveraging our new and improved GaN4 process. Our next-generation base station products will be updated with in-sourced IPD and matching circuits to: one, improve performance; and two, lower our manufacturing costs. Third, extending our leadership in A&D and winning market share in microwave and optical RF over fiber applications across all major accounts in the U.S. and working to expand our business across Europe and support new defense and space programs like IRIS2. Fourth, continue to develop advanced semiconductor technologies for high-frequency MMICs, high-power diodes and high-speed optical semiconductors. Our goal in FY '26 is to make meaningful progress on hot-via flip-chip, bump technologies like copper pillar to enable MACOM to lead the industry in advanced chip scale package solutions. Fifth, carefully managing our capital expenses and prioritizing investments that, one, expand our existing manufacturing capabilities; and two, support new technology developments. As an example, we intend to purchase and install a modern MOCVD epi reactor in our European Semiconductor Center, or MESC. This reactor will support our 6-inch production transition and the growing volumes of GaN on Silicon and other gas processes. In summary, our strategy is to build a diversified semiconductor portfolio that enables MACOM to capture a larger share of the markets we serve. Our strong organizational foundation, along with our speed and agility, help us win opportunities and ultimately beat our competitors that are often larger and have more resources. Jack will now provide a more detailed review of our financial results.
John Kober: Thank you, Steve, and good morning, everyone. Before getting into our fourth quarter results, I would like to summarize a few items regarding our full fiscal year, which ended on October 3, 2025. We achieved record revenue of $967 million, which grew more than 32% over fiscal 2024. Our annual adjusted operating margin grew by 140 basis points to 25.4%. Adjusted earnings per share grew by more than 35% to $3.47. Cash flow from operations continued to strengthen and increased by 45% to $235.4 million. We refinanced and extended the maturity of the majority of our convertible note debt at favorable rates. Our workforce, which now totals approximately 2,000 employees, grew by 17% over the past year as we have expanded our research and development and production employees to support our growing business. Now on to fourth quarter results as well as some additional commentary on the full fiscal year 2025 and outlook on fiscal year 2026. Q4 revenue again reached record levels with strong financial performance across all 3 end markets and record revenue across Data Center and Industrial & Defense. This sustains a trend of consistent revenue growth, improving operating income and ongoing cash generation. Fiscal Q4 revenue was a new quarterly record of $261.2 million, up 3.6% sequentially and up 30.1% year-over-year, driven by growth across all 3 of our end markets. Our overall book-to-bill for Q4 was 1:1. On a geographic basis, revenue from U.S. domestic customers represented approximately 43% of our fiscal Q4 results. Our full fiscal year 2025 U.S.-based revenue was approximately 44%. Adjusted gross profit for fiscal Q4 was $149.1 million or 57.1% of revenue. Through the hard work and our dedicated operations team, we have continued to increase capacity and improve yields, and we expect to see ongoing incremental progress across all 4 of our fab operations. I'll note, we are seeing an improvement in product demand across our internal fabs, which is driving higher production volumes and associated utilization. As a result, we expect sequential quarterly gross margin improvements of between 25 to 50 basis points as we move through fiscal 2026. These gross margin improvements include any offsets to cost increases, such as gold and other precious metals, depreciation and labor costs. Total adjusted operating expense for our fourth quarter was $82.1 million, consisting of research and development expense of $55.6 million and selling, general and administrative expenses of $26.6 million. The sequential increase in adjusted operating expenses compared to Q3 was primarily driven by ongoing R&D investments and employee-related costs. As we continue to grow our revenue, we will remain very focused on managing our OpEx. Depreciation expense for fiscal Q4 2025 was $8.7 million compared to $6.9 million in Q3 2025. The increase was primarily due to taking control of the RTP Fab during the quarter. As a reminder, since we have taken control of the RTP Fab, we have shifted from purchasing wafers from a third party to manufacturing wafers, resulting in MACOM now incurring all of the associated manufacturing costs, including labor, facilities and depreciation, to mention a few. Adjusted operating income in fiscal Q4 was $67 million, up 5.5% sequentially from $63.5 million in fiscal Q3 2025 and up 32.1% year-over-year. For fiscal Q4, we had adjusted net interest income of $6.6 million, a net decrease of $200,000 sequentially from $6.8 million in Q3, primarily driven by lower interest rates and interest expense associated with new leases. Our adjusted income tax rate in fiscal Q4 was 3% and resulted in an expense of approximately $2.2 million. As of October 3, 2025, our deferred tax asset balances, which includes R&D tax credits, were $208 million as compared to $212 million at the end of fiscal 2024. We anticipate further utilizing our deferred tax asset balances through fiscal 2026 and beyond, helping to keep our cash tax payments relatively low over these periods. We expect our adjusted income tax rate to remain at 3% as we enter fiscal 2026. Depending on the jurisdictional mix of our income, we expect the U.S. government's recent tax legislation to support a low to mid-single-digit adjusted tax rate for the next few fiscal years. Fiscal Q4 adjusted net income increased approximately 4.7% to $71.4 million compared to $68.2 million in fiscal Q3 2025. Adjusted earnings per fully diluted share was $0.94, utilizing a share count of 76.2 million shares compared to $0.90 of adjusted earnings per share in fiscal Q3 2025. Our team continues to optimize the business' performance, which has resulted in sequential increases in our adjusted operating income and EPS over the past 9 quarters. Before moving on to balance sheet items, I would like to note that during the fourth fiscal quarter, in connection with the RTP Fab transfer, we recorded a $10.1 million gain on acquired assets, which is recorded below operating income on our income statement. This gain, which has been excluded from our adjusted operating results, primarily represents the difference between the fair value of inventory we received from the prior fab owner on July 25, 2025 as compared to the estimated value we established in December 2023 at the time of the RF business acquisition. Now on to operational balance sheet and cash flow items. Our Q4 accounts receivable balance was $148.6 million, up from $129.5 million in fiscal Q3 2025. The increase in our accounts receivable balance was driven by revenue growth as well as the timing of customer shipments and payments. Our day sales outstanding averaged 52 days as compared to our previous quarter at 47 days. Inventories were $237.8 million at quarter end, up sequentially from $215.4 million, largely driven by additional work-in-process inventory at the RTP Fab as well as higher balances to support anticipated future demand across the business. Inventory turns decreased to 1.9x from 2.0x in the preceding quarter. Our fiscal Q4 cash flow from operations was approximately $69.6 million, up $9.2 million sequentially and an increase of more than $7.3 million over fiscal Q4 2024. The sequential increase was primarily due to increased net income combined with fluctuations in working capital. Capital expenditures totaled $20.2 million for fiscal Q4, up $11.5 million sequentially. The major driver of this increase was the anticipated purchase of $12 million of surplus equipment at the RTP Fab from the previous owner. We anticipate that the installation of this and other equipment will allow us to expand our RTP Fab capacity and capabilities by up to 30% over the next 12 to 18 months. Our fiscal year 2025 CapEx was $42.6 million, and we estimate fiscal year 2026 CapEx to be $50 million to $55 million as we upgrade and enhance our production equipment, facilities and expand capacity where needed. Next, moving on to other balance sheet items. Cash, cash equivalents and short-term investments for the fourth fiscal quarter were $786 million, up $50.7 million from Q3. We are in a net cash position of more than $285 million as of October 3, 2025, when comparing our cash and short-term investments to the book value of our convertible notes. Over the next couple of quarters, we anticipate paying off the $161 million of principal value of our remaining March 2026 notes as they become due under the terms of the original agreement from 2021. And finally, I'd like to recognize that the results we have achieved during fiscal year 2025 would not have been possible without the contributions from the entire MACOM team. We remain committed to investing in our employees through annual merit increases, promotions, bonuses and stock awards as well as offering competitive healthcare, retirement and other benefits. I will now turn the conversation back over to Steve.
Stephen Daly: Thank you, Jack. MACOM expects revenue in fiscal Q1 ending January 2, 2026, to be in the range of $265 million to $273 million. Adjusted gross margin is expected to be in the range of 56.5% to 58.5%, and adjusted earnings per share is expected to be between $0.98 and $1.02, based on 76.6 million fully diluted shares. We expect sequential revenue growth in all our end markets. Data center will lead with approximately 5% sequential growth, followed by Telecom and Industrial & Defense with low single-digit sequential growth. As Jack mentioned, we expect to see increased operating leverage over the course of fiscal '26, through a combination of top line growth and improving gross margins due to increased fab utilization and launching more profitable products. We will maintain operating discipline even as we continue to invest in the growth of the business. Given our talented and experienced team, our core technologies and the secular growth trends in our market, we are confident we will achieve our goals. I would now like to ask the operator to take any questions.
Operator: [Operator Instructions] Our first question coming from the line of Tom O'Malley with Barclays.
Kyle Bleustein: This is Kyle Bleustein on for Tom O'Malley. I just wanted to start off with the Telecom business. I think through earnings, you've seen a couple of companies point to traditional telecom being better. So I just wanted to kind of get your sense of how you think about that business through the fiscal year kind of the biggest pull factors you're seeing there?
Stephen Daly: Thank you for the question. The 2 main pull factors for MACOM this year will be 5G continuing to grow, and that's a core business for MACOM. And second would be the satellite communications and LEO business. If you're referring to the RF-related telecom part of the market, if you're talking about the metro long-haul piece, we are seeing continued growth in that business, and we expect that trend to continue during the year.
Kyle Bleustein: And then just for my follow-up, last quarter, I think you talked about broadening some of the ACC engagements. Can we kind of get an update on how that's been progressing over the past 90 days? Have you seen any of those engagements turn into the customers? And just how we should kind of think about that business through the next fiscal year?
Stephen Daly: Yes, we continue to be engaged across the industry with all different product lines, including the chipset we put inside the ACC product line. I would say, generally speaking, we have great engagements with the major hyperscalers, and we're certainly excited about some of the potential within that product set. And we'll see how that plays out as we move into the course of the year. We don't generally comment on, let's say, pre-revenue topics. We would always talk about our successes retrospectively, and that would be our approach here as well.
Operator: Our next question coming from the line of David Williams with the Benchmark Company.
David Williams: Congrats on the $1 billion run rate. Maybe first, just kind of the transition and the demand pull between the 100G and 200-gig that next-gen kind of solution, how are you seeing that? And maybe are the demand trends developing as you would have expected or maybe accelerated a bit?
Stephen Daly: Thank you for the question. So our core 100G business, last year, was very stable and actually grew quite nicely. And as we look out into our fiscal '26, we would expect the 100G growth trend to continue. However, the massive growth is really at the higher data rates. So that would be 200 gig per lane servicing primarily 1.6T. And we are very early in the cycle of the rollout of those interconnects. And so that is one of the fastest-growing parts of our Data Center business. It was last year, and we believe it will be as well again in fiscal '26.
David Williams: Great. And then just maybe on some of the new capabilities you talked about the acquisition in the quarter, just any color there around the magnitude of that and really the capabilities you think that brings. And you talked about some of them. But just any additional color, I think, would be helpful.
Stephen Daly: Yes. You were referring to the HRL IP license agreement. Is that right?
David Williams: Yes, yes, I'm sorry. That's correct.
Stephen Daly: Yes. So thank you for the question. Very interesting technology, as I highlighted in the script, it very much complements what we're doing with our -- what we call our GSIC140 process, which we launched a couple of years ago. And we're continuing to improve that process even today. The HRL technology was a combination of U.S. government and HRL funding to really develop a technology that would be able to operate at higher power levels at the highest frequency. So this is a technology that really begins to shine above 40 gigahertz. And why we felt this transaction would be important is it allows us to service the higher-frequency SATCOM bands, which are becoming more and more critical for the LEO constellations. And there will be a transition from, what I would consider, pHEMT gas technology at these frequencies to GaN technology, and we will be leading that transition. And the reason why you would want to make that transition is a GaN amplifier on this process will have a higher power density, almost 2x what pHEMT can do, and you'll also get 10 points of higher efficiency on that particular amplifier. So there's a compelling reasons why we believe the LEO constellations will -- and our customers will want to adopt this technology as soon as it's ready in our fab.
Operator: Our next question coming from the line of Harsh Kumar with Piper Sandler.
Harsh Kumar: Congratulations on some great results. Steve, if I look at your guidance, I think there's a little bit of a step-up in growth. Just at a broad level, I mean you talked about multiple drivers. But if I had to be specifically ask you about what is driving the step-up in growth, how would you characterize that? And I have a follow-up.
Stephen Daly: Are you referring to Q1 specifically or in general?
Harsh Kumar: Yes, yes, the December quarter.
Stephen Daly: Well, I think it's, first and foremost, driven by the continued rollout of 1.6T and 800-gig platforms across various customers with various products. That is absolutely driving the growth. And then I would say the other factor is we're seeing a little bit of a bounce back in Telecom. As you know, going Q3 to Q4, it was sequentially down a little bit, really due to the timing of orders and also just continued strength in our Defense business. And then the other thing I'll add, as we really are at the beginning of our fiscal '26, our October bookings were one of the best months we've had in years. And so we're really excited to start the year with a strong backlog and a lot of momentum.
Harsh Kumar: Fair enough. And Steve, you talked a lot about satellite on this call, something you haven't done. You've talked about -- you mentioned satellite, but not to this extent. And you talked a lot about LEO satellites. I guess, could you help us understand the timing of some of these new products, the scale? Where is the business at today? And how big could it be? And also, I was wondering, part 2, the standard question LPO, you started shipping seems like -- could you help us size that market for 2026?
Stephen Daly: Yes. Thanks, Harsh. So I would say that the current LEO business is included in the Telecom numbers that we're currently reporting. We don't particularly want to break out that particular submarket within Telecom. So I would say, the timing is now, and it's -- we're ramping. And the LEO business that we have is expected to grow over the next 12 to 18 months. How big could it be? It can be hundreds of millions of dollars in size. This is not a small market, it's a large market. As I mentioned, we support this business at the chip level, the module level and even the subsystem level. And when we talk about LEO constellations, I also have to highlight it includes not only the payload on the satellite, but it also includes the ground gateways and the terminals, which also have very high value-added products. In terms of the LPO question you mentioned -- you asked, we talked about having one customer in production on our last conference call. I can tell you, that number has tripled. So now we have 3 and growing. And so we would expect that number to continue to increase as the industry adopts LPO. We don't necessarily want to size the market. It really depends on what the customers do in terms of their deployments, and that's a very difficult number to put out there. We have our own internal models. But we would rather -- we're sure that there's error associated with those estimates. I will say that our competitive advantage with LPO shines very well because there's no DSP. So the landscape and the competitive dynamics change quite dramatically when you remove the DSP. And then the other thing I'll just highlight, the LPO solutions today are running at 100-gig per lane.
Operator: Our next question coming from the line of Karl Ackerman with BNP Paribas.
Karl Ackerman: Steve, you spoke of record backlog, but does that include a record backlog for datacom products such as TIAs, drivers and PDs? And as you address that, can you quantify the level of order visibility with your customers, perhaps in terms of quarters as you seek to add capacity to fulfill this customer demand?
Stephen Daly: Yes. Thank you. We don't really break the backlog out by product line or market per se. But you can imagine that coming off of a year where we had 50% year-over-year growth in the data center, and there's a lot of momentum that the data center backlog is growing nicely. Some of our other end-markets like defense, they typically have longer lead times and manufacturing cycle time. So we typically would build backlog with our defense customers at the beginning of the year. So overall, a healthy backlog, and we really can't break it out any further than that.
Karl Ackerman: Got it. That's fair. Jack, perhaps one for you, if I may. Just on the RF business, any updated thoughts on the timing of yield enhancements and operational performance? Would you anticipate this business going to be margin neutral once these yield enhancements are complete perhaps before you add the planned 30% of wafer capacity?
John Kober: Yes, I think what you're referring to, Karl, is some of the gross margin improvements, and we talked about it in our prepared remarks, the sequential improvements that we expect to see on a quarterly basis of anywhere from 25 to 50 basis points. As we've also discussed, we've completed the RTP Fab conveyance. So that's part of the MACOM portfolio. And through a combination of enhancements to our gross profits and cost reductions and yield improvements across all of MACOM, including facilities like Lowell and our other 2 fab manufacturing locations, are going to be helping to contribute to some of those gross margin improvements that we had talked about earlier. So it's more of a global effort that we have as opposed to being focused on any one area of the business.
Operator: Our next question coming from the line of Tore Svanberg with Stifel.
Tore Svanberg: And let me add my congrats on the record results. Steve, I know you typically don't guide more than a quarter out, but just so many irons in the fire here across all 3 segments. So directionally, how should we think about growth in the 3 segments next year, especially also in light of the more than 40% growth in both Data Center and Telecom this year?
Stephen Daly: Thank you for the question, Tore. As you know, we don't typically give full-year guidance. But I'd be happy to make some general comments on our expectations for 2026. And maybe before I do so, I think there's some important trends to highlight, and I think you mentioned a few. Number one, we had very strong growth year-over-year, 32% growth on the top line. And that really represented the 4 out of 6 years in a row, we've had double-digit growth and we're excited about that. Our CAGR over the last 6 years has been in the mid-teens, and we're pleased with that type of performance. As we think about '26, we have various scenarios, we have our base case scenarios and our improved or best case scenarios. But if I just focus on the base case for a minute, we would certainly expect double-digit growth with no less than mid-teens on the top line. We believe the growth will be driven by the Data Center business. It will have -- it will be our strongest market, then followed by Industrial & Defense and Telecom. And it will be a year where you begin to see leverage on -- of our business model and improved operating income and earnings growth. So we're very excited about that as well.
Tore Svanberg: Great. And as my follow-up, it sounds like you turned about 14%, 15% of the revenue this quarter. I'm just curious, given the strong momentum, the order rates, are you starting to see some tightness, whether that's with your own fabs or lead times starting to stretch? Because obviously, the growth momentum seems to be accelerating. So I just want to make sure that everything is on track as far as capacity is concerned.
Stephen Daly: Yes. Well, we're growing as quickly as we are. There's always stress points throughout our operations and supply chain, and we have an outstanding team that can manage those tactical and strategic issues quite well. So we're very pleased with the team's performance, and we're able to get the things we need and have the capacity available. I highlighted as an example with our 200-gig per lane photodetector. We recognized last year that we were going to have some very strong growth in the next 24 months. And so we took actions to move that product to our large Lowell facility here, where we have really unlimited manufacturing capability to produce PDs to support the industry. So we're taking those steps. A lot of those things you see behind the scenes, where we're making sure we have a front-end, back-end test capacity in place, there's always areas where we need to do more and pinch points. And the team is managing those very well. So yes, it's always a challenge in a high-growth environment, but I think we have it under control.
Operator: Our next question coming from the line of Blayne Curtis with Jefferies.
Blayne Curtis: I want to ask you, I mean, obviously, very strong comments about growth in fiscal '26. The book-to-bill just over 1, I guess, I think you said maybe there's some function with the Defense business. But I'm just kind of curious, is that the case across all 3 segments? Is there something that's down? Or is that just timing-wise and if that should improve?
Stephen Daly: Yes. We track the book-to-bill for each of our markets and submarkets and customers on a very granular level. And every quarter, it's a different setup. And so over the long term, is really what matters. And over fiscal year '25, our book-to-bill ratio was 1.1, to be clear. And that's a very strong number. And we started fiscal '26 in October with one of our best Octobers in as long as I can remember. So we're not -- you have to read through the noise. I wouldn't get too fixated on any particular quarter's book-to-bill. And if you remember a few years ago, we had a quarter where we had 0.5 book-to-bill, and we survived that quite nicely. But -- so that's the nature of the business. Some of our markets are a little volatile. Some of them have different timing of orders, and customers have different schedules, and we just try to blend it all together and report the results.
Blayne Curtis: And then I wanted to ask on the gross margin, the 25 to 50 basis points improvement. Obviously, you took over the Wolfspeed fab, and there was some lifting to do there. Maybe you could just talk about the contribution from those improvements versus just what it looks like overall, volumes are going up as well.
Stephen Daly: Yes. Thanks for that. And I'll just highlight on a go-forward basis, we don't really want to talk about the gross margins by fab. I think that our business is too complicated than that. I know, before the closing of the fab and during the transition, we were very transparent about the puts and the takes on the RTP site specifically. But now that it's in the MACOM tent and we're changing so many things, including the mix, the customer base, the focus, as I highlighted as an example, we took one of the RTP 150-nanometer GaN on Silicon Carbide processes and we upgraded it by adding an ALD covering and now that's going to open up a new market segment and that will lead to great things; so there's just a lot of moving parts at each one of the fabs. And to get fixated on any particular fabs, near-term performance is -- could be limiting. So I think we take a broader approach and we're not really going to be discussing gross margins by fab because that could be a tell on the profitability of those associated products, which we don't want to disclose. Now the other thing I'll highlight is a big part of our business uses external fabs. And we are working with the leading fabs across the U.S., Europe and Asia to support a lot of our high-speed business, primarily data center centric, as well as various test -- very high-performance test chips or products for broadcast video or other high-speed trading-type chips that are very high-speed matrices that are used in high-speed trading. So we have a lot of high-end chips that we externally source from 4 to 5 different fabs, depending on the technology. And that -- those product lines also contribute quite nicely to our business and can also affect the overall corporate gross margins. Jack, I don't know whether you want to add to that?
John Kober: I think just maybe just providing a little bit more color in terms of RTP, right, when we had talked about it last quarter, we had only had it for 2 weeks. So it came in line with our expectations. It allowed us to also derisk the business in terms of being able to take control of that business. So the team has done a fantastic job with everything that's going on there.
Operator: And our next question coming from the line of Sean O'Loughlin with TD Cowen.
Sean O'Loughlin: Like my peers, I'll congratulate you on the excellent results. I wanted to ask -- two of your, I guess, I'll call them sort of competitors announced a merger last week, a question that we've gotten from investors is whether you anticipate much changing on the competitive landscape following that merger. Obviously, you don't compete in the handset market, but maybe as you think about those companies' respective broad markets businesses coming together, does that change much? Or is it too early to say with any certainty?
Stephen Daly: Yes. Thank you for the question, and congratulations to both companies. And you're right, we're not in the handset business, so it shouldn't affect us. Neither companies are customers or suppliers to us, so there's no sort of impact there. So we don't really see a direct impact. We have noticed that each of those companies is closing down their fabs, and I imagine over the course of time, there'll be some restructuring. And so it's possible that, that could create an opportunity for us to maybe win some more sockets or hire some great talent. So we'll see how it goes. And we again, congratulate both companies on that deal.
Sean O'Loughlin: Great. And then as a follow-up, I wanted to ask an AI question that is actually not about the data center market, if you can believe that. But in telecom, one of the themes that our colleagues on the comm infrastructure side of the house have been exploring is the potential impact of some of these deployments and the data center builds on access and long-haul networks as bandwidth increases either due to distributed training or more 2-way inference traffic. Are you -- I guess, put simply, are you seeing that at all? Or do you anticipate that in the future? And then maybe how should we be thinking about the puts and takes of those trends as it relates to MACOM?
Stephen Daly: Well, we have very good relations with the major RAN manufacturers that are deploying 5G and working on 6G. We also have a very strong understanding of the front-haul network itself because that's a big part of our business. And we're very, very strong with RF over fiber. And in some future generations, there may be more RF over fiber directly to the radio. And so all of these things would contribute to moving high-speed data or large blocks of data faster. And so we are definitely working with customers and trying to keep up with their investigations of different architectures like the ones you mentioned. So we do have -- again, I think the key point here is that trend would most likely be a long-term trend, and we think we have the right technology, given the highest speed, highest data rate, highest frequency. A lot of these applications might also deploy very high frequencies. And so we think we're in a good spot to take advantage of that.
Operator: And our next question coming from the line of William Stein with Truist Securities.
William Stein: And also congratulations on the strong results and outlook and perhaps especially on the fiscal '26 commentary, which sounds good. Steve, I was hoping that you might reflect on the one hand, relatively light comments about the industrial end market performance, while on the other hand, gross margin sounds like they're going to be tracking better consistently over the coming year. I've historically sort of associated these 2 things together that a lull in the industrial end market has been sort of a weight on gross margins. Is that still the case? Is that part of the thinking behind expanding gross margins next year or recovery in that market? And if any other details you could provide around that thinking, would be helpful.
Stephen Daly: Yes. And I think you're thinking about it the right way. And historically, we've had a lot of our industrial revenue was internal fab centric. And that's because it would be servicing markets like test and measurement or medical markets where they use a nonmagnetic high-voltage diodes, which we have a very strong position in the market on, as well as factory automation and other wireless platforms. And so as that market improves, that benefits the loading and can have a benefit on the gross margins. Generally speaking, I would -- with that said, generally speaking, as we look into '26, we think there will be some positive trends in industrial, but more importantly, stronger trends in defense, And that will also be a tailwind on our gross margins.
William Stein: That's helpful. Maybe as a follow-up, can you maybe help us understand the diversification in the data center end market? And maybe explore a little bit where the design wins come from. Are they more from module makers, from semiconductor suppliers, from the cloud service providers? And maybe give us an idea of the diversification and the types of customers that you're actually getting design wins from and transacting with.
Stephen Daly: Thank you for the question. We address to the back half of your question, all 3 of those customer categories. So that would be the module manufacturers or cable manufacturers, semiconductor companies and the cloud or the hyperscalers directly. So we engage in all of those categories. And so when you take that and add that all up, you'll see that there's a lot of mix of what those different companies would want in terms of product for MACOM. As we look at the market, we break it up into really 3 segments, it would be the multi-mode market itself, which is generally short reach; single mode, which is medium, long reach; and then metro long-haul and coherent. And so as we look down and service these different companies in those different categories you mentioned, depending on what they're focused on, we'll try to be a merchant supplier and sell them chips. It might be a driver, it might be a laser, it might be a photodetector or TIA. And so that is -- there's about a half a dozen primary product lines, let's say, that we service the data center with, and that's how we go to market.
Operator: Our next question coming from the line of Peter Pang with JPMorgan. All right. I will go on to the next person in queue, next person in the Q&Q coming from the line of Tim Savageaux with Northland Capital Markets.
Timothy Savageaux: Okay, just made it. Congrats on the results. And indeed, we've seen some pretty positive results across this AI optical landscape thus far this week, even with a lot of references to step-function accelerations and demands, I think, both inside and outside the data center. And I think maybe that marries up well with your very strong October bookings commentary, I think. I guess the question is, in that environment, so you're guiding data center to high 20s growth, maybe 28% growth in Q1; and I guess given this environment that we're seeing and what seems to be a bit of a tidal wave of demand, is that type of growth rate sustainable for the year in fiscal '26? Or can it even increase?
Stephen Daly: Yes, I think it can increase. And we have a base case, and then we have our sort of best case. And we're setting guidance on it, I would say, our base case are more conservative which even provides strong sequential growth coming off of a very strong Q4. And so we would expect that to continue. There are scenarios, as we model our fiscal '26, where our data center can actually really outperform and have very strong performance similar to last year. But we're not forecasting that now. We know a lot of things have to happen, including various ramps have to occur and things of that nature. So we're not forecasting that sort of super strong growth. We're going to start the year and look at our backlog and plan accordingly. But you're correct, and those trends are there, and it's primarily around 1.6T. That's where the volume is, that's where the demand is, that's where the shortage of supply in some key technologies is. And quite frankly, that's where MACOM can be a strategic partner.
Operator: Our next question coming from the line of Quinn Bolton with Needham & Company.
Quinn Bolton: I guess maybe, Steve, just coming out of the ECOC optical show a few weeks back, there was some chatter about market share shifts in the TIA and the driver side at 800-gig and 1.6T modules. I just wonder if you could address how do you feel about your relative share position across TIAs drivers? Have you seen any shifts? Do you feel like you're still pretty well holding share or maybe even taking share? But any commentary just how you're doing in the PMDs for optical modules at 800 and 1.6T?
Stephen Daly: Thank you for the question. I think we're doing well. I think we have differentiated product, and it's a very competitive landscape. So you have to earn every socket based on performance, timing, price and I think we're bringing our best game to the market.
Quinn Bolton: So holding share?
Stephen Daly: I'm not going to comment on particular product lines, whether we're gaining or losing market share.
Operator: And there are no further questions at this time. I will now turn the call back over to Mr. Steve Daly for any closing remarks.
Stephen Daly: Thank you. In closing, Jack and I would like to thank the entire MACOM team for their continued dedication, which made our FY '25 results possible. We will continue to work as a team to meet our customers' needs and execute our strategic plan as we start fiscal year '26. Thank you very much, and have a nice day.
Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.