Welcome to MACOM’s Second Fiscal Quarter 2022 Conference Call. This call is being recorded today, Thursday, April 28, 2022. I will now turn the call to Mr. Steve Ferranti, MACOM’s Vice President of Strategic Initiatives and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Olivia. Good morning, and welcome to our call to discuss MACOM’s financial results for the second fiscal quarter of 2022. 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 fiscal Q2 results. When Jack is finished, I will provide revenue and earnings guidance for fiscal Q3, and then we will be happy to take some questions. Revenue for the second quarter was $165.1 million, and adjusted EPS was $0.68 per diluted share. We continue to improve the quality of our earnings as both gross and operating margins increased sequentially. We also generated strong cash flow, ending the quarter with over $500 million in cash and short-term investments, which is a record level. Our financial performance reflects the numerous improvements that we have made across many aspects of the business. Overall demand for our products continues to increase. Our book-to-bill ratio for the quarter was 1.2:1, representing the sixth consecutive quarter above 1. Our backlog is again at record levels, which is helpful as we plan the remainder of fiscal 2022. We believe that the strong Q2 bookings reflect market share gains, market traction from our new products as well as long lead orders which are being placed well ahead of the required ship dates. Our turns business was up slightly to approximately 19% of our total revenue during the quarter. The business metrics for our new products show favorable performance. In aggregate, as a percentage of total revenue, products less than 3 years old are contributing more to revenue today than in the past and with gross margins that are higher than our current corporate average. These trends are in line with our strategy to build a diversified and highly profitable product portfolio. Our team continues to work effectively to accelerate product and technology developments. To meet our future goals, we are investing in new HR programs and benefits for our existing employees as well as expanding our workforce with additional design, operations and sales staff. I am pleased with how our team has been performing and with the amazing new talent we are attracting to the company across all functions of our organization. Revenue breakdown by end market for Q2 was as follows: Industrial & Defense was $67.1 million, Telecom was $62.9 million, and Data Center was $35.1 million. Data Center and Telecom revenues achieved strong double-digit sequential growth, which was offset by a decline in I&D revenues due to timing of shipments. Additionally, we expect our top line growth in the second half to be slightly higher than in the first half of our fiscal year. Now moving to our 3 end markets. The Industrial & Defense markets have been a focus area for MACOM because we believe these markets have the potential for significant revenue growth over the next few years. Customers in these markets typically produce products with long life cycles, which can create an annuity-like revenue stream for MACOM. In part, our strategy is focused on strengthening and expanding our high-performance product portfolio to better address the highest frequency, highest power and highest data rate opportunities across these markets. I&D customers are performance driven, and they look to adopt new technologies. We will engage this market with our proprietary semiconductor technologies, our IC design capability and our growing subsystem design capabilities. Our continued focus on this market is uncovering numerous large opportunities in which our technology is a perfect match for the customers’ needs. We see opportunities with our new 0.14 micron GaN on Silicon Carbide mimic process, our pure carbide high-power amplifiers, our analog and mixed signal ICs and our specialty optical and RF subsystem products. Our new products are creating a growing pipeline of meaningful opportunities involving a variety of ground airborne and ship-based programs, including radar, electronic warfare, avionics and microwave communication applications. I am pleased that we are now engaged with some of our largest customers to insert optical connectivity technology in their applications. I’ll note, we maintain a long-term perspective in this market because most defense programs take a long time to transition to production. However, the programs have long life cycles, and we are able to stack up multiple programs with high dollar content, which makes the financial returns compelling. I am pleased to announce that in Q2, we were awarded a multimillion-dollar 2-year development contract to produce a 45-kilowatt transmitter utilizing our gallium nitride amplifier and phased array antenna technology. This governing contract with the Navy validates that our GaN amplifier and phased array technologies are best-in-class. Congratulations to the capture team for this award. Our Telecom end market revenue increased sequentially in Q2 following a strong Q1. We continue to experience broad strength in demand across various Telecom applications, including 5G, metro/long haul, broadband access and broadcast video. As a reminder, Telecom is a very broad and diverse end market for MACOM, spanning numerous communication protocols, network architectures and topologies. Today, we are only delivering a fraction of the overall opportunity for this market. Our primary long-term growth drivers across these market opportunities will be new product introductions. As an example, we recently announced availability of our 128-gigabaud transimpedance amplifiers and modulator drivers for coherent networking applications. These new products improve upon MACOM’s already strong competitive position in these markets by supporting long-haul metropolitan and Data Center Interconnect, or DCI applications. This new product family includes high bandwidth, low noise and low power consumption, dual channel and quad channel TIAs and quad channel drivers that are designed to enable coherent transmit and receive systems that operate from 800 gigabits to 1.6 terabits per second. Additionally, over the last several quarters, we have been gaining traction with 5G OEMs and O-RAN equipment manufacturers for our RF portfolio of front-end modules, high-power switches and amplifiers. A number of our customers have recently moved programs to low rate initial production using our power amplifier products. Here, we are providing 100-watt, 220-watt and 450-watt peak power GaN on Silicon Carbide amplifiers for small cell and macro base stations for both U.S. and international deployments. The base station power amplifier market is large and comprised of numerous opportunities, spanning different customers, frequencies and power levels. We are just beginning to penetrate this market. Demand for our Lightwave products for Telecom and access application also continues to grow, especially for our 25G DFB lasers. We have multiple 5G front haul customers and low rate production with our lasers primarily for CWDM6 modulation schemes. Our expectation is that production volumes will increase over the next 6 to 12 months. Finally, our Data Center end market revenue was up in Q2 based on incremental demand from our high-performance analog solutions, which include CDRs, TIAs and driver products. In March, we attended the 2022 Optical Fiber Conference, or OFC, in San Diego, where we had more than 10 product demonstrations to showcase our latest products. For example, one of the demos included a single chip laser array with 8 CW lasers each operating at different wavelengths. The laser array utilized MACOM’s etched facet technology and is ideal for co-packaged optics. This laser array was developed to work alongside one of our customers’ chipsets to enable connectivity at speeds as high as 2 terabits making it ideal for AI or high-speed chip-to-chip connectivity. MACOM is currently engaged with several customers to enable data center interconnect requirements at 800G and 1.6 terabits with our next-generation linear driver and TIAs. In some instances, we will support a linear interface architecture, also known as Direct Drive to optimize performance of the entire signal path from host switch ASIC to the optical interface. One of the first expected deployments will be for applications addressing deep learning and AI for high-performance computing utilizing low-latency InfiniBand networks. And last, MACOM is pleased with the customer interest level in our recently introduced linear equalizers, and we see growth opportunities in active copper cable applications at both 200G and 400G data rates for high-performance computing platforms. The foundation of our growth strategy revolves around introducing new product lines, new technologies and raising the bar on semiconductor performance in areas where we choose to compete. We often use trade shows as a venue for product announcements and for our teams to drive deadlines associated with these events. IMS or International Microwave Symposium, which supports the RF and microwave industry is less than 2 months away. During this event, we plan to unveil some of our latest products, technologies and product lines. At this year’s event, we plan to demonstrate our highest power level amplifier, a GaN power amplifier, which delivers 4.5 kilowatts of RF power, almost 1.7x higher than our 2.6-kilowatt device we introduced last year. Our first 8-watt and 10-watt 5G massive MIMO GaN on SiC power amplifier modules, or PAMs, which include driver stage, CMOS power management ICs and a Doherty output stage. We’ll introduce the first GaN mimic products from our internal AFRL 0.14 micron GaN on Silicon Carbide process, specifically a 10-watt Ka-band mimic chip. We will also introduce our first waveguide packaged products, specifically an e-band power amplifier module, which combines 16 of our 80 gigahertz mimics using a novel waveguide combiner. And last, while we’ve been utilizing SOI technology in our 5G RF modules for some time, we are launching our first SOI standard product, a DC to 67 gigahertz switch for test and measurement and I&D customers. Perhaps most notably at IMS, we plan to demonstrate our first BAW or bulk acoustic wave product. BAW technology is a passive silicon crystal filter technology used in most handset and wireless applications to filter unwanted signals. We are not targeting commercial wireless applications or consumer electronic markets but rather high-performance industrial and defense electronics. In addition, our team plans to implement novel semiconductor processing techniques to push the frequency performance of BAW technology. Today’s BAW technology is limited to about 6 gigahertz, and we plan to push our technology through 15 gigahertz. I&D customers have a growing need to filter out high-frequency signals in their microwave systems. Our goal is to enable solutions with filters based on our proprietary semiconductor processing techniques. At IMS, our chip scale package BAW product will be showcased in 2 applications, a 2-channel switch filter bank and alongside a MACOM Comb generator to select desired frequency. It is difficult to estimate the size of this market, but we conservatively estimate the opportunity exceeds $100 million, and we believe customers will be willing to pay a premium for our technology. Before Jack reviews our financials, I would like to highlight that in March, we celebrated our tenth anniversary as a public company. Today, MACOM is recognized as a trusted partner, and I congratulate our entire team for their hard work and significant contributions to both our customers and the industries we serve. To mark the anniversary, our marketing team updated and launched a new website with a modern look and feel, which better organizes information on products and improves navigation so our customers can quickly find the information they need. In summary, we have many compelling new processes underway, world-class IC designers and unique manufacturing capabilities. I am confident we can continue to push the boundaries of semiconductor engineering. Jack will now provide a more detailed review of our financial results.

Thank you, Steve, and good morning to everyone. We continue to build on our sound financial performance during our second fiscal quarter ended on April 1, 2022. Revenue for the second quarter was $165.1 million, up 3.5% quarter-over-quarter. On a geographic basis, revenue from our domestic U.S. customers was approximately 45% of our fiscal Q2 results, representing geographic diversity across our customer base. From a supply standpoint, the environment continues to be challenging for our operations, planning and logistics teams. The recent resurgence of COVID-19 in Asia has resulted in additional lockdowns in various cities, which has impacted some of our outside assembly and test suppliers. Also, shortages of certain key components and production capacity limitations within our supplier base are impacting our ability to ship product. We expect these conditions to improve modestly in the second half of the fiscal year. MACOM’s operations team has done an excellent job managing through this difficult environment, enabling us to meet our near-term revenue goals. Adjusted gross profit was $101.9 million or 61.7% of revenue, up 30 basis points sequentially. Q2 adjusted gross margin came in toward the upper end of our guidance range based primarily on continuing operational improvements. We are pleased with our growing gross margins and expect further improvements over time, albeit at lower rates. Total adjusted operating expense was $51 million, consisting of R&D expense of $31.8 million and SG&A expense of $19.2 million. Total operating expenses were sequentially up $2 million from fiscal Q1 2022, driven by an increase in R&D and staffing-related costs. While we anticipate modest increases in OpEx over time as we grow our R&D capabilities, invest in new technology development and expand our product portfolio, we do expect to maintain fiscal discipline over all of our discretionary spending. Adjusted operating income in fiscal Q2 was $50.9 million, up from $49.1 million in fiscal Q1. Adjusted operating margin was 30.8% for fiscal Q2 sequentially up from 30.7% in Q1. Depreciation expense for Q2 was $5.8 million and adjusted EBITDA was $56.7 million. Trailing 12-month adjusted EBITDA was $213.9 million as compared to $205.1 million in our prior fiscal quarter ending in December 2021. Adjusted net interest expense in fiscal Q2 was $1 million, down approximately $200,000 from fiscal Q1, primarily driven by higher short-term investment balances and the associated interest income. Our adjusted income tax rate for fiscal Q2 was 3% and resulted in an expense of approximately $1.5 million. Our net cash tax payments were approximately $500,000 for the second quarter, up $300,000 from fiscal Q1. We expect our adjusted income tax rate to remain at 3% going forward. Fiscal Q2 adjusted net income was $48.4 million compared to $45.4 million in fiscal Q1. Adjusted earnings per fully diluted share was $0.68 utilizing a share count of 71.1 million shares compared to $0.64 of adjusted earnings per share in fiscal Q1. Now moving on to operational balance sheet or cash flow items. Our Q2 accounts receivable balance was $100.6 million, up from $97.4 million in fiscal Q1. As a result, days sales outstanding were 55. Our accounts receivable balance reflects an increase over prior periods, primarily due to higher revenue and the timing of shipments during the quarter. Inventories were $93.4 million at quarter end, up by $4.8 million sequentially, and inventory turns were 2.7x, down sequentially in Q2 from 2.8x in the prior quarter. These higher inventory levels are to support future revenue growth. Fiscal Q2 cash flow from operations was approximately $42.5 million, up $8.4 million from our prior fiscal quarter. Capital expenditures totaled $7.1 million for fiscal Q2 as we further invested in our fabs, facilities and R&D equipment. We continue to expect our strategic capital investments for fiscal year 2022 to be in the range of $30 million to $35 million. Free cash flow was $35.4 million for the second fiscal quarter, up $6.4 million sequentially, mostly due to higher adjusted net income. Now moving on to other balance sheet items. Cash, cash equivalents and short-term investments for the second fiscal quarter were $503 million, up $25.3 million sequentially and $235 million or 88% from the previous year’s second fiscal quarter. We view our cash and short-term investment balances as a strategic asset that will help support future growth initiatives as we go forward. With further improvements in trailing 12-month EBITDA, our second quarter gross leverage is currently 2.8x, down from 2.9% in Q1. Further, our net debt is now around $100 million and net leverage is currently below 1. Prior to our annual stockholder meeting in March and throughout the year, we conducted extensive investor outreach focused on better understanding the concerns and perspectives of our stockholders, including diversity, governance and other topics related to ESG. We discussed our ongoing company-wide review of ESG-related matters and initiatives with the goal of enhancing or creating additional policies, programs and practices over time. Finally, I would also like to highlight that last week, Moody’s upgraded our corporate credit rating from B2 to B1. We view this as continued recognition of our improving operational and financial achievements during the past year as well as our ongoing and consistent efforts to improve the business. These improvements across the business would not have been possible without the teamwork and dedication of the entire MACOM organization, and I’d like to thank our team for their efforts. I will now turn the discussion back over to Steve.

Thank you, Jack. MACOM expects revenue in Q3 to be in the range of $168 million to $172 million. Adjusted gross margin is expected to be in the range of 61% to 63%. And adjusted earnings per share is expected to be between $0.68 and $0.72 based on 71.3 million fully diluted shares. In Q3, when compared to Q2, we expect Industrial & Defense revenue to increase by approximately 5% to 10% and Telecom and Data Center revenues to be relatively flat. As I highlighted earlier, we expect our second half FY ‘22 growth to outpace our first half FY ‘22 growth. In summary, we stand in front of a multibillion-dollar SAM with a unique and growing technology portfolio. Our strategy is to further diversify our products, customers and end markets. We maintain a long-term perspective on executing our strategy, and we will work to manage our business to be profitable throughout all business cycles. We are confident we can continue to improve our financials and take market share in the months and years ahead. I would now like to ask the Operator to take any questions.

Now, first question coming from the line of Quinn Bolton with Needham & Company.

Congratulations on the nice steady consistent results. I wanted just to ask, with the business mix shifting around a little bit, what are your expectations for year-on-year growth by segment in fiscal ‘22? It sort of feels like the Telecom business may be stronger than what you might have thought a quarter or 2 ago. And wondering if you still think Data Center is tracking to be up slightly fiscal year ‘22 versus fiscal year ‘21?

Quinn, thank you for the question. So your comments are accurate in terms of our outlook for the full year. We are seeing very strong growth from Telecom, and we expect that to continue through Q3 and Q4. And we do also expect both I&D and the Data Center to deliver year-over-year growth. And we do believe we are on track to deliver a minimum of 10% growth for the full year. We’re seeing broad strength across all of our markets. Our book-to-bill across all market segments this past quarter was again close to 1.2 individually, let’s say. So very strong broad performance across all of the segments. And we are on track for our original planning as we looked into the year for at least 10% growth.

Great. And then my follow-up question just on the Data Center business. It sounds like you came in a little bit better than expected in the March quarter, but I think you had talked about last quarter having pretty solid backlog and your biggest challenge was sort of supply constraints. Wondering if you could just sort of talk about the supply constraints? And do you think you’ll be able to hit that very strong customer demand as you look into the September quarter on the Data Center side?

All indications suggest we will meet our goals. As we calculate for the latter half of the year, we anticipate our Data Center business segment in Q4 to be close to $40 million. A significant portion of this growth is attributed to improvements in our supply chain. Additionally, we are observing positive trends within this segment, notably a strong interest in our linear equalizers for copper cables catering to both 200G and 400G markets. We have also seen growth across all our PAM4 product segments and our overall 400G business is expanding. Furthermore, we are increasingly engaging with high-performance computing at the higher data rates I previously mentioned. These positive trends within the data center sector are certainly advantageous for our long-term growth prospects.

Our next question coming from the line of Harsh Kumar with Piper Sandler.

Congratulations to everyone involved. There has been solid execution during these turbulent times. Steve, you appear quite enthusiastic about the telecom business. You have initiated several opportunities there, and I’m curious to know if you could rank your top one or two opportunities in Telecom that you’re most excited about, where you foresee the greatest potential for growth in the near to midterm.

Yes. So I think that’s a difficult question to answer because we have so many moving parts within Telecom. If I just look at the performance in Q2, the strength and the growth came from primarily 5G, both on the RF product side as well as the optical side. So that would include products like front-end modules and then analog ICs for front haul. And also, we’re starting to get traction with our Lightwave components, both on the laser side and the photodetector side inside of some of the front-haul platforms. So that’s certainly supporting the growth, and these are product lines that we’ve talked about during the course of the year. So we’re very pleased that things are coming together as we had expected. We’re also seeing growth from what we call access markets, which includes 10 GPON. We have a very strong position with some of our analog chips within that market. We are also starting to support that market with photodetectors, which is a content gain for that market for this year. And later on this year and going into next year, we plan on adding lasers to that market, which will really turn that market on from MACOM. And as you know, historically, when MACOM was supplying lasers to the 2.5 GPON market, there were quarters where we were doing $10 million to $20 million of revenue per quarter just for that market segment alone. And then the last thing I would add is Metro/Long-haul business is also very strong right now, not only our legacy 32-gigabaud business but also the new content for 64 gigabaud. And as I highlighted in my scripts, we’re introducing our 128-gigabaud products as well. So we really have a nice position there. And so the common denominator for all of these markets is really infrastructure. We are getting good traction within the infrastructure markets within Telecom and certainly quite pleased about that.

And then this is a good segue into my next question. You guys actually started launching lasers in selected markets. I think Telecom is one which you highlighted already. I was curious, of the $40 million number that you cited for the fourth quarter for the data center business, does it include lasers? And then secondly, can you help us understand the scope of your entry into lasers and perhaps the SAM or TAM opportunity associated with this entry into various markets?

Yes, there is a contribution from laser revenue within the data center segment. This comes from two main areas: LAN WDM, which is currently in production and is expected to grow in the latter half of the year, and CWDM4, which is gaining market share and we expect to see progress in the next six months. To answer your question regarding the presence of laser revenue in the data center, the answer is yes. More broadly, we are focused on telecom, particularly 5G. Over the past 1.5 years, we have been working on increasing our market share and getting our products qualified by customers. We are seeing traction with CWDM6 and BiDi platforms. We are enthusiastic about this market as we believe MACOM has a competitive edge since we utilize 4-inch indium phosphide. We conduct all the laser testing and lasing at the wafer level, which sets us apart from competitors who test after cleaving the wafers. This allows us to maintain a superior cost structure, making our laser launches beneficial for our gross margins. This part of our business is quite profitable and supports our objective of increasing gross margins. Additionally, our laser business functions as a portfolio. Currently, we offer Fabry-Perots and DFBs suitable for lengths of 2 to 15 kilometers, as well as CW lasers for silicon photonics applications. We are also introducing higher power CW lasers and aim to expand into other laser categories, including EMLs for longer reach applications, which are attractive due to strong pricing and a shortage of capacity in that segment. In the long run, we plan to release more laser families into various markets. We also continue to improve in industrial markets that use lasers. Notably, we recently surpassed a 10,000-hour qualification milestone for our DFB platform, which is foundational for our EML business and future targets in the data center.

Our next question coming from the line of Tore Svanberg with Stifel.

This is Jeremy calling for Tore. And let me add my congratulations on the execution here. Just a follow-up on the laser comments. Can you give us maybe a quick update in terms of the competitive dynamics if there’s been any changes in terms of supply chain or recent geopolitical impacts on the competitive landscape here?

Yes. First of all, the laser segment is highly competitive. We compete with U.S. companies, Asian-based companies, and Chinese companies. It's very competitive. I would say there's really no shift in the dynamics. We've observed some smaller companies discontinuing certain product offerings. The laser is essential for optical links, and customers are cautious about selecting vendors for high-volume applications. If the laser fails, the link fails. Therefore, we ensure that when we enter this market, we focus on quality and reliability. We want customers to recognize that we are achieving some of the highest standards in functionality and reliability. To directly answer your question, there’s no significant change in the competitive landscape. It remains intensely competitive. When we enter this market, we bring analog solutions for customers, which include drivers for the lasers and TIAs for the receive side. We have significant content within many of these optical transmitters and receivers. Finally, it's worth mentioning that we are still the only company in the industry using this type of product on 4-inch indium phosphide.

Got it. And maybe switching to the I&D side. Can you tell us about any shift in terms of demand that you’re seeing there, just again in the current environment? And maybe what are some of the key applications going forward?

Sure. I would say there are no changes in the environment. Our customers continue to look for advanced technologies for their platforms. I’d like to take a moment to elaborate on our strategy within this segment. We aim to provide customers with the highest power, highest frequency, and highest data rate solutions. Earlier this week, we announced a significant contract, a multimillion-dollar two-year development contract with the Navy for producing a 45-kilowatt transmitter using our GaN technology. We view this as an important milestone for MACOM as we enhance our capabilities to create multi-chip assemblies and very high power components. This project showcases the engineering excellence at MACOM, which reflects our expertise in thermal engineering and power control necessary to operate the devices, along with our ability to manufacture phased array antenna systems. It’s a valuable multiyear project that will lead to additional opportunities like this, and our team is performing exceptionally well.

And our next question coming from the line of Tom O’Malley with Barclays.

I just wanted to ask specifically on the I&D side. You mentioned some pushout due to customer timing and you’re obviously guiding that business up strongest of your 3 segments. Is that related to the I side or the D side? And traditionally, you don’t really have these big chunky revenue bunches except in the defense department. So I would assume it’s there. But any color on the moving pieces between March being weaker than June being a bit stronger here.

Sure. Maybe I’ll say a few words, Tom, and then Jack can also add. So certainly, we are, as you highlighted, had a down I&D. And that really had to do with operations rebalancing and reprioritizing shipments within the quarter based on customer priorities. And as we highlighted, as Jack highlighted, in the script, we had a higher turns business. We saw incremental demand for the Data Center coming in. And so essentially, what we did is we had a mid-quarter remixing of priorities based on customer priorities, let’s say. And so that’s really why I&D came down the way it did. There’s nothing structural, no issues, no execution issues or anything like that. It was simply a matter of resetting priorities during the middle of the quarter. And Jack, I don’t know whether you want to add to that or just some general trends on I&D.

Yes. And just to add to that, Tom, as Steve had mentioned, the book-to-bill across the business has been strong, specifically within I&D. And we moved some things around like we typically do during the course of the quarter. So we expect that strength that we’re seeing going into Q3 to remain as we go forward. So nothing really specific to highlight things tend to move around throughout the business, and that’s where we ended up here for the quarter and with our outlook going into Q3.

Got you. And then as a follow-up, I think there’s a lot of concern out there, obviously, with the China shutdown, particularly with the module makers. Could you just fill us in with any details you have or what you’re seeing in terms of your supply chain there? Is there any financial impact that you’re recognizing in the results that you just gave us? Are you seeing that improve or get a bit worse? Any color there would be really helpful as well.

Certainly. We have several offices in different cities across China, primarily focused on sales and application labs. In areas like Shanghai that have experienced shutdowns, many of our staff have been working from home. Meanwhile, our Shenzhen office, which handles planning and logistics, has remained fully operational, though we've had some fluctuations in the past two years that required staff to work remotely at times. We don’t have any suppliers in China, so we haven't been affected by the shutdowns in specific regions. Our attention has been directed towards our customers and the sales and application efforts. Despite some challenges due to parts of the country being shut down, our customers have remained active, and our sales and applications teams have also been quite engaged. Fortunately, we have not faced the same level of impact that some other companies have experienced due to city closures.

Our next question coming from the line of Vivek Arya with Bank of America.

Steve, I have one more on the I&D segment. If I take kind of a longer-term historical view. It seems like I&D tends to have a strong year followed by a softer year, so there seems to be that cyclicality in the business. And I’m curious, what is the right way to think about the growth opportunity for I&D? Can this grow in line above or below kind of the 10% to 15% kind of growth rate that you think for the company as a whole?

I understand your question, but I don't completely agree with the idea of an on-year and an off-year cycle. From our perspective, MACOM’s Industrial & Defense business has been weak over the last five to six years due to a lack of focus, but that changed in 2019 when we started to pay more attention to the market. We are now cross-selling our existing portfolio and introducing products and technologies that appeal to this market, while also driving our sales team to secure contracts such as the Navy contract, which we aim to replicate. This is a massive market. In the past three years, our revenue has increased from the $30 million to low $40 million range per quarter to the high $40s to the 50s, and now we’re reaching the 70s. We expect this trend to continue as we invest heavily in this sector, whether on the optical, RF, or microwave sides, or by supporting customers with high-end subsystems for niche applications. Our long-term goal is to achieve $1 billion in revenue by fiscal year 2025, primarily driven by our Telecom business due to its diversity, followed by our defense and Industrial & Defense sectors, and lastly our Data Center business, which has a more limited solution set. This market represents one of our largest opportunities. We have also introduced our BAW technology for the Industrial & Defense segment, responding to customer needs for smaller and higher-performing components. There is a strong desire among customers to move away from traditional filter technologies to innovative solutions, and we are positioning ourselves to meet that demand with our high-frequency BAW technology, which would be an industry first. Additionally, our 0.14 GaN on Silicon Carbide process targets key programs in phased array radar and SATCOM for Industrial & Defense applications. Our focus on this market is significant, as customers have long-term programs that can generate enduring revenue streams, unlike the more volatile dynamics seen in the data center market. We’ve also made strides in the medical applications space, moving from single components to multichip assemblies. Recently, we secured an automotive telematics program that will go into production in the next six months. There are many exciting developments in our Industrial & Defense sector, and we expect it to remain strong.

Got it. Very helpful. And for my follow-up, Jack, I was hoping you could just give us a sense for how we should think about balance sheet inventory. I understand everyone is holding more inventory than usual because of all the well-known reasons. What is your target in terms of days of inventory? And how does that impact your fab utilization and gross margins if there is an impact?

Yes. And as we’ve discussed over the past few years, inventory has been an area of focus for us. And I think if you go back a few years, we brought our inventory levels down to what we thought were healthy levels over the past couple of quarters, there’s been a bit of a build in our inventory for strategic purposes, and I think that’s played out well for us in terms of supporting future growth and revenue opportunities as they emerge. In terms of a long-term goal, I don’t think we’ve established a longer-term goal. I think we’ve been around 3x. We’ve come a little bit below that with some of the increases that we’ve seen in inventory, but I think right around that 3x is where we’ve been would be a healthy enough target. And from a turns perspective, with our improving gross margins, that puts pressure on the inventory turns as well. So it’s a little bit of an uphill battle that we’ve been fighting overall when you look at turns with regard to the margin improvement that we’ve had.

Our next question coming from the line of Harlan Sur with JP Morgan.

Great job on the quarterly execution and strong margins. The innovation profile is expected to drive growth and improve the margin outlook in the mid to long term. Do you have a target to increase the number of new standard product introductions by about 35% this year? Could you provide us with rough percentages regarding where the new products are focused by end market? I’d like to know more about the R&D focus over the next few years. Additionally, I believe you have a strong pipeline of custom product development. Are most of these efforts aimed at your I&D business, particularly with defense-related customers, or do you also have custom product development programs in Telecom and Data Center?

Thank you for the question. It would be quite challenging for us to break down our R&D spending by end market or product line, as that would involve sharing sensitive information. However, I can provide some general insights. Our high-performance analog business is one of our largest segments, and it receives a significant portion of our R&D investment. This business has historically focused on the Data Center, but we aim to broaden its reach into industrial, defense, and more analog and mixed signal technologies beyond the Data Center. Our objective is to grow this group into other markets. In contrast, one of our smaller segments, the Lightwave business, encompasses three different technologies: lasers, photodetectors, and silicon photonics. We are investing heavily in all three areas, with lasers and photodetectors currently generating revenue, while we continue to invest in silicon photonics. I prefer not to get into more specifics, but our R&D investment strategy aligns with our strategic plan that outlines the technologies we aim to develop, the product lines we want to enhance, and the gaps we intend to fill in our portfolio. We acknowledge that our portfolio is smaller than that of many competitors in the industry. As mentioned in our earlier remarks, you will soon see an increase in new product lines for both existing and adjacent markets, which we believe is the best approach for us to outpace industry growth. I would also like to clarify what we are not pursuing. We will not be investing in next-generation DSPs or in large programs or systems with low margins, as those areas do not align with our interests. Many companies producing optical, RF, and microwave equipment have weak financials and face profitability challenges. Therefore, we will be selective in our investments, focusing on areas where we can offer something unique that also meets our financial criteria for enhancing profitability.

Very insightful. You guys continue to drive strong gross margin improvements. It’s been a combination of mix, manufacturing efficiencies and optimizations, maybe stronger on the optimization front, but it actually looks like your incremental margins are kind of now settling into a stable range of somewhere between 70%, 75%, which is where we would expect them to be given the richer mix of your products? And also, I know you guys have talked about mid- to longer-term target of mid-60s gross margin. So we would expect that incremental margins to be in that 70%, 75% range. But is this how we should think about the margin trajectory on continued revenue growth kind of in that sort of low to mid-70s type of incremental margin range?

Great question. Our operations, sales, and finance teams have done an excellent job enhancing the business's profitability, particularly the gross margins, through various strategies including pricing, execution, and yield enhancement programs, as well as collaborating with vendors for better pricing. This effort is ongoing. To further improve margins, we will rely on innovative products. Today, we've shared several examples of our best-in-class product lines that are expected to achieve higher gross margins. As these products are integrated into our business, we anticipate our margins will continue to rise. We don't set specific target models because predicting the timing and mix of new products is challenging. Everyone knows that new products often take months or even years to significantly impact both revenue and gross margins. Therefore, we prefer to reflect on past achievements in gross and operating margins rather than try to project 1 or 2 years into the future. However, I can say that we are consistently working to increase margins, and the data we've gathered on our new products strongly supports our objectives. Would you like to add anything, Jack?

Just to pile on a little bit more in terms of some of the internal initiatives that we have been going through and how those continue to contribute to the margin improvements that we’ve seen as well as the revenue increases, that additional volume through the top line is helping to drive incremental margins as well. So it’s really a combination of factors that have supported us thus far, and we think will continue to support us as we go out into the future, but it does become a bit more challenging as we continue to go forward with the improvements that we’ve made over the past few years.

Our next question coming from the line of David Williams with Benchmark.

Just, I guess, a couple of high-level questions, but just kind of think about the order book, it’s still very strong book-to-bill, but have you seen any changes, I guess, in the behavior of your customers maybe their longer-term planning, just kind of given the volatility that we’ve seen in the marketplace over the last several weeks.

The short answer is no. As we entered this month or as we’re finishing out this month, orders continue to be strong across all the different market segments. So we’ve not seen any pullback or slowdown from our customers. So nothing to report there.

Fantastic. And then a few others have commented on substrate constraints, really on the high-performance products. I’m just wondering if you’re seeing anything similar there or maybe specific areas of constraints that could potentially be troublesome as we head to the second quarter.

Yes, we have definitely been impacted by the substrate issues affecting capacity in the industry. This has affected two parts of our business: the Data Center, particularly some of our high-end products, including HPA products and what we refer to as connectivity products, such as crosspoint and very high-end switches. So, the answer is yes, we have been affected by that, and this has been incorporated into our guidance over the last two to three quarters. During our last call, we mentioned that this issue was causing a backlog in our Data Center revenue. We still believe that there will be a significant increase in Data Center performance in Q4 as some of these supply constraints are resolved, allowing MACOM access to the necessary packaging to ship our products. This situation will gradually improve over time. We have been taking steps to transition away from certain technologies and to adapt our components and products to more suitable technologies. All this engineering work has been ongoing behind the scenes, and looking ahead to 2023, we anticipate improvements. It will no longer be a concern. Our business units are effectively managing this situation; they are fully engaged, and we are managing through it.

Our next question coming from the line of C.J. Muse with Evercore.

I guess a follow-up question on the supply constraint side. Curious what your view was pre-China lockdowns in terms of when you thought things would normalize and how that’s been affected due to lockdown? Just trying to get a better understanding there.

C.J., it’s Jack. Just to clarify, in my prepared remarks, I had some commentary with regard to supply chain. And I think that’s just a to highlight that those items still do exist. Obviously, they’ve been evolving over time, and there have been some more recent items that have come up more specifically in China. And I think Steve had addressed that in his earlier response to one of the questions, but part of the prepared remarks was also for recognition to our operations team in terms of how well they’ve been able to manage through this over the past number of years, really when you look back over time. So no real major impacts to us over the past quarter versus where we were 3 months ago. We did highlight that we were expecting some modest improvement as we work our way through the back half of the year. But as always, and as we’ve learned, that’s always subject to change. But based on where we’re sitting here today, no real major change from where we were a quarter ago.

Our next question coming from the line of Richard Shannon with Craig-Hallum.

Steve, I’d like to dive into the topic of GaN here. I’ve had some positive commentary in the last few calls here. It sounds like the business is really building, particularly on the bookings side. You’ve also talked about a goal of getting to the company at $1 billion in a few years. And I wonder if you can give us a sense of how the backlog is building here? And how you think about the size of your GaN business relative to that goal out in a few years? I mean can GaN be 10% of that total? And how would you kind of think of it between your I&D and Telecom segments?

We have three main components of our GaN strategy, actually four segments to highlight. The first is high-frequency mimics using 0.14 GaN on Silicon Carbide, which will serve high-frequency applications in I&D, SATCOM, and microwave radio links. These multifunction mimics can be utilized on both the transmit and receive sides of microwave systems. The second component focuses on lower frequencies with very high power, labeled PURE CARBIDE. Last year, we launched the industry's highest power device at 2.6 kilowatts, and at IMS in June, we will showcase a 4.5 kilowatt device aimed at radar systems, jammers, and electronic warfare, where extremely high power is essential. We will offer products not only at the chip level but also as packaged or multichip assemblies, where we incorporate ancillary circuits like drivers and isolators with our high-power devices. The third component relates to Telecom and wireless applications, primarily massive MIMO. We will also demonstrate power amplifier modules at IMS, as the industry shifts from discrete amplifier setups to more integrated power amplifier modules for 5G. We have been gaining traction with design wins for small and macro base stations and expect to see further design wins for these power amplifier modules over the next year. All three segments I've mentioned utilize GaN on Silicon Carbide. The fourth area involves GaN on Silicon, where we are collaborating with ST to advance this technology. Once it is ready, we plan to enter the market where it will be most beneficial. We've noticed various bands opening up at different power levels, and lower power applications may find GaN on silicon more attractive than silicon carbide. In the next 6 to 12 months, GaN on Silicon could be competitive against LDMOS and silicon carbide. At a high level, these are the four pathways we’re exploring for RF power. In response to your question about whether GaN can achieve 10% of our revenue, we expect our revenue this year to be approximately $670 million to $680 million. So, can we generate $67 million from GaN? Absolutely. In fact, our power business is one of the fastest-growing parts of our portfolio, starting from a small base. Our team is performing excellently, and we continue to expand. We have recently recruited a talented team of DPD engineers specializing in amplifiers for 5G radios. As we approach 6G and encounter new high-frequency bands, this team will play a crucial role. We strongly believe in RF power, as it is integral to our identity, and we aim to capture more market share over the next two years.

Steve, thanks for that great detail. I’ll ask a follow-on question. It could be a long, I don’t intend it to be, but one of your prepared comments, you talked about an emerging subsystem capability in I&D. Can you talk to that the strategic and financial implications of that and when we might see that?

Sure. We understand that some customers prefer to let us handle the problem, particularly in high power areas that require specialized equipment and experienced personnel. The Navy contract we mentioned is a prime example of this approach. We are proceeding cautiously. We recently established a small design center in Western Massachusetts, which focuses on developing the essential components to serve this market. Our engineers are skilled in creating multichip assemblies and working with waveguides for higher frequencies. This will gradually develop over time without a major turning point; instead, MACOM will begin to explore more opportunities in the market that align with our capabilities. We aim to avoid pursuing business where customers can source chips from multiple semiconductor companies to assemble a solution. Instead, we will create modules based on our proprietary semiconductor technology, not on other companies' chips. This criterion likely eliminates around 75% of potential opportunities, so we will be very selective when considering small subsystem or module opportunities.

Next question coming from the line of Ruben Roy with WestPark Capital.

I have a quick follow-up, Jack, regarding the gross margin discussion. Considering the different segments and product mix, as Steve mentioned, products less than three years old are starting to contribute more to revenue and higher margins. Can you remind us what the margin differences are, if any, across the three product groups today? Also, looking ahead to Q4 as the data center starts to pick up, do you expect any margin impacts from the changing mix over the next four to six quarters?

Yes. Thanks, Ruben. Yes, from an overall gross margin perspective by each of the end markets, that’s not something that we break out. We do look at the gross margins, and there is a bell curve across our entire product portfolio, where we’ve got some that are obviously higher than the corporate averages and some that are lower. The same holds true for the new product introductions that Steve had referenced in his prepared remarks, there’s going to be a spectrum of different gross margin profiles that those products have. We are looking to obviously focus on the ones with the stronger gross margins to try and focus on how we can do more of that. We also focus on some of the lower-performing products, even the ones that we’re introducing to make sure we understand why they have below our margins that may be below our expectations or may not even have the revenue desires that we had going into the development cycles. But NPI and overall gross margin is an area that we focus on across the organization. And some of those gross margin implications that we have come into play in terms of some of the production capabilities that we have within our own internal fab and our internal test and assembly facilities, and then there’s other implications as well with some of the product that we have externally fab and how that might play out from an overall mix perspective as it relates to our overall gross margins.

Very helpful. And just a quick follow-up. Steve, I don’t think you mentioned PON in your remarks today. I know you had a 25-gig PON demonstration at OFC. And just wondering if you can give us an update on where we are at 10-gig PON and kind of your perspective on when we’re going to get to 25 gig and how that might impact your Teleco business.

Sure. The volumes for 10G PON continue to increase, and we have observed this across several of our product lines. Our objective remains to enhance the content within our platform. Currently, we have a robust driver business and are gaining market share in photodetectors. We are in the process of introducing lasers to customers, which is ongoing. Additionally, for the first mode TIAs, we still have some work to complete. Overall, our 10G PON business is expanding. This is an international market, not limited to just China, and we are bolstering our market position.

Thank you. I will now turn the call back over to Mr. Daly for any closing remarks.

Thank you, Olivia. In closing, we would like to thank our employees, customers and suppliers for their continued support. Have a nice day.

Ladies and gentlemen, that does our conference for today. Thank you for your participation. You may now disconnect.