Welcome to MACOM's Third Fiscal Quarter 2025 Conference Call. This call is being recorded today, Thursday, August 7, 2025. 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.

Thank you, Olivia. Good morning, and welcome to our call today to discuss MACOM's financial results for the third fiscal quarter of 2025. I would like to remind everyone that our discussion today will include 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.

Thank you, and good morning. I will begin today's call with a general company update. After that, Jack Kober, our Chief Financial Officer, will review our Q3 results for fiscal year 2025. When Jack is finished, I will provide revenue and earnings guidance for the fourth quarter, and then we will be happy to take some questions. Revenue for the third quarter of fiscal 2025 was $252.1 million and adjusted EPS was $0.90 per diluted share. We had a strong quarter of cash generation and ended the quarter with approximately $735 million in cash and short-term investments on our balance sheet. Overall, our team did an excellent job in meeting our business and financial objectives this quarter. Revenues by end market were as follows: Industrial & Defense was $108.2 million; Data Center was $75.8 million; and Telecom was $68.1 million. I&D was up 10% sequentially. Data Center was up 5% sequentially, and Telecom was up 4% sequentially. Our I&D and Data Center quarterly revenues achieved record results. Our Q3 book-to-bill ratio was just over 1.1:1. As a result, our backlog remains at a record level. Our turns business, or orders booked and shipped within the quarter, was around 17% of total revenue. We believe our backlog growth is driven by our new products gaining market share as well as positive secular trends across our three major end markets. Our ability to provide competitive and leading solutions to our customers is what drives our financial performance. As a result, we continue to focus on technology differentiation across all our product lines. Simply put, our strategy is to enable the highest power, highest frequency, and highest data rate applications within our three core markets, using proprietary semiconductor processes, IC design techniques, and package technologies. In addition, over the past six years, our strategy has included strengthening our RF, microwave, and optical systems engineering capabilities. As a result, we are better able to engage customers early on system architecture discussions rather than offer point product solutions after the schematics and block diagrams have been developed. This approach, when combined with the strength of our chip designers and manufacturing capabilities, allows us to have input on the system block diagram, which can translate into larger business opportunities and more cross-selling of products from our diverse portfolio. Industrial & Defense remains strong, and we continue to see opportunities in the U.S. and European markets. We support a wide range of applications, including military space electronics, MILCOM, onboard drone electronics, and directed energy anti-drone defense systems. Electronic warfare has been very active within our I&D business. EW systems typically contain complex wideband MMIC semiconductors generally operating at the higher frequency bands. These precision high-frequency applications often require high levels of integration and novel engineering solutions. Examples include components for radio and radar jamming as well as optical electronics used in conjunction with microwave electronics to spoof radar systems. These requirements within the defense electronics sector play into MACOM's strengths. Our industrial and multimarket product lines had modest improvements in demand during the quarter. Standard product sales are increasing across a wide range of low and medium-volume applications. Telecom orders remained solid, specifically in 5G infrastructure, broadband access, and metro/long-haul. While our lead 5G customers expect limited growth in the global radio access network market, our strategy is to gain market share with new designs that outperform the competition. In support of this goal, over the past 18 months, we have developed our next-generation high-power GaN on silicon carbide semiconductor process at our RTP fab to support existing and future 5G applications. We call this process GaN 4. I am pleased to report products from the GaN 4 process have been sampled to several of our major customers, and we have received very positive feedback on product performance. We believe our GaN 4 process will make us more competitive in massive MIMO applications, which we are not currently addressing well. Our metro/long-haul and SATCOM businesses within the telecom end market continued to perform. Expansion of high-speed data transmission and increased ground-to-satellite and satellite-to-satellite communications are driving demand for our products, some of which operate at 130 gigabaud data rates and up to 80 gigahertz in frequency. And finally, our Data Center business continues to grow, driven by the global expansion of this market. Demand remains solid for our high-performance connectivity IC portfolio supporting 800G and 1.6T deployments. In fact, we believe we will have record 200G per lane product revenue in Q4. Additionally, we are seeing demand at the lower data rates, including 100G and 400G, supporting expansion links and more traditional data center architectures. As we look at our full year results for the data center, we expect significant growth across almost all data rates and platforms. Even our legacy 25G NRZ business is expected to grow year-over-year. We are also pleased to report our data center product revenue mix is expanding as two new product lines enter production. First, we recently transitioned our 200G per lane photodiodes or photodetectors, also known as PDs, into high-volume production. We have a strong market position with 200G per lane PDs as MACOM is one of the few suppliers who can offer customers both the TIA and photodetector ICs, and we can offer a chip-scale stacked configuration with four PDs mounted on top of the TIA. Second, we have secured high-volume production orders for 100G per lane linear pluggable optics or LPO chipsets. Our LPO customer is deploying an 800G network in a median reach application. We believe this production order confirms that the market will continue to evaluate and adopt LPO architectures and roll out LPO solutions at scale. LPO is beginning to spread, which is good for MACOM. Our R&D, product development, and operational execution ramping the PD and the LPO products represent a major technical accomplishment by our teams. We believe these two new product lines will support future revenue growth. Many investors ask us about our ACC or active copper cable business and opportunities. Internally, we refer to these products as linear equalizers. As the data rates increase, we believe passive connectivity will coexist or be replaced with active solutions. Active connectivity solutions can be organized into three categories: active copper cable or ACC; active optical cables or AOCs; and active electrical cables or AECs. MACOM provides linear equalizers and TIA plus driver chipset solutions for ACC and AOC configurations. We do not support AECs, which are typically retimed DSP-like solutions. We believe the trends to electrify connectivity with equalization will continue to expand inside and around the data center as well as in other applications. An example would be PCIe 7 to connect disaggregated GPUs, CPUs, and memory together using high-speed connections. Disaggregated computing enables the efficient use of compute, memory, and storage resources, but it increases the need for fast low-latency connections. MACOM is addressing this high-volume application with existing InfiniBand and Ethernet devices and developing ICs with PCIe-specific protocol features for plug-and-play compatibility with existing cabling and multiple connector form factors. We have developed PCIe solutions for both single-mode and multi-mode fiber applications and demonstrated these at recent OFC and ECOC conferences. While MACOM is focused on supporting current generation applications, we are also looking ahead at future applications. As an example, at the last OFC, we demonstrated a 300 gig per lane PAM6 driver IC. As we work on advanced ICs like this, we engage with industry leaders so we can properly understand future system requirements. When we participated in the International Microwave Symposium in San Francisco, this exhibition showcased our latest microwave millimeter-wave and optical technology innovations. At this year's show, MACOM featured 16 live technology demonstrations, showcasing our newest products for electronic countermeasures, radar, and SATCOM applications. I want to highlight three noteworthy new products. First, a 1-kilowatt X-band pulse power amplifier module developed for electronic countermeasures and directed energy applications. This is a great example of the type of high-value add system-level offerings that I mentioned earlier. Second, a wideband front-end module or FEM, covering 20 to 18 gigahertz. This multichip transmit-receive module solution is ideal for wideband phased array architectures. And third, a new product solution for RF over fiber applications, MACOM's transmit/receive module offers up to 70 gigahertz of bandwidth, making it ideal for antenna remoting. The module provides a complete solution for transporting wide bandwidth signals over optical fiber within a compact form factor. I'll mention a few other noteworthy items. Our RF power business continues to perform well with an attractive mix of defense and commercial applications. Supporting this activity is our wafer fab located in RTP, North Carolina. On July 25, this fab came under MACOM's full control, almost six months ahead of the original schedule. We felt it was in our best interest to accelerate the transfer to remove risk given the seller's bankruptcy situation. The accelerated transfer will create a modest near-term gross margin setback, which Jack will review. However, now that we have full control of the fab, we can intensify yield enhancement efforts and optimize performance and operational metrics of the fab. We have recently executed a plan to increase fab output capacity by up to 30% with the purchase of heavily discounted fab equipment. The equipment installation and qualification will take 12 to 15 months to complete. Our lead high-volume customers are excited for this capacity to come online, and we expect that this move will lead to additional high-volume program wins starting in 2026. Our business development activities based out of MACOM's European Semiconductor Center, or MESC, continue to gain momentum in the market. We believe we are better able to penetrate the major European industrial, defense, space, and telecom accounts with the design and manufacturing site in France. Our goal is to be the premier designer and manufacturer of high frequency and high-power gas and GaN IC semiconductors in Europe, and I am confident our talented team in France can make this happen. And last, our six business units continue to engage customers on significant programs at the IC, module, and subsystem level in all three of our target markets. We continue to strategically expand our workforce with industry-leading talent to meet the challenge, to be first to market with best-in-class performance. Jack will now provide a more detailed review of our financial results.

Thanks, Steve. Our Q3 results are at a record revenue level with strong financial performance, continuing our steady growth in revenue, increased operating income, and ongoing cash generation. We have made sustained operational improvements across the business, which have supported our strong balance sheet and cash generation. Fiscal Q3 revenue was a new quarterly record of $252.1 million, up 6.9% sequentially based on growth across all three of our end markets. Our overall book-to-bill ratio for Q3 was just above 1:1. Adjusted gross profit for fiscal Q3 was $145.2 million or 57.6% of revenue, slightly ahead of prior quarters. As Steve had mentioned, we are pleased to have assumed operational control of the RTP, North Carolina fab on July 25, ahead of the original scheduled December transfer date. While we anticipate that the acceleration of this transfer will result in some minor near-term gross margin dilution of approximately 60 basis points or about $1.5 million in Q4. We are excited to have eliminated the business risks of not having the important facility under our operational control. With the facility now under MACOM's control, we believe we will be able to increase the speed of improvements to the fab's production capacity and yields, which will help to stabilize and improve the fab's performance as we enter fiscal year 2026. Total adjusted operating expense for our second quarter was $81.7 million, consisting of research and development expense of $55.1 million, and selling, general and administrative expenses of $26.6 million. The anticipated sequential increase in adjusted operating expenses compared to Q2 was primarily driven by higher R&D associated with employee-related costs and foundry expenses as well as higher variable compensation. As we are scaling the business, we have added new capabilities and resources, primarily within R&D functions. I would like to note that we have remained very focused on controlling our OpEx as we continue to grow our revenue. Depreciation expense for fiscal Q3 2025 was $6.9 million compared to $6.8 million in Q2 2025. Adjusted operating income in fiscal Q3 was $63.5 million, up 6.2% sequentially from $59.8 million in fiscal Q2 2025. For fiscal Q3, we had adjusted net interest income of $6.8 million, increasing $400,000 sequentially from $6.4 million in Q2. Our adjusted income tax rate in fiscal Q3 was 3% and resulted in an expense of approximately $2.1 million. We expect our adjusted income tax rate to remain at 3% for the remainder of fiscal year 2025. We are continuing to assess the impact of the U.S. government's recent legislation to understand the longer-term impact on our income tax rates and associated balances. Fiscal Q3 adjusted net income increased approximately 6.1% to $68.2 million compared to $64.3 million in fiscal Q2 2025. Adjusted earnings per fully diluted share was $0.90, utilizing a share count of 75.9 million shares compared to $0.85 of adjusted earnings per share in fiscal Q2 2025. We continue to make operational improvements within the business, which can be seen in the sequential increases in our adjusted operating income and EPS over the past eight quarters. Now moving on to operational balance sheet and cash flow items. Our Q3 accounts receivable balance was $129.5 million, down from $131.4 million in fiscal Q2 2025. The decrease in our AR balance was driven primarily by stronger cash collections. Our days sales outstanding averaged 47 days, which was below our previous quarter at 51 days. Inventories were $215.4 million at quarter end, up sequentially from $209.3 million, largely driven by inventory increases to support existing programs and anticipated future demand across the business. Inventory turns increased to 2x from 1.9x in the preceding quarter. Fiscal Q3 cash flow from operations was approximately $60.4 million, up $21.6 million sequentially and an increase of more than $11 million over fiscal Q3 2024. The sequential increase was primarily due to increased net income combined with fluctuations in working capital. As I have noted in previous quarters, given the dynamics of our growing business, it's typical to have variations in cash flow from quarter to quarter. Our business model over the last few years has demonstrated strong cash flow from operations. We believe we are on track for our cash flow from operations to be in excess of $220 million for fiscal year 2025. Capital expenditures totaled $8.8 million in fiscal Q3, up $700,000 sequentially. As a result of our increasing demand from customers during the fourth quarter, we expect to purchase $12 million of surplus equipment at the RTP fab from the previous owner. This will allow us to expand our RTP capacity by up to 30% over the next 12 to 15 months. Including this $12 million purchase, we expect our total capital expenditures for fiscal year 2025 to be in the range of $40 million to $45 million. Next, moving on to other balance sheet items. Cash, cash equivalents, and short-term investments for the third fiscal quarter were $735.2 million, up $53.7 million from Q2. Comparing our cash and short-term investments to the book value of our convertible notes, we are in a net cash position of more than $235 million as of July 4, 2025. I will highlight that we expect to pay off the $161 million of our remaining 2026 notes over the next three fiscal quarters as these notes become due under the terms of the original agreement. As we move into our fiscal fourth quarter, we expect revenue and profitability growth and to also maintain a strong balance sheet with ample cash to support our strategic goals. We will continue to carefully manage our discretionary and capital spending to support annualized revenue in excess of $1 billion while further improving our operational margin, EPS, and cash flow. I would like to thank the entire MACOM team for their contributions over the past quarter, including those that supported the planning and accelerated integration of the RTP fab. I look forward to us making ongoing improvements to the business as we complete the remainder of fiscal year 2025. I will now turn the discussion back over to Steve.

Thank you, Jack. MACOM expects revenue in fiscal Q4 ending October 3, 2025, to be in the range of $256 million to $264 million. Adjusted gross margin is expected to be in the range of 56% to 58%, inclusive of the near-term impact of the early RTP fab transfer. And adjusted earnings per share is expected to be between $0.91 and $0.95 based on 76.5 million fully diluted shares. We anticipate 5% sequential revenue growth in Data Center and Industrial & Defense. We expect Telecom revenues will be slightly down sequentially. These targets support record revenue and earnings for the company. And finally, I would like to take a moment to announce that Susan Ocampo will be retiring from our Board of Directors effective as of August 31, 2025. Susan, together with her late husband, John Ocampo, fundamentally transformed MACOM when they acquired the company in 2009, setting MACOM on a path of innovation and growth that continues to this day. Over her 15 years as a director, Susan has been an integral part of MACOM's journey, providing exceptional guidance through our company's most significant periods. The Ocampo's legacy is permanently woven into the fabric of our company, from our corporate values to our commitment to excellence. Susan has shared with us her plans to dedicate more time to philanthropic endeavors with a particular focus on supporting engineering students pursuing degrees in RF engineering and related technical fields. This commitment to nurturing the next generation of semiconductor talent reflects Susan and John's lifelong passion for education and our industry. We're inspired by Susan's vision to give back to the industry that has been central to her professional life, and we look forward to seeing the impact of her future endeavors in the years to come. On behalf of the entire Board and management team, I want to express our gratitude for Susan's dedication and steadfast commitment to our company's success. While we will certainly miss her guidance in the boardroom, her contributions will continue to benefit MACOM for years to come. I would now like to ask the operator to take any questions.

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

Congratulations on the nice results and outlook. I guess, maybe start with the RTP fab conveyance, Steve and Jack, you mentioned a 60 basis point headwind, but you now have the opportunity to sort of get in there, increase capacity, enhance yields. Wondering if you could give us some sense when do you think those improvements could turn RTP from a margin headwind into a margin tailwind?

Thanks for the question, Quinn. I want to share a few thoughts about the transfer, and then Jack can provide additional insights. Firstly, we are thrilled to have completed this fab conveyance. As part of this process, we have welcomed around 180 employees who were previously not MACOM employees but have been contributing to the fab over the past 18 months. We extend a warm welcome to these new team members. Our integration teams have collaborated effectively during this time. We have successfully transitioned all IT systems, purchasing, and controls that were previously managed by Wolfspeed to MACOM's oversight. This means there is no longer a fab operating committee with shared decision-making between Wolfspeed and MACOM regarding projects and priorities. We now have full autonomy in our operations. Our immediate focus will be on enhancing yields, efficiencies, cycle times, and the overall quality and performance of the fab. One of our senior executives who managed the Lowell fab has relocated to RTP, and we have new leadership in place that understands MACOM's operational preferences. We are eager to see the positive contributions from him and his team. Looking ahead, as we implement these enhancement programs, we expect to see financial benefits, projecting an improvement of 25 to 50 basis points after Q4. Based on this, we anticipate that it may take a couple of quarters, perhaps three, before we begin to experience a positive impact. Another key element for the fab's success is increasing output capacity. We have made investments in new equipment to address single-point failures and alleviate operational bottlenecks, which will enhance the fab's efficiency and overall profitability. We are very pleased with the transfer, which occurred about six months earlier than planned. We initially aimed for the fab transition to be gross margin neutral. Although we are currently about $1.5 million short on a quarterly basis, we believe this can be effectively addressed moving forward. Perhaps Jack can share more about our future plans.

Great. Thanks, Steve. And Quinn, we've had the fab under our full control for all of a little less than two weeks at this stage. So we're still learning and finding items that are out there. We think we've got a good plan to make those improvements from a yield perspective. We are familiar with running a fab of this size. We have similar capabilities here in Lowell and that extends to some of the suppliers that we have and making sure that we're linking up our supply base with the supply base that's down there at RTP. We've identified a number of different opportunities that we think we can work through over the next 90 days that will help improve the margins as we go forward and work our way through fiscal year 2026. So great effort and looking forward to weaving the RTP fab fully into MACOM. A lot of work was done upfront to make sure we understood what we were working through as part of this transition. A lot of that work had helped us to accelerate it and get it done almost six months ahead of schedule.

Excellent. My second question, just I wanted to come back to the LPO opportunity. Very encouraging to hear. I think your first customer is starting to go into volume production. Just wondered if you could talk about the pipeline you see for LPO adoption. Are you seeing a broader number of customers sort of where you're engaged, looking to go to production, say, in fiscal '26 and beyond? Just any sort of sense of how quickly you could see broader adoption of LPO.

Yes. So if we take a step back and look at some of the work we showcased at the OFC at the end of March, beginning of April this year, it's important to highlight that our demonstration at our booth had an LPO ecosystem being showcased, which included utilizing switches from two different vendors, servers from three different vendors. We had twelve different module manufacturers showcasing their hardware which was either running at 400 or 800 gig in both multimode and single-mode solutions. That really puts a stake in the ground as to where LPO was back in March. Now as we look at where we're at today, much of that hardware is being qualified by end-users, and we're starting to see production orders roll in. We're very happy about that. Over time, we will continue to sign up new customers for this application. The reason is that fundamental to the LPO solution is it's a solution that eliminates the DSP, which means it's lower power, lower latency, lower cost, it's easier to use, and it's ideal for short lengths. Now the challenge is that the customer needs to work on getting acceptable bid rates over all of their use cases. There has to be very clean interop between all the different hardware, and you lose some of the creature features of the DSP and the application. Sometimes that is a problem for the end user. The adoption of LPO is compelling for the reasons I stated, but it also has its challenges, which means it's not ideal for all cases, but we are seeing pull, and that pull is increasing. As we stand here today, we have signed up one customer for production. We're very close to signing up a second, and we expect that as we move into 2026, there will be more business.

And our next question coming from the line of Blayne Curtis with Jefferies.

I wanted to ask on the Industrial & Defense. You had strong growth in June, and it looks like it continued in September. I'm just kind of curious as it relates to 1:1 book-to-bill, if you could just talk about Industrial & Defense trends, what's driving the strength? And a lot of people with broader industrial businesses have been kind of worried about whether it's starting to tail off. Just specifically anything that you're seeing in industrial would be great as well.

Yes. Most of the growth in our Industrial & Defense category is coming from Defense. Let's be clear about that. The book-to-bill of our I&D business has been overrun for at least six quarters, maybe five quarters. The category has been doing quite well. The Industrial category for us is a little bit of a catch-all. We did start to see some improvement this past quarter, as I mentioned, and our general business, some of that's test and measurement related, some of it's medical-related. Generally speaking, the Industrial is a small segment for us, and our main strategic focus is taking full advantage of the expanding and growing Defense market. We really put all our resources on that. I would just say that the industrial MACOM is not a bellwether for how that market is doing. It's a small piece of our business. It's a general category, and it's slightly improving today.

Great. And then I wanted to ask, and I feel bad asking the question because it's been such a good segment since the acquisition. But as we kind of look at you trying to fill this RTP fab. Just curious, down slightly in September. What's driving that? And I guess, when you look at this RF business, I think it surprised a lot of people how strong it has been and you have this great opportunity to gain some share with this capacity. Maybe just comment on September and then the outlook for the RF business in general.

Right. We're very happy that our telecom business, generally speaking, has been growing really since the beginning of or the end of our fiscal '23, and we are running near record levels. When you sort of compare our Q3 performance to our Q4 guide, it's, I would say, noise level differences. It's not meaningful. I think what's important to note is the secular growth of SATCOM, satellite communications, where we have a very strong position on the ground, gateways, as well as on the satellites. We are seeing solid business, and we are predicting growth into next year for our 5G business year-over-year. We're starting to see some improvements in our 10G PON business over the last couple of quarters. So I wouldn't read anything into the modest sequential decline going into Q4. The fact is, on a full year basis, our Telecom business should grow over 40%. We're quite happy with that.

Our next question coming from the line of Thomas O'Malley with Barclays.

Congrats to the team for reaching that $1 billion run rate in the June quarter. I know that's what you kind of started out on this adventure targeting. So congrats on that. I wanted to start off on the Data Center bucket, so continued strong growth into the back half of this year. Can you walk through the moving pieces of that bucket? Historically, I think the largest piece had been kind of TIAs and drivers in optical modules, and ACC was kind of coming up the curve, and now you're getting some LPO contribution. But in terms of the drivers of what's continuing that strength here into the back half of the calendar year, maybe spend some time just walking through where specifically you're seeing the strength in that bucket.

Sure. As I said in my remarks, we are seeing broad strength this year across all of the data rates. I just want to highlight that to begin with. I'll also remind listeners that in 2023, we had about 6% year-over-year growth. In 2024, we had 35%, and now we're triangulating for 2025 to have about 48% year-over-year growth. Very, very strong performance. We've had some great success, primarily at the higher data rates, so 1.6T, 800 gig, 400 gig. Our business and our positions there had been quite strong. I'm excited about the diversification of the revenue stream, and that's why I highlighted that LPO is coming in. Our PDs are coming online. We see many customers moving to the higher data rates, and they're recognizing that it might be more affordable to use an ACC solution or to use an LPO solution than a full DSP-based module. So there's a lot of pull there. We remain focused on analog solutions. We are not investing our R&D dollars on DSP technology. We are focusing on looking forward at the next data rates. That's why I mentioned the 300-gig and the 400-gig R&D work that we're doing. Great work by the team. Generally speaking, we're engaged not only with the pluggable module players in the market, but also people that are working on CPO, also known as NPO. We're working with companies that want to push optics onto the PCBs, onto the switchboards. From our perspective, it's an LPO solution without the package. One last thing I'll highlight is our fiscal '25 was a very good year for our linear equalizers for a 1.6T application. Our lead customer ramped up that application and ramped it down. For fiscal '26, we want to make sure we can add new 800 or 1.6T programs to our business, and we are working to that end. We see lots of growth across product segments, but I think the year-over-year comparisons on ACC are still to be determined.

Helpful. And then the second one is maybe for Jack, just on RTP. You gave some of the cadence on headwind turning into a tailwind over the next couple of quarters. But I know you guys don't want to give away your secret sauce here, but I remember kind of early days of that deal, you had talked about potentially bringing some product in-house that you had done externally. Could you maybe talk about the product roadmap at RTP? Is it something where you can bring in compound semis or make any changes to the products coming out of there that also offers a next leg of growth and margin improvement? Just anything that you can offer on strategy longer term with that fab and why it's so critical for you guys.

Yes. Maybe I'll say a few words first, Tom, and then Jack can add some comments. When we first acquired the business, we recognized that their MMIC portfolio was too small. They had a lot of great foundry business, which we wanted to continue to grow, and they had a very good position in 5G. When we look at how to improve the margins, obviously adjusting the product mix there, primarily weighing towards MMICs, which are generally very high-margin products, was a focus. We wanted to ensure that we have the best designers in the industry to make use of the processes they have. You've seen us take actions with hiring and adding R&D resources to our MMIC design teams, including the recent acquisition of a company called ENGIN-IC, which has design centers in Dallas and San Diego. We feel great about our design talent that will drive high-value products through that fab. When you specifically ask about insourcing, a part of the RF business that supports 5G includes purchasing from external suppliers, things like capacitors and passive devices, which we refer to as IPDs that might be used in a matched amplifier module. We have an active program to insource all of that. We'll likely insource it in our Lowell facility, solving the utilization issues we've been discussing here. Our strategy for improving profitability includes making use of all the technologies at our different fabs. Some of the insourcing refers to bringing in some of the silicon and GaAs passives that are currently outsourced to one of our other fabs. Did you want to add to that, Jack?

The only thing I would add is that, as we noted, we saw some strong strength from our 5G telecom customers recently. A lot of that was a result of MACOM getting involved, and they appreciated the relationship with MACOM and themselves. That has helped to expand some of the market share and grow the business. There's also the I&D piece of the business, or the Defense piece, that goes through that fab. It is a trusted foundry similar to what we have here at Lowell. We think that's a strategic capability that we have. As we've mentioned, it takes a little bit longer to get things moving from a defense customer perspective, but we have made great strides with those customers over the last year or so and see that as an opportunity to support growth. With the fab under our control, we'll be able to expand the capacity. We talked about adding some equipment over the next 12 to 18 months. We think we're in a good spot to improve the overall fundamentals of that fab as we work our way through fiscal year 2026 and beyond.

And our next question coming from the line of Karl Ackerman with BNP Paribas.

I was a lot of good questions already within datacom and industrial and the fabs, so I want to pivot a bit to telecom. I guess, why flat growth in Telecom given ongoing strength in DCI? And similar to that, when would we expect a pickup in SATCOM from some of the breadth of design wins you previously communicated? Does that begin to pick up back in December and into 2026? Any thoughts on the SATCOM opportunity within Telecom would be great as well.

Sure. Thank you, Karl. You're correct to highlight that our DCI or metro/long-haul business is performing quite strongly. We have lots of programs running for very high data rate long haul as more data centers are built out, driving demand for hardware in some instances will be coherent-based solutions. That business is doing well, so that's not an issue there. The quarter-over-quarter dip you're seeing in Q4 is more to do with managing the backlog and working with customers to hit their dates. I want to remind you that year-over-year, our Telecom business in the fourth quarter, as forecasted, is doing quite well. The year-over-year numbers are very, very solid. I don't think there's anything fundamentally broken there. The market has seen great growth this year. We expect the potential within this segment to be quite large. I provided an update on last quarter's call that we were finishing up the MMIC design phase. We're now building engineering models, and that work continues. In the near term, we're aiming to deliver our major customer for that one large order engineering models. Once they go through a review of that hardware, we will go through what they call the Critical Design Review, lock down the design, and then start production. The timing of that right now hasn't really changed. We're thinking production could start as early as the end of this calendar year or the beginning of next calendar year. It will depend on the results of the work we are doing over the next few months.

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

Steve, you talked about the photodetector product with the TIA and I think you mentioned the chip-scale package. I'm trying to understand the value proposition there. It does sound like a level of integration that perhaps some of your competitors don't have. Could you talk a little bit about what specific use cases there will be for those TIAs? Is it that sort of intersecting 800 gig or 1.6? Or is it more broad-based than that?

Great. Thank you for the question, Tore. Our photodetector product area is world-class in our, in my opinion, our team's opinion. It's fundamentally rooted in epi design and also the chip design itself. The chip design is backed by submicron processing that allows us to do very close alignment of all the various layers on these photodetectors. Our products have industry-leading dark currents, which means the products are very stable and reliable over time. Our products are self-hermetic, meaning they can be open to the environment, and we use special processing to achieve self-hermeticity, which we believe is unique. We have very good control over the lens fabrication process, both on the front side in aligning the lens to the backside of the device. A lot of engineering has gone into these designs. MACOM has historically been known for having the most sensitive photodetectors in the industry. Historically, our customer base has included test and measurement companies that make optical testers. Over the last year, we have been focusing on winning high-volume sockets in the data center, and we expect to see results in 2025 and 2026. To do that, we've set a strong foundation for high-volume testing in manufacturing to support what looks like massive step-ups in volume for us. We're excited about the work our team is doing. It's been a group effort between our business units, operations, applications teams, and the use cases for these parts. It's a 200 gig per lane photodetector, so it's suitable for an 800-gig receiver or a 1.6T receiver. For a 1.6T receiver, it would require eight photodetectors, representing millions of devices.

Yes. That's great color. And as my follow-up, you mentioned PCIe gen 7. I assume these are, again, PCIe over fiber products and not copper. And again, from there, trying to understand the timing. Is this, again, trying to intersect the 2027 cycle? Or could we start to see some revenues even before that?

Yes, you're right that PCIe 7 is optical-based. We're working with some customers on electrical solutions that might come online before PCIe 7. PCIe 7 is a fairly high data rate, bidirectional, lots of lanes, 32 gigabits per lane, but many lanes. The compute industry is pulling companies like MACOM into their block diagrams because they need to add equalization as they move high-speed data across their computer boards. It's a perfect ancillary solution. All of this falls under our equalizers. To be clear, we do have equalizers for PCIe that are electrical-based, not just optical.

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

Congratulations, first of all, on yet another solid and fantastic result. Steve, I wanted to understand the headwind with the margins. You got it a little bit earlier than you wanted. Is that simply it that the revenue isn't quite where it needs to be? I want to understand what you can do or what you need to do to overcome this small $1.5 million or 60 basis points of margin? Are there any functional steps that are needed to be done?

Yes, I think it's important for us to take full control of the fab to resolve issues that have been outstanding. Our operations team is performing exceptionally well in driving improvements as rapidly as possible. When we initially acquired the business, it was financially in poor condition. Over the last 18 months, we’ve made significant transformations. Even prior to the acquisition's completion, we collaborated with the seller to restructure the business to ensure it would contribute positively to our earnings immediately upon acquisition, and we succeeded in that effort. This acquisition is projected to be self-sustaining within three years, and we believe we're on track to achieve that. Moving forward, it's vital to implement proper controls, address low yield rates, and enhance material flow through the fab, which involves reengineering our processes. There isn’t a single issue to highlight; it involves about twenty different initiatives that our team is actively pursuing to gradually enhance financial performance. A key focus is our plan to potentially double the size of this business. In terms of market positioning, our GaN on silicon carbide technology offers substantial growth potential. It's a foundational technology that allows us to engage major clients in sectors like test and measurement, military, defense, and telecommunications, enabling us to sell not only this primary product but also our surrounding chips. In the short term, we are concentrating on fundamental improvements, and as indicated earlier, we expect to see incremental improvements of 25 to 50 basis points starting next year.

The thing I would add is that we did not have operational control of the entire fab in terms of the workforce and how we ran the equipment until a little less than two weeks ago. We had made strides with our fab operating committee with the former owner. Over the past six months, there may have been a little lack of focus. That drove our decision to accelerate the transfer. We were more than willing to accept a temporary margin step back to ultimately accelerate improvements that we're anticipating now that we have full control. We can minimize risk now that we can control it. Hopefully, that color helps explain the minor margin setback we referred to.

No, it does. I guess, my next question is also on the fab because most product questions have been asked. I wonder if you would be willing to share with us what level of revenues this fab is doing now. Also, we understand it to be a telecom fab, but from a technical competency, what kind of technologies can you have in this fab? What kind of markets can it address? And then also, when it's all said and done, let's say two years from now, I'm talking to you, what could the margins be for this company? Could they be accretive to your corporate gross margins before you bought this? Or would it fall somewhere in the same range?

Harsh, these are great questions. Before I answer, I'll highlight that we're happy that as we exit fiscal 2025, we are running at operating margins peaking compared to the last couple of years. We had a setback here on the gross margin of $1.5 million, or 60 basis points, but we see earnings growing faster than revenue. Regarding the revenue from the fab, that's sensitive to discuss in detail. We announced the prior 12-month run rate when we acquired the fab, but we have not publicly updated since for competitive reasons. The strategic value of the fab is not just telecom. Its GaN on silicon carbide operates up through X-bands around 10 gigahertz on most of their legacy processes. These are ideal for high-power applications. This technology can replace LDMOS, especially in military applications. The RTP fab also has a 0.15 micron process for microwave applications that operates up to about 20 gigahertz. This allows for capturing backhaul radio links, other telecommunication applications, military applications, and it covers many SATCOM bands. SATCOM is a fast-growing area for us, as discussed over the last couple of years, with LEO and MEO constellations being launched. The RTP technology is ideal for those applications. Many of these platforms are now adding direct-to-cell or direct-to-device connectivity. We really have an advantage where we are strong in 5G; many of these LEO satellites are flying base stations. We have great technology to support that. It's a trusted foundry with a high MRL level supporting military production programs. This business is booming because we have a strong amplifier in transmitter design capability. Combining that with GaN on silicon carbide technology at RTP, we're hard to beat. We are very excited about the prospects. I'm confident we can double the revenue of this business.

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

Thanks for letting me jump on. I guess, maybe first, thinking about the lower speeds, you talked about that are gaining some traction. What's driving that? Is it more of just the expansion beyond the core data center and into maybe edge AI as kind of moving out or anything that's driving the legacy type solutions?

Yes, I think your thinking is correct there. We believe that as the AI data centers expand, there’s a front-end traditional data center looking toward the Internet. We're seeing an uptick across various product categories supporting that forward-looking equipment. We think that's why our lower data rates are growing.

Okay, great. I would assume that those products probably have a little better margin profile. And then just secondly on that, can you talk about what the impact is from the utilization or underutilization at the Lowell fab?

Well, to clarify, the lower data rate products are in most of our drivers and TIAs and are not processed in MACOM fab. I want to make that clear. So it's not impacting Lowell's utilization. Regarding margin comparisons for lower data rate products, I can't comment specifically. Over time, as volumes go up, prices typically come down, but it depends on the product, customer, and application as to whether these lower data rate products have higher or lower margins.

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

Great job on the quarterly execution. I know there's been a lot of questions on the RTP fab conveyance, but I would have thought there would have been a gross margin step-up on the transfer. I assume that your cost per wafer under the supply agreement was low speeds fully loaded costs, which includes a lot of the deficiencies and inefficiencies you've discussed regarding yields, et cetera. Then they add a markup. So now with full ownership, you don't have that markup, which can imply better gross margins. What am I missing here?

Our goal was always for the fab to come over as neutral or positive. We've clearly missed the goal; it's coming over about 60 basis points away from where we would want it to be neutral. I can't comment on the supply chain agreement or the cost structures on our prior arrangements with Wolfspeed. It's important to highlight that as we look forward, we expect to improve the performance of the fab, driving gross margins. Remember, MACOM is a complex company. We have a fab in Lowell, RTP, a small fab in France, and one in Michigan. You combine that with a large fabless business; there's a lot of moving parts in our model and gross margin model. We like the diversity of our business and manufacturing footprint, seeing it as a competitive advantage. We think we've executed well in integrating the acquisition, and we believe things will only improve from here.

Perfect. I apologize; a lot of product and technology questions have already been asked, but foundry has always been a part of the MACOM strategy. It's been a while since we caught up on this part of your business. I believe the team offers the most diverse set of III-V compound semiconductor processes in the industry. What has the traction been like in attracting foundry programs? How big is foundry as part of your overall revenue profile today, and what’s your view on the growth outlook for this part of your business?

Harlan, I'm very impressed that you know all our processes. You're exactly right; we have a rich portfolio of processes. I would invite investors and listeners to our summer newsletter, highlighting a few different things, including work we're doing with EW systems, BAE award, a contract from the French government, and a summary of the various processes at our fabs, whether gallium arsenide, GaN, or AlGaAs devices for limiters. Our foundry customers base is growing, particularly in Europe. In Lowell, a small number of foundry customers supports test and measurement and defense. We welcome and support their business. We don't break out foundry numbers publicly for competitive reasons.

Our next question coming from the line of Tim Savageaux with Northland Capital Markets.

I know we're running long here. But just a quick question on Telecom, which at least came in a little bit stronger than I expected. I'm curious, in particular, what you're seeing in cable networking, that seems to be picking up a bit across the industry. And I'll just ask my follow-up real quick here. Regarding LPO, you mentioned new engagement there. Is that with a new customer or a current large customer? Can you give us a little more color?

Our cable infrastructure business is growing. It's a small piece of the overall telecom number, but it is in the right direction. The LPO engagements are with customers we've previously done business with on other platforms. They’re familiar with MACOM, providing support for other products for pluggable optical modules that are more traditional. We have one lead customer, and we think the dam is beginning to break; we'll bring on additional customers soon.

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

My first question would be a quick and simple one, a two-parter here just to get a sense of size of revenues here. I'd love to get a sense of the split between I&D, especially the defense here, it sounds like it's going very well; would love to get that. Also, especially with the close of the RTP fab and you talked a lot about GaN today, what's the percent of sales coming from your various GaN processes and products?

With regard to the I&D split, that's varied over time. If you go back a number of years, we probably had a majority of revenue coming through the industrial side. That's changed as the defense piece has picked up through acquisitions. We're now closer to a 65-35 split. We don't generally break those pieces out as part of our public discussions.

Okay, fair enough. I thought I'd try that. My follow-on question is, as people are trying to model for 2026, I'd love to get a sense of relative growth by your segments here. You're seeing some tough compares in the Telecom business. In Data Center, it sounds like you're adding new products, which could continue growth there. The Defense is doing well. I know you're not going to give us much quantification, but anything on relative growth by segments for next year would be a great outlook.

It's difficult to discuss 2026 at this stage. I'll just highlight that 2025 should see over 30% growth, maybe closer to 32% or 33%. All of our secular growth trends are intact across our core markets. Our portfolio has room to grow. We are seeing revenues slightly ahead of what we talked about previously regarding achieving the $1 billion. We're seeing gross margins slightly behind, but our earnings are on track. We expect MACOM should be growing double digits on the top line. You've seen performance over the past four to five years, and we expect that to continue. The mix will change every quarter and every year. We think we have a strong strategy and a strong team that can execute it.

Our next question is coming from the line of William Stein with Truist Securities.

I fear I might have misheard the last one, and I hope I'm not asking the same question, but there's been a lot of attention paid today on this call to the gross margin effect of the RTP fab conveyance. We understand there's one other aspect of the business that's preventing gross margins from achieving the targets that you established were 60% plus at a $1 billion run rate. While I get that the RTP fab conveyance is one of them, I think the other piece is the Lowell utilization. Can you talk about your ability to track toward that 60% level? Is there an expectation that we could hit that level maybe in the middle of next year?

Yes, thank you for the question. As we look out into '26, I realize it's early, but as we look at the programs and moving parts we've discussed, we think we are more likely to exit 2026 closer to 59% gross margins in that sort of a year from now. The 60% gross margin goal seems more like a fiscal '27 event than '26.

Okay, a follow-up if I can. You've talked about a lot of moving parts within your data center business; there are a lot of products there. For some of us, the detail is a little overwhelming. CapEx is still strong in that end market. You're guiding to a level where we should expect around 48% sales growth this fiscal year. If there were no great movements in products, should we expect something close to that growth level next year? I wouldn't imagine that you want us modeling a similar 48% growth in the coming year, as well. Could you talk about how you might suggest we think about growth in that market next year?

You're correct that we wouldn't recommend putting 48% growth into our year-over-year growth for fiscal '26 related to Data Center. When we look at our business, we want to sustain profitability and improve operating margins, continuously diversifying the portfolio and getting a stronger position in the market; Data Center is a part of that strategy. We expect MACOM to grow double digits on the top line, and you've seen that performance over the past four to five years; we expect that to continue. The mix will change every quarter and every year, but we have a solid strategy in place.

And I'm showing no further questions at this time. I will now turn the call back over to Mr. Daly for any closing remarks.

Thank you. In closing, I'd like to thank all of our employees for making these results possible. Have a nice day.

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