Earnings Call Transcript - MTSI Q1 2025

Operator, Operator

Welcome to MACOM's First Fiscal Quarter 2025 Conference Call. This call is being recorded today, Thursday, February 6, 2025. At this time, all participants are in a listen-only mode. I will now turn the call to Mr. Steve Ferranti, MACOM's Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

Steve Ferranti, Vice President of Corporate Development and Investor Relations

Thank you, Olivia. Good morning. And welcome to our call to discuss MACOM's financial results for the first fiscal quarter of 2025. I'd like to remind everyone that our discussion today will contain forward-looking statements, which are subject to certain risks and uncertainties as defined in the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOM's filings with the SEC. Management statements during this call will also include 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. And with that, I'll turn over the call to Steve Daly, President and CEO of MACOM.

Steve Daly, President and CEO

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 Q1 results for fiscal year 2025. When Jack is finished, I will provide revenue and earnings guidance for the second quarter of fiscal '25 and then we will be happy to take some questions. Revenue for the first quarter of fiscal 2025 was $218 million and adjusted EPS was $0.79 per diluted share. We continue to execute our strategy, and we are pleased with our Q1 cash flow and increased earnings. Free cash flow for Q1 was approximately $63 million. At quarter end, we held approximately $657 million in cash and short term investments on our balance sheet. Overall, Q1 was a great way to start our fiscal 2025. Revenues by end market were as follows: Industrial and Defense was $97.4 million; Data Center was $65.3 million; and telecom was $55.4 million. Data Center was up 16% sequentially, Telecom was up 7% sequentially, and I&D was up 5% sequentially. I'll note that both our I&D and Data Center quarterly revenues were at record levels. Our Q1 book to bill ratio was 1.1:1 and new order activity was strong in certain areas of our business. While our backlog is at record levels, we do see pockets of both strength and weaknesses across our customer base. Our turns business or orders booked and shipped within the quarter was approximately 23% of total revenue. MACOM serves three large and diverse end markets, some of which have strong secular growth drivers. Our targeted end markets collectively represent approximately $7 billion to $8 billion serviceable addressable market or SAM. Today, we have a small fraction of the market and we continue to deploy a variety of strategies to gain market share. We intend to capture market share by leveraging our advanced IC design and semiconductor technologies by expanding our portfolio with compelling new products and by launching new product lines, all while focusing our investments in areas where our product performance will be a differentiator. Now turning to our three end markets. I&D revenue is approaching $100 million per quarter, driven largely by growth in our defense business. The defense market is evolving rapidly in response to changes in new threats seen in the battlefield due to recent technology advancements. We are seeing an uptick in the design of novel and innovative radar and EW systems, many of which have increased RF and microwave semiconductor content. In some cases, these systems are being designed by new and well-funded defense startups with innovative technology and business models. MACOM plays an enabling role in the defense market, providing technology solutions to Tier 1 defense primes, Tier 2 subsystem suppliers, and a long list of medium and small customers that service the industry. Most opportunities we address trend towards higher frequencies, higher power levels, wider bandwidths, and higher levels of integration, all of which play to MACOM strengths. In some cases, customers are focused on high-volume applications where they're looking for partners that can deliver complete system solutions and domestic manufacturing scale while meeting aggressive cost targets. The increased use of UAVs and low-cost drones has created a growing and urgent need for upgrades to legacy airborne and ground-based radar platforms along with entirely new electronic warfare platforms to detect, identify, track, and eliminate threats. In addition, the DoD's need for ubiquitous anytime, anywhere access to high-speed broadband connectivity is driving new investments in DoD satellite programs. And finally, newer avionics, radar, and EW platforms are increasingly adopting analog and digital optical links to adapt to greater data transport requirements. Our strategy to service defense customers is built upon a few key differentiators. First, MACOM's industry-leading gallium arsenide and gallium nitride capabilities spanning both our RF power and MMIC product portfolios. As an example of complexity, MACOM's products utilize nearly a dozen unique GaN semiconductor processes, which allow us to address a wide range of applications and technical requirements. And we now have design teams that specialize in both narrowband and wideband use cases for radar, EW, secure communications, and signal intelligence. Second, MACOM has broad expertise in a comprehensive product portfolio for hardened optical solutions, including RF over fiber subsystems. RF over fiber utilizes linear photonics to transmit a radio signal directly over fiber without the need for digital conversion. The result is higher bandwidth, longer transmission distances, lower signal loss, and better immunity to interferences versus traditional coax cable. These solutions are typically used in phased array radar, remote antenna, and towed decoy applications. RF over fiber can replace copper coax cable or high-speed digital cables. Third, MACOM has leading RF diode technologies, which are ideal for receiver protection, high power switching, comb generators, and tunable filter applications. In some of these areas, MACOM is regarded as the gold standard in the industry for performance and quality. Many customers within the AAD markets have been using MACOM diodes in their platforms for decades. And the final differentiator is MACOM's growing microwave system engineering capabilities. We've spent the last few years building our system engineering and applications engineering team with industry-leading veterans and technology experts across our core area of expertise. This team has enabled us to engage much earlier in our customers' project design cycles to present the full scope of MACOM's capabilities to help solve the customers' technical challenges. With the combination of our technology portfolio along with our growing ability to support higher level system design, we are increasingly viewed as a partner of choice for many of our defense and space customers. To extend our reach and gain market share, we plan to add new technologies to our portfolio in calendar 2025. We plan to announce two new product lines at upcoming trade shows in March and June in just a few months' time. Additionally, we have an amazing pipeline of high-performance products coming to market this year for our defense and space customers. Within the telecom market, there are also multiple areas where MACOM's technology shines. MACOM has a comprehensive portfolio of GaN on silicon carbide solutions for 5G applications. 5G base stations require medium and high power amplifiers, and this provides us a great growth opportunity. Our products use unique device structures, proprietary circuit architectures, and high-performance packaging solutions. We believe that we are gaining market share in the macro base station segment of 5G, driven by the need for higher power multi-band radios where MACOM's products offer unique advantages over our competition. That said, we are not complacent and we are developing new epitaxial solutions to improve our products' competitiveness and performance, especially for massive MIMO applications. Second, we have established a broad portfolio of products for low earth orbit or LEO satellite-based broadband and direct-to-cell applications. MACOM provides semiconductor and module solutions for satellite-to-satellite links as well as satellite-to-ground links utilizing technology from our HPC, diode, MMIC, RF power, lightwave, and linearizer product lines. As an example, our linear modules and subsystems team, or LMS, specializes in designing products and solutions that overcome non-linearity of RF, microwave, and millimeter-wave signal transmission for space-based communication systems. In some cases, SATCOM links require linearization to boost the power efficiency and improve the quality of the connection. This team can leverage our European Space Agency space-qualified processes from our MACOM European Semiconductor Center when designing very high frequency linearizers, SSPAs, or frequency converters. We also have a team that specializes in state-of-the-art linear photonic components and optical modules and systems for use in free space optics and ground system distribution networks. Other segments within the telecom market we focus on are front haul, 132 gigabaud coherent systems, and metro and long-haul deployments, PON, and cable infrastructure. We leverage the strength of our high-speed IC portfolio and our photonic products from our lightwave portfolio to address these markets. Our data center market revenue is on pace to have another strong growth year. There are favorable secular growth trends driven by cloud service providers accelerating capital expenditure to deploy next-generation data center architectures. Our broad-based expertise in high-speed signal integrity allows us to support the industry with our existing products. More importantly, we have aligned our product roadmaps with our customers' needs to deliver the right technology at the right time. We can differentiate in this market based on our IC and system design expertise as well as our unique photonic materials and product expertise. Today, we are servicing customers with products that support from 100G to 1.6T applications. Our 100G per lane product supports 400G and 800G systems, while our 200G per lane product supports 800G and 1.6T systems. As we look ahead, we are focused on designing 400G per lane products, which will eventually support 3.2T connectivity. Our ability to stay on the leading edge while supporting multiple generations of products across a wide customer base is a key differentiating factor. And as a reminder, our products support both retimed and linear PAM4 architectures as well as non-DSP solutions using linear pluggable optics or LPO. Regardless of the technology or architectures selected by our customers, we lean in and support them with best-in-class engineering and application support. We assist our customers whether they're designing active copper cables, pluggable modules, and active optical cables using DSPs or no DSPs. We also support customers that utilize silicon photonics and co-packaged optics or near packaged optics. Our products for 400G and 800G ZR and ZR plus coherent are also well positioned within the market to support future growth. And finally, as we look ahead, we see new applications emerging with disaggregated computing such as PCIe 6 and PCIe 7. In summary, our strategy is to build a unique best-in-class and diversified semiconductor portfolio that will enable MACOM to capture a larger share of the three markets we focus on. Our agility helps us address opportunities and ultimately beat our competitors that are often larger and have more resources. Before I pass the conversation to Jack, I would like to review two recent press releases. On January 14th, we issued a detailed press release summarizing our long-term wafer fab capital investment plan and the associated CHIPS Act in state funding. Our investment plan has two major tenets, which we believe will make MACOM a more competitive company over the long term. First, we have plans to modernize our Lowell Massachusetts fab and expand its technology base with advanced node GaN on silicon carbide. And second, we plan to expand the manufacturing capacity and capabilities at our North Carolina fab. To enable faster execution of our strategy, we will seek to take advantage of the grants and tax benefits offered by federal and state programs. As of today, MACOM has only signed a non-binding preliminary memorandum of terms or PMT with the CHIPS program office. Over the coming weeks and months, we expect to finalize the terms of the definitive agreement. In the near term, there will be minimal or no impact to our P&L. And second, on February 5th, we issued a press release announcing that MACOM's European Semiconductor Center or MESC was awarded a MMIC development project funded by the French government within the framework of the France 2030 program. We look forward to collaborating with our private and public sector partners to execute this exciting program. This award symbolizes recognition of our MESC team and facility as a supplier and partner to the French industrial base and potentially opens the door for MESC to collaborate on larger French and European Union technology development and capital investment programs. Jack will now provide a more detailed review of our financial results.

Jack Kober, Chief Financial Officer

Thanks, Steve. And good morning to everyone. Our Q1 results show strong financial performance building upon our steady growth in revenue, operating income, and cash generation. This has allowed us to strengthen our balance sheet while accumulating cash and positions us well to execute our corporate priorities. Before getting into the numbers, I would like to highlight a recent announcement. In December 2024, we refinanced approximately 65% or $289 million of our convertible notes that are due in March of 2026. As part of the refinancing, we issued new convertible notes of approximately $340 million, which have a zero percent coupon rate and are due in December 2029. Also in connection with the refinancing, we issued approximately 1.6 million shares of common stock to certain of the note holders who refinanced their notes. Based on the accounting rules, the majority of these shares were already included in our diluted shares as of the date of the refinancing. From a GAAP reporting perspective, we recorded a one-time primarily non-cash loss on the extinguishment of the debt of $193.1 million. The refinancing has had a neutral impact on our pro forma net leverage and we believe helps to strengthen our balance sheet and future financial performance. And now, on to our quarterly results. Fiscal Q1 revenue was a new quarterly record high of $218.1 million, up 8.7% sequentially based on growth across all three of our end markets. On a geographic basis, revenue from US domestic customers represented approximately 45% of our fiscal Q1 results, levels consistent with fiscal Q4 2024. Adjusted gross profit for fiscal Q1 was $125.3 million or 57.5% of revenue, 60 basis points lower than the preceding quarter. We recognize that our gross margin for the first quarter is below our targets and would like to provide some additional trend information on this. As a result of ongoing softness within certain of our industrial and telecom end markets, we have had lower wafer volumes going through our low fab, resulting in under absorbed costs compared to prior periods. Further, based on our estimated mix of future product shipments, including the increased revenue contribution from our RF Power business, we expect gross margins for the remainder of fiscal year 2025 to be in the range of 57% to 58%. I would like to note that we are making good progress on numerous initiatives where our team continues to refine and optimize our cost structure and execute on incremental operational efficiencies and yield enhancements. These improvements can be seen in the sequential increases in our adjusted operating income, operating margin, and EPS over the past three quarters. Total adjusted operating expense for our first quarter was $69.9 million, consisting of research and development expense of $47.5 million and selling, general, and administrative expense of $22.4 million. The sequential increase in adjusted operating expense of $4 million was primarily driven by higher compensation-related expenses associated with our annual employee merit increases and higher R&D costs. Depreciation expense for fiscal Q1 was $6.7 million compared to $6.3 million in Q1 2024. Adjusted operating income in fiscal Q1 was $55.4 million, up 9% sequentially from $50.7 million in fiscal Q4 2024. For fiscal Q1, we had adjusted net interest income of $5.9 million compared to net interest income of approximately $5.3 million in Q4. As we continue through fiscal 2025, we expect quarterly net interest income to increase at a similar rate as the Q1 increase. We expect to increase investment balances through operational cash generation, which will more than offset potentially lower future interest rates and associated yields. Our adjusted income tax rate in fiscal Q1 was 3% and resulted in an expense of $1.8 million. Our net cash tax payments were approximately $1.1 million for the first quarter. We expect our adjusted income tax rate to remain at 3% for fiscal year 2025. As of January 3, 2025, our deferred tax asset balances increased to $217 million as compared to $212 million at the end of fiscal Q4 2024. We anticipate utilizing our deferred tax asset balances, including R&D tax credits through the remainder of fiscal 2025 and into fiscal 2026, helping to keep our cash tax payments relatively low over these periods. Fiscal Q1 adjusted net income increased to $59.5 million compared to $54.2 million in fiscal Q4. Adjusted earnings per fully diluted share was $0.79 utilizing a share count of 75.6 million shares compared to $0.73 of adjusted earnings per share in fiscal Q4 2024. Now moving on to operational balance sheet and cash flow items. Our Q1 accounts receivable balance was $91.8 million, down from $105.7 million in fiscal Q4 2024 due to improved shipment linearity and strong collection activity during the quarter. As a result, day sales outstanding were 41 days compared to 48 days in the prior quarter. Inventories were $198.4 million at quarter end, up sequentially from $194.5 million. Inventory turns were flat sequentially at 1.7 times. The increase in our inventory balance is to support our growing customer order backlog and our strategic growth plans for fiscal 2025. Fiscal Q1 cash flow from operations was approximately $66.7 million, up $4.3 million sequentially and more than $33 million over fiscal Q1 2024. Capital expenditures totaled $5.3 million for fiscal Q1, slightly above the preceding quarter. As Steve had mentioned earlier, we are pleased with the announcement of the non-binding preliminary memorandum of terms with the CHIPS program office and look forward to finalizing the details of a definitive agreement in the near term. We expect our capital expenditures to be approximately $30 million for the full fiscal year 2025, excluding any CHIPS program spending. Next, moving on to other balance sheet items. Cash, cash equivalents, and short-term investments for the fourth fiscal quarter were $656.5 million, up $74.6 million from Q4. 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 $157 million as of January 3, 2025. Our balance sheet and cash generation remain sound, and we continue to exercise leverage over our operations and discretionary spending to support MACOM's target margins through ongoing cyclical pressure. We are pleased with the company's performance and accomplishments during Q1, and we will continue to execute on the financial goals to build a company that can achieve an annualized revenue run rate of $1 billion or more in fiscal year 2026 to carefully manage and allocate our discretionary spending and capital expenditures to growth areas of the business, sequentially improve quarterly operational margins and increase EPS, generate quarterly cash flow from operations that exceed prior year levels, and ensure our capital structure is optimized to provide operating flexibility at a low cost. I would like to thank the entire MACOM team for their support and look forward to the remainder of fiscal year 2025. And now back over to you, Steve.

Steve Daly, President and CEO

Thank you, Jack. MACOM expects revenue in fiscal Q2 ending April 4, 2025, to be in the range of $227 million to $233 million. Adjusted gross margin is expected to be in the range of 57% to 58%, and adjusted earnings per share is expected to be between $0.82 and $0.86 based on 76 million fully diluted shares. We expect sequential revenue growth in all our end markets. We expect that data center will lead with approximately 10% growth, followed by telecom and industrial and defense both with low to mid-single digit sequential growth. As evidenced by our Q2 outlook, we continue to make steady progress to achieve our goal of $1 billion in annual revenues. I would now like to ask the operator to take any questions.

Operator, Operator

Our first question comes from Thomas O'Malley with Barclays.

Thomas O'Malley, Analyst

I wanted to start on the data center side as it's really the growth engine of the business right now. Kind of a two-part question there. So you guys have always talked about the ACC inflection point potentially happening kind of in the middle of calendar year '25. You sounded a bit more modest on your expectations for ACC last fall, but could you just update us there on the progress with ACC this year? Do you still kind of see the inflection point middle of '25? And then the second is really around LPO, which you spoke a little bit on the call. There's been a lot more talk about co-packaged optics; there's been a lot more talk about optics potentially moving to the back of the rack. Could you talk about what solutions you're offering in LPO? And if that's an opportunity that potentially could exceed the opportunity that you kind of laid out for the ACC side? Apologies for everything being in data center, but I wanted to kick it off there.

Steve Daly, President and CEO

You're right to point out that the data center end market is experiencing a strong year. It had impressive growth last year at 35%. Looking ahead, our guidance for the second quarter suggests we might surpass that growth in fiscal '25, largely driven by our optical portfolio, especially our 800 gig offerings. However, we anticipate some slowdown in 800 gig as key customers shift to 1.6T. It's important to note that we've observed changes in data center architecture which will affect demand for our ACC products. We've accounted for this in our guidance and don’t see it as a significant challenge since we have a diverse range of offerings within the data center space. However, we have noticed that as one customer transitions from a two rack solution to a one rack solution, it may decrease demand for that specific product. On a positive note, we've demonstrated our ability to deliver electrified copper cables at both 800 gig and 1.6T, which has generated considerable interest from a wide range of customers. This development is a significant advantage. Early adopters are clearly modifying their architectures, and we believe this trend is favorable in the long run. Regarding LPO, which is a solution without a DSP, there is a correlation between LPO and ACC. We see substantial interest and activity in higher data rates, such as 800 gig and 1.6T, and have a robust product line to support these solutions. We expect contributions from this area to become significant in late '25 and into calendar '26 regarding our overall data center revenue.

Operator, Operator

And our next question coming from the line of David Williams with The Benchmark Company.

David Williams, Analyst

I guess maybe first, just kind of thinking about the DoD satellite programs that you mentioned earlier. I mean, satellite comms has been an area that you've been enthusiastic about for some time. Just kind of wonder if you could give a little more color on that and what you're seeing in that overall satellite comm space and how do you think about that revenue opportunity over the next couple of years just given the strength we're seeing in that space?

Steve Daly, President and CEO

I believe that this strength will persist for the next three to five years. We are witnessing significant demand not only from established satellite manufacturers but also from a new generation of manufacturers focusing on lower-cost LEO satellites. The space industry is quite active right now. Global broadband services are being delivered by commercial providers, alongside a military dimension. There are multiple high-frequency opportunities available, including E-band, V-band, and Q-band, all of which represent very high frequency levels with few semiconductor solutions. MACOM is positioned to be a leading provider of RF and microwave solutions. These systems contain various components that we can supply, including analog mixed signal devices that facilitate high-speed data transfer on the platform, as well as optical solutions for satellite communications, whether it's satellite-to-satellite or satellite-to-ground. Additionally, when considering connectivity to airborne platforms or ground-based terminals, there is significant activity at those endpoints where we excel. Our linear module subsystems group has a track record of 30 years in this area, and with MACOM's scale and customer access, we are seeing excellent opportunities to produce linearized SSPAs and TWTs. We are increasingly integrating photonics into these platforms and have exciting new product lines set to launch in the latter half of this year that will drive further growth. Overall, the environment looks promising for MACOM due to our unique technology and vertical integration with millimeter-wave semiconductors, allowing us to use proprietary processes to benefit our customers. On the optical side, our capability to manufacture lasers and photodetectors provides a competitive edge for our defense customers, enabling them to rely on a single source for their needs. There will be phases of rapid growth and slower growth tied to the timing of contracts. For instance, we announced a $55 million contract about six to nine months ago, and we are currently in the development phase of that contract, with revenues expected in the latter half of our fiscal '25 and contributing in fiscal '26. We are optimistic about the dynamic market, which encompasses both commercial and defense sectors.

David Williams, Analyst

Lots of really great color there, thanks for that. And then maybe secondly, just on the data center side, you talked a bit about this earlier. But can you talk maybe about any changes that you've seen in terms of just the spending expectations over the next couple of years? We've all heard the changes that potentially could happen just kind of given the state of that industry now and kind of what we've heard from DeepSeek. But just curious if you're hearing anything from customers early on in terms of their spending thoughts or plans.

Steve Daly, President and CEO

So we generally have a bullish posture on the expansion and the capital spending within the data center. And so it continues to be a focus area for MACOM. And I'll add that we're not only supporting our existing customers with very high data rate products on the electrical side, PAM4 solutions, but also we believe in the future we'll be providing more on the optical side as well. We have a very strong 200 gig per lane PD product and we have a very strong CW laser product, 75 milliwatt and 100 milliwatt product that can support silicon photonic solutions. And we think during the course of 2025 and into 2026, this will add additional revenue to our overall portfolio. The other thing I'll highlight is with regards to the connectivity around compute, and we're starting to see opportunities with PAM4 solutions for PCIe 6 and PCIe 7, and we are one of the few companies that really understands the electronics around those interfaces. And so we plan on bringing the full way to MACOM into these markets for the interconnect portion of those PCIe systems. So we're forming partnerships; we're working with some major customers, and we'll be offering not only electrical solutions but also optical chipsets, which support those new protocols, and PCIe 7 is right now still in the forming stage. They're still ironing out a lot of the standards. But it's essentially a 500-gigabit-per-second PAM4 link. So we are continuing to see opportunities. And I'll just add to that, there's other markets that are being dragged into sort of the high-speed data connectivity area. Obviously, I just talked about defense, but I would also add automotive as well. We're starting to see more and more opportunities for high-speed connectivity within the automobile harnesses and the connectivity associated with inside the cabin as well as connecting to things outside the cabin.

Operator, Operator

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

Tore Svanberg, Analyst

Steve, could you just sort of take a step back and talk about the data center business for this calendar year? So it sounds like the growth is going to be driven mainly by the transition to 1.6 optical. You may see some growth in copper, and then obviously LPO comes late this year. Is that how we should think about it?

Steve Daly, President and CEO

Yes, I think that's right. There's been very strong growth over the past few quarters with our 800 gig optical products. There is going to be, in some instances, some customers migrating away from that and going to 1.6T. And so that is for MACOM. We're already in, let's say, low-rate production, and that's going to ramp up, and so that will continue. And remember that in the back half and as we go into 2026, we would expect LPO solutions, standard pluggable module solutions with DSPs, and of course continued contribution from ACC. Just because there's been, let's say, a reduction in the SAM size within one particular application, we actually think overall the SAM is increasing.

Jack Kober, Chief Financial Officer

And as we had discussed in the prepared remarks, it's just making sure that we've got a bit more product running through that low fab when we're most efficient. And it is a high mix fab so we're continuing to utilize the fab. It's just we just don't have as many products going through there at this stage that are absorbing some of that additional cost as we had seen in the past. And I think just to build upon that, there are some mix issues. We've been pleased with some of the growth areas that we've seen that are driving top line improvements as well as bottom line improvements that are just coming through at slightly lower than the corporate average gross margins for MACOM. So there was a little bit of a mix element that we're seeing that we talked about in our prepared remarks. But overall, we're pleased with the growth that these product lines have been bringing to the organization.

Operator, Operator

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

Karl Ackerman, Analyst

I have two questions, if I may. First, could you discuss your in-house capabilities to address silicon photonics optical transceivers, particularly whether you want or have customers asking you to scale your CW laser portfolio that you've been discussing about the last couple of quarters? And I have a follow-up please.

Steve Daly, President and CEO

To clarify, we do not have any internal silicon photonic processes operating in our facilities. We are working with indium phosphide and other processes, typically involving gas and GaN on silicon carbide. We are not producing silicon photonic materials or wafers. There is a market for these products and foundry services available from other companies. Several years ago, MACOM invested considerable resources into silicon photonics, partnering with a large fab to integrate a laser with our platform, but this initiative ultimately did not succeed, leading us to cancel the program. We have downsized our silicon photonic design team to focus on defense-related applications, thus exiting the commercial silicon photonic market. Since then, we've noticed many of our customers and larger module manufacturers developing their own silicon photonic solutions through different foundries. We aim to support these efforts as a merchant supplier of CW lasers, as there are limited companies that offer this capability. We are currently partnering with module manufacturers designing their own devices that require a CW laser. This creates a valuable opportunity for us. Additionally, these solutions may also require laser drivers and transimpedance amplifiers, which further enhances our offering without competing directly with our customers, allowing us to provide unique technology and performance they cannot find elsewhere.

Karl Ackerman, Analyst

For my follow-up, I wanted to pivot to satellite. I guess within that, there's clearly a lot going on. Should we expect government funding to shift toward this area as well? And separately, are you seeing any pickup in your PON business ahead of BEAD funding initiatives?

Steve Daly, President and CEO

Well, the question about government funding, anything these days is an interesting question to ask. So we'll have to wait and see how things ultimately shake out. But I can tell you that the need is there and we're actively engaged with the traditional as well as the new companies that are manufacturing or designing satellites and launching satellites. And we're in pretty deep on a lot of different programs. So we believe that it's needed for a variety of reasons, some of which I stated in the prepared remarks. And so it is sort of our expectation that the government funding to improve the posture of the DoD's position in space is necessary, and so that funding will continue. So that's our expectation. Have we seen a direct impact to the PON market per se? I can't say that we could draw that correlation. Our PON business has been slowly ticking up over the past few quarters, but it's only at a small level compared to what it was a few years ago. So I would say that they're disassociated generally speaking.

Operator, Operator

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

Blayne Curtis, Analyst

I had two. I just want to start on the gross margin comment. You're obviously at the middle of that range. I think when you look at the RF business, you kind of had a margin improvement there. I just want to kind of understand the moving pieces. Is it that that overall business is growing and kind of offsetting the internal margin improvement with that or should we see some margin improvement within that range you gave? I'm just trying to understand.

Steve Daly, President and CEO

Let me address that and then Jack can provide more insights. In relation to our RF business, it can be divided into several components. The segment we acquired from Wolfspeed has shown significant growth over the past year for various reasons. The margin trend is on the rise and is surpassing our expectations regarding yield improvements, cost reduction, and operational efficiency. We are experiencing substantial enhancements in the pro forma profit and loss of that business, and we are pleased with the outcomes. The team, including our operations team and the support from Wolfspeed’s sales team, is performing well. Additionally, part of our strategy involves launching more MMIC products within that lineup. We identified that there weren't enough standard products in the Wolfspeed portfolio when we acquired it. Therefore, we are fast-tracking the introduction of standard products in that portfolio, which should positively impact the profit and loss and gross margins of that business. On the other hand, our base MACOM business has generally been growing but has faced some demand weaknesses, particularly in cable infrastructure and other wireless and industrial platforms over the last three quarters. This has resulted in increased underutilization of the low fab, directly affecting our gross margins at the corporate level. Conversely, our industrial and defense sectors have strong profitability profiles, as does our data center business. The key challenge lies in optimizing the low fabs, which is a priority for the business. Jack, would you like to elaborate on that?

Jack Kober, Chief Financial Officer

I think you did a good job with that one, Steve.

Blayne Curtis, Analyst

Steve, I want to clarify your comments on optical. Should we interpret your mention of 1.6T versus 800 as an indication that overall volumes are decreasing, or is there a difference in your content between the two that suggests a slowdown?

Steve Daly, President and CEO

So I would say that over the past few quarters, we've had concentrated revenues around our 800 gig business; that is expected to expand as we enter the back half of the year and go into '26. As that demand at where we're concentrated dips down over the next quarter or so, it will be filled with a ramp of 1.6T. So net-net, we expect the data center revenues to be growing. They grew last quarter; they're growing this quarter, and we're starting to build backlog for our Q3 and Q4. So there is a little bit of a transition at one of our lead customers, which we're noting. But more importantly, we're expanding the breadth of our customer base at 800 gig, and that's the key point here.

Operator, Operator

And our next question coming from the line of Quinn Bolton with Needham and Company.

Quinn Bolton, Analyst

I just wanted to come back to the Lowell fab and the loadings there. The defense business is at record levels, and I guess I thought a lot of the defense revenue also went through Lowell. So I understand cable infrastructure and industrial is weak, given we've heard that from pretty much everyone in the industry. But I guess I would have thought that loadings on the defense side would have certainly offset some of that. So could you just give us a sense how much of the defense business goes through Lowell and why that wouldn't be helping fill that fab?

Steve Daly, President and CEO

You're right that the fab supports a significant amount of defense business. However, I want to point out that we have a large radar program, and the volumes for that particular program have decreased as we await a reload of another long-term contract. This situation is creating a temporary headwind. Overall, you are correct that there are various technologies within the fab that support the broader defense market. Additionally, demand for some of our products in the industrial and medical sectors, such as high power devices and switches, has recently declined, but we anticipate that demand will return at some point.

Jack Kober, Chief Financial Officer

I would also add that some of the growth that we've seen from a defense perspective has come through some of the newer acquisitions. So that’s once again driving the top line, not necessarily all flowing through the low fab. So with that increase in the revenues that we're seeing on the defense side, it's not helping to support that low fab underutilization.

Tore Svanberg, Analyst

I have a follow-up regarding the linear equalizer opportunity. It seems that the ACC cable opportunity may be diminished now due to customer transitions. However, you appear more enthusiastic about linear equalizers. I'm curious about the extent to which this is influenced by cable backplane needs. There have been reports of significant customers experiencing signal integrity challenges with their copper backplanes, potentially necessitating a shift to active cables to address these issues. How do you perceive this opportunity? You've also mentioned applications, like lower speed PCIe cables that utilize linear equalizers. Could you elaborate on where the growth is coming from within that broader linear equalizer market? That would be very helpful.

Steve Daly, President and CEO

I would just say that the primary growth will be on the cables as opposed to on the backplane. So I think that is where we believe the volume will be. And you're correct to think that there'll be equalizers or equalization put on in various places to boost gain and help signal integrity. So that will be ancillary to the main focus or the main volumes, which we believe will be on the cables themselves.

Operator, Operator

And our next question coming from the line of Srini Pajjuri with Raymond James.

Srini Pajjuri, Analyst

I have a couple of questions regarding the data center. Steve, as we transition from 800 to 1.6 terabits, could you elaborate on the kind of ASP benefit you anticipate? Additionally, we hear a lot about LPO. While there seems to be an ASP benefit associated with moving to 1.6 terabits, is there also a benefit in transitioning from a DSP-based solution to LPO, on top of the 1.6 terabit change?

Steve Daly, President and CEO

It's challenging for us to discuss the average selling prices of our products due to the competitive landscape. Therefore, I can't provide specific commentary on that. However, it's crucial to emphasize that the LPO solution allows customers to remove a DSP, resulting in significant cost savings. Additionally, there are notable power savings, and the latency performance of the on-time solution is improved. These factors alone could justify a premium for an LPO solution, provided it is implemented successfully in their environment. From our perspective, we are delivering a technology that enables these benefits, and we strive to offer our customers good value. Similarly, when discussing 1.6T, the same points hold true. The challenges increase; the interface becomes more complex, and the assembly methods—whether using bare die, bump die, wire bonds, flip chip, or die stacking—are all critical. We excel at managing these intricate details. Another pertinent point to mention is MACOM's expertise with photodiodes. We might be the only company in the industry that manufactures both transimpedance amplifiers and photodiodes, allowing us to combine these components seamlessly for our customers. We also provide training so they can purchase the chips from us. MACOM has substantial expertise in these solutions, positioning us well as data rates continue to increase.

Operator, Operator

And our next question coming from the line of Michael Mani with Bank of America Securities.

Michael Mani, Analyst

This is Michael Mani standing in for Vivek Arya. I would like to delve deeper into the backlog situation. Are there specific areas within the backlog where you've noticed any changes in strength or weakness compared to last quarter? It seems there might be some weakness on the telecom side, but has there been any change on the industrial side that could affect your outlook? Also, do these developments influence your strategy for achieving the $250 million per quarter run rate? It appears they might not, but could you clarify the factors at play?

Steve Daly, President and CEO

Just to remind everybody, as we said, our backlog is at a record level. This has been the fourth quarter in a row that we've had a book to bill of 1 or higher. I think the last three quarters have been a book to bill of 1.1. And as you look at sort of where we stand today and the trajectory, it seems that our year-over-year growth is going to be quite strong today. Even looking at the data center end market where we had 35% growth last year, even if you assume modest slowdowns of growth in the back half, you're talking about close to 50% year-over-year growth there and then strong double-digit growth for telecom and industrial. So we're actually quite pleased with the setup. We're booking large contracts, multiyear contracts. I wouldn't read anything into the turns business per se on any particular quarter because it just has to do with the execution and the normal moving parts of our business. What I would be hyper-focused on is our booking book to bill number; that is the most important number we put out every quarter. It's why it's one of the first things we say is this is the bookings. And so we're very proud of the work that the sales team, the business development team has done, and our operations team has been able to keep up so that we've been able to deliver this very diversified growth. So I wouldn't read anything into the turns business. Our revenue during the course of the quarter is evenly balanced over the three months of the quarter. That shows up in our cash flow and our overall financial performance of the business. So very strong, very healthy business and some great growth in front of us.

Operator, Operator

And our next question coming from the line of Peter Peng with J.P. Morgan Chase.

Peter Peng, Analyst

Just based on some commentary about your record backlog and some expectations of a pretty sizable ramp in your 1.6T in the Q3 and Q4 quarters. Is there any reason to think that we can't grow sequentially in your data center business throughout the year?

Steve Daly, President and CEO

That's always a risk. And as we talked about every quarter, the data center end market is certainly one of our most volatile. And our lead times for our products are typically anywhere between four and six months. And so our visibility in the next two quarters is generally very good, but after that it does fade away, let's say. And based on all the discussions we had today about the different programs we're getting involved in, we're confident that we can continue to have strength within this segment. We're expanding and broadening our customer base. We're adding new products like the PDs and the lasers that I talked about. So we're confident that this year will be a record year for MACOM within the segment. In closing, I would like to thank all our employees for their hard work and dedication, which made these results possible. Have a nice day.

Operator, Operator

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