Q2 2025 MACOM Technology Solutions Holdings Inc Earnings Call
Srinivas Pajjuri, Srinivas Pajjuri
[inaudible]
Speaker Change: Welcome to MACOM's second fiscal quarter, 2025 conference call. This call is being recorded today, Thursday, May 8, 2025. At this time, all participants on the list in only mode. I will now turn the call over to Mrs. C. Ferranti, MACOM's Vice President of Corporate Development and Investigations. Mr. Ferranti, please go ahead. Mr. Ferranti, please go ahead.
Speaker Change: Thank you, Olivia. Good morning and welcome to our call today to discuss MACOM's financial results for the second fiscal quarter of 2025.
Speaker Change: I would like to remind everyone that our discussion 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 Security's litigation reform act of 1995.
Speaker Change: Actual results made different materially from those discussed today. For more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to become's filings with the SEC.
Speaker Change: Management statements during this call will also include discussion of certain adjusted non-gaup financial information.
Speaker Change: A reconciliation of GAP to adjusted non-GAAP results is provided in the company's press release and related for made K, which was filed with the SEC today. With that, I'll turn over the call to Steve Daly, President and CEO of MACOM.
Speaker Change: Thank you, and good morning. I will begin today's call with the general company update. After that, Jack Kober, our Chief Financial Officer, will review our Q2 results for fiscal year 2025.
Speaker Change: When Jack is finished, I will provide revenue and earnings guidance for the third quarter of fiscal 25, and then we will be happy to take some questions.
Speaker Change: Revenue for the second quarter of fiscal 2025 was $235.9 million in adjusted EPS was $0.85 per
Speaker Change: We ended the quarter with approximately 682 million in cash in short-term investments on our balance sheet.
Speaker Change: The diversity of MACOM's end markets, product portfolio, and global customer base continues to provide us with great opportunities for growth.
Speaker Change: Revenue by NMarket, whereas follows industrial and defense was 98.5 million, data center was 72.2 million, and telecom was 65.2 million.
Speaker Change: Telecom was up 18% sequentially, data center was up 11% sequentially, and IND was up 1% sequentially.
Our IND and data center quarterly revenues achieved record levels.
Our Q2 book-to-bill ratio was 1.1 to 1.
Speaker Change: Notably, this was the fifth consecutive quarter of strong bookings and we are pleased our backlog is at a record level.
Speaker Change: Our turns business, or orders booked in shift within the quarter, was around 20% of total revenue.
Speaker Change: We believe our growth is driven by our new products gaining market share as well as positive secular trends in certain segments of our three major end markets.
Now turning to the end markets.
Speaker Change: First, Industrial and Defense, demand continues to grow, driven by the U.S. and International DOD system upgrades in radar, EW and communication systems.
Speaker Change: The need for higher frequencies, higher power levels and higher levels of integration within the defense electronic sector plays directly to MACOM's strengths and enhances our addressable opportunities.
Speaker Change: Outside of the aerospace and defense business, demand in our traditional industrial and multi-market area, which includes automotive, factory automation and medical was unremarkable.
Speaker Change: Second, Telecom Order Trends have been improving, specifically in 5G infrastructure, broadband access and metro long haul.
Speaker Change: The most active areas of the telecom market is our SATCOM segment, where we continue to secure design wins and ground and space-based systems supporting broadband connectivity and direct-to-cell applications.
Speaker Change: Third, data center business is strong. Continue with demand from domestic and international cloud service providers.
Speaker Change: We see an accelerated pace of new technology deployments in this market as well as rapid shifts in demand between various platforms and production.
Speaker Change: Our data center business is on pace to have a strong growth here, although we always like to remind investors that this market is our most volatile end market.
Speaker Change: During Q2, MACOM had exhibits at two significant industry trade shows, including the Satellite 2025 Conference in Washington DC and the Optical Fiber Conference or OFC in San Francisco, California.
Speaker Change: These large industry events were great venues to demonstrate the full breadth of our technology offerings and to introduce new product lines to our customers.
Speaker Change: So I'll take a moment to highlight some key products we displayed.
Speaker Change: At Satellite 2025, we introduced our new Opto Amp product line. Our flagship product is capable of producing up to 40 watts of optical power.
Speaker Change: Our OptoAMP is an all optical amplifier and has been developed to support free space optic applications, including satellite to satellite links and gateways to satellite links [inaudible]
Speaker Change: This new product line leverages MACOM's command and experience with optical amplification.
Speaker Change: Our knowledge and relationships in the Space and SACcom industry, as well as our RF over fiber photonics and material science expertise.
Speaker Change: OptoAMP utilizes advanced materials like Irvium Intervium to achieve high output power inefficiencies.
Speaker Change: Because of our engineering capabilities and manufacturing scale, I believe this new product line can rapidly gain market share over the next few years.
Speaker Change: At OFC, MACOM had a total of 17 product and technology demonstrations.
Speaker Change: One of the major themes at OFC was the maturity of the linear pluggable optics or LPO ecosystem.
Speaker Change: MACOM's booth featured a full ecosystem demonstrating at 100 gig per lane consisting of switches from two different vendors, three different servers, and 400 and 800G modules from 12 different module vendors.
Speaker Change: The multi-mode and single-mode fiber optic link demonstrations ran seamlessly during the show with bid error rates well below required thresholds.
Speaker Change: One of the applications for LPO that appears to be gaining traction is server to switch links at 100G and 200G per lane. These high volume short reach links, which typically involve active optical cables require very low power consumption.
Speaker Change: We also unveiled our chipstack TIA and photo detector for 800G and 1.6 T applications.
Speaker Change: This solution utilizes four of MACOM's new 200G photodetectors, which are die stacked onto a MACOM 800G Transimpedance Amplifier.
Speaker Change: This solution leverages MACOM's expertise in high-speed signal integrity, ICs, photonics, system design, and advanced packaging.
Speaker Change: As we have just passed the midpoint of our fiscal year, I would like to update and remind everyone of our long-term strategy.
Speaker Change: Simply put, we are focused on designing semiconductor-based products and platforms to support the highest power, highest frequency, and highest data rate applications within our three core markets.
We estimate our SAM is approximately $7 to $8 billion.
Speaker Change: I'll take a moment to discuss a few fundamental themes of our strategy.
Speaker Change: First, Highest Power. Our strategy is to build a best-in-class semiconductor portfolio that will enable commercial and defense systems to operate at the highest possible RF in microwave power levels.
Speaker Change: Our portfolio is underpinned by an array of leading proprietary three-five semiconductor process technologies, and we continue to focus on innovation in these areas.
Speaker Change: Differentiated Semiconductor Process Performance is a critical factor in our products' competitive advantage and therefore advanced process development is an important part of our strategic plan.
Speaker Change: Today's development efforts may not impact our revenue for three or four years, but they are the lifeblood of the future growth of the company.
Speaker Change: When we think about high power, we don't just think about amplifiers, but a wide range of products, like control products, kill-of-volt capacitors.
50 watts to 7 kilowatt transistors.
Speaker Change: Filters, Power Combiners, TWT linearizers, and Receiver Protector Limiters, just to mention a few.
Speaker Change: And as I just discussed, we have added high-power optical amplifiers to the portfolio, which will be a new growth vector for us.
Speaker Change: As we focus on future requirements for commercial systems, I'll also highlight that our team is making great progress on the development of our fourth-generation GAN on Silicon Carbide RF Power Process, also known as GAN-4.
Speaker Change: We expect this new process will ensure MACOM's next generation cellular infrastructure products support customers' demands of higher power, better efficiency and improved linearity
Speaker Change: Second is highest frequency. Our strategy is to develop differentiating gas and again high frequency processes to support our core three markets.
Speaker Change: Recently completed the installation of a new molecular beam epitaxy or MBE reactor at our low wafer fab that gives us the ability to perform advanced semiconductor processing steps, including developing new ways to reduce omit contact.
Speaker Change: A lower resistance equates to higher frequency operation higher gain in higher power efficiencies, especially at sub hundred and 40 nanometer gate lengths. The reactor is installed and operational in our team is already developing proprietary processes to create industry.
Speaker Change: Contact performance I'll note. The reactor will also be used on other product lines, Besides gan, including expand bar filter technology, which is currently in development installing and qualifying the MBE is a major undertaking in our fab equipment.
Speaker Change: Job executing this project on time and in budget.
Speaker Change: These U S based activities are complemented with efforts to expand our presence in Europe at Mecom's European semiconductor center, or Mese, which has expertise in epi growth compound semiconductor wafer processing and IC design.
Speaker Change: We are gaining market share across Europe, and the U S customers are pleased to see mecom revitalized and scale M E se's capabilities, our efforts to transfer the current processes from three inch to six inch production tooling are on plan and should.
Speaker Change: Few quarters once the transfers are complete we will initiate an exciting technology development roadmap with the goal of becoming Europe's leading three five foundry for gas and gano silicon carbide in parallel we expect to expand our European.
Speaker Change: Facturing capabilities to support a wide range of growing European industries.
Speaker Change: Third is high performance connectivity our strategy in high performance connectivity revolves around high speed data transfer over copper and optical fiber, while we often say our solutions are analog based in fact, many of our Ics canta.
Speaker Change: Proprietary mix signal in digital IP to support complex functionality and performance modes as required by the applications our growing team of analog mixed signal and digital IC designers have a rich history of advanced circuit design.
Speaker Change: Is to focus on customers building systems for datacenter and telecom optical networking emulation and prototyping broadcast video and semiconductor testing. In addition, we look to diversify our product portfolio and customer base.
Speaker Change: N R Z Pam four incoherent modulation schemes and multiple protocols, including Ethernet fiber channel Infiniband and P. C. I E as well as multiple automotive in industrial standards for the datacenter we focus on.
Speaker Change: High performance silicon processes and leverage our design techniques to address requirements at 800, G 1.6, T and 3.2 T data rates to achieve best in class performance in support of next generation datacenter deployments.
Speaker Change: Summary, our long term growth strategy revolves around developing high performance solutions using a wide range of semiconductor technology in circuit design expertise, we seek to deploy our expertise to provide our customers standard and customized solutions.
Speaker Change: The highest speeds lowest noise best distortion and highest power our diverse portfolio is unique to the industry and we remain focused on growing our business in a differentiated way next I would like to provide an update on the status of Wolf speed R.
Speaker Change: Five second due to increasing demand the fab is experiencing high equipment utilization and in some cases bottlenecks to reduce execution risks and expand capacity. We are developing plans to increase the current foreign.
Speaker Change: After 30% over the next 12 to 15 months, we see an opportunity to increase four inch capacity with a modest investment by purchasing and installing a short list of used equipment.
Speaker Change: In third as part of the original RF business transaction, we established the right of first refusal to acquire the real estate associated with the R. T. P site, we have exercised our right and we are facilitating a real estate transaction in which our current.
Speaker Change: Low location would purchase the R. T P real estate and then lease it to make on this real estate exchange will have no material impact on our P. N. L to summarize we are focused on ensuring a smooth transfer of the fab and enabling further growth.
Speaker Change: Before I pass the discussion to Jack I would like to review a few recent customer engagements with which exemplify the diversity and span of our portfolio. We recently received a supplier award from Bae in recognize.
Speaker Change: Congratulations to our linear module systems team for this well deserved recognition our lightweight Budd photo detector products are gaining traction in the market for next generation datacenter applications, our sales engineering.
Speaker Change: Have been collaborating have been collaborating to achieve major wins and we are in the midst of ramping up volume production and finally, we received pilot production orders from a leading European radar manufacturer to support its new.
Speaker Change: Jack will now provide a more detailed review of our financial results. Thank you, Steve Our Q2 results reflect record revenue levels and strong financial performance building upon our steady growth and revenue increased operating income and ongoing cash generation.
Jack Kober: Our operational performance has allowed us to maintain a strong balance sheet, while continuing to generate cash, which we believe positions us well fiscal Q2 revenue at a new quarterly record of $235.9 million up 8.1%.
Jack Kober: Based on growth across all three of our end markets notable double digit sequential growth within datacenter and telecom were the primary drivers. Our overall book to Bill ratio for Q2 was again above one with customer orders exceeding our revenue by.
Jack Kober: Percent.
Jack Kober: Adjusted gross profit for fiscal Q2 was $135.6 million or 57.5% of revenue in line with the past few quarters total adjusted operating expense for our second quarter was $75.8 million.
Jack Kober: Research and development expense of 50.4 million and selling general and administrative expenses of 25.4 million. The sequential increase in adjusted operating expense compared to Q1 was primarily driven by higher Rd and marketing cost.
Jack Kober: Employee related costs associated with calendar year payroll tax resets and variable compensation as we are scaling the business, we have added new capabilities and resources, primarily within Rd functions, including those from the recently completed and previously announced engineer.
Jack Kober: I would like to note that we remain very focused on controlling our opex as we continue to grow our revenue depreciation expense for fiscal Q2, 2025 was $6.8 million compared to 6.7 million in Q1 2025.
Jack Kober: Adjusted operating income in fiscal Q2 was $59.8 million up 8% sequentially from 55.4 million in fiscal Q1 2025 for fiscal Q2, we had adjusted net interest income of $6.4 million, which increased.
Jack Kober: Sequentially from 5.9 million in Q1.
Jack Kober: Or adjusted income tax rate in fiscal Q2 was 3% and resulted in an expense of approximately $2 million. Our net cash tax payments were approximately $2.8 million in Q2, we expect our adjusted income tax rate to remain at 3%.
Jack Kober: We anticipate continued utilization of our deferred tax asset balances through the remainder of 2025 into fiscal 2026 and beyond.
Jack Kober: Our utilization of these deferred tax asset balances as well as other items will help to minimize our future cash tax payments I would like to highlight that based on our continued and increasing profitability. We currently estimate our adjusted tax rate.
Jack Kober: We anticipate our tax rate will begin to rise from 3% to mid single digits as we progress through fiscal year 2026 fiscal Q2, adjusted net income increased approximately 8% to $64.3 million compared to 50.
Jack Kober: Fiscal Q1 2025.
Jack Kober: We continue to make operational improvements within the business, which can be seen in the sequential increases in our adjusted operating income and E. P. S over the past seven quarters.
Jack Kober: Now moving on to operational balance sheet and cash flow items. Our Q2 accounts receivable balance was $131.4 million up from 91.8 million in fiscal Q1 2025, the increase in our a R balance was driven.
Jack Kober: Revenue as well as revenue timing during the quarter with more revenue being recorded later in the March quarter as compared to our December quarter. Our day sales outstanding averaged 51 days, which we feel is within our normal operating range.
Jack Kober: Inventories were $209.3 million at quarter end up sequentially from 198.4 million inventory turns increased to 1.9 times from 1.7 times in the proceeding quarter.
Jack Kober: We have continued to make strategic investments in inventory to support key programs and feel our growth in inventory over the past year is in line with our overall revenue growth, we remain confident that the quality and mix of our inventory is strong and supports our strategic plans.
Jack Kober: Fiscal Q2 cash flow from operations was approximately $38.7 million down 28 million sequentially and an increase of more than 20 million over the fiscal Q2 2024 time period. The sequential decrease was primarily due to working capital increases.
Jack Kober: Dynamics of our growing business. It is typical to have variations in cash flow from quarter to quarter Maycom's proven business model has over the last few years demonstrated strong cash flow from operations as an example in fiscal year 2023, our cash flow from operations.
Jack Kober: 67 million fiscal year, 2024 was 163 million and we believe we are on track for our cash flow from operations to be in excess of 210 million for fiscal year 2025.
Jack Kober: Capital expenditures totaled $8.2 million for fiscal Q2 up 2.9 million sequentially. Much of this increase is driven by upgrades to our wafer foundry and R and D facilities, we expect our capital expenditures to be approximately $30 million for T.
Jack Kober: Next moving on to other balance sheet items cash cash equivalents and short term investments for the second fiscal quarter was $681.5 million up 25 million from Q1, comparing our cash short term investments.
Jack Kober: Notes, we are in a net cash position of more than 182 million as of April 4th 2025.
Jack Kober: We are aware of the increasing macroeconomic uncertainty impacting the global business environment, we maintain a strong balance sheet with ample cash to support our strategic goals. We continue to carefully manage our discretionary spending and capital spending to help drive.
Jack Kober: In fiscal Q3, ending July 4th 2025 to be in the range of $246 million to $254 million. Adjusted gross margin is expected to be in the range of 56.5% to 58.5%.
Jack Kober: Earnings per share is expected to be between 87, and 91 cents based on 76.5 million fully diluted shares we expect sequential growth revenue growth in all of our end markets, we anticipate that industrial an.
Jack Kober: With approximately 10% sequential growth followed by datacenter at 5% sequential growth in telecom slightly up sequentially as Jack noted we acknowledged the increased uncertainty in the markets. Nevertheless, we have an amazing product.
Jack Kober: Strategy and we continue to focus on execution to capture market share I would now like to ask the operator to take any questions. Thank you. Please and gentlemen to ask question you will need the restart.
Speaker Change: My first question coming from the line of Tori Sendberg with Stifel. Your line is now open yes. Thank you and congratulations on the strong results here, Steve. So your data center business is on track to growing I think you know close to 50% or above 50%.
Speaker Change: You've talked about this this business being quite volatile you know what what's your current read on the market and you think this growth momentum you know can sustain going into fiscal 26.
Speaker Change: Great. Thanks for the question Tori and you're you're right to observe that our datacenter business has been growing in fact, it's been it's really been growing since 2018 on year.
Speaker Change: More recently and our fiscal 23, we had about 6% year over year growth and then in our fiscal 24 about 35% and here. We are halfway through fiscal 25, and I would say we're on track to be somewhere in T.
Speaker Change: Percent year over year growth range and a lot of that is coming from the movement within the datacenter to go to the higher data rates a lot of that is being driven by via adoption of the hundred G per lane platforms across.
Speaker Change: Including 800 gig S. R. Eight 400 gig S. R four and even some early adopters at 1.6 T. Generally speaking we think those trends will continue and then as a tailwind we do.
Speaker Change: Industry is beginning to seriously look at LPO and I think the industry sort of hit a milestone in March at OFC when it.
Speaker Change: Ratified the L. P O standard.
Speaker Change: Within the MSA and so just to remind everybody. There's an industry organization, that's helping define the interface standard for LPO solutions and a specification was released in March it's basically an Ethernet BA.
Speaker Change: Hundred G per lane and it allows the switch and the Nick and the module manufacturers to understand what the interface specs are and so now that that is settled we believe over the next year to two years LPO will become a.
Speaker Change: We believe if that happens then we could continue to see strong growth now with all that said I would I would just also highlight as I did on my script. This is a very volatile market. We have seen examples of fast moving ramp ups and ramp down.
Speaker Change: And we would expect that type of volatility to continue so from our point of view, we have to continue to be on that leading edge of high data rate, we have to introduce new products and I talked about our 200 gig photo detector, how we're now.
Speaker Change: And we're also working on lasers on our last conference call. We talked about the efforts that may come is making with CW lasers. So a lot of moving parts I would probably.
Speaker Change: Dot recommend.
Speaker Change: WEL.
Speaker Change: So you know just just trying to get an understanding of some of the gross margin impact you know as as that transition happens here in about six months, especially given your comment that things are running ahead of schedule. Yeah. So maybe we'll do a two party answer I'll take the front end of that.
Speaker Change: Can also add some commentary so when we originally acquired the business. We highlighted two investors that the the overall business was had very low profitability. The gross margins were very low and we did.
Speaker Change: Close the deal to restructure and adjust the opex. So that on day, one the business would be accretive to make homes P. N L. Although it would be dilutive to the gross margins and you saw that come into fruit.
Speaker Change: Back in 2023, when we you know on that first quarter, where we had a step back in gross margins. Since then over the past 17 18 months, we have been incrementally improving the margins the gross margins and we always had a go.
Speaker Change: Transferred it would be neutral or positive to our gross margins and I would say that today. We're not there I think we have more of a gap to close in terms of looking at yields looking at through put cycle times in things of that nature and so I do think that there is AB we only have our models, which I think are very good. So I would say that we still have a little bit of work to do and certainly we have more time to do that as as you highlighted the fab would be convenient.
Speaker Change: And that work will continue after the fab conveys and the last thing I'll I'll say before I turn it over to Jack is we established a model where this transaction would pay for itself in three years, we are on or ahead of plan to make that happen. So the cash genera.
Speaker Change: For us where we can take effectively more control when the fab is under our direction, we'll be able to make further improvements from an overall gross margin perspective, so hopefully that that helps more to come as we work our way through the remainder of the calendar.
Speaker Change: Thank you now our next question coming from the line of David Williams with the Benchmark Company. Your line is now open.
David Williams: Hey, good morning, and thanks for taking my my questions here I guess, Steve first you talked a little bit about the the volatility and the changing trends that happened within the datacenter, but I guess from a bigger picture. How are you seeing that the budget can I play out.
David Williams: Maybe what are your expectations for next year in that datacenter, especially where your position and where do you think you're going to see the largest growth opportunities there maybe by technology.
David Williams: Well, we do see continued trends that the Isps are continuing to invest in datacenters. So that that's a positive trend that we think will continue into next year and even the year. After that that's number one number two we also are seeing a high level of innovation within.
David Williams: Service and you hear things like C. P O and N P O and L. P O and all of these different variations of how to connect high speed data and as a merchant supplier, we're sticking ourselves right in the middle of that conversation, whether we're talking with somebody that's input.
David Williams: Cables or or Fibroptic links we want to be involved in that and so we think that the the Sam within the datacenter for Maycom is growing and so because of that we think that there's still tremendous room to grow in the future.
David Williams: We have to we of course have to pick and choose our battles we have to make sure. We have the right product at the right time, we have to remain competitive on a lot of different levels in terms of performance cost producing time to market. So it's an exciting place to be.
David Williams: We're not short of opportunities and we do think that will continue to grow and gain market share in the datacenter.
Speaker Change: Great. Thanks for that color and then maybe just secondly, the the satellite business. It sounds like you're continuing to gain some nice traction. There just wondering if you can kind of size. The magnitude of what you think your opportunity is there and then maybe just any color around.
David Williams: Would be helpful. Thank you.
David Williams: Thanks. Thank you David So the Sackcom business for Maycon is continuing to grow it's been growing over the past few years and we expected.
David Williams: More good things in the future and maybe I would just highlight an example of increasing our Sam within that market by adding new product lines and I talked about the opto Amp, which is a high power optical amplifier, that's suitable for gateways or onboard.
David Williams: To have a free space optical link, which will not only provide data streaming from satellite to satellite, but also location position and other overhead that's necessary to run the network. So we're very excited about doing things like.
David Williams: Difficult products to bear, helping our customers find solutions and I think that opto lamp is just a really good example of adopting.
David Williams: Technology coming up with unique circuit designs. So that we can support our customers. The other thing I'll highlight in the satcom market, which which is historically a lot of the links of Ben a K U band, which is about a 10 to 13 gigabyte.
David Williams: Frequency and what we're seeing is a lot of the newer satellite networks and the connectivity is moving up to K, a band, which is in that 30, gigabyte as well as Q band and V band and to throw another one out there W band and so these are.
David Williams: Customer close a link at these frequencies and we're one of those companies that can do that and so when we go to market and we think about the satcom opportunity. We think about optics, we think about power RF power and we think about very high freq.
Speaker Change: Frank So we think that the opportunity size is actually very attractive we're always hesitant to put a number on it because it depends on where you draw the line, but I would say that we are continuing to invest our rd dollars to support.
David Williams: Opportunity.
Speaker Change: Thank you now next question coming from the line of Carl Ackerman with B N. P. Perivan, yes. Thank you Steve I'd like to go back to that comments or comments on Satcom I was hoping you could address the previously announced 55 million.
Speaker Change: Okay, and whether you have greater clarity on the opportunity for the program to expand additional 25 million I guess as you address that perhaps you could discuss the breadth of design wins and size of the satcom business within your telecom business today and I have a follow up please.
Speaker Change: Sure. So the large contract that we announced about a year ago. We explained that that the sort of two phases. The first phase is an R. D phase, where we were doing a wide range of chip developments I think there is.
Speaker Change: Like that and now we're moving into more of a build phase and getting our E M's or engineering models built up and delivered to customer and going through sort of a certification phase what will follow after that would be a ramp in.
Speaker Change: Production, we expect that that's probably about six months away.
Speaker Change: So probably starting towards the end of this year beginning of next year, depending on how things go and so I would say generally that large program is on track I don't want to comment on the potential follow on of that 25 million additional modules and so.
Speaker Change: On that at this point, we're very focused on executing.
Speaker Change: Some of the other questions you had about the overall size and other opportunities I'll, just say that we're continuing to see new companies enter the market they have different approaches to solving communication sensor.
Speaker Change: Networking problems and we are again, inserting ourselves and providing lots of semiconductor content in perhaps one example would be you're starting to see more and more networks adopt direct to sell.
Speaker Change: The the leo's or the Meos are going to have connectivity directly to your cell phone and so if you can imagine that mecom is a big supplier into the cellular infrastructure market we understand.
Speaker Change: That's necessary to have unefficient transmitter or receiver in a base station and we're bringing that same knowledge to bear to our satellite customers and they love it. They like the fact that we understand the protocol we understand all the different.
Speaker Change: Work and so and we have the space heritage so they're embracing us to help them solve the direct to sell issues.
Speaker Change: Got it. Thank you for that I want to pivot to fence. You you indicated that industrial defense should grow 10% sequentially, perhaps both of those markets are growing with industrial maybe appear to be bottling, but within defense I was hoping you could address what you're exposure is to.
Speaker Change: Correctly, I ask giving you very large defense business and certainly growing government interest to expand defense spending globally. Thank you.
Speaker Change: Thank you so our our direct exposure to European defense spending is growing and we see that as a good thing and part of our long term growth strategy was to build out a stronger PR.
Speaker Change: The the catalyst for that was the acquisition of a a small wafer fab based right outside of Paris in France, and that has given us a great platform to work with customers across Europe.
Speaker Change: About 50% of its revenue came from foundry business, meaning the customers design the chips and the other 50% was product based the 50% that was foundry based was primarily coming from European defense contractors, and so when we completed that.
Speaker Change: A really sort of a running start in a instant relationship with a lot of companies, we hadn't done business with and so over the last two years, we've been developing those relationships we've been improving the performance of the me.
Speaker Change: A lot of our U S based technology, including optical technology, and Ganofilicon carbide and so all of these things are are starting to fall into place and will generate future growth and as I highlighted in my comments we.
Speaker Change: Very significant pilot order to support a large European radar program and.
Speaker Change: Oh I expect more good things to happen, we expect that exposure will increase there is not in Europe. They do not have the depth in my opinion.
Speaker Change: At the U S has in terms of the capabilities on the RF and microwave side. So they're looking for companies like ours to set up shop and support them and that is exactly what we plan on doing and I'll add that we will use our our M. E. S E facility as a foundation.
Speaker Change: Higher level solutions for our customers not only on the defense side, but also on the space side.
Speaker Change: Thank you. Our next question coming from the line of Williamstein with true Security. Your line is now open great. Thank you for taking my question. Congrats on the good results and outlook I'd like to start by asking about the telco end market broadly it seems to me by my.
Speaker Change: Die that this was the end market that drove the majority of the upside in the quarter and yeah I recognize that revenue performance in that end market over the last few quarters has been relatively depressed. So was this a matter of sort of true en.
Speaker Change: More a matter of inventory through the supply chain, having been consumed and we're starting to grow from that maybe maybe you could clarify which of those two dynamics is really driving this.
Speaker Change: Telco, so you're you're right that it had a great quarter in Q2, I would say that if you compare our current run rate.
Speaker Change: We should start to get into a range, where we're having record telecom revenues on a yearly basis. So we're very happy about that from a market segment point of view I would just highlight that the five G market generally if you listen to.
Speaker Change: Yams, they're saying that business is relatively flat.
Speaker Change: Nevertheless, we continue to grow our business by gaining market share introducing more products to the same customers. So our that has been a tailwind for our five G business second we put satcom inside of the telecom number. So that's also a big driver of the.
Speaker Change: And regarding inventory I would say that there are some segments of the telecom market that have pretty much gone through and burned down their inventory one of them would be cable infrastructure, we're starting to see an increase in orders, albeit at a increase.
Speaker Change: Cable infrastructure customers here in the U S and also we're starting to see slight growth in sequential growth in 10 G Pond.
Speaker Change: The last item I'll highlight within telecom is a segment we call Metro long haul, which is generally these are links between datacenters or that are in different cities that use coherent modulation. These are generally very high data rate.
Speaker Change: Data rates and the customer base adds building these as sort of a different customer base than the let's say the traditional datacenter customer base and we've started to see a ripple effect that the growing.
Speaker Change: Datacenter demand is now increasing the connectivity between datacenters at higher rates and so we are involved in some nice programs that are as high as 1.2 T for coherent modules, where we supply.
Speaker Change: Chips into those solutions, so that business is doing well, we're actually continuing to build backlog to support our metro long haul business. So we think that business will continue to grow over the next few quarters.
Speaker Change: That helps thank you and maybe.
Speaker Change: Help me understand whether I think there's a similar dynamic in the industrial part of your industrial Defense I think you're in your prepared remarks, you said that performance was unremarkable in those industrial end markets and I suspect there's.
Speaker Change: Situation, there as well, but I'm not sure. So maybe you can clarify please.
Speaker Change: Yes, I would say that.
Speaker Change: E se.
Speaker Change: Thank you and our next question coming from the line of Quinton with Needham and company. Your line is now open.
Neo Young: Hey, guys. This is neo young I'm for Quin, Bolton I know you touched on gross margin a little bit when discussing the wolf speed R. F fab, but I guess looking forward what are your gross margin expectations throughout the rest of the year and if possible could you walk us through the puts and takes thanks.
Neo Young: Yeah. Neil this is Jack Cober, so as we've looked back over the past couple of quarters, we've been in the mid 57% gross margin range. It also looking forward to our our guide that that puts us roughly in a similar spot.
Neo Young: Percent as the midpoint of the guide as we get out longer term I think we'll have to see how things play out from an overall mixed perspective, we've continued to have some lower utilization of our low fab, just where all of the costs are not.
Neo Young: A number of years ago, some of that is driven by the.
Neo Young: The low demand that Steve was just referencing with regard to the industrial end markets that we service. So as we go out longer term, we're going to have to see how it plays out but in terms of the guide that we have going out through Q3 still in that 57% range is where we.
Speaker Change: Okay, great. Thanks, and you didn't mention terrace in your prepared remarks, I was wondering if you've seen any direct or indirect impact so far and if not I guess looking forward, which areas of business by product line or end market.
Neo Young: More exposed and which would be more insulated. Thank you.
Neo Young: Thank you for the question. So I would say that we've not seen any noticeable impact to date regarding customer behavior, whether pull ins push outs cancellations with see none of that I'll, just remind everybody that.
Neo Young: Over 95% of our businesses direct with customers in in some cases with partners reseller partners. So we have good line of sight of major programs, we're selling non commodity products that are generally sold source. So we have a lot of.
Neo Young: So I would say that we'll continue to monitor the situation of course, we have a complex manufacturing and assembly you know manufacturing footprint, but I would say that this is something that the team is more than capable.
Neo Young: And in terms of breaking out you know country of origin by product line, we we're not gonna do that due to competitive reasons and other reasons and and the potential impact is always subject to change anyway. So I would just.
Speaker Change: Thank you. Our next question coming from the line of Blaincurtis with Jefferies. Your line is now open Hey, guys. Good morning in a great results actually wanted to go back to on the datacenter market I thought you said mid forties and I, just clarify that I'm, assuming that's physical year and.
Speaker Change: Yes, we take it straight literally that would be a down September and I think you said something about lumpiness. So I thought when we saw your OSC. It seemed like you had that transition 800 G and it was coming in at plan. So I just maybe you can just elaborate on what that messaging was.
Speaker Change: I think as we had this is Jack plain as we had talked about high level. If you look year over year and that's fiscal year 25 for us we probably be in the mid forties I think we can support growth as we talked about going into the third quarter for.
Speaker Change: Steve had mentioned I still to be determined but still the underlying demand is there to support growth even going into our fiscal fourth quarter.
Speaker Change: Gotcha. Thanks, Jack and then maybe another one for you I just want to ask on Opex I think it increased five or 6 million in March and I think the implied guidance, probably something similar maybe four or 5 million. So how do we think about opex for the year.
Speaker Change: Yeah, we've we've seen a step up here in the operating expenses as I had described in my in my prepared remarks with some continued investments we've been carefully managing our operating expenses over the past number of years, so with that step up we've made investments obviously in D type doubt.
Speaker Change: Things as we're we're growing to that that billion dollar run rate that we hope to achieve in terms of investing in the business and things, including it infrastructure and it security. So there's other things that that we're seeing as we work our way through the remainder the.
Speaker Change: Beyond that the Q3 time period, we would probably see a bit more of a leveling off of the operating expense increases from an absolute dollars increased standpoint going into Q4, and and as we work our way through fiscal year 26.
Speaker Change: Thank you now next question coming from the line of Street with Raymond James Your line is now open.
Speaker Change: Thank you just want to go back to the previous question on datacenter. The September commentary I understand the visibility is not great in this businesses, but at the same time are you seeing any any sort of inventory at your customers is that giving.
Speaker Change: On one hand, I see that the market is moving to 1.6 and you also talked about you know the potential opportunity on the LPL LRO side, but I guess your commentary about September sounds a bit cautious so I'm just trying to understand what's giving you that.
Speaker Change: Because we haven't September yes. Thank you for the question. So just to be clear, we're not guiding for the fourth quarter. So we we go out one quarter at a time and we're certainly very confident in the numbers that we're forecasting for Q3.
Speaker Change: I just want to make that point and we we would always be very very cautious about commenting on more than one quarter out and you shouldn't read into that as negative news, let's say or a negative commentary or sentiment, it's just being cautious and especially cautious.
Speaker Change: Market as we talked about which is the datacenter in terms of the general trends I would say that what we talked about on the last call is also playing out as we had expected which is that we were seeing a major.
Speaker Change: Of ours ramp down multiple 800 gig platforms and at the same time, we were ramping up other customers at 800 gig and the timing and how those things come together has has yet to play out so I would just highlight that the second.
Speaker Change: One point 60 is there's really only one major.
Speaker Change: Company in the industry that is very focused on one point 60. The rest of the industry is is primarily focused on 800, 400, and even 100 and when we Peel apart our revenue in our numbers as we look forward.
Speaker Change: We see continued growth in even some of the lower data rates, including you know hundred G platforms. So I just want to highlight that the other thing I would highlight is we do not see an inventory issue in the datacenter segment I would say.
Speaker Change: We are we are we you know being expedited across multiple platforms multiple data rates multiple end customers and so it's the it's really the opposite customers are they want their products, they see demand and there's a lot of.
Speaker Change: Operations team to do more faster, which is a good problem to have so.
Speaker Change: Hopefully that gives you comfort without guiding to Q4, yes.
Speaker Change: Thanks, Steve that's very helpful. And then on the same topic, you kind of mentioned that the LPL LRO standards have been ratified just want to hear your thoughts on what you're hearing from your customers in terms of you know what.
Speaker Change: Sort of applications or customers looking to implement these solutions and in terms of you know speeds or seeing more interest in lower speed versus higher speed for these applications and also if you can talk about whether you know these applications are seeing interest from you know.
Speaker Change: Sorry is it more for cloud workloads, you know I think that'll be very helpful. Thank you.
Speaker Change: Yes, I would say a few things what's interesting is Mo first of all most of it is the folks that are interested are at 100 gig per lane for 800 G solutions. That's number one the second comment I would make is not all.
Speaker Change: And others, it's all about power latency and cost and they're willing to lean into new technologies like LPO. So I think we're in this mode where.
Speaker Change: People are very interested they are looking at different use cases, and it's still very early okay, and so ultimately, which Isps are interested in not I mean, that's proprietary information to make comp.
Speaker Change: At that level, but I can say that we see the continuum of of interest and and I would highlight that not all I S. P's are interested today I think over time that will change as the use cases and scale our proven out and then the more riskers will.
Speaker Change: Server to Nick or I should say, Nick to switch and that is the area that we will probably go into production first.
Peter Pang: Thank you and our next question coming from the line of Peter Pang with J P. Morgan. Your line is now open.
Peter Pang: Okay. Thanks for taking my question on the data Center you guys do have like a several new products coming you know like a photo detectors. Your C. W lasers and your H C. C solutions, maybe you can talk about like how you know to think about the revenue ramp there and how.
Peter Pang: In the second half of this year and more so in the next fiscal year.
Peter Pang: [noise] sure I mean, we're as in just to highlight that within our datacenter segment, we have multiple product lines multiple functions multiple form factors and so to sort of call out two or three that may or may not be ramping.
Peter Pang: Breath of the product line. So I just want to highlight that I did comment in the remarks that our 200 gig photo detectors are ramping and those are primarily for 800 G. D. R. Four applications and that you know.
Peter Pang: Reality of that we also see opportunities and activity at one point 60, as well just to be clear on 200 gig PD.
Peter Pang: I would say that the overall performance of our our NPI metrics for our datacenter products is best in class, we have a very high success rate of designing products getting them to market in getting design wins that we had originally.
Peter Pang: The team does a very strong job with execution in this area and I'll highlight that today supporting our datacenter business, we actually have eight different.
Peter Pang: Design centers collaborating in different projects to support this business and so a lot of moving parts a lot of different and use cases as we I mentioned in my script, we're starting to take a very.
Peter Pang: As as as the networks and the Datacenters begin to disaggregate.
Peter Pang: Memory and storage that creates opportunities for high speed connectivity and so that would be another example of the Sam expanding where we are going to try to insert ourselves directly into those those opportunities.
Peter Pang: Perfect. Thank you and then just on the gross margin I think in aggravate your telecom and industrial defense kept coming in a little better and I would think that would maybe help somebody utilizations that your low fab, maybe just remind us like what is running through your what kind of products are running through.
Peter Pang: And maybe why even with kind of upside it's more flattish gross margin.
Speaker Change: Sure and I think Jack touched on this a little bit that generally speaking the utilization rates of our low fab have not changed over the past couple of quarters most of the products within the low fab are RF products, we have different.
Speaker Change: We have a discrete diodes and there's about a half a dozen different product families. Within the diode product line. We also have M. M. I c's that are gas or Gan running through the fab. Additionally, we are running into.
Speaker Change: Through the fab. So it's a high mix medium volume fab I would say, they're generally is more exposure to defense and industrial related markets with the with the low fab not.
Speaker Change: Sure and as we've been talking about over the past couple of quarters, our industrial business is down and so while our defense business is growing quite strongly it's coming from other areas of our technology portfolio.
Speaker Change: Thank you. Your next question coming from the line of Richard Shannon with Craig Hallum Capital Group. Your line is now open.
Richard Shannon: Hi, guys. Thanks for taking my question, maybe a follow up in the in the I N. D segment here, you clearly, suggesting industrial soft which is not necessarily it says the defense part here is doing very well, let me get a sense of if there's any large programs that are driving this this very strong grow.
Richard Shannon: Does that convey over to following quarters here and and what it seem to suggest that the I N. D segment kind of takes growth leadership for Maycom as we get into fiscal 26.
Richard Shannon: Thank you for the question Richard So our core area in defense is is centered around radar systems.
Richard Shannon: Second to that would be EW in communication systems, and so when we look at these platforms, we envision not just selling our F content, but also optical content and subsystem content and so you you have a wide of.
Richard Shannon: There is absolutely a refresh going on with radar systems across multiple platforms to address drone related threats.
Richard Shannon: We are involved in both sides of that equation. We're involved on the next generation drones that have more sophisticated sensors as well as technology that want to knock the drone out of the sky. So we would be looking at ways to support both of those applications.
Richard Shannon: As we look at our business and our strategy our strategy is to bring more technology to bear on this market and we've talked over the last couple of years about Maycom pivoting a lot of its analog mixed signal and.
Richard Shannon: The defense market and that strategy has been playing out and proven to be very successful.
Richard Shannon: In terms of our 2026 and the potential growth there I think it's it's too early to say other than I I'll just highlight that our team has never been busier in terms of the amount of opportunities. When we acquired Wolf speeds portfolio. It was a major shot of high power technology.
Richard Shannon: Maycom and we are taking full advantage of that in the market. So we believe we are gaining market share in large radar systems, not only ground based but shipborn and airborne.
Speaker Change: Very helpful details Steve there. Thanks for that my second question is in datacenter really kind of looking at the newer newer products and how do we think of this over the next you know one to two years, obviously just started selling the pds here at 200 gig talked about C. W lasers and LP about.
Speaker Change: You know kind of the timing I guess more so on the CW Laters and LPL, but then if you look say one to two years out which one of these newer areas within this bucket do you think can have the most impact.
Speaker Change: Yeah, I think that's a tricky question, because I would say our batting average on calling the future is not so good and we've had examples in the password, where we thought one product line would have a breakout year and it turns out it was another one and so I would say that we would rather.
Speaker Change: Assesses of these new product lines retrospectively and so we're talking about the PD, because we have big orders and we're ramping production and as the other product lines come on we'll certainly do the same there we are very with.
Speaker Change: Wants a 75 Milliwatter 100, milliwatt part and we're working to make sure that we can field a very competitive part so still a lot of work to do there but of course, if we have success on lasers. It you know.
Speaker Change: It could be a meaningful number, but we don't want to count our chickens before they hatch.
Speaker Change: Thank you and I'm showing up for the questions and the queue. At this time I will now turn the call back over to Mr. Steve Daily for any closing remarks. Thank you in closing I would like to acknowledge and thank all of our employees for their continued.
Speaker Change: Have a nice day.