MACOM Technology Solutions Q1 2025 Earnings Call Transcript

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February 6, 2025
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Operator

Welcome to MACOM's First Fiscal Quarter twenty twenty five Conference Call. This call is being recorded today, Thursday, 02/06/2025. At this time, all participants are in a listen only mode. I will now turn the call to Mr. Steve Ferrante, MACOM's Vice President of Corporate Development and Investor Relations.

Operator

Mr. Ferrante, please go ahead.

Stephen Ferranti
Vice President of Strategic Initiatives & Investor Relations at MACOM Solutions

Thank you, Olivia. Good morning, and welcome to our call to discuss MACOM's financial results for the first fiscal quarter of twenty twenty five. 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, you refer you to MACOM's filings with the SEC.

Stephen Ferranti
Vice President of Strategic Initiatives & Investor Relations at MACOM Solutions

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 are provided in the company's press release and related Form eight K, which was filed with the SEC today. And with that, I'll turn over the call to Steve Daley, President and CEO of MACOM.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Thank you, and good morning. I will begin today's call with a general company update. After that, Jack Cobour, our Chief Financial Officer, will review our Q1 results for fiscal year twenty twenty five. When Jack is finished, I will provide revenue and earnings guidance for the second quarter of fiscal twenty twenty five, and then we will be happy to take some questions. Revenue for the first quarter of fiscal twenty twenty five was $218,000,000 and adjusted EPS was $0.79 per diluted share.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 $63,000,000 At quarter end, we held approximately $657,000,000 in cash and short term investments on our balance sheet. Overall, Q1 was a great way to start our fiscal twenty twenty five. Revenues by end market were as follows: Industrial and Defense was $97,400,000 Data Center was $65,300,000 and Telecom was $55,400,000 dollars Data center was up 16% sequentially, telecom was up 7% sequentially and I and D was up 5% sequentially. I'll note that both our I and D and data center quarterly revenues were at record levels.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Our Q1 book to bill ratio was 1.1:one 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 $7,000,000,000 to $8,000,000,000 serviceable addressable market or SAM.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 in 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 and D revenue is approaching $100,000,000 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 one defense primes, Tier two 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 plays to MACOM's strengths. In some cases, customers are focused on high volume applications where they are looking for partners that can deliver complete system solutions and domestic manufacturing scale while meeting aggressive cost targets.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 mimic product portfolios.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 and 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

These solutions are typically used in phased array radar, remote antenna and towed decoyed 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 A and D markets have been using MACOM diodes in their platforms for decades.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 to gain market share, we plan to add new technologies to our portfolio in calendar twenty twenty five.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 five gs applications. Five gs base stations require medium and high power amplifiers and this provides us a great growth opportunity.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 five gs, 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 leaks utilizing technology from our HPC, diode, mimic, RF power, light wave and linearizer product lines.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 required 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 is front haul, 132 gigabaud coherent systems and metro and long haul deployments, PON and cable infrastructure.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

We leverage the strength of our high speed IC portfolio and our photonic products from our lightweight 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 100 gs to 1.6 gs applications. Our 100 gs per lane product support 408 gs systems and our 200 gs per lane product support 800 gs and 1.6 T systems. As we look ahead, we are focused on designing 400 gs 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 we 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 400 gs and 800 gs ZR and ZR plus coherent are also well positioned within the market to support future growth.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And finally, as we look ahead, we see new applications emerging with disaggregated computing such as PCI six and PCI seven. 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 14, we issued a detailed press release summarizing our long term wafer fab capital investment plan and the associated CHIPS Act and state funding.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Our investment plan has two major tenants, 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 and L. And second, on February 5, we issued a press release announcing that MACOM's European Semiconductor Center or MESC was awarded a mimic development project funded by the French government within the framework of the France Two Thousand And Thirty 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Jack will now provide a more detailed review of our financial results.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

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.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

In December 2024, we refinanced approximately 65% or $289,000,000 of our convertible notes that are due in March of twenty twenty six. As part of the refinancing, we issued new convertible notes of approximately $340,000,000 which have a 0% coupon rate and are due in December 2029. Also in connection with the refinancing, we issued approximately 1,600,000 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 $193,100,000 The refinancing has had a neutral impact on our pro form a net leverage and we believe helps to strengthen our balance sheet and future financial performance.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

And now on to our quarterly results. Fiscal Q1 revenue was a new quarterly record high of $218,100,000 up 8.7% sequentially based on growth across all three of our end markets. On a geographic basis, revenue from U. S. Domestic customers represented approximately 45% of our fiscal Q1 results, levels consistent with fiscal Q4 twenty twenty four.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

Adjusted gross profit for fiscal Q1 was $125,300,000 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 twenty twenty five 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.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

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 $69,900,000 consisting of research and development expense of $47,500,000 and selling, general and administrative expense of $22,400,000 dollars The sequential increase in adjusted operating expense of $4,000,000 was primarily driven by higher compensation related expenses associated with our annual employee merit increases and higher R and D costs. Depreciation expense for fiscal Q1 was $6,700,000 compared to $6,300,000 in Q1 twenty twenty four. Adjusted operating income in fiscal Q1 was $55,400,000 up 9% sequentially from $50,700,000 in fiscal Q4 twenty twenty four. For fiscal Q1, we had adjusted net interest income of 5,900,000 compared to net We expect to increase investment We expect to increase investment balances through operational cash generation, which will more than offset potentially lower future interest rates and associated yields.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

Our adjusted income tax rate in fiscal Q1 was 3% and resulted in an expense of $1,800,000 Our net cash tax payments were approximately $1,100,000 for the first quarter. We expect our adjusted income tax rate to remain at 3% for fiscal year twenty twenty five. As of 01/03/2025, our deferred tax asset balances increased to $217,000,000 as compared to $212,000,000 at the end of fiscal Q4 twenty twenty four. We anticipate utilizing our deferred tax asset balances, including R and D tax credits through the remainder of fiscal twenty twenty five and into fiscal twenty twenty six, helping to keep our cash tax payments relatively low over these periods. Fiscal Q1 adjusted net income increased to $59,500,000 compared to $54,200,000 in fiscal Q4.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

Adjusted earnings per fully diluted share was $0.79 utilizing a share count of 75,600,000.0 shares compared to $0.73 of adjusted earnings per share in fiscal Q4 twenty twenty four. Now moving on to operational balance sheet and cash flow items. Our Q1 accounts receivable balance was $91,800,000 down from $105,700,000 in fiscal Q4 twenty twenty four due to improved shipment linearity and strong collection activity during the quarter. As a result, day sales outstanding were forty one days compared to forty eight days in the prior quarter. Inventories were $198,400,000 at quarter end, up sequentially from $194,500,000 Inventory turns were flat sequentially at 1.7 times.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

The increase in our inventory balance is to support our growing customer order backlog and our strategic growth plans for fiscal twenty twenty five. Fiscal Q1 cash flow from operations was approximately $66,700,000 up $4,300,000 sequentially and more than $33,000,000 over fiscal Q1 twenty twenty four. Capital expenditures totaled $5,300,000 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 $30,000,000 for the full fiscal year 2025, excluding any CHIPS program spending.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

Next, moving on to other balance sheet items. Cash, cash equivalents and short term investments for the fourth fiscal quarter were $656,500,000 up $74,600,000 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 $157,000,000 as of 01/03/2025. Our balance sheet and cash generation remained 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 $1,000,000,000 or more in fiscal year twenty twenty six, 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.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

I would like to thank the entire MACOM team for their support and look forward to the remainder of fiscal year twenty twenty five. And now back over to you, Steve.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Thank you, Jack. MACOM expects revenue in fiscal Q2 ending 04/04/2025 to be in the range of $227,000,000 to $233,000,000 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 76,000,000 fully diluted shares. We expect sequential revenue growth in all our end markets.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 $1,000,000,000 in annual revenues. I would now like to ask the operator to take any questions.

Operator

Thank you. Our first question coming from the line of Thomas O'Malley with Barclays. Your line is now

Thomas O'Malley
Thomas O'Malley
Director - Equity Research at Barclays

open. Hey guys, thanks for taking my questions. I really appreciate it. I wanted to start on the data center side as it's really the growth engine of the business right now. Kind of two part question there.

Thomas O'Malley
Thomas O'Malley
Director - Equity Research at Barclays

So you guys have always talked about the ACC inflection point potentially happening kind of in the middle of calendar year 2025. 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 package optics.

Thomas O'Malley
Thomas O'Malley
Director - Equity Research at Barclays

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 with everything being in data center, but I wanted to kick it off there.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Thank you, Tom for the question. And I think you're correct to conclude that the data center end market is having a very good year. It had a very good year last year with 35% growth. And based on providing guidance into the second quarter, it looks like we might even be able to exceed that growth level in our fiscal twenty twenty five. A lot of that growth is being driven by the optical side of our portfolio.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So I want to make that very clear. A lot of that growth has been driven by strength in our 800 gig portfolio. And what we see happening during the course of our fiscal twenty twenty five is actually probably a bit of a slowdown in 800 gig as some of our lead customers transition over to 1.6T. So I just want to highlight that. Now when you overlay the dynamics around the ACC product line, which we offer to customers to support various data rates, not just the highest data rates, I think there are a few notable facts.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Number one, we have seen in the market architecture changes in some of the data centers and that will absolutely change the trajectory of the demand on for that customer for ACCs. We've built that into our guidance. We don't see this as a major challenge for the company given we have lots of variety within the data center. But I would just highlight that we are seeing one customer as they've moved from let's say a two rack solution to a one rack solution that will ultimately reduce the overall demand for that particular product. Now with that said, I have to highlight that the fact that we have proven that we can provide electrified copper cables at 800 gig at 1.6T is a little bit of a game changer for the entire environment.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And so we are seeing tremendous interest from across a very broad customer base to evaluate this technology. And so that in our mind is really the game changer. So the early adopters are making some changes clearly in architecture, but we think long term it's a very positive trend. And then your second question was really on LPO, which to remind everybody is a solution without the DSP. We are also sort of there's an equivalence here between LPO and ACC.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

We also see a lot of interest, a lot of activity, primarily at the higher data rates, so 800 gig and also 1.6t. We have a very, very strong product line for that for solutions in this area. And I would say from our point of view, this is a late twenty five late calendar '20 '5 and calendar twenty six contribution to our overall data center revenue.

Thomas O'Malley
Thomas O'Malley
Director - Equity Research at Barclays

Very helpful. Thank you.

Operator

Thank you. And our next question coming from the line of David Williams with The Benchmark Company. Your line is now open.

David Williams
Equity Research Analyst at The Benchmark Company LLC

Hey, good morning. Thanks for taking my questions and congratulations on the execution and the really strong results here.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Thank you.

David Williams
Equity Research Analyst at The Benchmark Company LLC

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?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Well, I think that strength will continue for the next three to five years and we are seeing tremendous demand not only from established satellite manufacturers, but also let's say a new class of satellite manufacturers that are building more let's say low cost LEOs. So it's a very active environment across the space industry. So clearly there's global broadband services being provided by commercial providers, but also there's a DoD overlay. And what we see is there's multiple bands of opportunity or high frequency bands of opportunity, including E band, V band, and even Q band. So these are generally very, very high frequency levels.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

There's very limited semiconductor solutions for those bands and MACOM can be a leading provider of solutions just from an RF or microwave point of view. The systems generally speaking have lots of different components that we can sell into the platforms. Not only are we selling in analog mixed signal devices, selling products that are effectively moving high speed data on the platform. But we're also involved on the optical side as well, whether it be really free space optics for satellite to satellite or satellite to ground communications. Now when you overlay on top of that, the connectivity to either airborne platforms or ground based terminals, there's a lot of content that's happening on those other ends.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And that's where also we shine. And in my prepared remarks, we talked about the work that our linear module subsystems group is doing or LMS is doing. And this has really been their bread and butter for thirty years. And so with MACOM's scale and breadth and access to customers, we're really seeing just some great opportunities to produce linearized SSPAs and TWTs. We're pushing more photonics onto these platforms.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

We have some very exciting new product lines we're going to introduce in the back half of this year that will support even more growth. So I think it's a great environment for MACOM. It's a great environment because we have unique technology. We're vertically integrated, obviously with the millimeter wave semiconductors. So we have a lot of proprietary processes that we can provide our customers.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And of course on the optical side, the fact that we're making lasers and photo detectors is a tremendous advantage to our DoD customers where they can go to one company to provide them the solution that they want. So it will be good business. It is there will be periods of high growth and slow growth depending on how these contracts flow. As you may remember, we did announce a $55,000,000 contract probably about six to nine months ago. And I'll just highlight that we are in the development phase of executing on that contract and the revenues associated with that contract won't happen until the back half of our fiscal twenty twenty five and it's really a fiscal twenty twenty six revenue contributor.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So we like the market, it's very dynamic, it's not only commercial, it's also defense.

David Williams
Equity Research Analyst at The Benchmark Company LLC

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 this early?

David Williams
Equity Research Analyst at The Benchmark Company LLC

Thank you.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So we generally have a bullish posture on the expansion in 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 six and PCIe seven. 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 that those new protocols and PCIe seven 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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

Thank you. And our next question coming from the line of Tore Svanberg with Stifel. Your line is now open.

Tore Svanberg
Tore Svanberg
Managing Director at Stifel Financial

Yes, congratulations on the results. 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?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Yes, I think that's right. There's been very strong growth over the past few quarters with our 800 gig optical products. There's 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And remember that in the back half and as we go into 2026, we would expect LPO solutions, optical 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.

Tore Svanberg
Tore Svanberg
Managing Director at Stifel Financial

That's great color. And then either for you or Jack on the gross margin, so sounds like there's a mix element here that's driving lower utilization in the lower fab. Just curious, what are some of the specifics there? Is it products primarily for telecom or data center? And what's the team doing to try and get that gross margin back up again?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Thanks, Torrey. Maybe I'll say a few words and then turn it over to Jack. As everybody has seen, MACOM has had gross margins in the low 60s just really just a few quarters ago. And we really were hitting our stride when we had our core base MACOM telecom business was very strong. And I would say right now that that piece of our business is relatively weak as I talked about in my script and also Jack.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And so we there'll be in time when that returns to strength that will really be the will be what's necessary for us to get back over 60. So I want to make sure that people understand that it's really a base MACOM, low fab related topic. It's not necessarily related to the Wolfspeed acquisition of the ARRA business or other dynamics within our business. It really has to do with the overall utilization, which maybe Jack can expand upon.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

Yes.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

Thanks, Steve. 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 is there are some mix issues.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

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

Thank you. And our next question coming from the line of Carl Ackerman with BNP Paribas. Your line is now open.

Karl Ackerman
Managing Director - Equity Research at BNP Paribas

Yes. Thank you, gentlemen. 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Sure. So we have just to be clear, we have no internal silicon photonic processes running within any of our fabs. We do have indium phosphide and other than that it's generally other gas and GaN on silicon carbide type process. So we are not a producer of silicon photonic materials and wafers. There is a merchant market and foundry services available from others.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

MACOM in let's say going back seven or eight years was spending a significant amount of effort and resources and investment looking at silicon photonics. We had partnered up with a large silicon photonics fab and we were trying to attach a laser to our silicon photonic platform, let's say. At the end of the day that did not work out. We canceled the program. We basically reduced our silicon photonic design capability down to a small team that we retain today primarily to service defense related applications.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So we've effectively exited the commercial silicon photonic space. Now what we've seen since then by the way is many of our customers, many module manufacturers and larger companies have been utilizing other foundries and developing their own silicon photonic solutions. And so we want to complement that effort. We are a merchant supplier of CW lasers. There's a finite number of companies that can do that.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So what we find ourselves doing today is partnering with module manufacturers, that are designing their own silicon photonic devices that need a CW laser. And so this actually opens up a bit of an opportunity for us. The other thing I'll add is those solutions will also need laser drivers and transimpedance amplifiers in some cases. And so it's a very nice setup from our point of view where we're not competing necessarily with our customers and we're able to provide them a unique technology or unique performance that they can't get elsewhere.

Karl Ackerman
Managing Director - Equity Research at BNP Paribas

Yes, very clear. Thanks, Steve. For my follow-up, I wanted to pivot to satellite.

Karl Ackerman
Managing Director - Equity Research at BNP Paribas

I guess within that, there's clearly

Karl Ackerman
Managing Director - Equity Research at BNP Paribas

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 BEED funding initiatives? Thank you.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 on 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Have we seen a direct impact to the POND market per se? I can't say that we could draw that correlation. Our POND 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

Thank you. And our next question coming from the line of Blayne Curtis with Jefferies. Your line is now open.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

Hey, good morning. Thanks for taking my question. I had two. I just want to start on the kind of the gross margin comment. You're obviously at the middle of that range.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

I think when you look at the RF business, you kind of you 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 from RF? I'm just trying to understand, moving pieces, it does sound like the bulk of growth in telecom has been from RF, so that mix is kind of going against you.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

But maybe you can address the kind of the margin improvement within that business?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Sure. Let me try to take a crack at that answer and then Jack can help out here. So in terms of our RF business, you can sort of break it out into multiple pieces. The piece that we acquired from Wolfspeed, which has we've been growing over the past year quite significantly for a variety of reasons, we have that the trend line on that margin is improving and it's actually exceeding our expectations in terms of our ability to improve yields, lower cost, be more efficient running the business. So we see tremendous improvements with the sort of the pro form a P and L of that business.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And we're very happy about that. And the team has done a great job. Our operations team, the support with Wolfspeed, the sales team. So that is working as expected. And by the way, I'll add to that, that part of our strategy is to launch more Mimic products within that portfolio.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

When you actually look at the sort of the Wolfspeed portfolio as it came over, we felt there just weren't enough standard products. So we've been accelerating the launch of standard products within that portfolio and that will also have a benefit to the P and L and the gross margins of that business. When you look at base MACOM, which our base MACOM business generally speaking has been growing. However, we have pockets and gaps in some of our demand, primarily cable infrastructure related in some other wireless platforms as well as some industrial platforms. That demand has been weak, I would say over the past three quarters.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And as a direct result of that, you've seen under utilization within the low fab creep up and that's having a direct effect on the gross margins at the corporate level. Outside of that industrial and defense, great profitability profile, our data center business, great profitability profile. The issue really revolves around filling the low fabs. That is a priority for the business. And Jack, do you want to add to that?

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

I think

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

you did a good job

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

with that one, Steve.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Thanks.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

Thanks. And then Steve, I just want to understand the commentary on optical. Should we assume can you maybe comment on your comment at 1.6 versus 800? I'm just trying to understand if you're just saying overall volumes are going down or is there a difference in your content between the two to indicating the slowdown?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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

Thank you. Our next question coming from the line of Quinn Bolton with Needham and Company. Your line is now open.

Quinn Bolton
Managing Director, Equity Research at Needham & Company

Thanks for taking my question. Cassie, I just wanted

Quinn Bolton
Managing Director, Equity Research at Needham & Company

to come back to the Lowell fab and the under 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 can you just give us a sense how much of the defense business goes through Lowell and why that wouldn't be helping fill that fat?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Yes, I would say that you're correct that the FAB here supports a significant amount of defense business. The only thing that I would highlight is that we do have a large radar program that is, I would say the volumes on that one particular program have come down as we wait for a reload of another long term contract. And so that is having a headwind effect, which we think is a temporary effect. But generally speaking, you're correct. There's a lot of different technologies within the fab that support the broader defense market.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And then I'll just add to that, a lot of the products for industrial and medical like some of our high power devices, high power switches, the demand on those products recently has been down and we expect that to come back at some point in time.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

And Torrey, this is Jack. 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 the LULFAB underutilization.

Quinn Bolton
Managing Director, Equity Research at Needham & Company

Got it. Thanks for that. And then I guess just a follow-up on the I'll call it the linear equalizer opportunity because you've kind of highlighted that the ACC cable opportunity may be smaller now given customer transition. But overall, you seem more excited or more upbeat about linear equalizers. And I'm just kind of wondering how much of that is driven by sort of cable backplane?

Quinn Bolton
Managing Director, Equity Research at Needham & Company

There's certainly been reports in the industry of large customers having signal integrity issues in their copper backplanes and maybe needing to go to active cables to help those signal integrity issues. How do you see that opportunity? I think you've also talked about applications like lower speed PCIe cables that use linear equalizers. I mean, just where is the growth coming from in that larger linear equalizer TAM? If you could just spend a minute there, that'd be very helpful.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Yes, 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And

Stephen Daly
President, CEO & Chairman at MACOM Solutions

you are correct to think that there will 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

Thank you. And our next question coming from the line of Srini Bajuria with Raymond James. Your line is now open.

Srini Pajjuri
Srini Pajjuri
Managing Director at Raymond James Financial

Thank you. Good morning, guys. A couple of questions on the one on the data center first. Steve, as we go from 800 to 1.6 could you speak to what sort of ASP benefit you see? And then we hear a lot about LPO.

Srini Pajjuri
Srini Pajjuri
Managing Director at Raymond James Financial

I guess there is the ASP benefit as we go to 1.6 t, but as we go to I guess from DSP based solution to LPO, is there a benefit as well on top of 1.6 T transition for you?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Yes. So it's very difficult for us to comment on the ASPs of the products given the competitive nature of the business. So I can't really comment specifically there on that. I think it's important to highlight that the benefit of the LPO solution is the customer is able to eliminate a DSP, which is really a major cost savings for them. Additionally, there is certainly significant power savings, so less power and the last sort of benefit is the latency with the on time solution is better.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So that those reasons alone one could argue somebody should pay a premium for an LPO solution. If you can put it into service and make it work in your environment and so from our point of view we're providing an enabling technology and we want to make sure we also always provide our customer good value. And then similar, when you talk about sort of 1.6T, I think all those same arguments apply. Things get harder, The interface is more difficult. How you assemble the unit, whether you use a bare die, a bump die, wire bonds, flip chip, die stacking, all of that matters.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And so we're very good at dealing with a lot of those details. The other thing I would add, which is I think relevant to as things move up in the higher data rates is MACOM's expertise with photodiodes. And we are one of I think we may be the only company in the industry that makes transimpedance amplifiers and photodiodes. And so we're able to eliminate that connection for our customer by mounting one on the other. And so, and then teach our customers how to do it so that they can buy the chips from us.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So a lot of depth and expertise around these solutions, and I think Mac comes in a very good position as the data rates go to higher speeds.

Srini Pajjuri
Srini Pajjuri
Managing Director at Raymond James Financial

Got it. Thanks for that. And then my other question is on the LEO satellite business. Are you able to kind of give us at least a high level qualitatively what the contribution is? And also, how do you think about the opportunity here in terms of the SAM or whatever else you're willing to share with us in terms of how big this market is going to be and how do you see your competitive position?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So it really depends on the engagement and what ultimately the customer is buying for the satellite, whether it's different products from across our portfolio at the chip level or whether they want us to build a module or a multi chip assembly or a full up subsystem. So you could imagine that the prices for these products or the contribution can range from sort of hundreds of dollars to thousands or tens of thousands of dollars depending on exactly what we're building for them. Some of the more exotic products that our linear module systems team is building, these are 5 and 6 figure type products that would go on board a satellite.

Operator

Thank you. Our next question coming from the line of Arash Kumar with Piper Sandler. Your line is now open.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Yes. Hey, guys. Congratulations, first of all, on great results and guidance as usual. And then, I had a multi part question. Let me start with that one, Steve, for you.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

ACC, are you shipping right now? Is it a contributor? When do you think it will come? And then, we get this question a lot. Does is ACC a long term viable solution or is this just a trend in the technology path and it probably doesn't have functionality three, four, five years out?

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

What are some of the other uses that you can think of outside of rack to rack?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So the first part of your question is, are we shipping and we have been shipping and we'll continue to ship. So yes to that question. And then the second piece is, do we believe there's a long term opportunity there. And I can tell you that today we are seeing that and you can even see some of the capabilities spill over into PCIe six and seven. So I think that finding ways to make use of the ASIC power within the switches or within compute and then using linear equalizers or the equivalent of an ACC chip in these connections is very attractive to customers.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So we believe that, this is not a 2024 or 2025 fad. We believe the demand will continue. It's very much use case specific. I mean these are typically short reach applications. And so if you're doing long reach, very long reach, you're going to need a DSP, it will be single mode architecture and it will be a very different solution.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

But clearly there is a cost advantage and there is a simplicity associated with ACC that the industry is trying to sort out what is the exact use case. And as the industry gets more experienced, I guess we'll have the answer to that question. So in the meantime, we will continue to engage customers and try to make them successful.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Fair enough. That's very clear, Steve. Thank you. And then maybe one for Jack. Jack, I'm sort of surprised that your 23% turns number seems like your book to bill is strong.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Everything is good. At this time, I would expect turns to be down and orders to be up. The orders are up, but your turns are also pretty high. Is this an accurate assessment on my part? And then if you could also clarify how much is defense off the defense and industrial segment?

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

Yes. We

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

Sure. No problem.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

So we've been pleased with our book to bill ratio that came in at 1.1 again this quarter. So we've been building backlog. And from a turns perspective, yes, there's been a bit of a bump up. That's just the nature of where we've been, but it's been relatively consistent in that 20% range for the past number of quarters. So I don't think there's anything really out of the ordinary from a turns perspective to highlight.

John Kober
John Kober
CFO & Senior VP at MACOM Solutions

We are pleased with the backlog piece that we've been going through and building backlog. And yes, as evidenced by our growing defense revenues, that's been an area where we have continued to build backlog. We generally don't break out the bookings by each of the three different end markets, but it will vary from period to period. But as evidenced by the growth in defense and some of the other areas, you could see that's where it's been focused over the past number of quarters.

Operator

Thank you. And our next question coming from the line of Michael Manni with Bank of America Securities. Your line is now open.

Michael Mani
Michael Mani
Equity Research Associate at Bank of America

Hi, this is Michael Mani on for Vivek Arya. Just to double click on the backlog point, are there any areas of the backlog where you kind of see an incremental weakness or strength versus last quarter? It sounds like there is any weakness that might be coming from the telecom front, but was there anything on the industrial side that changed your prospects as well? And do these changes at all impact your thinking for how you get back to or how you get to that $250,000,000 per quarter run rate? Doesn't sound like it does, but just what are the moving parts there?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Sure. Thank you, Michael for the question. 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 one or higher. Higher.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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, multi year contracts.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

I wouldn't read anything into the turns business per se on any particular quarter because it just has to do with the execution in 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So 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 the overall financial performance of the business. So very strong, very healthy business and some great growth in front of us.

Michael Mani
Michael Mani
Equity Research Associate at Bank of America

Got it. Thank you. And then for my follow-up, just on these initiatives at the Lowell fab and the capacity expansion in North Carolina fab as well. So for Lowell, I mean, what opportunities do you think these modernization efforts will help you pursue? And then for both initiatives, could you give us a sense of timeline, when do you expect both initiatives to kind of conclude and how should we think about the impacts of P and L, especially from a gross margin impact?

Michael Mani
Michael Mani
Equity Research Associate at Bank of America

Like are there any kind of headwinds to gross margin, especially as you're ramping up capacity in North Carolina or does that become a tailwind eventually? Or is it fairly measurable? Thank you.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Sure. Thank you for the question. And I'll try to briefly run through some of the key elements regarding our investment plan and overall Chip's commentary. And just to remind everybody, we have today significant R and D funding under the Chip's program primarily for advanced scan projects. These projects are supported by the DoD, and most of them are sort of in the category of high national security and we probably have about $25,000,000 to $30,000,000 of generally active programs to do some of this advanced development.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

The announcement we made in January on January 14 came through really through the Commerce Department and that was to address different elements, modernization, supply chain resiliency, some capacity expansion and general technology development. And our overall application was very highly regarded by the Commerce Department. So the MACOM is the poster child of who should get this funding in our minds. So that's I just want to point out that set number one. Number two, the program is a long term program.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So you would not expect to see some of the benefits of this program for at least five years. At the Lowell site, we plan on modernizing and improving some of the infrastructure within the fab, replacing some antiquated equipment. We're not building any new buildings. We're just going to give certain areas that have single point failure or low, let's say low end equipment we want to upgrade. And so that will have an immediate benefit to our gross margins because our end quality will improve and our yields will improve and our throughput will be increased.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

So we'll actually be picking up capacity benefit there as well. In addition to that in Lowell, part of our application was to install a six inch, a small six inch GaN on silicon carbide line to support advanced GaN technology. So we do not plan on shutting down our four inches line. We will continue to run that line. We do not plan on moving our products off of our four inches line.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

We're just going to modernize it and keep running that as a very profitable part of our business. And then we'll augment that here in Lowell with a small, very focused advanced GaN capability. In North Carolina, it's a little bit different. That fab as we do the calculus, we see that in the next year or two, we're going to bump up against capacity issues and we want to expand capacity. And so that application was primarily installing a six inches line right next to the four inches line in the existing building.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

And over time we would fill the six inches line with high volume programs. And so in addition to that we were going to buy an MOCVD reactor so that we can work on advanced epi for GaN. So that in a nutshell is the program. It's all subject to approval and as we highlighted, there's a lot of dynamics in Washington. So there's always the risk factor that the whole thing gets canceled.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

But if it does, we will adjust our strategy accordingly. But I do want to highlight that in the near term, no impact to the P and L. It's a long term investment program. The benefits will be, MACOM will be a stronger supplier of these technologies in the market.

Operator

Thank you. And our next question coming from the line of Peter Pan with JPMorgan Chase. Your line is now open.

Peter Peng
Equity Research Analyst at JP Morgan Chase & Co

Hey, good morning guys and thanks for taking my question. Just based on some commentary about your record backlog and some expectations of pretty sizable ramp in your 1.6% 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?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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 so 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.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

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.

Peter Peng
Equity Research Analyst at JP Morgan Chase & Co

Got it. And then maybe if you can level set me on your expectations for at least for fiscal twenty twenty five, what is the percentage that is levered to the higher speed applications, so 800 gig and 1.6 key applications and then the lower speeds and how you expect those to kind of play out in the year?

Stephen Daly
President, CEO & Chairman at MACOM Solutions

That's an interesting question. Our base business has been actually improving. So a lot of our 100 gs CWDM4 platforms for LR4 have which are all NRZ platforms have been we've been seeing some strength there. Our 100 gig SR4 AOCs also doing quite well and we even have a bump up in some of our 100 gs DR1 platforms where we actually are manufacturing a DSP. So our base data center business is actually improving and then sort of the next stop would be 400 gig.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

We also see strength there both FR4 and DR4. So I would say generally speaking that business is improving. So all of that is considered the lower data rate base business. And now you layer on top of that all the other elements that we talked about you know give us gives us confidence that fiscal year 2025 will be a good year.

Operator

Thank you. And I see there are no further questions in the queue. I will now turn the call back over to Mr. Steve Daley for any closing remarks.

Stephen Daly
President, CEO & Chairman at MACOM Solutions

Thank you. 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

Ladies and gentlemen, that does not conference call today. Thank you for your participation. You may now disconnect.

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MACOM Technology Solutions Q1 2025
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