MACOM Technology Solutions Holdings, Inc 2026 Q3 Earnings Call

Thank you, Livia. Good morning and welcome to our call to discuss MACOM's financial results for the third fiscal quarter of 2026. I would like to remind everyone that our discussion today will contain forward-looking statements, which are subject to certain risks and uncertainties as defined in the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOM's filings with the SEC. Management statements during this call will also include a discussion of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related Form 8-K, which was filed with the SEC today.

With that, I'll turn over the call to Steve Daly, President and CEO of MACOM.

Thank you. Good morning. I will begin today's call with a general company update. After that, Jack Cober, our Chief Financial Officer, will review our Q3 results for FY 2026. When Jack is finished, I will provide revenue and earnings guidance for the fourth quarter of FY 2026. We will be happy to take some questions. Revenue for the third quarter of fiscal 2026 was $342.2 million, and adjusted EPS was $1.40 per diluted share. Demand for our products is strong across our three end markets, and our backlog continues to build. Our sequential financial performance improved across most key metrics in Q3, including gross and operating margins. Our Q3 book-to-bill ratio was a record 1.6 to one, and orders booked and shipped within the quarter were 11% of total revenue. All three end markets had exceptional bookings, with notable outperformance in the data center.

Our record backlog reflects market strength as well as our progress that we are making to expand our product portfolio and better address our customer needs. We are pleased with the customer order trends. Our strategy of strengthening our core technologies and expanding our product portfolio around three central themes, highest power, highest frequency, and highest data rate, is proving to be effective. We believe the breadth in our technology and product portfolio, coupled with our unique manufacturing capabilities, enable a strong and durable business model. MACOM is well-positioned in three large markets, namely data center, Industrial and Defense, and telecom. In total, these markets contain thousands of potential customers with a combined SAM that we now estimate to be in the range of $15 billion in 2027.

To address the large SAM opportunity, we have been and will continue to invest in R&D and expand our engineering and manufacturing teams. We continue to align and expand our engagements with customers that are industry leaders. Two years ago, we had approximately eight customers with $10 million in revenue. Today, we have over 20 customers above $10 million and a few in the range of $50 million to $100 million. While we are growing revenue by over 30% per year, our year-to-date top 10 end customers still represent less than 40% of our total revenue. Our customer base continues to grow and remain diversified. Now turning to recent market trends. Q3 revenue performance by end market was as expected, with all end markets growing sequentially. Data center revenue was $137.6 million, Industrial and Defense was $133.4 million, and telecom was $71.3 million.

Data center increased approximately 40% sequentially, I&D increased 11% sequentially, and telecom increased 2% sequentially. Both data center and I&D revenues are at record levels. Next, I'll take a moment to review each of our three core markets in more detail, starting with the data center. Our data center business is growing due to increased demand for high-speed connectivity using our 800G and 1.6T PAM4 products. As a reminder, our portfolio is highly diversified, supporting NRZ, PAM4, and coherent modulations across EML, silicon photonics, and VCSEL-based architectures. Our connectivity solutions include IC and photonic semiconductors, with the photonic products being produced in our internal fabs. We see multiple trends in the industry, including the proliferation of optical links as hyperscalers are moving from passive copper to fiber connectivity in scale-up applications. This trend represents a large SAM expansion opportunity for MACOM, as we currently do not promote passive copper solutions.

Another contributor to our SAM expansion is the need for higher density interconnects that support both fast and slow data rates. In many cases, our newest products are designed for highly integrated architectures like NPO and XPO. These applications typically require smaller chips, more lanes of data, and lower power consumption compared to pluggable modules. These architectures often include LPO and LRO using single mode or multi-mode modulation. We practice the be first, be fast approach. We also strive to provide options including lower power, smaller chip size, and multiple channels using flip-chip, bump chip, or through-silicon via technologies, all to ensure our customers meet their size, manufacturability, and performance goals. Additionally, we are constantly innovating and improving our products to achieve better performance. As an example, today we are sampling our latest generation of 200G and 400G per lane TIAs and driver products for various advanced interconnect applications.

Interest in our indium phosphide products is growing as optical connectivity expands inside the data center. Our near-term and long-term growth strategy is to gain market share with new lasers and higher speed photodetector products, and to install necessary manufacturing capacity to meet demand. Our team is having strong results with our 200G photodetectors, which are ramping in volume production and becoming a meaningful contributor to our overall data center growth. In addition, our 400G photodetectors are receiving very positive customer feedback. Our 75 mW CW laser qualification efforts continue. Our laser team is actively working to lock down a production process, and while we cannot declare success yet, we are gaining confidence in our ability to meet our customers' reliability and performance requirements. Customers have been providing us with positive feedback on our product's performance, and there is intense interest and customer pull to get us into production.

We are developing plans to support a potential start to production in late calendar 2027. This includes scoping modest CapEx investments and fab space requirements to support a rapid, high volume ramp for a few strategic customers. I will provide an update on the CW laser activities in the coming quarters. On a related note, we are seeing increased demand from our 25G DFB laser products, which serve the 100G QSFP, CWDM-4, and LR4 applications. These products launched a few years ago and in some cases were previously qualified by customers. Customers are coming to us with urgency due to the general supply shortage of indium phosphide DFB lasers. We believe our indium phosphide photonics product lines represent a large growth opportunity for MACOM, and we expect to gain meaningful market share over the next three years.

We continue to promote linear equalizer products that help optimize copper interconnects at 800G, 1.6T, and beyond. We are working closely with customers to address their program-specific requirements and various use cases. This includes copper cables and onboard equalizers. We are also seeing growing interest in coherent light solutions as coherent modulation can enable higher bandwidth and better link budgets in short reach data center applications with the potential to optimize power efficiency as data rates scale beyond 1.6T. In summary, we see many new large opportunities in the data center. High speed connectivity is growing in complexity, and in the future, systems will operate at data rates above 1.6T. Our strategy is to collaborate with the leaders in the industry and support their connectivity needs, whether it's scale up, scale out, or scale across.

Turning to our I&D business, we see many growth opportunities across the industrial and defense markets, primarily in the defense segment. Our defense customer base is large and very broad, and we typically support radar systems, missile and missile defense systems, drone and drone defense systems, communication systems, and wideband electronic warfare systems. Last year, our defense business grew by 19%, and this year we expect it to grow by approximately 25%. The U.S. defense electronics market is projected to grow significantly over the next few years, and we are in a great position to benefit. In addition, we believe European countries will spend more on existing and new defense systems. We have a growing team of application and design engineers that can support our defense customers and offer the full scope of MACOM's capabilities.

Our primary focus is providing unique solutions that improve overall system performance to give our customers an advantage. As an example of the type of products we develop, at this year's International Microwave Symposium, also known as IMS, in June, we showcased an X-band front-end module which utilized a combination of MACOM's GaN ICs in a highly integrated multi-chip module assembly. The X-band frequency is ideal for precise target detection and discrimination and is often used for defense radar applications. Our product can deliver 16 watts of transmit power and over 40% power-added efficiency. The receive side features industry-leading recovery time and exceptional linearity and noise figure. This product's small footprint can support compact, high volume radar systems.

Our R&D team works to push the limits of our semiconductor technology. In recognition of our efforts this past quarter, we received incremental funding from the Air Force Research Labs, or AFRL, to support mmWave GaN on silicon carbide production maturation. This effort is directly in line with our high-frequency and high-power strategy. Further aligns MACOM with the needs of the defense industry. Over the past few quarters, we have also seen an increase in demand from our industrial market segments, including test and measurement, medical, automotive, and general multi-market products. We believe our test and measurement customers are seeing increased demand from the market, primarily driven by expanding microwave SATCOM and AI-related engineering and production facilitization. Notably, our automotive business, which is one of our smaller sub-markets, is expected to double its revenue this year, primarily driven by market penetration and increased design wins.