MACOM Technology Solutions Holdings, Inc. (MTSI) Earnings Call Transcript & Summary

Welcome to MACOM's Third Fiscal Quarter 2026 Conference Call. This call is being recorded today, Thursday, August 6, 2026. [Operator Instructions] I will now turn the call to Ms. Steve Ferranti, MACOM's Senior Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Olivia. 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's 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, and good morning. I will begin today's call with a general company update. After that, Jack Kober, our Chief Financial Officer, will review our Q3 results for fiscal year 2026. When Jack is finished, I will provide revenue and earnings guidance for the fourth quarter of FY '26, and then 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 1.6:1, and orders booked and shipped within the quarter were 11% of total revenue. All three end markets had exceptional bookings with notable out-performance 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. 2 years ago, we had approximately 8 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 multimode 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-milliwatt 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 products' 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, CWDM4 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 3 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 on-board 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 a wide 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 multichip 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 in 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. And in recognition of our efforts this past quarter, we received incremental funding from the Air Force Research Labs, or AFRL, to support millimeter wave GaN-on-silicon carbide production maturation. This effort is directly in line with our high-frequency and high-power strategy and 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 submarkets, is expected to double its revenue this year, primarily driven by market penetration and increased design wins. Now moving to Telecom. Within the Telecom end market, satellite-based broadband access and direct-to-device or D2D opportunities remain robust with numerous LEO networks in the planning or production stages. These systems support consumer, enterprise, government and defense requirements. Today, we are supporting a variety of these LEO networks, and we expect our revenue in this market segment to continue to grow. I'll note that our commercial RF power team, which is traditionally focused on 5G base station opportunities, is now targeting the LEO market given the significant similarities and requirements. Our 5G technology is directly applicable to LEO D2D systems. LEO networks typically use microwave or millimeter wave frequencies and free space optics or FSO communications for satellite to satellite or satellite-to-ground communications. Notably, on the business development side, this quarter, our team was selected to support a next-generation satellite optical communication platform. This new award establishes MACOM as a strategic partner and will contribute to our growing LEO business. Why did this customer select MACOM? Because we are capable of solving their technical and production problems and because all the critical ICs for the system could be sourced from MACOM. This win exemplifies how we continue to penetrate the LEO market with our unique technology. Ground stations are a key part of LEO networks. In many cases, ground-to-satellite links prefer linearization of SSPAs or TWTs to boost the linear power efficiency of the link. At this year's IMS exhibition, we demonstrated how to linearize a high-power V-Band TWT. The demonstration showcased how to improve linear power and efficiency for microwave transmitters used in satellite communications, defense and other ground and space-based applications. At IMS, MACOM also demonstrated a complete W-band transmit and receive signal chain. LEO satellites are increasingly turning to W-band frequencies, which is approximately 75 gigahertz as this spectrum enables multi-gigabit communication links, high-resolution imaging, more precise sensing and improved spectrum reuse. A few more highlights to share. First, in Q3, we began installing our new G10 epitaxial reactor at MACOM's European Semiconductor Center, or MESC, to support future growth and technology development. MESC being located in France, is well positioned to support the European continent's commercial and defense markets. Second, recently, our engineering teams demonstrated how AI can be used to support the chip design process. We are aggressively developing AI capabilities to accelerate our time to market and to make MACOM a more formidable competitor. Third, last week, over 50 summer interns presented the results of their summer projects. Our talented interns were recruited from top universities across the U.S. and Europe. Special thanks to our HR team and everyone who has been involved to support another successful internship session. We view this program as a core activity directly tied to growing our talented workforce. And last, in mid-July, the management team published its 2026 to 2030 Growth Strategy Plan to our Board of Directors. Like prior years, we refined and updated our plans based on lessons learned, market dynamics and evolving business priorities and opportunities. In summary, we continue to build a best-in-class and diversified company. Jack will now provide a more detailed review of our financial results.

Thank you, Steve, and good morning. MACOM again achieved multiple new quarterly records associated with our financial performance during our fiscal third quarter. Benefits from ongoing customer demand and operational improvements across the organization have again increased revenue, profitability and cash flow. Fiscal Q3 revenue was $342.2 million, up 18.4% sequentially and up 35.8% year-over-year, driven by growth across all 3 of our end markets with Data Center leading, followed by I&D and Telecom. The strong bookings across all our end markets resulted in a book-to-bill of 1.6:1. As a result, we continue to have strong visibility across the business and Q3 marks our highest quarterly bookings ever. Adjusted gross profit for fiscal Q3 was $204.2 million or 59.7% of revenue. This represents a gross margin increase of 120 basis points over the prior quarter. We have and continue to expand our manufacturing capacity to meet growing customer demand. We expect to add new capacity across our operations during the remainder of fiscal 2026 and into fiscal 2027. These expansion actions will help ensure that we meet our operational and financial growth plans. The product demand increases across the business have resulted in enhanced utilization of our fabs, helping to drive higher gross margins. As we move forward, we expect ongoing quarterly sequential gross margin improvements through the remainder of fiscal 2026 and fiscal 2027. Total adjusted operating expense for our third quarter was $96.5 million, consisting of research and development expenses of $65.3 million and selling, general and administrative expenses of $31.2 million. As anticipated, the sequential increase in adjusted operating expense compared to Q2 was primarily driven by ongoing R&D investments and employee-related costs. As our business expands, we expect to continue to leverage our existing OpEx functions. We will efficiently manage our SG&A and prioritize future R&D investments to support our growth objectives. Adjusted depreciation expense for fiscal Q3 2026 remained relatively stable at $9 million, in line with the prior quarter. Adjusted operating income in fiscal Q3 was another record coming in at $107.7 million, up 33.9% sequentially from $80.5 million in fiscal Q2 2026 and up 69.6% year-on-year. This increase in adjusted operating income further reflects the leverage in our operating model as the business continues to scale. I would like to note that our Q3 fiscal year 2026 adjusted operating margin was 31.5% and over the past year has increased from 25.2% in Q3 fiscal year 2025. We expect our adjusted operating margin to be approximately 37% for the fourth fiscal quarter. For fiscal Q3, we had adjusted net interest income of $5.5 million, a decrease of approximately $1 million sequentially from $6.5 million in Q2. This lower interest income was partially due to the planned repayment of our 2026 convertible notes in March 2026 as well as our $61 million investment in [ IQE ] during the June quarter. Our adjusted income tax rate in fiscal Q3 was 3% and resulted in an expense of approximately $3.4 million. We expect our adjusted income tax rate to remain at 3% for our fiscal Q4 2026. I would like to highlight that due to the increasing profitability, we currently estimate our adjusted income tax rate will increase in fiscal 2027. Depending on the jurisdictional mix of our income, we anticipate our adjusted tax rate will begin to rise from our current 3% to mid-single digits as we progress through fiscal year 2027. And to close out our fiscal Q3 2026 income statement discussion, I am pleased to note our adjusted net income increased 30.2% to $109.8 million compared to $84.3 million in fiscal Q2 2026. Adjusted earnings per fully diluted share was $1.40, [ utilizing ] a share count of 78.4 million shares compared to $1.09 of adjusted earnings per share in fiscal Q2 2026. We strive to optimize the business' performance, which has contributed to sequential increases in our adjusted operating income and EPS over the past 12 quarters. Now on to operational balance sheet and cash flow items. Our Q3 accounts receivable balance was $179.1 million, up over $19.5 million compared to our fiscal Q2 2026 balance. Our days sales outstanding averaged 48 days compared to the previous quarter at 50 days. Inventories were $281.5 million at quarter end, up sequentially from $252.2 million to support increasing demand across the business. Inventory turns increased to 2x, up 0.1x from the preceding quarter. Fiscal Q3 cash flow from operations was approximately $80 million, up $1.3 million sequentially. We expect that our Q4 cash flow from operations will be in excess of $100 million. Capital expenditures totaled $20.8 million for fiscal Q3. We estimate fiscal year 2026 CapEx to be in the range of $60 million to $65 million. MACOM has been disciplined with its CapEx in recent years, investing $22.4 million in fiscal year 2024 and $42.6 million in fiscal year 2025. A majority of this CapEx has been focused on expanding capacity at our production facilities and enhancing our R&D capabilities in support of customer demand. I would like to highlight that our capital plans are focused on expanding existing fab manufacturing capacity and capabilities. Typically, our new capacity CapEx is installed and online in less than 1 year from the start of each project. We believe this approach will support all of our growth objectives, minimize financial risk while maximizing profitability and shareholder value. Next, moving on to other balance sheet items. Cash, cash equivalents and short-term investments as of the end of the third fiscal quarter were $663 million. We view our cash balance as a strategic asset that can be used to help fund ongoing investments to support our growing business. An example of this can be seen in the $61 million investment we made in [ IQE ] during the third quarter. We believe this investment will strengthen our supply chain resilience and competitive position. I would also like to note that this investment resulted in a $41 million noncash gain associated with the GAAP accounting fair value remeasurement of the investments from the investment date through the end of our fiscal quarter on July 3, 2026. This noncash gain was excluded from our non-GAAP results. We are in a net cash position of approximately $322.5 million as of July 3, 2026, when comparing our cash and short-term investments to the book value of our remaining $340.5 million of convertible notes, which mature in December 2029. As we move into our fiscal fourth quarter of 2026 and into fiscal 2027, we remain confident in our ability to keep building upon our strong and diversified foundation to deliver continued financial improvements for MACOM. We acknowledge and appreciate the ongoing hard work and dedication of the MACOM team who make these results possible. I'll now turn the discussion back over to Steve.

Thank you, Jack. MACOM expects revenue in fiscal Q4 ending October 2, 2026, to be in the range of $415 million to $425 million. Adjusted gross margin is expected to be in the range of 60% to 61%, and adjusted earnings per share is expected to be between $1.97 and $2.03 based on 78.9 million fully diluted shares. We expect approximately 35% sequential growth in Data Center, approximately 20% sequential growth in Industrial and Defense and low single-digit sequential growth in Telecom. I would now like to ask the operator to take any questions.

[Operator Instructions] Our first question coming from the line of Tom O'Malley with Barclays.

Congrats on the really good results. I wanted to ask specifically within Data Center, what's driving strength. You mentioned across the PAM4 portfolio. Is it TIAs and drivers? Is it the PDs getting better in the near term? And what's driving the increased book-to-bill in that portfolio? Just want to get a little flavor of where the strength is coming from specifically in the quarter and the guide?

Sure. Thanks, Tom, for the question. And just to remind everybody, our Data Center business has been growing quite rapidly over the past 3 years. In 2024, we grew by 35% in '25, 48%. And now we are -- it looks like we're trending towards about 74% this year. So there's been a lot of moving parts, a lot of new products coming into production. If you pull back and look at our growth from, let's say, fiscal '25 to fiscal '26, the primary driver is 200-gig PAM4 products, primarily in pluggable optical modules. We have seen tremendous growth from other parts of our portfolio for the Data Center in no particular order. Certainly, our ZR, ZR-light business is growing quite rapidly over 100% year-over-year. Our other data rates, sort of slower data rates, 100-gig per lane, not only multimode, but single mode, all very strong high double-digit growth. And some of our legacy products, our 25-gig per lane products that support 100-gig FR and LR4 type platforms also exhibiting very strong growth. So what you're seeing is tremendous growth across all of the different data rates and really hitting all of our different product lines. In terms of the book-to-bill within the business, if you're asking specifically around the Data Center, I would say it's primarily driven by 1.6 and 800-gig platforms. That is the main driver.

And then good results -- bring questions on future good results. Traditionally, you've given a little bit of a sneak peek as the fiscal year closes. Just curious if you have any color for where you see the business kind of trending next year? It's been 2 really good years in a row of above 30% growth. I know you're very much execute as time goes along, but any peek into the growth trajectory into fiscal year '27?

Right. Thank you, Tom. So a few things there. You're right, it's a little early to talk about our fiscal '27. We're still very much focused on closing out Q4. With that said, if you were just to take the midpoint of our Q4 guidance and annualize that into our fiscal '27, you're going to see numbers that are in the mid-20s, 27%, 28% as a company. If you drill down and look at our highest growth market, which is our Data Center business, that number then trends to 50% year-over-year growth. So for us, sort of from where we stand today, that's very much a base case. When we look at our business, our book-to-bill, as you highlighted, has been quite strong this year. Q1, it was 1.3. Q2, it was 1.5. And this past quarter, it was 1.6. So when you look at those numbers, it certainly suggests that we are starting our fiscal '27 or should start our fiscal '27 in a very strong position for growth.

Our next question in the queue coming from the line of Blayne Curtis with Jefferies.

Also congratulate you on the results. I wanted to ask on Telecom. I mean, I feel bad asking because everything seems to be firing on all cylinders. Just kind of curious, I mean, you highlighted the LEO opportunity I think I'm just kind of curious when you think that Telecom business may accelerate into next year and how to think about that LEO driver layering in?

Yes, you're right. The Telecom segment, which is today our smallest segment is forecasted to grow by sort of double digits this year. We would expect similar performance or better performance next year. We do have, as we've talked about in the past, two or three major LEO programs that will start production at the end of this calendar year and at the beginning of next. I talked about in my script, picking up a really nice optical product position at a large satellite OEM that's a leader in the industry, and we feel like that's going to drive growth for the next 2 to 3 years. And we also see several other programs coming online. There's probably 4 or 5 major customers within the LEO market that we're servicing. In some cases, it's direct to sell, which is the lower frequency, high-power products. In some cases, it's the millimeter wave backhaul links. We're getting more and more involved in the optics, including free space optics. And I'll remind everybody about 1.5 years ago at a SATCOM show, we demonstrated a very high-power optical amplifier. And we are getting a lot of interest from OEMs that want to build high-power optical ground stations. So we're very excited to see that product generate some revenue over the next 1 to 2 years. And then the last thing I'll say is we continue to offer these customers the full suite of our manufacturing capability. So they look to us not only as a chip supplier, but also as a module and a subsystem supplier.

Excellent. And then maybe one for Jack. Just how do you think about -- you said gross margins should increase sequentially all next year. How do you think about the incremental gross margins in the business?

Yes. Thanks for that, Blayne. We've been pleased with the gross margin improvement. I think we've been having some conversations throughout this fiscal year with regard to those sequential improvements. Obviously, looking back over the past quarter, 120 basis point improvement in gross margins is something we've been pleased with. That's been supported through some of the increases in volumes that we've seen, but also a lot of hard work in terms of trying to improve yields and other efficiencies along the way. So as we look out into the future, if you look at the midpoint of our guide for the fourth quarter, that has us increasing about 130 basis points, once again, supported through the volume increases on the revenue line. As we look further out, it's hard to tell, but we would expect to see some of those sequential improvements on a quarterly basis, similar to what we had seen during 2026. But we try to be a little bit more measured as our gross profit gets a little bit higher, gross margins get a little bit higher, it's harder to get things out at such a larger rate. So we think in the 25 basis points to 50 basis points per quarter range going forward.

Our next question coming from the line of Vivek Karia with Bank of America Securities.

Steve, there was recently something in the news about the proposed ban on the Chinese module makers for pluggable transceivers. We don't know whether there is anything more to it, but assuming there are those kind of restrictions, how does that impact MACOM in either direction when there are restrictions on some of your potential customers, but then also opens up more opportunities for other U.S.-based customers?

That's right. And thank you for the question. And we're also reading the same news you're reading. I'll sort of make a few points here. First, our Data Center business and our growth is really driven by U.S. hyperscalers as well as the enterprise and compute OEMs here in the U.S. These end users are typically directly involved in supply chain decisions in selecting chips for their hardware. And as you know, MACOM is selected due to the performance of our products, the uniqueness, our ability to scale, the quality cost, things like that. Our thinking is that if the hyperscalers have to shift the market share from their supply chain between different transceiver companies due to new regulations, then we would expect to follow that business to those other manufacturers. And so from our point of view, I think we would see a customer mix shift. And I'll just highlight, we have relations with all of the transceiver companies in the industry, including companies that -- in some of our business areas, we actually compete with. So where the transceivers or the NPO or XPO engines are designed and built is a little bit out of our control. As you know, it could be China, Thailand, Taiwan, Vietnam or here in the U.S. But I think it's important to highlight that the hyperscalers recognize MACOM as a strategic supplier. We have compelling products and manufacturing capability. So we'll continue to monitor this. But at this point, we're keeping our head down and it's business as usual. So that's sort of the first point on that. And then the second, I'll just highlight, which is pulling back a little bit and looking at our overall exposure to China. We have no manufacturing today in China. We have about 85 employees. They are primarily focused in the application sales and some logistics areas. And the team really is focused in two areas. The first is servicing a few Scandinavian telecom companies that have very large design centers in China that support a lot of the 5G base station infrastructure build-outs globally. And so our teams support those locations with application support. It's primarily our RF products and high-power products. And then the second, of course, is we -- our team focuses on the optical industry. And to your point, there's numerous Chinese transceiver companies as well as U.S. and European transceiver companies in China. And so that team is supporting all of those accounts. So the last point I'll make just regarding our overall China exposure is the vast majority of what we sell into China for products is exported out of China in systems, which are typically headed to the U.S. It's the vast majority of our business.

Got it. The second question is you gave us a number for your served addressable market or SAM for '27. And I'm curious, what is that SAM equivalent number for 2026? And do you expect to gain share in '27?

Right. It's a great question. And really, our numbers for 2027 and really, we have numbers out through 2030 came from the work we did over the past 4 months developing and updating our strategic plan. We did -- I would say we did a bit of a reset on some of our market-based numbers. We brought up our Industrial and Defense numbers for obvious reasons. There's a lot of spending going on right now. We talked about that in the script. And we also brought up our Data Center business. So we sort of have sort of a $6 billion number pegged to the Industrial and Defense and the $6 billion in Data Center and then the balance of about $3 billion for Telecom. I would say that's up about 20% to 30% from '26 to '27. We've seen a lot of new and exciting platforms coming our way. We are absolutely expanding our portfolio to address the market. So our SAM by definition is growing. And I'll just give a few examples. And really, these examples are what I would consider the accelerators for the next 3 to 5 years, which is, number one, more 200-gig per lane products for PAM4. We're adding capacity for our Indium Phosphide products. We talked about that. There are new programs we're involved in that are both scale up and scale-out and to some degree, scale-across. And we think NPO is going to start to grow significantly starting in 2028. We've talked in the past about coherent light. And then there's other interesting applications, including PCIe 6 and also some of the equalizers that we talked about. So those are all very much specific to the Data Center. On the defense side, it's our exposure to the Defense systems, primarily radar-based. So you see big programs like Golden Dome. You see lots of refreshing and rebuilding of the U.S. Armaments and Missile Systems. There's been a lot of discussion about stockpiles coming down. And then the last sort of really game changer is the work that we're doing with drones and anti-drone technology. So those sort of in aggregate are reasons why we decided to bump up our SAM.

Our next question in queue coming from the line of Quinn Bolton with Needham & Company.

Steve, you mentioned NPO several times on the call, and I think we're hearing this from others in the industry. And so maybe can you spend a minute talking about MACOM's position in NPO, what you're supplying? Is it TIA driver arrays? Are you looking at other types of solutions? Would you ultimately provide a full optical engine for NPO, but maybe just a little bit more color on your efforts there?

Sure. Thanks for the question. So I can tell you, we are not going to be building engines and supplying engines to the market. So we -- in the case of the Data Center, we are a chip supplier, not a multichip assembly or module supplier. We've seen an evolution go from sort of pluggable transceivers with DSPs to LPO platforms, which is removing the DSP. That is now morphing into, as you sort of pointed out, an engine or a smaller package-less NPO platform. And those architectures still need, as you pointed-out, drivers and TIAs. And what's different here is the density that's required to bring all of this interconnect to bear. So as I said in my script, customers want smaller parts. They want more channels. They want lower power. They want these products in different form factors. Some customers want to use wire bonds, some want to use bumped devices, some use flip chip devices. And so we're engaged with pretty much well, I won't say all, but probably most of the OEMs that are developing NPO solutions. And what we're finding is these solutions are becoming very specific to the architectures that the hyperscalers are driving. And so those slowdowns are coming directly to us. So we have numerous over, I would say, somewhere between 10 and 20 active NPO development projects that are servicing various customers and use cases. And so I think that's a general trend. A lot of this revenue will kick in, in our estimation sometime in '28. Some of these programs will never make it to production, some will. We'll have to wait and see.

And then just looking at the acceleration in the Data Center business kind of coming out of fiscal '26, I guess, any thoughts about -- you've got 3 years of accelerating Data Center growth. Certainly, it looks like fiscal '27 is going to be a good year. But what would it take to see a further acceleration in Data Center revenue in '27? Is it just continuation of trends, market share gains? Kind of what are the puts and takes looking into next year?

Right. And I think we will answer that question probably more completely next quarter at the end of our fiscal year and the beginning of '27. We'll probably follow the same methodology we did this year where we'll talk about sort of a base case level of business. And then as we move into the year, as we bring on capacity, as we see these design wins go to production, we will modulate up or down our Data Center business. I suspect it will be going up. There's more good things happening than, let's say, negative things happening. But we'll really just have to wait and see. I'll also highlight that something that's very important to our Data Center business and overall MACOM growth, which is the amount of R&D spending we're doing as a company. And if you go back just 3 years in 2023, we were spending as a company about $132 million in R&D. This year, we're going to spend almost $250 million. So we've doubled the amount of R&D spending in about 3 years. And as we look ahead and as we try to grow into this $15 billion SAM, we will continue to build-out and staff our design centers with the best chip designers we can. And we've been very fortunate to be able to really bulk up on our chip design capability, which is really going to pay dividends over the next 2 to 3 years. So we'll follow the market dynamics. I'm not sure I'm really completely answering your question, but we do have a lot of projects in the works. We talked a lot about the PDs. We are thinking, as I mentioned, that the CW laser activity is quite positive right now. We are well into the back half of a high-temperature operating light test and HTOL test, which typically is 5,000 hours, and the data looks exceptional. So we are building our confidence that we have a winner.

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

Yes. Let me echo congratulations on the very strong results. Steve, in your prepared remarks, you sounded much more positive on some of the indium phosphide projects that you have, including new lasers and high-speed PDs. Can you maybe rank order which ones you're more excited about over the next couple of years?

Well, that's a great question. And if you're asking specifically about the PDs or the lasers, the PDs right now are ramping, and we're seeing tremendous demand, and we expect that demand to continue. And we've been adding incremental capacity to support that demand. That has been a great door opener to other strategic relationships with major accounts. So we're very pleased about that. If we're able to bring a CW laser into production in 2028, that's a watershed moment. That will be a big number that will really drive tremendous growth. You can put the laser market in the billions of dollars of revenue. And so if we can get a fraction of that to start and then grow into it over time, I think we'll be quite happy.

Yes, that's great color. And you also mentioned that you're now basically installed with some capacity in Europe to support that market. I'm just curious, when do you expect to -- for especially EU Defense revenue to become more material revenue?

Probably sometime in '28, that Defense number will start to grow. We are, as an example, this year, finishing up the conversion of the production line from 3-inch to 6-inch. So we've completed the transition of one process set, and we have two more to go, which should be done in the next, I would say, 4 to 6 months. A lot of the defense contractors that we engage with today are waiting for us to do that. And so the reason why that's important to those customers is our quality goes up, our cost goes down and our capacity doubles. So we're very excited to sort of bring that to bear to the European market. Most of the business that we do with the European defense contractors are custom design related, whether we're doing those designs or whether it's a foundry relationship. And I think over the next month or 2, I'm told we're going to get one of the largest orders in MESC's history for a U.K. defense company that's working on airborne defense systems. So very excited about the prospects of that business and that technology. And just to remind everybody, our strategy is the highest power, highest frequency and highest data rate and the MESC technologies, which, in some cases, are sub-100-nanometer gate links checks the box of the highest frequency. So we will leverage that into the U.S. market, the European market and the satellite market. And those markets are growing and need that technology. So we do expect good things in the future. And just one last point on that. When we acquired that site, we acquired that site from the French government. We paid about EUR 38 million. The land was worth about EUR 25 million, and they had about $100 million of capital equipment installed in their fab, and they had a broken business. And so it was really, from our point of view, a fixer-upper that we've been working on over the next -- over the past 3 years, and it will start to pay dividends probably in about a year from now.

Our next question coming from the line of Sean O'Loughlin with TD Cowen.