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John Kober

Thank you, Steve. Our Q2 results reflect record revenue levels and strong financial performance, building upon our steady growth in revenue, increased operating income, and ongoing cash generation. Our operational performance has allowed us to maintain a strong balance sheet while continuing to generate cash, which we believe positions us well.
Fiscal Q2 revenue hit a new quarterly record of $235.9 million, up 8.1% sequentially, based on growth across all three of our end markets. Notable double-digit sequential growth within data center and telecom were the primary drivers. Our overall book-to-bill ratio for Q2 was again above one, with customer orders exceeding our revenue by approximately 10%.
Adjusted gross profit for fiscal Q2 was $135.6 million, or 57.5% of revenue, in line with the past few quarters. Total adjusted operating expense for our second quarter was $75.8 million, consisting of research and development expense of $50.4 million, and selling, general, and administrative expenses of $25.4 million. The sequential increase in adjusted operating expense compared to Q1 was primarily driven by higher R&D and marketing costs, as well as employee-related costs associated with calendar year payroll tax resets and variable compensation.
As we are scaling the business, we have added new capabilities and resources, primarily within R&D functions, including those from the recently completed and previously announced ENGIN-IC acquisition. I would like to note that we remain very focused on controlling our OpEx as we continue to grow our revenue. Depreciation expense for fiscal Q2 2025 was $6.8 million, compared to $6.7 million in Q1 2025.
Adjusted operating income in fiscal Q2 was $59.8 million, up 8% sequentially from $55.4 million in fiscal Q1 2025. For fiscal Q2, we had adjusted net interest income of $6.4 million, which increased $500,000 sequentially from $5.9 million in Q1. Our adjusted income tax rate in fiscal Q2 was 3% and resulted in an expense of approximately $2 million. Our net cash tax payments were approximately $2.8 million in Q2. We expect our adjusted income tax rate to remain at 3% for the remainder of fiscal year 2025.
As of April 4, 2025, our deferred tax asset balances were $213 million, as compared to $212 million at the end of fiscal Q4 2024. We anticipate continued utilization of our deferred tax asset balances through the remainder of 2025 into fiscal 2026 and beyond.
Our utilization of these deferred tax asset balances, as well as other items, will help to minimize our future cash tax payments. I would like to highlight that based on our continued and increasing profitability, we currently estimate our adjusted tax rate will increase in the future. We anticipate our tax rate will begin to rise from 3% to mid-single digits as we progress through fiscal year 2026.
Fiscal Q2 adjusted net income increased approximately 8% to $64.3 million, compared to $59.5 million in fiscal Q1 2025. Adjusted earnings per fully diluted share was $0.85, utilizing a share count of $75.7 million shares, compared to $0.79 of adjusted earnings per share in fiscal Q1 2025. We continue to make operational improvements within the business, which can be seen in the sequential increases in our adjusted operating income and EPS over the past seven quarters.
Now, moving on to operational balance sheet and cash flow items. Our Q2 accounts receivable balance was $131.4 million, up from $91.8 million in fiscal Q1 2025. The increase in our AR balance was driven by higher Q2 revenue, as well as revenue timing during the quarter, with more revenue being recorded later in the March quarter as compared to our December quarter.
Our day sales outstanding averaged 51 days, which we feel is within our normal operating range. Inventories were $209.3 million at quarter end, up sequentially from $198.4 million. Inventory turns increased to 1.9 times from 1.7 times in the preceding quarter. We have continued to make strategic investments in inventory to support key programs and feel our growth in inventory over the past year is in line with our overall revenue growth. We remain confident that the quality and mix of our inventory is strong and supports our strategic plans.
Fiscal Q2 cash flow from operations was approximately $38.7 million, down $28 million sequentially, and an increase of more than $20 million over the fiscal Q2 2024 time period. The sequential decrease was primarily due to working capital increases. Given the dynamics of our growing business, it is typical to have variations in cash flow from quarter to quarter. MACOM's proven business model has, over the last few years, demonstrated strong cash flow from operations.
As an example, in fiscal year 2023, our cash flow from operations was $167 million. Fiscal year 2024 was $163 million, and we believe we are on track for our cash flow from operations to be in excess of $210 million for fiscal year 2025. Capital expenditures totaled $8.2 million for fiscal Q2, up $2.9 million sequentially. Much of this increase is driven by upgrades to our wafer foundry and R&D facilities. We expect our capital expenditures to be approximately $30 million for the full fiscal year 2025.
Next, moving on to other balance sheet items. Cash, cash equivalents, and short-term investments for the second fiscal quarter were $681.5 million, up $25 million from Q1. 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 $182 million as of April 4, 2025.
We are aware of the increasing macroeconomic uncertainty impacting the global business environment. We maintain a strong balance sheet with ample cash to support our strategic goals. We continue to carefully manage our discretionary spending and capital spending to help drive improving margins and cash flow over the long-term.
In summary, I'm pleased with the company's performance and accomplishments during the first half of fiscal year 2025. We will execute our financial goals as we continue down the path of building a company to support annualized revenue in excess of $1 billion while further improving our operating margin, EPS, and cash flow.
I would like to thank the entire MACOM team for their support and look forward to the remainder of fiscal year 2025. Steve, now back over to you.

Stephen Daly

Thank you, Jack. MACOM expects revenue in fiscal Q3 ending July 4, 2025 to be in the range of $246 million to $254 million. Adjusted gross margin is expected to be in the range of 56.5% to 58.5% and adjusted earnings per share is expected to be between $0.87 and $0.91 based on $76.5 million fully diluted shares.
We expect sequential growth, revenue growth in all of our end markets. We anticipate that industrial and defense will lead with approximately 10% sequential growth followed by data center at 5% sequential growth and telecoms slightly up sequentially. As Jack noted, we acknowledge the increased uncertainty in the markets.
Nevertheless, we have an amazing product portfolio, a sound long-term growth strategy, and we continue to focus on execution to capture market share. I would now like to ask the operator to take any questions. Thank you.

Question and Answer Session

Operator

(Operator Instructions) Tore Svanberg, Stifel.

Tore Svanberg

Yes, thank you and congratulations on the strong results here. Steve, so your data center business is on track to growing, I think, you know, close to 50% or above 50% this fiscal year. You've talked about this business being quite volatile. What's your current read on the market and do you think this growth momentum can sustain going into fiscal '26?

Stephen Daly

Great, thanks for the question, Tori. And you're right to observe that our data center business has been growing. In fact, it's really been growing since 2018, year on year. More recently in our fiscal '23, we had about 6% year-over-year growth and then in our fiscal '24, about 35%. And here we are halfway through fiscal 25 and I would say we're on track to be somewhere in the mid-40% year-over-year growth range.
And a lot of that is coming from the movement within the data center to go to the higher data rates. A lot of that is being driven by the adoption of the 100G per lane platforms across multiple data rates, including 800G, SR8, 400G, SR4, and even some early adopters at 1.6T.
Generally speaking, we think those trends will continue. And then as a tailwind, we do see that the industry is beginning to seriously look at LPO. And I think the industry sort of hit a milestone in March at OFC when it ratified the LPO standard within the MSA. And so just to remind everybody, there's an industry organization that's helping define the interface standard for LPO solutions.
And a specification was released in March. It's basically an ethernet-based single-mode link at 100G per lane, and it allows the switch and the NIC and the module manufacturers to understand what the interface specs are. And so now that that is settled, we believe over the next year to two years, LPO will become a mainstay in a variety of applications. And we believe if that happens, then we could continue to see strong growth.
Now, with all that said, I would just also highlight as I did on my script, this is a very volatile market. We have seen examples of fast-moving ramp-ups and ramp-downs during this year. And we would expect that type of volatility to continue. So from our point of view, we have to continue to be on that leading edge of high data rate. We have to introduce new products.
And I talked about our 200G photo detector, how we're now mounting those devices on our TIAs. And we're also working on lasers. On our last conference call, we talked about the efforts that Macom is making with CW lasers. So a lot of moving parts. I would probably not recommend investors or analysts to expect continued growth at these growth rates. We think that over the long-term, things will settle down into a more rational growth rate.

Tore Svanberg

That's great. Thank you for that. And as my follow-up, I had a question on the Wolfspeed RF transition. So we're about six months away here. Sounds like things are ahead of schedule. So just trying to get an understanding of some of the gross margin impact as that transition happens here in about six months, especially given your comment that things are running ahead of schedule.

Stephen Daly

Yes, and maybe we'll do a two-part answer. I'll take the front end of that with some comments and then Jack can also add some commentary. So when we originally acquired the business, we highlighted to investors that the overall business had very low profitability. The gross margins were very low. And we did a lot of work before we closed the deal to restructure and adjust the OpEx so that on day one, the business would be accretive to MACOM's P&L, although it would be dilutive to the gross margins.
And you saw that come into fruition back in 2023, when we, you know, on that first quarter where we had a step back in gross margins. Since then, over the past 17, 18 months, we have been incrementally improving the margins, the gross margins. And we always had a goal that when the FAB transferred, it would be neutral or positive to our gross margins. And I would say that today we're not there.
I think we have more of a gap to close in terms of looking at yields, looking at throughput cycle times and things of that nature. And so I do think that there is a gap. It's not easy for us to say what that gap is right now because we're not running the FAB. We only have our models, which I think are very good. So I would say that we still have a little bit of work to do and certainly we have more time to do that as you highlighted the FAB would be conveying maybe between now and year end.
And that work will continue after the FAB conveys. And the last thing I'll say before I turn it over to Jack is we established a model where this transaction would pay for itself in three years. We are on or ahead of plan to make that happen. So the cash generation from this transaction has been very positive.
Jack, do you want to go a little deeper on gross margins?

John Kober

Sure, I think I would just add as Steve had mentioned in his prepared remarks, there is increasing demand on the FAB down there. We are looking to expand the capacity. And I think as things continue to transition for us where we can take effectively more control when the FAB is under our direction, we'll be able to make further improvements from an overall gross margin perspective. So hopefully that helps more to come as we work our way through the remainder of the calendar year.

Operator

David Williams, The Benchmark Company.

David Williams

I guess, Steve, first, you talked a little bit about the volatility and the changing trends that happened within the data center. But I guess from a bigger picture, how are you seeing the budgets play out this year? And maybe what are your expectations for next year in that data center, especially where you're positioned? And where do you think you're going to see the largest growth opportunities there, maybe by technology?

Stephen Daly

Well, we do see continued trends that the ISPs are continuing to invest in data centers. So that's a positive trend that we think will continue into next year and even the year after that. That's number one.
Number two, we also are seeing a high level of innovation within the platforms that we service. And you hear things like CPO and NPO and LPO and all of these different variations of how to connect high-speed data. And as a merchant supplier, we're sticking ourselves right in the middle of that conversation, whether we're talking with somebody that's in compute or whether somebody is building a server or a switch or a module. And we want to bring to them not only high-speed electrical solutions, but also optical solutions.
So whether they make those short-reach connections using copper cable or optical cables, or fiber optic links, we want to be involved in that. And so we think that the SAM within the data center for MACOM is growing. And so because of that, we think that there's still tremendous room to grow in the future, but we of course have to pick and choose our battles.
We have to make sure we have the right product at the right time. We have to remain competitive on a lot of different levels in terms of performance, cost, producibility, time to market. So it's an exciting place to be. We're not short of opportunities. And we do think that we'll continue to grow and gain market share in the data center.

David Williams

Great, thanks for that. And then maybe just secondly, the satellite business, it sounds like you're continuing to gain some nice traction there. Just wonder if you can kind of size the magnitude of what you think your opportunity is there. And then maybe just any color around how quickly that market is developing would be helpful.

Stephen Daly

Thank you, David. So the SATCOM business for MACOM is continuing to grow. It's been growing over the past few years and we expected more good things in the future.
And maybe I would just highlight an example of increasing our SAM within that market by adding new product lines. And I talked about the OptoAMP, which is a high-power optical amplifier that's suitable for gateways or onboard satellites to have a free space optical link, which will not only provide data streaming from satellite to satellite, but also location, position and other overhead that's necessary to run the network. So we're very excited about doing things like that, bringing unique, difficult products to bear, helping our customers find solutions.
And I think that OptoAMP is just a really good example of adopting new technology, coming up with unique circuit designs so that we can support our customers. The other thing I'll highlight in the SATCOM market, which is historically a lot of the links have been a KU band, which is about a 10 to 13 gigahertz, maybe 14 gigahertz frequency.
And what we're seeing is a lot of the newer satellite networks and the connectivity is moving up to KA band, which is in that 30 gigahertz range, as well as Q band and V band, and to throw another one out there, W band. And so these are all very high frequencies, 40 gigahertz, 50 gigahertz, and even 65, 70 gigahertz. And so there are very few companies in the industry that can provide chips for these networks.
And in addition to that, there's very few companies that can build modules or subsystems or help a customer close a link at these frequencies. And we're one of those companies that can do that. And so when we go to market and we think about the SATCOM opportunity, we think about optics, we think about power, RF power, and we think about very high frequency. So these play to our strengths.
So we think that the opportunity size is actually very attractive. We're always hesitant to put a number on it because it depends on where you draw the line, but I would say that we are continuing to invest our R&D dollars to support the opportunity.

Operator

Karl Ackerman, BNP Paribas.

Karl Ackerman

Steve, I'd like to go back to that comments on SATCOM. I was hoping you could address the timing of the previously announced [55 million] SATCOM and whether you have greater clarity on the opportunity for the program to expand an additional [25 million]. I guess as you address that, perhaps you could discuss the breadth of design wins and size of the SATCOM business within your telecom business today. And I'll have a follow-up, please.

Stephen Daly

Sure. So the large contract that we announced about a year ago, we explained that that sort of two phases, the first phase is an R&D phase where we were doing a wide range of chip developments. I think there's between 10 and 15 specific chips that we are designing for that platform. We're pretty much, I would say, three quarters through that phase, things look great.
We're having some amazing results from our chip designers and they're hitting the specs they need to hit and things like that. And now we're moving into more of a build phase and getting our EMs or engineering models built up and delivered to customer and going through sort of a certification phase. What will follow after that will be a ramp in revenue and production. We expect that that's probably about six months away. And so probably starting towards the end of this year, beginning of next year, depending on how things go.
And so I would say generally that large program is on track. I don't want to comment on the potential follow-on of that [25 million] additional modules. And so I really just don't want to comment on that. At this point, we're very focused on executing the program we're on and if there's announcements that need to be made on that later, we'll certainly do that.
But I would say generally speaking, that program is on track and the team is doing a great job. In terms of some of the other questions you had about the overall size and other opportunities, I'll just say that we're continuing to see new companies enter the market. They have different approaches to solving communication, sensor and networking problems.
And we are, again, inserting ourselves and providing lots of semiconductor content. And perhaps one example would be, you're starting to see more and more networks adopt direct-to-cell connectivity, which means the LEOs or the MEOs are going to have connectivity directly to your cell phone.
And so if you can imagine that MACOM is a big supplier into the cellular infrastructure market, we understand what's necessary to have an efficient transmitter or receiver in a base station and we're bringing that same knowledge to bear to our satellite customers and they love it.
They like the fact that we understand the protocol, we understand all the different bands, we understand how to make these products work and we have the space heritage. So they're embracing us to help them solve the direct-to-cell issues.

Karl Ackerman

Got it, thank you for that. I want to pivot to defense. You indicated that industrial defense should grow 10% sequentially. Perhaps both of those markets are growing with industrial maybe preparing to be bottoming. But within defense, I was hoping you could address what your exposure is to European defense spending directly or indirectly. I ask, given your very large defense business and certainly growing government interest to expand defense spending globally, thank you. Thank you.

Stephen Daly

So our direct exposure to European defense spending is growing and we see that as a good thing. And part of our long-term growth strategy was to build out a stronger presence in Europe and really the catalyst for that was the acquisition of a small wafer fab based right outside of Paris in France. And that has given us a great platform to work with customers across Europe to support their programs.
Now, historically, that business had about 50% of its revenue came from foundry business, meaning the customers designed the chips and the other 50% was product-based. The 50% that was foundry-based was primarily coming from European defense contractors. And so when we completed that acquisition, it gave us a really sort of a running start and a instant relationship with a lot of companies we hadn't done business with.
And so over the last two years, we've been developing those relationships, we've been improving the performance of the MESC facility, we've been introducing a lot of our US-based technologies, including optical technology and gamma ray technology, and GaN of silicon carbide. And so all of these things are starting to fall into place and will generate future growth. And as I highlighted in my comments, we recently received a very significant pilot order to support a large European radar program.
And so we expect more good things to happen. We expect that exposure will increase. There is not in Europe, they do not have the depth in my opinion that the US has in terms of the capabilities on the RF and microwave side. So they're looking for companies like ours to set up shop and support them. And that is exactly what we plan on doing.
And I'll add that we will use our MESC facility as a foundation to build higher level solutions for our customers, not only on the defense side, but also on the space side.

Operator

William Stein, Truist Securites.

William Stein

Congrats on the good results and outlook. I'd like to start by asking you about the telco end market broadly. It seems to me by my less trained eye that this was the end market that drove the majority of the upside in the quarter.
And yet I recognize that revenue performance in that end market over the last few quarters has been relatively depressed. So was this a matter of sort of true end market demand or was this more a matter of inventory through the supply chain having been consumed and we're starting to grow from that? Maybe you could clarify which of those two dynamics is really driving this.

Stephen Daly

Sure, and maybe just a few words on the telco. So you're right that it had a great quarter in Q2. I would say that if you compare our current run rate, we should start to get into a range where we're having record telecom revenues on a yearly basis. So we're very happy about that.
From a market segment point of view, I would just highlight that the 5G market generally, if we listen to the major OEMs, they're saying that business is relatively flat. Nevertheless, we continue to grow our business by gaining market share, introducing more products to these same customers.
So that has been a tailwind for our 5G business. Second, we put SATCOM inside of the telecom number. So that's also a big driver of some of the growth that we're seeing. And regarding inventory, I would say that there are some segments of the telecom market that have pretty much gone through and burned down their inventory.
One of them would be cable infrastructure. We're starting to see an increase in orders, albeit at a very low level, but increases in orders from our cable infrastructure customers here in the US. And also, we're starting to see a slight growth in sequential growth in 10G pond.
The last item I'll highlight within telecom is a segment we call metro long haul, which is generally, these are links between data centers that are in different cities that use coherent modulation. These are generally very high data rate, 128 gigabaud data rates. And the customer base that's building these is sort of a different customer base than the, let's say, the traditional data center customer, a customer base. And we've started to see a ripple effect that the growing data center demand is now increasing the connectivity between data centers at higher rates.
And so we are involved in some nice programs that are as high as 1.2T for coherent modules where we supply chips into those solutions. So that business is doing well. We're actually continuing to build backlog to support our metro long haul business. So we think that business will continue to grow over the next few quarters.

William Stein

That helps, thank you. And maybe help me understand whether, I think there's a similar dynamic in the industrial part of your industrial defense. I think in your prepared remarks, you said that performance was unremarkable in those industrial end markets. And I suspect there's an over inventory situation there as well, but I'm not sure. So maybe you can clarify, please.

Stephen Daly

Yes, I would say that we see that there's a few catalysts in the industrial sector right now for growth. And that is, so I would say end demand is weak. And then perhaps there's an overhang of inventory issues, but we see the more fundamentally a weak environment.

Operator

Quinn Bolton, Needham & Company.

Neil Young

Neil Young. I'm for Quinn Bolton. I know you touched on gross margin a little bit when discussing the Wolfspeed RF fab, but I guess looking forward, what are your gross margin expectations throughout the rest of the year? And if possible, could you walk us through the puts and takes?

John Kober

Yeah, Neil, this is Jack Cober. So as we've looked back over the past couple of quarters, we've been in the mid 57% gross margin range. And also looking forward to our guide that puts us roughly in a similar spot at 57.5% as the midpoint of the guide. As we get out longer term, I think we'll have to see how things play out from an overall mixed perspective. We've continued to have some lower utilization of our [Lowell] fab, just where all of the costs are not being absorbed like they were a number of years ago.
Some of that is driven by the low demand that Steve was just referencing with regard to the industrial end markets that we service. So as we go out longer term, we're going to have to see how it plays out. But in terms of the guide that we have going out through Q3, still in that mid 57% range is where we see things.

Neil Young

Okay, great. Thanks. And you didn't mention tariffs in your prepared remarks. I was wondering if you've seen any direct or indirect impact so far, and if not, I guess looking forward, which areas of business by product line or end market do you think would be more exposed and which would be more insulated?

Stephen Daly

So I would say that we've not seen any noticeable impact to date regarding customer behavior, whether pull-ins, push-outs, cancellations, we've seen none of that. I'll just remind everybody that over 95% of our business is direct with customers and in some cases with partners, reseller partners. So we have good line of sight of major programs. We're selling non-commodity products that are generally sole source. So we have a lot of stickiness with our business.
So I would say that I will continue to monitor the situation. Of course, we have a complex manufacturing and assembly, you know, manufacturing footprint, but I would say that this is something that the team is more than capable of managing.
And in terms of breaking out country of origin by product line, we're not going to do that due to competitive reasons and other reasons. And the potential impact is always subject to change anyway. So I would just reassure investors that our business is unique. It's in many ways, very US centric, about half our business is here in the US built and shipped into the US. And then the balance, the other sort of half of our business, I think we're going to be able to manage quite well.

Operator

Blayne Curtis, Jefferies.

Blayne Curtis

Hey guys, good morning and great results. I actually wanted to go back to on the data center market. I thought you said mid 40s, and I just clarify that. I'm assuming that's fiscal year. And I just want to understand, I mean, I guess if you take it straight, literally, that would be a down September. And I think you said something about lumpiness.
So I thought when we saw you at OFC, it seemed like you had that transition 800G and it was going well. You had that transition 800G and it was coming in at plan. So I just, maybe you can just elaborate on what that messaging was.

John Kober

I think as we had -- this is Jack, Blayne. As we had talked about high level, if you look year over year, and that's fiscal year '25 for us, we'd probably be in the mid 40s. I think we can support growth as we talked about going into the third quarter.
Fourth quarter, as Steve had mentioned, still to be determined, but still the underlying demand is there to support growth, even going into our fiscal fourth quarter.

Blayne Curtis

Got you, thanks, Jack. And then maybe another one for you. Just want to ask on OpEx. I think it increased $5 million or $6 million in March. And I think the implied guide's probably something similar, maybe $4 million or $5 million. So how do we think about OpEx for the year?

Stephen Daly

Yeah, we've seen a step up here in the operating expenses, as I had described in my prepared remarks with some continued investments. We've been carefully managing our operating expenses over the past number of years.
So with that step up, we've made investments, obviously in R&D type applications, but there's also been other things as we're growing to that billion dollar run rate that we hope to achieve in terms of investing in the business and things, including IT infrastructure and IT security. So there's other things that we're seeing.
As we work our way through the remainder of the year, and once we get beyond that, the Q3 time period, we would probably see a bit more of a leveling off of the operating expense increases from an absolute dollars increase standpoint, going into Q4 and as we work our way through fiscal year '26.

Operator

Srini Pajjuri, Raymond James.

Srini Pajjuri

I just want to go back to the previous question on data center. The September commentary, I understand the visibility is not great in these businesses, but at the same time, are you seeing any sort of inventory at your customers? Is that what's giving you pause? Because on one hand, I see that, the market is moving to [1.6], and you also talked about, the potential opportunity on the LPO, LRO side.
But I guess, your commentary about September sounds a bit cautious. I'm just trying to understand what's giving you that little bit of caution as we head into September.

Stephen Daly

Yes, thank you for the question. So just to be clear, we're not guiding for the fourth quarter. So we go out one quarter at a time, and we're certainly very confident in the numbers that we're forecasting for Q3. So I just want to make that point. And we would always be very, very cautious about commenting on more than one quarter out.
And you shouldn't read into that as negative news, let's say, or negative commentary or sentiment. It's just being cautious, and especially cautious in our most volatile market, as we talked about, which is the data center. In terms of the general trends, I would say that what we talked about on the last call is also playing out as we had expected, which is that we were seeing a major customer of ours ramp down multiple 800 gigabyte platforms. And at the same time, we were ramping up other customers at 800 gig, and the timing and how those things come together has yet to play out. So I would just highlight that.
The second thing I would highlight just regarding 1.6T is there's really only one major company in the world in the industry that is very focused on 1.6T. The rest of the industry is primarily focused on 800, 400, and even 100. And when we peel apart our revenue and our numbers as we look forward, we see continued growth in even some of the lower data rates, including 100G platforms. So I just want to highlight that.
The other thing I would highlight is we do not see an inventory issue in the data center segment. I would say it's the opposite. We are being expedited across multiple platforms, multiple data rates, multiple end customers, and so it's really the opposite. Customers, they want their products, they see demand, and there's a lot of pressure on MACOM and our operations team to do more faster, which is a good problem to have. So hopefully that gives you comfort without guiding to Q4.

Srini Pajjuri

Yeah. Thanks, Steve. That's very helpful. And then on the same topic, you kind of mentioned that the LPO, LRO standards have been ratified.
Just want to hear your thoughts on what you're hearing from your customers in terms of what sort of interest there is in the market and what sort of applications are customers looking to implement these solutions and in terms of speeds, are you seeing more interest in lower speed versus higher speed for these applications? And also if you can talk about whether these applications are seeing interest from the so-called mega-clusters or is it more for cloud workloads? I think that would be very helpful.

Stephen Daly

Yes, I would say a few things. What's interesting is, first of all, most of the folks that are interested are at 100 gigabyte per lane for 800G solutions. That's number one. The second comment I would make is not all ISPs are interested right now in LPO. Some are very interested and some are going to take a wait and see. And we see the full spectrum. We have, as an example, ISPs that they care about reliability and they don't care about power consumption or cost.
And others, it's all about power, latency, and cost. And they're willing to lean into new technologies like LPO. So I think we're in this mode where people are very interested. They are looking at different use cases and it's still very early, okay?
And so ultimately, which ISPs are interested and not, I mean, that's proprietary information to MACOM, so we're not going to discuss the engagements at that level. But I can say that we see the continuum of interest. And I would highlight that not all ISPs are interested today. I think over time that will change as the use cases and scale are proven out.
And then the more risk averse will perhaps adopt. In terms of the application, we see server to NIC, or I should say NIC to switch, and generally very short reach. And that is the area that we will probably go into production first.

Operator

Peter Peng, JPMorgan.

Peter Peng

On the data center, you guys do have like several new products coming, you know, like your photo detectors, your CW lasers, and your ACC solutions. Maybe you can talk about like how to think about the revenue ramp there and how material could it be in the second half of this year and more so in the next fiscal year.

Stephen Daly

Sure, I mean, just to highlight that within our data center segment, we have multiple product lines, multiple functions, multiple form factors. And so to sort of call out two or three that may or may not be ramping, it sort of understates the breadth of the product line. So I just want to highlight that. I did comment in the remarks that our 200 gigabyte photo detectors are ramping.
And those are primarily for 800G DR4 applications. And that, you know, I don't want to necessarily comment on the materiality of that. We also see opportunities in activity at 1.6T as well, just to be clear on the 200 gigabyte PD.
I would say that the overall performance of our NPI metrics for our data center products is best in class. We have a very high success rate of designing products, getting them to market and getting design wins that we had originally targeted. So our team does a very strong job with execution in this area. And I'll highlight that today, supporting our data center business, we actually have eight different design centers collaborating on different projects to support this business.
And so a lot of moving parts, a lot of different end use cases. As I mentioned in my script, we're starting to take a very serious look at PCIe as the networks and the data centers begin to disaggregate memory and storage, that creates opportunities for high-speed connectivity. And so that would be another example of the SAM expanding where we are going to try to insert ourselves directly into those opportunities.

Peter Peng

Perfect, thank you. And then just on the gross margin, I think in [aggravate], your telecom and industrial defense, kept coming in a little better. And I would think that would maybe help some of the utilization that you're a little fab. Maybe just remind us like what is running through your, what kind of products are running through your little fab and maybe why, even on the upside, it's more flattish gross margin.

Stephen Daly

Sure, and I think Jack touched on this a little bit that generally speaking, the utilization rates of our low fab have not changed over the past couple of quarters. Most of the products within the low fab are RF products. We have different categories, we have discrete diodes and there's about a half a dozen different product families within the diode product line. We also have MMICs that are gas or GaN running through the fab.
Additionally, we are running indium phosphide lasers through the fab. So it's a high mix, medium volume fab. I would say there generally is more exposure to defense and industrial related markets with the low fab, not entirely, but I would say that's the most exposure. And as we've been talking about over the past couple of quarters, our industrial business is down.
And so while our defense business is growing quite strongly, it's coming from other areas of our technology portfolio.

Operator

Richard Shannon, Craig-Hallum Capital Group.

Richard Shannon

Maybe I'll follow up in the IND segment here. Clearly suggesting industrial soft, which is not necessarily surprising. It says the defense part here is doing very well. Love to get a sense of if there's any large programs that are driving this very strong growth we're seeing in this quarter. Does that convey over to following quarters here? And would it seem to suggest that the IND segment kind of takes growth leadership for MACOM as we get into fiscal '26?

Stephen Daly

Thank you for the question, Richard. Our core area in defense is centered around radar systems. Second to that would be EW and communication systems. And so when we look at these platforms, we envision not just selling RF content, but also optical content and subsystem content. And so you have a wide range of solutions and platforms that we're selling to these large programs. There is absolutely a refresh going on with radar systems across multiple platforms to address drone related threats.
We are involved in both sides of that equation. We're involved on the next generation drones that have more sophisticated sensors, as well as technologies that want to knock the drone out of the sky. And so we would be looking at ways to support both of those applications. As we look at our business and our strategy, our strategy is to bring more technologies to bear on this market.
And we've talked over the last couple of years about MACOM pivoting a lot of its analog mixed signal and optical technologies into the defense market. And that strategy has been playing out and proven to be very successful.
In terms of our 2026 and the potential growth there, I think it's too early to say, other than I just highlight that our team has never been busier in terms of the amount of opportunities. When we acquired Wolfspeed's portfolio, it was a major booster shot of high-power technology to MACOM. And we are taking full advantage of that in the market.
So we believe we are gaining market share in large radar systems, not only ground-based, but ship-borne and airborne.

Richard Shannon

Very helpful details, Steve there. Thanks for that. My second question is in data center. Really kind of looking at the newer products and how do we think of this over the next one to two years? Obviously, you just started selling the PDs here at 200 gigabyte Talked about CW lasers and LPO. How do we think about kind of the timing, I guess more so on the CW lasers and LPO, but then if you look, say one to two years out, which one of these newer areas within this bucket do you think can have the most impact?

Stephen Daly

Yeah, I think that's a tricky question because I would say our batting average on calling the future is not so good. And we've had examples in the past where we thought one product line would have a breakout year and it turns out it was another one. And so I would say that we would rather talk about the successes of these new product lines retrospectively.
And so we're talking about the PD because we have big orders and we're ramping production. And as the other product lines come on, we'll certainly do the same there. With that said, I would just highlight we are very interested in taking a position in the market on CW lasers. We have a unique technology with our edge faceted technology.
And we believe that the market demand for CW lasers is increasing, but we still have a lot of work to do. I think that the market wants a 75 milliwatt or a hundred milliwatt part. And we're working to make sure that we can field a very competitive part. So still a lot of work to do there.
But of course, if we have success on lasers, it could be a meaningful number, but we don't want to count our chickens before they hatch.

Operator

Thank you. And I'm showing no further questions in the queue at this time. I will now turn the call back over to Mr. Steve Daly for any closing remarks.

Stephen Daly

Thank you. In closing, I would like to acknowledge and thank all of our employees for their continued dedication. Have a nice day.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.