Steve Daly: Yeah. I think I was looking at the last five years, Tore. I think the number you’re quoting is probably back in 2016 or 2017, as sort of the high watermark for the data center. And so I have to caveat my comments to being back to 2019.
Tore Svanberg: Got it. So maybe because of that, how should we think about the volatility of the data center business? Because it grew very strongly for two quarters last year, then it took a breather this last quarter now starting to grow again. So is that sort of the cadence going forward sort of like two quarters of strong growth over one digestion? Any other types of visibility there would be helpful
Steve Daly: Well, I think you hit the nail on the head. It’s a very volatile end-market. And we can’t control that volatility. So I think investors need to expect continued volatility overtime so long as the trend line is showing that overall the business is growing and becoming more diversified, I think we’ll be able to manage that business. So you’re certainly right that, it can turn on and off. You typically see that when the ISPs release large orders into the supply chain, as they’re doing a build-out or you see that when they’re moving from one data rate to another. Some people are saying that the speed of these transitions is increasing. And so we’re trying to keep up with all of that. But yes, you are exactly right. The data center is certainly a volatile end market. We have a very conservative approach to forecasting and managing the business so that we don’t get ahead of ourselves in terms of investor expectations.
Operator: Thank you. And our next question coming from the line of Srini Pajjuri with Raymond James. Your line is open.
Srini Pajjuri: Good morning guys. Thanks for taking my question. One of the questions on the data center, I think copper connections are becoming more-and-more important as AI gains traction especially clusters, AI clusters gain traction. I’m just trying to understand the market size is the way you think about it Steve, maybe and your positioning? Because we keep hearing that this could be hundreds of millions of dollars of opportunity longer term. So I just want to hear your thoughts on, how you think about the ACC market in particular? And how you’re positioned to kind of capture and leverage that potential?
Steve Daly: Yeah. Well, we certainly hear the same things. And what we’re trying to do is, make sure that we have the best equalizers in the market to capture market share, to work with all of the cable manufacturers, work directly with the network folks, work with people that are designing next-generation switches, working with people that are struggling to improve Signal Integrity. And so that is where we sit in terms of a position in the market. You are correct to say that there is a lot of copper deployed in the data centers. More-and-more that’s becoming electrified to carry higher speed data. And the limitation is certainly distance. You can get it to work very well over short distances. But as you go longer in distances, you need to most likely switch over to an active optical cable or a pluggable solution and use a DSP, especially if it’s a long link.
So, I think there is a spot inside of the data centers for active copper cable. You have to recognize that the history of our data center revenue has always revolved around analog solutions and the active copper cable end product that we’re designing is exactly that. It’s an analog solution, which makes adjustments in terms of the signal integrity through the copper. It’s also early in this cycle, and we think over the next few years, there is certainly great potential. It’s probably one of the highest volume products in the data center, especially due to the reconfiguration of the data centers these days. And so yes, we are — we see the opportunity. We are very sober about what that means to MACOM and how much revenue we’ll generate. There’s competition.
There will be more competition. And so, we think we’re in a lead position from a technology point of view and we’ll work hard to try to keep that.
Srini Pajjuri: Thank you. Very helpful. And then just one clarification. On the cable weakness that you mentioned, could you maybe help us understand how much exposure you have to cable market? And you seem to think that even next year that market could remain weak. Just wondering what’s giving that level of visibility as why you think — I mean, you talked about DOCSIS 4.0 probably not ready or either the technology issue with more of a market demand issue? Any color would be helpful. Thank you.
Steve Daly: Yes. We have about maybe 5 to 10 different product lines that we sell into cable infrastructure. And so we follow the industry very carefully. During COVID, we saw a huge run-up of production from our cable customers, many of which today are sitting on a tremendous amount of inventory. So we think that all of that inventory needs to bleed down with sort of the current generation. When we look at the market and the financial models of a lot of sort of this industry, it struggles to make money, let’s say. And so it’s a difficult market and there’s a lot of pressure coming online in terms of alternative solutions, including PON, fiber-to-the-home, satellite solutions and whatnot. So, I can tell you today our cable revenue is close to zero.
And so that’s the good news. So if anything turns on or comes back then that will be a tailwind for our revenue. But we think that it’s going to be some time. We think that the hardware manufacturers want to continue to sell the DOCSIS 3.0 product, because they have a tremendous amount of inventory and that could last for a couple of years before people start investing, and it’s a big — it’s a heavy lift to launch DOCSIS 4.0 into the market. So, we’ll have to wait and see. We continue to engage the customers. We have some great differentiated technology. And as we think about the next three years, like I mentioned, we are keeping our expectations very low.
Operator: Thank you. And our next question is coming from the line of Peter Pan with JPMorgan. Your line is open.
Peter Pan: Hey. Good morning, guys, and thanks for taking my questions. Wanted to touch on the gross margin and what your expectations are for the — recall for the Wolfspeed business that you were in the low-40s and there’s plans to maybe bring that up to the 50 as we exit. So is that still on track? And then just on the overall, how do we think about gross margins kind of moving forward?
Steve Daly: Yes. I’ll say just a word on that and then Jack can answer your question. So, we look at this as a long-term project to improve their gross margins in a similar way to what we really did as a company over the last few years moving MACOM’s gross margins, which were in the low to mid-50s up to above 60%, and we had to do a lot of work internally, operationally, yield enhancement programs, managing costs associated with high-volume production and so our team is very skilled at taking a business that has underperforming gross margins and improving them. And so that is part of what we’re going to do. And the last thing I’ll say before I turn it over to Jack is we do want to let investors know that this will take time.
It’s not — there’s no magic bullet here that will all of a sudden move there. The RF Power business up to let’s say 60% or above. There’s multiple pieces inside of that business that will be addressed on a case-by-case basis. Jack, maybe you can add to that.
Jack Kober: Yes, just to provide some additional color, we do have numerous margin and yield enhancement programs that are occurring throughout the entire MACOM organization in addition to what we’re doing more specifically with the acquired RF business. And then if you take a step back just overall from a gross margin standpoint, there’s a number of things that we have going as well from a new product introduction standpoint and we’ve talked about this a bit in the past with our new product introductions having gross margins higher than the corporate averages for MACOM. So that will be another area that we continue to focus on as we go forward that will support improving margins as we work our way into the future. But it will take time.
These things don’t happen overnight. There’s a lot of hard work that goes into it. But going back to where Steve had mentioned, our goal would be to approach it similar to the way we approach things back in the 2020 through 2023 time period with looking to make incremental improvements across the business over time.
Peter Pan: Got it. Thank you. And then for your data center, can you just provide some color on what’s the exposure to more of the higher speed line products versus the more legacy? And then, as we think about the 1.2 — 1.6 products, what kind of — is there any content gains that you guys are expecting from this?
Steve Daly: Yes. So the — just sort of looking at the recent quarter, I can say the vast majority was servicing 800-gig applications. So, more than 50%. The legacy business has been improving as I mentioned in my comments that includes 100 gig CWDM4 long-reach type applications. We’ve seen some strength there. Also DR1 has been showing some improvements. So the legacy business is moving in the right direction nothing earth shattering, but certainly, we are seeing positive trends there. In terms of the content for the 1.6, it primarily revolves around laser drivers and transimpedance amplifiers. Those are the two functions that we want to sell into this hardware. Also, it’s not just on the optical side, it’s also on the active copper cable side. Our customers want to move 1.6 over copper if it’s possible. And we’re certainly up for the challenge.
Peter Pan: Thank you.
Operator: Thank you. Now, I will now turn the call back over to Mr. Steve Daly for any closing remarks.
Steve Daly: Thank you. In closing I would like to thank our employees, customers and suppliers for making these results possible. We are excited to be involved with new I&D programs and cutting-edge data center applications for next-generation high-speed infrastructure and to service the growing SATCOM market. We will continue to work as a team to meet our customers’ needs and execute our strategic plan. Thank you and have a nice day.
Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
