MACOM Technology Solutions Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 10 speakers on the call.

Operator

Welcome to MACOM's 3rd Fiscal Quarter 2023 Conference Call. This call is being recorded today, Thursday, August 3, 2023. At this time, all participants are in a listen only mode. I will now turn the call over to Mr. Steve Ferrante, MACOM's Vice President, Strategic Initiatives and Investor Relations.

Operator

Mr. Ferrante, please go ahead.

Speaker 1

Thank you, Olivia. Good morning, and welcome to our call to discuss MACOM's financial results for the 3rd fiscal quarter of 2023. 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.

Speaker 1

Management statements during this call will also include discussion of certain adjusted non GAAP financial information. A reconciliation of GAAP to adjusted non GAAP results are provided in the company's press release and related Form 8 ks, which was filed with the SEC today. With that, I'll turn over the call to Steve Daley, President and CEO of MACOM.

Speaker 2

Thank you, and good morning. I will begin today's call with a general update on our business. After that, Jack Cober, our Chief Financial Officer, We'll provide a more in-depth review of our financial results for the Q3 of fiscal 2023. I will then provide revenue and earnings guidance for our 4th fiscal quarter and we will be happy to take some questions. Revenue for the Q3 of 2023 was $148,500,000 and adjusted EPS was $0.54 per diluted share.

Speaker 2

Cash flow from operations was approximately $46,000,000 and we ended the quarter with $588,000,000 in cash and short term investments on our balance sheet. Our team did an excellent job in meeting our business and financial objectives, albeit in a challenging market environment. We are especially pleased with our cash flow as we manage our way through the down part of the cycle. Our book to bill ratio in Q3 was 0.9, which was a significant improvement over Q2. Our total company backlog decreased slightly quarter over quarter, although it remains at a healthy level.

Speaker 2

The bookings growth was driven primarily by our data center and defense customers. Our turns business or revenue booked and shipped within the quarter represented approximately 18% of our total revenue, which is approaching historical norms. While we are encouraged by the improvement in bookings, the broader demand environment remains weak in several of our served markets, and in particular with the telecom end market. I'll note that customer cancellations and push out requests have slowed, which is a positive indicator. However, I would still characterize overall industry inventory levels as high, with many customers still carrying excess inventory.

Speaker 2

Our external sales channel inventory did decrease in Q3 and we plan to manage our external sales channel inventories down again in Q4. Turning to our discussion of our end markets for fiscal Q3. Industrial and Defense revenue was $83,500,000 up sequentially and it was a company record. Within the I and D market, demand for MACOM's products remains robust And we continue to see numerous secular drivers within both the industrial and defense markets, which have the potential to drive slow but steady growth for MACOM over the coming years. Applications include new satellite networks within the DoD, New Aesa or active electronically steered antenna radar deployments, electronic warfare applications, secure communications and new very high frequency electronic sensors.

Speaker 2

These applications require progressively higher frequency levels, More bandwidth and higher power levels in smaller form factors, which plays directly to MACOM's competitive strengths. Our goal is to expand our SAM within the IND market and to establish differentiated products that span analog ICs, Mimics in RF and Microwave subsystems. Our portfolio has multiple growth initiatives, which we've previously discussed, including our high frequency 0.14 GaN process, low frequency MACOM pure carbide power amplifier products, BAW filters, kvcaps, ruggedized photonic subsystems and RF amplifier pallets. Our recent acquisition of Linear Communications Group is an example of our SAM expansion initiatives. As previously highlighted, the linearizer team brings MACOM new design and manufacturing capabilities in microwave pre distortion products for SATCOM and satellite payloads as well as microwave photonic subsystem products for defense applications.

Speaker 2

Over the past 3 decades, the linearizer team has developed an outstanding reputation in the SATCOM industry and forged strong relationships with many leading TWT manufacturers, Tier 1 U. S. Defense Prime Contractors, SATCOM ground station OEMs and satellite manufacturers. This acquisition strengthens our market position within the defense industry and improves our ability to capitalize on the estimated incremental $250,000,000 TAM. Since closing the acquisition in March, We have initiated new R and D activities to combine our proprietary semiconductor technologies with linearizers' System design expertise to create more differentiated solutions for our combined customers.

Speaker 2

The industrial market continues to expand with new applications, including, by way of example, traffic monitoring radars, Automotive sensors such as LiDAR, industrial wireless IoT platforms, factory automation and robotics and wireless and laser based instruments for medical applications. In short, we continue to build a unique and differentiated product portfolio of RF and microwave and millimeter wave and optical capabilities for the IND market. While programs in the IND market take a long time to enter Production, the programs typically have long life cycles and carry healthy margins, which ultimately create attractive financial returns. Revenue for the telecom end market was $38,300,000 down 29% sequentially. The global telecom markets remain very challenging with weakness in China, slowing 5 gs deployments in the U.

Speaker 2

S. And elevated inventory levels at CATV and Metro Long Haul customers. Our telecom bookings have been weak for most of fiscal year 2023 and at current levels, we believe we are under shipping to end demand. In spite of the current market weakness, We continue to view telecom as an attractive market with large and diverse long term growth opportunities. We believe this market has the potential to be one of our faster growth markets because design cycles are fast, volumes are high and customers Typically select products based on performance rather than price.

Speaker 2

MACOM has compelling products for the telecom market From our diode and mimic portfolio to our analog ICs and optical or optoelectric analog IC products. While this year's order demand has been weak, our sales team have been doing a great job finding new customers and applications, which will drive our future growth. We believe our telecom revenues will improve in the near term when infrastructure deployments increase and as customers and sales channel inventory New product introductions remain a core aspect of our growth strategy in the telecom market. As an example, over the past few years, we have expanded our portfolio to include high power switch and LNA modules to serve 5 gs base stations, including macro cell, small cell and massive MIMO active antenna systems and frequency bands up to 6 gigahertz. We've also developed a product line of high power transmit and receive front end modules or FEMs that operate in the 5 gs FR2 microwave frequency bands, which consist of multistage PAs, LNAs and a TR switch and directional MACOM's RF and microwave IC design expertise is compelling.

Speaker 2

Our chip designers have the ability to utilize a wide range of gas, GaN, SOI and CMOS processes from both internal and external fabs. And as a result, we're able to select the process which achieves leading product performance. While this capability is ideal for 5 gs radios, our growth strategy is broader than the 5 gs infrastructure market And our product line managers use the same technology to target other high volume applications where we can differentiate. For this reason, we see a large telecom growth opportunity for MACOM over the next few years. Data center revenue was $26,600,000 in Q3, down 31% sequentially.

Speaker 2

We still see excess inventories impacting customer demand at lower 25 gs and 100 gs data rates. However, during the quarter, we were pleased to see customer demand for our 400 gs and 800 gs products start to accelerate. And this near term trend will provide an opportunity for significant quarter over quarter growth. We have also seen an uptick in 200 gs short reach PAM4 demand to address some new U. S.

Speaker 2

Cloud deployments. MACOM has a focused product portfolio for the data center to support high speed analog connectivity and our products are used in optical transceivers, active optical cables in active copper cable applications. MACOM has been a leader in supporting the analog linear drive architecture across InfiniBand And Ethernet protocols because we believe linear drive in certain applications can provide lower latency and reduced power consumption compared to DSP based solutions. We believe our solutions are gaining traction in the market, especially at the higher data rates. As an example, our linear drive products can support new deployments in artificial intelligence, machine learning and high performance computing.

Speaker 2

Hyperscale operators are in the early stages of 400 gs and 800 gs deployments today and these customers are actively looking for ways to reduce complexity, DC power and cost. We believe we are well positioned to capture a portion of the market with our analog solutions. I would now like to review a few key events during Q3. First, we continue to focus on developing cutting edge semiconductor processes. In support of this effort, We were awarded a contract from the United States Air Force Research Labs or AFRL to develop advanced semiconductor process The contract will support MACOM's research and development on process technologies used in millimeter wave mimic products.

Speaker 2

We believe this contract underscores MACOM's technical leadership and commitment in high power millimeter wave GaN on silicon carbide and it will enable us to strengthen our competitive edge. This is a multi year contract that has a total value of around $4,000,000 Our strategy is to provide customers with the industry's best High frequency gas and GaN mimic products. Future mimic products from advanced processes represents a large growth opportunity for MACOM over the next 2 to 5 years. Historically, Mimics have been among the most profitable products within our portfolio. 2nd, we are pleased to announce that during the quarter, we were awarded a platinum supplier status by a U.

Speaker 2

S.-based Tier 1 defense contractor And we were named as a global preferred supplier by a leading Japanese test and measurement company. Customer satisfaction is at the center of MACOM's Business strategy and these awards are a great recognition of our success in servicing these customers. I would like to congratulate the sales teams, Application engineering, operations and all of the other critical members of the MACOM team who helped make these awards possible. 3rd, we are pleased that during the quarter, we formally established the MACOM European Semiconductor Center outside of Paris, France. The center bolsters our European presence and provides a manufacturing platform from which we can build upon to expand and better serve our European customers.

Speaker 2

The center also brings us an amazing team and a portfolio of high performance Mimic products. And finally, I would like to note that the integration of Linear Communication Group acquisition is on schedule And our teams have been excited to start collaborating together to win new business. Before I turn the discussion over to Jack, I would like to review one more item. In mid July, the management team updated its long term strategic plan. As a reminder, in July of 2020, we initiated a long term new planning process And this year was our 4th revision of the plan.

Speaker 2

As you would expect, the strategic plan analyzes our capabilities, The markets and potential areas for SAM expansion, it reviews our current technology portfolio, product roadmaps, competitive landscape, SWOT Analysis and formulates a roadmap for growing revenue and profitability at a detailed product line level. We believe that in-depth long term planning is essential for a semiconductor business and this is a critical element of how we manage the company. We believe our strategy will strengthen and diversify our business and provide MACOM the ability to capture market share. We are excited to scale the business and achieve $1,000,000,000 in revenue. Jack will now provide a more detailed review of our financial results.

Speaker 3

Thank you, Steve, and good morning, everyone. Our results for the Q3 of fiscal 2023 were within our guidance for the period. Revenue for the Q3 was $148,500,000 down 12% quarter over quarter. The sequential decrease was driven by weakness in telecom and data center markets, with a slight sequential increase in industrial and defense. On a geographic basis, sales to domestic customers represented 49% of revenue, flat sequentially.

Speaker 3

Sales to China based customers were 16% of revenue, down from 20% in our fiscal 2nd quarter. Despite sales declines in China, we continue to see additional growth opportunities in Asia and Europe. Adjusted gross profit was $89,200,000 or 60.1 percent of revenue, down 200 basis points sequentially, driven by lower absorption of some of our fixed costs with the lower Q3 revenue levels. MACOM utilizes a flexible manufacturing model, leveraging our internal wafer, fabs as well as third party foundries, which we believe will provide financial leverage as the business cycles and revenue improve. Total adjusted operating expense was $52,200,000 consisting of R and D expense of $33,200,000 and SG and A expense of $19,000,000 As expected, our total operating expenses were sequentially up by $3,600,000 mostly due to the incremental expense from our acquisition of Linearizer and the establishment of our European Semiconductor Center in France.

Speaker 3

Adjusted operating income in fiscal Q3 was $37,000,000 down from $56,600,000 in fiscal Q2. Adjusted operating margin was 24.9 percent for fiscal Q3, sequentially down from 33.4% in Q2. Going forward, we expect our operating margins to improve as revenue recovers. Depreciation expense for fiscal Q3 was dollars 5,800,000 and adjusted EBITDA was $42,800,000 Trailing 12 month adjusted EBITDA was $233,100,000 compared to $250,300,000 in Q2 fiscal 2023. Adjusted net interest income for Q3 was $2,800,000 up roughly $700,000 from fiscal Q2 on higher investment portfolio returns, partially offset by higher interest expense on our term loan.

Speaker 3

Our adjusted non GAAP income tax rate in fiscal Q3 remained at 3% and resulted in an expense of approximately $1,200,000 Our cash tax payments were $1,200,000 down from $1,400,000 in the Q2 of fiscal 2023. We expect our adjusted income tax rate to remain at 3% for the Q4 of fiscal year 2023 and through fiscal year 2024. Fiscal Q3 adjusted net income was $38,500,000 compared to $56,700,000 in fiscal Q2. Adjusted earnings per fully diluted share was $0.54 utilizing a share count of 71,400,000 shares compared to $0.79 of adjusted earnings per share in fiscal Q2. Now moving on to balance sheet and cash flow items.

Speaker 3

Our Q3 accounts receivable balance was $105,900,000 down from $121,800,000 in fiscal Q2, with our days sales outstanding remaining at 65 days. The decrease in our accounts receivable balance is primarily due to the timing of outstanding receivable collections as well as lower sales in the quarter. Inventories were $139,000,000 at quarter end, up by $7,100,000 sequentially, primarily due to inventory balances acquired through our European Semiconductor Center acquisition as well as increases expected to support future data center revenues. Inventory turns were 1.7 times in Q3, down slightly on a sequential basis from 2.0 times in the prior quarter. We recognize that at this stage of the business cycle, our inventory balance is at a multiyear high.

Speaker 3

However, the quality and mix of our inventory is strong and continues to support our strategic backlog. I would like to note that our turns business was the highest since our fiscal Q2 of 2022 and our book to bill also improved during the quarter, both of which we believe are positive indicators that will support improving inventory turns as we progress through fiscal 2024. Fiscal Q3 cash flow from operations was approximately $45,800,000 compared to $32,500,000 in fiscal Q2. The increase was due in part to increased accounts receivable collections. Capital expenditures totaled $3,300,000 for fiscal Q3, down from $6,000,000 in the prior quarter.

Speaker 3

Our full year 2023 CapEx is now estimated to be dollars 25,000,000 based on the timing of payments and as we balance our capital spending with the growth and profitability of the business. Continued capital investments in our fabs, manufacturing capabilities, as well as process and product development initiatives remain strategic priorities for us. Cash generation continues to be an important priority for us as we manage through changing business cycles. And despite the challenging demand environment in Q3, We generated cash flow from operations of $45,800,000 and approximately $117,000,000 year to date. Cash, cash equivalents and short term investments for the fiscal Q3 were $587,600,000 up from $577,300,000 in fiscal Q2 2023.

Speaker 3

During the 3rd fiscal quarter, we utilized approximately $37,000,000 of available cash to acquire the assets utilized to establish our European Semiconductor Center located in France. Today, our net debt remains less than $50,000,000 and our gross leverage is approximately 2.6 times. Before turning the discussion back to Steve, I would like to note a few additional items. As Steve mentioned, we opened our new MACOM European We do not expect that ESC will have a meaningful impact on our revenue in 2023 and its associated operating expenses will result in slight EPS dilution. However, we are excited that it brings us new products, technology, manufacturing and customers.

Speaker 3

We are also pleased to announce today that we have paid off the $121,000,000 that remained outstanding on our term loan. The term loan did not come due until May 2024. However, with increasing interest rates and our consistent quarterly cash generation, We felt it was appropriate to put this outstanding floating interest rate debt behind us and reduce our net interest expense by approximately $600,000 per quarter. And finally, as Steve mentioned, we completed our 5 year annual strategic planning process during the quarter, which we believe will result in increased stockholder value. I will now turn the discussion back over to Steve.

Speaker 2

Thank you, Jack. MACOM expects revenue in fiscal Q4 ending September 29, 2023 to be in the range of $148,000,000 to $152,000,000 Adjusted gross margin is expected to be in the range of 59% to 61% and adjusted earnings per share is expected to be between dollars 0.53 $0.57 based on 71,500,000 fully diluted shares. Sequentially, in Q4, we expect revenue in I and D and Telecom to be down and data center up. And finally, as you may have seen in a press release issued yesterday, I am pleased to announce the appointment of Wayne Struble as Senior Vice President, Advanced Semiconductor Technology, a newly created position reporting to me. Wayne will be a key contributor the development and management of our semiconductor technology roadmap.

Speaker 2

Wayne has over 40 years of experience in the RF and Microwave Engineering In RF and Microwave Engineering, Anne has served as a MACOM Distinguished Fellow of Technology since joining MACOM in 2010. I would like to congratulate Wayne on this well deserved promotion and the entire management team and I look forward to working more closely with him going forward. I would now like to ask the operator to take any questions.

Operator

Thank you. And our first question coming from the line of Tom O'Malley with Barclays. Your line is open.

Speaker 4

Good morning, guys, and thanks for taking my question. I guess my first question and it's something that you've highlighted since you took over the company is just the strategic review process in July. You mentioned the $1,000,000,000 again. Can you just give us any update on the timeline there? Could you talk about just the overarching growth drivers that get you to that $1,000,000,000 and just The framework that you put together over the last month, that's going to guide you from this point, over the next couple of years.

Speaker 2

Sure. Good morning, Tom. So the timing of that is in the Our fiscal 2026 or early 2027 timeframe, which is about a year or year and a half behind what we had sort of originally stated a year ago, primarily due to the softness in the market slowing things down this year. When we look at our growth trajectory, we want to achieve at least Our 10 year historical CAGR, which is about 14%. When we look at what's going to be driving our growth, it's Primarily new product driven, not necessarily acquisition driven.

Speaker 2

And I think more importantly, when we start to look at The P and L at that $1,000,000,000 to $1,300,000,000 run rate, we see an EPS close to $5 And so part of our strategy is to make sure that we are growing profitable revenue that's accretive to the business model. In terms of the specific product lines or segments that we're focused on, it's really the same markets that we've been speaking about Over the past few years, certainly, we believe telecom over the long term will drive growth, followed by industrial and defense And then the data center. And then the framework that I talked about is really some of those details that I spoke of in my prepared remarks. It's really an external review of market dynamics, looking at our capability to design And then positioning the company in a market where we know we can be successful.

Speaker 4

Helpful. And then something, I guess, more shorter term than the overarching question there. But it looks like data center was a lot stronger, particularly well into the September quarter. You mentioned specifically higher speed connections at 400 gs and 800 gs. Is that the area of the data center business that you're seeing accelerate?

Speaker 4

And could you talk about different areas where You're seeing traction with those deployments? Thank you.

Speaker 2

You're correct that we are predicting Strong growth in our Q4 for the data center business. In fact, we think it will be so strong that We'll have year over year growth within the segment. So this would represent 5 years in a row where the data Our end market is growing, so we're happy about that. The growth is primarily coming from 408 100 gs short reach applications. Typically, it's 100 gs per lane and we have a very strong position with some of our latest products that are ramping quite quickly.

Speaker 2

We have not seen a general recovery in the lower data rate applications, Sort of the standard 4x50gs or 8x50gs type applications. Where we see the growth is primarily short reach 100 gs per lane. Some of these products are supporting linear drive applications. Most, if not all of the business is coming from PAM4 protocol. And so we do expect that Good things in the quarter.

Operator

Thank you. And our next question coming from the line of C. J. Muse with Evercore ISI. Your line is open.

Speaker 4

Yes. Good afternoon good morning. Sorry. Thank you for taking the question. Guess first question just to follow-up on Tommy's question on the data center.

Speaker 4

You just highlighted year over year growth, which means roughly 10,000,000 Plus growth sequentially. And I guess, can you speak to kind of the trends that you're seeing in terms of kind of, I guess AI data center trends versus kind of base case. And is there enough kind of spending on this high speed connectivity Related on the AI side to sustain growth in data center through the calendar year.

Speaker 2

Right. So, our primary focus for product development within the data center is analog solutions as well as Optical, photo detectors and lasers. Those are really the three areas that we focus on. And So wherever we can find an application, whether it's a pluggable transceiver, a CPO, an active optical cable or even active electrical copper cable. We want to sell our products into those applications.

Speaker 2

We have definitely seen an increase in what we would consider AI related deployments and applications. And we've seen many examples where customers are excited to perhaps reduce the diameter of a copper cable by electrifying it and running it at a higher data rate over a slightly longer reach than they could have otherwise. And that's been a growth area for us. And then of course, the linear drive as we've talked about in the past has many advantages over a DSP solution. And so we are seeing a bit of a convergence around this type of architecture.

Speaker 2

And this is typically In areas where you have 100 gig switch effectively and you have 100 gig optical. And so This is an example where MACOM can insert 1 or 2 or maybe 3 or 4 different products That go into these applications. And the key here really for the customer is, there's no gearbox, lower power consumption, lower latency and lower cost. And so, of course, the challenge is designing these optical channels with just equalization or An analog solution for signal integrity is very difficult. So the design process is complex.

Speaker 2

And we've been working with major OEMs to support the growth of this part of our business.

Speaker 4

Very helpful. I guess maybe a broader cyclical question. You talked about book to bill almost to 1 versus 0.5 last quarter, turns normalizing. It looks like backlog somewhere close to $300,000,000 so still Strong. Are you suggesting that we're nearing a bottom for the totality of your business or might it take a few more quarters for

Speaker 2

So we try not to Call the bottoms, let's say, because we really don't know. And what we can say based on where we are today that For a year over year comparison, 2 of our 3 markets will be up. I and D will be up, data center will be up And telecom will be down somewhere between 20% 25%. And as I highlighted in my comments that the Inbound new business and that has been quite weak this year for telecom. We do expect at some point that will turn.

Speaker 2

We see certainly great opportunities in the SATCOM market, with the deployment of a wide range of different satellite platforms, which we believe can provide certainly near term growth opportunities. But it's very difficult for us to say sort of where the bottom is and what might happen 3 or 6 months from now.

Operator

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

Speaker 4

Yes. Thank you. Good morning and congrats on the order turnaround here. Steve, you talked about being able to Support InfiniBand and Ethernet. You also said that for next quarter, it sounds like most of the growth is going to come from PAM4.

Speaker 4

So Does that mean InfiniBand is kind of further out? If you could just add any color to that, that'd be great.

Speaker 2

Yes. So most of our Well, I would say more than 50% of our data center revenue over the past few quarters has been PAM4 related. And so we see that trend As we go into the our fiscal 2024. So I would certainly I'll highlight that point. The other point I would make frankly is that InfiniBand and Ethernet are both PAM4.

Speaker 4

Perfect. Thank you. And as a follow-up, you mentioned China revenue 16%. Is that predominantly PON at this point? Or do you still have some base station business there?

Speaker 4

Just trying to understand regionally where the risks And so on and so forth with that 16% revenue.

Speaker 2

Well, I would say there's been a broad decrease in Our China based business, it's primarily on the optical side and 5 gs related. And so I would say that's the area that's the weakest. Areas where we see support would certainly be in some parts of some 5 gs networks we are supporting at a low level. But there's no doubt that this year is going to be a down year for our China business. And as it starts to come back, it will come back primarily due to the recovery from our data center and optical customers.

Operator

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

Speaker 1

Yes. Thank you. Good morning. I wanted to follow-up on data center for a second. I just wanted to Confirm, are you suggesting that data center is up year over year in the fiscal Q4 Or for fiscal 2023 as a whole.

Speaker 1

And I have a follow-up.

Speaker 2

Sure. So from a data center point of view going into Q4, it would be up certainly quarter over quarter significantly as well as year over year. I would say very strong double digit quarter over quarter and high single digit year over year. And just to highlight that the color of our data center revenue has shifted quite a bit this fiscal year. The first half strength predominantly came from shipping backlog that was constrained in fiscal 22 due to supply issues and we cleared out a lot of that backlog in the first half.

Speaker 2

Then in Q3, we Effectively hit an air gap where there was very little demand on what I would consider our base business due to inventory issues. And now what we're starting to see is growth and demand for our higher data rate Products for 408 100 gs that is just starting to kick in. So when you add all of that up, what you ultimately get is growth year over year And growth quarter over quarter for the Q4.

Speaker 1

Yes. Thank you for that. I guess, Is there anything to read into your prepared remarks on slowing sales in China? Is the reduction due to general market malaise in 5 As you just called out or are you seeing competitive pressures there? Can you just clarify on that?

Speaker 1

That would be very helpful. Thank you.

Speaker 2

Yes. Well, our and just to come back to your last question, so that you're perfectly clear, there will be Full year year over year growth for our data center. That is what we're expecting. And then answering your question about China. So China, Our revenues there have been trending down pretty much all year.

Speaker 2

We started, I think, in Q1 about 20% to 23% of our business was China based and now it's in the mid teens. Most of that is due to 5 gs in front haul weaknesses as well as we just talked about the data center. I would say that there's Always been a very competitive dynamic in China and that competitive dynamic I would say is increasing. There's certainly More and more focus on supplying locally and having Local vendors supply the local OEMs. And so I would say that that trend is increasing and some of that's due to geopolitical reasons.

Speaker 2

We have not been defocusing our efforts on China. Today, still some of the major telecom Suppliers into the optical networks and whatnot are based in China. So we'll continue to service the market. We're not pulling back per se. However, I would also add that we are focused on developing our revenues in other areas, including Europe and that's one of the main reasons why we decided to establish facilities and manufacturing inside of the EU.

Operator

Thank you. And our next question coming from the line of Harlan Lee Sur, Jr. With JPMorgan. Your line is open.

Speaker 5

Yes, good morning. Thanks for taking my question. And good to see the inflection in order activity, But can be quite noisy, right, during this period of sort of macro weakness, but it looks like dynamics are stabilizing, right, as reflected by the decline in orders and push outs. So quarter to date here in September, are bookings continuing to rise sequentially? And what's the terms assumption embedded in your September quarter guide?

Speaker 2

So, we're certainly very pleased with our 0.9 book Bill in the Q3 and I would say that we've started the Q4 with strong bookings and It certainly would be our expectation that we can be somewhere around the 0.9 to 1 book to bill this Quarter, that's our expectation. We'll see how August September go. A lot of these programs that are coming in are also program related, large So in some instances, we have good line of sight. But I think your point about the choppiness is absolutely there. As I highlighted, the telecom market is still very, very weak.

Speaker 2

We see that many of our major customers still are carrying tremendous levels of inventory, And then regarding your question about the turns, I think we're going to have similar turns Level in Q4 as we had in Q3.

Speaker 5

Thank you for that. And then congratulations on It looks like their operations are going to become the hub of the European semiconductor sector. Is the MACOM team Going to be transferring some of its MACOM originated gas and GaN based Mimic technology to the Ohmic fab, including your 0.14 Micron GaN Technology. And what's the revenue potential out of their current 3 inches manufacturing line?

Speaker 2

So thanks for that comment and question. So just to highlight, we've had operations in Europe. We have a fairly large facility in Cork, Ireland, where we have a design center. We do quality and reliability testing, And we have a fair amount of sales in finance and administration supporting a lot of our international business. So, Quark is certainly Today, the main hub of MACOM certainly in Europe.

Speaker 2

We've also had a design center in Sofia, France for over 10 years and they've done a super job supporting a lot of our high performance analog product development. And then adding a wafer fab and a group that is expert at Very high frequency millimeter wave process technology really complements the portfolio. We do not have any plans Transfer any of our technology that we're running here, including the 0.14 micron process to France. Instead, we will continue to build and develop the technologies that they've been working on and as a priority move some of those process Technologies from the 3 inches line to a 6 inches line. We haven't explicitly said what the revenue potential is of that fab.

Speaker 2

We probably Wouldn't want to say that, that with that level of detail. But what I can tell you is right now that is that fab is Underutilized, we see a tremendous opportunity for growth and our sales team and our business development teams are Very actively, really turning the business around and, we see that will be a nice growth vector for us over the next 1 to 2 years.

Operator

Thank you. And our next question coming from the line of Vivek Arya with Bank of America. Your line is open.

Speaker 6

Hi. This is Blake Freeman on for Vivek. Thanks for taking my questions. Just kind of want to focus a little bit more on the Q4 guide. I know you gave color around data center.

Speaker 6

If you can provide kind of the sequential commentary maybe for the industrial and defense and telecom business, the magnitude of the declines in each of those areas, that would be helpful.

Speaker 2

Sure. I'll say a word on that and then maybe Jack can add in. So as we've talked about, we do expect very strong data center growth And we expect I and D will be down in the sort of mid single digits and telecom and somewhere between 10% 15% down sequentially. And Jack, I don't know whether you want to add to that. Yes.

Speaker 2

I think

Speaker 3

I would just add, we've developed a fairly strong backlog over the past couple of years, and We've beaten into that a little bit over the past couple of quarters. So I think with regard to some of those Q4 guide items that we have with industrial and defense and telecom being down, that's also coming on the back of lower than one to one book to bill. So we need to work some of those lower order patterns that we've seen going through the past couple of quarters through this Q4 time period. But once again, as I had mentioned, we do have a fairly strong backlog that supports the business going into Q4 and beyond.

Speaker 6

Got it. And then just kind of following up on that, maybe specifically on the industrial defense side. I know that certainly across the industry, several vendors observing some kind of digestion in the core industrial space. I was just I know this segment is kind of about 50%, 60% defense. So I was maybe kind of hoping you can kind of Provide more specifics, maybe what you're seeing specifically on trends on the defense side and then areas in core industrial markets that could be a little bit weaker or stronger versus others.

Speaker 2

Yes. I would say, in general, our industrial business is weak and will remain weak in In the near term and most of the growth that we're getting in the IND segment is coming from defense programs, primarily radar programs, rate communication programs. I think we mentioned on last quarter's calls, some heavy demand for international radios coming out of Europe that we have some content in. So the eye part of eye and d today is weak. I talked about in my prepared remarks some of the New applications that we are going after within the eye portion there.

Speaker 2

But generally speaking, it's And the other thing I would add is we're not really a good bellwether of the industrial end market. It's one of the smaller parts of our portfolio. Yes.

Speaker 3

And Blake, this is Jack. I would just add that some of the inherent business that we have going through from a defense perspective, that can be lumpy at times. And I think the other item when you look at our industrial and defense end market is that it's quite diverse. There's a number of different things that work its way into the industrial category as well. So that helps us from a stability standpoint as well.

Operator

Thank you. And our next question coming from the line of Matt Ramsay with TD Cowen. Your line is open.

Speaker 7

Thank you very much guys. Good morning. Not to go back to the data center stuff, but You can't get through a call now without saying AI a few times. So we kind of have to go there. I wanted to ask about your 408 100 gig Product portfolio and particularly you mentioned the linear drive differentiation versus DSPs.

Speaker 7

Steve, maybe you could expand on that a little bit more from a technical perspective and also, how you're thinking about The penetration of linear drive into those data center markets, where we are today, where that can go over time and what it represents as sort of A dollar TAM for your company. Thanks.

Speaker 2

Sure. So, I'll Try to provide a bit more detail. So where we see linear drive working is when you have 100 gig electrical lane Matching up with 100 gig optical lane. That's the ideal application. So you can run that at You can run that at 400, you can run that at 800, you can run that at 1.6 terabits as well.

Speaker 2

And when you use a linear drive architecture, you're effectively removing the function of the DSP or a CDR from the module and you're Having the switch effectively manage the interface, the interface within the module, If it's a module. So there's benefits in doing that just from latency, cost, Power consumption. And so that those are the benefits and you can eliminate the DSP and still be in a pluggable form. So you can use this for active optical cables. You can use this for pluggable cables.

Speaker 2

And so There's customers like that option because then they can use many vendors to support their deployments. What it requires is certainly a switch ASIC that and it requires now the module manufacturer to work very closely with the switch Vendor. We demonstrated at OFC a few months back, 3 different module manufacturers with an interop with the Tomahawk 5 switch. So that was ideal for Primarily short reach and that's where MACOM has historically serviced the short reach market. That's just sort of the lane that we're in.

Speaker 2

And what we sell into that market are drivers and TIAs primarily and equalizers. So those are the sort of the 3 product sets. These are highly integrated silicon chips that have all sorts of creature features on them so that the customers can Turn the knobs they need to turn to get the product working. And so where we stand right now is we have production at 100 gs And we are pretty far along with 200 gs per lane as well.

Speaker 7

Thank you for all that detail. I Really do appreciate it. As my follow-up, I think it is encouraging to see book to bill up to 0.9, and I think you guys indicated close To 1, hopefully for the September quarter. Maybe you could give a little bit of color, if you could, on The 3 segments and how book to bill is trending in each of those are some well ahead of 1 at this point and What those products might be and are there certain end markets where we're still coming off the 0.5 that we were last quarter and working our way back up? Thanks.

Speaker 2

Right. Well, as in Q3, we will see the same behaviors in Q4. It will be primarily Industrial and Defense and Data Center driving the bookings growth or recovery, let's say. We still see Tremendous weakness across many of our telecom end segments, cable, test and measurement, 5 gs. These are still very weak.

Speaker 2

Don't expect recovery in the Q4. In terms of the products, it's certainly many of the products that we've talked about in the past, A lot of our mimic products, a lot of our high end gas and GaN products for military applications, there's a wide range of those are really supporting the growth within the defense sector. When we think about 2024, the growth drivers from a Product set point of view would certainly be GaN. GaN is we think 2024 will be a great year for us. We launched the 0.14 micron process about 6 months ago into production, and our teams are in the process of getting their first design wins, which will turn Production next year.

Speaker 2

Certainly on the data center side, we think in 2024, there'll be more high data rate applications coming to bear, Potentially ramping up. And then in the telecom area, the only real bright spot for us right now is what we're doing in the Satcom market, both On the ground side and on the satellite side.

Operator

Thank you. And our next question coming from the line of Harsh Kumar with Piper Sandler. Your line is open.

Speaker 8

Yes. Hey, Steve and Jack. Had a quick one. Steve, when you talked about your long term drivers, you mentioned the order of telecom, industrial and then data center. As you try to get to your $1,000,000,000 goal by FY 'twenty six or early FY 'twenty seven, is that how you're thinking about growth To that $1,000,000,000 number or was that just a random order?

Speaker 8

And if I can flip the question, if that's not the correct order, what is the correct order as we think about it?

Speaker 2

Yes. So that is the correct order. That's the way we think about it. But we're oftentimes wrong, More often wrong than right when we make forecasts. So you have to take that with a grain of salt.

Speaker 2

But when we look at our R and D spending And we look at the projects that are in our pipeline and where we want to position the company, we see that there's a lot of variability within the telecom space that is very attractive And so we like the diversity. We like the long tail of customers that we can approach, and it plays to a lot of our strengths. So we do end up spending a fair amount of our R and D dollars developing chips for that end market. Obviously, the A and D market is another great market for us. I think as I think I mentioned in the script, Q3 was a record for our I and D segment.

Speaker 2

And this year, we'll have great year over year growth for the full year. And we expect more good things to happen next year and the year after that as we start to bring into production Some of the new programs that we know were designed into. And the smallest piece of our business is the data center. I realize we get probably the Questions about the data center. But as I highlighted, we do have a narrow focus in the data center where we focus on analog solutions For short reach where we can insert high performance connectivity chips or Lasers and detectors.

Speaker 2

That is our strategy there. So that's a fairly narrow focused strategy.

Speaker 8

Thank you for what it's worth. We get things wrong all the time too, so I wouldn't be too hard on yourself. For my follow-up, You're seeing some pretty good pickup in the data center space. The kind of trend you're talking about typically don't go away in a quarter or 2. So Is it a fair assumption to think that the activity in $408100 should stick around for a handful of quarters As you look maybe past the next quarter and a little bit more beyond?

Speaker 2

It is possible and it's very difficult for us to say. And we have certainly seen in the past Examples where programs ramp up very quickly and then they ramp down very quickly. So we have to be cognizant of that. So while we're certainly excited about all the great things we're doing within the data center, we also recognize that it can be a very volatile business.

Operator

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

Speaker 1

Good morning. Thanks for taking the question. Steve, just quickly, I guess, on the magnitude of the inventory depletion That you still see needs to happen in the channel. And you've talked about, I think you've mentioned tremendous a few times. So it sounds like a fairly heavy level of inventory digestion needs to happen, but

Speaker 3

just wondering if you could thoughts that for us.

Speaker 2

Yes, sure. I'll make a comment and then certainly maybe Jack can add to it. And As everybody knows, the manufacturing cycle times for many of our products can be in the range of 6 months, maybe longer, maybe shorter depending on The fab in the technology. And as everybody knows, just 2 quarters ago, we had a run rate of $180,000,000 So when you're at our inventory today and you relate that to sort of $180,000,000 run rate, you could see that we are, as Jack said, carrying Excess inventories at today's level, but if but not necessarily, from maybe 1 or 2 quarters ago. So we are going through a digestion period where we need to move that inventory out into the market.

Speaker 2

And part of what we're also doing is making Sure that our channels are not carrying excess inventory. And so we are definitely managing that down. We want to see more depletion. And Jack, maybe you can add to that.

Speaker 3

Yes. I think as we had discussed in some of our prepared remarks, we're working closely to monitor What's out in the channel and making sure we understand where things are going there. We have had some positive trends over the past quarter That are somewhat encouraging, but we will continue to monitor that. And with regard to MACOM's inventory, I described the uptick that We've seen some of that uptick is associated with some of the acquisitions that we've brought on board when you look back over the past year, but we're also continuing to purchase inventory to support our backlog. And I think most notably, the data center backlog that we have.

Speaker 1

Great. Thanks. And Jack, in the past, you've talked about the flexibility in the model On the expense side, and just hoping you could give us a little more thoughts in terms of modeling and what's appropriate. And if you're restraining growth or development efforts here, just kind of to this software demand environment.

Speaker 3

Yes. So we've been pleased with the gross margin performance of the business in light of the slowdown over the past few quarters. We've made a fair amount of structural changes To the business, to manage the improvements that we've seen over the past couple of years from an overall gross margin standpoint. So We do have the flexible manufacturing model as I had described with some of the products being manufactured in house in our internal fabs and others that go to 3rd party. So that helps us in terms of being able to mitigate some of the That we have with a portion of them being essentially variable.

Speaker 3

And then I think the other Piece that I would like to highlight is our internal manufacturing fabs are generally medium volume. We don't Carry the same large overheads like some of the mega fabs have. So that helps protect us too in periods where there may be a slowdown. And then as we look out into the future and hopefully as we get back to some of the higher run rates that we were at from an overall revenue perspective, I think that will support improving gross margins as we go forward.

Operator

Thank you. And our next question coming from the line of Wynn Bolton with Needham, your line is open.

Speaker 3

Hey guys, just a quick clarification on the 400 gig, 800 gig. Is that Almost entirely optical? Or are you starting to see copper applications, active copper cables starting to take off within that higher speed PAM4 business?

Speaker 2

We see both. And some of our chips are Four lanes of 100 on a single chip and you can use 2 of those to achieve 800. The other thing I'll note, which is sort of a benefit of the linear drive approach is it can really work with A whole variety of architectures within the module, whether it's a silicon photonic based solution, whether it's DML or EML, And also thin film lithium niobase. So whatever technology the module vendor wants to use, We can support those in including VCSEL's as well if I didn't mention that. So Very flexible technology from MACOM's point of view.

Speaker 3

And a follow-up on linear drive. It sounds like your Comments, it's mostly on the Ethernet around Tom Hock 5, but InfiniBand seems like it's much more closed channel. You have effectively one vendor, I think, That dominates that market. So it seems to me that InfiniBand could be a pretty significant opportunity for linear drive. Where do you think we are in Adoption of linear drive in the InfiniBand market?

Speaker 2

So we I would agree that We can service both sides or both protocols. And I think we in fact demonstrated a solution using InfiniBand application in EdofC. So yes, we are supporting that as well.

Operator

Thank you. And our next question coming from the line of Richard Shannon with Craig Hallum. Your line is open.

Speaker 9

Hi, guys. Thanks for taking my questions. Steve, I want to follow-up on one of your responses to an earlier question on Gantt. I think you mentioned you're expecting a great year in Fiscal 'twenty four, maybe if you can help us understand those dynamics and maybe even quantify what you see as the opportunity for that in that year?

Speaker 2

Sure. And I'll sort of define great as we developed a process and now we're selling it. So that we'll start selling it in 2024. So we're starting at 0 for our 0.14 micron process. And we are getting design wins and we expect to see growth in that fiscal year.

Speaker 2

So that's our right now that's our definition of great. It's a win. And so our sales team, our business development team, our fab engineers are excited to make that happen. We haven't Put a fine number on the goal, our internal goals and we haven't shared that externally and I think it's premature to do that. But we just look at that as another vehicle for growth.

Speaker 2

We have the full support Major OEMs here in the U. S. That want to use the technology. We're doing some novel things regarding R and D, as I mentioned on my prepared remarks, including bringing in sort of next generation process steps to improve performance beyond what we currently have. And so certainly we think next year will be a great year for CAN.

Speaker 9

Okay, perfect. Thanks for that detail. And last question for me on Data Centric here. I just want to verify,

Speaker 2

I think you said it, but

Speaker 9

I just want to verify is all the upside here you're seeing is on the analog side or are you seeing any upside Coming with lasers, obviously had some great discussion in the last few quarters on what you're thinking about your laser portfolio, but it seems like it's all analog oriented. Can you confirm if that's what you're seeing?

Speaker 2

I would say it's true the growth is coming from the analog side and I would characterize our fiscal 2023 as A building year for our optical products where lots of design ins and lower revenue than we had expected. So that's been a disappointment. However, the team is making progress winning those design wins, not only At accounts here in the U. S, but also in China. And we're also working on new laser Categories including EMLs and arrays that are we have a lot of interest in on that.

Speaker 2

So But to your point, yes, the growth for this year, for this quarter in the data center is driven by analog solutions.

Operator

Thank you. And I'm not showing any further questions in the queue at this time. I would now like to turn the call back over to Mr. Steve Daley for any closing remarks.

Speaker 2

Thank you. In closing, I would like to thank our team for their continued hard work and dedication. Have a nice day.

Operator

Ladies and gentlemen, that does conclude our conference call today. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • MACOM reported Q3 revenue of $148.5 million (down 12% QoQ) with adjusted EPS of $0.54, generated $45.8 million of operating cash flow, ended with $588 million in cash and improved its book-to-bill to 0.9 despite high industry inventory levels.
  • The Industrial & Defense segment set a company record at $83.5 million, driven by demand for satellite communications, AESA radars and electronic warfare, and MACOM is expanding its SAM through new GaN processes, BAW filters, photonic subsystems and the $250 million TAM Linear Communications Group acquisition.
  • Telecom revenue fell 29% sequentially to $38.3 million amid weak 5G rollouts, China telecom headwinds and channel overstock, but MACOM sees long-term upside with high-performance diode, mixer and RFIC portfolios and new 5G base station and FR2 FEM modules.
  • Data center revenue declined 31% to $26.6 million due to excess inventories at 25 G/100 G, yet customer demand for 400 G/800 G and 200 G PAM4 is accelerating, where MACOM’s analog linear-drive solutions offer lower latency and power for AI/ML/HPC hyperscale deployments.
  • Key strategic moves include a $4 million AFRL contract for advanced mmWave GaN development, establishment of the European Semiconductor Center, pay-off of the $121 million term loan (net debt < $50 million), and a refreshed 5-year plan targeting $1 billion in revenue by FY 2026/27.
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Earnings Conference Call
MACOM Technology Solutions Q3 2023
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