MACOM Technology Solutions Holdings, Inc.

Good afternoon and welcome to MACOM's fourth fiscal quarter 2020 conference call. This conference call is being recorded today, Thursday, November 5th, 2020. At this time, all participants are in a listening mode. I will now turn the call to Mr. Steve Ferranti, MACOM's Vice President of Strategic Initiatives and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Shannon. Good afternoon. and welcome to MACOM's fourth fiscal quarter 2020 earnings conference call. 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 more detailed discussion of the risks and uncertainties that could result in those differences, We refer you to MACOM's filings with the SEC. Management statements during this call will also include 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 8K, which was filed with the SEC today. With that, I'll turn over the call to Steve Daley, President and CEO of MACOM.

Thank you, and good afternoon. I will begin today's call with a general company update. After that, Jack Kober, our chief financial officer, will provide a more in-depth review of our fourth quarter and full-year financial results for fiscal year 2020. When Jack is finished, I will provide revenue and earnings guidance for the first quarter of FY21, and then we will be happy to take some questions. Before I start my review, I would like to acknowledge the amazing work and contributions of our employees who make these results possible. Revenue for the fourth fiscal quarter was $147.2 million and adjusted EPS was 40 cents per diluted share. This was the highest EPS performance in 12 quarters. I'll note that our fiscal year 2020 had multiple financial highlights, including 6% year-over-year revenue growth, 440 basis points of improved gross margin, and operating income that grew by a factor of eight, which generated over $150 million in free cash flow. Jack and I, along with the entire management team, are pleased with the progress to date, and we remain focused on further improving our financials. The secular trends associated with our three core end markets, data center, telecommunications, and industrial and defense, provide us significant opportunities for growth. We estimate our serviceable available market, or SAM, is approximately $5 billion. To maximize our market share, we are working to establish Macom as a leading supplier of LightWave, RF, and high-speed analog solutions. It is our goal that these technologies will be supported with best-in-class customer engagements, manufacturing, and quality. New products are our growth engine, and as I've stated in the past, our future performance will be based in part on our ability to introduce more innovative products at a faster pace. In support of our growth strategy, we are focused on execution and fast time to market. I see meaningful progress here, and as an example, I am pleased that our engineering teams have more than doubled the number of product introductions in fiscal year 20 versus fiscal year 19. Further, I am pleased the competitiveness and the uniqueness of our new products continues to improve. As we start our new fiscal year, I would like to share some of our top priorities. Above all else, we seek to maintain a safe and healthy work environment for our employees. I'll note we are in our third month of a program which offers voluntary, daily, on-site COVID-19 screening to any employee working at our largest manufacturing sites. Easy access and fast COVID test results help support a safe work environment. Our first priority is to continue to improve our profitability. Strategies underpinning this effort include maximizing the efficiency of our R&D investments, developing high-margin differentiated products, improving factory utilization and yields, optimizing sales strategies, and maintaining OPEX disciplines. We are pleased that our operating margin is currently greater than 23%, and we are confident we can do even better. Second, we want to expand our presence in 5G utilizing RF, high-speed analog, and lightweight solutions. Today, MACOM is present across the 5G network with product content in the antenna systems, as well as in front-haul, mid-haul, and metro long-haul optical systems. Today we are only delivering a fraction of our potential, and we believe our best performing products for some of these applications will come to market over the next six to 12 months. Third, we will use our high speed analog and connectivity design capabilities to expand deeper into our target end markets. Our data center growth strategy includes working closely with worldwide cloud service providers to ensure our technology roadmaps are aligned with their future needs. Roadmap alignment is critical, whether working on current 100G, 200G, or 400G systems, or disruptive future generation architectures. Included in this effort is supporting emerging applications, such as Next Generation PON. Our high-speed analog and optical design capability is compelling, and we will build upon this strength. Fourth, we are focused on leveraging the manufacturing capability of our Lowell, Massachusetts and Ann Arbor, Michigan wafer foundries. This is critical for our long-term industrial and defense and market growth. We have revamped our process technology roadmaps for each FAB and we expect to make some exciting announcements on new initiatives throughout our fiscal 21. Investing in our FAB infrastructure and process technologies enables differentiation which ultimately supports unique products that may drive highly profitable growth. And fifth, our priority is to take market share with best-in-class lasers and photo detectors in and around the data center and 5G telecom systems. We believe that our newest laser and APD products will set the standard for performance. We have a broad technology portfolio, and each one of our engineering organizations now has detailed product roadmaps and refreshed market positioning strategies. It is exciting to see our engineers and sales teams working in a collaborative way with customers to win market share. Let me highlight one example of improving our position in the emerging 10 GPON market. Today, Macom is a leading supplier of 2.5 GPON lasers. Historically, we have supplied two GPON products in volume production, lasers and laser drivers. As 10 GPON emerges and ramps up, we expect to provide up to five products across four product families. namely high and low power lasers, laser drivers, transimpedance amplifiers, and photo detectors. PON networks are deployed globally, and we believe the work-from-home trend across Europe, Asia, and the U.S. will accelerate the deployment of next-generation PON systems because the systems operate at higher speeds. This trend has the potential to benefit MACOM. Our Q4 revenue by end market was as follows. Data center was $43.9 million. Telecom was 55.4 million and industrial and defense was 47.9 million. Data center had sequential growth of 35% while our industrial and defense business was essentially flat and telecom declined by 2%. We had an exceptional year in bookings and we are pleased to start our fiscal year 21 with a near record backlog. Our Q4 book to bill ratio was approximately 0.8. However, I will note our book to bill for the full year was 1.1 to 1. I'll also note in FY20, we had periods of exceptional bookings driven by healthy underlying demand across our end markets, augmented at times by long lead time IND orders, and customer pull-ins driven by concerns about supply chain disruptions due to COVID-19. Our Q4 turns business was approximately 13% of total revenue. I'll highlight in Q4 we ceased shipping and canceled certain customer backlog in order to remain compliant with the expanded U.S. export restrictions announced in August. We estimate the year-over-year impact of the expanded restrictions is approximately $20 million of lost revenues. We do expect to offset this lost revenue with growth from new products and market share gains at other customers. We track channel inventory and long-term demand forecasts from our largest customers, and I would characterize the new orders environment in October as improving when compared to our fourth quarter. Now turning to the markets. Our data center and market revenue was driven by strong cloud data center demand for both domestic and international deployments. Our 100G high-performance analog products and our emerging 200 and 400G analog products are supporting this growth. I'll note that our international data center growth is driven by Asia-based data center expansion where we sell both 25G and 100G analog products. Our telecom market demand was primarily driven by 5G products and to a lesser extent GPON products. We believe the near-term demand for our 5G products will temporarily slow before it begins to accelerate again when the next round of 5G bids is released. We also expect near-term delays in global deployments of 5G due to COVID-19 and the Huawei business impact. Nevertheless, the secular growth opportunity in 5G remains intact as worldwide demand for improved connectivity at higher data rates will continue to grow. Our industrial and defense end market revenue performed as we expected, with general weakness in testing measurement as well as avionics. However, in the coming quarters, we anticipate the negative trends will be offset by strengthening demand from a variety of U.S. defense programs some of which are already in backlog. Each of our six engineering teams has tremendous growth potential. Notably, we have a tremendous growth opportunity with our RF power business. Our efforts include, one, taking market share on legacy silicon bipolar business, two, expanding our MACOM pure carbide GAN product portfolio with compelling new products, three, partnering with major OEMs across the industrial and defense markets, and four, participating in the 5G power amplifier opportunity. As you may remember, we launched two flagship general-purpose pure carbide GAN products last quarter. Since then, we have expanded our pure carbide GAN portfolio to a total of five products, including 25-watt, 65-watt, 85-watt, 150-watt, and 2.6 kilowatts. Our 2.6 kilowatt product is truly unique and represents Macom's highest power product ever. And it achieves industry leading power levels, making it ideal for certain defense applications. We plan to grow our pure carbide portfolio significantly over the next 12 months with additional high performance products. In summary, we stand in front of a multi-billion dollar SAM with a strengthening technology portfolio. We maintain a long-term perspective on executing our strategy. We are excited with the pace of innovation that we are achieving. We are confident we can continue to improve our financials and take market share in the months and years ahead. Jack will now provide a more detailed review of our financial results.