MACOM Technology Solutions Holdings, Inc.

Welcome to MACOM's second quarter 2021 conference call. This call is being recorded today, April 29th, 2021. At this time, all participants are in a listen-only 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, Livia. Thank you, Livia. Good morning, everyone, and welcome to MACOM's conference call to discuss its second fiscal quarter of 2021 financial results. 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 8-K, which was filed with the SEC today. And with that, I will turn over the call to Steve Daley, President and CEO of MACOM.

Thank you, and good morning. I will begin today's call with a general company update. After that, Jack Kober, our Chief Financial Officer, will provide a more in-depth review of our second quarter results for fiscal year 2021. When Jack is finished, I will provide revenue and earnings guidance for the third quarter of FY21, and then we will be happy to take some questions. Revenue for our second fiscal quarter was $150.6 million, in adjusted EPS was 51 cents per diluted share. Q2 results represent record high adjusted gross margin and adjusted operating margin since MACOM went public nine years ago. I would like to thank and congratulate our dedicated employees for their efforts to make this achievement possible. We remain focused on executing our strategic plan, which emphasizes profitability. and investing in compelling R&D projects in order to win market share. Before discussing the second quarter in detail, I would like to highlight on March 22nd, we announced we would use $100 million of cash on hand to pay down a portion of our long-term debt. In addition, we announced a convertible notes transaction to restructure a portion of the remaining debt. We believe these two actions reduce our balance sheet risk and create shareholder value by saving the company approximately $11 million in interest payments per year. In a few moments, Jack will review in detail these transactions. Our Q2 revenue by end market was generally as we expected and included industrial and defense at $72.1 million, telecom at $42.3 million, and data center at $36.2 million. IND was up 17% sequentially, telecom was down 18% sequentially, and data center was up 2% sequentially. Our book-to-bill ratio was 1.1 to 1, and our turns business was approximately 16% of our total revenue. Overall, we are pleased with our Q2 bookings and the gains we are making in the market. This was a solid quarter, and we believe we are on plan to meet our near-term financial and technical objectives. Now turning to more specifics in our three end markets. Our industrial and defense end market revenue was up in Q2, driven in part by strong demand from a variety of industrial applications and U.S. defense radar programs. Over the past year, we have implemented new strategies to initiate growth. including increasing cross-selling of our technologies into industrial and defense markets, improving our sales channels, refocusing on key accounts, and developing additional standard and custom products which will appeal directly to current and potential customers. These efforts are supporting some of our recent IND growth. Our telecom and market revenue was down in Q2, driven by softness in 5G deployments in China. We anticipate our telecom business will begin to improve when the Chinese carriers begin to launch additional 5G infrastructure. However, today we have limited visibility as to the exact timing. We feel the secular growth opportunity in 5G remains intact as worldwide demand for improved connectivity at higher data rates is growing. We also expect revenue growth from PON, CATV, and SATCOM in the next few quarters primarily driven by strengthening markets, new product introduction, and market share gains. Our data center and market revenue was up slightly in Q2, driven by both domestic and international business. We expect our emerging 400G products to perform well in the coming quarters, although this growth may be tempered by flat or reduced 100G volumes. There are four technology areas that I would like to highlight today. First, I am pleased to announce we have developed a semiconductor process to support the introduction of a new high-voltage capacitor product line, branded as MACOM KV-CAPS. Over the past 18 months, our device and process engineers have been collaborating to produce the industry's highest voltage silicon capacitors. The team has achieved industry-leading 1,800-volt standoff performance, which opens up new markets and new opportunities for MACOM. This new process utilizes several one-of-a-kind proprietary MACOM technologies, and it builds upon our unique knowledge in creating deep trench via structures in very conductive silicon substrates. Our breakthrough here was to successfully develop a high-quality dielectric material that can withstand extremely high voltages, and then combine it with other proprietary processes to maximize voltage performance. Capacitors are ubiquitous in electronic systems. Our business strategy is to target non-commodity systems where customers will pay a premium for a semiconductor solution with superior stability, reliability, chip scale size, and high voltage operation. This includes radar systems, medical systems, automotive, renewable energy, and various industrial applications. We estimate that this product line will expand our SAM by at least $100 million. And we believe Macom KVCAP products fit perfectly into our strategy to target performance-driven markets with unique, high-performance discrete devices. Second, I am pleased to report in Q2 we were selected to be a pallet amplifier supplier to a new U.S. defense radar program. In late 2020, we provided our customer with qualification hardware, and after a technical review and competitive bidding process, our solution was selected due to its superior performance. This win validates our ability to field best-in-class RF and microwave high-power amplifier pallet subassemblies and at the multi-hundred-watt power level. The current pilot production volume is limited. However, this program and others like it represent a large growth opportunity. And third, I am pleased to announce we have nearly finished our 25G DFB laser telcordia qualification, which includes the completion of a 5,000-hour high-temperature operating life test. We are pleased with the results to date, and we believe our customers will be satisfied with our product's performance and reliability. We are targeting 5G optical infrastructure as a priority, and then we will focus on the data center. We expect that a formal product launch and introduction will come in the next few months. And fourth, we are making excellent progress with the new 10G PON product development. We have completed development and are sampling laser drivers for 10G EPON, XGPON, and XGSPON for both ONU and OLT applications. We have also released photodetectors for 10G ONU and OLT applications. We are finalizing the design of our new 1270 nanometer high-powered 10G DFB laser for XGSPON, And finally, we continue to make progress on improving the burst mode TIA performance, allowing us to take market share. In June, MACOM will attend the International Microwave Symposium, or IMS, in Atlanta, Georgia, and the Virtual Optical Networks and Communication Conference, or OFC. We are excited to host a series of virtual product demonstrations and educational MACOM Tech Talks for each event to share information on topics which we believe our customers will find valuable. The planned product demonstrations contain some of our newest products and will provide insight into the technology, products, and applications which we believe will drive our future revenue growth. I'll also note that these demonstrations exemplify the breadth of our RF, microwave, analog and mixed signal, digital, and optical design capabilities. Our IMS demonstrations can be organized into three categories, high-performance discrete, RF power, and millimeter wave. Our two discrete component demonstrations include a demo of MACOM's KVCAPS product line being used in a simulated medical application and a high-performance 200-watt force-throw switch and driver for military applications. Our four RF power amplifier demonstrations use our Macom pure carbide GAN on silicon carbide technology. We will demo high power GAN showcasing a three kilowatt power level from a single device. We will also demonstrate high efficiency GAN showcasing high efficiency performance between 3.1 and 3.5 gigahertz with a hundred watt power amplifier. We will also showcase ultra wide band GaN using our 25 watt pure carbide matched amplifier. And last, we will showcase a 5G massive MIMO GaN solution showcasing 400 megahertz, 110 watt Doherty amplifier performance and a DPD system. And last, two millimeter wave demonstrations including a 5G 28 gigahertz transceiver front end module and a demo which highlights how to power combine two high performance KA band mimic power amplifiers to achieve over 10 watts of power. At OFC we have multiple demonstrations planned and I'll highlight two today. The first is a demonstration of a two chip analog solution for short reach data center applications. Here we will be demonstrating our new two chip fully analog solution for 200 and 400G QSFP module and AOC applications. Chip number one is a PAM-4 CDR and TIA, and chip number two is a PAM-4 CDR and VIXL driver. The chipset will demonstrate IEEE standard compliant bit error rate and OpenEye MSA transmit compliance and also be interoperable with an Ethernet switch. The second is a demonstration of our new 50G reference design for 5G wireless mid-haul applications. This demonstration will feature a complete 50G PAM-4 QSFP28 reference design using all MACOM components. The demo platform is a 20-kilometer optical link with single-mode fiber using 1310 nanometer wavelength. Our reference design showcases MACOM's new PRISM50D DSP with integrated DML driver, a 26-gigawatt 1310 iTemp laser, a 26-gigabaud PIN photodiode, and a 26-gigabaud PAM4 TIA. I'd next like to highlight that while MACOM has a large and diversified product portfolio, and we continue to invest in many new and existing product lines to drive future growth, we also have a few product lines where we make minimal investment, and as such, we expect in time that demand for certain of these product lines will ramp down. Two legacy product lines in our connectivity business are nearing the end of their product life cycles due to protocol upgrades or changes. We expect revenue from these product lines to decline in FY22 by approximately $15 million when compared to the levels in FY21. We view these periodic events as normal product life cycle management. We are confident that our growth strategies and new products including some of the products which I discussed today, will more than offset these anticipated declines. Our key growth driver is compelling new products, which is why we have been prioritizing improving the quality and the pace of new product introductions. In fiscal 2020, we released a record number of new products, and I am pleased to report we are on pace to release at least 15 percent more new products in fiscal 21. Jack will now provide a more detailed review of our financial results.