MACOM Technology Solutions Holdings, Inc.

Welcome to MACOM's third fiscal quarter 2021 conference call. This call is being recorded today, Thursday, July 29th, 2021. At this time, all participants are on 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, Olivia. Good morning. Good morning. and welcome to our conference call to discuss MACOM's financial results for the third fiscal quarter of 2021. 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 discussions of the risks and uncertainties that can result in those differences, we refer you to MACOM's filings with the SEC. Management statements on this call will also include discussions 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. And with that, I'll turn over the call to Steve Daly, 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 third quarter fiscal year 2021 results. When Jack is finished, I will provide revenue and earnings guidance for the fourth fiscal quarter, and then we will be happy to take some questions. Revenue for our third fiscal quarter was $152.6 million, and adjusted EPS was 57 cents per diluted share. We are pleased to achieve 60.3% gross margin and 28.7% operating margin. We believe that our culture of continuous improvement along with our disciplined financial management and investment in developing differentiated products will support further gains in market share as well as improved profitability in the quarters and years ahead. Our Q3 book-to-bill ratio was 1.3 to 1, and our turns business was approximately 16% of our total revenue. We believe our strong Q3 bookings reflect market share gains as well as the current industry trend of customers placing orders well in advance of demand due to continued supply concerns. As most are aware, the semiconductor industry and our business are currently being challenged on multiple fronts. We see exceptionally high utilization levels at many of our wafer foundry suppliers, which results in extended ordering lead times. Second, we see pockets of component shortages due to manufacturing capacity limitations. This is especially true with certain package and PCB technologies. And third, we are once again seeing COVID-19 cause operational disruptions across Southeast Asia. where many of our assembly and test suppliers are located. Our operations, planning, and logistics teams are doing an excellent job managing these issues and working to meet customer commitments. We believe we can meet our near-term targets. However, given the deteriorating situation I just noted, we do see a higher execution risk profile in Q4 when compared to last quarter. Our fiscal Q3 revenue by end market was generally as expected and included industrial and defense at 71.4 million, telecom at 48 million, and data center at 33.3 million. IND was down 1% sequentially, telecom was up 14% sequentially, and data center was down 8% sequentially. For the first three quarters of FY21, IND was up 40%, data center up 27.6%, and telecom down 8%. Our industrial and defense end market performed well in Q3, with only a modest sequential decline following two quarters of strong double-digit growth. Demand is being driven by industrial applications, including test and measurement in medical systems, along with continued traction in various U.S. defense programs. Our strategy of developing compelling and more innovative products is opening up new opportunities for us across our existing industrial and aerospace and defense customer base. Additionally, we continue to make progress in our campaign to better leverage our entire portfolio within the IND market. We seek opportunities that will create a diverse, sustainable, and profitable business in the IND space based on our differentiated product lines, including RF power, millimeter wave mimics, high-speed data ICs, and optical components. We will also begin evaluating select subsystem opportunities to further leverage our IC and system knowledge. Our telecom and market revenue was up in Q3, driven by a modest increase in 5G product shipments. along with increased product shipments in PON, cable TV, and SATCOM markets. I'll note that over the last month, we've been tracking the 5G awards to support the next phase of China's domestic 5G network deployments. As a reminder, Macom has a comprehensive 5G solution portfolio, which supports coherent metro long-haul and front-haul optical hardware, as well as a suite of RF products used within the radio base station. The specific opportunities for MACOM vary depending on the base station configuration, regional frequency bands, and details of the network architecture being deployed. For example, within China, 5G deployments at 2.1 and 2.6 gigahertz typically utilize 25G front-haul links, and deployments at 700 megahertz typically utilize 10G front-haul links. In aggregate, we believe 5G represents a large secular growth trend for MACOM over the next few years as the worldwide demand for improved connectivity at higher data rates grows. We also expect contribution from 10G PON, cable TV infrastructure, and SATCOM, primarily driven by strong end market dynamics, new product introductions, and market share gains. Our data center and market revenue was down in Q3. As expected, traction with our new 200G and 400G products and gains in international 25G and 100G deployments was offset by a decrease in demand for our 100G products. We believe the 100G slowdown is related to inventory consumption at our largest customer. In fact, we believe 100G volumes will remain healthy for the foreseeable future and we continue to secure new design wins within the 100G segment. Long term, we are confident in our data center growth prospects with our leading CDR, driver, and TIA product portfolio, and with our strategy to expand into new applications, such as active copper cables, which is an emerging and very high volume, short reach, typically less than three meters, 400G and 800G data center segment. At this year's Optical Fiber Conference, we announced the availability of a two-chip analog PAM4 solution for 200G and 400G modules and active optical cable applications within the data center. This is our second-generation product for 200G and 400G PAM4 applications, and this chipset solution provides customers an alternative to DSP-based solutions with lower power consumption, lower latency, lower cost, and utilizes a smaller footprint. We believe this chipset is ideal for short-reach applications within the data center. Notably, in May, one of the three projects approved by OIF, or the Optical Inter-Networking Forum, is a project for linear interface directly from the server switch ASIC to the optical front-end module. effectively eliminating the DSP component from the optical module and moving the functionality into the switch ASIC. This interface was proposed by several leading cloud service providers, IC, optics, and IP vendors to enable a low-cost, lower-power, lower-latency solution for next-generation interconnects. MACOM is working to bring to market IC solutions for this effort. And the OIF's project aligns well with MACOM's technology roadmap to achieve 100G per lane analog solutions. Next, I would like to provide a progress report on various important topics. I am pleased to report the transfer of the Air Force Research Lab's 0.14 micron GAN on silicon carbide process into our Lowell wafer fab is on schedule. We have successfully completed front-side development, including the formation of the special T-gate structure using complex photoresist stack-ups and e-beam exposure technology. This effort is a top corporate priority, and our world-class team of dedicated process and device engineers in the FAB have been working around the clock to complete the transfer so we can bring this technology to market. As a reminder, this technology is ideally suited for very high frequency, very high power mimic products, and we are targeting aerospace and defense, test and instrumentation, and SATCOM markets. We believe that this process will establish MACOM as a major supplier of millimeter wave GAN mimics. Putting this process into production is the first step of our multi-prong millimeter wave GAN technology strategy. Recently, we received and are currently testing our first GAN on silicon devices from ST's wafer fab. We expect to receive additional samples over the next few months as ST works on process experiments and refinements. We believe we will need multiple iterations in order to achieve product success, and we continue to view this as a long-term and high-risk effort. Early in the quarter, we announced a new vendor relationship with Modelithics. Modelithics has set the gold standard in the RF and microwave industry for producing accurate device and product models that system engineers and designers can rely on when they simulate their designs. With Modelithics' support, we have released a series of device models on our new Macom pure carbide GAN products, which will aid our customers to accurately simulate their designs. Quick access to product samples and accurate models along with outstanding customer and application support will help ensure we win market share. Next, I'll highlight that our LightWave R&D team continues to make steady progress on the development of our 400G silicon photonic ICs. Investors should also view this effort as a long-term technology development with first products expected to be introduced late next fiscal year at the earliest. Our product introduction schedule is driven in part by the production readiness and the stability of the silicon photonic process we are using. We will continue to work with our foundry partner to perform producibility experiments and resolve technical issues as they emerge. And when the process is ready, we will release our designs to production. During fiscal Q3, we announced the production release of our new high-speed 25G and 50G DFB laser portfolio, following our successful completion of Telcordia qualification testing. The new laser platform, trademarked Clear Diamond Lasers, is based on MACOM's Etched Facet Technology, or EFT technology, and utilizes a new single-ridge design for enhanced performance and reliability. The portfolio includes over 50 laser products, which support multiple 5G infrastructure applications, including CWDM6, MWDM12, LWDM12, 50 gigabits PAM4, and 1310 BiDi. We are pleased to report that multiple customers have successfully finished their 5G module qualifications with our lasers, and we believe this will support revenue in the coming quarters. Looking forward... As the next generation data center and high performance compute architectures evolve, we are seeing growing interest in our high power CW lasers and our ability to produce CW laser arrays. Next generation architectures will inevitably increase the data throughput in a smaller form factor, which creates thermal challenges for the system, specifically the laser. MACOM's team is working on novel semiconductor and package technology to support these new laser array requirements, and we believe we have properly aligned our laser roadmap with industry needs. Our future financial performance is dependent on launching compelling new products. During Q3, we launched over 30 new products, and we remained on pace to release more products in fiscal 2021 compared to last fiscal year. We showcased many of these products at the International Microwave Symposium, or IMS, in Q3, where we successfully held many demo sessions with customers showcasing the breadth of Macom's technology. Investors should understand that our growth strategy includes further diversifying our business. This includes launching new product lines as well as further penetrating or entering adjacent markets, including the automotive market. In support of our automotive growth strategy, I am pleased to report we successfully completed a major milestone in our certification process in Q3, and we believe we are on schedule to be fully certified before the end of calendar 2021. This will open the door for customers to evaluate our LightWave, RF and Microwave, kilovolt capacitor, and high-speed analog technologies, which are ideal for automotive applications such as sensors, LIDAR, under-the-hood power management, and autonomous driving applications. Jack will now provide a more detailed review of our financial results.