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spk01: Welcome to MECOM's first fiscal quarter 2022 conference call. This call is being recorded today, Thursday, January 27th, 2022. At this time, all participants sign the listen-only mode. I will now turn the call to Mr. Steve Ferranti, MECOM's Vice President of Strategic Initiatives and Investor Relations. Mr. Ferranti, please go ahead.
spk08: Thank you, Olivia. Good morning and welcome to our call to discuss NACOM's financial results for the first fiscal quarter of 2022. 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 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. With that, I will turn over the call to Steve Daly, President and CEO of MACOM.
spk02: 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 review our Q1 results. When Jack is finished, I will provide revenue and earnings guidance for fiscal Q2, and then we will be happy to take some questions. Q1 was a good start to our fiscal year. Revenue for the quarter was $159.6 million and adjusted EPS was 64 cents per diluted share. We made incremental progress in profitability, achieving gross margins above 61% and operating margins above 30%. Our financial performance reflects the numerous improvements that we're making across all aspects of the business. Over the last couple of years, our management team and employees have worked hard on numerous continuous improvement projects that have spanned the company. We are focused on execution, whether it involves developing and launching new products, meeting customer delivery requests, improving our operational efficiency, or improving internal business development processes, to name a few. I would like to thank all Macon employees for their continued dedication and hard work. Overall demand for our products has been increasing. Our book-to-bill ratio for the quarter was 1.1 to 1, representing the fifth consecutive quarter of a book to bill ratio being greater than one. Today's near record backlog is helpful as we plan Q2 and beyond. Similar to prior quarters, we believe that our Q1 bookings activity reflects a combination of market share gain and or long lead orders, which are being placed well ahead of required ship dates due to extended industry cycle times. Our turns business was approximately 14% of our total revenue during the quarter, which was in line with expectations. Our operations, planning, and logistics teams continue to do an excellent job managing the variety of day-to-day challenges, whether supply chain shortages of key components, temporary interruptions from offshore assembly and test, or production capacity limitations within our supply base. The team continues to outperform, which has allowed us to meet our near-term revenue goals. The revenue breakdown by end market for Q1 was as follows. Industrial and defense was 73.1 million. Telecom was 55.8 million. And data center was 30.7 million. Industrial and defense was down 2.7% sequentially. Telecom was up 20% sequentially. and data center was down 8.4% sequentially. All these figures were in line with our expectations. Our industrial and defense market, following several quarters of strong sequential growth, was down slightly in Q1. Our current backlog is strong, and we are well positioned for future growth in this market. I'll also highlight the test and measurement segment is trending up, mostly supported by standard products. The defense market is a focus for MACOM, and we believe there is a significant opportunity to expand our market share over the next few years. Today, we are working to strengthen relationships with major aerospace and defense primes, introducing them to the full scope of MACOM's capabilities and technology. We believe that this work is leading to a growing pipeline of meaningful opportunities. I would like to highlight to investors how MACOM plans to further differentiate itself in the defense markets. We will offer low-frequency but extremely high-power amplifier solutions, typically at multi-kilowatt power levels. We will support advanced high-frequency radar applications using our GaN MIMIC technology and solutions. We will introduce advanced high data rate transmitter and receiver solutions, which combine our proven optical semiconductors with advanced package technology. And lastly, we are improving our microwave system engineering design capabilities to enhance our competitiveness with microwave assemblies, which we believe will maximize the value of our semiconductor content. Our telecom and market revenue increased in Q1. As a reminder, telecom is a very broad and diverse end market for MACOM, spanning numerous network architectures and topologies. These include wireless systems, metro long-haul optical backbone deployments, fiber to the home, cable television infrastructure, broadband satellite networks, wireless backhaul, 5G wireless, and broadcast video. During Q1, we experienced broad strength across various telecom applications. Today, we believe we are only delivering on a fraction of our potential for this market, and we anticipate further expanding our portfolio to more fully address these markets. Our data center and market revenue was down in Q1, primarily driven by reduced shipments to low data rate short-reach 25G AOC applications, and 100G CWDM4 pluggable module applications. I'll note our long-term growth vectors remain intact and include supporting 100G to 800G platforms with market-leading analog CDR solutions, TIAs, and drivers. Additionally, we are also expanding our data center product offerings to now include equalizers, photo detectors, and lasers. And lastly, we are seeing growing interest in Macom's linear drive solutions, which will compete with DSPs in certain applications and interconnect architectures. Technology development and portfolio expansion to better address our 3N markets are among the key growth drivers for Macom. Our long-term growth strategy is built upon offering our customers unique products based on our compelling semiconductor process technologies, innovative analog and mixed signal designs, which will use world-class silicon semiconductor processes, and offering solutions to customers which utilize advanced packaging and proprietary subsystem designs. We envision that the end result of this strategy is the creation of unique solutions that help solve complex technical challenges for our customers while driving highly profitable growth for MAKOF. An important element of our strategy is to leverage our innovative new semiconductor technologies to expand our market opportunities. For example, we estimate the market opportunity for MACOM and high-frequency GaN mimics to be around 300 million. We expect our 0.14 micron GaN on silicon carbide mimic process will enable us to enter this market within the next 12 months. Additionally, we estimate our opportunity for high-voltage capacitors to be around 100 million. We have only recently entered the market with our new MECOM KV-CAPS. We believe that our KV-CAPS technology provides compelling advantages to our customers, and we expect to grow share over time. And lastly, over the past two and a half years, we have made significant progress bringing to market our Indian Phosphite 25G FP and DFB laser product lines. These products are early in their life cycle, and they represent a large growth opportunity for us. Our team has done a great job developing and improving our laser semiconductor processes, and we are very excited to execute our laser technology roadmap. I would now like to provide an update on some recent key activities. This month, we received an aerospace quality management systems certification for our facilities in Lowell, Massachusetts, Nashua, New Hampshire, in Arbor, Michigan, and Mooresville, North Carolina. AS9100D is an internationally recognized quality management system, or QMS, standard for aviation, space, and defense organizations. This certification demonstrates MACOM's continued commitment to ensuring the highest level of operations and production standards for aerospace customers. Last quarter, we announced the release of our new high-performance linear equalizer product line for use in backplane and data center applications that require high-speed data paths over short distances. Customer response has been very positive. Our initial products include two-channel and four-channel PAM4 equalizers running at 56 and 112 gigabits per lane, respectively. These products consume very low power and have extremely low latency. MACOM linear equalizers can double the reach of existing passive cables in short reach 200G, 400G, and 800G applications. Our wafer fab and engineering teams driving our 0.14 micron GaN on silicon carbide mimic process continues to make excellent progress. I am pleased to report that earlier this month, we achieved our power density performance goal of 6 watts per millimeter at 25 volts at X-band frequencies. We believe this power density will provide us with a competitive advantage because, simply put, our MIMIC amplifiers will be smaller in size and capable of transmitting more power than our competition. Smaller chip size also means our designers can push performance to higher frequencies. Our plan is to install new backside process equipment as well as atomic layer deposition or ALD capability. Our goal is to enter the market in late calendar 2022. Although I'm pleased we already have engaged with select customers who may want to be early adopters of our GAN. Our team is planning to attend the Optical Fiber Conference or OFC in March. ACOM has a broad portfolio of optical and high-speed analog mixed signal solutions that we will be highlighting during the conference. Demo examples include our low-power 2-chip analog PAM4 solution supporting 200G and 400G short-reach applications. We believe this chipset can provide comparable performance to DSP-based PAM4 solutions at lower cost, lower power, and lower latency for short-reach multimode applications. We will also be demoing our industry-leading transimpedance amplifiers and laser drivers supporting 400G and 800G applications. We plan to have more than 10 product demonstrations at OFC, and we look forward to announcing more details on these demos prior to the conference. We continue to strengthen our engineering and sales applications and operations teams with very talented new hires at all levels of the organization. Our highly skilled global workforce is critical for us to meet our future R&D and revenue growth objectives. Further, adding employees with different skills, experiences, and backgrounds helps to further create a diverse and inclusive workforce, which makes MAKOM stronger. Before turning it over to Jack, I would like to make a few final remarks. Our product strategy will continue to utilize both internal and external wafer foundries. Some of our product lines, like diodes, mimics, and lasers, rely on our internal process technology to provide a competitive advantage. Other product lines like CDRs, network products, and cross-point switches rely solely on our industry-leading high-speed analog and mixed-signal circuit design capabilities to differentiate. Our internal semiconductor processes combined with best-in-class analog and mixed-signal chip design capability allows us to address a wide range of applications within our target markets. In aggregate, we believe our SAM today now exceeds $5 billion, which provides us with a significant opportunity to create stockholder value. Our long-term goal is to reach $1 billion in revenue in our fiscal year 2025. Going forward, we will seek not only to maximize our revenue opportunities in the market segments I've discussed, but we will also add new market segments where we will have the ability to leverage MACOM's engineering excellence to drive growth. Jack will now provide a more detailed review of our financial results.
spk11: Thank you, Steve, and good morning, everyone. Our fiscal year 2022 began with further improvements in revenue, gross margin, operating margin, and earnings per share. Revenue for the first quarter was $159.6 million, up 2.8% quarter over quarter. The sequential improvement was driven by strength in our telecom and market. On a geographic basis, consistent with prior periods, domestic customers represented approximately 47% of our fiscal Q1 results. Adjusted gross profit was $98 million, or 61.4% of revenue, up 30 basis points sequentially. During fiscal 2022 and beyond, largely as a result of the numerous operational improvements that Steve noted in his prepared remarks, we expect further gross margin improvement albeit at a slower rate compared to prior periods. Total adjusted operating expense was $49 million, consisting of R&D expense of $31.2 million and SG&A expense of $17.8 million. Total operating expenses were sequentially up by $900,000 from fiscal Q4 2021, driven by anticipated increases in R&D staffing. Over the past few years, we have implemented new processes to assess our R&D investment opportunities and new product initiatives. We feel these investments and the rigor associated with our processes will continue to help ensure we are maximizing returns for our stockholders going forward. I would also like to note that we will continue to be disciplined with overall discretionary spending for fiscal year 2022, carefully balancing growth-related operating expenses with appropriate returns. Adjusted operating income in fiscal Q1 was $49.1 million, up from $46.8 million in fiscal Q4. Adjusted operating margin was 30.7% for fiscal Q1, sequentially up from 30.2% in Q4. We expect a combination of top-line growth, incremental gross margin improvements, and disciplined spending will enable opportunities for modest operating leverage improvements in fiscal year 2022. Appreciation expense for fiscal Q1 was $5.9 million, and adjusted EBITDA was $55 million. Trailing 12-month adjusted EBITDA was $205.1 million as compared to $194 million in Q4 fiscal 2021. Adjusted net interest expense for fiscal Q1 was $1.2 million, down approximately $100,000 from fiscal Q4. Our adjusted tax rate in fiscal Q1 remained at 5% and resulted in an expense of approximately $2.4 million. Our cash tax payments were $200,000 for the first quarter, unchanged from fiscal Q4 2021. After completing our fiscal year-end reporting and updating our tax analysis during our fiscal Q1, we feel it is now appropriate to update our adjusted income tax rate to 3%, beginning in our fiscal Q2 and going forward. I would also like to highlight that as of December 31st, 2021, we estimate that we have more than $700 million of available U.S. net operating losses. Fiscal Q1 adjusted net income was $45.4 million compared to $43.3 million in fiscal Q4. Adjusted earnings per fully diluted share was 64 cents. utilizing a share count of 71.2 million shares, compared to 61 cents of adjusted earnings per share in fiscal Q4. Now, moving on to operational balance sheet and cash flow items. Our Q1 accounts receivable balance was $97.4 million, up from $84.6 million in fiscal Q4. As a result, day sales outstanding were 55 days. Our accounts receivable balance reflects an increase over prior periods due primarily to the timing of shipments occurring later in the quarter. Inventories were $88.5 million at quarter end, up by $5.8 million sequentially. Inventory turns were 2.8 times in Q1, down slightly on a sequential basis from 2.9 times in the prior quarter. As you may know, we have been very focused on inventory management over the past few years, and since September 2019, we have reduced our inventory balance by approximately 18%, while growing our quarterly revenue by more than 40%. These higher fiscal Q1 inventory levels are required to support future growth. Fiscal Q1 cash flow from operations was approximately $34.1 million. As we have previously noted, our expectation is that cash flow from operations will run at a comparable amount of non-GAAP net income over time. Capital expenditures totaled $5.1 million for fiscal Q1 as we made investments in our internal fab and production capabilities, as well as R&D equipment. We expect CapEx to increase in fiscal year 2022 and be in the range of $30 to $35 million as we continue to strategically invest in capital that will support us as we grow. Free cash flow was $29 million for the fiscal quarter, down $6.8 million sequentially, mostly due to the increases in working capital items previously noted. Next. I'd like to provide some additional information regarding the December 2021 sale of our less than 10% equity interest in Ampere Compute Holdings for $127.8 million. Our equity interest in Ampere was established back in 2017 when Macom divested Applied Microcircuit Corporation's farm-based compute business. Macom was a passive investor in Ampere, not involved in its operations, and we had limited rights. One of Ampere's other limited liability members exercised its call option, which was established in 2017. The $127.8 million cash consideration amount was also established back in 2017. Our fiscal Q1 2022 financials reflect a $118.2 million gap gain recorded as other income. This gain represents the difference between the $127.8 million of proceeds and our approximate $9.6 million carrying value of the investment. There was substantially no tax impact as we were able to utilize net operating losses to offset the gain. This transaction further strengthens MACOM's financial position. Next, moving on to other balance sheet items. Cash equivalents and short-term investments for fiscal quarter were $477.7 million, up $132.8 million from fiscal Q4 2021. Our long-term debt currently consists of $450 million of convertible notes due in 2026 and $121 million remaining on our term loans due in 2024. Neither of these arrangements require any principal payments until their maturity. Another balance sheet item to highlight is that during Q1, based upon the adoption of a new accounting standard, we reclassified $72.2 million associated with our convertible notes from equity to long-term debt. We believe the adoption of this accounting standard provides a more accurate financial representation of overall debt and do not expect the new accounting standard to have any impact on our non-GAAP adjusted interest expense or net leverage calculations. During the past fiscal quarter, our net debt decreased from $255 million to $122 million, a decrease of roughly 52%. With this reduction in net debt, along with the improvement in trailing 12-month EBITDA, we exit the first quarter with a net leverage ratio of around 1.0 times and gross leverage of 2.9 times, down from 1.7 and 3.1, respectively, in Q4 2021. Before turning it back to Steve, I'd like to highlight that the MACOM team has continued to reach out to our stockholders and other stakeholders of the company to discuss the business, including environmental, social, and corporate governance, or ESGIs. Earlier this month, we filed our annual proxy statement, which includes additional information related to our ESG program, as well as a summary of what we have heard from our stockholders during some of these engagements and how we have responded. We view this process as another meaningful step toward improving our practices and disclosures. I will now turn the discussion back over to Steve.
spk02: Thank you, Jack. Maycomb expects revenue in Q2 to be in the range of $161 to $165 million. Adjusted gross margin is expected to be in the range of 60 to 62%. And adjusted earnings per share is expected to be between 64 and 68 cents. based on 71.4 million fully diluted shares. In Q2, when compared to Q1, we expect revenue for industrial and defense and data center to be flat to slightly up, and telecom to grow by approximately 5%. In summary, we stand in front of a multi-billion dollar SAM with a unique technology portfolio. Our strategy is to further establish a diverse portfolio of products, customers, and end markets. We maintain a long-term perspective on executing our strategy, and we will work to manage our business to be profitable throughout all business cycles. We are confident we can continue to improve our financials and take market share in the months and years ahead. I would now like to ask the operator to take any questions.
spk01: Thank you, sir. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the start and the one key on your touchtone telephone. to withdraw your question, press the pound key. In the consideration of time, we ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Now, first question coming from the lineup. Tom O'Malley from Barclays. Your line is open.
spk00: Hey, good morning, guys, and thanks for taking my question, and I appreciate the color into March as well. I guess the major question here is when you guys laid out kind of the shape of the year heading into this year, you had talked about a data center business that would grow high single digits to low double digits. You're guiding the data center business up slightly, flat to up slightly. What's going to drive this acceleration in the back half in June and September? Is that the addition of the laser portfolio? Are you seeing increased analog shipments there? Just any color on that acceleration, which is kind of implied for the back half.
spk02: Sure, Tom. Good morning. So thank you for the question. Maybe what I'll do is I'll sort of take a step back first and talk about the expectations for the full year in total, and then we can talk a little bit about the data center. So for today, certainly we can update everybody to say that we are still on plan to hit at least 10% year-over-year growth for the company. So we're very excited about that. Second, I would just highlight that there's really no changes to our outlook in industrial and defense, that end market, which is our largest market. On our last call, we had signaled sort of an 8% to 10% year-over-year growth rate. We're comfortable with that range. And third, our outlook for telecom has increased slightly since our last call And our outlook for data center has decreased slightly. And so as we look into the rest of the year, we think telecom is going to be in the mid-teens or slightly better. And we think the data center will more likely be in the low to mid single digits for growth year over year. And what's driving that is a few different factors, and we highlighted some of these on our call last quarter, and some of these trends continue. We are seeing softness in 100G CWDM4 pluggables, some of our short-reach volumes. We're also expecting to continue to either remain at the current levels or decrease slightly in the back half of the year. And so those are areas within the data center that I would say are soft, and that's our expectation for the balance of the year. And that will be offset by some different areas of growth, and most of which are PAM4-related, including 200G short-reach applications, 400G DR4 and FR4 applications, and then some of the work we're doing for linearizers within the data center. And then on top of that, The only other thing I'll highlight for the data center, some of our new products and some of our existing products will have strong acceleration in Q4. Some of that is timing of ramps, and some of that is back-end supply chain related. So I hope that's helpful. That's sort of the 10,000-foot view of what we see going on for the balance of the year. And I'll just highlight also that As we say every quarter, these markets are constantly changing, and there's constant mix changes and outlook changes and demand changes from our customers. And so we try to blend that together and provide the best information we can. Of course, we are still excited about a lot of the different product development activities that we have within the data center, including we're starting to see traction with our lasers, especially for long-reach applications, and so that's exciting for us.
spk00: Thank you that's really helpful. I guess the second question is just on the broader supply-demand environment. When you're looking about the group, you're seeing a lot of people talking about increased supply pressures, freight costs, et cetera. What did you build into your guidance in terms of, you know, cautionary measures to protect against, you know, those risks? And then can you just describe the supply-demand environment and what you're seeing? Is it improving? Is it worsening? And just highlight areas where you can highlight importance, I guess.
spk02: Sure. So our approach to providing guidance for the quarter or even sort of our general outlook for the year has not changed. We try to factor in all the things that you've talked about, including supply chain risk, potential shortages of components. An area that is a little bit of a wild card, of course, if some of our customers are having problems supplying components for their builds, oftentimes what they will do is delay the production, which, of course, has an impact on companies like Maycom. So we try to factor all of those things in. I would say, generally speaking, the environment has not really changed for Macom in the last three months. We have areas where we are running very, you know, at very high utilization rates or at or near capacity. We have a few product lines, mostly network and data center related product lines that are being directly impacted by capacity constraints or high density let's say, ball grid array package technology. And so there is a significant amount of work we're doing right now to bring up second sources. And that's one of the reasons why you're really seeing a plateauing of the data center run rates sort of mid-year. And we think that will open up in Q4. But generally speaking, Tom, the environment has not changed in the last three months. The impact to COVID, I would say, is abating significantly. Of course, on the logistics side, there's lots of issues moving product around the world right now, and our team, I think it does a nice job managing those challenges.
spk01: Our next question coming from the lineup, Tori Sandberg with Stifel. Your line is now open.
spk07: Yes, thank you, and congratulations on the continuous execution here. Steve, maybe it's just my perception, but I thought the laser business would probably start to ramp a little bit quicker, or I was thinking maybe it would ramp this year. Any changes there? Are there some qualification delays? If you could update us specifically on the laser business, that would be great.
spk02: Yes. So our expectation for laser growth, and revenue growth in the second half is significant. And we think our laser revenues for both telecom and data center will grow by at least a factor of five in the second half compared to the first half. So from a design qualification winning market share, nothing has changed there. It's really a timing around individual customers ramp, We are starting from, in the case of 25G technology, we're starting from a very small base, effectively zero. As you remember, we launched our clear diamond product line in June of 2021. But we are getting positive signals from the market. We believe we will be winning market share this year. And so, you know, I don't see any yellow or red issues associated with the laser business in general. Great, thank you for that.
spk07: And I know analog PAN4 has been an opportunity for a while, but you spent a little bit more time on it on this call. Does that mean we are potentially at an inflection point of seeing analog PAN4 penetrating the market more materially this year?
spk02: I think I can talk from our perspective and the makeup of our revenue. Three, maybe four years ago, all of our business was NRZ business. And today we're approaching about 50% of our data center revenue being PAM4 related. So it's absolutely, we see a movement of the, you know, movement towards PAM4. And our contribution is primarily 200, 400, 800G applications where we support short reach analog platforms.
spk01: Our next question coming from the lineup, Harsh Kumar with Piper Sandler. You want to start open?
spk05: Yeah. Hey, guys. First of all, congratulations. Solid print, solid guide. Appreciate that very much. So, Steve, Macom had, you know, historically been a growth story, and you were showing leverage on the gross margin. I think you're indicating on this call that the leverage on the gross margin piece and the off-margin leverage is intact, but I wanted to understand the growth piece a little bit more. Can you point us to things that are working in telecom as you look out the next 12 months, you know, which parts might move faster than the others? And my other question was, did you leave any revenues behind on the table because of supply concern in either December or the implied guidance for March? And I have a follow-up.
spk02: Sure. Thanks. Thank you for the question. Maybe a couple of words about the recent history of our execution. And as we've talked about in the past on prior calls, from, you know, taking a big step back from 2010 to 2020, those fiscal years, MACOM had a CAGR of about 7.5%. And our goal from 2020 to 2025 is to at least double that. That is our goal. And when we do that, we end up at approximately a billion dollars of revenue in our fiscal year 2025. So that is our goal. Now, we had, of course, as everybody knows, a very strong fiscal year 20 and 21. In fact, in fiscal year 21, we had 14.5% year-over-year growth, which meant that we exited fiscal year 20 20 at a very high run rate because the sequential growth during fiscal year 21 was between 1 and 2%. And if you look at our sequential growth today and what we're forecasting for the back half of the year, Q1 and Q2, it's around, you know, north of 2%. And then in the back half of the year, we expect sequential growth greater than 4%. So, We believe there will be some slight acceleration of growth in the back half of our year due to some of the reasons we've talked about. Now, when you ask, well, where's the growth coming from, it really speaks to our strategy. Our strategy is to expand our SAM, to launch new product lines, to get into new markets. And as we've talked about some of the accomplishments and we look at our business today, I can tell you that this past quarter we had record bookings with GANs. on our pure carbide line, which certainly supports our growth strategy for RF power. We want a major development contract with the Tier 1 defense contractor to work with them on some what we call RF over fiber or high-speed connectivity applications in their systems, where we did benchmarking of some of our components for them. We're also doing an architecture trade study with them. This validates our idea of bringing optical technology into the military market. We're winning market share with discrete components. This past quarter, we had a first design win with a major base station manufacturer that we hadn't worked with in the past on volume platforms. I also recently announced, actually back in November, we re-organized our China organization. We promoted one of our senior executives to be president of Mekong China. to emphasize the focus we have on those markets. And, of course, there's many other things that we're doing. So our growth is more than just coming from telecom. It's coming from industrial and defense. It will come from expanding our SAM by adding new technologies and new products. So I would... ask that you focus on those attributes rather than, let's say, those submarkets. And, of course, it's the common markets that we talked about, 5G. PON, a variety of wireless applications, SATCOM. So we really are very much attracted to the industrial and defense. We're very attracted to the various telecom markets. We believe over time those two markets will outgrow the data center on an absolute growth basis. So we're very happy that we have a lot of different attributes of our portfolio that will support this growth target.
spk05: Hey, Steve, very helpful. And then maybe one for you or Jack. I want to go back to gross margins. So, you know, you came on and it was very quick. Gross margin turn ups were very quick because of tweaks to the business and some initial cost cuttings. Can you maybe help me understand as I look to the next three years, let's say, my gross margin growth, you know, is that likely to come from tweaks to the business? or to a greater degree from the new products that you're getting into? Is there a threshold that you have for gross margin for the new products that is perhaps driving gross margin up?
spk02: Tori, thanks for the question, and maybe I'll make a few comments, then Jack can also add to it. So you're correct. We've done – the team's done a lot of work to improve the gross margins of the portfolio, and that work continues. As we think about the future, we'll now start turning towards more of a dependency on the new products and their contribution to the gross margin improvement. And so – You know, let's say over the next two to three years, the majority of the improvements will come from product and technology and making sure that we're more differentiated and our price points have more value where we can achieve higher gross margins.
spk11: And just to build on that, Harsh, as I had mentioned in my prepared remarks, there's a fairly robust process that we have from an R&D perspective in terms of analyzing those projects to make sure they're coming out with higher margins. Not every new product is going to have higher margins, but we are definitely focused on driving that higher. And then to your other point, there are things that we can continue to do within the business to improve the gross margins over time. There's a number of internal initiatives that we have working that will improve that over time. And, you know, as we continue to expand our product launches, as well as the SAM that Steve had mentioned, you know, that additional revenue will also provide additional margin expansion as we go forward.
spk02: Sorry for misspeaking harsh on calling you, Tori.
spk01: Our next question coming from the line of Chris Caso with Raymond James. Your line is now open.
spk10: Yes, thank you. Good morning. For the first question, I just wanted to go through a bit of the expectations for the second half of the fiscal year based on the color you've provided, both of the overall revenue of 10% and the different segment commentary. You know, based on what you said, it would seem that – you know, IND would be, you know, kind of up slightly on a quarterly basis in the second half of the fiscal year. But then telecom, you know, to get to that kind of mid-teens growth, it would suggest that it's down on a quarterly basis. And then data center, as you said, would be up pretty strongly in the second half of the fiscal year. Is that consistent with your expectations and, you know, maybe some kind of color on the what would be driving those trends as you go into the second half of the fiscal year?
spk11: Yeah, Chris, this is Jack. So yeah, based on the math that you're describing, that would get us to the things that we had described. But also, you know, as Steve had mentioned, it isn't going to be a perfect answer. The markets do continue to change and evolve, but that would be our viewpoint. And we also look to our strong book to bill and our backlog as we formulate some of these projections going out over time. So that backlog gives us some of the strength to, you know, to hit those numbers as we work our way through the year. Okay, great.
spk10: As a follow-up, you know, just about that backlog as you go to the second half of the year, and maybe you could talk about what's in that backlog. And, you know, I presume, you know, based on, you know, we talked about the growth projections, a strong part of that backlog is in data center. And is that really dependent on supply constraints right now and, you know, getting some of that back-end capacity you talked about there? Is that the main constraint or kind of risk factor on getting to those numbers as you go to the second half of the year.
spk02: Maybe I'll help with the answer on that question. So you're correct that we have been building backlog. I think as I highlighted, we've had five consecutive quarters of greater than one book to build. A data center backlog has been growing and We are constrained in some product areas I talked about related to different package technologies. And so we do see that Q4 is an important quarter for us on the data center to make sure a lot of things fall into place to support the demand that we have for our products. But generally speaking, as we – again, as we talked about, you know, making two- or three-quarter forecasts is – not as scientific as we would want. Certainly we have a strong backlog, but there's also dynamics at play from each of these different markets. Our smallest market in Q1 data center, which is about 18% of our revenue is the most volatile market. So that can move around quickly on us, both on the ramp up and as well as on the ramp down side of the cycle. So we have to plan for that and hedge our, those extreme cases and make sure that we can hit the targets that we put out there publicly. But generally speaking, if we look at the growth, IND is going to have a very good year this year. Telecom is going to be, as I highlighted, in the mid-teens for the full year. And then the data center, if we can hit, you know, a mid-single digit, we'll be very pleased with the way we set ourselves up for fiscal year 23.
spk01: Our next question coming from the line of David Williams with Benchmark. You'll want to open.
spk04: Hey, good morning, and thanks for letting me ask a few questions here. Just wanted to kind of touch base maybe in terms of the order trends you're seeing and how those have maybe tracked. Obviously, the bills have been good, but just are there any areas that you're seeing particular, I guess, changes in customer behavior in terms of order trends?
spk02: Generally, no. I think our main customers that run in high-volume platforms are well aware of the extended cycle times in the industry. They understand the risks associated with supply and potential constraints. And so our customers and our sales force have been working very closely to make sure that We understand their demands, and we tell our customers the best way to secure supply is to place orders so that we can, you know, instigate the planning. The other thing that I'll just highlight, and Jack mentioned this in his script, is that we have been building a bit of inventory. Our inventory went up this quarter, and that also will allow us to hit some of the, you know, the revenue projections that we have for Q3 and Q4. We have seen, I will say we have been messaged by some customers that they're not getting all the components they need to run production, and that has an attenuating effect on our plans. And so I would say that's probably the only sort of new dynamic that's at play right now. We are hearing that from customers, and I think now they're level setting what they can execute and resetting production schedules based on good information about supply. And so that has a trickle-down effect to us. But, again, I think these are short-term issues. They're manageable. And over the long term, I think we're setting ourselves up for success. I'll highlight that the engineering team this year has been doing a great job with product development. We are still on track to launch at least 35% more products this year than we did last year. We are coming up to OFC in March and also IMS in June. And these are major conferences where we like to introduce our best and latest products. So we're getting pretty excited about some announcements at OFC and also IMS.
spk04: Great. That's very helpful. Thank you. And then maybe just kind of thinking about when the supply chain begins to normalize, Do you think that there's a period of replenishment of the supply chain that will need to happen that maybe helps kind of isolate the oversupply that we typically see? And just trying to get a feel of how you think the customer behaviors will act as we get closer to normalization. How do you think in terms of your business and your visibility into that supply chain, do you feel like you're fairly well positioned to maybe avert some of the problems as we begin to normalize?
spk02: So it depends on the end market. We have some end markets where the channel inventory is empty or very, very low, and then we have other markets where the customers are in low or medium volume production, and they do a very good job of planning, and so we wouldn't expect any sort of unforeseen fall off on their run rates. I'll highlight that. Most of our major customers deal directly with MACOM, and we have good visibility into their plans. And so that gives us comfort that if there's going to be changes in the future, we can plan for that because, as you know, our manufacturing cycle times in some instances are longer than six months. And so we have to stay very close to our high-volume customers.
spk01: Our next question coming from Delaina – Call Ackman with Colin. Your line is now open.
spk06: Yes, thank you. Two questions, if I may. Good morning. I guess first, just on capacity growth, you wouldn't be expanding capacity in New Hampshire, which there wasn't much commentary on this call relative to 90 days ago, but you wouldn't really be expanding capacity in New Hampshire unless your customers are telling you they need more capacity. Clearly, the markets you serve are all growing, which you indicated there's several areas where your TAM is expanding now. But are these customers giving you order visibility beyond 2022 and maybe even into the back half of 2022? And can you discuss the manufacturing loading and when that facility should be up and running?
spk02: Thank you for the question. In some areas, we have very good visibility and backlog through the back half of 2022, so yes. And as we highlighted in the script, we have a record backlog. If we roll the math even on our last five quarters where we had greater than one book to build, it shows, and you compare that to what we actually shipped, we've actually generated over $120 million of backlog over the past five quarters. And so the demand is there. You mentioned New Hampshire and the manufacturing site we have there and the doubling of the space. So I would just highlight that that's one example of an area that we're expanding. We're expanding in all different parts of our business, including the business units, operations, planning, logistics, design engineering, and, of course, production. And so we have very aggressive growth plans. Obviously, we talked about 35% more products coming out this year than last year, and that requires more people and more facility to support the growth. Now, with that said, we like the fabless model, and we have a significant portion of our business that we run through other people's fabs, and that provides our business tremendous leverage where we can ramp production quickly with adding little or no cost to our operations. So we still have leverage in the model. We're expanding based on expectations of growth in areas where we think it makes sense to do that. The New Hampshire facility runs a wide range of products for a wide range of markets, and so I wouldn't read into that expansion as sort of an indicator of any one particular customer program or activity. It's to support broad-based growth.
spk06: I appreciate that. Two quick clarifications, if I may. I'll tie them into one. The Higher growth projection you have in telecom, is this mainly front-haul lasers, or is this also coming from PON? Second, Jack, I guess, you know, when might you finalize plans to deploy the proceeds from the inflow of cash from Ampere? Thank you.
spk02: Thank you for the question. I'll take the first one, and maybe Jack can take the second. So... I wouldn't want you or investors to think that our telecom growth is exclusively coming from 5G front haul or PON. It is a diversified growth. Certainly, PON is an important market for us, but we also service various wireline and broadband applications as well as, of course, 5G, not only on the optical side but on the RF side. The good news is our growth in telecom is broad-based, not just based on the two items that you talked about. Jack, do you want to take the second?
spk11: Yeah, and then with regards to the Ampere transaction, we were pleased with the outcome there. And as we sit here today, we don't view ourselves as having any kind of excess cash. We're still in a net debt position, Carl. So we think we're appropriate in terms of where we sit today. Don't feel like there's any needs to deploy that cash immediately. As we've mentioned, we've been making investments internally in the business over the past year and plan to continue doing that. I know in my prepared remarks, I had also mentioned some CapEx investment. So that'll be some of the utilization for our cash to make sure we're generating appropriate returns for the business as we go forward.
spk01: Our next question coming from Delana. Quinn Baldwin with Neham. Your line is now open.
spk09: Hey, guys. Just a couple of quick questions for me. Just one on the gross margin guide, midpoint of 61, down 40 basis points sequentially. Any particular headwinds you're seeing in the current quarter, either from a product mix shift or COVID cost-related issues, higher input costs that we should be aware of?
spk11: The short answer to that, Quinn, is no. But as we work through gross margins as we look to go out into the future, our goal is to continually improve. It does get a bit more challenging as time goes on and things don't always happen in a straight line. Our plans are to, as I said, continually make those improvements. And effectively, we grabbed the guide that we put out there last quarter. It was within the range, you know, over the 60% number. So I think the guide that we had was 60 to 62%. So nothing really notable to point out with that guide there.
spk09: Perfect. Thanks for that clarification, Jack. And then, Steve, I guess a couple of questions on the data center. You mentioned the 25 gig AOCs and CWDM4 business was going to be soft in the second half of the year. Should we sort of think of those now as past their peak and those businesses sort of move into a legacy and a declining mode as the business shifts towards PAM? Or do you think at some point you could see a resurgence in those lower speed applications?
spk02: So, uh, that's a, that's a very good question. And that's a question we're also asking ourselves. And as we look to work with our customers, uh, our general sense is these programs, especially a hundred GCW DM four, uh, have steady demand and they'll continue to be, uh, relevant, let's say in the future. Uh, but, uh, we're still looking at that. It's possible they'll continue to trend down, but that that's really not our expectation. And then certainly things are migrating towards PAMFOR and the higher data rates. And certainly areas that we see that are very exciting, and maybe I'll spend a moment on this, is the new product line that I talked about in my prepared remarks, the linear equalizers. And I think it's important to highlight that this technology really addresses two very different applications in the data center. The first is short-reach electrical applications. connections where you're on, let's say, a backplane or a copper cable, and you're moving an electrical signal as opposed to an optical signal. And then the second application is inside the data center where we're working with companies that have all of the components necessary to stand up very high-end computers, and they want to use the infrastructure of of their computers and the ASICs to drive and make adjustments to the optical signal. And so we're working with some key customers to develop solutions to effectively remove the DSP function, let's say, from the pluggable module and have that functionality brought into the ASIC. And so that's exciting for us, and we're entering programs at 400G, And if we're successful here, that will break the dam on moving that as a more adopted technology for broader applications inside the data center. So we're very focused on that as a company where we have very unique technology. We have close relationships with some major companies that are looking at you know, effectively, there's different words for it. You can call it direct detect or direct drive, but the goal would be to eliminate the DSP in certain applications. And so, you know, The reason why I mention this, when we talk about some of those legacy platforms like 100G SR4 or 25G SR AOCs, things will migrate to newer technologies, and we are involved in those. So it's about portfolio management and making sure that we're engaged with next-generation platforms.
spk01: I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Daly for any closing remarks.
spk02: Thank you. In closing, we'd like to thank our customers, suppliers, business partners, and employees for their continued support. Thank you and have a nice day.
spk01: Ladies and gentlemen, that's the conference for today. Thank you for your participation. You may now disconnect.
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