MACOM Technology Solutions Holdings, Inc.

Welcome to MACOM's first fiscal quarter 2023 conference call. This call is being recorded today, Thursday, February 2nd, 2023. 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, Olivia. Good morning, and welcome to our call to discuss MACOM's financial results for the first 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. 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 FCC today. With that, I'll 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 financial results for the first quarter of fiscal 2023. When Jack is finished, I will provide revenue and earnings guidance for our second fiscal quarter, and then we will be happy to take some questions. Revenue for our first fiscal quarter of 2023 was $180.1 million, and adjusted EPS was $0.81 per diluted share. Our financial performance translated to strong cash flow from operations of $38 million, and we ended the quarter with $595 million in cash in short-term investments on our balance sheet. Our book-to-bill ratio for Q1 was 0.9. This was the first time in eight quarters that our book-to-bill was less than one. Our turns business, or revenue booked and shipped within the quarter, was approximately 13% of our total revenue. Overall, our sales team executed well in Q1, albeit in a challenging market environment. On our last earnings call, we highlighted that demand was weakening in our three end markets. Today, I can report that the business environment has not improved. For this reason, we expect our Q2 book-to-bill ratio to be less than 1. Weakness is most prevalent at our largest 5G telecommunications and broadband access infrastructure customers, as well as many of our data center customers. Generally speaking, our major customers in these markets are slowing orders and they are focused on reducing inventory levels. Beyond our main customers, broadly speaking, demand is also weak. However, one bright spot is that our industrial and defense end market continues to perform well and demand for our products is strong. Additionally, our backlog entering fiscal Q2 remains at historically high levels, despite the current softness in bookings. I think it's important to emphasize that we balance our short-term financial goals with a long-term perspective and, despite the current slowdown, we remain confident in our strategic plan and our future growth prospects. MACOM is positioned to capitalize on a number of secular trends across our end markets related to growing bandwidth needs and increasing data rates, which in turn drive the need for higher power levels and higher frequency transmission signals. Our customer systems are more complicated than ever before, and they need specialized suppliers like MACOM to provide high-performance solutions. Many of our products have long life cycles and produce revenue for years after they've been introduced. with the potential to generate best-in-class financial returns. We view the diversity of our technologies, products, and end markets as an inherent strength of our company, helping to provide financial stability. And finally, the quality of competitiveness of our products released to the market over the past few years is outstanding, and it continues to improve. Turning to our end markets for fiscal Q1, Industrial and defense revenue was 77.2 million, down 1.8% sequentially. Telecom was 61.5 million, down 0.8% sequentially. And data center was 41.5 million, up 10.2% sequentially. The sequential growth in data center was driven by a combination of increased shipments of our cross-point switches and networking products, both of which had been supply constrained during much of FY22, along with a modest increase in our high-performance analog portfolio. While we see softness in current large production programs, we remain engaged in a wide range of exciting new opportunities, which we believe will drive MACOM's future success. I would like to highlight a few recent engagements to illustrate the breadth of our customer base and applications. All of these wins have multi-million dollar revenue potential. Our diode team continues to be a leader in the market for discrete control products in diode circuits, including high-power switching and high-power limiters. We have secured a new high-power limiter socket on an Aegis shipboard radar platform. The team has also won new sockets on automatic toll detection platforms and achieved two design wins on an automotive wireless communication system. Our high performance analog or HPA team continues to diversify their revenue and has successfully penetrated a tier one US defense OEM with custom IC design wins. The application is a mobile man-packed high power radio. They also secured a large IC development contract from a major customer to support next generation DDR memory test infrastructure. Our MIMIC team is actively supporting various U.S.-based radar and satellite system requirements that utilize our trusted foundry and gallium arsenide technologies. Specifically, our MIMIC team has won close to $10 million in development contracts across a wide range of customers, functions, and solutions. Our Metro long-haul design team is supporting data center customers that are designing next-generation coherent light or ZR light systems. and we have won an 8x200G driver and TIA socket to support a major U.S. Internet service provider, with production ramping this fiscal year. These wins validate that our products and solutions are compelling and that MACOM is a trusted partner to support critical or long-term programs. These examples also illustrate we are gaining market share in our core markets. Most of these wins are coming from new products, and we believe a portion of our future growth will come from our most recently introduced products, which everyone knows takes time to ramp up. As an example, we are excited to be sampling our new 10G XGS PON laser, and customers have confirmed the product meets their system requirements. This market is a high-volume market, and while today we have no laser sales in the 10G XGS PON, we expect that to change over the next 12 months. In addition, our LightWave team continues to successfully engage with customers on 25G DFB design wins. More and more of our customers are completing their requisite 5,000-hour module HTAL qualifications, which is required by the ISP or network end users. These wins will support future revenue beyond Q2. I would like to review a few key activities across the business. First, Our engineers, sales, and applications team will be attending the Optical Fiber Conference, or OFC, in March, where we will be highlighting our latest products to our customers and hosting eight live product demonstrations at our booth, including we will demonstrate a 200G per lane solution to support 1.6 terabit OSFP module designs. Our chipset solution includes MACOM's industry-leading coherent drivers and transimpedance amplifiers, along with a new photo detector offering. 200G ProLane applications are the leading edge of high-speed data throughput in the industry today. We will also demonstrate MACOM's PureDrive solution for optical connectivity in conjunction with switch hardware from a leading U.S. ASIC supplier. Our PureDrive solution comprises of a linear driver and transimpedance amplifier designed specifically for single-mode and multi-mode PAM-4 architectures that operate up to 800G. Our innovative chipset has been designed to support broad dynamic ranges, linear equalization, and low noise amplification to enable direct connection to switch and server ASICs. This solution represents industry-leading low-power, low-latency solutions for 100G-per-lane optical communications. As previously announced, approximately two years ago, we established a company priority to transfer a 0.14 micron Gannon silicon carbide mimic process from the Air Force Research Labs to our wafer fab in Massachusetts, with the goal to commercialize the technology and make products for our aerospace, defense, and commercial customers. I'm happy to announce that the process is being released to production this month. We are excited to now offer our customers a state-of-the-art GaN and silicon carbide technology with industry-leading power density. In parallel with the transfer activities, our IC design engineers have been designing products on the process, and we will begin introducing these products later this month. Our flagship MIMIC product from this process, which is available for sampling and sale today, is the MAPC MP003, a KA band power amplifier designed for satellite uplink applications. This MIMIC amplifier provides 10 watts of output power and delivers power-added efficiency or PAE performance, which is comparable with the best products in the market today. This process will support MIMICs that operate up to about 40 gigahertz, including power amplifiers, low-nose amplifiers, high-power switches, and transmit receive ICs as well as beamforming ICs. We are very excited about achieving this production release and product launch milestone, and I congratulate the entire team for getting it done on schedule and on budget. We believe this process opens a $300 million segment of the high-frequency GaN on silicon carbide MMIC market. As you may have seen in a press release issued earlier today, I am pleased to announce MACOM has entered into a definitive agreement to acquire the assets and operations of OMIC SAS, a semiconductor manufacturer located near Paris, France. OMIC has a 40-plus year heritage in 3-5 materials and specializes in gallium arsenide and gallium nitride epitaxy, wafer processing, and integrated circuit design. The OMIC team comprises of approximately 100 employees including process engineers, skilled IC designers and technicians, and wafer production staff. Today, the company has a small portfolio of differentiated products and compelling compound semiconductor processes suitable for microwave and millimeter wave applications in telecommunications, aerospace, and defense. This acquisition provides numerous strategic benefits to MACOM. First, OMIC's high-frequency processes and products expand and strengthen MACOM's portfolio so we can better address our target markets. OMIC's team have spent years developing and refining their proprietary 100 nanometer and 60 nanometer MIMIC processes, and we plan to build upon their expertise. Today, they offer very high frequency products, including true time delay, radar core chips, high power amplifiers, as well as low noise amplifiers that have industry leading performance. Simply put, OMIC produces products that typically operate at higher frequencies than MACOMs. Second, OMIC's material and epitaxial growth expertise is world-class, and we believe strengthening our material science expertise in epi growth knowledge and manufacturing capabilities is strategic. Increasing our insourcing of epi growth across our entire business has the potential to simplify our supply chain, increase our gross margins on certain products, and improve our products' performance, all of which improve our competitive advantage. Third, OMIC represents a significant revenue growth opportunity. Historically, OMIC has serviced a small customer base, many of whom were foundry customers. We believe we can grow their customer base and associated revenues significantly. Revenue growth will also come by leveraging MACOM's larger IC design team onto their processes to accelerate expansion of their standard products portfolio and by emphasizing custom chip development work at major OEMs. We are also confident our larger global sales force can gain market share with their existing products. I'll note several of OMIC's processes and products are already qualified by the European Space Agency, or ESA, for satellite use. Fourth, we see an opportunity to fully utilize their idle six-inch wafer manufacturing capability to improve gross margins and profitability on both OMIC and MACOM products. While they have purchased and installed a six-inch wafer production line, they have not yet transitioned their production to the six-inch line. Today, OMIC runs all production on their three-inch line, and notably, MACOM's Massachusetts fab is a four-inch fab. And finally, this acquisition significantly expands MECOM's European presence, which will enable us to better serve European-based customers, which is a strategic focus for us. Having an engineering and manufacturing operation inside the EU will enable us to better access a wide range of customers in aerospace, telecommunications, industrial, and automotive markets. We have a strategic goal to increase our European business to offset any potential future geopolitical headwinds from other regions. The acquisition is structured as an asset purchase for consideration of approximately 38.5 million euros. MACOM will purchase OMICS assets and operations using existing cash on hand. The purchase includes OMICS existing business operations, intellectual property, real estate, and facilities. We expect the transaction to close during MACOM's second fiscal quarter. However, I would like to highlight that the transaction is subject to regulatory approvals and customary closing conditions. Jack will now provide a more detailed review of our financial results.