MACOM Technology Solutions Holdings, Inc.

Welcome to MACOM's second fiscal quarter 2023 conference call. This call is being recorded today, Thursday, May 4th, 2023. At this time, all participants are on the listen-only mode. I will now send 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 second 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 more detailed discussions 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. 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 update. After that, Jack Kober, our Chief Financial Officer, will provide a more in-depth review of our results for the second quarter of fiscal 2023. When Jack is finished, I will provide revenue and earnings guidance for our third fiscal quarter, and then we will be happy to take some questions. Revenue for our second quarter of fiscal 2023 was $169.4 million in adjusted EPS with 79 cents per diluted share. Cash flow from operations was approximately $33 million and we ended the quarter with $577 million in cash in short-term investments on our balance sheet. Overall, our team did an excellent job on execution to meet our business and financial targets. Our book-to-bill ratio for Q2 was 0.5, which was well below our expectations, and our turns business, or revenue booked and shipped within the quarter, was approximately 9% of our total revenue. also lower than expected. Despite the weak Q2 bookings, our backlog remains strong as seven of the nine past quarters have had greater than one book-to-bill ratios and our book-to-bill ratio for the full year FY22 was 1.1. Given the extraordinarily weak Q2 bookings, I thought it would be helpful to discuss the current order trends and address a series of important questions. First, Were we surprised with the weak Q2 bookings? As discussed on our last earnings call, we had anticipated that bookings would be weak in Q2. However, our actual bookings were approximately $40 million below our internal forecast. So, while we expected some softness, we did not expect the magnitude of weakness in the number of cancellations that occurred during the quarter. What caused the weak bookings? We believe a combination of excess customer and channel inventory, as well as pockets of short-term and demand weakness. What markets have the most inventory? We believe our data center, networking, and 5G infrastructure customers and the associated sales channels continue to have high levels of inventory. Additionally, some of our cable broadband customers have significant levels of inventory, and they will not be ordering more products for at least a couple of quarters. Most of these customers placed large orders in FY21 or FY22 to lock in capacity and to minimize the risk of supply chain interruption. As supply constraints have been resolved, many of these customers find themselves with excess inventory and therefore are delaying new orders or asking to push out or cancel certain backlog. Are any of our target end markets slowing down? We believe there is end demand slowdown in certain parts of the data center and telecommunication markets. For example, our customers that manufacture optical transceivers for the US-based cloud ISPs are telling us they expect to receive new volume production orders, but only at 60 to 70% of the prior year's levels. We also believe the China pond market demand is currently weak compared to last year. somewhat offset by moderate support for XGS PON for the U.S. and European markets. We do not see any slowdowns in defense opportunities or end demand. Are there any notable MACOM specific issues causing the weak bookings? With the exception of the timing of DoD orders, we believe the weakness is excess inventory and or short-term end demand related. Is MACOM losing market share? We do not believe we have lost market share or have lost any major customers or programs. Most of our design wins are sole source sockets based on our product's performance. Additionally, our design inactivity is strong and the interest in our newest products very high. Given the weakness in Q2 bookings, what is our outlook for Q3 and Q4? We have identified which major programs and associated orders are delayed, reduced in scale, or canceled. We believe it will take time for customer and channel inventory to return to normal levels. Therefore, we expect bookings to remain relatively weak in the next one or two quarters. That said, we do expect booking trends will begin to improve in Q3. Where is end demand strong for MACOM? Defense, medical, avionics, satellite communications, and high-performance compute remain strong. Further, we are confident that our growth potential continues to improve. We have been expanding our SAM and our latest products are compelling. The near-term weakness should not be confused with the long-term secular growth potential in our three core end markets. In summary, the Q2 bookings do not reflect the strength and the depth of MACOM's portfolio and our long-term growth potential. I hope this extra detail on bookings helps investors understand the current market environment. Turning to our end markets for fiscal Q2, industrial and defense revenue was $77.2 million, flat sequentially. Telecom was $53.9 million, down 12.3% sequentially, and data center was $38.3 million, down 7.6% sequentially. I'll note that both IND and data center revenues are up year over year, and telecom is down year over year. Within telecom, North America, China, and Korea have led in 5G deployments thus far. As the number of 5G subscribers increases, additional network densification and capacity expansion will be required to support the associated increase in traffic. Based on these factors, we do believe 5G will remain a growth opportunity over the next few years, and we will continue to invest in penetrating this market. Additionally, within our telecom market, fiber-based broadband access networks continue to increase globally, displacing copper and coax-based networks. Fiber-to-the-home deployments create a very large high-volume market with the total unit shipments of 2.5G and 10G PON approaching 100 million units annually, representing a sizable opportunity for MACOM over the next few years. Satellite-based broadband networks are seeing a resurgence as a viable alternative or supplement to terrestrial-based systems. Low Earth Orbit, or LEO, satellites configured with mesh network architectures are making global broadband coverage a reality. Constellations announced by SpaceX, OneWeb, Amazon, Kuiper, and Telesat will drive demand for thousands of new LEO satellites over the next few years. To support these systems, new ground station infrastructure is being built, along with the associated backhaul fiber networks. All of these RF and microwave platforms play directly to MACOM's strengths. Turning to the data center, we see new trends emerging fueled by growing bandwidth demand. Today, hyperscale operators are in the early stages of 400G and 800G deployments, and 1.6T is following closely behind. The technical challenges for high-speed mixed signal ICs and systems designed associated with these higher speed nodes grows more complex with each successive generation. This has a number of positive implications for our business. Artificial intelligence and machine learning are just beginning to be deployed, which will drive the next wave of growth within the data center. Finally, we see the defense market as a growth opportunity for MACOM in so many areas. Radar, communication systems, and electronic warfare requirements across space, airborne, ship-borne, and ground-based platforms can drive significant growth for our type of semiconductor products. In summary, our target markets contain significant growth drivers, and we believe our differentiated technology will provide MACOM a competitive advantage to capture market share. I'd like to review some major accomplishments across the business during Q2. As previously announced, we released to production our 0.14 GaN on silicon carbide semiconductor process. Today, we have approximately 20 new MIMIC designs being processed in the FAB. Initially, the target applications will be high-volume ship-borne and airborne radar programs and various SATCOM and telecommunication systems. On a related note, our FAB equipment team has recently completed the installation of a new backside via etch tool and an atomic layer deposition or ALD tool to support this and other next generation GAN processes. During the quarter, we made our first production shipments from our new bulk acoustic wave or BAW filter product line. Our BAW growth strategy is to focus on high performance applications in industrial, telecommunications, and defense applications. In March, our technical team successfully demonstrated performance of a newly designed high power transmitter subarray panel this was an important contract milestone and we will now begin work on the full array we expect this program will lead to similar opportunities in the next 12 to 24 months notably this transmitter is designed with almost 100 make on rf content a few trends in the data center market include we are seeing Demand declined for NRZ products as new systems are moving more and more to PAM4. Current product demand for 100G AOCs as well as 100G CWDM4 in LR4 is weak. We expect this to continue for one or two more quarters. We are seeing strengthening production demand and growth in 100G DR1, 400G, and 800G. Most of this demand is supporting AI and high-performance compute applications. During the past few months, we have secured numerous design wins for laser drivers and TIAs for 400ZR and ZR Lite to support coherent systems for data center campus applications. And a few notable items on the RF power products. We have been selected by a Tier 1 defense prime to support an L-band radar program with a custom-designed amplifier sub-assembly. We expect this large program will begin to ramp production within the next six months. We expanded our pure carbide portfolio to include products specifically designed for industrial RF power cooking and heating applications. And ST Microelectronics delivered FET devices from its newly qualified GaN on silicon process. This material will enable us to design our next-generation GaN on silicon amplifier products to support low-power and lower-cost RF amplifier applications. And during Q2, we received numerous initial orders that have significant long-term revenue potential, including an IC design contract to support a long-range automotive FMCW LiDAR application, a pilot order from a Tier 1 base station OEM for a new 5G massive MIMO front-end module, and initial diode orders from both Japanese and German customers to support their new tactical radio production programs. In March, we attended the Optical Fiber Conference, or OFC, where we highlighted our newest products and hosted eight live product demonstrations at our booth. One demonstration which gained a lot of attention was our linear drive products that support single-mode and multi-mode PAM-4 architectures at 800G. The linear drive architecture enables power savings compared to re-timed solutions and a significant cost reduction due to the elimination of the DSP chip from the optical module. Our demonstration showcased 800G link performance and interoperability with Broadcom's Tomahawk 5 switch using OSFP modules designed by Eoptolink, Hisense, and Cloudlight. The demonstrations confirmed post-FEC error-free operation with multiple orders of magnitude margin over the standards requirements. Additionally, we demonstrated NVIDIA's 800G modules, which we believe will be ideal for applications like artificial intelligence, machine learning, and high-performance computing. The linear drive architecture is protocol independent and can support InfiniBand, Ethernet, as well as other low-latency interconnects. We believe our first-to-market linear drive products and associated intellectual property position us for growth as this new architecture is adopted. Before I turn the discussion over to Jack, I would like to review two recent acquisitions. In early March, we completed the acquisition of Linearizer Communications Group, a private company located in Hamilton, New Jersey. Linearizer is expert in microwave predistortion linearization, microwave electronics for satellite payloads, and microwave photonic subsystems, or RF over fiber, for defense applications. Linearizer designs and manufactures custom products for space, SATCOM, and defense customers. Their customers are primarily U.S.-based, and the revenues will be reported as part of our industrial and defense and telecommunication market segments. I'm excited to welcome the entire Linearizer team to MACOM. Linearizer is a well-run, profitable business with great management, great employees, great technology and customers, and a 31-year track record of success. By combining our proprietary semiconductor technology with their component and subsystem design expertise, we can create even more differentiated solutions for our combined customers and further penetrate the relevant markets. Together, we make a powerful combination. And in January, we announced a definitive agreement to acquire the assets of OMIC, a semiconductor manufacturer located outside of Paris, France. The transaction has a few more hurdles to clear, and currently, we expect to close in our fiscal third quarter. This acquisition of key manufacturing capabilities and technologies will expand our millimeter wave frequency gas and GAN portfolio, increase our wafer manufacturing capacity with an operational 3-inch and idle 6-inch production line, add epitaxial growth expertise, bolster our European presence, and strengthen our MIMIC semiconductor process and IC design teams. This acquisition supports our strategic goal to establish a leadership position in very high frequency semiconductor mimic processes and products. Jack will now provide a more detailed review of our financial results.