MACOM Technology Solutions Holdings, Inc.

Welcome to MECOM's third fiscal quarter 2023 conference call. This call is being recorded today, Thursday, August 3rd, 2023. At this time, all participants are on a listen-only mode. I will now turn the call over to Mr. C. Ferranti, MECOM's vice president for strategic initiatives and investor relations. Mr. Ferranti, please go ahead.

Thank you, Olivia. Good morning, and welcome to our call to discuss MECOM's financial results for the third 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 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 SEC today. 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 on our business. After that, Jack Kober, our Chief Financial Officer, will provide a more in-depth review of our financial results for the third quarter of fiscal 2023. I will then provide revenue and earnings guidance for our fourth fiscal quarter, and we will be happy to take some questions. Revenue for the third quarter of 2023 was $148.5 million, and adjusted EPS was 54 cents per diluted share. Cash flow from operations was approximately $46 million, and we ended the quarter with $588 million in cash and short-term investments on our balance sheet. Our team did an excellent job in meeting our business and financial objectives, albeit in a challenging market environment. We are especially pleased with our cash flow as we manage our way through the down part of the cycle. Our book-to-bill ratio in Q3 was 0.9, which was a significant improvement over Q2. Our total company backlog decreased slightly quarter over quarter, although it remains at a healthy level. The bookings growth was driven primarily by our data center and defense customers. Our turns business, or revenue booked and shipped within the quarter, represented approximately 18% of our total revenue, which is approaching historical norms. While we are encouraged by the improvement in bookings, the broader demand environment remains weak in several of our served markets, and in particular with the telecom end market. I'll note that customer cancellations and push-out requests have slowed, which is a positive indicator. However, I would still characterize overall industry inventory levels as high, with many customers still carrying excess inventory. Our external sales channel inventory did decrease in Q3, and we plan to manage our external sales channel inventories down again in Q4. Turning to our discussion of our end markets for fiscal Q3, industrial and defense revenue was 83.5 million, up sequentially, and it was a company record. Within the I&D market, demand for MACOM's products remains robust, and we continue to see numerous secular drivers within both the industrial and defense markets. which have the potential to drive slow but steady growth for MACOM over the coming years. Applications include new satellite networks within the DoD, new AESA, or active electronically steered antenna radar deployments, electronic warfare applications, secure communications, and new very high frequency electronic sensors. These applications require progressively higher frequency levels, more bandwidth, and higher power levels in smaller form factors, which plays directly to MACOM's competitive strengths. Our goal is to expand our SAM within the I&D market and to establish differentiated products that span analog ICs, MIMICs, and RF and microwave subsystems. Our portfolio has multiple growth initiatives, which we've previously discussed, including our high-frequency 0.14 GAN process, low-frequency MACOM pure carbide power amplifier products, BAW filters, KV caps, ruggedized photonic subsystems, and RF amplifier pallets. Our recent acquisition of Linear Communications Group is an example of our SAM expansion initiatives. As previously highlighted, the Linearizer team brings MACOM new design and manufacturing capabilities in microwave predistortion products for SATCOM and satellite payloads as well as microwave photonic subsystem products for defense applications. Over the past three decades, the Linearizer team has developed an outstanding reputation in the SATCOM industry and forged strong relationships with many leading TWT manufacturers, Tier 1 U.S. Defense Prime contractors, SATCOM ground station OEMs, and satellite manufacturers. This acquisition strengthens our market position within the defense industry and improves our ability to capitalize on the estimated incremental $250 million TAM. Since closing the acquisition in March, we have initiated new R&D activities to combine our proprietary semiconductor technologies with Linearizer's system design expertise to create more differentiated solutions for our combined customers. The industrial market continues to expand with new applications, including, by way of example, traffic monitoring radars, automotive sensors such as LiDAR, industrial wireless IoT platforms, factory automation and robotics, and wireless and laser-based instruments for medical applications. In short, we continue to build a unique and differentiated product portfolio of RF and microwave and millimeter wave and optical capabilities for the IND market. While programs in the IND market take a long time to enter production, the programs typically have long life cycles and carry healthy margins, which ultimately create attractive financial returns. Revenue for the telecom end market was $38.3 million, down 29% sequentially. The global telecom markets remain very challenging, with weakness in China, slowing 5G deployments in the U.S., and elevated inventory levels at CATV and Metro long-haul customers. Our telecom bookings have been weak for most of fiscal year 23, and at current levels, we believe we are under-shipping to end demand. In spite of the current market weakness, we continue to view telecom as an attractive market with large and diverse long-term growth opportunities. We believe this market has the potential to be one of our faster growth markets because design cycles are fast, volumes are high, and customers typically select products based on performance rather than price. Macom has compelling products for the telecom market from our diode and mimic portfolio to our analog ICs and optical or optoelectric analog IC products. While this year's order demand has been weak, Our sales team have been doing a great job finding new customers and applications which will drive our future growth. We believe our telecom revenues will improve in the near term when infrastructure deployments increase and as customers and sales channel inventory is depleted. New product introductions remain a core aspect of our growth strategy in the telecom market. As an example, over the past few years, we have expanded our portfolio to include high-power switch in LNA modules to serve 5G base stations, including macro cell, small cell, and massive MIMO active antenna systems in frequency bands up to 6 gigahertz. We've also developed a product line of high-power transmit and receive front-end modules, or FEMs, that operate in the 5G FR2 microwave frequency bands. which consists of multistage PAs, LNAs, and a TR switch and directional couplers. MACOM's RF and microwave IC design expertise is compelling. Our chip designers have the ability to utilize a wide range of GAS, GAN, SOI, and CMOS processes from both internal and external fabs. And as a result, we're able to select the process which achieves leading product performance. While this capability is ideal for 5G radios, our growth strategy is broader than the 5G infrastructure market, and our product line managers use the same technology to target other high-volume applications where we can differentiate. For this reason, we see a large telecom growth opportunity for Macom over the next few years. Data center revenue was $26.6 million in Q3, down 31% sequentially. We still see excess inventories impacting customer demand at lower 25G and 100G data rates. However, during the quarter, we were pleased to see customer demand for our 400G and 800G products start to accelerate, and this near-term trend will provide an opportunity for significant quarter-over-quarter growth. We have also seen an uptick in 200G short-reach PAM4 demand to address some new U.S. cloud deployments. MACOM has a focused product portfolio for the data center to support high-speed analog connectivity, and our products are used in optical transceivers, active optical cables, and active copper cable applications. MACOM has been a leader in supporting the analog linear drive architecture across InfiniBand and Ethernet protocols because we believe linear drive in certain applications can provide lower latency and reduced power consumption compared to DSP-based solutions. We believe our solutions are gaining traction in the market, especially at the higher data rates. As an example, our linear drive products can support new deployments in artificial intelligence, machine learning, and high performance computing. Hyperscale operators are in the early stages of 400G and 800G deployments today, and these customers are actively looking for ways to reduce complexity, DC power, and cost. We believe we are well positioned to capture a portion of the market with our analog solutions. I would now like to review a few key events during Q3. First, we continue to focus on developing cutting-edge semiconductor processes. In support of this effort, we were awarded a contract from the United States Air Force Research Labs or AFRL, to develop advanced semiconductor process technology related to gallium nitride on silicon carbide. The contract will support MACOM's research and development on process technologies used in millimeter wave mimic products. We believe this contract underscores MACOM's technical leadership and commitment in high-power millimeter wave GAN on silicon carbide, and it will enable us to strengthen our competitive edge. This is a multi-year contract that has a total value of around $4 million. Our strategy is to provide customers with the industry's best performing high frequency gas and GAN MIMIC products. Future MIMIC products from advanced processes represent the large growth opportunity for MACOM over the next two to five years. Historically, MIMICs have been among the most profitable products within our portfolio. Second, we are pleased to announce that during the quarter, we were awarded platinum supplier status by a U.S.-based Tier 1 defense contractor, and we were named as a global preferred supplier by a leading Japanese test and measurement company. Customer satisfaction is at the center of MACOM's business strategy, and these awards are a great recognition of our success in servicing these customers. I would like to congratulate the sales teams, application engineering, operations, and all of the other critical members of the Macom team who helped make these awards possible. Third, we are pleased that during the quarter, we formally established the Macom European Semiconductor Center outside of Paris, France. The center bolsters our European presence and provides a manufacturing platform from which we can build upon to expand and better serve our European customers. The center also brings us an amazing team and a portfolio of high-performance MIMIC products. And finally, I would like to note that the integration of linear communication group acquisition is on schedule, and our teams have been excited to start collaborating together to win new business. Before I turn the discussion over to Jack, I would like to review one more item. In mid-July, the management team updated its long-term strategic plan. As a reminder, in July of 2020, we initiated a long-term new planning process, and this year was our fourth revision of the plan. As you would expect, the strategic plan analyzes our capabilities, the markets, and potential areas for SAM expansion. It reviews our current technology portfolio, product roadmaps, competitive landscape, SWOT analysis, and formulates a roadmap for growing revenue and profitability at a detailed product line level. We believe that in-depth, long-term planning is essential for a semiconductor business, and this is a critical element of how we manage the company. We believe our strategy will strengthen and diversify our business and provide MACOM the ability to capture market share. We are excited to scale the business and achieve $1 billion in revenue. Jack will now provide a more detailed review of our financial results.