MACOM Technology Solutions Holdings, Inc.

Welcome to MECOM's first fiscal quarter 2024 conference call. This call is being recorded today, Thursday, February 1st, 2024. At this time, all participants are in listen-only mode. I will now turn the call to Mr. Steve Ferranti, MECOM's Vice President of Corporate Development 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 first fiscal quarter of 2024. 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 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. Before I review the quarter's results, I would like to acknowledge the passing of John Ocampo, our chairman, this past November. His contributions to the semiconductor industry, educational institutions, and charitable organizations help make the world a better place. His vision to make Macom a world-class company lives on. Now, I will provide a general company update. After that, Jack Kober, our chief financial officer, will provide a more in-depth review of our first quarter results for fiscal 2024. When Jack is finished, I will provide revenue and earnings guidance for the second fiscal quarter of 2024, and then we will be happy to take some questions. Revenue for Q1 was $157 million. Adjusted EPS was 58 cents per diluted share, and operating cash flow was approximately $33 million. MACOM's core business was essentially flat quarter over quarter, but in total, Our revenue grew by 4.5% sequentially, including approximately $6 million from the Wolfspeed RF business acquisition, which closed on December 2, 2023. We ended the quarter with approximately $463 million in cash in short-term investments on our balance sheet. Our business remains healthy and profitable, and we continue to generate strong cash flow while improving in future growth opportunities. In Q1, our book-to-bill ratio was 0.9 to 1, and our turns business, or orders booked and shipped within the quarter, was approximately 26% of total revenue. Separately, our required RF business included a significant amount of backlog, which provides us increased visibility over the next few quarters. Fiscal Q1 revenue by end market was as expected, with industrial and defense at $77 million, data center at 49.5 million, and telecom at 30.6 million. For the quarter, IND was down 3% sequentially, data center was up 22% sequentially, and telecom was flat sequentially. We maintain a highly diversified customer base consisting of thousands of customers across a broad range of end markets, and our strategy is to further diversify and expand our geographic and industry exposure. We continue to see new growth opportunities in all our end markets. Industrial and defense is our largest market and has been steadily growing over the past few years. Defense orders remain robust while industrial orders remain weak. Overall, IND revenue was down sequentially in Q1, primarily due to weakness in the industrial markets. We believe the long-term trends for our IND business are favorable and our growth strategies are working. Our focus over the last few years has been on building out and improving the competitiveness of our established MIMIC and DIODE product lines to cover more functions, power levels, and higher frequency ranges, expanding our addressable market opportunity through organic and new technology developments like KV caps, VAW filters, and high-frequency GAN, adding new product categories such as RF over fiber, and cross-selling our optical and high-speed analog product lines. In total, we address a wide range of applications within the IND market. Our opportunity pipeline with major defense customers is robust, and our capture rate for future business looks strong. Our data center and market revenues grew sequentially in Q1. Demand continues to be very strong within 100G per lane, 400G, and 800G short-reach products optical connectivity solutions. Customer demand for shipments exceeded our expectations during our Q1 and Q4 as certain customers ramped up production. Given the fast growth rates in shipments in the past two quarters, we are anticipating reduced shipments in Q2. However, our current expectation is the demand for high-speed products will remain steady over the next couple of quarters. MACOM's linear product portfolio continues to grow. We recently announced the addition of a new dual-channel laser driver and transimpedance amplifier, or TIA, products, supplementing our existing portfolio of four and eight-channel products. These products feature high bandwidth, broad dynamic range, and low noise to enable linear pluggable, or LPO, solutions in targeted applications and form factors. These new solutions can provide a cost and power optimized solution for SFPDD and SFP112 optical form factors targeting Ethernet, fiber channel, and InfiniBand applications. We are also seeing the opportunity to further expand in other high-volume applications by implementing linear drive connectivity and network interface cards, or NICs, to support 100G per lane optical-to-switch to server connections. Finally, our R&D teams are actively engaged in developing the next generation solutions at 200 G per lane to further enable 1.6 terabit per second applications. We support a broad spectrum of applications, including DSP-based solutions, linear pluggable optics, and coherent. The full breadth of MACOM's high performance analog and photonics capabilities will be on display at this year's Optical Fiber Conference, or OFC, in San Diego in March. Our team is planning a variety of live demonstrations, including multiple hardware examples of 100G per lane linear pluggable optical or LPO module solutions showing interoperability, 200G per lane single mode fiber LPOs, and 200G active copper cable solutions. These products will support high-speed opportunities, including the latest disaggregated data center architectures. Overall demand in our telecom end market continues to be weak, with revenues down approximately 50% compared to just four quarters ago. Demand weakness is broad-based, spanning most of our larger market subsegments, including 5G, metro long-haul, cable infrastructure, and passive optical networks. And in many of these markets, customers continue to reduce inventory or suffer from weak demand. While we remain cautious on certain portions of the telecom market, we are excited about the expansion of our technology portfolio and customer engagements within telecom. We believe telecom remains an attractive and diverse market for Macom. It provides opportunities to differentiate based on product quality and performance. As data speeds continue to increase across wireless, wireline, cable, and satellite networks globally, we see numerous opportunities for MACOM. And of course, we believe our RF power product line is well-positioned to capture market share, and over time, we expect to be a much larger player in this market. We also believe the SATCOM portion of the telecom market will continue to provide exciting opportunities for MACOM and FY24 and beyond. And we see an expanding SAM for ground terminals, gateways, and space-based hardware. We can provide these customers unique high-performance IC and module solutions based on proprietary semiconductor process technologies and capabilities. In addition, we added to our already growing space and SATCOM portfolio with the acquisition of Linear Communication Group. This acquisition added design capabilities in solid state power amplifiers, or SSPAs, and standalone linearizers for ground station and satellite applications. We expanded our capabilities last year in millimeter wave frequencies with the opening of our MACOM European Semiconductor Center, MESC, which recently received European Space Agency qualification on certain of its key semiconductor processes and products. And finally, we continue to expand our RF, microwave, and millimeter wave assembly and test capabilities for special microwave components and sub-assemblies for satellite, military, test equipment, and other high-performance applications. We leverage our custom MIMIC and analog ICs with specialized PCB materials and unique interconnect technology and assembly techniques to create smaller size solutions compared to our competition. On a related note, we look forward to participating in the upcoming satellite conference in Washington, D.C. in March. The conference provides our team an opportunity to engage with various satellite manufacturers and industry groups to discuss requirements for traditional defense and commercial satellite constellations. We see a great opportunity to support new commercial constellations targeting high-speed broadband internet connectivity and direct-to-sell applications. We believe our comprehensive product portfolio is ideal for this market segment, which requires optical, RF, millimeter, and microwave technologies from the IC component level up to the subsystem level. I would like to update investors on our recently closed acquisition of Wolfspeed's RF business. We are excited to take ownership of this compelling technology and product portfolio and advance its ongoing business activities. The acquired process technologies and products are highly complementary to our existing portfolio and support our goal of SAM expansion within our target markets. Our GaN on silicon carbide RF product portfolio is now one of the most advanced and complete portfolios in the industry. We estimate the RF GAN market to be a $2 billion SAM, and forecasts predict the market will grow to approximately $3 billion by 2027, primarily driven by the increased adoption of GAN in defense and commercial wireless applications. Our RF GAN portfolio now supports a wide range of low-frequency applications, including ground-based radar systems, electronic warfare, and terrestrial communication systems, as well as very high-frequency applications including various DoD systems and terrestrial and satellite communication systems. We believe our GAN team has industry-leading depth and experience, and I am confident we can disrupt the industry with further GAN epi, semiconductor process, and IC design innovation, which will ultimately lead to market share gains in the years ahead. A few other comments regarding the transaction. First, prior to closing, we identified significant synergies and took actions to enable the business to meet an important objective, to improve profitability and to be accretive to our bottom line. And based on our current projections, we believe the acquisition will modestly contribute to our earnings in Q2. Of course, we still have a great deal of work ahead of us to improve the overall profitability of the product line. Second, our respective integration teams established a plan to enable the acquired business to be fully operational within MACOM immediately after closing. We met our goal, and a few days after the closing, the RF business was operating within MACOM's systems environment, including IT, HR, ERP, and financial reporting systems. And most important, over the next 12 to 18 months, we expect to make meaningful progress on improving operational efficiencies, profitability, in expanding revenue within the RF business. In summary, MACOM now has a wider range of products than ever before. Many of these products have long life cycles and will produce revenue for years after they've been introduced. We view these business attributes as an inherent strength of our business model. Before I turn the discussion over to Jack, I would like to welcome Raj Shanmugaraj, an independent director, to our board. Raj brings extensive telecommunications hardware expertise and decades of industry experience to Macon. He was previously the president and CEO of Acacia, a leader in coherent products and components, which was acquired by Cisco in 2021. The management team and the board of directors look forward to working with Raj. Jack will now provide a more detailed review of our financial results.