MACOM Technology Solutions Holdings, Inc.

Q2 2024 Earnings Conference Call

5/2/2024

spk02: Welcome to Maycom's second fiscal quarter 2024 conference call. This call is being recorded today, Thursday, May 2nd, 2024. At this time, all participants are in the listen-only mode. I will now turn the call to Mr. Steve Ferranti, Maycom's Vice President of Corporate Development and Investinations. Mr. Ferranti, please go ahead.
spk07: Thank you, Livia. Good morning and welcome to our call to discuss Maycom's financial results for the second 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 Delegation Reform Act of 1995. Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that can result in those differences, we refer you to Maycom'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 Daley, President and CEO of Maycom.
spk04: 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 Q2 results. When Jack is finished, I will provide revenue and earnings guidance for fiscal Q3, and then we will be happy to take some questions. Revenue for Q2 was $181.2 million and adjusted EPS was 59 cents per diluted share. We ended the quarter with approximately $476 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 investing in future growth opportunities. We expect our net income and associated cash generation to increase in the second half of our fiscal year compared to the first half. In Q2, our -to-bill ratio was 1.0 to 1, and our turns business, or orders booked and shipped within the quarter, was approximately 20% of total revenue. This was a notable quarter for new orders and our team did a great job securing two large future programs, which I will discuss in a few moments. Despite the sequential bookings improvement, we still see weakness in our telecom and industrial end markets. Fiscal Q2 revenue by end market was as expected, with industrial and defense at $90.9 million, telecom at $47.2 million, and data center at $43.1 million. For the quarter, data center was down .9% sequentially, IND was up 18% sequentially, and telecom was up .1% 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 across all our end markets. Industrial and defense is our largest market and it has been steadily growing over the past few years. Defense orders remain robust, while industrial orders remains weak. We believe the long term trends in our IND business are favorable and our growth strategies are working. Our focus over the last few years has been on building out our engineering capabilities so we can better serve our defense customers. For example, we approach our defense customers as a merchant supplier of high performance IC components. In doing so, we offer standard and custom IC and package solutions to support their needs. We embrace custom design projects, which we view as a great way to build strong relationships with our customers engineering teams. We also offer defense customers access to our wafer foundries and technology. In some instances, our defense customers have their own wafer fabs and IC designers, but they are inclined to use DoD trusted foundries like MACOM to access differentiated process technologies. And we offer to design and manufacture custom component, module and subsystem solutions, but only in areas where we have high MACOM IC content and true subsystem expertise, which typically revolves around millimeter wave, very high RF or microwave power, filtering or switching, and specialized fiber optic subsystems. I would now like to highlight a few trends that we are seeing and believe will be favorable to our IND business. We are seeing accelerated development of electronic warfare systems, increased production rates, upgrades or expansion of existing radar systems, addition of features to existing integrated battlefield defense systems to improve performance, and investment in new technologies to address the threat of drone attacks, including the use of very high RF power in microwave signals. We are seeing an increased number of large opportunities across these areas. As an example, in Q2, our team secured design wins and low rate initial production orders from a tier one defense OEM on a very large new defense program. We believe we won this competitively bid program due to our unique in-house semiconductor technology and our ability to rapidly scale production. While the current purchase orders are a few million dollars in size, we believe this fast moving program has the potential to be a leading contributor to our IND growth over the next few years. Our opportunity pipeline with major defense customers is robust and our capture rate is strong. And finally, as noted in a press release issued on March 19th, MECOM received Quality and Best Supplier awards from Northrop Grumman, one of the largest defense contractors in the U.S. Northrop Grumman has thousands of suppliers and a limited number of companies were selected for special recognition. During the event, MECOM was one of five suppliers to receive multiple awards and I congratulate our dedicated quality engineering operations and safety and safety professionals. And our sales teams for earning these prestigious awards. Our data center and market continues to be an exciting and dynamic market with significant growth opportunities. We believe demand is growing for 100 gig per lane, 400 and 800 gig short reach optical connectivity solutions. And for this reason, our current expectation is the demand for high speed products will drive steady growth during the second half of our fiscal year. Today, our 100g per lane, multimode and single mode drivers and TIAs and active copper solutions are in high volume production. The vast majority of these shipments are supporting the industry's deployment of 800g interconnects. Our engineering team is actively engaged in developing next generation solutions at 200 gig per lane to further enable 1.6 terabit applications. We are pleased that we have secured key design wins in first production orders for our 200 gig per lane chipsets for 1.6 T interconnects and we expect to begin ramping deliveries in mid fiscal 2025. We believe high speed connectivity will be ubiquitous and spread to applications outside the data center, including automotive telecommunications and general networking infrastructure. Related to this expansion, it is noteworthy to highlight at this year's Optical Fiber Conference in San Diego in March or OFC, we demonstrated with partners optical PCIe solutions based on our laser driver and TIAs targeting disaggregated computing applications. Interest in Maycom's linear products portfolio continues to grow. Maycom is one of the founding partners of the Linear Plugable Optics LPO Multi-Source Agreement or MSA, formed by industry leading companies to develop the specifications required to enable an ecosystem for LPO solutions. We support a wide range of data transmission protocols, including NRZ, PAM4, Coherent and PCIe. The full breadth of Maycom's high performance capabilities was on display in March at OFC. Areas that sparked particular interest were the demonstrations of our 200G per lane single mode fiber LPO, our 200G active copper cable solutions and optical PCIe solutions. These products will support high speed data opportunities, including the latest disaggregated data center architectures. Finally, demand for our legacy Ethernet data center products, which has become a smaller part of our revenue, is now modestly improving and we are pleased to see some positive trends. Our telecom end market is showing improvements in certain areas. While the macro environment for carrier 5G investments is weak, we are seeing platform shifts at our lead 5G customer, which may result in revenue growth opportunities for Maycom over the next 12 months. In addition, we see the opportunity to gain market share at certain key accounts where we currently have limited penetration. Overall, we are excited about the opportunities in 5G in spite of the current market dynamics. In addition, as 5G networks are being rolled out, we are finding opportunities in adjacent applications such as distributed antenna system networks or DAS networks. A DAS system combines multiple radio bands such as LTE with 5G and acts as a repeater to provide local but strong full carrier coverage. Deployments are typically inside buildings or in a private enterprise or campus like environment. The systems are designed with high performance wideband RF and optical components, which plays to Maycom's strengths. The cable TV and wired broadband market remains very weak. We believe the cable TV market is in a transition between DOCSIS 3.1 and DOCSIS 4.0. Maycom is engaged with these OEMs who are currently qualifying solutions for DOCSIS 4.0. However, there is uncertainty in the timing of market deployments and adoption, so we have set a low revenue growth expectation for DOCSIS 4.0 over the next one to two years. 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 Maycom. As data speeds continue to increase across wireless, wireline, cable and satellite networks globally, we see numerous opportunities for Maycom. 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 larger player in this market. We also believe the SATCOM portion of the telecom market will continue to provide exciting opportunities for Maycom. 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. I am pleased to announce that in Q2, we were awarded a contract worth approximately $55 million from a major satellite manufacturer. The contract, which also has the option for the customer to purchase an additional $25 million of hardware, represents one of the larger commercial contracts in Maycom's history. I congratulate our business development and engineering teams on this win. Our novel high-frequency process technologies and unique IC design and manufacturing capabilities help to solidify this large award. Ultimately, we believe our solution will enable our customer to achieve superior system-level performance compared to the competition. This multi-year contract has two phases, a design phase, which will last about nine months, and a production phase, which starts late in our fiscal 2025 and is expected to run for approximately 18 to 24 months thereafter. As a practice, because long-term customer contracts can be subject to certain inherent risks, we typically do not include orders that have deliveries beyond a 12-month horizon in our reported quarterly bookings. Only $3 million of this order was included in my previously mentioned Q2 -to-bill ratio. I would like to take a moment to update investors on our pursuit activities for CHIP and Science Act federal funding. As previously discussed, through the Department of Commerce, we are pursuing support and funding for a potential foundry modernization and expansion project. Because this process is under review, we are unable to comment further on this specific activity. Separately, through the Department of Defense, we are also pursuing technology development funding. The DOD has created eight regional innovation hubs, and Maycom is a hub member or core partner in five of eight of these hubs. This part of the CHIPS Act is referred to as the Microelectronics Commons Program, and its goal is to accelerate commercialization of new semiconductor technologies that are of military importance. The Microelectronics Commons Program established a network of technology hubs designed to accelerate domestic hardware prototyping and -to-fab commercialization of semiconductor technologies, as well as develop the US-based semiconductor workforce. Earlier this month, Maycom was awarded a multi-year contract valued at up to $11.4 million through one of these hubs. The focus of this contract is advancing GAN technology for RF and millimeter-weight applications. While this award is relatively modest in size, it represents our first CHIPS Act award, and we are pleased to participate in the project. Investors should expect that we will continue to pursue additional technology development funding in areas that are critical to the DOD and also in line with our technology roadmap and strategy. In summary, there have been a number of very positive results within the business this fiscal year that we believe help set Maycom up to have a strong fiscal 2025 from a revenue growth and profitability standpoint. These include, one, executing a strategy that focuses on market positioning to capitalize on trends, advance technology development, strengthen our franchise and differentiate ourselves from the competition to win market share. Two, securing key design wins in the data center and market to participate in next-generation advanced architecture rollouts. Three, winning large new multi-year programs in defense and commercial satellite programs. Some of these are amongst the largest program awards in Maycom's history. We expect these will start to contribute to revenue in fiscal year 2025 and 2026 timeframe. Four, gaining market share in telecom by leveraging our RF power teams leading Gantt capabilities. Five, winning new higher level sub-assembly business leveraging Maycom's unique semiconductor content and system level expertise. And last, of course, always focusing on improving productivity and profitability. We are excited about the future and confident in our plan to achieve our goals. Jack will now provide a more detailed review of our financial results. Thank you, Steve, and good morning,
spk06: everyone. Revenue for the fiscal second quarter was $181.2 million, up .3% sequentially, based on growth in our industrial and defense and telecom and markets. Our IND and telecom revenue was supported by the first full quarter of revenue contribution from the acquired RF business. On a geographic basis, revenue from US-based customers represented approximately 44% of our fiscal Q2 results, flat sequentially. Adjusted gross profit for fiscal Q2 was in line with our expectations at $103.5 million, or .1% of revenue, compared to .2% in fiscal Q1 2024. Two items impacted the quarter's margins. One, mix associated with the Wolfspeed RF business acquisition, and two, under-absorbed costs primarily at our low wafer fab. As we move forward through continuous improvement actions and grow our revenue, we expect to drive our consolidated gross margins to be closer to 60%. Total adjusted operating expense for our second fiscal quarter was $63.3 million, consisting of research and development expense of $40.1 million and selling general and administrative expense of $23.2 million. Total operating expenses were up sequentially by $8.7 million, primarily due to the full quarter of expenses associated with acquisitions. Adjusted operating income in fiscal Q2 was $40.2 million, up from $38.6 million in fiscal Q1 2024. Adjusted operating margin was .2% compared to .5% in fiscal Q1 2024. I'll note our operations team has been focused on margin and yield enhancement activities associated with current production programs, from which we expect to see near-term incremental benefits to our operating margin. Depreciation expense for fiscal Q2 was $7.3 million, up from $6.3 million in fiscal Q1 2024, driven by a full quarter of the acquired RF business. Adjusted EBITDA was $47.4 million, up $2.6 million, or approximately 6% sequentially. Trailing 12 months adjusted EBITDA was $178.5 million. Adjusted net interest income for fiscal Q2 was $4.4 million, roughly $200,000 lower than the prior quarter, primarily due to lower average investment balances during the quarter due to recent acquisitions. Our adjusted income tax rate in fiscal Q2 was 3% and resulted in an expense of approximately $1.3 million. Our net cash tax payments were approximately $1.7 million for the second quarter. We expect our adjusted income tax rate to remain at 3% for the second half of fiscal year 2024 and into fiscal year 2025. Fiscal Q2 adjusted net income was $43.2 million, compared to $41.8 million in fiscal Q1 2024. Adjusted earnings per fully diluted share was $0.59, utilizing a share count of $73.3 million shares, compared to $0.58 of adjusted earnings per share in fiscal Q1 2024. I would now like to spend a few moments discussing some of the items that resulted in the increase to our diluted share count over the past quarter. Our diluted shares increased by approximately $1 million from December 2023 to the end of our fiscal March quarter, primarily for two reasons. First, our March quarter diluted share count included a full quarter impact from the 712,000 shares issued on December 2nd, 2023 in connection with the RF business acquisition. Second, due to accounting rules, our diluted share count increased by approximately 400,000 shares as a result of our average stock price being above the strike price of our convertible notes for a portion of the quarter. In total, these two items represented an approximate 1% increase in our share count compared to the prior quarter. Now, moving on to operational balance sheet and cash flow items. Our Q2 accounts receivable balance was $120 million, up from $101 million in fiscal Q1 2024, primarily due to higher revenue contribution from the RF business. As a result, day sales outstanding were 60 days compared to 59 days in the prior quarter. The acquired RF business contributed approximately $14 million to the sequential increase in accounts receivable for the quarter. Inventories were $177.8 million at quarter end, up sequentially from $159.5 million. The sequential increase was primarily driven by the acquired RF business and will enable us to continue to ramp new programs, customers, and revenue. Inventory turns were 1.8 times, up sequentially in Q2 from 1.6 times in the prior quarter. We expect inventory turns to improve throughout the remainder of fiscal 2024 as we continue to optimize wafer starts and material utilization. It's also important to note that we have been actively reducing inventory balances held at certain of our channel partners in the past four consecutive quarters. Fiscal Q2 cash flow from operations was approximately $18.2 million, down from $33.1 million sequentially. There were two notable one-time cash flow items in the quarter. A working capital increase of approximately $14 million associated with a full quarter's activities of the RF business acquisition and payments for acquisition related expenses of approximately $9 million, which were accrued in prior fiscal quarters. Going forward in fiscal Q3 and Q4, we expect our quarterly cash generation to be in excess of $35 million. Capital expenditures totaled $5.1 million for fiscal Q2. Even with Maycomb's expanded operational footprint, we will continue to carefully balance capital expenditures with our revenue, depreciation expense, and income. We expect our fiscal year 2024 capital expenditures to be between $30 to $35 million. Next, moving on to other balance sheet items. Cash, cash equivalents, and short-term investments for the second fiscal quarter were $476.4 million, up $13.1 million sequentially, driven by net cash from operations. Again, in fiscal Q2, our $476.4 million of cash equivalents and short-term investments exceeds the book value of our $448 million convertible note debt. Finally, I would also like to recognize the teamwork and dedication of the entire Maycomb organization, and thank you all for your efforts to help grow and support the business. I will now turn the conversation back
spk04: over to Steve. Thank you, Jack. Maycomb expects revenue in fiscal Q3 ending June 28, 2024 to be in the range of $187 to $193 million. Adjusted gross margin is expected to be in the range of 56 to 58 percent. And adjusted earnings per share is expected to be between $0.63 and $0.69, based on 74 million fully diluted shares. In fiscal Q3, we expect revenue in all markets to be up sequentially. We believe data center will lead with low double-digit growth, followed by telecom with mid single-digit growth, and industrial and defense with low single-digit growth. We believe we can achieve modest sequential improvements in revenue and operating profit over the remainder of fiscal 2024. And over the longer term, as revenues in our telecom and industrial business recover, and as our margin enhancement activities continue, we expect gross margins to trend back towards 60 percent with operating margins above 30 percent. I would now like to ask the operator to take any questions.
spk02: Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. In the consideration of time, we ask 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 line of Thomas O'Malley with Barclays. He'll let us open.
spk03: Good morning, guys, and thanks for taking my questions. I just wanted to start off with the progress thus far on the RF acquisition. You guys clearly had some milestones laid out for when you would take over that FAB, but in the intermediary period of time you were talking about maybe running some more of your lines. You now have the business under your roof for the first full quarter. Can you talk about what's going on there thus far, and then in terms of what you're able to do in terms of getting that gross margin profile to where you want it to be, what steps are you kind of taking to do that? Because I would assume that's a large portion of kind of where the headwind are on gross margins right now. Thank you.
spk04: Thank you, Tom. So as everybody knows, we closed the acquisition about four months ago, and I can report that the customer engagements have been outstanding. Our RF team and the Wolfspeed RF team have been, you know, meshed together and the team is settling in and working well together. So we're very pleased about the level of collaboration with all the new employees that came over to Maycom. I can also say that the work that's being done in our operations organizations is really truly world class. That includes, you know, working with the team in Morgan Hill with the back end manufacturing capability that came over with the transaction, as well as our team in Malaysia. We had a team in Malaysia and Wolfspeed had a team and we brought those two teams together to support a lot of the high volume, you know, demand. So I would say that from an integration point of view, we're doing quite well. As it relates to looking at the gross margins and taking steps to improve the gross margins, I think we have a lot of work to do. I can tell you that our team has laid out a long list of action items outside of the FAB to address a lot of the areas that we have full control over. But then when you move into the FAB, as I think I mentioned on our last call, we have to operate within a certain framework which is defined by the FAB Operating Committee, which is comprised of both Wolfspeed and Maycom staff. And this team is really looking at the -to-day operation of the FAB, setting priorities, setting up various projects. Maycom controls the wafer starts and the mix and also the amount of development versus production. And so really it's early innings, let's say, we're still establishing a good working relationship inside the FAB. We have always felt with this transaction that the biggest risk with the transaction is really, you know, making improvements, operational improvements related to the FAB and that is certainly a work in progress. But I can report we're very happy with the results. We have an outstanding working relationship with the Wolfspeed team and as Jack mentioned in his script, we expect incremental improvements in the gross margins really starting now and going into our fiscal 2025. And then the last thing I'll just highlight is the business itself is hitting all of the key markers that we wanted from a revenue and an operating profit point of view. So we're very pleased with the performance and the financials of the business to date.
spk03: Thanks for the thorough response. The second one is broader as well and not looking for exact guidance, but just want to hear your thoughts. So you guys have historically said that you expect Telecom to kind of be your fastest growing business. And if you look at kind of the fiscal year 24 and how it's tracking, you know, that data center business is going to be a big leader in terms of growth. So when you look at fiscal year 25, do you still think that Telecom is going to be the leader in your growth or are you seeing some of these opportunities in data center kind of come on at least in the near term in terms of this year and next year come on so quickly that that may be the leader in growth when you look at fiscal year 25?
spk04: I think that's a good question and I don't think we're prepared to comment on the growth rates of the different markets today. You know, as we take a step back and look at our Telecom business and our data center business, they're about the same size right now within a few million dollars on a quarterly basis. So we do think over the long term the Telecom will outgrow data center just due to the amount of different opportunities in different market segments. So we think over the long term you know, that will be a big leader and be the leading market over data center. Now with that said, the data center market is doing really well. We're having a great year this year. We expect as I talked about in my script a very strong year next year. The data rates are going higher and this makes it more complex in terms of fielding solutions due to the sort of the changes going on inside the data center. We find that there's a tremendous amount of opportunities for short reach high data rate connectivity and that's where we play. And then the industry is trying to bring on different ways to solve the same problem and that's why I spoke about the LPO-MSA which is really the industry coming together and saying how do we make an optical or a copper link that uses less power and we are absolutely right in the mix of that. And what we're very happy to see is a growing number of companies joining the MSA leading networking companies leading module manufacturers and even leading chip companies. And so, you know, we think over the long term that will be a tailwind to our business.
spk02: Thank you. And our next question coming from the line of Harsh Kumar with Viber Centler. Yeah,
spk11: hey, thanks guys, congratulations once again in a solid quarter, solid diet. I was going to ask this later on but since you were talking about LPO I'll ask this right now, Steve. There was a big debate at the OFC around LPO everybody was showing it you everybody was wanting to get there but it seems like the luminaries in the networking world had doubts and they expressed it pretty openly we all know the benefits of LPO But I was curious how you see the path of adoption of the LPO in the market. It would be fantastic for you and a handful of other players, and really bad for some guys that make DSPs. But I was curious how you see the adoption happening and what the impediments are at this point in time.
spk04: Sure. Well, a few things. First, you have to understand that the LPO solution that we're working on is being done in the context of a broader portfolio of products for the market. So whether LPO kicks in or not isn't going to change the opportunity set, let's say, inside the data center. I don't want investors to feel like we're evangelizing LPO. We're not. We see it as an interesting product set that is very similar to the current analog solutions that we sell today in active optical cables. And also it's sort of a cousin to our 200 gig electrical solutions for ACCs. So with that said, I think it's going to take time. I think what you see in the industry right now is people showing examples of links working and meeting the bid error rate requirements at significantly lower power, lower latency, and a lower cost compared to DSPs. So I think it will take time. The first step is to have the industry come together and create interop specs so that the hardware people know exactly what the switch and the server people want from a specification point of view. And that work is really happening this year. So it's true that there are a lot of companies showing examples of hardware working in a lab environment that's very different than making 10 or 20 million links. And so the concept needs to mature and we think that will take time. And a certain part of the work that we're doing at MACOM. So I just want to highlight that it's an activity. We think it's an important activity. It's in line with our analog solutions that are pushing higher and higher data rates. But I don't want folks to believe that if LPO doesn't work, then our data center revenues won't grow.
spk11: Of
spk04: course. Thank you
spk11: for the color, Steve. And then we're hearing good things in data center. We obviously see what the growth rate of the generative AI space is and all of those compute power needs to be connected. So I was curious if you could just maybe give us an idea of how you see a data center candidate being. I know you said telecom grows bigger in the longer term, but perhaps in the near to midterm, maybe you could comment to the extent you're comfortable with the prospects of your data center business. Yeah, that's it. Thanks.
spk04: Yeah, I think in the near term, we're going to do quite well and we're building backlog with lead customers. We're seeing 800 gig, you know, the leaders at 800 gig have a very strong position in the market and we're part of that supply chain and we see it now spreading to other ISPs and other folks building the hardware. So the 800 gig business for Maycom right now is very strong. These are basically short reach, 100 gig per lane, mostly pluggables. And so we think that business will continue to grow. Then we get to layer on basically solutions for 1.6 terabit. And that's where our 200 gig per lane products come in for next generation. And we're starting to build backlog for those solutions. So we think going into 2025, 800 gig solutions will grow. Our position at 1.6 will grow. We think we will have more diversity in our revenue by customer next year, which is a good thing. And then, you know, sort of adding to that, we are also seeing some traction with our 400 gig ZR light for sort of the 12 to 15 kilometer reach in and around the data center. And we have good content on some of those platforms. So we think the near term is looking very good. However, as we always say, it's the most volatile part of our portfolio. It turns on quickly and it turns off quickly. There's a it's a fast paced environment and so it can be volatile. And so we always temper expectations. But given the trajectory, I think this year will be one of Maycomb's best years in terms of total revenue in the data center. It should be a record or near record year.
spk02: Thank you. And our next question coming from the line of Gwen Baldwin with Needham and Company, Ilanis Elfin.
spk05: Hey, guys, thanks for taking my question. Wanted to follow up on the data center opportunity. One of the big things that seem to come out of OFC is that we're starting to see potentially a pretty large ACC opportunity at 200 gig per lane to connect GPUs together in, you know, across somewhere between eight to 16 racks. Sounds like this opportunity could reach into the tens, if not exceed 100 million as it ramps and wanted to see, you know, how Maycomb is positioned. Excuse me if you guys think that that's a significant opportunity for you as you look into fiscal or calendar 25.
spk04: Well, we certainly heard and saw the same things at OFC, so I don't think we would disagree with the fact that there's a big opportunity there. And so we'll have to wait and see on that, I guess would be the best thing to say, Gwen. So it is a big opportunity. There's more customers coming online at the higher data rates, which plays to our favor. We have a lot of different products, informed factors and solutions for these customers. But you have to understand that there's still a lot of work being done, a lot of testing, a lot of qualification. And we think that this year will really be the year where we can, you know, secure strong positions at, you know, for 200 gig ACC. But I would say that, yes, there's an opportunity. I think we're seeing the same things you are.
spk05: Great. Thank you for that. And then, Steve, you called out, you know, a couple of the larger programs in your prepared comments and you mentioned something about that that sort of helps accelerate or drive, you know, pretty strong growth in fiscal 25. I know you haven't given guidance for 25, but I think the street was already looking for 25 to be, you know, probably back in your long-term CAGR of 10 to 15 percent. I'm kind of wondering, does this push you potentially to the high end or above that range as some of these new programs ramp to volume?
spk04: Well, potentially, but it's as things are ramping up, we have to remember things are also ramping down and there's also uncertainty associated with the market and our customers run rates and whatnot. So I would not want to signal sort of our target for next year. I think there are certainly models out there that people can look at. But you know, from our point of view, what we're seeing this year is good performance in the back half as we're guiding it to Q3. All three markets are up. Our data center business will be up by double digit, telecom mid-single digit. We are building very strong backlog as I highlighted that large contract, you know, is significant in the bulk of that revenue will begin at the mid-year, middle of our fiscal year 25. And so potentially, we could have a very good year next year, but we're not really giving more specific guidance than that.
spk02: Thank you. And our next question coming from the line of Carl Ackerman with BNP Purpose. The line is open.
spk10: Thank you. It sounds like telecom is beginning to recover I think
spk00: sooner than what computer time suggested.
spk10: Is the near-term for... Hey, Carl,
spk06: this is Jack. We're having trouble hearing you.
spk10: Okay, sorry about that. Can you hear me now? Yes. Okay, great. Thank you. So it sounds like that telecom is beginning to recover a bit sooner than what some of your peers have suggested. Is the near-term performance in June and your outlook for fiscal 25 driven primarily by satellite products that you spoke about or is it broader than that? Thank you.
spk04: Right. So I think our... It's, you know, I think every company has a different position within the telecom markets. And so, you know, I think we're just, you know, our behavior is very different than maybe what our competitors are doing. And so we have a lot of very specific things happening within the telecom and market that are favorable. We talked about the large SATCOM business that we, you know, announced this large award. I mentioned that we are seeing some shifts in some of the production run rates at some of our existing 5G base station customers and some growth opportunities there. I think that's very specific to Maycom. It doesn't necessarily reflect what's going on in 5G. And I also mentioned, of course, that cable is very weak and we expect it to be weak, so we don't think that's going to be helping things, you know, next year. The other sort of bright spot that I might mention is our Metro Long Haul business is also beginning to improve. We had some great product releases recently, including 130 gigabaud coherent IC, which is just starting mass production, and that supports connectivity up to 1.2 terabits per second. So that's going to be a tailwind. I think the legacy Metro Long Haul business is relatively weak, but we also are seeing some of our 800 gig ZR applications in that space as well. So then the last thing I'll mention is PON is very weak for a general point of, or general comment, and our thinking is it will remain weak for at least another few quarters. So I wouldn't necessarily say that we are a bellwether of what's going on in telecom.
spk02: Thank you. One moment for our next question. And our next question coming from the line of Tori Sandberg with Stiefel, U.S. Open.
spk01: Yes, thank you. Could you share with us the contribution from the acquisition in the quarter and the impact of the industrial defense being up 18% sequentially, was that all organic or did that also include some of the acquisition?
spk04: Yeah, so maybe I'll say a few words and Jack can also add. So I think we mentioned on our last earnings call that we expected the Wolfsby business to contribute about $30 million this quarter Q2. And so that was about the amount they contributed this quarter. It was a little bit higher than that. So very happy about that. And then in terms of the growth that we're seeing this quarter, sort of Q2 to Q3, half the growth is coming from our data center sequential growth. And then the balance of that is really spread between the telecom and the IND markets. And it's both Wolfsby business or the RF business and Maycom business. Or said differently, the Maycom based business is beginning to improve.
spk01: Very good. Go
spk06: ahead, Jack. And then just to add, I think we had discussed the acquired RF business being profitable and generating some bottom line. So we did see that come through as expected for the full quarter here in the March time period.
spk01: Very good. And as my follow up, Steve, you just mentioned you expect data center to potentially reach a record year. If I'm not mistaken, the record was 173 and you just got it to a 50 million quarterly run rate. So I mean, wouldn't you be above that record for this year unless I'm misreading some potential volatility in the business for the back half?
spk04: Yeah, I think I was looking at the last five years, Tori. I think the number you're quoting is probably back in 2016 or 17 as sort of the high water mark for the data center. And so I have to caveat my comments to being back to 2019.
spk01: Got it. So maybe because of that, how should we think about the volatility of the data center business? Because it grew very strongly for two quarters last year. Then it took a breather this last quarter. Now it's starting to grow again. So is that sort of the cadence going forward? So like two quarters of strong growth over one digestion? Any other types of visibility there will be helpful.
spk04: Well, I think you hit the nail on the head. It's a very volatile end market and we can't control that volatility. So I think investors need to expect continued volatility over time. So long as the trend line is showing that overall the business is growing and becoming more diversified, I think we'll be able to manage that business. So you're certainly right that it can turn on and off. You typically see that when the ISPs release large orders into the supply chain as they're doing a build out or you see that when they're moving from one data rate to another. You know, some people are saying that the speed of these transitions is increasing. And so we're trying to keep up with all of that. But yes, you are exactly right. The data center is certainly a volatile end market. We have a very conservative approach to forecasting and managing the business so that we don't get ahead of ourselves in terms of investor expectation.
spk02: Thank you. And our next question coming from the line of Srinivacharu with Raymond James, you want to start then?
spk08: Morning, guys. Thanks for taking my question. One of the questions on the data center, I think copper connections are becoming more and more important as AI gains traction, especially clusters, AI clusters gain traction. I'm just trying to understand the market size and the way you think about it, Steve, maybe, and your positioning, because we keep hearing that this could be hundreds of millions of dollars of opportunity longer term. So I just want to hear your thoughts on how you think about the AFC market in particular and how you're positioned to kind of capture and leverage that potential.
spk04: Yes, well, we certainly hear the same things. And what we're trying to do is make sure that we have the best equalizers in the market to capture market share, to work with all of the cable manufacturers, work directly with the network folks, work with people that are designing next generation switches, working with people that are struggling to improve signal integrity. And so that is where we sit in terms of a position in the market. You are correct to say that there is a lot of copper deployed in the data centers. More and more, that's becoming electrified to carry higher speed data. And the limitation is certainly distance. You can get it to work very well over short distances. But as you go longer in distances, you need to most likely switch over to an active optical cable or a pluggable solution and use a DSP, especially if it's a long link. So I think there is a spot inside of the data centers for active copper cable. We, you have to recognize that the history of our data center revenue has always revolved around analog solutions. And the active copper cable end product that we're designing is exactly that. It's an analog solution which makes adjustments in terms of the signal integrity through the copper. It's also early in this cycle. And we think over the next few years, there is certainly great potential. It's probably one of the highest volume products in the data center, especially due to the reconfiguration of the data centers these days. And so, yes, we see the opportunity. We are very sober about what that means to Macom and how much revenue we'll generate. There's competition. There will be more competition. And so, you know, we think we're in a lead position from a technology point of view and we'll work hard to try to keep that. Thank you. Very helpful.
spk08: And then just one clarification on the cable weakness that you mentioned. Could you maybe help us understand how much exposure you have to cable market? And you seem to think that even next year, that market could remain weak. Just wondering what's giving you that level of visibility? I mean, you talked about DOCSIS IV probably not ready. Is it a technology issue or is it more of a market demand issue? Any color would be helpful. Thank you.
spk04: Yes, we have about maybe five to 10 different product lines that we sell into cable infrastructure. And so, we follow the industry very carefully. During COVID, we saw a huge run-up of production from our cable customers, many of which today are sitting on a tremendous amount of inventory. So, we think that all of that inventory needs to bleed down with sort of the current generation. When we look at the market and the financial models of a lot of, you know, sort of this industry, it struggles, you know, it struggles to make money, let's say. And so, it's a difficult market and there's a lot of pressure coming online in terms of alternative solutions, including, you know, PON, Fiber to the Home, you know, satellite solutions and whatnot. So, I can tell you today, our cable revenue is close to zero. And so, that's the good news. And so, if anything turns on or comes back, then, you know, that will be a tailwind for our revenue. But, you know, we think that it's going to be some time. We think that, you know, the hardware manufacturers want to continue to sell the DOCSIS 3 product because they have a tremendous amount of inventory and that could last for a couple of years before people start investing and it's a big, it's a heavy lift to launch DOCSIS 4 into the market. So, we'll have to wait and see. We continue to engage the customers. We have some great differentiated technology. And as we think about the next, you know, three years, like I mentioned, we are keeping our expectations very low.
spk02: Thank you. And our next question coming from the line of Peter Peng with JP Morgan. Yelena Seltzer.
spk09: Great. Good morning, guys. And thanks for taking my question. I want to touch on the gross margin and what your expectations are for the, recall for the Wolf's Beard business that you were in the low 40s and there's plans to maybe bring that up to the 50s as we exit. So, is that still on track? And then just on the overall, how do we think about gross margins kind of moving forward?
spk04: Yeah, I'll say just a word on that and then Jack can answer your question. So, we look at this as a long term project to improve their gross margins in a similar way to what we really did as a company over the last few years, moving, you know, Maycom's gross margins, which were in the low to mid 50s up to above 60 percent. And we had to do a lot of work internally, operationally, yield enhancement programs, managing costs associated with high volume production. And so our team is very skilled at taking a business that has, you know, underperforming gross margins and improving them. And so that is part of what we're going to do. And the last thing I'll say before I turn it over to Jack is we do want to let investors know that this will take time. It's not there's no magic bullet here that will all of a sudden move their mark. The RF power business up to, let's say, 60 percent or above. There's multiple pieces inside of that business that will be addressed on a case by case basis. Jack, maybe you can add to that. Yeah,
spk06: just to provide some additional color, we do have numerous margin and yield enhancement programs that are that are occurring throughout the the entire Maycom organization. In addition to what we're doing more specifically with the acquired RF business. And then if you take a step back, just overall from a gross margin standpoint, there's a number of things that we have going as well from a from a new product introduction standpoint. And we've talked about this a bit in the past with our new product introductions, having gross margins higher than the corporate averages for for Maycom. So that'll be another area that we continue to focus on as we go forward that will will support improving margins as we work our way into the future. But it will take time. These things don't happen overnight. There's a lot of hard work that goes into it. But going back to where Steve had mentioned, you know, our goal would be to to approach it similar to the way we approach things back in the the twenty twenty through twenty twenty three time period with looking to make incremental improvements across the business over time.
spk09: Got it. Thank you. And then for your data center, can you just provide some color on what's the exposure to more of the higher seedling product versus the more legacy? And then as we think about the one point one point six products, what kind of is there any content games that you guys are expecting from this?
spk04: Yes. So the sort of looking at the recent quarter, I can say the vast majority was servicing eight hundred gig applications, so more than 50 percent. The legacy business has been improving, as I mentioned in my comments, that includes hundred gigs CWDM for long reach type applications. We've seen some strength there. Also, DR one has been showing some improvements. So the legacy business is is moving in the right direction. Nothing earth shattering. But certainly we are seeing positive trends there. In terms of the content for the one point six, it primarily revolves around laser drivers and trans impedance amplifiers that those are the those are the two functions that we want to sell into the into these into this hardware. Also, it's not just on the optical side, it's also on the active copper cable side. Our customers want to move one point six over copper if it's possible. And we're certainly up for the challenge. Thank you.
spk02: Thank you. Now I'll now turn the call back over to Mr. Steve Daly for any closing remarks.
spk04: Thank you. In closing, I would like to thank our employees, customers and suppliers for making these results possible. We are excited to be involved with new I&D programs and cutting edge data center applications for next generation high speed infrastructure and to service the growing SATCOM market. We will continue to work as a team to meet our customers needs and execute our strategic plan. Thank you and have a nice day.
spk02: Ladies and gentlemen, that is our conference for today. Thank you for your participation. You may now disconnect.
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