MACOM Technology Solutions Holdings, Inc.

Welcome to MACOM's second fiscal quarter 2024 conference call. This call is being recorded today, Thursday, May 2nd, 2024. At this time, all participants are in listen-only mode. I will now send a call to Mr. Steve Ferranti, MACOM's Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Livia. Good morning, and welcome to our call to discuss MACOM'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 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 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 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 book-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 12.9% sequentially, I&D was up 18% sequentially, and telecom was up 54.1% 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 INV 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 and 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 1 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 I&D 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, MACOM 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, MACOM was one of five suppliers to receive multiple awards, and I congratulate our dedicated quality engineering, operations, and 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 multi-mode 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 200G 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 1.6T 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 MACOM's linear products portfolio continues to grow. MACOM 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 MACOM'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 Macom 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, it 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 MACOM's strengths. The cable TV and wired broadband market remains very weak. We believe the cable TV market is in the transition between DOCSIS 3.1 and DOCSIS 4.0. MACOM is engaged with these OEMs who are currently qualifying solutions for DOCSIS 4. 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 MACOM. 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 larger player in this market. We also believe the SATCOM portion of the telecom market will continue to provide exciting opportunities for MACOM, 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 MACOM'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. So only $3 million of this order was included in my previously mentioned Q2 book-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 MACOM 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 lab-to-fab commercialization of semiconductor technologies. as well as develop the US-based semiconductor workforce. Earlier this month, MACOM 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 wave 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 MACOM 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, advanced 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 MACOM'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 MACOM'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.