MACOM Technology Solutions Holdings, Inc.

Welcome to MACOM's fourth fiscal quarter 2024 conference call. This call is being recorded today, Thursday, November 7, 2024. At this time, all participants are on a listen-only mode. I will now turn the 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 fourth fiscal quarter and full fiscal year 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 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, We'll review our Q4 and full year results for fiscal 2024. When Jack is finished, I will provide revenue and earnings guidance for the first quarter of our fiscal 2025, and then we will be happy to take some questions. Revenue for the fourth quarter of fiscal 2024 was $200.7 million, and adjusted EPS was 73 cents per diluted share. For the full year, FY24 revenue was $729.6 million and EPS was $2.56. We ended our fiscal year with record quarterly revenues and our Q4 free cash flow of just over $57 million. At fiscal year end, we held approximately $582 million in cash and short-term investments on our balance sheet. Our Q4 book-to-bill ratio was 1.1 to 1, and our turns business, where orders booked and shipped within the quarter, was 22% of our total revenue. Our backlog entering fiscal 2025 is at a record level, inclusive of some of our recent large program awards. New order demand was strongest at our data center and defense customers, while industrial and certain telecom submarkets remained weak. Given we are at the start of a new fiscal year, I would like to review our long-term strategy, briefly recap some of last year's accomplishments, and then highlight some of our top priorities for fiscal 2025. Simply put, our strategy is to focus on supporting the highest power, highest frequency, and highest data rate applications in our core three markets. We align our R&D and product development resources around these themes and then, using our annual strategic planning process, establish near and long-term goals to strengthen our portfolio's competitiveness and position the company for future success. Our goal is to have our technical teams work closely with customers and provide unique options for them to consider. By leveraging a wide breadth of unique technologies with world-class manufacturing strength, we believe we can attract many new customers and gain market share. fiscal year 2024 was a busy year for Macom. And when I would like to highlight four notable accomplishments. First, we are pleased that we were awarded several large purchase orders and contracts by industry leading customers in each of our three major markets. We expect these program wins will help support our growth over the next 12 months and beyond. Second, We expanded our leadership position in high performance connectivity solutions for data center customers, and we continue to provide advanced solutions to the leaders in this space. Our full year fiscal 2024 data center revenue was a record, and we posted greater than 30% data center growth for the year. Third, we continue to execute our strategy to develop industry leading microwave and millimeter wave frequency processes. products and solutions. Many of our advanced semiconductor development projects have U.S. government support, as we highlighted in a press release that we issued earlier this week. In total, in recent times, we've been awarded funding of approximately $29 million to develop advanced semiconductor technology. And last, the recent strategic acquisitions have resulted in MACOM being larger, stronger, and more competitive. Expanding our portfolio has increased our serviceable addressable market, or SAM, significantly. And while we are pleased with the numerous achievements during the past fiscal year, there are some areas that we recognize we did not meet our targets. First, we fell short of our goal to introduce 50% more IC products year over year. More work needs to be done to increase our new product introduction, or NPI, capacity and efficiencies, including expanding automation, streamlining NPI processes, and accelerating FAB cycle times. Second, we did not achieve optimal utilization of our Lowell wafer FAB. MACOM's financials are strongest when our internal FABs are fully utilized. We maintain a continuous improvement mindset and we will certainly be addressing these two important areas in fiscal 2025. As we turn our attention to fiscal 2025, our priorities include extending our leadership in gallium arsenide and GAN mimics and taking market share in RF and microwave applications, leading the market in 200G per lane high-speed analog solutions for data center applications across copper cable and optical interfaces, further expanding our optical capabilities within the aerospace and defense applications, growing our module and subsystem business in key high-performance applications while leveraging our domestic and international operations, completing the qualification of our European Semiconductor Center's 6-inch wafer production line before the end of calendar 2025, ramping our high-speed photo detector and CW laser products to support 800G and 1.6T applications, accelerating the pace of new product introductions, which can drive increased FAD utilization, and finally, continuing to recruit and attract industry-leading talent to ensure we stay on track with executing our comprehensive strategy. Turning to our end markets. Q4 revenue performance by end market was as expected, with industrial and defense at 92.8 million, telecom at 51.7 million, and data center at 56.2 million. For the quarter, data center was up 14.7% sequentially, and IND and telecom were both up 2.1% sequentially. I'll note our IND revenue level was an annual and quarterly record. We continue to identify growth opportunities in the industrial and defense market, spanning radar, electronic warfare, secure communications, and integrated battlefield systems. The trend across all these applications is towards higher frequencies, higher power levels, wider bandwidth, and higher levels of integration. Threats from UAVs, more sophisticated targeting systems, and dramatically more complex electromagnetic environment on the battlefield are driving systems towards higher frequency ranges, including X-band and V-band to increase system performance. I am pleased to report that earlier this month, MACOM delivered a large S-band high power GAN based phased array transmitter to a Navy customer. This was a major milestone for MACOM and I congratulate our dedicated team on completing this complex project. Our system engineering team was supported by our RF power components team, which resulted in an efficient design and build of this high-performance system. We are pleased that our efforts resulted in a new contract at twice the value to design and build a higher-frequency, next-generation high-power GAN transmit array. We believe the trends for the IND market play directly into MACOM's strengths. In particular, we are focused on supporting U.S., in certain international markets with our very high frequency semiconductor mimic process technologies and products. For example, the opening of our MACOM, European Semiconductor Center, expanded our wafer manufacturing capacity, added epitaxial growth expertise, and bolstered our presence with European defense customers. Our telecom and market revenues continue to grow with some MACOM specific bright spots emerging. While many expect global 5G spending to decrease modestly in 2025 compared to 2024, we are currently seeing strength due to demand from the North American market. Demand from Europe and India remains weak, although we have seen some large 5G award announcements in India, which may benefit MACOM. We are also receiving new demand on older products as inventory at our lead customers has normalized. But more importantly, we believe that we are gaining market share in new platforms for the 5G markets we participate in. This is mainly driven by the need for higher power, multiband radios, where MACOM's products can offer unique advantages over our competitors. The satellite communications market remains very robust. In particular, the market for low Earth orbit, or LEO satellite-based broadband access, provides a significant growth opportunity for MACOM. Satellite-based broadband access is increasingly being a more viable solution for rural areas, broadband service for ships and planes, and emergency services. Some networks are incorporating direct-to-cell capabilities, which MACOM also supports. LEO networks are typically constructed in a mesh architecture involving thousands of satellites. For example, one of the leading satellite-based internet service providers has launched over 6,000 satellites to date, and some believe this number could more than double. We anticipate other large LEO constellations will be designed and deployed over the next few years. I'll note, on the DoD side, new satellite constellations are also being developed to support secure communications, robust GPS, and space-based radar systems. Within these satellite networks, MACOM provides semiconductor and module solutions for satellite-to-satellite links as well as satellite-to-ground links. These typically use a combination of microwave, millimeter wave radio frequencies, and free space optic communications. In some cases, the satellite-to-ground links require linearization to boost the power efficiency of the link. We also provide solutions for ground-based gateway networks. MACOM is executing on multiple programs today involving our MIMIX, RF Power, LightWave, and Linearizer product lines. Finally, the cable TV infrastructure market is in the midst of a transition from DOCSIS 3.1 to DOCSIS 4.0. Demand typically goes through a lull during these transitions as new systems are designed and go through qualification. We have seen that lull in demand over the last one to two years But during that time, we continue to release new products and work with customers on new design wins. We are now starting to see modest demand on our new DOCSIS 4.0 products as certain U.S. providers begin their rollouts. We supply amplifiers, valens, couplers, and filters for the line amplifiers and nodes in these deployments. And we expect some modest revenue growth in fiscal year 2025 from our cable TV customers. The data center end market continues to be dynamic with significant growth opportunities. We see favorable trends continuing as the internet service providers are accelerating capital expenditures to deploy next generation data centers. In some cases, new data centers may deploy large number of processors which can require increased optical and or copper interconnects. And we support these areas with our products. We remain agnostic as to whether customers select electrical or optical solutions. In certain applications, our market position is strong. And I'll note that our 800G products are in full production and 1.6T designs are starting to ramp. In fiscal year 2024, we executed shipments to support 800 gigabit per second optical modules, which in some cases was eight lanes of 100G. We expect certain parts of this market will transition to the 1.6T products, and we are well positioned with key design wins and have started to support customers with these 8x200G solutions. While our products support both retimed and linear architectures, DSP-based technologies require higher power consumption to perform retiming signal processing functions, creating major thermal and cost challenges for customers. To address this, linear pluggable optics, or LPO, and linear copper equalizer technologies keep getting mindshare, and we are seeing new customers joining the LPO MSA, which MACOM is a founding member. We expect to see these technologies starting to take some share to support 800G applications. MACOM is also supporting new applications that have disaggregated computing, where pools of processors and memory are interconnected via computing interfaces. The longer-reach PCIe interfaces will operate at higher data rates of 64 and 128 gigabits per second per lane, or PCIe 6 and 7, respectively. And MACON can service these links with our linear TIAs, laser drivers, and copper equalizers, as successfully demonstrated at the recent CIOE and ECOC trade shows. One of our areas of growth is related to data center interconnect, or DCI, specifically 400G, ZR, and ZR+, and the emerging 800G, ZR, and ZR+, due to rapidly growing demand for more bandwidth that supports cloud computing and content delivery. MACOM's 400G and 800G, ZR, and ZR+, coherent driver and TIA families are well positioned within the market to support this growing demand. Another area of increasing interest from customers is the use of coherent within the data center campus network, also known as coherent light. MACOM is supporting efforts to enable the use of coherent optics in less than 15 kilometer lengths with low-power, cost-effective drivers and TIAs and CW lasers for 400G ZR light and eventually 800G. Deployments of these 400G networks has already begun with volume ramps anticipated in calendar year 2025 and an expectation that 800G will be deployed after that. In summary, the data center market continues to be an exciting area for our high-speed analog designers. And finally, in support of our strategy to strengthen and expand our design capabilities, I'm pleased to announce that this week we completed the acquisition of Ingenic, a small, private, fabulous IC design company that with offices located in Dallas, Texas, and San Diego, California. Engenic has approximately 20 employees who are expert in microwave IC and module design. Since their inception more than 10 years ago, the team has primarily focused on supporting defense applications. The three co-founders, Steve Nelson, Chris Eisen, and Jack Giles, are industry veterans who have helped define what's possible and gallium arsenide and gallium nitride circuit and module design. We are excited to welcome the talented Engenic team to MACOM, and we look forward to collaborating for the benefit of our mutual customers. Engenic's wideband amplifier design capabilities and know-how complement MACOM's strengths around narrowband amplifier design suitable for radar and communication applications. I invite everybody to visit our website and learn more about Engenic. In summary, our strength is to build a unique, best-in-class, and diversified semiconductor portfolio, which enables MACOM to capture a larger share of the market. Our speed and agility help us address opportunities and ultimately beat competitors that are often larger and have more resources. Jack will now provide a more detailed review of our financial results. Thank you, Steve, and good morning, everyone. Before getting into the details of our quarterly results, I would like to summarize a few items associated with our fiscal year 2024 financials. Fiscal 2024 was a year that included sequential quarterly revenue and EPS increases, with our total revenue increasing more than 12% over fiscal 2023. During fiscal years 2024 and 2023, we have maintained solid and consistent cash flow generation. which has allowed us to fund acquisitions with available cash and to also accumulate cash for future corporate priorities. Now, on to our Q4 quarterly results, as well as some additional commentary on our full fiscal year 2024 and our outlook on fiscal year 2025. Revenue for the fourth fiscal quarter was a quarterly record high of $200.7 million, up 5.4% sequentially, based on growth across all three of our end markets. On a geographic basis, revenue from U.S. domestic customers represented approximately 45% of our fiscal Q4 results, consistent with Q3. For fiscal year 2024, revenue from U.S. domestic customers represented 45%, down slightly from 48% in the prior year. We've been working to geographically diversify our business and are pleased to have a healthy mix of U.S. and international-based revenue opportunities. Adjusted gross profit for fiscal Q4 was $116.6 million, or 58.1% of revenue, 60 basis points higher than the third quarter. Total adjusted operating expense for our fourth fiscal quarter was $65.9 million, consisting of research and development expense of $43.9 million and selling general and administrative expense of $22 million. The sequential increase in adjusted operating expense of $2 million was primarily driven by higher compensation-related expenses as we continued to grow the business. Depreciation expense for fiscal Q4 was $7.3 million, and $28.1 million for fiscal year 2024, approximately $4.3 million higher on an annual basis, primarily due to investments in acquired equipment. Adjusted operating income in fiscal Q4 was $50.7 million, up 11% sequentially from $45.6 million in fiscal Q3. For fiscal year 2024, adjusted operating income was $175 million compared to $189.6 million for fiscal 2023, resulting in a 520 basis point reduction in adjusted operating margin compared to fiscal 2023. We recognize that initially, some of the incremental revenue from our recent acquisitions has reduced our adjusted operating margin from a year-over-year perspective. However, we note that our adjusted operating income and associated margin have been improving over the past few quarters as we expected. For fiscal year 2025, our team plans to further optimize our acquisitions, executing on incremental operational efficiencies and yield enhancement activities. And as Steve highlighted, our team operates the entire business with a continuous improvement approach, and we will work to further increase our operating margin over the course of the year. For fiscal Q4, we had adjusted net interest income of $5.3 million compared to net interest income of approximately $4.8 million in Q3. Fiscal year 2024 adjusted net interest income was $19 million compared to income of $10 million in 2023. As we move into fiscal 2025, we expect quarterly net interest income to be consistent with Q4 levels. as we increase investment balances through additional quarterly cash flow, offset by expected lower interest rates and yields. Our adjusted income tax rate in fiscal Q4 was 3% and resulted in an expense of approximately $1.7 million. Our net cash tax payments were approximately $1.6 million for the fourth quarter and $6 million for fiscal year 2024. We expect our adjusted income tax rate to remain at 3% for fiscal year 2025. As of September 27, 2024, our deferred tax asset balances were $212 million as compared to $218 million at the end of fiscal 2023. We anticipate further utilizing our deferred tax asset balances, including R&D tax credits, through fiscal 2025 and into 2026. helping to keep our cash tax payments relatively low over these periods. Fiscal Q4 adjusted net income increased to $54.2 million compared to $48.9 million in Q3. Adjusted earnings per fully diluted share was $0.73, utilizing a share count of 74.5 million shares, compared to $0.66 of adjusted earnings per share in Fiscal Q3. Now, moving on to operational balance sheet and cash flow items. Our Q4 accounts receivable balance was $105.7 million down from $106.8 million in fiscal Q3 due to improved shipment linearity and strong collection activity during the quarter. As a result, day sales outstanding were 48 days compared to 51 days in the prior quarter. Inventories were $194.5 million at quarter end, up sequentially from $190.7 million. Inventory turns were flat sequentially at 1.7 times. The quality and mix of our inventory is strong and continues to support our strategic backlog and our growth plans for fiscal 2025. As we move through fiscal 2025, we expect to see improvements in inventory turns. In addition, this marks the fifth quarter in a row where we have reduced channeled inventories held at certain of our partners. Fiscal Q4 cash flow from operations was approximately $62.3 million, up $13.3 million sequentially. Capital expenditures totaled $5.2 million for fiscal Q4, and fiscal 2024 annual CapEx of $22.4 million decreased slightly from $24.7 million in 2023. As we move into fiscal year 2025, we expect our capital expenditures to be approximately $35 million for the full year. Next, moving on to other balance sheet items. Cash, cash equivalents, and short-term investments for the fourth fiscal quarter were $581.9 million, up $60.4 million from Q3. I'm pleased to note that we were able to utilize available cash for our RF business acquisition earlier in the fiscal year, and comparing our cash and short-term investments to the book value of our convertible notes, we are in a net cash position of more than $133 million as of September 27, 2024. Our balance sheet and cash generation remain sound, and we continue to exercise leverage over our operations and discretionary spending to support MACOM's target margins through ongoing cyclical pressure. Fiscal 2024 was a solid year for MACOM, and we are pleased with the company's performance and accomplishments and believe the diverse, resilient portfolio we have built will support future growth of the business. As we begin fiscal 2025, we've established financial goals to Continue to build a company that can achieve an annualized revenue run rate of $1 billion or more in fiscal year 2026. Carefully manage and allocate our discretionary spending and capital expenditures to growth areas of the business. Sequentially improve quarterly operating margins and increase EPS. Generate quarterly cash flow from operations that exceeds fiscal year 2024 levels. And ensure our capital structure is optimized to provide operating flexibility at a low cost. In addition, we remain committed to investing in our employees through career development opportunities, annual merit increases, promotions, bonus and equity programs, as well as offering competitive healthcare, retirement, and other benefits. I will now turn the conversation back over to Steve. Thank you, Jack. MACOM expects revenue in fiscal Q1 ending January 3rd, 2025, to be in the range of $212 to $218 million. Adjusted gross margin is expected to be in the range of 57 to 59%. And adjusted earnings per share is expected to be between 75 and 81 cents, based on 75 million fully diluted shares. We expect sequential revenue growth in all of our end markets. we expect data center will lead with approximately 15% sequential growth, followed by telecom and industrial and defense with low to mid single-digit sequential growth. I'll note that Ingenic will not contribute materially to our Q1 financial performance. I would now like to ask the operator to take any questions.