MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) Q1 2024 Earnings Call Transcript

MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) Q1 2024 Earnings Call Transcript February 1, 2024

MACOM Technology Solutions Holdings, Inc. beats earnings expectations. Reported EPS is $0.58, expectations were $0.57. MACOM Technology Solutions Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to MACOM’s First Fiscal Quarter 2024 Conference Call. This call is being recorded today, Thursday, February 1, 2024. At this time, all participants are in 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.

Steve Ferranti: Thank you, Olivia. Good morning, welcome to our call to discuss MACOM’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’s 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 8-K, which was filed with the SEC today. With that, I’ll turn over the call to Steve Daly, President and CEO of MACOM.

Steve Daly: 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 helped 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 $0.58 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 and 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. In our turns business or orders booked and shipped within the quarter was approximately 26% of total revenue. Separately, our acquired 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 remained robust, while industrial orders remained weak. Overall, I&D revenue was down sequentially in Q1, primarily due to weakness in the industrial markets.

We believe the long-term trends for our I&D 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 BAW 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 I&D market. Our opportunity pipeline with major defense customers is robust and our capture rate for future business looks strong.

Our Data Center end-market revenues grew sequentially in Q1. Demand continues to be very strong within 100G per lane, 400G and 800G short-reach 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 that, 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 and targeted applications and form factors. These new solutions can provide a cost and power-optimized solution for SFP DD and SFP 112 optical form factors targeting Ethernet, Fibre 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 200G 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 sub-segments, 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 in FY 2024 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 component and sub-assemblies for satellite, military, test equipment and other high-performance applications. We leverage our custom mimic and analog IC 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 DC 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 sub-system 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’m 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 months to 18 months, we expect to make meaningful progress on improving operational efficiencies, profitability and 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 make MACOM. 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.

Jack Kober: Thank you, Steve, and good morning to everyone. Revenue for the fiscal first quarter was $157.1 million, up 4.5% sequentially based on growth in our Data Center end-market. Revenue in Q1 included approximately $6 million, which was a partial month contribution from the RF business, which closed on December 2, 2023. On a geographic basis, revenue from US customers represented approximately 44% of our fiscal Q1 results. Adjusted gross profit for fiscal Q1 was $93.1 million or 59.2% of revenue compared to 60.1% in fiscal Q4. The decrease was due to the RF business acquisition, which had gross margins lower than MACOM’s corporate average. The adjusted operating expense for our first fiscal quarter was $54.5 million, consisting of research and development expense of $35.7 million and selling, general and administrative expense of $18.8 million.

Total operating expenses were sequentially up by $1.4 million mostly due to added R&D expense from the acquired RF business, partially offset by lower discretionary spending. Adjusted operating income in fiscal Q1 was $38.6 million, up from $37.2 million in fiscal Q4 2023. Adjusted operating margin was 24.5%, down 20 basis points from fiscal Q4. We see opportunities for improving our operating leverage over the course of fiscal year 2024 as we continue to focus on operational excellence and exercise discretionary spending discipline across the entire business. Depreciation expense for fiscal Q1 was $6.2 million and adjusted EBITDA was $44.7 million. Trailing 12 months adjusted EBITDA was $193.2 million. Adjusted net interest income for fiscal Q1 was $4.6 million, roughly $400,000 higher than the prior quarter due to favorable yields on our short-term investment portfolio.

We expect interest income to decline slightly next quarter based on the lower cash balance following the RF business acquisition. Our adjusted income tax rate in fiscal Q1 was 3% and resulted in an expense of approximately $1.3 million. Our net cash tax payments were approximately $900,000 for the first fiscal quarter. We expect our adjusted income tax rate to remain at 3% for fiscal year 2024 and into fiscal year 2025. Fiscal Q1 adjusted net income was $41.8 million compared to $40.1 million in fiscal Q4 2023. Adjusted earnings per fully diluted share was $0.58, utilizing a share count of 72.3 million shares compared to $0.56 of adjusted earnings per share in fiscal Q4. Based on the applicable accounting rules, our diluted share count was 72.3 million for Q1, including approximately one-third of the 712,000 shares issued to the seller in connection with the RF business acquisition.

And our Q2 diluted share forecast of $73 million will include all of these shares. Now moving on to operational balance sheet and cash flow items. Our Q1 accounts receivable balance was $101.1 million, up from $91.3 million in fiscal Q4 2023, primarily due to incremental December revenue from the acquired RF business. As a result, day sales outstanding were 59 days compared to 55 days in the prior quarter. Inventories were $159.5 million at quarter-end, up sequentially from $106.3 million. Inventory turns were 1.6 times, down sequentially in Q1 from 1.8 times in the prior quarter. The sequential increase in our inventory balance and associated decrease in turns were a result of the acquired RF business. This incremental inventory will support the business’s strategic defense, industrial and communications infrastructure customers.

We expect to improve inventory turns within the RF business in the coming quarters as we will now manage wafer starts and other material purchases for the RF business. Fiscal Q1 cash flow from operations was approximately $33.1 million, down from $50.4 million sequentially due to increases in working capital items and one-time acquisition-related costs paid during the quarter. As we look forward in fiscal year 2024, we will remain focused on cash generation and we expect our cash flow from operations to exceed our Q1 level. Capital expenditures totaled $4.7 billion for fiscal Q1. During fiscal year 2024, we expect our capital expenditures to be in the range of $30 million to $35 million for the full fiscal year. Even with our expansion of our operations, we continue to effectively manage our CapEx budgets.

Next, moving on to other balance sheet items. Cash, cash equivalents and short-term investments for the first fiscal quarter were $463.3 million, down $51.2 million sequentially, driven by $75 million of cash consideration paid for the acquisition of the RF business, partially offset by cash generated from the base MACOM business. Prior to handing the call back to Steve, I would like to provide some additional commentary on the recently acquired RF business. We see many opportunities for our combined teams to drive revenue growth and achieve operating excellence as we go forward. In addition, as previously noted, the RF business will dilute our gross margins in near-term. However, we do expect the acquired business to be accretive to our Q2 non-GAAP earnings.

As we improve operational execution, realize additional post-closing synergies, refine business strategies and accelerate the introduction of new products, we expect our consolidated corporate adjusted gross margins to return to historical levels in excess of 60%. I will now turn the call-back over to Steve.

Steve Daly: Thank you, Jack. MACOM expects revenue in fiscal Q2 ending March 29, 2024, to be in the range of $178 million to $184 million, adjusted gross margin is expected to be in the range of 56% to 58%, and adjusted earnings per share is expected to be between $0.56 and $0.62 based on 73 million fully-diluted shares. In fiscal Q2, we expect I&D and Telecom revenues to increase sequentially by approximately 20% and 50%, respectively, compared to the prior quarter. Data Center revenues are expected to be down 15%. Two final comments on MACOM’s base business. First, we see ongoing weakness in the telecom and industrial markets throughout 2024 and we expect our base business to be flat in Q2. That said, even with the weak markets, we believe we can modestly grow our base revenues and profits in the second-half of FY 2024.

Second, I’ll note at current revenue levels MACOM’s base business gross and operating margins are under pressure relative to prior periods. As revenues recover in our base business, we expect to return to prior profit levels. I would now like to ask the operator to take any questions.

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Q&A Session

Operator: [Operator Instructions] And our first question coming from the line of Thomas O’Malley with Barclays. Your line is open.

Thomas O’Malley: Good morning, guys, and thanks for taking my question. I guess the first one is on Data Center. So, in your prepared remarks you kind of talked about very strong growth in the September and December quarter and kind of taking, maybe a little bit of a breather from that in the March. Could you just describe the dynamic there? Is that inventory position being worked down, is that demand slowing? And then could you talk about, is this a temporary pause in March or do you think that things remain weak for longer than just one quarter?

Steve Daly: Sure. Good morning, Tom. Maybe I’ll make a few comments about the overall data center market and then we can talk about the revenue trends. So we are definitely seeing a lot of activity across our customer base as it relates to moving to the higher data rates. So that is a general trend, where there is an incredible amount of work at both 400 and 800 gig solutions. We are providing products for those solutions in production today that has been driving our growth over the past couple of quarters. Included in that is contributing products that we call linear drive products. And while it’s still very early, we do see increased interest in this product set, in this architecture for these systems. And so, we’re continuing to work with industry and customers to better understand how to use those type solutions.

And so ultimately, we think that will add further growth as we move into the year and even into next year. The other trend I would highlight is, with the 100 gig [indiscernible] becoming more omni-present across the market, we think that will stimulate more demand for the — sort of in the traditional architectures. So our goal as a company is to focus on analog solutions. We want to have the best drivers, TIAs, equalizer and linear drive products, cross point switches servicing the highest data rates. We believe we have one of the best signal integrity teams in the industry. And we’re very focused on NPI as it relates to our new product development. Now most of our revenue and backlog, like I mentioned is at the higher data rates. We have a very strong backlog at 800 gig today.

We have very good visibility into our lead customers’ ramp schedules. And as they are bringing hardware and they’re beginning to modulate some of the shipments, that’s why we’re dipping down in Q2. But I would highlight that we actually, as a company, this past Q1, it was actually a record level of shipments into the data center at just about $50 million just under $50 million. So we’re not really surprised or concern that there’ll be a dip down. We think the long-term trends are favorable, we expect to see moderation in Q3 and Q4, as other programs come online. So while we’re not giving guidance to for Q3 and Q4, we have an expectation that will remain or build upon the levels that we’re seeing in Q2.

Thomas O’Malley: Very helpful. Thank you. And just as a follow-up, when you guys closed the Wolf acquisition or when you first talked about guidance, you had talked about $150 million a year in revenue contribution. Obviously, things get a little messy with the stuff. But if I’m doing my math right, here it looks like in March, if you’re talking about that core business the way you are, Wolf is around $24 million, which is just a little bit below that $150 million run rate. Could you talk about, one, is that $150 million kind of like more of a run rate where that business is growing into that? Or what’s going on with that acquired asset where it’s a little bit below that run rate right now? Thank you.

Steve Daly: Yeah, so from the point of announcement of the transaction in August until December when we closed, the run rate for that business has declined. It was over $40 million, and it’s come down to about a $30 million run rate. When we look at our Q2 guide, we are including in that $30 million contribution from the Wolfspeed business, plus or minus a little bit. So you’re correct in your sort of comment that things have come down a bit. That is primarily due to the Telecom portion of the business being weaker than, let’s say, it was six months ago. But then when we look at the returns and the contribution and the cash generated by the business, I have to just highlight, number one, we acquired a business that was fundamentally losing a lot of money.

It had very high expenses, very high material costs. And so we fundamentally changed the way that business is running through the acquisition process that I talked about. So when it actually came into MACOM in the first full quarter, it will add about a penny in Q2 is our thinking. And that is really the beginning. And as we look at the cash that will be generated over the next 12 months and then the following 12 months, we see that this business in the next 12 months can easily generate $20 million in that ballpark. And then year two, certainly in the mid-30s and year three in the mid-40s. So when we add those numbers up, we get pretty close to our purchase price. What we need to do is the business is, number one, we need to grow the top line.

We certainly need to address the margins as the business has come into MACOM, as Jack pointed out, with gross margins that are significantly below MACOM’s corporate average. We don’t see that we have to spend a lot of capital to do the work on this business. So we’re actually quite excited. And I’ll also highlight that when this management team took over running MACOM back in 2019, that first quarter where we provided results, our gross margins were below 40%. And it took us eight quarters to get the business to 60% and another five quarters to get the business to almost 63%. And so we plan on running that same program on this business, which is today at a run rate of somewhere in $120 million and growing. And from a business point of view, we have an incredible team, incredible technologists, arguably number two in the U.S. as a merchant supplier of RF Power GaN.

It’s an amazing fit to MACOM. And our team feels like we were just handed a bazooka and we’re ready to go into the market and do some serious damage.

Operator: Thank you. And our next question coming from the line of Quinn Bolton with Needham. Your line is open.

Quinn Bolton: Hey guys, thanks for taking my question. I just want to follow up on the Wolf business. Just to try to size the opportunity there. Obviously, it’s coming below core MACOM. Steve, you mentioned that core MACOM margins are under pressure relative to the recent past, just given industry conditions, should we be thinking the core business probably in the kind of 59-ish percent range, and then Wolf takes you down to the to the guidance of 56%, I think, to 58% for the quarter. Is that kind of the right ballpark just to be thinking about where that base business may be settling in the near term?

Steve Daly: Right. So our modeling and our data right now in recent — looking at the business as well as the trends, my comments revolved around coming off that peak of just under 63% and when we were at $180 million run rate for the core business, we’re now at $151 million run rate for the business, and it’s come down to 60%. We don’t expect it to go below 60% for the core business. So I think you can then sort of back into the gross margins on the Wolfspeed side, which would get you to gross margins in sort of the low 40% and Jack, I’ll turn to you if you want to add to that.