Jack Kober: I think that was a good summary. I guess, just to follow up, Quinn, the — there’s many things that we’ve done to structurally improve the base MACOM business from an overall cost perspective that have helped to preserve that 60% gross margin number that Steve was referring to. So expectation is, as we go forward, we’ll be able to apply some of those same things that we’ve done with the base business to the Wolfspeed acquired business, and that will help support us. And then with some lift from a revenue perspective on the base business as well as with the acquired business, that will help improve margins as we go forward.
Quinn Bolton: Got it. And then a follow-up question was just you guys — I guess, Wolf will continue to operate that fab for the first two years. And so is there anything that handicaps you from being able to get into that fab to start to run your processes or to try to drive higher yields? I mean are you somewhat constrained with what you can do while the fab is being operated by Wolf or do you think you’ve got free access to the fab, you can start to implement your blocking and tackling your know-how to start to improve those yields immediately post close?
Steve Daly: Sure. So I’ll provide a lot of background information to help answer that question. So, we have today, a foundry relationship with Wolfspeed where we buy wafers at effectively a fixed price. So that’s point number one. And that will stay in place until the fab conveys in about two years. Second, Wolfspeed, as part of the transaction, we made — there was a significant portion, $50 million of stock given to Wolfspeed. So they are now an equity holder in MACOM aligning our strategic goals. Third, we have something called the Fab Operating Committee, which is comprised of both Wolfspeed and MACOM staff, who will work together to implement change in the fab with Wolfspeed support. And as you can see, it’s within their — it’s beneficial for them to improve execution and yield because it lowers their cost of wafers they’re selling to us.
So everybody’s goals are aligned. And so it’s — we’re just coming out of the gate. It’s been two months. We have an amazing working relationship with the staff in North Carolina, both inside the fab and their technologists and whatnot around the fab. So we will be able to affect change, but there’s boundary conditions, and I want to be clear that there’s structure around that to make sure that we’re able to do that. And so that is an — that was an important part of the transaction for MACOM, and we were able to have a great meeting of the minds on how to do that. So that would certainly address making improvements inside the fab. When you move outside the fab and you look at the back-end assembly and test as well as all of the other inbound material costs associated with the business, we have full control over that.
So we can make changes to OSAT contracts. We can look at yield enhancement on assembly and test, and we can bring the full force of MACOM to the back end, which is a significant part of the COGS to effect change, and we’re doing that immediately. Wolfspeed has a great team over in Malaysia, a great team out in Morgan Hill. They’re rolling up their sleeves with the MACOM staff, and we’re going to work. So there’s many pieces that we’ll be focused on. And then the other item I’ll just highlight that there’s also business-related practices that we will change and will bring in line with the way MACOM runs its business. For example, we don’t like to rely on distribution channels. We like to deal with our major customers direct and we would rather engage and sell the full product line.
And so we’ll be looking at optimizing distribution, the use of distribution for selling these products. We’ll certainly be looking at all the contracts that have been put in place whether it be long-term purchase agreements or foundry agreements, we certainly want to make sure that we can form that to the MACOM standards. So we certainly have a lot of work to do. And as Jack mentioned and I highlighted, this is going to not be an instantaneous gratification. There’s just a lot of hard work here, and you’re going to — our thinking is you’ll see incremental improvement over time. And if we do that, it will meet our financial targets. And also, we will begin to dominate in the market.
Operator: Thank you. And our next question coming from the line of Vivek Arya with Bank of America Securities. Your line is now open.
Vivek Arya: Thanks for taking my questions and thank you, Steve, for giving the color around the steps required to drive all the cost synergies. I was wondering if there is a way to quantify when you think the combined entity can get to that 60% or so gross margin level. Is that an eight-quarter type time line as you described in your historical activities? Or should we think about something different and something you can achieve faster?
Steve Daly: So we don’t have a sharp answer for you on that. We’re starting in the low 40s. We’d like to exit our fiscal year close to 50%, if we can get to 49% or 50% for this business segment. Going into our fiscal 2025, I think that would be a win. So that’s — we’re sort of head down focused on pulling all the levers we can to make that happen. So I can’t necessarily put a timeline on like our end target. But I can tell you in the near term, we plan on making significant changes. And part of that also will have to do with the mix and will have to do with the amount of growth that comes through the business. And so there’s just a lot of factors there that make it difficult to give you that firm answer. But I can say this, we do fundamentally understand the business. When we look at the industry and we look at competition and we look at their gross margins, we know that there’s a lot of room to go with this technology.
Vivek Arya: Got it. And then can you give us a sense for what is the core MACOM industrial and defense revenue that you’re guiding to in the March quarter? And where do you see the trough on the industrial side? I realize it’s tough given all the cyclical headwinds. But what is sort of the core MACOM industrial you’re guiding to? And where do you see the trough for that business? I think you mentioned something about a back-half recovery. So I was just hoping you could give us some color so we can model that business in the right way.
Steve Daly: Sure. I’ll start with that and then Jack can add. So going into Q2, our base business, the Industrial and Defense, we think, will be up about 5% or 6%. We think Telecom will be up about 8% or 9%, and we know that the Data Center will be down about 15%. So that is for the core business. Now when you compare that to my commentary for the full business, Industrial and Defense going in Q2 will be up 20%, Telecom, 50% and Data Center, the same at that 15% drop. Obviously, the big step-up in the aggregate numbers are due to the Wolfspeed contribution of that $30 million, and it’s essentially evenly split between the two market segments. Jack, do you want to add to that?
Jack Kober: I think the only other item to add was with regard to the industrial piece of that I&D business. So I think we’ve been discussing how the industrial piece has been down for us over the past couple of quarters. That’s something that we continue to manage. But I think we’ve been pleased with the performance on the defense side of the business, which has really supported things within that end market, and we continue to see opportunities on the defense side to ultimately drive improvements in that end market as we go forward.
Operator: Thank you. And our next question coming from the line of Harsh Kumar with Piper Sandler. Your line is open.
Harsh Kumar: Yeah, hey, guys. Congratulations on closing the deal and looking forward to you guys doing an excellent job on integration. Steve, I did have a question, a follow-up on kind of what Vivek was just asking about. You said your book-to-bill for the business was 0.9 in the December quarter. Sounds like if I take your guidance of the core business being roughly flattish, is it fair for me to assume that the book-to-bill is now very close to 1? And if you’re talking about a recovery in your business in the back half and the book-to-bill starts to climb. The reason why I asked that, historically, when the book-to-bill start to climb like that, it signals the bottom. Is it fair for me to assume that your industrial business is bottoming out right about now to plus or minus a quarter?
