MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) Q2 2024 Earnings Call Transcript

MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) Q2 2024 Earnings Call Transcript May 2, 2024

MACOM Technology Solutions Holdings, Inc. misses on earnings expectations. Reported EPS is $0.2044 EPS, expectations were $0.58. 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 Second Fiscal Quarter 2024 Conference Call. This call is being recorded today, Thursday, May 2, 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, 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 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’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. 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 $0.59 per diluted share. We ended the quarter with approximately $476 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 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. In our turns business, where orders booked and shipped within the quarter, was approximately 20% 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 remained robust while Industrial orders remains weak. We believe the long-term trends in our I&D 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 packaged 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 in 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 will be favorable to our I&D 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 the press release issued on March 19, MACOM received quality and best supplier awards from Northrop Grumman, one of the largest defense contractors in the US.

Northrop Grumman has thousands of suppliers in 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 end 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 1.6g 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 pluggable optics LPO, multisource 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, PAM-4, 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 and act 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 a 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 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 helped 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 multiyear contract has two phases: a design phase which will last about nine months in a production phase which starts late in our fiscal 2025 and is expected to run for approximately 18 months 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 CHIPS 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 in MACOM as a hub member or a 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 U.S.-based semiconductor workforce. Earlier this month MACOM was awarded a multiyear 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, helps 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 end-market to participate in next-generation advanced architecture rollouts. Three, winning large new multiyear 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 team’s leading GaN capabilities. Five, winning new higher-level subassembly business, leveraging MACOM’s unique semiconductor content in 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.

Jack Kober: Thank you, Steve, and good morning everyone. Revenue for the fiscal second quarter was $181.2 million up 15.3% sequentially, based on growth in our Industrial & Defense and Telecom end markets. Our I&D and telecom revenue was supported by the first full quarter of revenue contribution from the acquired RF business. On a geographic basis, revenue from U.S.-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 57.1% of revenue compared to 59.2% 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 22.2%, compared to 24.5% 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 2, 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, days 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 onetime 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 MACOM’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 million 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 MACOM organization and thank you all for your efforts to help grow and support the business. I will now turn the conversation back over to Steve.

Steve Daly: Thank you, Jack. MACOM expects revenue in fiscal Q3 ending June 28, 2024 to be in the range of $187 million to $193 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 $0.63 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% with operating margins above 30%. I would now like to ask the operator to take any questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And 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 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’s steps you kind of taking to do that, because I would assume that’s a large portion of kind of where the headwind on gross margins right now?

Steve Daly: 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 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 MACOM. I can also say that the work that’s being done in our operations organizations is really truly world-class. That includes 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 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 the certain framework which is defined by the fab operating committee, which is comprised of both Wolfspeed and MACOM staff. And this team is really looking at the day-to-day operation of the fab, setting priorities, setting up various projects. MACOM 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 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.

Thomas O’Malley: Thanks for the thorough response. Yes. 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 2024 and how it’s tracking, that Data Center business is going to be a big leader in terms of growth. So when you look at fiscal year 2025, 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 2025.

Steve Daly: 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. 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, that will 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 is 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 we think over the long term that will be a tailwind to our business.

Operator: Thank you. And our next question coming from the line of Harsh Kumar with Piper Sandler. Your line is open.

Harsh Kumar: Thanks guys. Congratulations once again, a solid quarter, solid guide. 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 are there. But I was curious how you see the path of adoption of the RPU 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?

Steve Daly: 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 our — the opportunity set let’s say inside the data center. We don’t — 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 ACC. 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 bit error rate requirements, at significantly lower power low 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 million or 20 million links. And so there — 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.

Harsh Kumar: Of course. Thank you 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 spaces 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 your Data Center trending. 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. Yes, that’s it. Thanks.

Steve Daly: Yes. 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, 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 MACOM right now, is very strong. These are basically, short reach 100 gig per lane mostly, pluggables. And so we think that is — 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 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 MACOM’s best years in terms of total revenue in the Data Center. It should be a record or near record year.

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

Q – Quinn Bolton: Hi, guys. Thanks for taking my question. I wanted to follow up on the Data Center opportunity. One of the big things that seem to come out of OFC is that, you’re starting to see potentially a pretty large ACC opportunity at 200 gig per lane to connect GPUs together in — across somewhere between eight to 16 racks, sounds like this opportunity could reach into the 10s, if not exceed $100 million as it ramps. And I wanted to see, how MACOM is positioned — guys think that that’s a significant opportunity for you, as you look into fiscal or calendar 2025.

Steve Daly: Well, I — 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, Quinn. 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 and form 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 secure strong positions for 200-gig ACC. But I would say that, yes, there’s an opportunity. I think you’re — we’re seeing the same things, you are.

Q – Quinn Bolton: Great. Thank you for that. And then, Steve, you called out a couple of the larger programs in your prepared comments. And you mentioned, something about that that sort of helps accelerate or drive pretty strong growth in fiscal 2025, I know you haven’t given guidance for 2025, but I think the Street was already looking for 2025 to be probably back in your long-term CAGR of 10% to 15%. 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?

Steve Daly: 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 from our point of view what we’re seeing this year is good performance in the back half as we’re guiding into 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 is significant in the bulk of that revenue will begin at the midyear — middle of our fiscal year 2025. And so potentially we could have a very good year next year but we’re not really giving more specific guidance than that.

Operator: Thank you. And our next question coming from the line of Karl Ackerman with BNP Paribas. Your line is open.

Karl Ackerman: Thank you. It sounds like telecom is beginning to recover I think sooner…

John Kober: Hey, Karl this is Jack. We’re having trouble hearing you.

Karl Ackerman: Okay. Sorry, about that. Can you hear me now?

John Kober: Yes, better.

Karl Ackerman: Okay. Great. Thank you. So it sounds like the 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 driven primarily by satellite products that you spoke about? Or is it broader than that? Thank you.

Steve Daly: Right. So I think it’s — I think every company has a different position within the telecom markets. And so I think we’re just — 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 end market that are favorable. We talked about the large SATCOM business that we announced this large award. We — 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 MACOM. 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 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 strengthen some of our 800-gig ZR applications in that space as well. So — and then the last thing I’ll mention is PON is very weak from our — 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.

Our markets and our product set is very different than our closest peers.

Karl Ackerman: Very helpful. Thank you.

Operator: Thank you. One moment for our next question. And our next question coming from the line of Tore Svanberg with Stifel. Your line is open.

Tore Svanberg: Yes. Thank you. Could you share with us the contribution from the acquisition in the quarter? And the — in total sense being up 18% sequentially was that all organic? Or did that also include some of the acquisitions?

Steve Daly: Yes. 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 Wolfspeed 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 happy about that. And then, in terms of the growth that we’re seeing this quarter sort of Q3 to 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, I&D markets. And it’s both Wolfspeed business or the RF business and MACOM business. Or said differently, the MACOM based business is beginning to improve.

Tore Svanberg: Very good. Yeah. Go ahead, Jack.

Jack Kober: And 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.

Tore Svanberg: 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 million and you just guided 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?