MTSI - Earnings call transcript Q3 2018 | MACOM Technology Solutions Holdings, Inc.

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Operator

Good afternoon, and welcome to MACOM's Fiscal Third Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session.

As a reminder, this conference call is being recorded today, Tuesday, July 31, 2018. I'll now turn the call over to Steve Ferranti, Vice President of Investor Relations at MACOM. ahead. go please Steve,

Stephen Ferranti

Good XXXX and earnings operator. fiscal to third quarter conference afternoon, you, welcome everyone, MACOM's Thank call.

Financial Vice Joining and me and Senior Chief President McMullan. Chief President Executive Officer, today John Croteau; are Officer, Bob MACOM's and

copy If press, the on website you you the under copy earnings at a of www.macom.com received obtain Investor have yet MACOM's not a can Relations section.

management's statements, your the call certain like are everyone that would questions to differ to to to answers forward-looking I over prepared actual John, results turn risks Harbor from Because in MACOM Reform uncertainties. and today, statements I which XXXX. claims forward-looking Before subject protection contain may the Safe remarks remind materially the of those Litigation Securities Act of discussed Private contained and the for

uncertainties February Form in section website. the at discussions result income will all can related forward-looking SEC Form reports no noted. today, conference release MACOM's in filings Report filed statements XXXX. on of including the and GAAP otherwise certain detailed filed of today the could measures differences, found refer future. July to and on financial assumes on The non-GAAP amounts during Form Investor its financial and today's and XXXX, XX, including with include referred measures are X-K on discussions to These information, call of unless was management XX-Q company's and on SEC, this filed and update risks on adjusted press to reconciliation release views press the MACOM's and current non-GAAP November Relations you and that XX, call provided and we Form more the statements report results Any it's Annual percentages filed of adjusted company's XX, with X, and to represent those be in quarterly statement For its X-K, as which a of XX-K management's MACOM only today, XXXX these obligation statements XXXX, May the

to time, the unable XX you MACOM's for John call turn quarter. will of Relations this at listen that, those be call for at Investor with his entire the And in I'll recording of to section days For to comments on over website. available via least webcast a the

John R. Croteau

I'll XX% out ongoing in QX the following XXXX. diluted Welcome, as Steve. I'll our for us thanks financial that course Overall, turn CFO, with fiscal of with per adjusted demand, call today's of third of the into overview fourth played and markets end $XXX further fiscal right conditions and share. quarter as Jumping largely and Thanks, fiscal in near-term quarter detail. McMullan, gross XXXX, the the of end-market prepared business for XXXX. comments recovery results expected with calendar $X.XX everyone, a margin we over impacted Revenue for for Bob third quarter million adjusted benefited downturn by guidance of from today. performance I'll to trends. joining an followed conclude over of review will the then today's begin our our current earnings who review call was our cyclical numbers. the

and subassemblies. the we manufacturing exited sales QX, the During of successfully LRX

which million related basis excluding incorporated OSA on quarter LRX sequentially below coming in was a the up gross midpoint margin contribution of and midpoint to up of of in of gross partial revenue guidance slightly a points of in the comparable revenue QX, of revenue range QX was QX, Our XXX margin our Timing guidance. we that upper only was such $XXX,XXX guidance had guidance, assumptions coming in of the sequentially. that basis, close with QX of end sales. but to favorably certain in the $X transaction, Overall, the contributed the toward OSAs from shipped timing assuming

million, cloud healthy creating cloud robust In more Overall Equally of strong and service was the Looking is virtuous investment grow more up by CapEx demand XX% a corresponding Data revenue total, leading Center this American is cloud-based cycle X% providers. XXXX. migrate up XXXX. important, as in to CapEx on continues QX. in is building center sequentially. environment capital be growth to infrastructure. by and to half of demand through into growth shaping services in by data within revenue, hyperscale is among This expected second supported for services details to supported as remain XXXX, a a the $XX.X trend Data XXX-gig Centers North healthy connectivity

a that to growth we years CWDM our in potential XX-gig year. long upgrade believe believe overall at lasers high-performance PAM-X double As on made tangible within our cycle project a on Data transceiver than more of this early layer XXXX for improvements revenue still L-PICs for CDRs, yield expect to lasers. we're to coming XX-gig that XXXX unit we a in and strong trend. in connectivity solutions positioned to next in our drivers last for Centers. for connectivity of our top well the XXX-gig white-box be volumes In with position Customer approaching and all innings both quarters, I'm preeminent from result, and capitalize the to We forecasts earnings CWDMX and XX demand standards. call million pleased we Cloud across to units progress analog reaching XXXX, TIAs since say we've are

the controlled readiness. XX-gig EFT continuing within industry point in our equipment XXG products thresholds hit etching Our starting the lasers. to worked for a capacity we're operationally At team us XX improvements testing that to X.X, fulfilling to for execute demand across and production optical lasers In capital key final high-speed scaling major overall high our fab. diligently invest for has production lasers lasers into connectivity. we expand parallel, in growing process a yield this establish equipment a ramp, to are and high-volume to progress, XXG Lowell production Based remain level, on trough for enabled have

for to our enter enables We Technology. Data with XXX,XXX-square-foot of expansion facility. Center manufacturer ample scalable last XXG on the into of our production yielding service a business an solutions revenue XXX-gig lasers, an opportunity manufacturing material transceiver customer new optical agreement had roster business. delivering quarter. partners, cloud output entered contribution fully-qualified quarter transceivers high-volume Based Facet This a their the potential CWDMX to which on of new in in to full As the ramps, new unlock from providers triggered launching we that Etched cost-efficient white-box progress based see we our volumes thereby our agreement

installs With capacity business increasing over of by quarters. footprint designs and which model partners and production we believe beyond. repeat ramps in that chain, that's solutions to production-qualified XXXX half we coming ready-made consume the supply to our well-positioned the high-volume to of begin Data solutions industry meet Data availability enabling scalability a dedicated Our lasers, scale production meet manufacturing business second we the and course are and multiple as our demands industry accelerate of MACOM Center to as the transceiver of scaling Center necessary will step demands. necessary This components manufacturing growing

of SRX, we're none, important, X In portfolio over their a key with now XXX-gig the XXX-gig and agnostic reason our supply as networking protocols Finally, XXX-gig Data PAMX, engaging CWDM, providers for and to to why eventually cloud our to directly CWDM of XXX- the we are major chains. chipset, supply of Tomahawk Broadcom's XXXX. anticipate all. service believe and at XXX-gig aggregate, Equally single corresponding OEMs Centers whether Lambda, ramping, scale X breadth North PAMX begin portfolio pre-standard is it's them with at American the course to on with beyond, MACOM layering we we solutions, availability respect Tier top of second in

total, provide front-line networking module engagements technology within with to the and for come. unique growth be timing service and XXXX the to on of a up ultimately and of with and remainder perspective products OEMs overall for solutions. shaping Centers our providers, are manufacturers, trends In Data curves years a many steering MACOM adoption major roadmap driver Our cloud industry, equipment the and

the & with part capitalize well Defense to we competitors Now, share XX% consolidation. as sequentially to as was of continue quite on performing $XX.X up gains is I&D. moving revenue undergo Industrial business over QX million. This

strong new in where particularly technologies is in with upon Perhaps expect the MIT with backlog, unique transmit rooted and this bid activity enter again, legacy modernizing equipment, We market long protection even MACOM we Labs, to Leveraging our components products incumbent structure by and preeminent have a business program a business providing new our antennas, enjoyed We threat receive MPAR and that's pioneering RF and by work leveraging bookings Lincoln base proprietary opportunities our being active to an proprietary in remain radar a components class approach more high-performance military building share. we're robust Demand QX AlGaAs. microwave and highly the solution like where hold foreseeable for technologies. in, demand and scalable revived retrofitting assemblies. part tile commercial with core HMIC strong to with future. in for building we and modules position, driven and and driven radar exciting, has

customers, largely from address with corrections run supplier Chinese and trend a mobile about prototypes operators SkyChaser, of XG/LTE Metro/Long-haul combats calls. pending a recovery Department recently of Telecom sales to their sequentially, of half more radar share Syracuse coming to SRC, Defense business much to segments the other which electronically to will progressively revenue both LRX Backhaul, capital In Industrial seem business. now expect in & due seek We to in spending largely have with their said, course. segments total, XX% the anticipating through was covers down past earnings have in called this munitions. the $XX million, of strengthening the ZTE's readily revenue the ramp, urgent of commercial and available in and in DoD over production orders SPAR within overarching top to to demands in Based capture believe certain begin and scanned of second as initial looks this of agencies, threat U.S. in future Tiles award activity to And inventory the broader example, budget government or needs like one part we security. to for Defense with we Commerce. continues & DHS the that days, our in the using have national As hope on current slow-rolled share Industrial base with appropriations, drones XX This XXXX, into telecom-related quarters XXXX. exit you Corporation, Research secured finally, We resolution smart That to that programs. and be the across modestly a status play contribute grow growing program like active we new on China and platform to on out new

already direct of assumptions, that during recovery had spending delay ZTE as the is the of pace While us. behind sales issue We this we temporarily factored market revenue our out a moderated quarter. largely the view temporary broader from China Chinese operators already QX

new supply U.S. Now Department awarded of months terminated order, their could We're normal. now operators public very and from been tenders have ZTE that suppliers to has get to resume ZTE with to back though the process Commerce engaged three to and in takes Chinese their that a the all fashion. chain, rebuild denial

greater In on operationally. additional ramp this share programs. global of traction operators ZTE ZTE engagements prospects, time orders investments total, growth as We course to to network awards as growth back regain Telecom as our see take with new business to in Again, well to set XG. tied works overall business get also will we as to and see their normal resume resumed

and stable we telecom a third instead XG station for lasers as the Fronthaul well product like flow as Along will Growth base Midhaul, cash products both and PON and lines of drivers, forward, businesses. both leadership Looking X.X-gig in shipments which and our we FEM amplifiers. as GaN-on-Silicon quarter-on-quarter for for XX-gig like traditional come saw XXX-gig Metro/Long-haul FEMs breakout CWDM power in from view growth Backhaul significant XXG these Data lines, in GaN AlGaAs products. quarter, Centers, in positions solutions leverage

superior the This are a ship antennas. loss proprietary the and RF AlGaAs our mobile high-power Inside in reminder, thereby provides base industry's and FEMs, reception smartphones. of As provide the and lowest switches valued a FEMs suppliers HMIC equivalent that modules highly barrier by customers. our for multi-chip insertion and our entry to high handsets it's high-power station

supporting base macro across the shipments, volume on ramp production for Our to begun field QX customers both deployments. GaN and and included of platforms and massive GaN have revenue station FEM deployments. multiple initial products start early mono

XG target the of new through of me let calendar Bob and remainder that, business assignments Telecom station In With quarter-by-quarter our growth quarter we build-out fiscal expanded over gigahertz. continue more multi-year optical of total, to the to worldwide. at in to accounts, at review XXXX and pipeline X.X to also our turn contribute for GaN We networks base our XG third detail. expect it financials securing products

Robert McMullan

Thank discuss you, exit on a agreement facilities, I John, MACOM's the quarter white-box of product subassembly and and business, results GAAP MACOM's center and third good financial position, LRX certain production financial will fiscal non-GAAP the lines afternoon, transceiver and everyone. other review data and effect outline the basis. of

$XX was million. revenue million, and revenue $XXX results. in respectively XX%; profit operating the million sequential by X%; sold X% margin down Telecom was or X% was in LRX XX% of basis. million $XX $XXX or year-over-year. XX% non-GAAP revenues, was million total total up in Industrial the up XX% sequentially. was down respectively, gross First, subassembly end and fiscal revenue Revenue million compared & Sequentially, revenue, gross XX% $XX $XX of fiscal both to $XXX to of the revenue, fiscal $XXX Non-GAAP subassembly in XX.X% second from and quarter versus down year-over-year, XX% quarter fiscal million down and XX% fiscal year-over-year. and and and And $XX year-over-year. third and Data was Center, $XXX of the out XX%. million XX.X% million third for Adjusting LRX of up XX% million quarters, $XXX,XXX on quarter quarter quarter's respectively business $XX.X markets. the Defense, third X%. third sequentially grown Revenue and down from would Center Telecom Data & Industrial revenues revenue Defense year-over-year and have approximately was revenues a of fiscal Non-GAAP million total

operating up higher million In up in on and operating terms million sequentially sequentially. and was were respectively of million $XX fiscal year-over-year up quarter. Adjusted $XX total the of basis $XX XX% million, and down in fiscal expenses due dollars and million XX% from and respectively Adjusted basis. expenses and Net non-GAAP expense rates. SG&A percentage $XXX,XXX compared expenses, X% X% were were operating $XX in R&D margins X% percentage down operating X% expenses revenue, million $XX and XX% up Total income and on $XX and year-over-year operations to third a to sequentially. over were interest interest a year-over-year; dollars up sequentially QX non-GAAP

the rate X%. tax continued at income non-GAAP normalized in Our third fiscal quarter

GAAP tax was less Our X%. effective than rate

refund our years generate $X net of upon cash As IRS Based are to cash of we return, cash taxes, XXXX, agreed $XXX,XXX. future had we expect amending for resolved audits tax refunds and will we a federal and which XXXX XXXX million.

be receive from and tax amended. refunds be state expect to yet to filings Additionally, to yet calculated income we tax

quarter million per fiscal non-GAAP calculate to share down EPS or up non-GAAP but was count was depreciation, fully XX% XXXX but earnings X% year-over-year million Non-GAAP $XX XX% $X.XX. net EPS in but was $XX share flat fully $X up million net down EPS net amortization sequentially. from quarter, sequentially. used $X.XX taxes, $XX flat million was non-GAAP shares. income Non-GAAP at from XX% and Adjusted diluted third million, from down EBITDA XX.X year-over-year. down interest, The was million respectively, diluted our sequentially. $X.XX before and Our $XXX,XXX flat EPS income was Sequentially, third income were fiscal $XX and year-over-year and and

million, fiscal million with flow flow. capital free million was quarter down essentially $XX expense to operations third compared deducting Moving $XX or in quarter the X% of sequentially. was flat of fiscal our of $XXX,XXX, negative negative second million the from GAAP compared fiscal XXXX third $XX from quarter. and XXXX approximately to cash third during $XX last cash of expenditures, $XX Depreciation $X expenditures and to flow in $X.X was last quarter cash flat million with adjusted Capital was quarter million, fiscal million quarter. fiscal After revenues, fiscal XXXX.

down Our flow $XXX balance approximately our expenditures $XXX depreciation, numbers. levels $XXX sequentially. in At fiscal Accounts were reducing turns of million, free two of days, Key $X investment maturity capital million sales exceeded inclusive from Inventory $XXX Days sheet our sequentially. XX $XXX annual million, and were minimum May million, our XX of cash million, at to current were days Long-term million. quarter repayments million end, days equivalents MACOM flat by sequentially. cash third from is sequentially. short-term were outstanding investments Inventories million cash, were down compared from with receivable days, times termed from were debt Long-term down XXX XXXX. days debt $XXX XXX down until sequentially. principal capital inventory leases. was and $XXX at

also $XXX net credit of quarter. We XXXX times line availability and the extend respectively. line undrawn during of Gross were our did May leverage and the million an maturity have to and X and credit X.X

announced and LRX call, our agreement earning of completed to last exit MACOM selling the subassemblies. we As manufacturing business an at

We retaining down amounted of going components and talent buyer its XXXX This and fiscal million fiscal of in contributed the during write-off million quarter assets. $XX XXXX. third early loss. to non-cash fiscal reported wrote $XX intangibles certain forward. and with to is supply expect semiconductor and other incremental cash will MACOM structure certain flows GAAP acquired key generate to manufacturing sale-related exit will inventory MACOM and MACOM a the continue the includes Payments design resources. license equipment. that The fee,

operating of a past laser two the few undertook fabs. MACOM the review of quarters, efficiencies Over

of manufacturing production a by Lowell X-inch non-recurring terminate successful charge to of consolidate redundant to production all This fab product outweighed the facilities. X-inch in manufacturing including in in our third seen running of duplicate and laser resulted line we've quarter. Lowell independent decided costs During other during laser and lasers maximizing this we've of are complexities our of X-inch we've improving production fab. X-inch begun time, Indium fiscal $XX our Phosphide output and qualifications, wafers. The And and fabs, million two the actions

such believe $X Finally, what Center John. revenue Center investments million new the revenue included Back strategic business, new solutions were what be to fiscal many in monetizing which in we creates our we you, first This Data previously QX a in secured stream, our of to of business. agreements. Data

John R. Croteau

Thanks, Bob. last To lingering industry-wide China in and summarize, international trade turbulence navigating we've storm year's of tensions. weathered the from are downturn currently

spending Data are near-term civil portfolio on macro navigate, of investments XG and technologies areas sustaining payoff. targeted well believe by areas for well-positioned of of now of vulnerability drag our Cloud making fruition our address spending we we growth. sure Centers, investments are approaching believe to impossible exceptionally homeland a security. these Telecom, to beyond events to to the now and and has global secular key in China, on rapidly be To created next such While but challenging capitalize within driven and bringing committed to in defense international surge predict we remain necessary to are EPS, we infrastructure disruptive We phase

with monetize we ahead, contribution. these leverage investments the strategic what significant previously company, Looking contribution for as little revenue will we the future provide believe from were operating

financial to efforts free fruition, target squarely our model XX% XX% gross fixated flow. these margin, getting operating and of operating we cash back come As on margin, XX% to are

backlog, brings scale That order ability at it a to products on based to forward, technologies. guidance. customer new visibility QX taking me guiding one we're operational these Moving our and time, quarter and

shares gross $X.XX in million fourth expect open be an may Adjusted earnings range and quarter now anticipated is XX% questions. ending we $XXX XX, you call per XXXX, fiscal the adjusted $X.XX be of and the revenue $XXX to outstanding. share to Operator, between the million XX%, XX.X September to margin For fully expected million. diluted and to between on

Operator

the from comes Needham line Quinn question of first Company. with & Bolton Our

line Your is open. now

Quinn Bolton

the Data nice Congratulations especially business. of the Center guys. Hey, the outlook, on side on

John R. Croteau

Thanks.

Quinn Bolton

sort included non-GAAP just to revenue led just looks color John, it of $X of us the looks and classified It new this it can sort that give you to the you as Data Center than million deferred of walk in like that like being revenue Can created solutions. a June quarter tune us in out through sort revenue actual that more a forward guidance. revenue? you your deferred on you're bit little rather backing what of of

John R. Croteau

Bob business talk cover you about treatment. the have do want and model Yeah. Bob, to? I'll solutions. accounting I'll the the

Robert McMullan

Yeah.

thanks that here. very up for bringing So, front much Quinn,

appropriate, implications a of fourth reflection close third quarter that non-GAAP we think for did our had we So, would reflects amount the the business in and first and all, we that we an negotiation. the in of in financial the it Basically, And run and guidance. of and is quarter. operating fiscal accurate guidance QX both include we visibility the multi-quarter that

terms. transaction the we written the payment is the met all according and On received deliverables. acceptance contractual transit customer itself, customer in We have to payment

felt, to themselves we we some it's to are insignificant items will rules adjustment think, So revenue. open a under reflect more that resolve recognition revenue again, as quarter. next minor, accurate There

Quinn Bolton

it. Got

like in it quote-unquote the as June to crossed, Ts able recognize sounds to it actual have sort the of didn't be revenue quarter. Is just of So dotted all you accounting

Robert McMullan

inflating Yeah. of quarter's the guided the small how of way to guidance include adjustment just have next inconvenience. actual. I'd we right that expense perspective the the what at is in business point like to and and and did It's look not just the we number at it this to a

John R. Croteau

Yeah.

Quinn Bolton

Understood. can business? through John, of the then, you And sort walk

John R. Croteau

Yeah.

X from imagine XX model as units of to solutions you expected much have to to we in can So the as which million next is basically, a million market X year. million CWDMX, is case grow the

be a needs that lot fulfilled. demand there's So market of to end

transceivers the deal. of very needs production today an million in able industry manufacturers lasers, scaled to produce supply components XX these at but is XXX-gig a It's bottlenecked big also terms to the to So level. be of much critical like be

and invested production well solutions a producing So transceiver, to, fully TOSAs can't speak QSFPXX heavily ROSAs. and receive in I matter that subassemblies, that transmit very in in transceiver, qualified is the and places the model industry which optical as the is at our we've as

ongoing in to able manufacturers, then scale and those So on those transfer large put a basically basis, then the we into who production at monetize merchant the high unit scale this market are we license by – components monetize components be fees we've to level. market these that demand. also designs And facilities to selling revenue can And to model, the volume basically what those and at prices. and production we merchant secure at transceiver invested in then

pretty it's them. to from to you The up this, who a qualified being is people that's given design already could compelling. valuable to matter in that lining places So imagine quite able are been looking be benefit

Quinn Bolton

guys partner a today a that you've partner on think Back with. announced at It that in this this OFC, Asia follow like partners up had mentioned sounds is the just you you'd third And for that. two I subcontractor space business. partnered

Robert McMullan

is because proprietary have directly I'm to MACOM ongoing. other going question to the avoid do this we negotiations pretty and

date. if So, till could later that pass I a on

Quinn Bolton

Understood. Okay. you. Thank

John R. Croteau

Good welcome. questions. You're

Operator

line question next of the Piper comes with Our Jaffray. Harsh from Kumar

is line Your open. now

Harsh V. Kumar

Hey, guys.

John R. Croteau

Harsh. Hey,

Harsh V. Kumar

wanted by Quinn. on follow-up question previous Just the to

the volume manufacturer, said you theirs yours design. final or high to have them of win the to And box is the give is you this understanding then Do manufacturer, to my what you design So, your make sell? sell or the final to or do it you components box? just the

John R. Croteau

It's it. sell. of backwards to theirs work I'll

CWDMX service same And the by XG exactly telecom. fulfill design. the way, for So we cloud be is providers. with them, transfer directly the it Midhaul as to the well. The shaping up demand But they basically license is

TOSA/ROSA So and we design designs. full invested transceiver the the in

helped put a build components on it and sustained them the we've their And So basis, into we them that. to then, sell qualify factories those.

Harsh V. Kumar

Got it.

and still except is here. win, you're going were nothing in components model? that getting and which the you're different, that selling the kind of that's really and a Is value-add same the almost services actually So like big you business design

John R. Croteau

model. solution absolutely, end, the services In Yeah. yeah. it's a Oh,

like design to places there's They qualified put ourselves production, and bear, So no that it's in matter. designed volume, you factories. We in high-volume is per I value low-cost production manufacturing. se. win which their in already it it in And into said, bring very high just

So is best, And efficient it's structures. very we attractive we volume produce cost chain. what supply at which very do components a very do high

competence chain. they which is So, supply and everybody core stays get want, within the efficient a scalable service guys cloud very their what

Harsh V. Kumar

the back Thanks I'll in progress. get Understood. clarification. Congrats on making for And line.

John R. Croteau

Great.

Operator

Our comes from of next question line Goldman with the Delaney Mark Sachs.

is line open. Your now

Mark Delaney

Good for taking Thanks the very afternoon. Yes. much questions.

John R. Croteau

Hey, Mark.

PON more have any be lasers? of better about going hoping question XX-gig And the of should size gross to number in get the MACOM has your XX-gig to going lasers additions that that color of company yields you quantification achieved? manufacturing, for Do First some of is on improvement the improved comment and the just to we the about extent manufacturing framing for lasers. or lasers transitioning over to us some think order help is to be or the you are

John R. Croteau

to and the production the the factory. X-inch sustain At feel on downside that we like point things that's improving we for don't comm production, we looks Yeah. factories. with yields it consolidating redundancy about and the the can this point, factory the Data of in second are one Center the The redundancy of the need COGs

would In me to it'd wafer. terms yields, units But I it the our think say it's quantify very to yields so way out in significant is be multiples inappropriate publicly. increase times of per about the integer for

the hit inefficient we the in is to utilization. not multiples, really were did And what the want integer it didn't it's factory. capacity multiples. where threshold So turned We holding on percentage it be back we because

fab. So, Lowell for filled right now, we've our the pipeline

etching, through from out. through front-end, and through So the is the epi, back-end factory, this the through

you'll progress what the factory out flowing quarters as units in see of is those this later So quarter. begin coming stepped

Mark Delaney

you. with for from my factory to up when can the us topic improved that expect can could shut Thank be down, you same And see then on the and Got follow margin it. helpful. the that we That's help to plan margins what the activity? implications you understand

Robert McMullan

Yeah.

point we on guide. did out, I'll gross I slightly margins So up for believe, guide,

So, towards margin. talked have we past, that about to the continue to improve gross as XX% visibility in target we've

So, as September, full margin we start enter benefit fiscal in of and contribution exit into gross our coming in that will XXXX. XXXX the fiscal first the quarter of in

And of terms John march about, is improvement improvement mix, the overall lasers in across important that yield XX-gig XX% as see board. to talked to In as well. we

together get line towards this XX%. to continues I – very our there to positive of So all think sight getting be we the

Operator

Barclays. the from line comes question next with of Blayne Curtis Our

Your line is now open.

Blayne Curtis

Center. A Data guys. on Hey, Thanks the for more my taking couple question.

I understand how Just I payment in there of another Is it $X say know in I a then point And that to so didn't what I start shipping curious of or with some that Any works partner think customers. you're if the is I'm part September? it willing And guess And – about customer now. maybe associated multiple want chips. quarter. kind you'll partner, is. to color the there. understand June I million this at guess

to So, these wins? it. another do to to you expect When components selling maybe look that's way at be

Robert McMullan

points extent talk the excellent. we will. Blayne, those the that about can it, we To are

there next quarter, is So, included. not similar revenue

basis GAAP solutions' additional except a that reverses anticipate contribution Center don't we So Data from the deferred. revenue,

on see a will revenue reversal you quarter. next the non-GAAP So of basis

prices. include the visible, transaction. upon those bread-and-butter our There revenue. contingencies And the market-related those going other around You're customer. be It And more become we increase or is no independent. to fees at and are This report we'll some customer with earn the with in like. revenue be component is will our will guidance sales consumption this and of growing pricing they that payment forward first correct, component them. at-market as opportunities of There's additional elements think

John R. Croteau

Yeah.

there, Blayne. last the emphasize me let point So

our don't we any. an on do But not does customer any that and payments ongoing guide, anticipate in So, assume from payments, further but others further basis. guide our we anticipate

Blayne Curtis

Thanks. the And maybe that is expect just visibility And components ship a do partner? when any there to end this there? you customers clarification to on

Robert McMullan

current components. fiscal the which are we quarter, is shipping QX, In

John R. Croteau

Sorry. Yeah. QX.

Robert McMullan

sorry... am I And

John R. Croteau

QX.

Robert McMullan

missed... I

John R. Croteau

Yeah. Timeline. Yeah.

the behind supply. shipping. cloud And we They're about about sensitive talking are providers their about very Blayne, We service can't talk us.

Blayne Curtis

on a curious saw flow. on Ampere because in cash just can I if was the computer one investment. I just last a moving the And What's pieces bigger Obviously, lot Thanks. lot there's this write-down there status squeeze of quarter? the the minority more. I'm

Robert McMullan

share specific, contribution financial statements. is be is there We our the rules of million in the our discontinued no was quarter. related – to the LLC Ampere. operations in And under in to So report $X.X negative write-down of GAAP no SEC

We We we exit will do the on impairment that value. the not are, a wrote goes off What a see continue to to report forward. our of carrying from any basis business. as of talked assets write-off GAAP to portion FiBest intangible write-down, as place the of LRX we a we're years about, The that expense majority in certain write-down, It's related resources back a in maintaining and the that partial certain a acquired Japan. design few capabilities acquisition ago. because is full not

what inventory about was shutdown, Phosphide write-down call X-inch fab. related I of further Indium the Secondarily, orphaned shutdown up laser at would the planned the to the facility

Operator

next Our question from Savageaux Capital. Northland the with comes Tim of line

open. line Your now is

Tim Savageaux

discussed component way MACOM in of past that XX in proportion XXXX, with and of the opportunity I Datacom million guess, for indirectly down try with looking think revenue, right, directly here, place, as you're the side starting but kind have at of neighborhood to, at all I on what that not in I addressable for these congratulations a that's $X forecast is, XXXX? of better is at now calendar we've we're this And or on the this a the fee. product maybe you a developments the XX-million-unit say CWDMX more $X to I'd agreement But you look that cloud now, calendar opportunity the by like taking guess sense the billion, afternoon. with million in the quarter. opportunity you would reasonably getting Good to

John R. Croteau

Yeah. Good question.

choke one address quantity. ability So our the number our sufficient in that in point to yield lasers ability to was market

threshold structure at it but produce said, doesn't we which Our to feel much, I now you can't the both behind And yields That made as to they sense in cost if is matter feet. The some, is hit step fantastic, right? with continue us. improve.

XX we they a the quickly answer terms we license, addressed million is licensing ramp because much I transceiver manufacturers, to of that. can enable – how to time-dimensional will people several how people how can our continue think ability capture the in be that quickly

a than think the like of that we'd and transceivers degree consolidation exit our structure fair industry we'll different fairly supply think next speculation now my And to the a of exists. that CWDM and exiting now year going there's what upon in probably is I right for solutions. a based currently portion those our with of very sizable will on from year be base a components

Tim Savageaux

it we talk you're could as coming guidance from? side. China that in pause. detail more the like then sounds touch your growth I sounds as that's seeing Can If coming on over a Telecom any implicit in like It on Thanks. after up follow Metro/Long-haul what And kind It can maybe back in resumption well? in about about Telecom. where as be is might of Backhaul you simple Great.

John R. Croteau

Sure.

recovered a from back pre-downturn levels. seems to standpoint, Metro/Long-haul, So, have units to

to inventory So it's fully reason have I correction made why comment the the the seems out. that played

deployments. much expect businesses, Backhaul. that nice XG XG/LTE and between Metro as Even X.X The healthy we new view stable deeply entrenched I in a And consider pretty flow growth grow. they're going businesses growth the Metro/Long-haul drivers, XG Fronthaul, just the XG-related. to and really getting we we in our we're is Backhaul very, share. They're kind state really cash but with Midhaul, those the the think, and is very don't flow normal. XX-gig like our back is cash coming very them Backhaul, GPON Metro/Long-haul of instead the to

from wheelhouse. we're there. So, as per a China, our been our Fronthaul Midhaul, just Data lot basis it XG go-forward a in is about right And to Centers. they're well-positioned because it's exceptionally over in borrowing inch about CWDMX, now in XX industrial we what lasers; feel relates talking right it's XX-gig, on all wheelhouse. we've XXX-gig

China a with that back tailwind with we're pretty year going from kind and of having be moving build-out. from to XG, So this as we XXXX XG strong into transitional feel gets like,

Operator

from with C. Muse comes question J. next Our Evercore ISI.

Your line is now open.

C. J. Muse

my $X as part Yeah. including September see to the there? Good you all revenues as I to sequentially question. Center segments or too growth guess, million sequential quarter grow in of any Data afternoon. you Thank much look And that, mix? guide, first from question, is expecting in you are ZTE deferred to are you for taking that

Robert McMullan

question. Good

at are everybody terms of rates a of So, essentially, even are LRX that Remind exited markets quarters $XX growth. guide, yes, revenue. that all number but same different growing we end they has two the million ago though as remained

be the business solid pretty continues the So And second that growth because underlying question of is that? to and that is I highlight improving. exit

C. J. Muse

Did you include ZTE in the guide?

Robert McMullan

Yeah.

So ZTE very taking a we're fourth in fiscal our the approach and minimal to conservative of contribution quarter.

John R. Croteau

It's is instant scheme a remains their in So, aggressively There get minimis grand to chain minimis and to started standing go supply de ZTE is rebuilt. revenue just it starts. de things. They from actually, but can't trying on. engaging and fits very of of in some the terms it stop

of things want the the remarks, think carrier our with some to to scripted preserve color their seeing a come to didn't customers. And competitors. share to denial this reallocated sell provide what able basically I to consumes. ZTE ZTE's to happened, we saw on of subassemblies They is more resolution seemed and share. a impaired demand because them order, the quick slow-roll be more to my their out that on resume fairly importantly BOSA for Again, they lot just customers

back But of without back without So it backlog, hard. orders on guide for the moderated clear we on don't the line kind China right now visibility. of it's days. XX demand It's in and just over in

They're as something XX stance sort lot day. a taken. a still think conservative meeting got from like They've yet. I mean, Remains that's Bob that there's if to I tailwinds days early they're come be trying still So, we've any it's it, but a seen said, through. to of suppliers.

right So over now. there it's fairly chaotic

C. J. Muse

helpful. up, shutting line, LRX margin cash rate about very as out second of down as what breakeven a thinking follow And lower flow today? are that you run mix, of you the laser think terms That's pulling in revenue

Robert McMullan

you got it. to I do That breakevens other a little give thinking So quick. a in real can couple I one,

So, timing the our difference EBITDA per quarter. The of question amount growing. to the and answer is really is that look, CapEx

online as the We have that, again, capital coming us continue pointed investment. the to of transceivers requires here agreement ST make power another to expand we out, as some production quarter we GaN

contribution cash capital we're EBITDA So are think from expected And between a so the free our improving it's and capital $XX from the flow next really that breakeven focused reduce million the again, really I we and we on basis. cash But if forth. very, the working difference that's flow on level quarter on side. very management also improving

free improved think point margins to but don't cash operating revenue the and number So I a I and gross across forward our see here. our EBITDA margins have our out, specific improving that with going flow growth, you'll line

Operator

next Our D.A. from question comes with Mark Kelleher Davidson.

open. now is line Your

Mark Kelleher

for Thanks questions. Great. the taking

step forward just, to general, there elements seemed terms should up And wanted in R&D, quarter. what going think R&D be? unusual of in efforts take your at Just look little in step-up? what in to should a we Were the that

Robert McMullan

observation. good Mark,

things simple before as solutions. describe and And this expenses line. we variable products I some including what products as on would new to develop applications, And continue go those here as as quarter release different their increase our of new – R&D packaging through is this cost, come we production,

has portion is amount. It a expense terms quarter. is quarters there in but material each of variable R&D So the that its recent related, of timing that over grown and

see we as therefore, expenses going you that of in guide, the see operating stabilizing sort here for of sort our So, forward. from number

Mark Kelleher

that at Stabilizing percent? or number that

Robert McMullan

yes. level, that Around

Mark Kelleher

That's I Okay. Thanks. all have.

Operator

Our from Svanberg comes next with question Tore Stifel.

is line open. Your now

Jeremy Kwan

Hi. Jeremy Yes. Thank Tore. you. for calling This is

look is also we towards your us term, months the a million Just maybe follow-up $XX much expanding at it out? CapEx of that Can how XX you earlier how XX directed little help maybe capacity? longer can understand laser a on bit question. to And

Robert McMullan

CapEx. Yes, are three we can. elements major the that consuming And of – most there's

it manufacturing or one, and out this to leasing here by Lowell the of expansion of people number our in over portion completed We versus capital of time. here be facility, over and our soon expanding build-to-lease, as in facilities capability our We're is to have months an we we feet. are XX,XXX four in know, is although facilities first three That Lowell. in next what the extension invest definitely square build-to-suit expenditure have adding short-term actual a decided process

longer. there returns XX-year the over is least the better upfront of cost are or than today fund and it it rates period Our to at lease it

is in test area equipment. second The

position in some our a continue future of are the more to putting additional materials, then, different new we as speed, subcontractors, we demand. buying higher capability more across equipment is advance expanding and equipment have things the both is test the And evolving biggest these to that third production as portion as and well be as to As in to board. technologies capacity Lowell the well performance, meet and higher portion in finally, the we're

Jeremy Kwan

And spending? can you elevated long this how talk about have may you

Robert McMullan

is So X% to original of of the our target grow, in cyclical level. we'll be terms Telecom X% was CapEx of revenue. specifically in space back as that our because depressing the issues revenue, We think, X%, the we

So an of in this is sort view. anomaly our

John R. Croteau

Yeah.

more opportunity, growth problem more you on I to want top-line growth. think more you the Obviously, case not be think if to expectations you be exceeding the scenario have would that's I where have the But you feed that basically get CapEx. would with have. that then

Robert McMullan

back model, our close to would operating margin. target getting also which that's XX% generate to operating again, And, Yeah.

first EBITDA is would be the step higher than today. it on So,

John R. Croteau

Yeah.

So some let provide color what's kind that on of me fueling CapEx.

So things like XX-gig we're Data Centers. simultaneously for ramping lasers

associated base We've TOSA now GaN production capital behind the taking got base got for it for panels coming and stations. got is or We've we lasers. the L-PICs antenna the panels. transceiver have FEMs believe We stuff stations. not, active have the receiving We've equipment. solution also that And orders

be laser production. upside breakthrough very frankly, feed CapEx feeding similar customers. we're And of that high So, as terms scale very to ramp, we to to XX-gig you now associated the able see with have quality getting this things, to the in

Operator

line the from comes question with of Harlan JPMorgan. Sur next Our

open. is now Your line

Harlan Sur

well give most development sight on your design Thanks Good by it's an this afternoon, And Maybe your you update I being for of know on you activities. XXX-gig. update guys. I any of customers. just XXX- focused these solution? Can give line qualified give us shipments? has timing production just on and L-PIC question. status taking been as L-PIC can several of of Can assume us in us some wins on calls, my guys XXX-gig an terms you and

John R. Croteau

outlook, about Yeah. one as L-PIC talking short-term up, to our I might to picked for futures. But, trying we're now, have as we and mean, stay is the focus the the kind on trying L-PIC with you breakthroughs is way describe mean, the from situation short-term similar away I results the the of themes the have lasers. achieved yields, I'd improvements of and

lasers the think is about talk actually I wafers are source where the We PIC factories. within from GLOBALFOUNDRIES. the difference internal internal our and can factories those we

cost, solutions Center the to lower talking ability So, to once version to timing that you're is chain the this business from news the ramp the today, the I'm manufacturable same really be of just And supply L-PIC, greased standpoint. really just drops designs, gated about ramp L-PIC good version of But and going of TOSAs into model. to And a with integrated the solutions more transceivers not more that same the we've that by same the is way this, the their it'll GLOBALFOUNDRIES' the a L-PIC where which gate – that's next. the year TOSA comfortable over skids Data improvement solutions about and it's think chain. OSA supply is integrated the the and

manufacturing PIC Data everything to there's matter in we're just all of business. now limited cost Center be L-PIC not of to BOM we the production. is scaled anticipated by Certainly, solutions a way and It's improvements, the of L-PIC So go further But a and getting have like the for cost availability. but as disruptive manufacturability, it's in expected. lot wait ramping L-PIC terms wafers to before our

Harlan Sur

part the catalog guys sticky have kind Thanks of segment. nice Great. a insight of for really And as there. high-margin Industrial you business your

do driving pull of of going business also to a as you go-forward broad think on are the I that just is Can give well. think basis? contribute to demand? growth a you what well types I assume as And diversified. there very demand sense us applications catalog you're also the strong it's seeing the sequential

John R. Croteau

one the all, of is is to remaining in very mean, for stuff, would lift legacy a out first and core a question. a we're I which our It's that the in be. long – programs are designed be of the and undergoing mean is general standing last retrofits place where field. turning what surge fantastic and some feelings demand then in ago There consolidation I business to doing last literally call upgrades catalog and other nice were we guy competitors in the I nicest

beyond talking core it's perfected upon an was rising that talk of base of very challenge in those like some application with Active is radar catalog for for And the a we to Data two then applications, that same just amazing assemble just just RF all the the that a It's Center Antenna there's mature are – is growth our we're When associated antenna station fuel that, technology there's a the business proprietary. upon It's it's solutions AlGaAs or actually new Whether the business will reception. technologies, top antennas. the about, based of an solution. about same really and use based substantial application, that same business. all stuff. our potentially But antenna, some this continuing tide highly applications on surge. it's be So really all things about

drag grow to It's our that's to great. growth fast on our Telecom & business, as your is Industrial turns business When portfolio in that but tends grow anything Data as Center special. up and shaping potentially and like So, it's core – it's our which business, XG Defense that, on. a

Operator

no to remarks. for call questions at like showing management closing to I'm I'd in any further the turn queue And this time. back

John R. Croteau

Great.

want today's Technology, and Hardware we'll Infrastructure in Jefferies X out I be on Conference and Summit XX Chicago. call, closing Internet as XX mention Oppenheimer on Communications as Before well in that August Boston, & Semis, attending August the to Communications

us call. these to like email meeting Operator, a today's arrange remarks. you'd at please If may events, at ir@macom.com. disconnect concludes of one now That you the

Operator

disconnect. Everyone, day. have conference. This for thank and you now Ladies may your great program you participation today's concludes a and the gentlemen, in

MACOM Technology Solutions (MTSI) 31 Jul 182018 Q3 Earnings call transcript