MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) This fall 2023 Earnings Call Transcript November 9, 2023

MACOM Technology Solutions Holdings, Inc. beats earnings expectations. Reported EPS is $0.56, expectations have been $0.55.

Operator: Welcome to MACOM’s Fourth Fiscal Quarter 2023 Conference Call. This name is being recorded immediately, Thursday, November 09, 2023. At this time, all members are in a listen-only mode. I’ll now flip the decision over to Mr. Steve Ferranti, MACOM’s Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go forward.

Steve Ferranti: Thank you, Livia. Good morning, and welcome to our name to debate MACOM’s fourth monetary quarter and monetary 12 months 2023 monetary outcomes. I want to remind everybody that our dialogue immediately will include forward-looking statements, that are topic to sure dangers and uncertainties as outlined within the Safe Harbor for forward-looking statements contained within the Private Securities Litigation Reform Act of 1995. Actual outcomes might differ materially from these mentioned immediately. For extra detailed discussions of the dangers and uncertainties that would lead to these variations, we refer you to MACOM’s filings with the SEC. Management’s statements throughout this name may even embrace dialogue of sure adjusted non-GAAP monetary data.

A reconciliation of GAAP to adjusted non-GAAP outcomes are offered within the firm’s press launch and associated Form 8-Okay, which was filed with the SEC immediately. With that, I’ll flip over the decision to Steve Daly, President and CEO of MACOM.

Steve Daly: Thank you, and good morning. I’ll start immediately’s name with a normal firm replace. After that, Jack Kober, our Chief Financial Officer, will present a extra in-depth evaluation of our fourth quarter and full 12 months outcomes for fiscal 2023. When Jack is completed, I’ll present income and earnings steerage for the primary fiscal quarter of 2024, after which we might be glad to take some questions. Revenue for This fall was $150.4 million, a slight improve over the prior quarter. Adjusted EPS was $0.56 per diluted share, and working money circulation was roughly $50 million. For the total fiscal 12 months ending September 29, 2023, income was $648 million, and adjusted EPS was $2.70 per diluted share. Fiscal 2023 income and EPS have been each down 4% 12 months over 12 months.

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We accomplished two small however strategic acquisitions in fiscal ’23, which mixed, contributed roughly 2% to our complete fiscal 12 months ’23 income. During the fiscal 12 months, we eradicated all of our remaining short-term debt and funded these acquisitions utilizing money just lately generated by the enterprise. We ended the fiscal 12 months with roughly $515 million in money and money equivalents. In This fall, our book-to-bill ratio was 1.1 to 1. In our turns enterprise, our orders booked and shipped inside the quarter was roughly 16% of complete income. These are optimistic developments, and notably, This fall bookings improved throughout all three of our finish markets. Improvements have been led by pockets of power at sure protection and Data Center prospects. Our complete firm backlog elevated barely quarter-over-quarter, and it stays at a wholesome stage.

We are beginning the brand new fiscal 12 months in a powerful place. While we’re happy with the current enchancment in complete bookings, in sure markets, orders remained weak in This fall. Demand continues to be weak in telecom and to a lesser diploma in sure elements of the commercial markets, and we stay adverse on the near-term outlook for these markets. However, extra positively, we see rising demand in Data Center, aerospace and protection, in addition to in satellite tv for pc communication markets. Fiscal This fall income by finish market was as anticipated, with industrial and protection at $79.2 million, Data Center at $40.5 million, and telecom at $30.6 million. I&D was down 5% sequentially, Data Center was up 52% sequentially, and telecom was down 20% sequentially. Notably, our high 10 finish prospects represented roughly 30% of our complete income in fiscal 2023, and nobody buyer was greater than 10% of our complete income.

We keep a extremely diversified buyer base consisting of 1000’s of shoppers. Industrial and protection was a powerful marketplace for us throughout fiscal 2023, and revenues achieved a historic stage. Fiscal 2023 represented our third consecutive 12 months of development inside the IND market, with 8% year-over-year development. In reality, the I&D market with 8% year-over-year development. In reality, over the past three years, our I&D revenues achieved an 18% compounded annual development fee. We consider our development initiatives for this market are on monitor. Core to our technique is increasing our serviceable addressable market or SAM inside the I&D market by launching compelling new merchandise. As a reminder, examples of recent development initiatives, which we have mentioned in prior quarterly calls, contains our new 0.14 GaN on silicon carbide course of, kilovolt capacitors or KV caps, and BAW filters.

These product traces are nonetheless within the early phases of their development and product life cycles. One necessary space of the I&D market we’re supporting is the RF over fiber section. In these functions, prospects convert RF or microwave indicators into gentle by instantly modulating a linear laser. This ensuing sign might be transmitted over fiber with minimal sign degradation or loss versus conventional coax cable. Fiber offers a decrease weight and safer transmission in comparison with coax. RF over fiber is good for demanding functions like SATCOM floor station networks, distributed antenna methods, and plenty of protection functions like safe communications, essential GPS methods, and radar methods, all of which require excessive reliability and lengthy life cycles whereas working in harsh environments.

MACOM’s power in microwave and optical design, laser and detector applied sciences, and ruggedized packaging and subsystem manufacturing capabilities positions us for development on this section of the protection market. We are seeing a rising variety of long-term program alternatives immediately. Another space of focus for MACOM in industrial and protection is additional penetrating the check and measurement market. A notable current new product introduction for this market section is our optical clock restoration or OCR options. Here our excessive efficiency connectivity crew is leveraging our PHY [ph], our excessive pace optical receivers, and excessive efficiency analog design experience. MACOM’s OCRs can be utilized in our buyer’s manufacturing check surroundings to validate their efficiency of their brief attain 400G and 800G optical transceiver merchandise.

Our telecom end-market revenues continues to be weak. In fiscal 12 months 2023, telecom was down 24% year-on-year. Weakness on this market is broad primarily based, spanning most of our bigger subsegments together with 5G, Metro lengthy haul, cable infrastructure, and passive optical networks. That stated, we consider the secular development drivers for telecom stay intact. Global telecom infrastructure must develop capability to hold greater knowledge charges and extra bandwidth all whereas having decrease latency. As an instance, just lately a US service accomplished area trials in New York State which demonstrated 1.2 terabits per second of knowledge over a single wavelength of lengthy haul in a protracted haul metro utility as a part of an ongoing fiber optic improve. MACOM supported this trial with our merchandise.

One section within the telecom market which we consider is rising is broadband satellite tv for pc communications or SATCOM and plenty of of those floor and satellite tv for pc methods function at microwave or millimeter wave frequencies, which performs to our experience. Telecom stays a sexy and numerous market and we see quite a few alternatives to develop our place on this market. Our Data Center finish market revenues grew sequentially in This fall. In addition, for the total fiscal 12 months 2023, Data Center revenues grew by 6% year-over-year, development that was primarily pushed by excessive knowledge fee brief attain functions. The Data Center market continues to supply development alternatives for MACOM and we anticipate new product introductions would be the major development driver for us on this market.

We are centered on designing and producing {industry} main cross level switches, excessive pace TIAs and laser drivers for a variety of functions. Our technique is to be the primary to market when knowledge charges leap to greater speeds. As an instance, we just lately introduced and demonstrated an industry-leading 200G per lane transimpedance amplifier or TIA for brief attain functions and a 200G per lane linear equalizer to be used in energetic copper cables. Both merchandise will help 1.6T deployments. Data Center architectures proceed to evolve. We consider lots of immediately’s deployments require considerably extra brief attain optical and/or copper cable to make connections. Our excessive efficiency connectivity crew gives an industry-leading portfolio of merchandise at 50 G, 100 G, and 200 G per channel to help these necessities.

In some functions, our options allow decrease value, decrease latency, and decrease energy consumption versus conventional options. Additionally, our linear equalizer merchandise allow copper interconnects to be prolonged in attain and into greater pace functions. Previously, a market section addressed with dearer energetic optical cables, or AOCs, and pluggable transceivers. Our options have been examined with the newest era of change ASICs accessible in the marketplace immediately, and our prospects are happy with the efficiency. Given we’re initially of a brand new fiscal 12 months, I want to evaluation our long-term technique, briefly recap a few of final 12 months’s accomplishments, and evaluation our priorities for fiscal 2024. Simply put, our technique is to deal with the best energy, highest frequency, and highest knowledge fee functions in our three core markets.

We align our R&D and product growth assets round these themes, after which, utilizing our annual strategic planning course of, set up close to and long-term objectives to strengthen our portfolio’s competitiveness and to place the corporate for future success. Our objective is to have our technical groups work carefully with our prospects to supply distinctive choices for them to think about. By leveraging a large breadth of distinctive applied sciences with world-class manufacturing strengths, we consider we are able to appeal to many purchasers and acquire extra market share. We consider prospects will hunt down suppliers who can, over the long run, change into strategic companions. During final 12 months’s This fall earnings name, we outlined our priorities for fiscal ’23. Our crew made significant progress in opposition to these acknowledged priorities.

As a reminder, a central theme we communicated then was to seize market share in ’23. We consider we have been gaining market share by rising our new product choices, increasing our expertise base, and strengthening our presence in sure geographic areas. As I’ve talked about, a key element of our technique includes constructing a portfolio of compelling semiconductor processes to help excessive frequency and excessive energy functions. The opening of our MACOM European Semiconductor Center expanded our manufacturing capability, added epitaxial development experience, bolstered our European presence, and strengthened our design groups. This acquisition helps our strategic objective to ascertain a management place in very excessive frequency semiconductor [indiscernible] course of applied sciences and merchandise.

While this was a comparatively small acquisition, we consider it’s strategic and it brings us great development potential. We are assured our technique will allow greater than common return on invested capital and subsequently help our objectives of creating exemplary profitability and money circulation. In help of diversifying our revenues geographically, we’re increasing our gross sales efforts throughout Europe. During This fall, we attended the European Microwave Week in Berlin, the place we hosted quite a few stay demonstrations at our sales space, which featured our newest merchandise and applied sciences. In addition, we’re happy that the European Space Agency, or ESA, just lately accomplished a web site go to at our France facility. We intend to construct new relationships with main organizations and prospects throughout Europe with the objective of driving long-term income development, diversifying our buyer base and including additional stability to our total enterprise.

During the 12 months, we launched 170 normal merchandise and elevated a rise of 15% in comparison with final 12 months. We additionally had nice success with our customized IC growth actions and we supported a variety of customer-funded initiatives. We acknowledged that continued investments in increasing our design engineering, new product prototyping, and engineering check capabilities will guarantee we transfer shortly and quickly carry merchandise to market and finally acquire market share. As we stay up for fiscal 12 months 2024, we anticipate that the speed of recent product introductions will additional speed up. In reality, we consider it’s potential to launch 50% extra merchandise in FY’24 in comparison with FY’23. As we deal with fiscal 12 months ’24, our priorities embrace extending our management in RF and microwave functions, taking market share on GaAs and GaN mimics, persevering with to realize traction with our high-speed analoge options for short-reach knowledge middle functions, finishing the mixing actions of our current and pending acquisitions, driving extra development of our RF energy, analog and light-weight product areas, constructing out and rising our module and subsystems enterprise in choose high-performance markets, making certain administration challenges, develops and rewards staff, and helps their wants to make sure they’ve a protracted and enriching profession at MACOM and final, managing the enterprise and technique to allow us to attain document earnings for the long run.

In abstract, MACOM has a variety of merchandise in manufacturing immediately. Many of those merchandise have lengthy life cycles and may produce revenues for years after they have been launched. We view these enterprise attributes as an inherent power of our enterprise mannequin. And final, I’ll word that MACOM and Wolfspeed have been working collaboratively on a carve out of their RF enterprise over the previous few months. I want to thank the mixing planning groups from each corporations for his or her nice work. Our integration planning efforts embrace aligning the crew we’re hiring, their organizations, and the ERP and different knowledge methods with MACOM’s infrastructure, so we’re absolutely operational and unbiased at closing. I’ve little question this transaction might be a win for MACOM.

Jack will now present a extra detailed evaluation of our monetary outcomes.

Jack Kober: Thank you, Steve, and good morning, everybody. Before moving into the small print of our quarterly outcomes, I want to summarize just a few gadgets related to our fiscal 12 months 2023 financials. As Steve famous, fiscal 2023 was down roughly 4% from a high and backside line perspective. Despite this, we have been in a position to keep adjusted gross margins in extra of 60%, with full 12 months fiscal 2023 adjusted gross margin of 61.3%. During fiscal 2023, we’ve maintained strong and constant money circulation era, which has allowed us to shut and fund two strategic acquisitions with accessible money and in addition repay the remaining $121 million steadiness of our time period mortgage that was scheduled to mature in May 2024. Now, on to our This fall quarterly outcomes, in addition to some extra commentary on our full fiscal 12 months 2023 and outlook on fiscal 12 months 2024.

Revenue for the fiscal fourth quarter was $150.4 million, up 1.2% sequentially, primarily based on development in our knowledge middle and market. On a geographic foundation, income from U.S. home prospects represented roughly 46% of our fiscal This fall outcomes, down from 49% in fiscal Q3. We’ve been working to geographically diversify our enterprise and are happy to have a wholesome mixture of U.S. and international-based income alternatives. On a fiscal 12 months ’23 annual foundation, income from U.S. home prospects represented 48%, up barely from 47% within the prior 12 months. A notable pattern is our fiscal 12 months ’23 income from the China market decreased, whereas income to our European-based prospects grew in comparison with the prior 12 months. Adjusted gross revenue for fiscal This fall was $90.3 million, or 60.1% of income, primarily flat from the third quarter.

Total adjusted working expense for our fourth fiscal quarter was $53.1 million, consisting of analysis and growth expense of $33.8 million and promoting, normal and administrative expense of $19.3 million. The modest sequential improve in adjusted working expense was primarily pushed by incremental prices from our current acquisitions, partially offset by decrease spending throughout the rest of the MACOM-based enterprise. Depreciation expense for fiscal This fall was $6.3 million and $24 million for fiscal 12 months 2023, primarily flat on an annual foundation. MACOM’s asset base contains quite a lot of manufacturing and analysis and growth tools that we’re repeatedly working to optimize, which has helped to maintain our capital expenditures and the related depreciation expense comparatively steady through the years.

Adjusted working revenue in fiscal This fall was $37.2 million, up barely from $37 million in fiscal Q3. For fiscal 12 months 2023, adjusted working revenue was $189.6 million in comparison with $211 million for fiscal 2022, leading to a 200 foundation level discount in adjusted working margin in comparison with fiscal 2022. For fiscal 12 months 2024, our crew plans to additional combine and optimize our acquisitions, additional executing on incremental synergies and value financial savings whereas operating the complete enterprise with a steady enchancment mindset and dealing to extend our working margin over the course of the 12 months. For fiscal This fall, we had adjusted web curiosity revenue of $4.2 million in comparison with web curiosity revenue of roughly $2.8 million in fiscal Q3. Fiscal 12 months 2023, adjusted web curiosity revenue was $10 million in comparison with an expense of $2.6 million in 2022.

The improve in fiscal 12 months 2023 adjusted web curiosity revenue was pushed primarily by greater yields on our short-term funding balances. Our adjusted revenue tax fee in fiscal This fall was 3% and resulted in an expense of roughly $1.2 million. Our web money tax funds have been roughly $100,000 for the fourth quarter and $2.9 million for fiscal 12 months 2023. We anticipate our adjusted revenue tax fee to stay at 3% for fiscal 12 months 2024. As of September 29, 2023, our deferred tax asset steadiness was $218 million as in comparison with $237 million on the finish of fiscal 2022. We anticipate additional using our deferred tax asset steadiness by way of fiscal 2024 and into fiscal 2025, serving to to maintain our money tax funds comparatively low over these intervals. Fiscal This fall adjusted web revenue elevated to $40.1 million in comparison with $38.5 million in fiscal Q3.

Adjusted earnings per absolutely diluted share was $0.56, using a share depend of 71.8 million shares in comparison with $0.54 of adjusted earnings per share in fiscal Q3. Now transferring on to operational steadiness sheet and money circulation gadgets; our This fall accounts receivable steadiness was $91.3 million down from $105.9 million in fiscal Q3 as a result of improved cargo linearity and robust assortment exercise in the course of the quarter. As a consequence, day gross sales excellent have been 55 days in comparison with 65 days within the prior quarter. Inventories have been $136.3 million at quarter finish, down sequentially from $139 million. Inventory turns have been 1.8 instances up sequentially in This fall from 1.7 instances within the prior quarter. We acknowledge that our stock steadiness is comparatively excessive and related turns proceed to be comparatively low.

However, the standard and mixture of our stock is powerful and continues to help our strategic backlog. Fiscal This fall money circulation from operations was roughly $50.4 million, up $4.5 million sequentially. Capital expenditures totaled $5.8 million in fiscal This fall. Fiscal 2023 annual CapEx of $24.7 million decreased barely from $26.5 million in fiscal 2022. Our operations and amenities groups are very disciplined and do an incredible job managing our capital expenditure price range. As we transfer into fiscal 12 months 2024, we anticipate our capital expenditures to be within the vary of $30 million to $35 million for the total 12 months. Next, transferring on to different steadiness sheet gadgets. Cash, money equivalents and short-term investments for the fourth fiscal quarter have been $514.5 million, down $73.1 million sequentially, pushed by the $121 million paydown of the remaining time period mortgage.

I’m happy to notice that as the tip of our fiscal 12 months 2023, we have been in a web optimistic money place of roughly $25 million after closing two acquisitions and paying off the time period mortgage. Our steadiness sheet and money era stay sound and we proceed to train leverage over our operations and discretionary spending to help MACOM’s goal margins by way of ongoing cyclical stress. In abstract, fiscal 2023 was a strong 12 months for MACOM and I’m happy with our crew’s efficiency and accomplishments and consider the varied, resilient portfolio we’ve constructed will help future development of the enterprise. In addition, we’re working with Wolfspeed to shut our beforehand introduced acquisition of their radio frequency enterprise earlier than the tip of December.

As we’ve beforehand mentioned, we anticipate the RF enterprise to be instantly accretive to MACOM’s non-GAAP earnings and this acquisition shouldn’t be anticipated to alter MACOM’s long-term adjusted gross margin objectives of being above 60%. We additionally anticipate the enterprise to generate sufficient money to supply a 100% return of the acquisition value in round three years. We consider that primarily based on the construction of the transaction, actions to be taken previous to closing, in addition to post-closing synergies, we can enhance the present gross margins of the Wolfspeed’s RF enterprise. That stated, given MACOM’s and Wolfspeed’s RF enterprise’s present income ranges, we anticipate modest gross margin stress instantly following closing, as sure post-closing synergies will take time to understand.

We consider the acquisitions introduced throughout fiscal 2023 might be strategic for MACOM’s capability, functionality, and buyer base for fiscal 12 months 2024 and past. I’ll now flip the dialog again over to Steve.

Steve Ferranti: Thank you, Jack. MACOM expects income in fiscal Q1 ending December 29, 2023 to be within the vary of $149 million to $153 million. Adjusted gross margin is predicted to be within the vary of 59% to 61% and adjusted earnings per share is predicted to be between $0.55 and $0.59 primarily based on 72.2 million absolutely diluted shares. In fiscal Q1, we anticipate industrial and protection and telecom revenues might be down or flat quarter over quarter and knowledge middle revenues might be up 10% quarter-over-quarter. Our steerage doesn’t embrace any contributions from the pending acquisition of Wolfspeed’s RF enterprise, which we anticipate to shut previous to the tip of December. We keep a long-term perspective on executing our technique, and we’re assured that we are able to proceed to enhance our financials and take market share within the months and years forward.

Our stage of engagement with main prospects is bettering, and we’ve a sturdy alternative pipeline. In brief, we consider MACOM might be larger, stronger and extra worthwhile in fiscal 2024. I’d now prefer to ask the operator to take any questions.

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