Earnings Call: Q2 2021

Apr 29, 2021

Welcome to MACOM Second Quarter twenty twenty one Conference Call. This call is being recorded today, 04/29/2021. 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 Strategic Initiatives and Investor Relations. Mr. Ferranti, please go ahead. Thank you, Olivia. Good morning, everyone, and welcome to MACOM's conference call to discuss its second fiscal quarter of twenty twenty one financial results. 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 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 eight ks, which was filed with the SEC today. And with that, I will turn over the call to Steve Daley, President and CEO of MACOM. 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 provide a more in-depth review of our second quarter results for fiscal year twenty twenty one. When Jack is finished, I will provide revenue and earnings guidance for the third quarter of FY21 and then we will be happy to take some questions. Revenue for our second fiscal quarter was $150,600,000 and adjusted EPS was $0.51 per diluted share. Q2 results represent record high adjusted gross margin and adjusted operating margin since MACOM went public nine years ago. I would like to thank and congratulate our dedicated employees for their efforts to make this achievement possible. We remain focused on executing our strategic plan which emphasizes profitability and investing in compelling R and D projects in order to win market share. Before discussing the second quarter in detail, I would like to highlight on March 22, we announced we would use $100,000,000 of cash on hand to pay down a portion of our long term debt. In addition, we announced a convertible notes transaction to restructure a portion of the remaining debt. We believe these two actions reduce our balance sheet risk and create shareholder value by saving the company approximately $11,000,000 in interest payments per year. In a few moments, Jack will review in detail these transactions. Our Q2 revenue by end market was generally as we expected and included industrial and defense at $72,100,000 telecom at $42,300,000 and data center at 36,200,000.0 IND was up 17% sequentially, telecom was down 18% sequentially, and data center was up 2% sequentially. Our book to bill ratio was 1.1 to one and our turns business was approximately 16% of our total revenue. Overall, we are pleased with our Q2 bookings and the gains we are making in the market. This was a solid quarter and we believe we are on plan to meet our near term financial and technical objectives. Now turning to more specifics in our three end markets. Our industrial and defense end market revenue was up in Q2 driven in part by strong demand from a variety of industrial applications and U. S. Defense radar programs. Over the past year, we have implemented new strategies to initiate growth, including increasing cross selling of our technologies into industrial and defense markets, improving our sales channels, refocusing on key accounts, and developing additional standard and custom products which will appeal directly to current and potential customers. These efforts are supporting some of our recent IND growth. Our telecom end market revenue was down in Q2 driven by softness in five gs deployments in China. We anticipate our telecom business will begin to improve when the Chinese carriers begin to launch additional five gs infrastructure. However, today we have limited visibility as to the exact timing. We feel the secular growth opportunity in five gs remains intact as worldwide demand for improved connectivity at higher data rates is growing. We also expect revenue growth from PON, CATV, and SATCOM in the next few quarters primarily driven by strengthening markets, new product introduction, and market share gains. Our data center end market revenue was up slightly in Q2 driven by both domestic and international business. We expect our emerging 400 gs products to perform well in the coming quarters, although this growth may be tempered by flat or reduced 100 gs volumes. There are four technology areas that I would like to highlight today. First, I am pleased to announce we have developed a semiconductor process to support the introduction of a new high voltage capacitor product line branded as MACOM KV caps. Over the past eighteen months, our device and process engineers have been collaborating to produce the industry's highest voltage silicon capacitors. The team has achieved industry leading 1,800 volt standoff performance, which opens up new markets and new opportunities for MACOM. This new process utilizes several one of a kind proprietary And it builds upon our unique knowledge in creating deep trench via structures in very conductive silicon substrates. Our breakthrough here was to successfully develop a high quality dielectric material that can withstand extremely high voltages and then combine it with other proprietary processes to maximize voltage performance. Capacitors are ubiquitous in electronic systems. Our business strategy is to target non commodity systems where customers will pay a premium for a semiconductor solution with superior stability, reliability, chip scale size, and high voltage operation. This includes radar systems, medical systems, automotive, renewable energy, and various industrial applications. We estimate that this product line will expand our SAM by at least $100,000,000 And we believe MACOM KV cap products fit perfectly into our strategy to target performance driven markets with unique high performance discrete devices. Second, I am pleased to report in Q2, we were selected to be a pallet amplifier supplier to a new US defense radar program. In late twenty twenty, we provided our customer with qualification hardware and after a technical review in competitive bidding process, our solution was selected due to its superior performance. This win validates our ability to field best in class RF in microwave, high power amplifier pallet sub assemblies, and at the multi hundred watt power level. The current pilot production volume is limited. However, this program and others like it represent a large growth opportunity. And third, I am pleased to announce we have nearly finished our 25 gs DFB laser Telcordia qualification, which includes the completion of a five thousand hour high temperature operating life test. We are pleased with the results to date and we believe our customers will be satisfied with our products performance and reliability. We are targeting five gs optical infrastructure as a priority and then we will focus on the data center. We expect that a formal product launch and introduction will come in the next few months. And fourth, we are making excellent progress with the new 10 gs PON product development. We have completed development and are sampling laser drivers for 10 gs EPON, XG PON, and XGS PON for both ONU and OLT applications. We have also released photo detectors for 10 gs ONU and OLT applications. We are finalizing the design of our new twelve seventy nanometer high power 10 gs DFE laser for XGS PON. And finally, we continue to make progress on improving the burst mode TIA performance, allowing us to take market share. In June, MACOM will attend the International Microwave Symposium or IMS in Atlanta, Georgia and the Virtual Optical Networks and Communication Conference or OFC. We are excited to host a series of virtual product demonstrations and educational MACOM tech talks for each event to share information on topics which we believe our customers will find valuable. The planned product demonstrations contain some of our newest products and will provide insight into the technology, products, and applications which we believe will drive our future revenue growth. I'll also note that these demonstrations exemplify the breadth of our RF, microwave, analog, and mixed signal, digital, and optical design capabilities. Our IMS demonstrations can be organized into three categories, high performance discretes, RF power, and millimeter wave. Our two discrete component demonstrations include a demo of MACOM's KV CAHPS product line being used in a simulated medical application and a high performance 200 watt force throw switch and driver for military applications. Our four RF power amplifier demonstrations use our MACOM pure carbide GaN on Silicon Carbide technology. We will demo high power GaN showcasing a three kilowatt power level from a single device. We will also demonstrate high efficiency GaN showcasing high efficiency performance between three point one and three point five gigahertz with a 100 watt power amplifier. We will also showcase ultra wide band GAN using our 25 watt pure carbide matched amplifier. And last, we will showcase a five gs massive MIMO GaN solution showcasing 400 megahertz, 110 watt Doherty amplifier performance and a DPD system. And last, two millimeter wave demonstrations including a five gs 28 gigahertz transceiver front end module and a demo which highlights how to power combine two high performance Ka band mimic power amplifiers to achieve over 10 watts of power. At OFC, have multiple demonstrations planned and I'll highlight two today. The first is a demonstration of a two chip analog solution for short reach data center applications. Here we will be demonstrating our new two chip fully analog solution for 204 gs QSFP module and AOC applications. Chip number one is a PAM4 CDR and TIA. And chip number two is a PAM4 CDR and VCSEL driver. The chipset will demonstrate IEEE standard compliant bid error rate, and Open Eye MSA transmit compliance and also be interoperable with an Ethernet switch. The second is a demonstration of our new 50 gs reference design for five gs wireless mid haul applications. This demonstration will feature a complete 50 g PAM4 QSFP 28 reference design using all MACOM components. The demo platform is a 20 kilometer optical link with single mode fiber using thirteen ten nanometer wavelength. Our reference design showcases MACOM's new PRISM 50 d DSP with integrated DML driver, a 26 Gbaud thirteen ten I temp laser, a 26 Gbaud pin photodiode, and a 26 Gbaud PAM4 TIA. I'd next like to highlight that while MACOM has a large and diversified product portfolio, and we continue to invest in many new and existing product lines to drive future growth, we also have a few product lines where we make minimal investment and as such, we expect in time that demand for certain of these product lines will ramp down. Two legacy product lines in our connectivity business are nearing the end of their product life cycles due to protocol upgrades or changes. We expect revenue from these product lines to decline in FY twenty twenty two by approximately $15,000,000 when compared to the levels in FY twenty twenty one. We view these periodic events as normal product life cycle management. We are confident that our growth strategies and new products, including some of the products which I discussed today, will more than offset these anticipated declines. Our key growth driver is compelling new products, which is why we have been prioritizing improving the quality and the pace of new product introductions. In fiscal twenty twenty, we released a record number of new products. And I am pleased to report we are on pace to release at least 15% more new products in fiscal twenty twenty one. Jack will now provide a more detailed review of our financial results. Thank you, Steve, and good morning, everyone. We had record financial performance for our second fiscal quarter ended 04/02/2021, achieving gross margin of 59.2% and adjusted operating margin of 27.8. In addition, we delivered sequential growth in revenue and earnings per share. Before reviewing the details of our Q2 financials, I want to note that we recently completed a few strategic financial transactions initiated during the quarter which I will summarize. First, on March 22, we announced a $100,000,000 principal pay down of our term loans utilizing available short term investments and cash. We view this as an important step toward delevering our balance sheet and one that is consistent with our long term goal of reducing our debt and associated leverage ratios. Our ability to pay down principal on the term loan is the direct result of MACOM's improving financial performance and cash generation over the past eighteen months. Second, we took advantage of historically favorable conditions and entered into a convertible note arrangement which has provided us with $450,000,000 at an interest rate of 0.25%. The convertible notes are due in March 2026 and have a conversion premium of 40% over our March 22 closing stock price, which is a conversion price of $82.12 We issued 400,000,000 of the convertible notes at the end of fiscal March with the additional $50,000,000 greenshoe amount being executed in early fiscal April. We used all the net proceeds from the convert issuance to pay down our term loan principal and there were no penalties associated with prepaying the term loans before their May 2024 due date. With these combined actions, we reduced overall outstanding debt by $100,000,000 We reduced our interest rate on $450,000,000 of debt from approximately 2.4% to 0.25. We expect to save around $11,000,000 in annual interest expense at current rates. And we extended the weighted average maturity date on our debt structure. I'd like to thank the Barclays banking team for their support with our execution of the convertible note transaction. Now on to the Q2 financials. Revenue for the second quarter was $150,600,000 up slightly versus the prior quarter. The sequential improvement in revenue was driven primarily by growth in the industrial and defense end market along with modest improvement in the data center market, which was offset by the anticipated decline in the telecom end market. On a geographic basis, approximately 48% of our Q2 revenue was from domestic customers, sequentially up from 43% in Q1. Revenue from international customers was 52% of our Q2 revenue. As we highlighted on prior earnings calls, the semiconductor industry has seen a broad increase in demand. This is causing higher than normal levels of utilization within some portions of our supply chain. We see this especially at some of our external foundry partners, as well as some of our assembly and test suppliers in Asia. We do not expect this temporary tightening to have a long term impact on our ability to service customers, although in Q3 we expect to have some delayed shipments. These delayed shipments have been factored into our Q3 guidance. Our operations team has excellent relationships with our suppliers and has done an outstanding job to help ensure our goals are met. Adjusted gross profit in fiscal Q2 was $89,200,000 or 59.2% of revenue, up 170 basis points sequentially. Our record gross margin in the quarter is a reflection of our drive toward operational excellence and continuous efficiencies in all aspects of our manufacturing and operations activities. Many of the drivers that have been contributing to gross margin expansion over the last few quarters remain in place today. These include continuous improvement activities associated with supply chain and logistics enhancements, increased manufacturing efficiencies, scrap reduction and optimizing the utilization of our assets. As I have noted in the past, we feel there will be additional opportunities for us to continue to improve our gross margins as we move forward. Total adjusted operating expense was $47,300,000 consisting of R and D expense of $30,000,000 and SG and A expense of $17,300,000 Total operating expenses were roughly flat to fiscal Q1 levels. We continue to carefully balance all of our operating expenses through the management of discretionary spending along with investments in new product development and other growth opportunities. Adjusted operating income in fiscal Q2 was $41,800,000 up from $37,800,000 in fiscal Q1. Adjusted operating margin was 27.8% for fiscal Q2, sequentially up from 25.4% in Q1. As I noted, our second quarter adjusted gross margin and adjusted operating margin represent record levels of profitability for MACOM dating back to our IPO in 2012. More importantly, we expect a combination of top line growth, expanding gross margins and or stable operating expenses to provide the opportunity for continued operating leverage over the remainder of 2021. Depreciation expense for fiscal Q2 was $6,000,000 and adjusted EBITDA was $47,800,000 This contributed to another increase in trailing twelve month adjusted EBITDA, which came in at approximately $169,000,000 as compared to LTM EBITDA of $148,000,000 for fiscal Q1. Adjusted net interest expense for fiscal Q2 was $3,800,000 down $100,000 from fiscal Q1. Our fiscal Q2 net interest expense included only minimal savings from our debt pay down and the new lower interest rate associated with the convertible notes as these transactions occurred late in Q2. Looking ahead, we expect our adjusted net interest expense to decline to around $1,300,000 in Q3 and beyond based on the lower debt level and the lower coupon payment on the convert. Our adjusted income tax rate in fiscal Q2 was 5%, in line with our expectations and resulted in an expense of approximately $1,900,000 Our cash tax payments were $700,000 for Q2. We expect our adjusted income tax rate to remain at 5% for at least the remainder of fiscal twenty twenty one. Fiscal Q2 adjusted net income was $36,100,000 compared to $32,200,000 in fiscal Q1. Adjusted earnings per fully diluted share was $0.51 utilizing a share count of 70,500,000.0 shares compared to $0.46 of adjusted earnings per share in fiscal Q1. Now moving on to the balance sheet and cash flow items. Our Q2 accounts receivable balance was $68,300,000 up from $55,200,000 in Q1. As a result, days sales outstanding were forty one days. Our Q2 accounts receivable balance was up sequentially due to a larger portion of revenue occurring later in the quarter as a result of the timing of scheduled customer delivery dates and Chinese New Year. Our DSO remains in line with industry metrics. Inventories were $84,500,000 at quarter end, down another $4,500,000 sequentially. Inventory turns was 2.9 times during the second fiscal quarter. While we recognize that there is a tightening within the semiconductor supply chain, which may cause fluctuations in our inventory balances, we remain very focused on inventory management. We continue to see opportunities to further improve our inventory metrics going forward while also balancing customer demands and market opportunities. We had healthy cash flow during fiscal Q2. Our Q2 cash flow from operations was approximately $28,000,000 driven by improvements in operating profit offset somewhat by the expected increase in accounts receivable. Cash flow from operations represented around 77% of our adjusted net income. We expect cash flow trends to improve as collections increase. And directionally speaking, over time, we believe cash flow from operations should run at a comparable amount of our adjusted non GAAP net income. Capital expenditures totaled $4,400,000 for fiscal Q2. Free cash flow was $23,500,000 for the second fiscal quarter. As we indicated in prior quarters, we anticipate higher quarterly capital expenditures during the remainder of our fiscal year twenty twenty one based on investments in our R and D and fab infrastructure, inclusive of the 0.14 micron GaN on Silicon Carbide AFRL program, which we discussed last quarter. Cash, cash equivalents and short term investments for the second fiscal quarter were $268,000,000 down $87,000,000 from Q1. The $100,000,000 we utilized to pay down the term loan was offset modestly by cash generated during the quarter. Cash generation will remain a priority for us. We expect our cash and short term investment balances as of the end of this fiscal year to be at a comparable level to the $333,000,000 we had on the balance sheet as of the end of fiscal twenty twenty, even after the $100,000,000 debt repayment. The final area I will discuss in a bit more detail is our Q2 debt balance. We have provided a summary of this Q2 debt activity in the reconciliation section of our earnings release as the accounting for these transactions can be complex. At the end of our December quarter, we had debt of approximately $658,000,000 We paid down our term loans by $100,000,000 In addition, based on the accounting rules currently in place, we were required to bifurcate a portion of the convertible note debt and recorded approximately $72,000,000 as equity. The net result of these and other items for the quarter resulted in a Q2 ending debt balance of $492,000,000 associated with our long term debt arrangements. Our debt structure as of today consists of approximately $120,000,000 remaining on our term loans which mature in 2024 and $450,000,000 including the $50,000,000 green shoe of convertible notes which mature in 2026. In addition, we have approximately $30,000,000 of financing leases. With the improvements in trailing twelve month EBITDA, we exit the quarter with a net leverage ratio of around 2.3 times and gross leverage of 3.5 times. These leverage calculations include the 72,000,000 of convertible notes classified as equity as well as the $30,000,000 of financing leases. We believe that we remain on course for solid financial performance in fiscal twenty twenty one. I will now turn the discussion back over to Steve. Thank you, Jack. MACOM expects revenue in Q3 ending 07/02/2021 to be in the range of $150,000,000 to $154,000,000 Adjusted gross margin is expected to be in the range of 58% to 60%. And adjusted earnings per share is expected to be between $0.52 and $0.56 based on 71,000,000 fully diluted shares. In Q3, we expect telecom to be up slightly, industrial and defense revenues to be flat and data center to be down slightly. As I have noted, we maintain a long term perspective on executing our strategy. We are confident we can continue to improve our financials and take market share in the months and years ahead. Before opening up the line to your questions, I would like to make a couple of final comments. First, we have been encouraged by recent proposals from the federal government to make investments in The US semiconductor manufacturing industry. We are very pleased to see recognition of the vital and strategic role that semiconductors play in America's future. With over seventy years of history and two semiconductor fabs operating in The United States, we believe MACOM could be a model candidate to benefit from these programs and we will actively explore opportunities for funding. Second, over the last several months we have undertaken an in-depth company wide review of our environmental, social, and corporate governance or ESG practices with the goal of enhancing our current policies and programs to drive continuous improvement in these areas. This initiative has the support of the Board of Directors. As a first step, we have established an executive level ESG task force to refine our policies, enhance our reporting and programs, and target best practices in key areas of focus. This will be a multi year process and we believe these efforts will ultimately help create value for our stockholders, employees, and other constituencies. Finally, on a related note, I would like to highlight that last month we announced the addition of John Ritchie as a new independent member to our Board of Directors who serves on the Audit and Compensation Committees. John brings financial and business software and hardware and technology expertise to the board and we look forward to working with him as we move ahead. I would now like to ask our operator to take any questions. Thank And our first question coming from the line of Vivek Arya with Bank of America. Thanks for taking my question. Steve, on the telecom side, if I go back to kind of the middle of last year when China was spending, you were doing something in the mid-50s million dollars quarterly. Is that what recovery looks like when China resumes spending? Because your telecom business is almost onethree of its highs. And if China does want to resume spending and put the 600,000 base stations, I assume that you'll start to get some visibility around that. So give us some color on what the visibility is in resumption of these deployments in China? And when recovery does come, should we see a return back to those kind of prior levels or are there other puts and takes? Thank you, Vivek, for the question. So yes, we do think that we will achieve those prior highs. And we actually believe we will exceed those because for this cycle we are in a stronger product position. A lot of the growth we saw last year was front haul related with high performance analog chips. And on the next cycle, will start sometime later this year or even into our next fiscal year, we would expect to have, additional RF components qualified as well as lasers perhaps qualified in certain applications. So generally speaking, we would expect to see new highs achieved in the telecom end market based on layering on those different product groups that I just mentioned. In terms of the timing, as I pointed out in the script, it's very difficult for us to estimate when that new cycle will begin. So for that reason, we have not really included significant five gs contribution in this fiscal quarter. And as we look into Q4, we're also we'll certainly take a conservative view of that unless something materially changes. The good news is it moves a lot of that growth revenue into next year and it could really set us up for a very strong fiscal year 2022. And I will also add that these delays that we're seeing in China, at some level are actually working to our advantage as we complete the qualifications of some of our new product lines. We have more time to engage customers. One final point on five gs, we are not just focused on the China market. This is a global market and we expect in the next year to two years to be a significant contributor to European and US deployments. Got it. And then on the datacom side, I know that's a segment where you have had quite a bit of movement and restructuring and so forth. When should we start to see that business really start to take advantage of all the investments that the hyperscalers are making? When do you see that segment start to really grow in line with some of the other semiconductor companies that are benefiting from cloud investments? Yes. So as you know, the data center segment is one of our smaller end market segments. And it's really a mix of some legacy product lines that I highlighted on the call, earlier, as well as generally analog solutions for short reach applications. And we still remain a dominant, supplier into that market. Those are primarily CWDM4 short reach 100 gs applications. We expect that business over the long term to be strong. We are seeing in this moment, I would say, level run rates or flat production levels. And so we think in the near term the growth will come actually from our new 400 gs products, which include four channel, 56 gigabaud drivers, four channel linear TIAs. And these products can be used with other companies' DSPs to service the 400 gs market. And then we are working on other product categories for the data center including active copper cable, analog solutions and equalizer solutions. So I set the expectation of consistent growth, but not, hyper growth, let's say. Or, you know, we have a limited product set for that end market. And over the long term, we would expect both industrial and defense and telecom to outgrow a data center. Our next question coming from the line of Tom O'Malley with Barclays. Your line is open. Good morning, guys, and thanks for taking my questions. Jack, I think my first one centers around some of your commentary about some of the pushouts in orders. Could you just talk about where you're seeing the tightness in the supply chain? Is that on the supplier side or is that really on back end and test? And could you quantify the size of what got pushed out? And will you be seeing that revenue kind of come in, in the fourth quarter? Thanks, Tom. Yes, as I had highlighted, we are experiencing some of those supplier tightness items that I did refer to. And some of that's coming in from a substrate standpoint, but there is some assembly and test items that are out there. So our operations team has been doing a fantastic job making sure we're managing through this. So it's a bit of business as usual in that our operations team is generally working through these issues in the ordinary course, but paying special attention to it now. In terms of quantification it may be upwards of about 5,000,000 that is pushed out I would say. But we are working to make sure we manage that. It's and that is factored into our guide. Great. That's really helpful. And then my second one is really for Steve. Steve, you mentioned some of the moving pieces of the data center. You mentioned the 400 gs products doing a bit better. And then you made a comment about some weaker 100 gs. You guys prior had kind of expected really strong fiscal year twenty one growth, almost 20%. Can you talk about what's happened since the last call in the 100 gs market that's made you kind of a bit more cautious there? Yeah. We've seen our lead customer level off their production run rates. And so that's sort of a directional change for us. We still do think that the data center will be a double digit growth year over year. So but the primary driver for our changes that the run rates have slowed a bit. And although as we are gaining market share in international we markets, especially for 25 gs and 100 gs applications, those wins have not yet offset, some of the, you know, what we're seeing in on the domestic side. And our next question coming from the line of Harsh Kumar with Piper Sandler. Your line is open. Yes. Hey, guys. First of all, congratulations. Very impressive results, among supply tightness. So Steve or Jack, your gross margin was super impressive. Is this the new base that we should be working off of as we look at your business going forward? That's my question number one. I have another one. So maybe I'll I'll make a few comments, and then Jack can follow-up on that question. So, we continue to make improvements in the execution of our business. And as Jack highlighted, a lot of that work is being done on the operational side. We are also adding higher value products to the portfolio and that will over the long term, support improvements in gross margin. For example, we talked about the new product technology for high power and high voltage capacitors. We're calling them KV caps. And this is a really unique type of a product line where we can go to market with something very different and command premium pricing. And so this is the type of thing that will ultimately allow us to breach the 60% gross margin levels and then grow from there. So we'd like to think that we can continuously do better. As you know, as you continue to improve the gross margins, it gets harder. But based on what we're seeing based on fixed, based on the portfolio getting stronger from a technology point of view, we think we can continue to improve our performance. Jack, do you want to add to that? I think you did a great job covering it. We are very pleased with the improvement that we've seen over the past quarter going up 170 basis points. As Steve noted, it does become a bit more challenging. We do take a longer term view to many of the improvement initiatives that we have and to some extent come back around to some of the same initiatives to see if we can further improve them. It does become a bit more challenging as we go forward. Thank you, guys. Very helpful. And for my follow-up, maybe a question for Steve. Steve, you touched upon this with what you're displaying at OFC and the International Symposium for Microwave Symposium. But could you maybe give us an update on the timing of your laser opportunity for commercialization, also silicon photonics? When do you actually expect revenues? And then secondly, as a part of that question, when I look at the laser industry, I see guys in the laser business having sort of subpar margins. You're a sort of a premium company with 60 close to, call it, high 50s gross margin. How does that product fit into your grand plan for gross margin expansion? So regarding the timing of revenue for the laser portfolio, and I suspect you're referring specifically 25 gs FP and DFB lasers because those are the newest part of the portfolio. And, well, because as you know, we still are a main supplier to, the GPON market with some lower data rate lasers. We announced the new platform for our DFB product line back in September of twenty nineteen. And since then, we've been working with customers to introduce the product, get them familiar with the performance. And in parallel with that running a qualification which is about a six month process. As I highlighted in my script, we are just finishing up, that long term reliability test. It will be done pretty much at the May. And so we would expect, laser revenue from these new product categories, as early as the Q4 time period, but, most likely Q1 of our FY 2022 in that timeframe. And just to level set, we believe it will start at a low modest level and it will grow over time. I'll highlight that we do have some significant advantages when we go to market. As I've talked about before, we've created a platform which allows us to, generate multiple wavelengths relatively easily, due to the platform and the design. And your question about other companies having lower gross margins, with their laser portfolios, I'd just like to highlight that we are, I believe the only company today in the industry that is producing four inch indium phosphide lasers. And the way we manufacture these lasers allows us to do on wafer optical testing without cleaving the wafers and doing it with, let's say, a more manual and more costly test method. So we believe we have a cost advantage because of the size of the wafer. And we have a cost advantage because of the methodology we employ on test. And I'll add to that, we are going after higher data rates. And when we enter specifically the data center market, which we hope to enter next year, next fiscal year, we will do so with premium product that has high reliability that can scale quickly. And we're confident we can be successful there. Now with that said, it is a competitive market. We believe that the laser portfolio will be accretive to our existing margins. So, you know, we'll have to wait and see how that works out. But that's our current thinking. The other thing you asked about, of course, was silicon photonics. So we continue to do design work, with that portion of the portfolio. Our primary focus is 400 gs DR4 and DR1 PIX. These are the discrete silicon photonic devices without the lasers attached. And you will not see any revenue from silicon photonics this year, this fiscal year for MACOM. And, it's unclear as to the timing, as to whether it will be, you know, first half or second half of next year. I can tell you that we've had a few, challenges in the last two to three months regarding process control at one of our key suppliers on this technology. And that is delaying a little bit some of the work that we're doing there. But just for modeling purposes, you should expect silicon photonic revenues sometime in FY twenty twenty two, most likely in the back half. And our next question coming from the line of Quinn Bolton with Needham and Company. Your line is open. Hey guys, congratulations on the record margins. I wanted to ask Steve you mentioned in the data center category $15,000,000 products going end of life next year. Can you give us a little bit more detail on what those legacy products are? And as you look at the data center business with sort of the flattening outlook for 100 gig CWDM4, do you think that that business can continue to grow in fiscal 'twenty two given the headwind from those legacy products? Thank you for the question. So the $15,000,000 decline would I guess you could organize that in sort of three different product areas. The first is we have integrated OTN devices that service 10 gs and 40 gs applications. And these are used basically in, transport network core layers. And these products were introduced by AMCC prior to MACOM acquiring AMCC. They were introduced in the 02/2009 and 2012 timeframe. And as these networks have moved to higher data rates, the need for the 10 gs and the 40 gs product is falling off. So that would be the first category that we would expect to see the decline in. The second is we have some older Ethernet PHY products in production. These are generally used in enterprise switches that operate at 10 gs. These products were introduced in the 02/2006 to 02/2007 timeframe. And again, we think that next year will most likely be the last year that we'll see revenues on those products. And then the third is we have a category we call PowerPC. This is at least a ten year old product line that we actually end of lifed over a year ago, mainly because the process was going obsolete. These are basically general purpose processors that would be used in communication systems, defense systems, in some cases medical systems. And, you know, the industry has moved really away from these type of processors more to ARM processors. So we believe product set will also ramp down next year. And we highlight this today because recently MACOM's management went through a review of our fiscal year twenty two projections. And these items came up as notable declines. And we wanted to put that information out there and share it with everybody. In terms of your question about 100 gs CWDM4 growing next year, I think the short answer is yes. We believe it will grow even though our lead customer today is leveling off their productions. We continue to win market share, with the products that we're launching today. And I'll highlight, by the way, as I talked about for one of the OFC demos, where we're demoing a 200 gs and 400 gs chipset, is meeting the, OpenEye analog, protocol. This is the first time we're putting out for this data rate a VCSEL and driver combo chip, a VCSEL driver and CDR combo chip, as well as a TIA and CDR driver, combo chip. And that's a first. So while we have had limited success at 200 gs, I can tell you that our combo chips, again, the VCSEL driver and CDR, and the TIA and CDR, just to be clear, those are new products to the market. And we think that, we will be well received with those products. In terms of the sort of our core CWDM4 business, we are, as I said, continuing to push new versions of existing designs, whether we're going from packaged devices to bumped devices and shrinking designs down to make sure that we are fielding the most competitive solution. And we're doing a lot of great work there. So we are still, all in on CWDM4 over the next few years. We think the volumes, generally speaking, will continue to grow. Great. Then my follow-up, Steve, is the new KV CAHPS capability, how long will that take to sort of sample and qualify at customers? When would you expect to see ramp from the new KV cap product line? So the good news here is the design in process for the capacitor should be relatively quick. And we have a very large built in customer base, right? So we have thousands of customers that today buy our high voltage diodes. They buy some of our, high power amplifiers. And we know they buy capacitors. We were talking to one company, that's in the medical industry and they're purchasing over $20,000,000 of high voltage capacitors a year. And that's just one company. So, our sales force is being wound up right now to bring these products to market. We believe we have a lot of existing accounts that will be interested in the product. And so we would expect some modest contributions starting next fiscal year. Of course, there's a design cycle that needs to take place. We'll offer these as bare die as packaged parts as well as screened for military and space. So it's a great product line. We believe it should be relatively easy to sell given it's so unique. Most capacitors that are at the 1,000 volt level and above are typically ceramic capacitors which are larger and arguably less reliable. Or they're large packaged capacitors using, you know, slightly different technologies. So what's unique here is achieving really 1,000 volt operation at the chip level. And that really speaks to the technology that we have at the Lowell facility here in Massachusetts in our ability to do, I'll say, complex etching and trenching of vias to allow us to achieve these voltages. So modest contribution next year. The team is excited about the launch. And, we'll have to wait and see ultimately what generate what revenue we generate next year. But it certainly, it will be a fast selling cycle. Our next question coming from the line of C. J. Muse with Evercore. Your line is open. Yes, good morning. Thank you for taking the question. I guess a little bit of a follow-up to the last question, question for you, Steve. I guess two part. On the industrial side, can you speak to the sustainability of the strength that you're seeing into September and beyond? And as part of that, can you update us on where you stand on the cross selling aspect of bringing incremental, I guess, tools to the portfolio and driving incremental growth. Would love to get an update there. Sure. So the IND, as everybody knows, has really been range bound in revenue over the last three to four years between 40 and $50,000,000. And what you've seen here in the last few quarters is some significant growth. Now we're above $70,000,000 A lot of that is being driven by the things I talked about in the script, including cross selling, including winning market share. I mentioned the pallet, that we recently won, a multi hundred watt power amplifier for a radar system. And so the certainly, having sequential growth of 17%, I would argue that's probably not sustainable. And we wouldn't don't expect that, of course. But I think over the long term, you will start to see that part of our business grow. It's we have a very diverse customer base. It's not only defense. It's also industrial. We include automotive and industrial. And recently, we've seen an uptick in our automotive business, in our sensor business. In terms of the cross selling, that work continues. And I can tell you we're starting to see requirements for RF over fiber. We're starting to introduce our optical design capability to defense contractors for the first time. And we're bringing more high power interesting products to the defense industry. And we're getting a lot of accolades and a lot, you know, a very warm welcome there. So the cross selling continues. And by the way, it's not just optical into defense. It's also analog and mixed signal into industrial markets. Our HPA, our High Performance Analog team, is historically been focused on telecom is now doing custom analog designs for defense contractors and industrial companies, whether they're driver circuits, whether they're complex switching networks or regulators. So the team is fully embracing the concept of diversifying their businesses their revenue streams. So that work will continue. Generally speaking, we do have a long term view at our business. And so some of these things will take time to turn into revenue, but I think we're doing all the right things. Very helpful. And then, Jack, a follow-up to supply constraint question earlier from Tommy. You talked about $5,000,000 push out from June. Do you expect the supply constraints to be fixed into the second half of the year? Or is that an ongoing headwind that we should be thinking about through the calendar year? Yes. I think it's something that we're paying close attention to. And at this stage, we kind of view it as a onetime item that we're going to be working through, but we will continue to monitor as we go forward. Thank you. Our next question coming from the line of Therese Sandberg with Stifel. Your line is open. Yes. Thank you and congrats on the record margins. I had two clarification questions. First of all, Steve, when you talked about five gs China, were you suggesting that there's been delays? Or are you suggesting there's just very low visibility as as when those deployments are gonna start or restart? So we've been expecting, a new round of tenders to emerge in, you know, basically we you know, six months ago we were expecting that new, tenders to emerge in the April timeframe and that hasn't happened. And now there's talk about the China operators, starting sort of a new cycle of bids possibly in the June timeframe in and around the World Telecom Day, event. So, we are our eyes are on the new tenders. Now, if we look at the number of five gs base stations deployed in calendar q one of twenty one, it was about 48,000 base stations. So there still continues to be five g deployments today, but those deployments are based on last year's tenders and last year's contracts. So we're focused on the new tender cycle. And from our point of view, event hasn't started yet. Thanks for that clarification. And then on the other one, which is a little bit more longer term. So you talked about how in telecom, obviously, you're going to have more opportunities, right, given new products. Could you maybe talk about that in data center, too? Because there's a lot of puts and takes here, but it does sound like an aggregate, especially with the lasers being qualified for data center that over time, you would have more opportunities in data center as well, even though it's the smaller business unit. Well, that's right. And I and I I I didn't mean to sort of underserved our our focus on the data center, of course. So the growth drivers for us are really organized into a, you know, different So, of course, we have the hundred g analog solutions, which are mostly today CWDM4, NRZ type applications. Then you layer on top of that 204 g analog solutions for PAM4. And I talked about some of the new combo chips that we've launched for that. You have 400 gs EML drivers, and and, 400 gs linear TIAs. And these would be for, Doctor four type applications. We have, as you know, a PAM4 DSP in production today. It's 100 gs PAM4 DSP that started production about a quarter ago, maybe two quarters ago. And those are all of our existing products today running in production. And to the extent that we can win market share, that those base product lines will grow. And that is our expectation. When you add on top of that some of the new technologies, you would add of course the lasers. And we plan on targeting the data center with our laser technology, at the beginning of our next fiscal year. Of course, you can add photo detectors as well as the data rates go higher. We have a unique technology coming from our Ann Arbor fab for very high speed pin detectors, which would be used inside the data center. And then we have new technologies that we're developing including active copper cable, which are allowing us to not not only service the AOC market, but also the copper market. And we have some very exciting technology there. And then sort of last and maybe furthest out is the silicon photonics that I talked about earlier where, we're focusing on first four hundred gs applications. So we do have a very large suite and any one of those product areas could drive significant growth for us. Of course, we're at a run rate right now of mid $30,000,000 run rate. So certainly, one laser design win, could be millions and millions of dollars inside the data center. And so, we're very focused on making sure that all of those different product lines that I talked about will be successful. Our next question coming from the line of Karl Ackerman with Cowen. Your line is open. Yes, thank you. Two questions, if I may. First one is more of a housekeeping question, but which is on gross margins. I understand that there are rising substrate and shipping costs as evidenced by many of your peers. So I'd appreciate it if you could walk through what supports your systematic improvement in gross margins for the June despite flattish revenue, in particular, such as new product mix versus price? And I have a follow-up. Sure. Maybe again, I'll try to help answer that and then Jack can step in. So a vast majority of the improvements are coming from operational execution, yield improvement, focusing on bringing out costs along our manufacturing production lines. And that has been and will continue to be a big effort and we still believe there's ample opportunity to improve that. And then second, there's a mix component depending on the product lines of course and depending on the different end markets. From our point of view, while we achieved a nine year record high, if you look at our gross margins and compare them to a high performance analog and mixed signal company that's a multi billion dollar company, These companies have margins that are in the high 60s and low 70s. And that's what we aspire to achieve. And that will take time. And it will happen when we begin to increase the number of unique products to the market and when we can command premium pricing. And that's a long term effort. And so doing things that other people can't do like 1,000 volt capacitors like 0.14 micron GaN on Silicon Carbide, doing 400 gs high end analog solutions to knock out a DSP. These are things that will create value for the company. And that will certainly be our focus. And I'll highlight that we are very focused on the industrial and defense markets. And as I mentioned earlier, this is an area for MACOM that's been range bound for years. And we are breaking through that now. And when you move into that space, you generally see less commodity, less commoditization, let's say, of the platforms. So you're able to command stronger pricing. And so whether it's selling products to a satellite manufacturer or a defense contractor, or focusing on industrial or even medical equipment. These are markets that demand performance and that's going to continue to be a focus for the company. Jack, did you want to add to that? No, I think you did a really good job covering that. But we are seeing margin improvements across many of the product lines that we do serve. So it is fairly broad based and not just limited to the IND items that Steve was referring to. Great. Thank you for that. Maybe for Steve, for my follow-up. I was hoping you could describe the level of orders you are seeing within your RF, and I guess, telecom business more broadly? I ask because some of your peers across the e comms supply chain have spoken about a push out in China center activity and weaker massive MIMO production plans, which you touched on a little bit in your prepared remarks. At the same time, one of your peers recently spoke about improving 10 gig PON activity. So I'd love to hear your thoughts on, I guess, why there's a pause in tenders and whether the investments in PON are percolating into front haul where you should benefit from the recently introduced front haul lasers? Thank you. Sure. Well, just a few comments. MACOM has a very unique portfolio. There's really no company in the industry that is a direct peer that represents our product portfolio. So we are in very different markets. And most of our peers are more focused, let's say, in one technology set. So I think we have a very unique portfolio where we have RF microwave, high performance analog, and optical. And so I think we're in a little bit of a unique position, which makes it difficult to do that one to one peer comparison. Regarding telecom, actually this past quarter it was our strongest booking in new order end market segment. It had the highest level of bookings. And that's a bit of obviously a leading indicator of things to come. And that was driven by a broad business, broad drivers, not just five gs. We are seeing strength in cable infrastructure. We are seeing strength in SATCOM. And so we think that we're gaining market share there. In terms of your question about why the pause in the tenders, I really can't answer that. And then as it relates to 10 gs PON, I can say that, the growth for MACOM will come from new product introductions there. We do believe year over year from FY 2021 to FY 2020, we will have very strong year over year growth and that will be even better when we look FY 2022 to FY 2021. We are just moving some of the latest products into the market. I mentioned, we do have a burst mode TIA, but we have a better one coming that we think will allow us to gain market share. And then the one question you had about the 10 gs laser, that laser is not ready for production yet. It will be ready for production beginning of next fiscal year. And our next question coming from the line of Ruben Roy with Westpark Capital. Your line is open. Thank you for taking my question. Steve, I think you just touched on this but maybe just talk about it just a little bit more. Based on your guidance for the June and assuming we don't see a big fall off in the September, you're on track to hit that double digit growth that you guys had targeted as a soft target for the fiscal year. And you just talked about 2022 possibly being a bigger growth year than 2021. So I just wanted to talk about that a little bit. In terms of 2022, it sounds like you have a couple of drivers coming up, potentially five gs coming back in China, new products ramping, including the 25 gs lasers, what you're doing with cross selling, etcetera. But when you look at all of that in aggregate, can you give us an idea of how you're thinking about each of those items as, you know, relative to each other as driving the growth, you know, as you look into next year, which are kind of the biggest growth drivers that you think, you know, help 'twenty two maybe grow faster than 'twenty one? And, you know, if I'm on track thinking about, that the right way? Sure. And just to clarify, I'm not sure I did say that FY 2022 will outpace FY 2021. May have been referring specifically to a product line or a product set. So we have not given guidance and have not commented on what we expect our FY twenty twenty two growth level to be. That's work we're currently doing today. And it's just too early to talk about how we think FY twenty twenty two might shape up. Obviously, what we talk about is our growth will come from new products. And that's why the heavy emphasis on talking about the different things that we're doing. And to the extent that five gs kicks in and we have success with, not only on the power side, but also on the optical side and some of our new front end modules that we're gaining traction You know, we do think it will be a very, or has the potential to be a very good year. But I wouldn't necessarily want to call out any one of these product categories. The way organize our business, we have six engineering silos, let's say. Each one is very focused on, growing their individual businesses. Our largest, one of our largest segments is HPA and diodes. And so we would expect those organizations to have more modest growth, let's say, to our smaller units such as RF power. Our RF power business has tremendous potential. And our Lightwave organization has tremendous growth potential. And these are some of our smaller business units, let's say. So in aggregate, we'll have to see how it works out. And that's certainly work that we'll be doing between now and the end of our fiscal year. Okay. Thanks for that, Steve. And just a quick follow-up for Jack. Jack, you mentioned inventory on your balance sheet. Just wondering if you have any comments on channel inventory by some of your end markets. Yes, that's something we're very proud of the inventory improvements we've made on our balance sheet over the past eighteen months or so. We pay special attention to that to make sure we've got the right levels of inventory and we're working very closely with our customers to ensure we've got the right inventory to meet their requirements. And from a channel perspective we continue to monitor that. We believe that the inventory levels there remain at fairly healthy levels, which I think bodes well for us as we go forward. Our final question coming from the line of Harlan Sur with JPMorgan. Your line is open. Hi. Good morning. Great job on the quarterly execution and strong results, especially on the margin front. The US defense spending budget is quite strong this year. It was strong last year. It looks like the proposals for next year are for spending levels to sustain at these current strong levels. And I and I believe the visibility here is very good because, obviously, these programs are very strategic in nature. So, does the team see further growth in your defense business next year? And I know you can't disclose specific programs, but the strength you are seeing in defense are centered around what areas? Is it radar? Is it weapon systems, Milcom, UAVs, ground based, airborne? Any color here would be great. Sure. And we view our defense business as so small relative to the overall budget and growth opportunity. And as I highlighted, it's an area of focus for the company. Part of our growth, I have to say will come from new account penetration. And we do not have as strong relations with, the major US Defense Contractors as we should. And so we're still working on that, which is a very fundamental issue that we're making great progress resolving and fixing. And when we do that, we think we'll start to see for the first time opportunities that we just hadn't seen before. So the team is doing a great job. Our US sales force is absolutely phenomenal. And they continue to impress Jack and I as to the type of opportunities and the quality of opportunities that they're digging out. The other thing I'll highlight is we're not a subsystem house. We are focused on component level or high power amplifier sub assembly type applications. And we will only go after, a subsystem if it's if we believe we have tremendous leverage from the chip point of view to leverage into the overall subsystem. Your question about what are the main applications. So most of our defense business revolves around RF and microwave components. So it's primarily discrete diodes, RF and microwave mimics, power devices. And these are typically used in, as you highlighted, radar, Milcom, ground based radar, shipborne radar. We have, content in numerous missile applications, and that's growing. And those are generally high volume applications as well. So the good news is we have a very diversified, business within the defense area and it's just getting more diversified. And the fact that we're now letting a lot of radar houses know that not only do we have best in class GaN on silicon carbide, but we're willing to build a very high power amplifier for you because we have the expertise to do it, just makes the growth opportunity even that much more exciting. So I think we're doing all the right things there. As you know, we highlighted on our last call the new relationship with the Air Force Research Labs, to bring in some very high frequency, high power GaN on Silicon Carbide to our Lowell manufacturing facility. And we believe this process will have some of the best power efficiency, numbers in the industry. So, we are very focused on the defense industry and we do expect to win more market share. Great. And then maybe switching to a more product new product perspective. Last call you guys talked about potential opportunity for active copper cabling in the data center for short reach. You mentioned it today as well. Obviously, it's more economical versus active op optical cabling, and we're hearing more and more from some of your cloud data center architects and customers talking about ACC. Can you give us a sense in terms of what high performance analog solutions you're developing for this new opportunity and maybe timing of a product introduction? So, we are engaged with the major customers that would want to build an active copper cable, and we are following their, road maps. These so I don't necessarily want to get into the specific, data rates or construct per se. But we are one year into this. And, we would expect that if we're successful with some of our lead customers that it will provide, some, new production, next fiscal year. So, it is very interesting area. We are very excited about the volumes. These are generally, you know, very high volume applications. And we think we can solve problems that they haven't had other vendors solve. So we're bringing a new capability and maybe a better capability, design capability to solve the problems. But generally speaking, these are higher data rates. And I probably shouldn't go into any more detail until we make formal announcements. And I'm showing no further questions at this time. I would like to turn the call back over to Steve Daley for any closing remarks. Thank you. In closing, would like to acknowledge our customers, our suppliers, and our hardworking employees for making all these results possible. Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.