TTM Technologies with us this afternoon. TTM is one of the, or maybe the, or top largest, printed circuit board suppliers and also in, military and defense electronics. Representing the company is the long-term CEO, Tom Edman. Welcome, Tom.
Thank you, Matt.
This is just a Q&A format. I did ask Tom to prepare some opening comments just about the company. Tom, you've been at TTM for more than 10 years now, right?
Yep.
The company's gone through pretty significant transformation in terms of end markets, acquisitions, margin targets, et cetera. So could you walk us through that a little bit, and-
Sure.
How you're positioned today?
Sure, sure. Yeah, so if you look at the company at TTM Technologies today, we're about $2.2 billion in revenue, at least last year we were. About 16,000 employees, 24 facilities globally. Really what Matt was addressing is how we got here in terms of the company content. So today, we manufacture printed circuit boards. That's for both commercial and aerospace and defense markets. But what we've done is, over the last 10 years, added a significant non-printed circuit board content to our defense business, in particular.
What we were doing there deliberately is adding capability that was connected to the printed circuit board that gave us additional content and engineering capability to allow the company to position ourselves primarily in radar and RF programs in order to bring additional capability value to what we supplied to our customers. We also increased our defense market from about 15% of our overall revenue 10 years ago to today we're at 45%-46%. So approaching 50% of our revenue in that area. So that's been the primary move. In the commercial side of our business, we've continued to build on our footprint capabilities over the years, most recently adding capability in Penang, Malaysia.
We also have trimmed our commercial footprint, primarily selling our mobility business back in 2020. So our consumer exposure, we reduced that. We also reduced and shut down a number of our assembly facilities because there we really weren't at the kind of scale that was required to be successful in that business. So, deliberately moving to improve our margins, add additional value to what we brought to our customer base over that ten-year span.
Okay, great. So let's start with some of your end markets. Maybe start with military and aerospace markets, which you said is 45% or so of revenue, and I believe half of that is PCBs, and half of that is basically electronic, finished electronic systems?
That's right.
Right. Okay, and break that down, commercial, meaning a commercial aerospace versus defense.
Sure. So yeah, aerospace and defense business as a whole, about 94% is defense, about 6% commercial aerospace. And to break it down a little bit more, about 7% of that revenue, overall revenue, is in space. And so the balance really in defense programs, if you look at that aerospace and defense business as a whole, about half is in radar. So half of that aerospace and defense business in radar, the half in the balance of a pretty widespread of programs.
Yep. And you acquired Telephonics almost two years ago now, right?
That's right.
Yeah.
That's right.
And since that acquisition, has that... I guess the question is, for Telephonics, has that been accretive in terms of revenue synergies, cost synergies, or other things, from both your perspective, but also Telephonics?
Right. Right, yeah. So it's an interesting portfolio. I think if you look at again, about a portfolio from a product perspective, about 50% in printed circuit boards, 50% in RF, microwave, microelectronics, which came from our Anaren acquisition in 2018. And then plus the Telephonics acquisition, which brought us mission systems capability. About half of that Telephonics business was in radar, so we brought in again additional mission systems capability and radar. So the way to think about it is, if you're a customer on the maritime side of our business, you might have a platform that's a helicopter platform for maritime applications. You would probably look at TTM to supply you with a complete radar.
And that radar, which would be today a standard radar, but tomorrow we're investing in AESA capability there, so an active electronically scanned array radar. That platform would include a number of TTM parts. So whether it might be our printed circuit boards, it might be our assemblies going into that platform, and then we would supply the completed radar to the customer. Okay? That's one end of the spectrum. If you're in a land-based radar program, as an example, LRDR, or AMDR or even the F-35, in that case, you would be looking at your own radar needs for active electronically scanned array, or AESA radar. And in that case, TTM would be approaching you as a supplier of modules, RF modules.
So as you released that specification for AESA performance, you'd be releasing it generally to your own internal team, and you would release it to a TTM. We would be designing to that specification. We would be simulating the RF performance, and if we win that program, right, we again would be sole sourced on that program, and that program may contain, again, our own subassemblies and assemblies, but also our own printed circuit boards. So we would be supplying content into that program, that program for that module, and that module would then be supplied from TTM into that customer program. Now, if you move outside of radar and you're a customer, and you're, say, working on a missile system, you may have radar requirements.
In that case, you're probably not gonna come to us for a module. You may come to us for a printed circuit board. So, in that case, you may have a print that you need to have fulfilled. You may source from TTM, plus your own internal fab, or perhaps from one of our competitors, or ideally from two TTM facilities. But you'll probably have two sources of supply. And in that case, again, TTM would be supplying the printed circuit board into that program. Just wanted to give you a feel for the span of the work that we do in this defense area. So back to your question, the Telephonics acquisition, in particular, about two years ago, that we acquired Telephonics, we've done very well in terms of cost synergies.
That's probably the least important aspect of this acquisition. What we've really been working on is the transition to AESA radar. And that's that was a program that Telephonics had started, it was called MOSAIC. They were in the initial phases of development for that program. With the combination of TTM, we've been adding our own support from an engineering standpoint to drive that program more quickly out into the marketplace, and we're on schedule at this point for releasing that program. Hopefully, able to bring in some initial wins in the next year to 18 months here on a critical program.
So, it's that driving for engineering, engineering content in radar and in the communication systems that was really the goal for us with Telephonics, and we're making good progress on that. Takes longer, of course, being defense involvement than a commercial acquisition would. But we're making good progress.
Yeah, and that's right. But one difference also is that these product cycles are much longer.
Much longer.
Yeah.
Yeah.
Like, you're talking several years, right?
Yeah. Well, so in a helicopter platform, you're talking about a minimum of 15 years, usually, usually longer. We have programs that we're still supporting that are over 30 years old, and we're still supporting radar needs there.
Who's the primary competition for the electronic systems at Telephonics? Is that just the large defense contractors?
Fortunately not-
Okay.
... because, they also are important customers, in most cases-
Oh, that's right, yeah.
Yeah. In most cases, it's smaller competitors, like Hensoldt out of Germany, is a competitor, DRS in some programs. BAE—we compete with BAE in a few programs, as well. Also, you know, by the way, of course, in the world of defense, they can be both suppliers and customers to us, as well.
What's the breakdown of your customers and defense, U.S. versus foreign companies, countries?
So, vast majority is U.S. We do have some programs that go into Europe, some that go into India, as well. But you're looking at over 90% of our defense work is U.S. focused.
Okay. Okay, great. I want to turn to your data center computing segment, which was 21% of sales, and the big driver there has been data center, AI, cloud. You've got hyperscale customers. Could you talk about what you do in terms of printed circuit boards for those customers and the opportunities? Yeah.
Sure. Yeah, so in this area, we supply high layer count printed circuit boards, and they go into what we call data center computing. That's the end market classification. And over two-thirds of that work goes into actual data center, predominantly hyperscale data center requirements. And the balance goes into semiconductor requirements for test and burn-in boards. So to focus on the data center side, if you look at data center right now, the largest driver, of course, is artificial intelligence requirements. We are servicing a number of customers, several customers in that space.
These are high layer count boards, high layer count boards, though, with, with particular requirements as it relates to reliability and it, as it relates to some of the, the, testing and, requirements as well. So, boards that we, that we continue to, to build, in a, facility in, China, Dongguan, China. We are also positioning, for the future, our posit—our facility in Penang, Malaysia, which we're presently ramping for high layer count, board production, as well. So, today, supplying out of China, tomorrow, we're looking to, add additional capabilities in our footprint to meet those kinds of requirements.
Mm-hmm. Okay, and could you talk, you talked about the hyperscale customers. How concentrated are you? Do you have, like, of the top five hyperscale customers, or players, are they customers, or could you give us-
Yes. So think about it as about, let's just say 3 major customers. We're looking to continue to build on that position over time. It's interesting with this space that, you know, you had a model that at one time was tilting towards white box server type requirements and a lot of ODM. Oh, so they, the customers were outsourcing much of their design. As customers have moved more toward into AI, there's a lot more proprietary design work that goes on with the hyperscalers. And so there has been more and more ownership of not only design, but also procurement with this customer base. So definitely offers opportunities for us going forward.
Is the dollar content of the PCBs that go into, like, AI data center higher or different than traditional data center?
So it's more related to the complexity of the boards. The complexity of the board requirements yields higher ASPs. So yes, it's a higher, higher ASP in general. Also, as a technology trend, more and more, so AI, with the speed of development, is moving very quickly towards finer lines and spacing. So denser circuitry requirements in the boards that are used there. As the circuits become more dense, even more attention needs to be paid to reliability. So as we are developing boards for those requirements, a lot more reliability testing.
This is not a simple phone type application. This is an application that requires where the boards are larger, and they need to be they need to last for a far longer time, and be serviceable. So as a result, reliability is at a real demand from the customers, as circuitry becomes denser.
Mm-hmm. Are you selling directly to those hyperscale customers or those designers or the EMS guys that are building for them?
So we in most cases will sell directly to the OEM, if you will, the hyperscaler. They will control procurement. The ship to will be a CM.
Okay.
There are some cases where the ODM may do the design for some of the simpler designs. So you could almost say yes to all those. Because in some cases, the CM will control the procurement. In most cases, the hyperscaler will control procurement and design.
Okay. Okay, and I know you're guiding that up this year. You didn't put a specific number. You grew 14% last quarter. And do you see, one thing with the hyperscale is, and then you, I think you saw this a year or two ago, there is some digestion periods, right?
Yes.
Do you have visibility into that so you can-
Good.
So, or no?
Yeah.
Maybe you were laughing? No. But how do you adjust, like, your capacity-
Yeah.
... during those downtimes?
Yeah, so visibility is always a great question. I think, you know, we have about one quarter's worth of visibility in general, in this space. But there are trends. We have the kinds of discussions with these customers where we get a feel beyond that in terms of what they're seeing coming their way in terms of demand. Just to add to what you said, Matt, year-on-year, if you looked at the growth rate in data center, we were at 106% in the first quarter versus the first quarter of last year, and the second quarter also looking very strong. So, absolutely have seen strong growth here.
In terms of digestion, it's program specific, and so there will be programs where we see a period of digestion. What we are always working to do is to be on the most recent programs and on a good program spread, so that while we may see digestion in particular programs, we'll also see a pickup or a ramp-
Yeah.
... in others and trying to balance that. The other positive in terms of TTM's footprint is that with these high layer count boards, if you start to look at market requirements, we also provide high layer count boards into networking. We provide them into medical, industrial, instrumentation as well. So even if we see data center computing come down a little bit, there are other areas where we can look to for a pickup in demand.
Oh, you can, you can use that capacity for those customers? Yeah.
That's right.
Yeah. Okay. Okay, great. Okay, perfect. Automotive, 13% of your revenue, it's been a good bit higher in the past. You did a big acquisition a few years ago to get you in that space. You're one of the biggest players. That's been a tough market, I know, the last few quarters. So, what's the outlook there in terms of and your long-term positioning within auto and in EV?
So, automotive probably in terms of end markets, and, you know, we're very, very optimistic here and in data center computing, certainly A& D, strong continuing growth there. Automotive is one of the areas that we have the least visibility into right now. And that's really because of the dynamic nature of the end market. Number one, China is a major factor in this end market. China is moving very quickly to EVs. EV requirements generally are higher for electronics, but the China market has tended to behave differently with EV than with internal combustion engine.
The difference is that they, these companies are tending to use China-based suppliers, not using the Tier 1 parts suppliers or Western Tier 1 parts suppliers, to the extent that they did for the internal combustion engine. So back that up to the effect on TTM, our major customers are the Western Tier 1 s. Those Western Tier 1 s have effectively been losing share in China as a result of that move. And so while we're benefiting from demand on the EV side in the Western world, in China we are actually impacted negatively by that demand because of our customer share position. So as a result, we're watching this area very carefully.
We are seeing a little bit of an uptick in demand this quarter with the internal combustion engine growth that we're seeing, but certainly not expecting huge growth in automotive for the balance of the year because of that development. Okay, so from a strategic standpoint, less than 15% of our revenue, an area that we will continue to service, it's very important to TTM, and we'll continue to service primarily that Western world market as it develops.
Yeah. And did you have share at some of those China customers and just lost share recently?
So again, it's not a-
Or-
Factor of U.S. losing share. It's really our Tier 1 customers, and I'm hoping that they come back, and they gain share in China. But I think there's, you know, they've been challenged with the EV market.
Got it. Okay. Okay, great. And then, your industrial markets, there's a, I know that the word, you'd call it medical, industrial, instrumentation, so a catch-all, right?
Yep.
20% or so of your revenue. I know you've talked about some strength in industrial. There's been weakness in semi cap, medical. So could you talk about those end markets?
Sure. Overall showing, looking at sequential improvement this quarter. Medical has continued to be fairly strong for us. That area has been good, positive trends. Industrial has been a little bit weak. Again, depends on the area of industrial, but automation dealing with some inventory challenges there. So still working through that. But instrumentation has been strong. Semiconductor capital, I should say, strengthening. Semiconductor capital equipment starting to get better. So again, sequential improvement there on instrumentation. So if you take that all together, we should be seeing regular sequential improvement in MII. Year-on-year, probably will be down at least in the first half of the year.
But again, with that sequential improvement, starting to see better conditions Q3 and Q4.
Okay. And you're getting visibility from semi cap customers too, or?
Better visibilities from semi cap customers. I think there's, again, AI is having an impact on that. We tend to provide boards that go into test, and test happens to be one of those areas that it particularly required, with AI. So, that's, that's been good, to a positive development, from the TTM perspective.
Okay. Okay, let's turn to the P&L, the profitability of the company. Your gross margins are down a bit this year. I know that part of it is because your expansion in Malaysia, and then you've got some end markets that are depressed, some recovering. Your operating margin was just under 9% last year. How should we think? I know your long-term targets are higher than that.
Mm-hmm.
Talk about those targets and, you know, what's the bridge to those targets?
Yeah. I think you're gonna see. So you've seen year-on-year pretty steady improvement in our operating margins. If you look year-on-year, and the best way to look at is to do that. Q1 for a Q1 is better to compare Q1 to Q1, because Q1 includes Chinese New Year impacts on our revenue and our margin. So Q1 will always be sort of the most challenging quarter for us from an operating margin standpoint. But we've done better year-on-year, and we'll continue. We should continue to see year-on-year improvement. There are a few factors that are critical here as we go through the course of the year. One is our Penang ramp.
So today, we are not generating revenue in Penang, but we're absorbing the cost structure. So in the first half of this year, that will be a headwind of about 190 basis points. So as we go into the Q3 and into Q4, we'll start seeing that situation improve. Our goal is to be at break even as we exit the year and go into and move into next year. So that will be a headwind that turns into a tailwind. We also shut down two California facilities last year. This year, the receiving facilities are starting to ramp that product. So at first, that means a yield challenge, and then over time, we'll see yields improve.
So again, that's an area where we will look to see operating margin improvement through the course of the year. We talked about a little bit about revenue. I think the revenue situation improving as well. And then, if you look at our long-term model, this move that I talked about in A& D, adding additional non-PCB content, building our program position, will allow us to enhance margins there. So a number of factors that will allow us to enhance margins. I, I should also add our Syracuse expansion. We will be building an Ultra HDI or advanced printed circuit board manufacturing facility in Syracuse. That will, again, should be accretive to our operating margins when we get that facility up and running, which will be in 2026.
So a number of initiatives to bring that operating margin into the 11%-13% area, which is our target.
Okay, great. And then, just on the topic of your expansion in Malaysia, I think you said you're gonna have $180 million of revenue capacity-
That's right.
-or so, and some of that coming from shifting from China, but other new customers. So that should be accretive to your growth in terms of opportunities. And, in terms of that capacity, is most of that spoken for already or?
Yeah. So, 180 to 200 million ASPs, the ASP determinant in terms of revenue. We have four anchor customers for the facility tied to long-term agreements, so it's in their interest as well to help with the ramp. A lot of demand. Of course, we have to go through the qualifications. That's critical in the facility, but the demand is certainly there right now for nearshoring, if you will, or China Plus One strategies from our customers. And so, for us, it's this is gonna be a deliberate process of ramping that facility successfully, taking it up by Q4 of next year to that run rate, which would equate to that $180 million-$200 million in revenue.
Got it. Okay, great. And then the last topic is M&A. As certainly since you've been at the company, you've done a lot of big acquisitions, and but now you're doing internal greenfield expansions. So how should we think of and your balance sheet is still very strong. So, sure, how we think about M&A, what areas are you looking at? Are there any pockets to fill in terms of technologies or skill sets?
Yeah. So yeah, greenfield, important part of our, of our organic, expansion plans. And again, looking at 4%-5% of revenue and CapEx should be our regular run rate. We're tilting a little bit above that with Penang, and certainly with Syracuse, will remain on, on the high side. But M&A will be a critical part of the, of the ongoing strategy, particularly in the defense area, and what we're trying to do there is build on our RF microwave, microelectronics, positions. That's where we've, we again, have a... It's a core to our strength. We have room to build there, particularly in Tier 2 and Tier 3 capabilities, and continue to therefore enhance that overall value package that we bring to the customer.
Okay. Okay, great. We're out of time. Thank you very much, Tom. Thank you.
Thank you.