Q2 2020 Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand I think you pay patients.
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Good afternoon, and welcome to make arms second fiscal quarter 2020 Conference call. This conference call is being recorded today Wednesday April 29, 2020 at this time.
All participants I know listen only mode.
I'll now turn the call to Mr., Steve Garanti May comes Vice President of Investor Relations Mr. for on G. Please go ahead.
Thank you operator, good afternoon, and welcome to make on second fiscal quarter 2020 earnings Conference call.
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. So 1995.
Actual results may differ materially from those discussed today.
More detailed discussions of the risks and uncertainties that could result in those differences. We refer you to make comes filings with the FCC.
Management's statements. During this call will include discussions certain adjusted non-GAAP financial information.
Reconciliation of GAAP to adjusted non-GAAP results provided in the company's press release and related form 8-K, which was filed with the FCC today.
With that I'll turn it over the call to see Bailey, President and CEO and they call.
Thank you and good afternoon.
I will begin today's call with a general company Yaki.
After that Jack Cooper, our Chief Financial Officer will provide you more in depth review of our fiscal 2020 Q2 financial results.
When jackets finished I will provide revenue and earnings guidance for Q3, and then we would be happy to take some questions.
Revenue for Q2 was $126.4 billion in adjusted EPS was 17 cents per diluted share.
Our Q2 results show positive trends in our performance in our employees should be proud of these results.
We continue to focus on a list of internal initiatives to enhance the overall efficiency of the business.
Notably during Q2, we made progress in our inventory management processes and the net result was an improvement in inventory turns and a reduction in total inventory levels.
While we still have a significant amount of work ahead of us the operations team is doing an excellent job with this and other continuous improvement projects.
We look before moving to the details of our Q2 results I would like to provide an overview of the impact of the cold at 19% dynamic on our business.
As you know they come as a global company, we have employees across Asia, Europe, and North America.
Since the beginning of this pandemic our top priorities have been to maintain the health safety and well being of our employees.
Keeping our business operational and delivering on commitments to our customers.
Among other things may come manufacturers certain essential products for U.S. defense and telecommunications infrastructure applications.
Accordingly, our us based manufacturing facilities have remained operational.
In addition to following local regulations and guidance in order to maintain a seek work environment, we practice social distancing protocols provide enhanced employee screening restrict on site visitors in non essential staff and conduct enhanced facility cleaning and disinfecting procedures regularly.
We've also implemented a work from home posture for our employees in nonmanufacturing functions, including customer service Engineering and administration.
At the same time, our global Salesforce has remain actively engaged with customers using video and teleconference.
Our operations team has been working with our global suppliers to mitigate the impact of cobot 19 related interruptions to our business.
During the quarter, we experienced both supplier closures impartial shutdowns, specifically from certain Asia based suppliers, including Assembly and test subcontractors in Malaysia.
We have managed these issues effectively and we do not believe these interruptions have had a material impact on our business to date.
However, the situation is dynamic and it requires daily management by our operations team to support our customers.
But simply put our dedicated employees have rallied to keep our business and operations up and running in an effort to service our customers and meet our commitments.
Our Q2 revenue by end market was as follows data Center was 26.7 million Telecom was 51.6 million in industrial and defense was 48.1 million.
Datacenter in telecom had sequential growth rates of 16 is 13%, respectively, industrial and defense was down 5% sequentially.
On a geographic basis, 45% of second quarter revenue was from domestic customers in 55% from international customers similar to prior quarters.
Our book to Bill ratio was approximately 1.25 to one and our turns business or business booked and shipped within the quarter was approximately 22% of total revenue.
Generally speaking demand for our products was strong in the second quarter.
We experienced strong bookings across all three of our end markets and we're pleased with the growth of our backlog.
I will highlight that we have very little consumer electronics or automotive business exposure.
We are staying in close contact with our largest customers in closely monitoring channel inventory general order activity and long term demand forecasts.
We believe the strong Q2 bookings is due to a combination of improved datacenter and telecom end market demand market share gains and to a lesser degree from customers ordering a hand ahead of end demand due to fear of future component shortages caused by cobot 19 supply chain disruptions.
Yes.
For Q2 sequential growth in our data center end market revenue was driven by cloud datacenter demands are one hundredg high performance analog products and our emerging 200, GE and four hundredg analog product lines support this market segment.
We view ongoing demand for data bandwidth and associated infrastructure upgrades inside the datacenter to be a strong growth driver for may come in the years ahead.
And we see the emergence of 200, Gi and four hundredg to be opportunities to expand our position in the market.
Sequential growth in our telecom end market revenue was primarily driven by demand for fiveg products as well as from new products, such as our 64 Gigabaud Metro long haul product lines. As a reminder, we have a broad portfolio of fiveg products today, consisting of receive side RF front end module.
Yes control products for base stations high performance analog Icees for Fiveg Fronthaul in high performance coherent driver in Ta products for mid Hall.
We view Fiveg infrastructure deployment as a key growth driver for Maycom revenue in the years ahead and in the coming quarters, we anticipate expanding our current fiveg portfolio by launching complementary new products, including additional optical components more discrete RF components and more high performing.
It's analog and mixed signal licenses.
Our industrial and defense end market revenue continues to be driven by long term us defense programs, particularly in electronic warfare applications, along with satellite communication applications and increased sales to test and measurement customers.
Ultimately, we believe that revenue growth in our three end markets will be driven by our ability to design and bring new products to market quickly and win market share.
We are confident that the changes made in our engineering management and broader organization last year as well as the updates to our product development process will enable us to improve may comps competitiveness and time to market.
Before discussing our notable new product releases for the second quarter I would like to highlight that in lieu of attending alessi, we hosted a virtual product demonstrations in total we hosted over 30 demonstrations in an interactive private video meetings with customers.
We had three engineering test ends showcasing may come products in real world optical applications.
We believe these demonstrations were well received and serve to further educate our customers and we expect these efforts will ultimately lead to new design wins.
We had three demos.
First we showed a complete ship chipset for 50, GE Pam four transmit and receive links with Ethernet security for Fiveg mid hall deployments over 10 kilometers.
This chipset featured a total of five maycom icees, including our new Prism 50, DSP Silicon Photonics, IC, a 26, Gigabaud Ta high speed photo detector and the Mac sat Fi Desso SEC.
Second we showed a high speed in like chipset to support two hundredg modules for use inside the data center that is compliant with the open I must say standard.
Our demo included customers, two hundredg and four Hundredg QSR PV modules and active optical cables built upon the may calm chipset.
These analog modules were plugged into commercial Ethernet switches running like traffic and were successfully working with other DSP based optical modules.
And third we showcased one hundredg single Lambda D. R. F. RPM for link over two kilometers of fiber leveraging may cause latest prism, DSP 56, Gigabaud Ta and high speed Photodiodes.
This setup is ideal for point to point or four by one hundredg breakout applications inside the data center.
I'd like Weve engineering teams released a number of new products during the second quarter, including a 20, fiveg Avalanche photodiodes or PD.
These are key optical components in Fiveg wireless and datacenter applications.
Our 25 GDP is capable of operating between 12 50 in 16 50 nanometers and features very high sensitivity of minus 22, DBM when coupled to a low noise amplifiers.
They come we'll offer the 20 Fiveg PD as a bare die and in chip on carrier formats to provide maximum design flexibility to our customers.
As a reminder, our Lightwave engineering team designs best in class HPD devices as well as a portfolio of over 15 unique laser configurations.
Our laser technology is targeting applications in the data center telecom infrastructure as well as industrial in defense markets.
We approach customers with a strong knowledge and experience in high speed data transmission optical transmission lightweight detection and communication systems with the goal to win semiconductor component business.
We seek applications in all markets, where customers transmit and receive high speed digital signals using optical technology.
During Q2, our high performance analog TV extended our transimpedance amplifier or Tah portfolio with two new Ta is optimized for use in applications ranging from one hundredg yarwun to 800 GTR eight in fr.
The first new T.A. supports high throughput optical data links in a very low power profile optimal for use in high density optical data Center Interconnects.
The devices intended for 50 to four hundredg receivers using pamfour modulation.
The second new Ta is a quad 26, and 53 Gigabaud linear pamfour PPA with automatic gain in integrated HCC loop.
The T.J. consumes very low power is primarily targeted for single mode fiber applications.
These new T. days are available to customers and flip chip and wire bonding packages up options for flexible deployment.
Our RF and microwave engineering teams continue to expand their product lines with the goal of gaining further market share in our core industrial and defense markets. We are focused on executing our product plans more efficiently. While also challenging our designers and technologists to raise the level of innovation with more best in class.
Products.
We believe that our mimic and diet product lines are getting stronger and we will continue to expand with differentiated performance.
The products I've just highlighted in our other recently introduced products provide us the opportunity to gain market share and drive revenue and profit growth in the near to midterm.
At the same time, we continue to work on long term R&D, which will support our next generation products in may comps long term growth.
Given the uncertainty in the markets I would like to highlight to investors that may come as a strong company that has a deep and diverse technology portfolio and we service three very large end markets, we have thousands of customers and dozens of product lines. Some of our product lines of extraordinarily long lifecycles and they.
Produced revenue years after that then introduced earlier.
Our R&D team continues to complement the strong foundation with new products and technologies, some of which I'll discuss today.
We are fortunate to have limited customer concentration limited to know consumer electronics, and automotive business exposure and limited product revenue concentration.
We believe that these business attributes along with our improved execution and financial performance will support new successes and new market share gains.
We maintain a long term view on our business and while cobot 19 may disruptor impact us in the coming months or quarters. We believe it will not change our fundamental long term growth opportunity as our businesses small relative to the large end markets we serve.
That said, we are planning for both best and worst case scenarios, given the risks and uncertainty associated with the coated 19 pandemic.
Jack will now provide a more detailed review of our Q2 financial results.
Thanks, Steve and good afternoon, everyone.
Fiscal Q2 results demonstrate the continued improvement in the overall profitability and cash flow to the company.
We posted sequential improvements in revenue margins and adjusted earnings per share. We also reported another quarter of positive cash flow exiting Q2, with our highest combined cash and short term investment balances since the third fiscal quarter of 2017.
I would like to thank all may come employees for their dedication that only and keeping our business operations functioning. During this covance 19 pandemic, but also supporting the growth in orders and revenue as well as helping to manage our spending.
Revenue in the second fiscal quarter, 2020 was $126.4 billion up 6% sequentially.
The sequential improvement was driven by positive trends in our tell telecom and datacenter markets.
Including growth from early Fiveg deployments and strong demand in datacenter upgrades.
Overall, industrial and different demand remain healthy despite our anticipated by a sequential revenue decline.
On a year over year basis revenue was down 2% from $128.5 billion in the second fiscal quarter of 2018.
Adjusted gross profit in Q2 was $68.9 million or 54.5% of revenue.
Adjusted gross margin was up 100 basis points sequentially.
As we've discussed in the past gross margin improvement remains at corporate priority for US. The team has done an excellent job maintaining focus on our internal margin improvement initiatives in spite of the coping 19 pandemic.
Related operational challenges, we face during Q2.
We believe these initiatives, which target cycle time improvement scrap reduction and other operational efficiencies will continue to resolve is incremental gains in gross margin over the course of fiscal 2020 and beyond.
Total adjusted operating expense was $49.3 million, consisting of R&D expensive $31 million in ESG and a expense $18.3 million.
Operating expenses were down $1.4 million sequentially.
We will continue to battle investments in new product opportunities, while diligently managing our discretionary spending.
Adjusted operating income in the second quarter was $19.6 million up $13 million.
In fiscal Q1 translating into 15.5% adjusted operating margin.
We expect.
Mission of improving gross profits and stable operating expenses will provide continued operating leverage throughout the remainder of the fiscal year.
Depreciation expense for Q2 was 7.7 point $3 million and adjusted EBITDA was $26.9 million fiscal Q2, adjusted net interest expense was approximately $6.7 billion down around $900000 from the first fiscal quarter 2020.
The decline was primarily driven by declining interest rates on our term loan.
Looking ahead to fiscal Q3, we expect to see an incremental reduction of $500000 in net interest expense.
Primarily from the full quarter benefit of lower interest rates.
Our non-GAAP adjusted income tax rate in fiscal Q2 continue to 8% and resulted in expense of approximately $1 million.
We expect our non-GAAP adjusted income tax rate to remain at 8% for the remainder of this fiscal year.
Fiscal Q2, adjusted net income was $11.9 million compared to $4.9 million in fiscal Q1.
Adjusted earnings per fully diluted share was 17 cents in fiscal Q2, utilizing a share count $68.1 billion fully diluted shares compared to seven cents of adjusted earnings per share in fiscal Q1.
Now moving on to cash flow and balance sheet items.
Cash flow in up from operations came in at $25.3 million improvements in operating income and inventory management helped to enable strong cash generation for the quarter.
Capex totaled $4.8 million for 4% of revenue.
Despite the lower capital spending we continue to invest in priority programs.
We continue to remain focused on achieving appropriate returns on capital that we deployed and we expect overall capital expenditures fiscal 2020 to be well below our fiscal 2019 levels.
Free cash flow was $20.5 billion for the second fiscal quarter and $33.4 billion in Q1.
These fiscal 2020 improvements in cash flow are result of revenue linearity improved operating income reduced capex and other working capital improvements.
We believe the numerous structural changes we have base throughout the organization will continue to drive positive cash flow as we progressed through the second half of the fiscal year.
Accounts receivable was $53 million up slightly from $52 million in Q1.
Day sales outstanding with 38 days down from 42 days in Q1.
Inventories were just below $100 million at quarter end down approximately $7 million sequentially.
Inventory turns improved 2.3 times during the second fiscal quarter.
As Steve had mentioned inventory management remains an area of emphasis and we see opportunities to continue to improve our inventory metrics going forward.
Overall, working capital was $103 million fiscal Q2 down approximately $2.5 million sequentially.
Cash cash equivalents and short term investments for $221.5 million up $11.5 million from fiscal Q1.
As a reminder, our short term investments are comprised of corporate bonds and commercial paper and are classified as held for sale.
Total long term debt with $683 million inclusive of finance leases.
Our long term debt of $654 million Covenant Lite and has minimal annual principal repayments until its maturity in May 2024, we also have an undrawn $160 million credit line available through November 2021.
It's worth noting that our trailing 12 month EBITDA increase in Q2 for the first time since early fiscal 2019.
Nearly doubling sequentially.
We believe that this trend of improving EBITDA should help to improve a leverage ratio of the company overtime.
As we've discussed in the past we remain confident in our liquidity position and believe the structural improvements we've made to increase our profitability and cash flow will provide us with sufficient financial options to execute our strategic objectives.
In summary, we feel Q2 with another quarter of solid financial performance and we are pleased with our progress.
We also understand there's still much more for us to do in order to achieve our longer term objectives and believe that we will continue to build positive momentum across the business.
I will now turn the discussion back over to Steve.
Thank you Jack May come expects revenue in Q3, ending July 3rd 2020 to be in the range of $129 million to $133 million. Adjusted gross margin is expected to be in the range of 54% to 56% in adjusted earnings per share is expected to be between.
19, and 23 cents based on 68.5 million fully diluted shares.
Our Q3 revenue projections include expectations that are three end markets will grow sequentially.
Specifically, we believe our revenue growth will be driven by the increase in data center traffic Fiveg network deployments in increased demand for our RF and microwave products in defense applications.
We are excited about the multiple growth opportunities in front of us and we are focused on execution and planning.
I would now like to ask the operator to take any questions.
Thank you ask a question you'll need to press star one on your telephone to.
So let's try a question pester turnkey and the interests of timely assets you. Please limit yourself to one question and one follow up please stand by the company can they last day.
First question comes from harsh Kumar with Piper Sunday. Your line is now open.
Yes, Hey, guys first of all huge congratulations to on a whole lot of companies that are beating and then actually guiding up on sequential basis. So.
Tremendous job.
I had two quick questions. The first of all Steve you talked about strengthened the June quarter arising from the March timeframe.
And you said all three end market to grow I'm. Just curious if you could give us some color just for modeling purposes, whether one will outperform the other are where do you think you'll get more traction mission in your backlog.
Okay. Thanks are so.
We think that the data center.
Will lead the growth going into the next quarter.
Probably a double digit growth strong double digit growth and then telecom and I, Andy I would say mid single digits, plus or minus little bit.
Okay, and then from my follow up.
Guys have a bunch of strategic products and the pipeline I believe for the rest of the year. We're hearing tenure PON is coming back in China strongly I believe you guys were also working on pemble analog product and you might have referred to that comes from the demo information I was curious and give us some idea of some of these critical products or they are there still on track that.
Despite Colin and all that's going on here in the world.
Sure. So I would say generally speaking our our R&D team is doing a great job holding schedules and continuing to move ahead and.
Make reasonable results given the current situation I will say that there have been some minor delays in terms of getting product.
Tested in the labs, given the social distancing and whatnot that were practicing but generally speaking we're on plan for where we want to be and Weve, where we want to go in terms of product development and product launches and I'll just highlight maybe as an example, we are well ahead of last years total.
Product introductions, even given.
The coven 19 pandemic situation. So the teams really stepping up and doing a great job in terms of some of those strategic.
Programs that you've talked about you're correct, we do have quite a few of them.
Whether it be some of our silicon photonic work that we're doing some of our advanced laser work some of our power amplifier process technology work that we're doing.
As well as.
With challenging our of analog designers to design analog solutions at higher data rates.
So there's probably too much of their to to drill down on into skus in any level of detail, but I would say generally speaking.
We have a solid plan, we're executing to the plan.
We are not updating any pivots per se on any of those strategic programs that I think you're referring to.
So it's really steady progress at this stage.
Thank you. Our next question comes from Quinn Bolton with Needham. Your line is now open.
Hi, guys, it's new cell onto Quinn congrats on the corner.
Hi.
Just one question on.
In terms of.
For Teekay, you mentioned that customers deploying in inventory to prevent brisket feature supply constraints and just wondering maybe I missed this but I assume you're saying that it's going into the third quarter Im just wondering is that.
More on telecom side or data center side, or both or maybe you can give a little bit of color.
You know.
On which markets you're seeing that.
Yes, that's fine and maybe I'll just give some general.
Background and Jack to quantify for us so.
I have to say that we've had some tremendous bookings over the past number of months.
And so we actually believe the majority of does the vast majority of this is end.
Market demand driven.
And only a small fraction is actually.
Sort of overreacting in sort of panic buying due to the covance situation.
I would say that the strength in the bookings is coming from datacenter in telecom and then to a lesser degree I Andy.
I'll also highlight that our channel inventory is very healthy right now.
Ben monitoring our channel partners and distributors.
In their inventories have been moving down over the past six months.
Really by our design and so we're very pleased with the level of inventory in the channel, we see very strong bookings, which we believe our and demand driven.
I will say, we do see a bit of softness in Europe, if I were to call out any one territory a region, that's sort of softer than the others that we would certainly be across Europe.
And Jack I don't know, whether you want to quantify.
In terms of.
Levels, where we may think customers are buying a little bit ahead of demand. So with regard to some of those those types of orders. We don't believe it's significant we do have active conversations with our customers to try and get an understanding of of the ultimate end use demand or whether they're they're stocking. These these items, but if we were to quantified it's probably less.
5%.
Okay.
That's helpful and if I can actually just sneak another one in there.
While way I know you guys said that they had you know.
Significantly declined after.
Being placed on the.
Take restriction entity less.
So just wondering though did you see any sort of increase and the the second quarter.
From offset the first quarter or what the change.
If any at all in one way orders.
Thanks Michelle.
In terms of walk away and they've been at less than 10% customer for quite a few years now.
As we've been stadium some of the prior discussions.
Their revenue.
And declining for us overtime.
So really really no meaningful change to that.
Thank you Hi next question comes from Tom O'malley with Barclays. Your line is now open.
Hey, guys. Thanks for taking my question and congratulations on the strong results I just wanted to start out with the guidance. You. Obviously are taking some consideration of some cobot impact. If you just take kind of the midpoint of what you described as double digit growth in data Center and then mid single digits in telecom and industrial you get a little bit above your range can you can you talk about where.
You are being cautious and what areas do you think you're giving yourself a little bit a room to get back in the range that you are guiding.
Yes, so I think our ops team and in is working very closely with our sales organization to make sure that we come up with of the most accurate guidance that we can give.
I wouldn't necessarily want to carve out anyone end market or customer or even product line of it's really a making sure that operations understands the any associated risks with the forecast.
For the third quarter now the good news is we have very high backlog for the Q for the third quarter were already one month into the quarter. So we're very comfortable with the the supply chain risks that are sort of built into our guidance.
And so.
We think we're doing all the right things in terms of planning I will say that generally speaking.
The supply chain is recovering so in areas, where we've started maybe a month or two months ago, where we were seeing impacts in shutdowns. We are seeing our suppliers come back online.
It's not only in Asia, but also across Europe and here in the US I will say by the way from a from a supply chain point of view, we effectively had no interruptions from our third party wafer foundries. So the good news is we were able to.
Received materials that we needed our fab remains completely operational so from a from a raw material point of view, we're at a very good position to service not only the third quarter, but also.
Beyond so I.
I think we're going to I think our guidance is as accurate as we can make it given all these different moving parts.
Great and then just a quick follow up you mentioned that hallway revenue was going up but you're also seeing sequential growth in telecom clearly, there's a number of tenders that are coming on China right now for optical.
Builds where are you seeing the sequential growth until it comes down to use space or are you participating in the Chinese ramps elsewhere outside of wallet.
Yes, so I would say that it's primarily.
Fiveg driven.
And the majority of that activity is China based.
Then as you drill down and look at the.
The Oems and their customers and their suppliers, we try to service as many as we can.
I wouldn't want to call out any one particular.
OEM in terms of our position as it relates to optical infrastructure.
I think the key point here is.
We are seeing more opportunities the volumes are going up.
We have very compelling technology.
For Fiveg front haul admit hall for analog solutions laser solutions detector solutions that I talked about so we actually have a very strong product set for.
The fiveg rollout on the optical side, which is what youre, referring to so I think it's really more than just anyone customer driving our demand we see lots of demand from lots of customers.
Thank you. Our next question comes from Richard Shannon with Craig Hallum. Your line is now open.
Great. Thanks for taking my questions as well.
Steve in your prepared remarks, you talked about.
Funded my notes here you talked about some.
Market share gains and I think you referring about datacenter telecom can you give us more detailed where thats coming from which products.
In geographies or customers, especially relative to.
Absolutely so I would probably start with our diode products. So we are our team within our.
Diode business unit has really been doing a very nice job.
Picking up business that previously we may have been losing there is a renewed effort to drive growth in our industrial and defense end markets.
Which means taking our existing technologies repackaging repricing in some instances screening.
So that is certainly an area, where I see a market share gains typically the our competitors in that in this technology area are weaker than us.
So it's our goal to.
Continue to put pressure on these smaller in weaker competitors and.
And when that business.
In terms of.
The other areas I would probably also highlight.
Our HPV or high performance analog team is doing a very good job winning business not only with hundredg analog solutions and picking up new customers.
But also going into adjacent markets, a part of our strategy will be to expand beyond the datacenter and be on telecom with some of our high performance analog.
Design capability and so we're starting to see new opportunities and win business and go after business that may be a year or two years ago, we wouldn't have gone after.
And then the last thing I'll add is.
I just want to emphasize that Fiveg architecture really plays to make on strengths with the very.
Large optical.
Piece of that network and this is an area where a year ago two years ago, We had no business. So the fact that there's a large optical component there is going to drive our growth in the.
In the months in quarters ahead, and that includes by the way not only the front haul piece, but also the mid whole piece.
Okay. Thanks for that Steve a follow on question I guess kind of following the end of your response here to the telecom market Youve talked about fiveg, mostly within that segment and I guess from from the other comments. It was it would be a relatively small piece of the other telecom from a dollar point of view so how do we reconcile.
While the rather small concentration or exposure there with your fairly strong growth both in March and June quarter share as Fiveg driving most sectors are also some benefit coming from pawn and backhaul and other things like that.
So.
I would say that theres this quarter and going into next quarter.
Less growth on the PON side, and it's more on the Fiveg side.
We did have actually some significant growth going from Q4 to Q1 this year.
And now we're seeing that growth continue I think.
You know I.
I think it was.
Just two quarters ago or three quarters ago. The telecom market was below 40 million and this quarter were above 50 million, so we'd like to growth.
We'd like to steady business and the diverse type of business that.
That the Fiveg market is bringing to us.
I will highlight that there are areas of bright spots of course is also areas, where we needed we need to do a lot of work, including only RF boards within the Fiveg radios themselves, it's very competitive market today, we we support the market successfully with front end modules and high power switches.
But we have a lot of work to do on the power amplifier side. So that's an area, where we are behind and we do need to do a lot of work there and we recognize that.
And so we're going to build that into our strategy as we move ahead.
Thank you and next question comes from having said that JP Morgan. Your line is now open.
Good afternoon, guys and good job on a quarterly execution on strong gross margin performance. If I if I look at the March quarter results in June quarter guidance, the incremental gross margins on the incremental revenue growth is falling through at about 70% historically, it's been about 60% to 65% so pretty strong step up.
Is that more a function of mix or is that a combination of mix into manufacturing efficiencies driving lower costs and going forward is this how we should think about the gross margin contribution.
On on revenue growth.
Yeah. This is Jack so in terms of that that step up that we're seeing going from Q2, two our Q3 guide if theres theres a number of different elements that come into play there obviously, the the increase on the topline helps.
In terms of the overall gross margin step up that we're showing here in the quarter.
There's been a number of.
Initiatives that we've been working throughout the company that are that are ultimately driving that Devon sequential margin improvement that you've been seeing over the past couple of quarters and this is the next natural step in our in our progression from from a guidance range perspective.
So I mean, it's going to be a kind of step by step process. As we continue to work through things and continue to execute it along these these initiatives that we have that are ultimately improving the margins and mix is a big piece of of how that can come into play in terms of the margin.
Okay, great. Thanks for the insights there and then on the Pet Excitingly you mentioned some of this and further bond spreads on the phone can you sort of mid hall backhaul, depending on the distance like we're hearing customers using 100 gig, they're using 200 gig Tom for some cases to using Cleveland and then in data centers you mentioned you have customer.
I was making any transitions 200 400 gig using 25 can go above 60 kebab.
Drivers in tea and Tom Ford DST is are these new Pam four opportunities potentially pulls in your Pamfour DST. In addition to Europe Tia and drivers are you guys seem the adoption of Pam four based devices in Fiveg and do you have design wins on both 200 gig fiveg.
And 200 gig data center and also 400, good for data center and if so like when would we expect to kind of see that the tangible to the revenue growth here.
Okay. So.
I'm going to try to address all of those points, but if I missed some healthy.
Just.
When I think about front haul I think about 25 gig links when I think about mid hall I think about 50 gig late so that's that's our starting point. So when we think about the products that we can support.
Fronthaul were specifically, referring to clock data recovery circuits Tias and drivers.
We want to introduce 20, Fiveg FP lasers, and Thats something that we talked about in the script that something we're demonstrating in as a product line that were sampling customers.
When we think about 50 GE links now.
Different logical form factors.
We believe we have a product called Prism 50, which is essentially a pamfour DSP.
It's a cousin of our prism.
Projects that we've been working on its in R&D, we don't have any design headwinds, but it's working quite nicely in this application and so we demonstrated that just a few months ago with our lead customers and lead prospects, let's say.
And we're gaining interest in traction.
On the mid Hall piece I would also add that the T. days are generally very high end T isn't I would argue that may come today has the best in the market. We are winning market share there as a result of that.
The last item is the driver for the for the.
Permit hall is so thats another area again, new revenue and new interest on this product line. So that that's a very.
Concise review of front haul in mid Hall, when you go into the data.
The other question on that.
No you're right. It was very concise. Thank you and then I just wanted to I think you mentioned the data center in 400, Jay and I can tell you that theres parallels so.
We are today supporting four hundredg into high began two hundredg applications with our T. days.
As well as our.
Our 56 Gigabaud drivers okay. So those would be supporting 204 hundred and just if you think about the different reaches those go all the way from short reach or MSR, all the way up to long reach LR and so that revenue today is small it's these are relatively.
New products, just gaining traction it's not those products are not what's driving the growth today, but they will if we go out in time, Okay. If we're successful.
So I hope I answered your questions, but I do think that.
You are asking the right question and I think the all of these products that we're talking about our relatively new and I think make on is a leader in this area.
No. Thank you very much from insights there just one more question if I may so on the industrial and defense business as we improved the portfolio I think much of your portfolio includes catalog products. So as the new development pipeline focused on multipurpose diodes multipurpose high performance analog and mimic product.
The kind of continuing to build up the catalog business or are you targeting more application specific products for the various sub segments within I Andy.
So it's it's a little bit of both and it's it's resource dependent opportunity dependent and we want to be.
We have eight so hey, we want to have our own product plan, where we want to raise the bar in terms of performance in the market. So thats, an internal plan and we always supplement those activities with custom design work, whether it's a diode.
Mimic.
This is we want to be very friendly to our Andy customers and we embrace that work and again I think this is a change in strategy, we want to do.
Custom mimic design, where for all the major us defense Oems that we're going to make sure that make on is at the table looking at the latest specs and bidding very aggressively to win that business. Because this is right in our wheelhouse as what we do very very well and.
I'd is as you know the our largest revenue segment, but it's also the largest end market so tremendous opportunities there.
Thank you next question comes from twice and back with Stifel. Your line is now open.
Yes. Thank you Stephen Jakone congratulations on this tremendous turnaround.
First question and maybe this is a bit counterintuitive, but obviously, there's a lot of questions, but inventory build in demand from the downturn, but.
You talk to your customers could could we actually the seeing something completely different meaning.
We think about datacenter fiveg, our customers actually maybe pulling in some of those deployments, maybe even accelerating them somewhat.
It's very possible Tory and this is a question, we're asking as well as we look at the end of the strong bookings and so as Jack alluded to at some of his comments when we see large orders coming in we do a lot of investigative work to understand what's behind this.
Customers.
Placing orders because they have won new business or are they getting ahead of expected future business and so I think that.
It's a hard question to answer, but I think it is possible yes.
Very good and and maybe I my perception is wrong here, but I think you mentioned some new products for test and measurements could that be kind of like fourth leg on the store here.
And if not is it still going to be embedded in any of the three categories.
It's an interesting question also so I would say that.
Our typical business in industrial in defense, and specifically test and measurement, which is a submarket in that category. The order sizes are generally smaller than say some of the large high volume sockets that we've been talking about over the past few minutes. So I would say that this is building out the base.
And it's something that will be done over time.
As opposed to.
Let's say of.
A fast ramp okay. So this is.
We look at our industrial and defense business and if you go back two years, it's been flat and we recognize that as a problem and so the fix will be.
To design more products for the lead defense Oems.
Screen products repackaged products.
And do a better job of going after the accounts and from a sales point of view and so.
There is a big opportunity there.
Moving the needle and the I'd and market.
It's a slow it's a slow process, so I would temper expectations in terms of.
Hi growth in this area.
Thank you Sir our next question comes from Tom differently with da Davidson. Your line is now open.
Yes, good afternoon kind of following on that.
Hoping to get a little bit of your thoughts on exposure and the outlook for specifically the industrial markets. You mentioned you didn't have much auto exposure I'm curious on the other industrial markets will be exclusions.
I would say that this is the one market that we are most concerned about.
We have a lot of customers across Europe that are in the industrial.
Sector and so we have seen.
A slowdown in bookings and whatnot.
I think over the past two to three quarters, it's been relatively.
Stable, but we are seeing weakness not only over the past month, but maybe the last two months things have started to slow down so the markets that would be in that area would be for example.
Folks that are are building test instrumentation.
People that are building even medical equipment for example.
We provide.
Essentially.
Very unique products for MRI, and we're seeing a bit of a slowdown there so.
The good news is the there's lots of customers, but the business level at any one customers is at a relatively low level. So we're not too concerned about it and as I highlighted in my my remarks, we have no automotive or consumer electronic exposure and those are the parts of the semi industry that have been hit the hardest with Corona virus.
Yes, Okay I appreciate that and then just a quick modeling question.
Revenues and 8% tax rate does not change over time, if data centers and these other segments become a bigger piece with the pie.
At this stage, Tom 8% is where we're looking for the remainder of the year from a tax rate from a non-GAAP tax rate perspective.
Thank you. Our next question comes from Tim Savageaux with Northland Capital markets. Your line is open.
Hey, good afternoon, sorry, sorry about that minerals around my congrats.
Question back on the Telecom card you were looking for.
Hi single digit growth I guess, maybe mid to high.
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For Q2, you ended up no around 13%.
And I Wonder if we could talk about what what surprised you to the.
Sorry, there I know you've mentioned.
You know Fiveg front haul mid haulers served as a driver you were seeing strength. There previously so if you look at fiscal Q2 in particular.
We are looking across.
Your five degree related markets, maybe just.
Cradled optical transport or or upon can you talk about where the upside was in the quarter and I have a follow up.
Yes, so I'm not sure I would say that we were surprised by the.
Results for Q2 in any of our markets.
A.
Fairly in line with what we were.
Signaling on our last call where.
In fact, we had signaled that I'd would be down this quarter, which it was so.
In terms of the areas, where we saw strength again it was the front haul market, which is 20 fiveg.
Modules essentially.
And I would also sort of maybe add on top of that.
We had some strong business with some of our.
Metro long haul products so.
Thats sort of.
In a similar end application right. So I would probably call out those two items as the ones that really drove the upside.
Great and to follow up on that you mentioned, a couple of quarters ago Youre under 40 million in telecom carrier.
And rich with your guidance maybe.
Into the close to the mid Fiftys.
If you look at that.
Kind of growth over that time period I Wonder if you can kind of segmented along the same line in terms of.
And marketer application drivers should we assume that.
The bulk of that the majority.
It is fiveg front on mid whole driven.
Or are there any.
Should we look at it basically is the same way you just described the upside drivers for Q2 as or anything else going on there. If you look over that longer time period.
Yes, so that the the telecom category is actually a large category for us. So it includes more than.
Just fiveg it includes access.
All of a whole variety of wireless and applications. So.
It would be a fair amount of work to kind of go down that list of sort of takes and puts.
It includes VIP as well, which has been a legacy business that we've had so I wouldn't necessarily want to call out any one of the sub markets I will say that some of our most exciting technology that we're developing.
Including the laser technology, the the analog solutions.
The power products, including power switches and power amplifiers.
For this end market.
Our compelling products and so.
We're pleased with the growth we recognize we have a lot of work to do.
We recognize that.
We're still below some of the the prior year peaks in this area.
Especially when two point Fiveg upon was running.
So we recognize we have a lot of work to do in this area.
Thanks very much.
Thank you. Our next question comes from lack of Akacias with Jefferies. Your line is now open.
Hi, Thanks for taking my question.
The department of Commerce introduced some new expert export control actions.
It looks like it's part of that them at the military area to the ban.
Acquisition technologies.
Our civilian use pretenses for military and uses.
Im wondering if you guys had a chance to look at that yet and if you had any view of that if that might impact you and then and then.
Separately and related given all the focus on China can you give a sense of what percent of your products actually consumed in China.
Thank you.
Sure. So we are aware of the the new.
Yes.
Announcement that came out I think on Tuesday.
Jack and I, both in brief by our internal council as well as our trade compliance folks to understand that the details of that our initial.
Assessment is that it really won't impact.
Our business a lot of that the categories in the additional restrictions that are being put into place.
At first review don't look like they're going to impact us so.
But we are aware of that and to the extent that we need to make adjustments to any of our procedures are policies, we'll certainly do that.
In terms of our exposure to China, I think our last output on that number was.
Yes, it's running running in the low 30%.
Range.
From a ship to perspective.
So low thirtys.
Sorry shipped to give us.
And do you have a sense of what the consumption.
Is.
I guess.
Unfortunately at this stage, we it's a tough when to figure out in terms of that's being consumed internally there versus what we export.
Got you.
Thank you Sir our next question comes from C.J. Muse with Evercore. Your line is now open.
Yeah. Good afternoon. Thanks for squeezing me and you talked earlier on the call about winning share in T. I am curious how big of the market. We think that is continue certainly those how accretive that is the margins.
And then I guess interestingly because the market share shift their enable you to bundle other components and did you get get kind of double the wouldn't because of it.
So.
Probably be difficult for me to explain the margin.
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Quest is or the margin question, we don't typically break out gross margins by product line and today. It's us it's a small piece of our revenue. So it it's really not accretive at this stage.
In terms of the bundling piece, we want to provide the customer value on a part by far basis and oftentimes when you bundle two parts enforce the customer to buy something that really not want to buy it you get a blow back effect.
Our our go to market strategy is to put the best products out there that we can have a very compelling price and whether they buy our T.A. or our laser diode or CDR, we want to provide a very.
Professional approach to make sure that they pick the parts they want and they're not penalized if they don't buy all of it lets say so we really don't practice the bundling.
The way you sort of are described in terms of the size of the market.
I'm sure. If I gave you a number it would probably be incorrect. So I don't have shied away from that.
Okay. That's helpful.
Hi, good just a follow up.
In terms of kind of this new world with Covidien hopefully towards the west backlog, but how are you thinking about cash that you want to have on end.
You know today.
And therefore, how do we think about.
The paydown of debt.
As a as your cash level exceeds that that perhaps new level. Thank you.
Great question, Jack do you want to maybe start with Doug, Yes. So CJ, obviously, we've done we've been quite a bit of modeling.
Going back over to the summer of 2019 time period and it is a fair amount of.
Modeling that were that we put together some upside some downside as as we work our way through it so to some extent we've had a head start on the on the modeling aspects and what a potential downturn might look like.
And how that might impact us, but where we stand today, we're fairly confident in our liquidity position and and the cash balances that we have so we're we're we're looking to keep keep our heads down and keep keep moving forward, we feel like the additional improvements we've made into profitability into cash flow generation.
Provide us with quite a few options as we go forward from a from a liquidity standpoint.
Yeah, and I'll just add to that.
It's kind of interesting if you look back over the past period of time.
We just delivered the lowest opex and 14 quarters.
We delivered better gross margins and for all of our fiscal 18 to 19. So the team has done a great job there.
And our operating income as a percentage of total revenue is I think.
Better than what we've done over the past 10 quarters. So it's really.
As Jack said doing the things that we're doing to prepare for uncertainty and to build a strong business, regardless of coded or losing a main customer or a main market or having a competitor come in.
We run a very diversified solid business that our goal is to make it.
A business that is very strong and I think the employees and make on we're doing a fantastic fantastic job to that end.
Thank you. This concludes our question and answer session I would now like to turn the call back over to Steve dairy for closing remarks.
Thank you and closing Jack and I would like to thank our employees for their extraordinary efforts and accomplishments during the past quarter.
Thank you and good evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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