Q4 2020 MACOM Technology Solutions Holdings Inc Earnings Call
Nation, a reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related form 8-K, which was filed with the SEC today.
With that I will turn over the call to Steve Daly, President and CEO of makeup.
Thank you and good afternoon.
I will begin today's call with a general company update after.
To maximize our market share we are working to establish may come as a leading supplier of lightwave RF and high speed analog solutions.
It is our goal that these technologies will be supported with best in class customer engagements manufacturing and quality.
Factory utilization and yields opt.
Optimizing sales strategies and maintaining opex discipline.
We are pleased that are operating margin is currently greater than 23%. When we are confident we can do even better.
Second we want to expand our presence in five G. Utilizing R F high speed analogue in Lightwave solutions.
Today may calm as president across the five G network with product content and the antenna systems as well as in front Hall mid Hall in Metro long haul optical systems.
Today, we are only delivering a fraction of our potential and we believe our best performing products for some of these applications will come to market over the next six to 12 months.
Third we will use our high speed analog and connectivity design capabilities to expand deeper into our target and markets.
Collaborative way with customers to win market share.
Let me highlight one example of improving our position in the emerging 10 jupon market.
Today may calm as a leading supplier of 2.5 Jupon lasers.
Historically, we have supplied to T porn products in volume production lasers and laser drivers.
$1 million of lost revenues.
We do expect to offset this lost revenue with growth from new products and market share gains that other customers.
Some of which are already in backlog.
Each of our six engineering teams has tremendous growth potential.
Notably, we have a tremendous growth opportunity with our RF power business.
Our efforts include one taking market share and legacy legacy silicon bipolar business to expanding our may call pure carbide Gan product portfolio with compelling new products three partnering with major Oems across the industrial and defense markets and for participating in the Fiveg power amplifier opportunity.
As you May remember, we launched two flagship general purpose pure carbide Gan products last quarter.
2020 revenue was $530 million up 6% from $500 million in fiscal 2019.
I'm going opportunities for savings, which helps support our new product development and growth initiatives.
$40.6 million in fiscal 2019.
Year over year improvement more than 200%.
In physical 2019.
Now moving onto cashflow and balance sheet items.
Fiscal queue for was an exceptional quarter for cash flow cute.
Q for cash flow from operations was $74.4 million <unk>.
Improvements in operating income a strong accounts receivable collections helped to enable strong cash generation for the quarter.
During the quarter.
During Q4, we were pleased that we were able to ship more of our revenue earlier in the quarter, which helped to drive the exceptional cash generation and lower dsos during the quarter.
Inventories were $91.6 million at quarter end down another $4 million sequentially even.
Inventory turns improved to 2.8 times during the fourth fiscal quarter, which has the highest inventory turns we've achieved since 2015.
Inventory management remains an area of emphasis and we see ongoing opportunities to further improve these metrics going forward.
Cash cash equivalents and short term investments for the fourth fiscal quarter were $333 million up $68 million from Q3.
In total for fiscal year, 2020, our cash and investment balances increased by $156 million.
As a reminder, our short term investments are comprised of corporate bonds and commercial paper and are classified as held for sale.
Long term debt of $659 million is covenant Lite and has minimal annual principal repayments until its maturity in May 2024. In addition, we have $30 million of finance leases.
Our trailing 12 month EBITDA increased again in fiscal Q4 with the increase in our cash position and the improvement in trailing 12 month EBITDA, we exit fiscal 2020 with a net leverage ratio of around 3.4 times.
And I would now like to ask the operator to take any questions.
Ladies and gentlemen, as a reminder to ask a question you will need to press. The Star then the one key on your touched on telephone.
In the consideration of calm we ask you to please limit yourself to one question and one follow up please.
Please standby were compiled a few many roster.
And our first question coming from the line of harsh Kumar with Piper Sandler Your line is open.
Yeah, Hey, guys solid performance, congratulations just sort of impressive numbers.
Steve first question for you industrial and defense turning up I think you said, 20% sequentially. So I'm curious.
What is happening there is some of that is onetime in nature or do you you've been counting on sort of the of the turn in industrial.
Or is that turn you know for good to.
Growth is finally, starting to happen and we should expect sustained growth here.
So thanks for the question I would say that there is a few things happening in our R&D and market.
Going into Q1 of the first is.
Our U.S. defense business is improving we've got a very solid backlog.
The type of products, we're selling into this market are typically for ground based in airborne radars.
As well as mobile radios.
And I would just also note that being supported by an uptick in some of our automotive radar.
Products products that we sell into that market as well.
Your company growth.
Okay, and then for my follow up Steve Historically and couple of it you know a few years around December timeframe, the channel inventory, particularly in optical in Asia sort of starts to adjust and create some fluctuation in business I was curious how you feel about your channel situation for the optical parts.
Particularly for data center in long haul and what you are seeing there.
I don't think we're going to have those same issues. This year that in terms of things you've seen in the past our channel inventories actually.
Quite healthy.
I think we will see a bit of a slowdown as I commented in my.
Prepared remarks regarding.
Fiveg, specifically front haul related so there is a bit of a slowdown there, but its not channel inventory related we think its.
Really.
Let's say, we're waiting for the new round of tenders to come out which will spark new demand.
So we are pretty comfortable with our inventory positions not only here it is.
At different levels of volumes, we think over the next 12 months, it's probably in the range of.
Maybe somewhere between five and 10 million.
Owing use which are the user premise and but we think in the out years in the peak years that could be 30 to 40 million units a year. So when you multiply that by four parts. It gets quite interesting. So this is what we're working on.
The good news is it's an emerging market and we think our timing will be.
Lined up with the ramp.
I will also highlight that may calm has a tremendous reputation in this market for being able to deliver very high volume products and so we are bringing with us a very strong reputation into the market for being able to deliver.
And that we have direct customer access and engagements. So we're actually quite excited about the.
The next Gen PON systems.
Yes. Thank you for all that color, Steve My follow up is for Jack.
Even when adjusting for the tax would turn your operating cash flow was 38% of revenue.
How should we think about cash flows going forward.
Or normalized basis as a.
No revenue I know, it's it moves around from quarter to quarter, but if you have sort of a a number in mind that you can share with those type of great.
We did we did have.
Tori we did have a very good cash generation quarter here in the way we look at.
Our free cash flow is really trying to look at that in terms of what percentage of our of our non-GAAP net income and we believe that can be a one to one it could it could bounce around some quarters might be a little bit better depending on what we do from a balance sheet perspective, and this past year has obviously been tremendous in terms of what we've been able to do with the.
The balance sheet.
From an inventory and from a receivables perspective.
Also that that tax item, which was about $18 million was another benefit here in the year. So.
As we go forward, our target is really to try and get.
Re cash flow to essentially equal our our non-GAAP net income.
And our next question coming from the line of Tom O'malley from Barclays. Your line is open.
Good evening guys. Thanks for taking my question. My first one is really about the September quarter. Clearly you saw some additional strength in data centers and when you initially set out during the quarter can you talk about where you saw that additional strength that got you to that really robust quarter.
Particularly if its strength in.
In a certain geography or in a certain product type.
Then reengineering a retired laser.
Design, so that it would be more manufacturer will.
It would be a platform based design.
And we while doing this improved overall performance and robustness and reliability of the laser platform and the 20 to 25 <unk>. It was really the first product that really the flagship product out the door, which were targeting.
Front Hall, five front hallway.
Why is that part important because it validated our approach to move.
Move towards a twenty-five DSB lasers.
And this is in so as you may have seen that one of our announcements.
Back in September.
He demonstrated at CIO.
A whole family of 25, DSB lasers, and we began to introduce our platform.
To not only five G customers, but also we started to gain interest from our data center.
Customers at the same time.
What's interesting here is the platform that we've developed is scalable so as you start to look at.
The five G networks, each one of the operators that's rolling out. These networks is certainly using a different modulation scheme. Some use CW DM six some use WDM 12, or Dwt M 16 appear in Korea for example, and so what all that means is there is a lot of <unk>.
Went wavelength that need to be created to support five G and so the work we did which allows us to have a scalable platform to address all these different wavelengths has been done.
And we are in the process of working through the qualification.
And starting to do our initial sampling with our customers. So that we can capture some of the <unk> opportunity, but what's most interesting as some of these wavelengths specifically the CW Dl six wavelengths also have the same wavelength site you see in the data center.
And it's the same device and so we are really excited.
To finish the work that we're doing which will.
Be talking about more on our next conference call and really into the spring.
But I have to say that the team here has done just a phenomenal job.
Putting together a platform that we believe is scalable not only for five G. But also it will allow us to re enter the data center with very compelling product.
Great that's really helped.
My next one's for Jack.
I'm looking at the margins here and you guys haven't touched these levels really since the end of December 18th.
Along with the gross margin Rep, you've really seen some nice revenue growth as well, but looking into December from.
From a sequential basis or not seeing as much revenue growth as you've seen over the past couple of course, but you're seeing that expansion of gross margin.
You are also kind of guiding two more industrial defense, which is traditionally a little lower gross margin than your other segments can you walk us through how you are getting gross margin incremental improvement quarter over quarter. When you have two.
Two pieces that are kind of not going in your favor.
Sure. Thanks for that time, so in terms of.
Gross margin expansion that we've got going into our our December quarter, There's a number of things that come into play in a lot of improvement that we've seen over the past year has really been a lot of operational efficiencies that that have been take.
Taking place throughout the organization that had been contributing to that that improving margin. We've talked about some of the scrap processes that that we've put in place to monitor and to reduce variances. So there's things that are happening across the organization that are driving that.
And I know you had touched upon the improvement in the indie revenue going into into our December quarter, I wouldn't read too far into that in terms of that driving the margin mix. It is really a combination of a number of different things that we've got going on throughout the organization that that have allowed us to to improve those margins and as we look at this.
Looking longer term, we want to get back to some of those higher gross margins that we had which were in the high fifties going back a few years and once we get to those those higher levels goal is to eventually exceed those.
Steve I don't know if you've got any further comments on our margin improvements well I'll just make a couple comments I think people are starting to notice the improvements.
<unk> here is really done just a phenomenal job as you've pointed out.
I'll also just add that.
Inside of engineering, we're really raising the bar on overall performance and I highlighted one of the parts that's really a best in class part, which is R. Two six kilowatt.
Device and so there's not many companies that can work with products at such high power levels and so when you walk into a defense defense OEM and you put a product like that on the table. It creates all sorts of interest in and around the things you are doing it ultimately that drives very high and opportunities.
That command very strong pricing and so you will certainly start to see more and more of that part of our strategic plan is to raise the bar to go after high performance non commodity type applications and by the way I'll just add to that a lot of the business that we've had this past year regarding our front.
Front Hall.
Product. These are very high end products you are talking about extremely.
Hi speed complex devices dual Cdr's power management, all sorts of diagnostics built in testing capabilities. These are fairly sophisticated devices that have very strong price points and so it really is a testament to the work that our team in engineering is doing to develop chips that.
Ken demand higher prices I will also add to that that are mimicking Dio teams have also been taking a critical look at the sales strategies in and around some of the legacy business and they have come to recognize that there are opportunities.
To expand and do a little bit better job with the pricing and some of that will will certainly contribute but we also think we have a fair way to go on the gross margin. We are delighted that it's moving in the right direction certainly once you get above 60% gross margin it become.
<unk> more about running an efficient operation with products that command very high price points and to do that you have to rely on either proprietary processes, which we can do because we have two foundries or best in class design talent using third party boundaries, which we also can do so I do think there's awkward.
Unities to grow.
The gross margin side.
Certainly I'll, just sort of coming back to my commentary on the lasers. These are generally die sales that are in very high volume.
And so there's tremendous opportunities for gross margin expansion as these products start to come to production.
Question coming from the lineup Kochman wet cough, I'm, calling your line or something.
Good afternoon gentlemen.
Two questions if I may.
Jack.
One for you how should we think about the <unk>.
How the $20 million headwind from Huawei abates on a linear basis throughout the fiscal 2021.
Follow up.
Thanks for that.
In terms of how that's going to play out I mean, it's pretty much linear throughout the year. When you think it's going to be that much.
Two two lumpy as you look back over the past year.
And once again that that may include some others.
That were on the entity list, it's not just limited to Huawei, while we would probably represent a majority of that of that $20 million and Steve referred to earlier.
Steve got it.
Yeah, the only thing I'll add to that is.
I'll come back to our underlying theme, which is we plan to outgrow.
The loss of that $20 million of revenue by introducing more and more new products faster and winning market share. So we.
We think we have a good plan for this year to kind of push right through that.
The loss of those revenues are obviously baked into our our queue. One numbers today, so and all of those customers have been driven two zero. So we're not expecting any.
Upside from any of those companies. So it really comes back to our ability to launch more products faster.
And by the way there may be.
Some instances, where other Oems pick up some of that market share and so to the extent that happens and we're able to support them.
Maybe.
There's an opportunity there, but the real growth story for May Khan is new products and our six engineering organizations are really just doing a super job pushing products out the door engaging the customers.
And so I would just not focus on the loss of the 20 million I would really focus on what are the new things coming out are the products competitive and I think that that will really.
Make you understand why we're going to grow through it.
Sure no helpful color.
Steve.
Previously you mentioned that wall you completed your Pam 411 hundred gig DSP design, you still need to intersect a design cycle intone receive revenue from that.
One of your peers Tonight, just spoke about how Pam for demand has been pushed out of bed, which I think should help you know bring up your design capabilities.
And kind of intersect that market.
Is there a way to think about the cadence of your DSP roadmap that could perhaps increase or competitive capabilities and also substantiate your long term value to that customer base. Thanks.
Sure.
I'm glad you asked that question. So I wanted to be clear on a few points. So.
We are not.
Investing in new DSP designs, we announced that strategy about a year ago.
When Jack and I took over and so what we what we communicated was that we would finish some of the projects that were in flight and bring them over.
Bringing them to conclusion, and then bring them to market if they would be competitive.
We do have an instance, where we have 100 GPM for DSP, where we have direct relations with the major Oems and we are in production with them on that part we will have some sister parts, we call them prism we.
We have essentially.
The other part that we will use and bring to market to.
To try to capture some market share. These are generally for 100, GDR one applications and by the way when there's the 400 G breakout it should actually helped drive some of the Hunter GDR one.
Volume four may calm.
And then the other thing I'll highlight is we will be taking.
That form that we have today it will be targeting mid hall for five G, which is running at 50 gigs per second so.
I just wanted to be clear that we're not going to continue to help to develop new silicon, we're going to product ties and create derivative products in and around the technology, we have and what we'll do with those design resources in.
The IP around the the pain for.
Universe, Let's say is we will apply to other areas, where we can be very successful and so we're actually quite excited to do that.
Our next question comes from Donna became useless.
And this whole thing.
Yeah. Good evening. Thank you for taking my question I guess first question you talked about.
Wanting to grow more than 10% in fiscal 21, and just curious if you could shed some light on.
Where do you see.
<unk>.
Growth on a segment basis, and then also within that on the telecom side.
Kind of assumption, you're making in terms of the timing and magnitude of votes RJ recovers.
So.
I think all three of our end markets will grow this year number one.
And we are being cautiously optimistic with when <unk> comes back online for US. We think that's most likely sometime late in Q2 or early Q3, when things start to really move.
Because of that and because of the backlog and some of the other markets that are.
Reasonably strong right now.
Primarily int in some other parts of the data center market that are that are still doing quite well. We think the first half will still be very strong.
And we think will end or.
Start to accelerate on the back half of 21, when the <unk> market kicks into gear and by the way what it does kick into gear as I highlighted we hope to have additional new content.
And some of the platforms primarily in the on the optical side.
Very helpful.
If I could follow up on Tommy's gross margin of question.
You had been kind of suggesting.
At least externally maybe not internally trying to hear at 57% in the back half a physical 21 and here we are seeing that.
December quarter so.
Guess should we be thinking.
Right, that's now higher than this level and I guess he was there anything mixed wise.
That is a.
Benefit in the December quarter that we should be talking about.
Yeah, maybe maybe we should try to answer that in two parts I'll say a few words within Jack can can help so.
Gross margin very much depends on mix.
So there was always uncertainty around mix as you enter.
Forward quarter.
So we can't stay with with specificity exactly what our margins might be in Q3 or Q4.
With that said, we liked the trends we'd like the things that we're doing we talked about the the strength of the product line improving.
Our operations team has done a phenomenal job with yield enhancement programs. The SIOP program that Jack mentioned is actually driving costs down as well and we're getting better efficiency out of our fab. So when you line. All these things up you see improvements and we would much rather deliver improved gross me.
Sergeant then give you a number that we might fall short of so Jack maybe you can add to that.
Yeah C. J, so obviously going back to kind of that 57 number that is that is that the midpoint of our guide going into Q1. So.
With the some of the sequential improvements that were looking for.
And also depending on mix that would obviously take that that exit right for fiscal year 21 up a notch or two.
My next question is coming from the lineup in line with benchmarking line is helping.
Thanks, very much Jack maybe we could just.
Continue on that.
In the line of questioning and maybe just to move down to the Opex you guys did a great job and you've talked about a lot of the strategic initiatives you are taking to manage expenses in the context.
Looking out towards 10% plus growth.
Physical 21 can you give us a little bit of an idea of how you're thinking about your spending.
With that type of growth in mind.
Sure. We've been we've been very disciplined as I've mentioned in terms of looking at all of our Opex spending throughout the organization.
Trying to balance the R&D investments that go along with that within the the R&D section of our operating expenses. So it's.
It's been a it's been a very rewarding progress that we've gone through over the past year in terms of the improvements that we've made.
Forecast adhere in the fourth quarter that that would be a bit of an uptick just based on the timing of some of those R&D expenses and those investments that we're making so that will.
Work is work its way through.
Some of the operating expenses items that we've got out there but.
Same thing with some of the things that we've been doing from an operational perspective in terms of continuous improvements. We're looking to do some of those same things.
Within our G&A in sales and marketing areas to help try and make sure we're doing things more efficiently, which are in turn supporting some of those R&D expenses that we have going forward, but having said all of that there is that natural tendency for operating expenses to creep up obviously things have been a little bit.
Dampened down by some of the Covid restrictions that are out there from a travel point of view, so hopefully over time will be able to travel a bit more so that might.
Cause some of those those operating expenses to creep up his work that way throughout the year.
The other area that that we've been focused on not only from an operating expense perspective is also some of our our capital investments if you look at.
Work for the year fiscal year 20, we came in around $18 million of Capex going back to prior years were way in excess of $30 million. So we've been very focused on all of our spin throughout the organization and making sure we're doing it prudently and making sure any dollars that we're we're investing in the business, we're getting the appropriate returns.
And <unk>.
Yes, I'm sorry, Yeah, I'll just bet, if I may just make one comment, especially on the capital side. So as we talked about on the prepared remarks.
We are very much focused on maximizing the utilization of our fab and making it run more efficiently and having newer and better equipment in the fab. So is part of our planning process for this year.
Certainly earmarked.
Capital for our paths and that should scare people because.
We're not talking about tens or hundreds of millions of dollars. We're talking about this year, probably a capital investment for our low fat here in the range of $5 million to $8 million, which will certainly keep.
In line with reasonable overall capex spending.
But it's such an important.
To make because one thing that Jack and his team have done quite well is focused on return on capital employed and that is absolutely something we look at whether it's buying test equipment, whether we're looking at change.
Changing out a piece of equipment in the fab.
So we have really instilled a very nice discipline in and around the business units as well as the operations to look at the overall returns on some of these big investments.
Thanks, Steve Bank struck for all the detail, it's very helpful. If I could ask crisp follow up.
If you had a lot of commentary around upon and sort of the additional products that you guys have worked on.
Is there a way to think about the content opportunity or maybe even higher level. The Tam opportunity I forget what <unk> was at its peak, maybe $100 million to $200 million market do you have an idea if we get the $10 million Jupon units.
10 gig coupon units with four or five parts in the box what can the market opportunity to look like.
Well at a very very high level in the range of $200 million a year.
Okay.
And that assumes that assumes.
Somewhere in the range of 5 million.
Optical line terminals or what they call a eltis and maybe about 25 million.
Owen use which are the.
The customer premise and so it sounds like a very big and attractive number right. So.
But today, we have little or no market share.
And this is what we're aiming at it we think it's in our wheelhouse, we have the technology, we have the customer relationships. So we're working on the designs. So it's a great market may calm market. It's something that we think we can be very strong on and by the way I'll point out there are other there was really one other you.
Competitor that we deal with here, that's that's been very successful in this market and.
We plan on moving in with better products and winning market share. So we still have a lot of work to do but we are.
We're making slow progress bit by bit.
No final question coming from the lineup Glen Buxton prominent have been company now open.
Thanks again for taking my question.
He wanted to come back to the the guidance you gave sorts of the December quarter with the industrial business up in Telecom and data center bones down about 10% I know you are actually give guidance for March but do you think that.
The data center sort of on one two quarter.
Any digestion do you think it's a fairly temporary pause.
Just wondering.
You gave us telecom was probably are kind of in the second quarter of fiscal second quarter I assume.
Before we might see that recovered, but just wondering any thoughts on data centre, how long that for them to digest and my last.
So.
It's a very difficult question to answer and.
We certainly for our largest customers have very good visibility and by the way typically the lead times and the manufacturer I should say the manufacturing times for these products is extends over one quarter. So we have to make certain assumptions about where we think the market will be before we start inventory.
But I really can't answer your question, it's very difficult to say what might happen to the data center market, let's say in Q3 or Q2 or even queue for so I wanted to sort of not answer that question right now.
With that said I think it's going to be a good year for the overall market and we are as I pointed out picking up new customers in Asia.
A new line of revenue we are starting to.
Ship or.
Are pinned for DSP, so that's a new color of revenue there.
And clearly there is an increasing demand for data due to covid and there's a secular tailwind that we're we're seeing and enjoying so.
When we know layer on top of that some of the new products, including some of our 400 G products.
That are in some instances best in class.
When we start to introduce our lasers.
Towards the back half of calendar 21.
I think we're setting ourselves up for some good growth.
Kennedy same questions. It's a follow up on the lasers are.
Most of the time.
<unk> home lasers.
The lasers.
Are you going to need the DLC lasers also for some of those one all applications that Simon from your comments in the script that it was going to be a mix of both in DSC lasers in the front hall, but he just wanted to clarify that.
Well I would say that.
You're going to need both and in fact, the DSP lasers are more important.
Because they handle they have better overall temperature performance, they're allowing you to run higher.
Distances.
And they're also there's new requirements that have come out so CWT.
Six and WDM 12.
These really need to be DSP lasers, and so the work in the platform that we've established will allow us to be successful there.
Remember that are twenty-five GFP laser as a single wavelength laser for a very particular application.
And so we will be successful there.
But I would say that on balance the work that we're doing to create this platform is more important and it opens up more of the market for us.
I'm not showing any further questions at this time I would not like to kind of call back home at 10 50, Danny for closing remarks.
Thank you and closing Jack and I would like to thank our employees for their extraordinary efforts and accomplishments throughout the past quarter and fiscal 2020, Thank you and good evening.
Please hang gentleman that that's gonna call conference for today. Thank you for your participation you may now disconnect.
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