Q1 2021 MACOM Technology Solutions Holdings Inc Earnings Call
At this time all participants are in a listen only mode.
I will now turn the call to Mr. Steve Ferranti, Vice President of strategic initiatives and Investor Relations. Mr. Ferranti. Please go ahead.
Thank you Shannon.
And welcome to make homes conference call to discuss the financial results for our first fiscal quarter of 2021.
I would like to remind everyone that our discussion today will contain forward looking statements, which are subject to certain risks and uncertainties as defined in the safe Harbor for forward looking statements contained in the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those discussed today.
For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to make comps filings with the SEC.
Management's statements. During this call will also include discussion of certain adjusted non-GAAP financial information a reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release on related form 8-K, which was filed with the SEC today.
And with that I'll turn it over the call to Steve Daly, President and CEO of May call.
Okay.
Thank you and good morning.
I will begin today's call with a general company update.
After that Jack Kober, our Chief Financial Officer will provide a more in depth review of our first quarter results for fiscal year 2021.
When Jack is finished I will provide revenue and earnings guidance for the second quarter of FY 'twenty, one and then we would be happy to take some questions.
Revenue for our first fiscal quarter was $148 $5 million and adjusted EPS was <unk> 46 cents per diluted share.
Our book to Bill ratio was one one to one and our turns business was approximately 15% of our total revenue.
Overall, we are pleased with the continued improvements in our financial results.
Which are made possible by the tremendous work of our dedicated employees.
Our Q1 revenue by end market was generally as expected and included industrial and defense at $61 6 million telecom at $51 5 million and datacenter at $35 4 million <unk>.
Industrial and defense was up 29% sequentially Telecom was down 7% sequentially and data center was down 20% sequentially.
As indicated by our positive book to Bill ratio the demand for our products has strengthened as we look forward. We believe that our <unk> business will continue to perform well that our telecom business will begin to benefit when China's telecom carriers resumed their <unk> build outs and debt our datacenter business.
We will begin to steadily improve as cloud service providers and enterprise demand increases.
Q1 was a positive start to our fiscal 2021, and we believe we are on plan to meet our financial and technical objectives.
Our goals for the fiscal year include.
At least 10% year over year revenue growth expanding.
Our product and technology portfolio to drive long term growth.
Improving our sales strategies to win market share.
Focusing on engineering excellence, and ramping new product introductions, and optimizing the efficiency of our operations to improve profitability and cash flow.
The semiconductor industry has recently seen a broad increase in demand.
We believe this is causing higher than normal levels of utilization within some portions of our supply chain, particularly at external foundry partners as well as our assembly and test suppliers in Asia.
We do not expect this temporary tightening to have an impact on our ability to service customers.
Our operations team does an excellent job working with our key suppliers to ensure our goals are met.
We manufacture a portion of our semiconductor product portfolio internally in fact, we believe our wafer foundries in Massachusetts in Michigan provide us a competitive advantage.
These facilities manufacture differentiated compound semiconductor process technologies that are at the foundation of some portions of our broad product portfolio.
Our long term strategic plan includes continuous development of compelling semiconductor process technology and installing best in class infrastructure at each of our Fabs.
This strategy enables differentiation, which ultimately supports the creation of unique products that can drive highly profitable growth.
As part of our strategic review, we have concluded that a high performance microwave and millimeter wave Gan on silicon carbide mimic process is a critical must have technology.
On Monday, we announced that May call them has entered into a cooperative research and development agreement or crate up with the United States Air Force's Research Laboratory also known as a F. R. L B.
<unk> com will collaborate with the F. A R L to transfer their production ready 0.14, Micron Gan on silicon carbide semiconductor process into our fab in Massachusetts.
This production ready process has exceptional performance and as an example, the process achieved industry leading power density.
This technology is ideal for very high frequency very high power amplifiers.
We will use this process to develop unique products that target high performance non commodity applications specifically.
Specifically this new capability will enable us to expand our product offerings to customers in the aerospace and defense.
Test and instrumentation and sell satellite communications industries.
Based on customer engagements competitive analysis benchmarking and industry reports, we believe the demand for this technology is rapidly expanding.
This effort is expected to be additive to our Sam and complementary to our existing RF power and gas mimic growth strategies.
Simply put the separate establishes a new growth opportunity from E. Com based on our proven best in class millimeter wave Gan on silicon carbide mimic process.
They called me is already actively supporting this project and we expect to launch our first products in calendar 'twenty 'twenty two.
Now turning to more specifics on our three end markets in Q1.
Our industrial and defense end market revenue was driven in part by strengthening demand from a variety of U S defense programs.
Over the past few quarters, we have implemented new strategies to initiate growth, including increased cross selling of all our technologies into the market improving our sales channels refocusing on key accounts and developing additional standard and custom products, which will appeal directly to current and potential customers.
As a reminder, this market consists of a variety of end applications, including long term U S defense programs satellite communication applications mill Com and public safety handheld radio applications test and measurement equipment and other industrial applications.
We believe that it will take time to grow our business and 90, given the long design in cycles in these markets, but we are pleased to see the early signs of traction in Q1.
Based on program wins and backlog, we see our industrial and defense business remaining strong over the course of fiscal year 2021.
Longer term, we view this end market as having tremendous growth potential from E com.
Our telecom end market revenue was down in Q1, driven by softness in five G and we expect the weakness to remain throughout Q2.
We anticipate our telecom business will begin to improve when the China carriers begin their 2021 to <unk> deployments.
We believe we have a strong and expanding position in <unk> with our high performance analog Ics front end modules and emerging laser portfolio.
While we still have limited visibility as to the exact timing of the resumption of China's five day deployments current indications are that tender activity will start to pick up in March or April after Chinese new year.
Nevertheless, we feel the long term secular growth opportunity in <unk> remains intact as worldwide demand for improved connectivity at higher data rates will continue to grow.
We continue to view global <unk> infrastructure deployments as a key growth driver for <unk> revenue in the coming years.
Make on this present across the <unk> network with wireless RF products and antenna systems as well as high performance analog products and front haul and mid haul and coherent driver and Tia I as in Metro long haul optical systems.
Today, we are only delivering on a fraction of our potential and we anticipate further expanding our current <unk> portfolio with 25 E. S. P. N D. FB lasers twenty-five G avalanche photo diodes, or a P. DS in more discrete RF components and more high performance.
Analog and mixed signal Ics.
Okay.
Outside of five G. Certain portions of our telecom product portfolio performed well in Q1, including $2 five G. PON products Telecom mimics and cross point switches, which address submarkets like cable TV and video broadcast.
I will highlight that our 10 G that 10 G. PON is an area of focus from May call on engineering and in the future. We expect to offer more products for this application.
Our data center end market revenue was down in Q1 as our customers continue to consume inventory following a period of multiple quarters of strong sequential revenue growth.
We expect future growth to be supported by our 100 <unk> high performance analog products and our emerging 400 G analog products.
I will note that our international datacenter growth has been driven by Asia based datacenter expansion, where we sell both twenty-five G and hundred G analog products.
Yeah.
I would next like to update investors on our data center growth strategy.
I'll start by noting that we typically target short reach applications inside the datacenter ranging from 50 meters to five kilometers east.
These applications are generally the highest volume applications and we find that customers are very supportive of evaluating may comps high performance analog solutions.
Example, applications include 100 G C. WDM 400 G. S. R. Four.
We believe C. WDM four in S. R for production volumes will continue to grow over the next five years.
Some industry reports predict 'twenty 'twenty four volumes will be two to three times higher than today's volumes.
Therefore, it is a priority to service these short reach applications with current and new products.
We also believe there is an opportunity to gain market share and CW D M. Four.
Further we note that short reach 400 G 800, <unk> applications are now emerging it will grow over the next five years to participate we are working on next generation analog solutions, which when combined together can support these higher data rates.
We have tremendous high performance analog Ctr design capability. However, there are other product areas, which are generating growth potential for may come in the datacenter.
First we will continue to develop advanced high speed T I, a and laser driver products I'll note some customers have expertise in DSP and or silicon photonics and they seek to work with us to develop customized best in class T. I, a and driver solutions as we are a merchant supplier with leading T. I a.
And driver technology.
Second we are developing a broad portfolio of laser products, including 25, <unk> D. FB lasers for use in Pam four applications.
In addition, we will offer low medium and high power CW lasers to customers, who wish to use their own silicon photonics.
Third we will leverage our silicon photonic technology into the data center first for 400 G. D. R. One and tier four where today, we have limited exposure.
Our initial product launches will be photonic Ics.
Fourth we will continue to look for ways to gain market share and we seek new applications inside the datacenter.
As an example, we see customers considering to use considering use of copper cables in very very short reach applications, which might be a new opportunity from a com.
And last we will continue to ramp production on our existing 100 G. Pam four DSP, which is targeting D. R. One applications.
We believe our lead customer will continue to increase production volumes over the next few years.
Aside from that program, we will pursue new opportunities to gain market share with our existing prism DSP.
In summary, given our unique technology portfolio in design capability, we believe we have tremendous growth opportunities inside and around the data center.
Jack will now provide a more detailed review of our financial results.
Okay.
Thank you, Steve we had another sound quarter of financial performance for our first fiscal quarter of 2021, posting sequential improvements in revenue margins and earnings per share.
Revenue for our first quarter ended on January one 2021 was $148 $5 million up approximately 1% from our fiscal Q4.
The sequential improvement in revenue was driven by strength in the industrial and defense end market, which more than offset anticipated declines in data center and telecom.
On a geographic basis, approximately 43% of our Q1 revenue was from domestic customers sequentially up from 36% in Q4.
Adjusted gross profit in fiscal Q1 was $85 $4 million or 57, 5% of revenue adjust.
Adjusted gross margin was up 110 basis points sequentially.
The sequential improvement in gross margin was supported by ongoing continuous improvement initiatives that we have underway at may com. These.
These include increased manufacturing efficiencies around production cycle times utilization and scrap reduction as well as supply chain and logistics enhancements.
We feel there will be additional opportunities for us to continue improving our gross margins as we move forward.
Total adjusted operating expense was $47 $6 million, consisting of R&D expense of $31 8 million and SG&A expense of $15 8 million.
Operating expenses were down $1 $2 million sequentially, primarily due to our ongoing companywide focus on expense management.
One area of focus for US has been the optimization of our worldwide office lease footprint over.
Over the last several quarters, we have continued to consolidate offices implement sub leases in space that was underutilized and also exit facilities that were no longer needed.
The net result of these actions has been around a 10% reduction in square footage, which helps drive savings will be on rent expense.
These efforts are ongoing and we are continuously looking for innovative ways to improve the efficiency of our facilities.
This is just one example of the many internal initiatives we have in place our operations and administrative teams remain highly focused on the details of our operations to find ways to manage our discretionary spending.
I would like to note that we do maintain a long term perspective on our R&D spending and we will carefully continue to balance the management of our discretionary spending with investments in new product development and other growth opportunities.
Looking ahead to Q2, we expect operating expenses to increase modestly from Q1 levels.
Adjusted operating income in fiscal Q1 was $37 8 million up from $34 $1 million in fiscal Q4.
Just on operating margin was 25, 4% for fiscal Q1 sequentially up from 23, 2% in Q4.
We are pleased to note that it's been more than 13 quarters. Since we have recorded adjusted operating margin in excess of 25% of revenue.
We expect the combination of top line growth improving gross margins indoor stable operating expenses to provide continued operating leverage over the remainder of fiscal 2021.
Depreciation expense for fiscal Q1 was $6 2 million and adjusted EBITDA was $44 million.
We posted another increase in trailing 12 month, adjusted EBITDA, which came in at approximately $148 million as compared to last 12 month EBITDA of $124 million for fiscal fourth quarter.
Fiscal Q1, adjusted net interest expense was $4 2 million roughly in line with fiscal Q4 2020 looking.
Looking ahead, depending on interest rates, we expect adjusted net interest expense expense to remain roughly at this level.
Our adjusted income tax rate in fiscal Q1 was 5% in line with our expectations and.
And resulted in an expense of approximately $1 7 million.
We expect our adjusted income tax rate to stay at 5% for at least the remainder of fiscal 2021, and we expect to continue to have relatively low cash tax payments.
Fiscal Q1, adjusted net income was $32 $2 million compared to $27 6 million in fiscal Q4 adjust.
Adjusted earnings per fully diluted share was 46 utilizing.
Utilizing a share count of $69 8 million shares compared to <unk> 40 of adjusted earnings per share in fiscal Q4.
Now moving on to cash flow and balance sheet items.
I would like to note that in November we issued approximately 850000 shares of stock related to a cashless exercise of warrants.
The warrants dated back to the time of our IPO in 2012 and were primarily held by summit partners. These.
These warrants were scheduled to expire in December 2020.
The warrants had historically been carried on our balance sheet as a liability at their fair value.
Each quarter, we recorded increases and decreases in the value of the warrants on our GAAP income statement as noncash gains or losses below operating income.
This was historically one of the larger items and a reconciliation of GAAP to non-GAAP financial metrics.
Based on the accounting treatment of these warrants the November transaction had no impact on our non-GAAP income statement, our cash flows and substantially no impact on our diluted share count.
Fiscal Q1 was another strong quarter for cash flow Q1 cash flow from operations was $34 $8 million driven primarily by the improvements in operating profit.
Cash flow from operations represented just over 100% of our adjusted net income.
Directionally speaking over time as we go forward, we believe cash flow from operations should run at a comparable amount of our adjusted non-GAAP net income.
Capital expenditures totaled $2 9 million for fiscal Q1, and free cash flow was $31 9 million for the first fiscal quarter.
We do anticipate higher quarterly capital expenditures during the remainder of our fiscal year as we continue to make investments in our R&D and fab infrastructure inclusive of the 0.14 Micron Gan on Silicon Carbide program as Steve noted earlier.
Our Q1 accounts receivable balance was $55 $2 million up from $45 9 million in Q4.
As a result day sales outstanding were 34 days.
I would note that we had an exceptional quarter for collections in fiscal Q4 and.
And while our Q1 accounts receivable balance was up around $9 million sequentially. Our DSO has been improving over the past few quarters and in line with industry metrics.
Inventories were $89 million at quarter end down another $2 $6 million sequentially.
Inventory turns were two eight times during the first fiscal quarter 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 first fiscal quarter were $355 million up $22 million from Q4.
Our short term investments are comprised of liquid high quality corporate bonds and commercial paper and are classified as held for sale.
Long term debt of $658 million is covenant light and has minimal annual principal repayments until its maturity in may 2024 in.
In addition, we have $30 million of finance leases.
With the increases on our cash position and the improving improvements in trailing 12 months EBITDA, we exit the quarter with a net leverage ratio of around two eight times.
In summary, we would like to thank all of the hardworking may come employees, who continue to help drive these operational and financial improvements. We believe that fiscal year 2021 is off to a solid start.
As I previously noted on numerous occasions, we believe there continues to be more for us to do to continuously improve the business and achieve our longer term objectives over the course of fiscal 2021 and beyond.
I will now turn the discussion back over to Steve.
Thank you Jack.
<unk> expects revenue in Q2, ending April <unk> 2021 to be in the range of $148 million to $152 million, which is approximately 18% year over year growth at the midpoint.
Adjusted gross margin is expected to be in the range of 57% to 59%.
And adjusted earnings per share is expected to be between 46% and 50.
Based on 72 million fully diluted shares.
In Q2, when compared to Q1, we expect industrial and defense to grow around 10% data center to be flat and telecom to be down approximately 10%.
In summary, we stand in front of a multibillion dollar Sam with a unique technology portfolio in any given quarter. We expect some end markets will experience periods of high growth in periods of low growth and possibly even negative growth, which is normal for our industry.
For these reasons our strategy is to establish a diverse portfolio of products customers and end markets. We maintain a long term perspective on executing our strategy and we will work to manage our business to be profitable throughout all business cycles.
We are confident we can continue to improve our financials and take market share in the months and years ahead.
I would now like to ask the operator to take any questions.
Yeah.
Ladies and gentlemen, as a reminder to ask a question you will need to press. The Star then the one key on your Touchtone telephone to withdraw your question. Please press the pound key.
Incineration of time, we ask that you. Please limit yourself to one question on one follow up.
Please standby, while we compile the Q&A roster.
And our first question coming from the line of harsh Kumar with Piper Sandler Your line is open.
Yeah, Hey, guys first of all huge congratulations tremendous execution and Steve Boy you on getting when you said you guys are focused on supply chain and operational line enhancements so tremendous move there.
I just had a couple of questions. So revenues are going up your largest end market in on telecom is Oh, sorry, industrial and defense is starting to move your Opex is coming down and you mentioned some real.
Real estate type benefits, where you consolidated some facilities, but what is there anything operational.
Stuff that was done relative to people or other measures index.
Good morning, harsh and thank you for those comments so.
No nothing.
Particular to call out regarding staffing levels in fact, we're in the mode of hiring.
And we would expect to continue to hire throughout the year you are correct, though to point out that we have been very focused on controlling costs.
If we look at our overall opex for a lot of fiscal 19 to fiscal 'twenty. It came down about 20%.
As we exited.
Our fiscal 'twenty.
We feel that our opex level is.
At the right.
At the right level, let's say.
We're able to execute our R&D plans, we're looking at investing in new technologies as we highlighted.
With our Gan on Silicon Carbide project and we are also at the same time very focused on running a more efficient business and maybe Jack can comment on some of the programs.
More detail.
Thanks, Steve and good morning harsh.
Steve noted, we do have a number of initiatives in my prepared remarks, I did talk about some of the office lease initiatives that we have underway, but you know there's there's numerous items that we have that continue beyond operating expenses and operating expenses comprises both R&D and SG&A.
We are in net hiring mode debt that Steve had noted but were also in the mode of making sure. We can can focus on our operating expenses and.
And reduce unnecessary costs where possible.
There probably is some bit of a reduction that we've seen over the past year as a result of COVID-19, primarily on the travel front, but but that's I'd say in the noise levels, but but something that would be a headwind once we emerge from the COVID-19 time.
Understood guys and from my follow up Steve a question for you on one question that we get a lot from investors is how do you size the new markets that you're going to enter in the second half call. It lasers silicon photonics. So.
What is the size and then what is your available opportunity.
Within that and then maybe you could update us on timing as well on and then I'll get on my questions.
Sure.
Well first of all I think it's very difficult to size. The overall laser market because we are in.
Three very different end markets, including.
Access infrastructure mobile front haul infrastructure and even backhaul infrastructure.
And then also the datacenter and so depending on.
What you include in terms of the overall <unk>.
Day on for those three large markets.
The number will vary quite a bit so I would be hesitant to.
First of all size that Sam for you.
And by the way by extension I would almost apply the same logic to silicon photonics. It really depends on what we include in those in those end markets.
I will say regarding the timing I'll say, a few words about each.
We have made tremendous progress on our laser development and if you remember it CIO back in September we actually demonstrated.
To the market of 25, <unk> DSP for very specific <unk> applications.
Where we demonstrated that we had product that worked in the CWT on six MW D. M 12 in a variety of other standards.
The reason why this is important is as the front haul infrastructure is being developed in China, specifically, we see that the.
The operators are using different wavelengths and different modulation schemes and when you add up all the different wavelengths for all the different modulation schemes, you literally get dozens of wavelengths.
I'll highlight that some of these lasers are operating at different temperature ranges, including what they call a temporary type of <unk>. So it's a very complicated matrix and the good news is.
Since September when we made those demonstrations we.
Went through a phase of sampling customers really over the past six months, we've had very positive feedback on the performance of our lasers.
I would say that we are now moving into that phase where.
Customers are more seriously looking at the product.
And going through a selection process.
And we think that.
Overall, we will.
Have very favorable results as we got to we start to get qualifications I can tell you that and just generally speaking in terms of five G front haul module sales roughly eight to 10 million modules manufactured a year and that's that's sort of based on 600 K base stations that number will.
Change, we think over time it will go up and then if you look at how the operators are laying down their fiber, we'll see that some of those modules might have six different lasers in number 12 different lasers in them depending on the application. So all I can to summarize I would say that we are in a very good position right now.
As we look at the back half of our year, we are tempering our expectation we know that these qualifications take time.
So I would only recommend that investors recognize that we are setting ourselves up for success here, but we're keeping very modest expectations in the back half of our fiscal year.
Regarding silicon photonics the work there.
Is primarily focused on launching our first products, which means we need to complete the development.
We are focused on basically 400 G applications, we do not believe we will be launching a product.
On a fiscal year.
But we will be getting very close to completing the development work so regarding expectations for revenue contributions on the back half of our fiscal year.
I would say that you should take that out of your models, it's more of a fiscal 'twenty two activity.
Okay.
And our next question coming from the line of Tom O'malley with Barclays. Your line is now open.
Good morning, guys. Congratulations on a really nice results. My question was just around the shape on the fiscal year Youre seeing this R&D business now that's growing pretty strong double digits.
It's about 10% growth I'm sure that's a soft target I'm sure internal expectations on to outgrow that but could you talk about what youre seeing in the second half that kind of gets you to that double digit range or do you keep seeing this growth on the R&D side, I mean, you get that pretty easily or are you looking at telecom and datacom and expecting some weakness from one of those in the back half that kind of offsets any color around just the <unk>.
Moving pieces into the back half would be really helpful.
Yes. Thank you. So we do expect our <unk> business to continue to be strong this fiscal year.
We're very confident of that.
We are hedging our expectations for data center and telecom.
For some of the reasons that I stated earlier on telecom, specifically the sort of that unknown.
Of what will be happening in China regarding the timing of the deployment and the number of base stations that are that are being built I can tell you that our as I just talked about with the lasers, we are actually improving our position in the markets. So when things turned on.
We think we'll benefit.
So I would say that we are taking a very conservative.
You know look at the second half.
And that's that's sort of why we're saying at least 10%.
Revenue growth.
We are setting ourselves up like I said for success, but there is uncertainty given the COVID-19 overlay, given China dynamics, and certainly what might be a fragile global economy. So we're proceeding with caution.
And we hope to exceed everybody's expectations in the second half.
Alright, that's helpful. My second one was a broader topic you spoke in your prepared remarks about the R&D agreement with the United States Air Force Laboratory and I think you mentioned that it's additive to the Sam obviously, it seems like something you're really excited about could you talk about.
How additive that could be to the salmon and what areas you could see growth.
Yes.
And I'm glad you asked that question because the the millimeter wave Gan mimic process is very different than the discrete RF power.
Products that we currently are building under the pure carbide.
You know brand. So this is a mimic process that allows us to include capacitors inductors resistors and bill it to build a complete chip.
Which allows us to make a complete.
Power amplifier as well as in integrating switches and <unk> onto the same power amplifier chip.
So we size this market today at a north of $200 million. When we look at the competitive landscape. We think that in five years that number will be over $350 million and today, we have zero market share and so we are very excited to work with the F. R. L.
This process fills a gap in our technology portfolio.
<unk> has been working on this process for years and they have effectively set the bar for power density.
And frequency performance. So we really look forward to implementing this.
<unk> I will say that we're taking the approach of a copy smart, where we will literally pick up the module and the methods and the formulas and drop them into our fab.
In areas, where we may not have the exact same equipment at the Air Force has we will either go out and buy that equipment some of which by the way is already on order.
Or we will work with the air force to use the existing equipment that may comp has in house. So this is not a science project. This is a transfer of technology on a process. That's known to have leading performance and we will build a product line not only for the defense industry.
Free.
As a primary target primarily airborne applications phased array radars, most specifically, but will also target commercial applications, including some of the ones I mentioned in the script test and measurement Satcom. This process lends itself very nicely too.
Ku band or 14 to 15 gigahertz products as well as K a band.
Which is in the 30 gigahertz range. So we're very excited about it it is as I pointed out a two year project.
We hit the ground running and it is absolutely additive to our overall Sam.
And our next question coming from the line of Karl Ackerman with Cowen Your line is open.
Hey, good morning, gentlemen, two questions if I may.
Just maybe to follow on that millimeter wave discussion.
Any update on your Gan on Silicon partnership.
And I guess, what kind of what sort of customer feedback and design opportunities are you getting from your recently introduced Gan on Silicon Gan on Silicon Carbide amplifier line I think your silicon carbide products.
Previously would take until the end of this calendar year to ramp.
But I guess I am curious if design wins are ahead of your prior view 90 days ago, and I have a follow up.
Yeah. So the first part of your question was regarding the Gan on Silicon project with S. T. A.
I can tell you that that project continues to proceed and is making progress.
I can report that all of our equipment is in place.
S T Catan your fab and they are going through a series of <unk> to bring that equipment on line and qualify it.
Now that the equipments online they can also finish the.
Development of the transistor cells that we need to make our products.
And so they're making a reasonable progress on that front as well.
We would expect to receive.
The first devices from their process.
In about six months time and from that we will.
Begin to evaluate the competitiveness of those transistors and a.
Look at how they how those transistors.
Perform inside of very specific applications and.
In terms of your question on Gan on Silicon carbide under our pure carbide product line as you know we have five products.
Most specifically.
Products that are targeting what we call multi market. So these are generally 50, what all the way up to a $2 six kilowatt product, so they're targeting industrial and defense.
Test and measurement type.
Type of applications. Since we launched this product line, we have we have won over $2 million of.
Development ore.
I'll call Special project.
Business from customers on the defense industry. So they're very excited they like what they see we're doing some novel things regarding achieving high power levels and so.
I can tell you that our sales force is extremely excited to have these products in their off running so well.
We're excited about the early successes, but I'll also caveat those comments that these markets are also slow moving and so it's about planting lots of seeds in lots of different applications. So we can build up the revenue, but I would say that the team is on track we.
We have another wave of products that are in development debt.
We're targeting for release before June of this year.
So the team is where are we focused on executing that new product introduction plan.
No I appreciate that.
For my follow up clearly you've seen the consolidation in the optical space as a as an acknowledgment of how important this will be on a go forward basis for you know across data center and telecom markets and I appreciate the demand update in your optical business in your prepared commentary.
But could you discuss in a bit more detail the opportunity you see from 400 gig I ask because the bear debate for quite some time has been the analog based optical products are challenged as line speeds grow to 400 gig, but in December even December you introduced several products for 400 gig and even 800 gig.
So you don't know your longer term opportunity on optical would be would.
It would be great. Thank you.
Yes, thank you for that and so I think youre right as you move higher in the data rates. It certainly does get harder for the analog solution to be successful.
Just to remind everybody. So part of our core business is supporting hundred G analog solutions, which represent 25 gig per lane and these lanes run in parallel with combined for 100, we're now doing the same thing.
To support 200 G applications with 50 gig per line.
We will continue that effort and that scaling it will have hunter G per lane solutions that support 400 G.
400 <unk> Dr for market is a very large market and we think we can be successful. There I can tell you that our focus is primarily with effectively quad channel T I as a as well as.
Optical drivers multi channel optical drivers and so.
That is really where we see ourselves being very very competitive.
We are a merchant supplier and we see there are companies that have their own DSP is that want to look to a may call on to support them.
Not only for I'll say 100 G. D. R. One, but also 400 G. D. R. Four so our focus is is continuing to be successful with the.
The TIAA and the drivers are.
We will also and we are working on what I would consider a complete analog solution, which includes the clock and data recovery that may be more challenging for us to be successful there, but it is a work that were oh, it's on our roadmap and its work that we're doing today. So that is that's really the <unk>.
Focus for the company had debt of course, when we overlay lasers, and we overlay silicon photonics youre going to get a bump in.
Revenue does that those new technologies, adding.
Content to our business.
Yeah.
And our next question coming from the line of Todd Thunberg.
Sandburg with Stifel. Your line is open.
Yes. Thank you good morning, and congratulations on the results.
Steve back to the a S. R. L announcements you had earlier this week.
Where was that process already today and my understanding your fab and in Massachusetts is pretty full so what what type of Capex commitments do you have to do in order to get that project up and running.
Right. So that will slow that process was developed.
You know at Wright Patterson Air Force base on Ohio, and that's the primary.
In their labs, let's just say.
They have a.
They're in some other locations they have semiconductor capability on development capability.
And so.
Our plan is as I pointed out has to move.
That technology directly into our fab.
In terms of your comment regarding you know the fab being full.
I'd say that our fab is highly utilized but we have tremendous leverage we run we run a sort of a medium volume high mix business.
And this technology fits perfectly into that model because we are targeting very high end applications, we're not talking about tens of thousands of wafers, we're talking about hundreds or thousands of wafers, which is very manageable for our business. So we don't.
We don't see that we're going to have a capacity.
City constraints.
And to the point that we see that coming of course, we add staff and at the various pinch points will add additional equipment in terms of the overall capital expenditure. So I would say that we can complete this transfer.
For it and spend between $2 million to $3 million of capital in total over the course of two years.
Well that's great news.
My follow up question is on data center. So you did talk a little bit about when you expect.
Telecom to perhaps start improving.
But any any visibility on data center other than you're guiding it to be flat sequentially at this coming quarter.
Tory its very difficult for us to really.
Look out to Q3 and Q4, so I would not necessarily want to.
Comment on what might happen in the back half of the year.
We'll say that we expect both.
Industrial and defense and datacenter business to experience high double digit growth.
This fiscal year, when we look year over year. So we would expect the datacenter to grow by at least 20%.
Or more year over year.
There are new design wins as we talked about on our last conference call in Asia that good work continues and we're picking up market share in Asia for our 25 G and.
800, Jeep products and.
And so we think there's lots of interesting opportunities. We're also going after different areas within the data center as I highlighted in my comments were looking seriously at.
Working with customers that are developing solutions using copper cables, which are very very short reach.
Connections within the data center and so that's an area of interest from a comment on I'm confident we can be successful there.
And our next question coming from the line of Quinn Bolton with me Henry Your line is open.
Hey, guys, let me offer my congratulations on the on the great margins.
Just wanted to come back to the airport L.
Agreement I'm wondering is that exclusive or would they have the rights to license that.
Process to other folks in the mimic our industry with whom you compete.
So I can't get into the specific details of the agreement.
So it's difficult for me to comment there I will say that ultimately <unk> goal is to have this technology industrialized so to the extent that they want to work with other wafer foundries or.
You know defense contractors that have their own fabs, they'll do that and so that you know it's hard for me to say or comment on what they might do or what they have done in the past I can tell you that they are very focused on seeing make on be successful. This is good for them. It's good for us it'll be good for a variety of <unk>.
U S defense programs, when we kick into production.
There are very limited companies here in the U S that have this capability and so we will be in.
You know part of the select few and make on has a very strong manufacturing muscle and when we put our minds to.
Moving things into high volume production, we can do it very successfully so the air force is very excited about that as our way.
One other point I'll highlight every year with our employees, we create a top 10 priority list and this is right up there on that list.
Great and then the second question interest in kind of looking forward into calendar 'twenty one in the next round of <unk> tenders.
600000 base stations drives something like eight to 10 million front haul modules. I guess my question is do you tend to see the module vendors beginning to build or pre stock inventory head on with good tenders or do you think that a lot of that manufacturing build only happens once things.
Tenders are released.
Some we do see some customers getting in front of it and they do start production ahead of those tend to releases, we have seen some movement of our.
Channel inventory in the last I'll say four weeks.
And it's probably addressing the exact point you're making.
So it sounds like the leading indicators are pretty good the debt that activity is picking up even though we don't have exact staggered on debt on the on attendance.
Correct.
Great. Thank you.
Thank you and our next question coming from the line of Chris Caso with Raymond James Your line is open.
Yes. Thank you good morning.
I guess the first question is regarding some of the commentary regarding.
Some of the some of the tight supply you've seen the industry, particularly at.
Some of the foundries and backend vendors.
I guess firstly for your internal capacity, if you could give us some more color about where utilization is right now.
And it sounds like Youre comfortable in your ability to meet that supply from from internal some.
Some more color there and then with regard to some of the outsourcing what we've heard from some others is.
Some price increases.
Yeah.
At some of those outsources in order to secure supply.
Are you seeing that as well and are you able to pass some of those cost increases if that's the case on to your customers.
Great. So thank you for the questions and.
Our fab here in Massachusetts run seven days, a week 24 hours a day, we're always busy I can't really comment specifically on the actual utilization that varies from period to period.
I would say that we are not constrained by our ability to meet our goals and.
And to the extent that we need to hire more people or add more equipment will certainly do that.
Clearly from our operating margins achieving sort of a 13 year high you can see that we're running very efficiency efficiently right now and we do expect that to continue.
Regarding the.
The industry in our some of our wafer foundry partners, we do typically have long term agreements, including <unk>.
Price agreements.
I can't really comment specifically, what any of our fab partners are doing with pricing to us directly.
Generally speaking, though whether it's a fab or a component or a package. If we see that our suppliers are raising prices. We will go through our calculus too.
Determine whether it's appropriate to pass that cost onto customers or not.
In some markets that's.
Easily done in other markets, it's just not acceptable so theres a bit of a balancing act there.
But I would say generally speaking we're in.
Not concerned about the.
The supply chain.
As I highlighted our operations our planners our team in purchasing does just a phenomenal job and the results clearly show.
We've been driving margins up gross margins up they've had a big hand in some of that work. So I congratulate them. There. This is not on our top worry list.
Where we worry about getting our products into the market as fast as we can and making sure that those products are extremely.
On a competitive and that's our focus.
And just just to build on that.
Teams are constantly moving through our continuous improvement initiatives to help offset some of those those price increases to the extent that we can and then just one other point of clarification I think Steve had mentioned our operating margins were at a 13 year high I think it was a 13 month high in my prepared remarks on 13 quarter.
13 quarter high.
On that front is not 13 years. Thanks.
Yes.
That's very helpful. Thank you as a follow up if I could just go into a little bit about some of the conservatism you've expressed but particularly on data center from the.
Second half on the fiscal year.
And based on in 20% year on year growth net.
I guess that debt.
On the growth on a quarterly basis from from these levels.
You're talking about.
There's still some digestion at your customers may be burning off inventory.
So and I guess it is just a question on <unk>.
Net inventory.
More time to burn off is it just general uncertainty and you're just being very conservative on that if you could just explain that a bit more from it.
Yeah, I think I think.
A lot of a lot of what you said applies right to our view in giving guidance and.
As you know we're in different parts of the datacenter where in short reach 20 high volume 25 G short reach applications, where 100 GSR for applications. We're now getting designed into 400 G. P. On for applications in each one of these programs is running at a different rates at different customers for different reasons.
So we.
We have I have seen and we have experienced certainly in the last 18 months a lot of.
Different dynamics, even within the data center, we had a tremendous Q4.
And in last fiscal year, driven by the data center it was about $44 million of revenue.
And so if you if you take that quarter out and you look at how we've been ramping.
For the last four or five quarters, you do actually see incremental growth.
Where our Q1 results were actually better than last year's Q3 result, so we do like the steady progress we are diversifying the revenue stream, which I think is very important but it's just very difficult for us to comment on what might happen in the back half of the year given the uncertainty.
Our next question coming from the line of Ruben Roy with benchmark. Your line is open.
Alright, Thanks for taking my question.
Steve I just wanted to follow up on the previous question on the supply.
Commentary.
So it certainly sounds like you're happy with sort of where you are from a supply perspective, but just want to understand in terms of.
Any bottlenecks out there that other suppliers might be having are you hearing anything from your customers on you know potential pauses on builds because certain components, whether passengers or otherwise are our.
No not not widely available at this point or do you think that you know everything is kind of flowing smoothly throughout the supply chain.
Yeah, so I'm not aware of any.
Specific bottlenecks that are where our customers are having component shortages, that's preventing them to ramp in and purchase make on products.
I will say with that said I will say that the automotive industry has experienced some issues and we do have a few parts designed into some platforms and.
This may maybe been a small impact on that on those volumes.
But I would also say that there's other dynamics in the market, including Covid in general and in demand within some of these end markets. So it's difficult for us to.
Connect all the dots, but I would say generally speaking, we do not have supply issues with our with our main customers sorry, Maine.
Suppliers, it's our team is doing a great job on managing anything that comes up and.
It's just not an issue for this fiscal year.
Got it thanks, Steve and just a quick follow up for Jack.
Right.
Margin performance again in line with the guidance for the March quarter.
We see some product mix and end market segment mix going on.
Can you give us a little bit of an idea now.
With some of the detail that you've given us around data center and telco.
You know on obviously with our infrastructure and defense continues to be strong how to think about gross margin as you kind of flow through the year interest.
Fiscal year.
Yep. Thanks, Ruben Yeah, we've been we've been pleased with our with our gross margin improvements and as I mentioned, there's a number of things that we have underway.
We have not disclosed any any longer term target model. That's out there we have been in the high fifty's going back over time, we're starting to bump up against that now which is a credit to the teams and all the work that they've been doing but we still believe there's more for us to do internally to.
Help try and improve those margins going forward and with the guide going into Q2, we've taken that up to the to the 57% to 59 range, which was a step up from Mark from our guide last quarter.
And our next question coming from the line of C. J Muse with Evercore ISI. Your line is now open.
Good morning. This is Kevin <unk> on for C. J. Thanks for taking the question.
So there's kind of been an increased focus on your SaaS on domestic semiconductor manufacturing in recent months and putting additional provisions on the most recent NDAA. So does make on standard potentially benefit on the shift from either additional contracts on the more positive stance towards U S Army's where increased subsidies or either R&D or manufacturing beyond.
The announced U S Air Force contract.
Yes, I think.
I think it's a very important topic that you've raised and we.
We will certainly be canvassing.
Various agencies for funding to modernize and expand and improve.
To the extent that there's grant money, we want to be.
Sitting at the table with our handout so yes.
Yes that is absolutely something that we are focused on I can tell you that our fab here in Massachusetts is already considered a U S trusted foundry, which makes it a preferred fab to run a business in.
And so we will certainly pursue those avenues for grant money or contracts or.
Support I will say that those are very difficult to win it's a multi year program. So even if we started today I wouldn't expect any major awards for modernization for a year or two of these things generally take time to.
To come to fruition.
Yes.
Okay, great. Thank you and lots of discussion on data center and telecom by industrial I think overall kind of expected to see strong cyclical recovery in 'twenty, one I think you're already starting to show pretty good growth. There. So how are you positioned to take advantage of potential upside here on core industrial whether that be underlying demand or share gains as we go through time.
Oh on.
Thank you I think we are getting stronger and stronger and we're continuing to approve the product line.
To make our products more competitive we have.
Our focus on cross selling a lot of our technologies into the industrial market that includes our optical capability our high speed analog.
Certainly.
RF and microwave we see that this is a sort of a target rich environment for the technology that we have.
We are making sure that all of our engineering organizations are.
Spending.
More than their fair share of time in the industrial markets.
And so that's something that's a little different than what <unk> has really done in the past and as you highlighted today industrial and defense is about 40% of our overall revenue and it is probably our largest segment it could be or continue to be our largest segment as we go forward. So.
So we do expect.
Long term growth from that.
<unk> market there are numerous number of and submarkets within that.
Industrial and defense headline name.
And we are absolutely focused on growing this part of our business.
Okay.
Yeah.
Our next question coming from the line of Harlan sur with Jpmorgan. Your line is now open.
Good morning, congratulations on the solid results from execution.
As you guys mentioned you know, we're starting to see 400 gig optical deployments in cloud and Hyperscale I think Amazon was the first to pull the trigger last year and he has got a lot more of the cloud Titans transitioning this year.
No I think you guys are targeting this market right with your amplifiers. Your 56 gigabyte laser drivers, but it seems like you guys also on the opportunity to potentially UNICEF to see emerging opportunity with a 56 Giga baud Lisa I think you already have with 56 gigabyte laser that supports your 100 gig single.
On the Prism solutions. So can you guys just the purpose of the laser for let's say 400 gig Dr for module configurations, and just what's the plan of attack here.
This particular opportunity.
Right. So you are correct that.
We can use our laser technology.
Four applications or 400 G and.
So we.
We will absolutely do that we've talked a lot publicly about our 25 G. Laser I can tell you that we have versions of our 25 day laborers lasers that are working at 50 G. Pam four.
And so obviously the next step will be 100 G paying for.
We'll have to see if we're able to do that but I will.
The short answer is yes, we will address that market, whether it's a DSP laser or a CW laser we.
We do see a lot of our customers that are working at 400 G moving towards silicon photonics, and they'll use a mach zehnder modulator and they'll require a CW laser.
So I think in my prepared remarks, I talked a little bit about that and it's an area of focus for us.
Okay. Thanks for the insights there and you go.
Guys continue to do good job of building on the catalog portfolio. It sounds like you've got good traction with the pure carbide line of Gan amplifiers, you guys manufacture these guarantees and lull or Ann Arbor or are these with your outsourced manufacturing partners and then if you could just give us a quick update on 10 gig connectivity trials qualification.
<unk> early deployment timelines. Thank you.
Sure and I'll, maybe I'll take the second question first.
<unk> is going well we are seeing.
And by the way I'll highlight.
Sort of at the our base business is two five G PON.
There, we think that total market size for lasers for example would be about 80 million lasers a year.
We estimate we have about 50% market share and that's growing.
As we look at 10 G PON, what I've talked about in the past that we look to expand our product line to include.
The more products, we think potentially up to five different products, including different.
Types of lasers.
As well as a P DS or photo detectors and basically.
First mode Tia's so.
Very interest in late and places as I mentioned, so we are beginning to see.
Higher volumes, we think our 10 G laser.
Sorry on <unk> overall revenue year over year will grow.
By at least 50% maybe.
Maybe closer to 100% so we.
We are seeing an uptick in the volumes and we think the back half of this year, but going into next fiscal year those volumes will increase.
Regarding your your comment or your question on.
Our Gan.
Portfolio. So it really depends on what parts of the portfolio you're referring to.
The Gan on Silicon today, we have license to a third party to manufacture for us in the case of R. R.
Our other power devices, we have not commented publicly on where that those products are being manufactured.
Our next question coming from the line of Richard Shannon with Craig Hallum. Your line is now open.
Great. Thanks, guys for fitting me in here I think Steve. My first question is on data center, you've talked about for a few quarters about seeing some success in international markets. As we look forward here I think you your comments earlier on the call about potentially seeing 20% growth in data center, how should we think about the relative dynamics between domestic and international growth and its domestic going to grow.
And what are the dynamics driving success.
Our success in the international markets here recently.
So I.
I would say that today the vast majority of our business is U S centric and we're just beginning to tap into the Asia market.
And so that's the first comment I would make.
The dynamics around the international market or primarily twenty-five G 100 G analog solutions.
We are seeing market share gains on C. WDM four.
Which is very exciting for us because it's a very large market.
And we have the right products and we are beginning to form a very solid relationships with our.
Our target customers in Asia.
So generally speaking the dynamics for the market you know we've talked a lot about today.
About the uncertainty in the timing of various programs I probably.
Don't have any other comments on what I've already said on that point.
Okay Fair enough my quick follow up question on gross margin. So Jack I think you talked to you about efficiencies any dynamics here regarding mix either backward looking or specifically forward looking.
Our industrial and defense markets typically are fairly rich and you're growing there, but you didn't identify mix as a driver there how should we think about those dynamics as we look at your gross margins going forward.
Yeah.
Yeah. Thanks Richard.
We do have a very diverse portfolio of products with some of the manufactured internally and others that are that our fab to outside of May come. So that that makes item can come into play on numerous occasions in terms of looking at our individual end markets.
And specific margins there.
We haven't broken that out.
Historically and again it can vary from from period to period, depending on on what we have going through it but I don't think there's anything to two discernible looking back.
In terms of having a major impact on our on our margins and going forward. We've got we've got initiatives that are happening not only within our manufacturing locations, but our operations teams are also working with.
Folks on the outside to see what we can do to become more efficient as we go forward from a from a margin point of view. So there's a lot of things going on internally within may come as well as externally to make sure we stay focused on on margins.
Okay.
I'm not showing any further questions I would now like to turn the call back on with Tim. This is Steve Daly for closing remarks.
Thank you.
In closing, we would like to acknowledge our customers suppliers and our hard working employees for making all of these results possible.
Have a nice day.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may all disconnect.
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