Q2 2021 MACOM Technology Solutions Holdings Inc Earnings Call
Welcome to make homes second quarter, 2021 conference call.
This call is being recorded today April 29th 2021.
At this time all participants are in a listen only mode.
I will now turn the call to Mr. Steve Ferranti may come from Vice President of strategic initiatives and Investor Relations.
Mr. Ferranti. Please go ahead.
Thank you Olivia good morning, everyone and welcome to make Coms conference call to discuss its second fiscal quarter of 2021 financial results.
I'd 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 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 statements. During this call will also include discussions of certain adjusted non-GAAP financial information.
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 and.
And with that I will turn over the call to Steve Daly, President and CEO of May call.
Thank you and good morning.
I will begin today's call with a general company update after that Jack Kober, Our Chief Financial Officer, who will provide a more in depth review of our second quarter results for fiscal year 2021.
When Jack is finished I will provide revenue and earnings guidance for the third quarter of FY 'twenty, one and then we will be happy to take some questions.
Revenue for our second fiscal quarter was $156 million and adjusted EPS was <unk> 51 per diluted share.
Q2 results represent record high adjusted gross margin and adjusted operating margin since May called went public nine years ago.
I would like to thank and congratulate our dedicated employees for their efforts to make this achievement possible.
We remain focused on executing our strategic plan, which emphasizes profitability and investing in compelling R&D projects in order to win market share.
Before discussing the second quarter in detail I would like to highlight on March 22nd we announced we would use $100 million of cash on hand to pay down a portion of our long term debt.
In addition, we announced a convertible notes transaction to restructure a portion of the remaining debt we.
We believe these two actions reduce our balance sheet risk and create shareholder value by saving the company approximately $11 million in interest payments per year.
In a few moments Jack will review in detail these transactions.
Our Q2 revenue by end market was generally asics as we expected and included industrial and defense at $72 1 billion telecom at $42 3 million and datacenter at 36 points from broken.
<unk> was up 17% sequentially telecom was down 18% sequentially and data center was up 2% sequentially.
Our book to Bill ratio was one one to one and our turns business was approximately 16% of our total revenue.
Overall, we are pleased with our Q2 bookings and the gains we are making in the market.
This was a solid quarter and we believe we are on plan to meet our near term financial and technical objectives.
Now turning to more specifics of our three end markets.
Our industrial and defense end market revenue was up in Q2, driven in part by strong demand from a variety of industrial applications and U S defense radar programs.
Over the past year, we have implemented new strategies to initiate growth, including increasing cross selling of our technologies into industrial and defense markets, improving our sales channels refocusing on key accounts and developing additional standard and custom products, which will appeal directly to current and.
Potential customers.
These efforts are supporting some of our recent R&D growth.
Our telecom end market revenue was down in Q2, driven by softness in <unk> deployments in China.
We anticipate our telecom business will begin to improve when the Chinese carriers begin to launch additional <unk> infrastructure.
Today, we have limited visibility as to the exact timing.
We feel the secular growth opportunity in five G remains intact as worldwide demand for improved connectivity at higher data rates is growing.
We also expect revenue growth from PON, CATV and Satcom and the next few quarters, primarily driven by strengthening markets, new product introduction and market share gains.
Our data center end market revenue was up slightly in Q2, driven by both domestic and international business we.
We expect our emerging 400 G products to perform well in the coming quarters. Although this growth may be tempered by flat or reduced 100 G volumes.
There are four technology areas that I would like to highlight today.
First I am pleased to announce we have developed a semiconductor process to support the introduction of a new high voltage capacitor product line branded as May com kv caps.
Over the past 18 months, our device and process engineers have been collaborating to produce the industry's highest voltage silicon capacitors.
The team has achieved industry, leading 1800 volt standoff performance, which opens up new markets and new opportunities from a cough.
This new process utilizes several one of a kind proprietary may call them technologies and it builds upon our unique knowledge and creating deep trench via structures and very conductive silicon substrates.
Our breakthrough here was to successfully develop a high quality dielectric material that can withstand extremely high voltages and then combine it with other proprietary processes to maximize voltage performance.
GAAP passengers are ubiquitous and electronic systems, our business strategy is to target non commodity systems, where customers will pay a premium for a semiconductor solutions with superior stability reliability chip scale size and high voltage operation.
This includes radar systems medical systems, automotive renewable energy and various industrial applications.
We estimate that this product line will expand our Sam by at least $100 million.
And we believe may com kv cap products fit perfectly into our strategy to target performance driven markets with unique high performance discrete devices.
Second I am pleased to report in Q2, we were selected to be a pallet amplifier supplier to a new U S defense radar program.
In late 2020, we provided our customer with qualification hardware and after a technical review and competitive bidding process. Our solution was selected due to its superior performance.
This win validates our ability to field best in class RF and microwave high power amplifier pallet substitute sub assemblies.
And at the multi hundred watt power level.
The current pilot production volume is limited however, this program and others like it represent a large growth opportunity.
And third I am pleased to announce we have nearly finished our 25 G. D. F. B Lazar tell cordy, a qualification which includes the completion of a 5000 hour high temperature operating life test.
We are pleased with the results to date and we believe our customers will be satisfied with our product's performance and reliability.
We are targeting five G optical infrastructure as a priority and then we will focus on the data center.
We expect that a formal product launch and introduction will come in the next few months.
And fourth we are making excellent progress with the new 10 G PON product development.
We have completed development and are sampling laser drivers for 10 G E. Upon X G PON and X G. S pond for both Owen you and O L T applications.
We have also released photo detectors for 10 G O N U N O L T applications.
We are finalizing the design of our new 12, 70 nanometer high powered 10 G. D. P laser for extra yes pod and finally, we continue to make progress on improving the burst mode T I, a performance, allowing us to take market share.
In June May call, we'll attend the international microwave symposium or I M. S in Atlanta, Georgia, and the virtual optical networks and communication conference or OFC.
We are excited to host a series of virtual product demonstrations and educational may comtech talks for each of that to share information on topics, which we believe our customers will find valuable.
The planned product demonstrations can say contain some of our newest products and will provide insight into the technology products and applications, which we believe will drive our future revenue growth.
I'll also note that these demonstrations exemplified the breath of our RF microwave analog and mixed signal digital and optical design capabilities.
Our I M. S demonstrations can be organized into three categories high performance discrete RF power and millimeter wave.
Our two discrete component demonstrations include a demo of May comps kv caps product line being used in a simulated medical application and a high performance 200 Watt force throw switch and driver for military applications.
Our for RF power amplifier demonstrations use our may comp pure carbide Gan on silicon carbide technology.
We will demo high powered Gan showcasing a three kilowatt power level from a single device.
We will also demonstrate high efficiency Gan showcasing high efficiency performance between 3.1 in three five gigahertz with a 100 watt power amplifier.
We will also showcase ultra wideband Gan using our 25 watt pure carbide matched amplifier and last we will showcase a five <unk> massive mimo Gan solution showcasing 400 megahertz 110 Watt Dougherty amplifier performance and a <unk> system.
And last two millimeter wave demonstrations, including a five G 28, gigahertz transceiver front end module and the demo which highlights how to power combined two high performance K, a bad mimic power amplifiers to achieve over 10 watts of power.
At OFC, we have multiple demonstrations play it and I'll highlight two today.
The first is a demonstration of a two chip analog solution for short reach data center applications.
Here, we will be demonstrating our new two chip fully analog solution for 204 hundred G. <unk> F P logical and Aoc applications.
Chip number one is a Pam four C. D. R. A T I a chip number two is a paying for CBR and VIX will driver.
The chipset will demonstrate I Tripoli standard compliant bit error rate.
And open eye MSA transmit compliance and also be interoperable with an Ethernet switch.
The second is a demonstration of our new 50 G reference design for five G wireless mid haul applications.
This demonstration will feature a complete 50 G. Pam for Q S. F. P 28 reference design using all may call them components.
Demo platform is it 20 kilometers of optical link with single mode fiber using 13 10 nanometer wavelength.
Our reference design showcases may com's, new Prism 50, D DSP with integrated DNA driver.
A 26 gigabyte, 13th 10, I tempt laser.
26, gigabyte pin photodiode, and a 26 gigabyte Pam four T I E.
Our next like to highlight that while may call them has a large and diversified product portfolio.
And we continue to invest in many new and existing product lines to drive future growth. We also have a few product lines, where we make minimal investment and as such we expect in time that demand for certain of these product lines will ramp down.
Two legacy product lines in our connectivity business are nearing the end of their product life cycles due to protocol upgrades or changes.
We expect revenue from these product lines to decline in FY 'twenty, two by approximately $15 million when.
Paired to the levels in FY 'twenty one.
We view these periodic events as normal product lifecycle management.
We are confident that our growth strategies and new products, including some of the products, which I discussed today will more than offset these anticipated declines.
Keith are key growth driver is compelling new products, which are which is why we have been prioritizing improving the quality and the pace of new product introductions.
In fiscal 2020, we released a record number of new products now I am pleased to report we are on pace to release at least 15% more new products in fiscal 'twenty one.
Jack will now provide a more detailed review of our financial results.
Thank you, Steve and good morning, everyone.
We had record financial performance for our second fiscal quarter ended April <unk> 2021, achieving gross margin of 59, 2% and adjusted operating margin of 27, 8%.
In addition, we delivered sequential growth in revenue and earnings per share.
Before reviewing the details of our Q2 financials I want to note that we recently completed a few strategic financial transactions initiated during the quarter, which I will summarize.
First on March 20, we announced a $100 million principal pay down of our term loans utilizing available short term investments and cash.
We view this as an important step towards Delevering, our balance sheet and one that is consistent with our long term goal of reducing our debt and associated leverage ratios.
Our ability to pay down principal on the term loan is the direct result of May comes improving financial performance and cash generation over the past 18 months.
Second we took advantage of historically favorable conditions and entered into a convertible note arrangement, which has provided us with $450 million in interest rate of 0.25%.
The convertible notes are due in March 2026 can have a conversion premium of 40% over our March 22nd closing stock price, which has a conversion price of $82 12.
We issued $400 million of the convertible notes at the end of fiscal March with the additional $50 million Green shoe amount being executed in early fiscal April.
We used all the net proceeds from the convert issuance to pay down our term loan principal and there were no penalties associated with prepaying. The term loans before there may 2024 due date.
With these combined actions, we reduced overall outstanding debt by $100 million.
We reduced our interest rate on $450 million of debt from approximately two 4% to 0.25%.
We expect to save around $11 million in annual interest expense at current rates and we extended the weighted average maturity date on our debt structure.
I'd like to thank the Barclays banking team for their support with our execution of the convertible note transaction.
Now onto the Q2 financials.
Revenue for the second quarter was $156 million up slightly versus the prior quarter the sequential.
Improvement in revenue was driven primarily by growth in the industrial and defense end market along with modest improvement in the data center market, which was offset by the anticipated decline in the telecom end market.
On a geographic basis, approximately 48% of our Q2 revenue was from domestic customers sequentially up from 43% in Q1.
Revenue from international customers was 52% of our Q2 revenue.
As we highlighted on prior earnings calls the semiconductor industry has seen a broad increase in demand this is causing higher than normal levels of utilization within some portions of our supply chain.
We see this especially at some of our external foundry partners as well as some of our assembly and test suppliers in Asia.
We do not expect this temporary tightened tightening to have a long term impact on our ability to service customers. Although in Q3, we expect to have some delayed shipments.
These delayed shipments have been factored into our Q3 guidance.
Our operations team has an excellent relationships with our suppliers and has done an outstanding job to help ensure our goals are met.
Adjusted gross profit in fiscal Q2 was $89 $2 million or <unk> 59, 2% of revenue up 170 basis points sequentially.
Our record gross margin in the quarter is a reflection of our drive toward operational excellence and continuous efficiencies in all aspects of our manufacturing and operations activities.
Many of the drivers that have been contributing to gross margin expansion over the last few quarters remain in place today.
These include continuous improvement activities associated with supply chain and logistics enhancements increased manufacturing efficiencies scrap reduction and optimizing the utilization of our assets.
As I have noted in the past we feel there will be additional opportunities for us to continue to improve our gross margins as we move forward.
Total adjusted operating expense was $47 3 million consisting.
Consisting of R&D expense of $30 million and SG&A expense of $17 3 million.
Total operating expenses were roughly flat to fiscal Q1 levels.
We continue to carefully balance all of our operating expenses through the management of discretionary spending along with investments in new product development and other growth opportunities.
Adjusted operating income in fiscal Q2 was $41 8 million up from $37 $8 million in fiscal Q1.
Adjusted operating margin was 27, 8% for fiscal Q2 sequentially up from 25, 4% in Q1.
As I noted our second quarter adjusted gross margin and adjusted operating margin represent record levels of profitability from May come dating back to our IPO in 2012.
More importantly, we expect a combination of topline growth expanding gross margins indoor stable operating expenses to provide the opportunity for continued operating leverage over the remainder of 2021.
Depreciation expense for fiscal Q2 was $6 million and adjusted EBITDA was $47 $8 million. This.
This contributed to another increase in trailing 12 month, adjusted EBITDA, which came in at approximately $169 million as compared to LTM EBITDA of $148 million for fiscal Q1.
Adjusted net interest expense for fiscal Q2 was $3 8 million.
Down $100000 from fiscal Q1.
Our fiscal Q2 net interest expense included only minimal savings from our debt Paydown and the new lower interest rate associated with the convertible notes as these transactions occurred late in Q2.
Looking ahead, we expect our adjusted net interest expense to decline to around $1 $3 million in Q3 and beyond.
On the lower debt level, and the lower coupon payment on the convert.
Our adjusted income tax rate in fiscal Q2 was 5% in line with our expectations and resulted in an expense of approximately $1 9 million.
Our cash tax payments were $700000 per Q2.
We expect our adjusted income tax rate to remain at 5% for at least the remainder of fiscal 'twenty one.
Okay.
Fiscal Q2, adjusted net income was $36 $1 million compared to $32 $2 million in fiscal Q1.
Adjusted earnings per fully diluted share was 51, Utah.
Utilizing a share count of 75 million shares compared to <unk> 46 of adjusted earnings per share in fiscal Q1.
Now moving on to the balance sheet and cash flow items.
Our Q2 accounts receivable balance was $68 3 million up from $55 2 million in Q1.
As a result day sales outstanding were 41 days.
Our Q2 accounts receivable balance was up sequentially due to a larger portion of revenue occurring later in the quarter as a result of the timing of schedule scheduled customer delivery dates and Chinese new year.
Our DSO remains in line with industry metrics.
Inventories were $84 5 million at quarter end down another $4 $5 million sequentially.
Inventory turns was two nine times during the second fiscal quarter.
While we recognize that there is a tightening within the semiconductor supply chain.
Which may cause fluctuations in our inventory balances, we remain very focused on inventory management.
We continue to see opportunities to further improve our inventory metrics going forward, while also balancing customer demands and market opportunities.
We had healthy cash flow during fiscal Q2, our Q2 cash flow from operations was approximately $28 million driven by improvements in operating profit offset somewhat by the expected increase in accounts receivable.
Cash flow from operations represented around 77% of our adjusted net income.
We expect cash flow trends to improve as collections increase.
And Directionally speaking over time.
We believe cash flow from operations should run at a comparable amount of our adjusted non-GAAP net income.
Capital expenditures totaled $4 4 million for fiscal Q2.
Free cash flow was $23 $5 million for the second fiscal quarter.
As we indicated in prior quarters, we anticipate higher quarterly capital expenditures during the remainder of our fiscal year 2021 based on investments in our R&D and fab infrastructure inclusive of the 0.14 Micron Gan on Silicon Carbide, <unk> program, which we discussed last quarter.
Cash cash equivalents and short term investments for the second fiscal quarter with $268 million day.
<unk> $87 million from Q1.
The $100 million, we utilized to pay down the term loan was offset modestly by cash generated during the quarter.
Cash generation will remain a priority for us we expect our cash and short term investment balances as of the end of this fiscal year to be at a comparable level to the $333 million. We had on the balance sheet as at the end of fiscal 2020, even after the $100 million debt repayment.
The final area I will discuss in a bit more detail is our Q2 debt balance.
We have provided a summary of this Q2 debt activity in the reconciliations section of our earnings release is the accounting for these transactions can be complex.
At the end of our December quarter, we had debt of approximately $658 million.
We paid down our term loans by $100 million. In addition, based on the accounting rules currently in place we were required to bifurcate a portion of the convertible note debt every quarter approximately $72 million as equity.
The net result of these and other items for the quarter resulted in a Q2 ending debt balance of $492 million associated with our long term debt arrangements.
Our debt structure as of today consists of approximately $120 million remaining on our term loans, which mature in 2024 and $450 million, including the $50 million Green shoe of convertible notes, which mature in 2026.
In addition, we have approximately $30 million of financing leases.
With the improvements in trailing 12 months EBITDA, we exit the quarter with a net leverage ratio of around two three times and gross leverage of three five times. These leverage calculations include the $72 million of convertible notes classified as equity as well as the $30 million of financing leases.
We believe that we remain on course for solid financial performance in fiscal 2021.
I will now turn the discussion back over to Steve.
Thank you Jack May.
<unk> expects revenue in Q3, ending July 2021 to be in the range of $150 million to $154 million.
Adjusted gross margin is expected to be in the range of 58% to 60% into.
And adjusted earnings per share is expected to be between 52 and 56.
Based on 71 million fully diluted shares.
In Q3, we expect telecom to be up slightly industrial and defense revenues to be flat and data center to be down slightly.
As I have noted we maintain a long term perspective on executing our strategy. We are confident we can continue to improve our financials and take market share in the months and years ahead.
Before opening up the line to your questions I would like to make a couple of final comments.
First we have been encouraged by recent proposals from the federal government to make investments in the U S semiconductor manufacturing industry.
We are very pleased to see recognition of the vital and strategic role that semiconductors play in America's future.
With over 70 years of history, and two semiconductor fabs operating in the United States. We believe may comp could be a model candidate to benefit from these programs and we will actively explore opportunities for funding.
Second over the last several months, we have undertaken an in depth companywide review of our environmental social and corporate governance or ESG practices with the goal of enhancing our current policies and programs to drive continuous improvement in these areas.
This initiative has the support of the board of directors.
As a first step we have established an executive level ESG task force to refine our policies enhance our reporting and programs and target best practices in key areas of focus.
This will be a multiyear process and we believe these efforts will ultimately create help create value for our stockholders employees and other constituencies.
Finally.
On a related note I would like to highlight that last month, we announced the addition of John Ritchie as a new independent member to our board of directors, who serves on the audit and compensation committees.
John brings financial and business software and hardware and technology expertise to the board and we look forward to working with him as we move ahead.
I would now like to ask our operator to take any questions.
Thank you, ladies and gentlemen, if you would like to ask the question do we need to press. The Star then the one key on your touched on telephone.
And in consideration of time, we ask you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
And our first question coming from the line of Vivek Arya with Bank of America.
Thanks for taking my question.
Steve on the telecom side, if I go back to kind of the middle of last year, when China was spending.
You were doing something in the mid fifties million quarterly is that what recovery looks like when China resumes spending because you're.
Telecom business is almost a powered off its highs and if China does want to resume spending and put the 600000 base stations I assume that you will start to get some visibility around that so give us some color on what the visibility is and resumption of these deployments in China and then recovery does come should we see how they're doing.
Back to those kind of per.
Prior levels or are there other puts and takes.
Thank you for <unk> for the question. So yes, we do think that we will achieve those prior.
Hi.
Actually believe we will exceed those because for this cycle, we are in a stronger product position.
A lot of the gross growth we saw last year.
Was front haul related with high performance analog chips and on the next cycle, which will start sometime later this year or even into our next fiscal year.
We would expect to have additional RF components qualified as well as lasers, perhaps qualified and certain applications. So generally speaking we would expect to see new highs achieved in the telecom.
And market based on layering on those different product groups that I just mentioned in terms of the timing as I pointed out in the script, it's very difficult for us to estimate when that new.
New cycle will begin.
So for that reason, we have not really included significant <unk> contribution in this fiscal quarter and as we look into Q4. We're also.
We'll certainly take a conservative view of that unless something materially changes.
The good news is it moves a lot of that growth revenue into next year. It could really set us up for a very strong fiscal year 'twenty two and I will also add that these delays that we're seeing in China.
At some level are actually working to our advantage as we complete the qualifications of some of our new product lines, we have more time to engage customers.
One final point on five G. We are not just focused on the China market.
As a global market and we expect in the next year to two years to be a significant contributor to European and U S deployments.
Got it and then on the Datacom side I know that's affect non video of hat.
A bit of a moment in restructuring and so forth when should we start to see beyond that business really start to take advantage of all the investments that the hyperscale ours.
Making but when do you see that segment start to really grow in line with some of the other semicon.
Semiconductor companies that are benefiting from cloud investments.
Yeah. So as you know the data center segment as one of our smaller end market segments and its really a mix of some legacy product lines that I highlighted on the call.
Earlier as well as generally analog solutions for short reach applications and we still remain a dominant.
Supplier into that market those are primarily CW DM for short reach 100 G applications, we expect that business over the long term to be strong we are seeing in this moment.
I would say a level run rates or flat.
Production levels.
And so we think in the near term the growth will come actually from our new 400 G products, which include <unk>.
<unk> channel 56 gigabyte drivers for.
<unk> channel linear T I as in these products can be used.
With other companies Dsp's.
To service 400, 400 G market and then we are working on other product categories for the data center, including active copper cable analog solutions in an equalizer solutions. So.
I would I would set the expectation of consistent growth, but not hyper growth, let's say or.
We have a limited product set for that for that end market.
Over the long term, we would expect both industrial and defense and telecom to outgrow a datacenter.
Our next question coming from the line of Tom O'malley with Barclays. Your line is open.
Good morning, guys and thanks for taking my questions.
I think my first one centers around some of your commentary about some of the push outs in the or.
Orders could.
Could you just talk about where youre seeing the tightness in the supply chain.
You've got on the supplier side or is that really on the backend test and.
And could you quantify the size of what got pushed out and will you be seeing net revenue kind of commented in the fourth quarter.
Thanks, Tom Yeah, as I had highlighted we are experiencing some of those.
Supplier supplier tightness items that I did refer to some of thats coming in from a substrate standpoint, but there is some assembly and test items that are out there. So our operations team has been doing a fantastic job, making sure we're managing through this.
So it's it's.
A bit of business as usual in that our operations team is generally working through these issues.
In the ordinary course, but paying special attention to it now.
In terms of quantification, maybe upwards of about $5 million that is pushed out I would say.
We are working to make sure we manage that so and that is factored into our guidance.
Great. That's really helpful. And then my second one is really for Steve Steve You mentioned some of the moving pieces of the data center.
You mentioned, the 400 G products doing a bit better.
And then you made a comment about some some weaker 100 G you guys pre.
I kind of expected really strong fiscal year 'twenty growth almost 20% can you talk about what's happened since the last call about 100 G market. That's made you kind of a bit more cautious there.
Yeah, we've seen our lead customer.
Level off their production run rates and so that's that's sort of a directional change for us we still do think that the data center will be a double digit growth year over year. So.
But the primary driver for our.
Change is that the run rates have slowed a bit.
And although as we are gaining market share in international markets, especially for 25 G 100 G applications.
Those wins have not yet offset.
Some of the you know.
What we're seeing on the domestic side.
And our next question coming from the line of harsh Kumar with Piper Sandler Your line is now open.
Yeah, Hey, guys first of all congratulations you know very impressive results amongst supply tightness. So.
Steve or Jack your gross margin was super impressive.
Is this the new base that we should be working off office you can look at your business going forward.
So my question number one and I have another one.
So maybe I'll.
A few comments and then Jack can follow up on that question. So we continue to make improvements in the execution of our business and as Jack highlighted a lot of that work is being done on the operational side.
We are also adding higher value products to the portfolio and that will over the long term.
Support improvements in gross margin for example, we talked about the new product technology for high power.
In high voltage capacitors were calling them kv caps.
This is a really a unique type of a product line, where we can go to market was something very different and command.
Premium pricing and so this is the type of thing that will ultimately.
Allow us to breach the 60% gross margin levels and then grow from there.
So wed.
We'd like to think that we can continuously do better as you know as you continue to improve the gross margins it gets harder.
But based on what we're seeing based on fixed based on the portfolio getting stronger technology point of view, we think we can continue to improve our performance.
You want to add to that I think you did a great job covering it we are very pleased with the improvement that we've seen over the past quarter going up 170 basis points.
As Steve noted it does become a bit more challenging we do take a longer term view to many of the improvement initiatives that we have and to some extent come back around to some of the same initiatives to see if we can we can further improve them but.
It does it does become a bit more challenging.
We go forward.
Thank you guys very helpful and from my follow up maybe a question for Steve Steve you.
Touched upon this but what you're displaying at OFC in March.
International Symposium from microwave symposium, but.
Could you maybe give us an update on the timing of your laser opportunity for commercialization also silicon photonics. When do you actually expect revenues and then secondly, as a part of that question when I look at the laser industry I see guys in Malaysia business, having set a subpar margins Euro zone of a premium company with close.
To call it high <unk> gross margin.
How does that product fit into your your Grand plan from gross margin expansion.
So regarding the timing of revenue for the laser portfolio and I suspect you're.
Are you, referring specifically to twenty-five G F P and <unk> lasers, because those are the newest part of the portfolio and.
Because as you know we still are a main supplier to the G PON market with some lower data rate lasers.
We announced the new platform for our DSP product line back in September of 2019, and since then we've been working with customers to introduce the product get them familiar with the performance.
And in parallel with that running a qualification which is about a six month process as I highlighted in my script. We are just finishing up that long term reliability test it will be done.
Pretty much at the beginning of May.
And so we would expect our laser revenue from these new product categories.
As as early as the Q4 time period, but most likely Q1 of our FY 'twenty two in that timeframe and I end and just to level set we believe it will start at a low modest level then it will grow over time.
Highlight that we do have some significant advantages when we go to market as I've talked about before we've created a platform which allows us to.
Generate multiple wavelengths relatively easily.
Due to the platform and the design.
And your question about other companies, having lower gross margins.
Their laser portfolios.
I just like to highlight that we are I believe the only company today in the industry that is producing four inch indium phosphide lasers and the way we manufacture. These lasers allows us to do on wafer optical testing without cleaving the wafers in doing it.
With let's say a more manual than out in a more costly.
Test method. So we believe we have a cost advantage because of the size of the wafer and we have a cost advantage because of the methodology we employ on test.
And I'll add to that we are going after higher data rates and when we entered the specifically the <unk>.
The data center market, which we hope to enter next year next fiscal year.
We will do so with a premium product that has high reliability that can scale quickly.
And we're confident we can be successful there.
With that said it is a competitive market.
We believe that the laser portfolio will be accretive to our existing margins.
So.
We'll have to wait and see how that works out, but that's our current thinking.
The other thing you asked about of course with Silicon Photonics. So we continue to do design work with that portion of the portfolio.
Our primary focus is 400 G D R. Four and Dr. Juan picks. These are the does the discrete silicon photonic devices without the lasers attached.
And you will not see any revenue from silicon Photonics. This year. This fiscal year for May com and it's unclear as to the timing.
As to whether it will be first half or second half of next year I can tell you that we've had a few.
Challenges in the last two to three months regarding process control at one of our key suppliers on this technology and that is delaying a little bit some of the work that we're doing there, but just for modeling purposes.
You should expect silicon photonic revenues.
Sometime in FY 'twenty, two most likely in the back half.
And our next question coming from the line of Quinn Bolton with Needham <unk> Company. Your line is open.
Hey, guys. Congratulations on the record margins I wanted to ask Steve.
Steve You mentioned in the data center.
Gory $15 million your products going into of life next year can you give us a little bit more detail on what those legacy products are in.
Look at the data center business with sort of a flattening outlook for 100 gig CW DM for do you think that that business can continue to grow in in fiscal 'twenty two given the headwind from those legacy products.
Thank you for the question so the 15 million dollar decline.
I guess, you could organize that into sort of three different product areas.
First as we have.
Integrated OTI devices that service 10, and 40 G.
Applications and these are used.
Basically in transport network core layers.
These products were introduced by AMC prior to make them acquiring a MCC.
They were introduced in the 2009 and 2012 timeframe.
And as.
These networks have moved to higher data rates the need for the Tianjin and the 40 G product is falling off so that would be the first category that we would expect to see the decline in the.
The second is we have some older Ethernet phy products in production.
These are generally used in enterprise switches that operate at <unk>.
These products were introduced in the 2006 to 2007 timeframe Ed.
And again, we think that.
Next year will most likely be the last year that we will see revenue on those products and then the third is we.
We have a category we call Powerpc. This is at least a 10 year old product line that we actually end of life.
Over a year ago, mainly because the process was going obsolete.
And this these are basically general purpose processors.
That would be used in communication systems defense systems in some cases medical systems.
<unk>.
The industry has moved really away from these type of processors more to arm processors. So.
We believe that that that product set will also ramp down next year and we highlight this today because recently May Com's management went through a review of our fiscal year 'twenty two.
Projections and these items came up as notable declines and we wanted to put that information out there and share it with everybody.
In terms of your question about 100 G. C. WDM four growing next year I think the short answer is yes, we believe it will grow even though our lead customer today is leveling off their productions, we continue to win market share.
With the products that we're launching today and I'll highlight by the way as I talked about.
For one of the OFC demos, where we.
Our demo demo Ing, a 200 G and 400 gig chipset, which is.
Which is meeting the open eye analog.
Protocol. This is the first time, we're putting out for for this data rate of VIX will and driver combo chip.
VIX will driver and SEDAR combo chip as well as a TIAA and CD R driver.
Combo chip.
That's the first so while we have had limited success at 200 G. I can tell you that our combo chips again, the VIX will driver in Ctr and the T. I a N C D R just to be clear.
Those are new products to the market and we think that we will be well received with those products in terms of the.
Sort of our core CW DM for business.
We are as I said continuing to push new versions of existing designs, whether we're going from package devices too.
Bumped devices and shrinking designs down to make sure that we are fielding the most competitive solution.
And we're doing a lot of great work there. So we are still.
All in on CW DM for over the next few years, we think the volumes generally speaking we.
We will continue to grow.
Okay, Great and then my follow up Steve.
Steve is the new kv caps.
Capability.
Long will that take to sort of sample and qualify at customers. One when would you expect to see ramp from the new K B cap product line.
So.
The good news here is the design design and process for the capacitors should be relatively quick and we have a very large built in data our customer base right. So we have thousands of customers that today by our high voltage diodes day by some of our high power amplifiers and we know.
No. They buy capacitors, we were we were talking to one company that's in the medical industry and their purchasing over $20 million of high voltage cap capacitors, a year and that's just one company. So our sales force is being wound up right now to bring these products to market.
We believe we have a lot of existing accounts that will be interested in the product and so we would expect some modest contributions.
<unk> next fiscal year of course, there is a design cycle that needs to take place.
We will offer these as bare die as packaged parts as well as screened for military and space.
So it's a great product line, we believe it should be relatively easy to sell given it's so unique most capacitors that are at the 1000 volt level and above are typically ceramic capacitors, which are larger and arguably less reliable or their large packaged.
Capacitors using slightly different technologies. So what's unique here is achieving really 1000 volt operation at the chip level and that really speaks to the technology that we have at the low facility here in Massachusetts, and our ability to do.
I'll say complex etching and trenching.
<unk> B is to allow us to achieve these voltages. So modest contribution next year. The team is excited about the launch and we.
We will have to wait and see ultimately what generate what revenue we generate next year, but it.
Certainly.
It will be a fast selling cycle.
Our next question coming from the line of C. J Muse with Evercore. Your line is open.
Yes. Good morning. Thank you for taking the question I guess, a little bit of a follow up to the last question a question for you Steve.
I guess two part on the industrial side can you speak to the sustainability of the strength that you're seeing into September and beyond and as part of that can you update us on where you where do you stand on the cross selling aspect of bringing incremental.
I guess tools to the portfolio and driving incremental growth, we'd love to get an update there.
Sure.
So the R&D is.
As everybody knows has really been range bound in revenue over the last three to four years between 40 and $50 million.
And what you've seen here in the last few quarters has some significant growth.
Now, where we're above $70 million.
A lot of that is being driven by the things I talked about on the in the script, including cross selling including winning market share.
I've mentioned the palette that we recently won a multi hundred watt.
Power amplifier for a radar system.
So.
Whether whether the.
Certainly having sequential growth of 17% I would argue that's probably not sustainable and we wouldnt you don't expect to that of course.
But I think over the long term you will start to see that part of our business grow. It's we have a very diverse customer base. It's not only defense. It's also industrial we include automotive and industrial and recently we've seen.
Uptick in our automotive business in our sensor business.
In terms of the cross selling.
That work continues and I can tell you, we're starting to see requirements for RF over fiber, we're starting to.
Introduce our optical design capability to defense contractors for the first time.
And we're bringing more high power interesting products to the defense industry and we're getting a lot of a lot of accolades and a lot you know a very warm welcome there. So the cross selling continues and by the way it's not just optical into defense. It's also <unk>.
Analog and mixed signal into industrial markets.
Our HPA or high performance analog team, which has historically been focused on.
Telecom is now doing custom analog designs for defense contractors and industrial companies, whether they're drivers circuits, whether there are complex switching networks of regulators.
So there you know the team is fully embracing the concept of diversifying.
Their businesses and their revenue streams, so that work will continue from.
Generally speaking, we do have a long term view at our business and so some of these things will take time to.
To turn into revenue, but I think we're doing all the right things.
Very helpful and then Jack.
Flow up to supply constraint question earlier from telling me.
You talked about 5 million Pushout from June do you expect.
The supply constraints.
B fixed into the second half of the year or is that an ongoing headwind that we should be thinking about it through the calendar year.
Yes, I think it's something that we're paying close attention to at this stage, we kind of view it as a as a one time item.
We're going to be working through but we will continue to monitor as we as we go forward.
Thank you.
Our next question coming from the line of choice Lindbergh with Stifel. Your line is open.
Yes, Thank you and congrats on the record margins I had two.
Two clarification questions first of all.
Steve when you talked about five <unk>, China, we use suggesting that there's been delays or are you, suggesting that's just very low visibility as when those deployments are going to start or restart.
So we've been expecting a new round of tenders to emerge in a b.
Basically we.
Six months ago, we were expecting the new <unk>.
Tenders to emerge in the April timeframe and that Hasnt happened and now there's talk about the China operators, starting sort of a new cycle of bids, possibly in the June timeframe in and around the World Telecom day.
Event so we.
We are our eyes are on the new tenders now if we look at the number of <unk> base stations deployed.
In calendar Q1 of 'twenty one it was about 48000 base stations. So there's still continues to be five G deployments today, but those deployments are based on last year's tenders in and.
Last year's contracts. So we're focused on the new tender cycle and from our point of view that that event Hasnt started yet.
Thanks for that clarification, and then on the on the other one which is a little bit more longer term you talked about how in telecom, obviously youre going to have more opportunity so I'd get a new products.
Could you maybe talk about that in data center too because there's a lot of puts and takes here, but it does sound like an aggregate, especially with the lasers being qualified for a data center that you know over time, you would have more opportunities in data center as well, even though it's a smaller business unit.
Well that's right.
I didn't mean to sort of underserved or focus on the data center of course so.
The growth drivers for us are really organized into.
Different product sets. So of course, we have the 100 G antolik seduce solutions, which are mostly to day CW DM for NRC type applications.
Then you layer on top of that 204 hundred G analog solutions for Pam four.
And I talked about some of the new combo chips that we've launched for that.
You have 400 GE ml drivers.
And.
400, G linear Tas and these would be for D. R. Four type applications.
We have as you know a Pam four DSP in production today, It's 100 G. Pam four DSP that started production.
About a quarter ago, maybe two quarters ago, and those are all of our existing products today running in production.
And to the extent that we can win market share that those base product lines will grow.
And that is our expectation when.
When you add on top of that some of the new technologies, you would add of course the lasers.
And we plan on targeting the datacenter with our laser technology.
At the beginning of our next fiscal year.
Of course, you can add photo detectors as well as the data rates go higher we have a unique technology coming from our Ann Arbor fab for very high speed pick.
<unk> detectors, which would be used inside the data center and then we have new technologies that we're developing including active copper cable, which are allowing us to not not only service the aoc market, but also the copper market and we have some very exciting technology there.
And then sort of last and maybe furthest out as the silicon photonics that I talked about earlier, where.
We're focusing on first 400 G applications. So we do have a very large suite.
Any one of those product areas could drive significant growth for us of course, we're at a run rate right now.
Mid $30 million run rate, so certainly one laser design win.
It could be millions and millions of dollars inside the data center and so.
We're very focused on making sure that all of those different product lines that I talked about will be successful.
Okay.
Our next question coming from the line of Karl Ackerman with Cowen. Your line is now open.
Yes. Thank you two questions if I may.
First one is.
More of a.
Housekeeping question, but which is on gross margins.
I understand that there are there are rising sub trade and shipping costs.
Evidence by many of your peers.
So I appreciate if you could walk through what supports your systematic improvement of gross margins for the June quarter, Despite flattish revenue.
In particular, such as new product mix versus price and I have a follow up.
Sure.
Maybe again I'll try to help answer that and then Jack can step in.
So a vast majority of the improvements are coming from.
Operational execution yield improvement.
Focusing on wringing out costs, along with our manufacturing.
Reduction lines and that is that is has been and will continue to be a big effort and we still believe there is ample opportunity to improve that.
And then second there's a mix component depends.
Depending on the product lines of course, depending on the.
The different end markets. So.
From our point of view, while we achieved.
Nine year record high if you look at our gross margins and compare them to.
Our high performance analog and mixed signal company, that's a multibillion dollar company.
These companies have margins that are in the high <unk> and low seventy's and Thats, what we aspired to achieve and that will take time and it will it will happen when we begin to increase the number of unique products to the market.
When we can command premium pricing and that's a long term effort and so doing things that other people can't do like thousand bulk capacitors like one four micron Gan on silicon carbide.
Doing.
400 G high end.
Analog solutions to knock out a DSP. These are things that are that will create value for the company and that will certainly be our focus and I'll highlight that we are very focused on the industrial and defense markets and as I mentioned earlier. This is.
An area for May come that's been range bound for years, and we are breaking through that now and when you move into that space, you generally see less commodity and a lower.
Less commoditization, let's say of the platforms, so youre able to command stronger pricing and so whether it's selling products to our satellite manufacturer or a defense contractor.
Or focusing on industrial or even medical equipment. These are these are markets that demand performance and that's going to continue to be a focus for the company.
Did you want to add to that I think you did a really good job covering that but we are seeing margin improvements across many of the product lines that we do serve so it is fairly broad based and not just limited to the the indie items that Steve was referring to.
Great. Thank you for that.
Maybe for Steve.
And my follow up I was hoping you could describe the level of orders you are seeing within your RF and I guess telecom business more broadly.
I asked because some of your peers across the comps supply chain.
<unk> spoken about a push out in China tender activity and weaker massive mono production plans, which you touched on a little bit in your prepared remarks at the same time one of your peers recently spoke about improving 10 gig PON activity. So I'd love to hear your thoughts on.
I guess why there is a pause in tenders and what are the investments in PON.
Our percolating into front Hall, where you should benefit from our recently introduced front haul lasers. Thank you.
Sure well just a few comments so there's.
<unk> has a very unique portfolio Theres really no company in the industry that has a direct peer that represents our product portfolio. So we are in very different markets.
And in most of our peers are more focused let's say in one technology set. So we I think we have a very unique portfolio, where we have RF microwave high performance analog and optical and so I think we're in a little bit of.
Unique position, which makes it difficult to do that one to one peer.
Comparison rig.
Regarding telecom.
Actually.
This past quarter it was our.
Strongest booking in new order and market segment. It had it had the highest.
Level of bookings, if thats and thats a bit of a obviously, a leading indicator of things to come.
And that was driven by a broad.
Business.
Broad drivers not just five G. We.
We are seeing strength in.
Cable infrastructure, we are seeing strength in satcom.
And so we think that.
We're gaining market share there.
I in terms of your question about why the pause in the tenders I really can't answer that and then as it relates to Teng PON I can say that the growth from E com will come from new product introductions there.
We do believe year over year from FY 'twenty, one to FY 'twenty, we will have very strong year over year growth and that will be even better when we look FY 'twenty two to FY 'twenty one.
We are just <unk>.
Moving some of the latest products into the market I mentioned, we do have a burst mode TIAA, but.
We have a better one coming that we think we will.
Allow us to gain market share.
And then the one question you had about the Teng laser.
That laser is.
Not ready for production yet.
It will be ready for production.
Beginning of next fiscal year.
And our next question coming from the line of Ruben Roy with West Park Capital. Your line is now open.
Thank you for taking my question, Steve I think you just touched on this but.
Maybe just talking about it just a little bit more based on your guidance for the June quarter, and you know assuming we don't see a big falloff in the September quarter, you're on track to hit that low.
Double digit growth that you guys had targeted.
As a soft target for the fiscal year end and you just talked about 'twenty, two possibly being a bigger growth.
Year than 'twenty, one so I just wanted to talk about that a little bit you know in terms of 'twenty two it sounds like you have a couple of drivers coming out potentially <unk> coming back in China, new products ramping, including the 25 G lasers.
What youre doing with cross selling et cetera, but when you look at all of that in aggregate. He can you give us an idea of how youre thinking about each of those items as you know relative to each other and it's driving the growth.
You look into next year, which are kind of the biggest growth drivers that you think.
20 to maybe grow faster than 'twenty, one and you know if I'm on track thinking about that the right way.
Sure and just to clarify I'm not sure I did say that FY 'twenty two will outpace FY 'twenty, one I may have been referring specifically to a product line or a product set. So we have not given guidance and have not commented on what we expect our FY 'twenty two growth level to be.
That's that's work we're currently doing today and.
It's just too early to talk about how we think FY 'twenty two might shape up obviously, what we talked about is our growth will come from new products and that's why the heavy emphasis on talking about the different things that we're doing and to the extent that <unk> kicks in and we have success with not only on the power.
Side, but also on the optical side and some of our new front end modules that were.
Gaining traction on we do think it will be a very or has the potential to be a very good year.
But I wouldn't necessarily want to call out any one of these product categories. The way we the way we organize our business we have six engineering silos, let's say each one is very focused on.
Growing their individual businesses are our largest.
One of our largest segments as HPA and diodes, and so we would expect those organizations to have.
More modest growth, let's say compared to.
Our smaller units such as RF power, our RF power business has tremendous potential.
And our Lightwave organization has tremendous growth potential and these are some of our smaller.
Our business units, let's say so in aggregate will have to see how it how it works out.
And that's certainly work that we'll be doing between now and the end of our fiscal year.
Okay, Yeah, thanks for that Steven and just a quick follow up for Jack Jack You mentioned.
Inventory on your balance sheet, just wondering if you have any comments on channel inventory.
And in fact, some of your end markets.
And that's something we're very proud of the inventory improvements we've made on our balance sheet over the past the past 18 months or so.
We pay special attention to that to make sure we've got the right levels of inventory.
And we will work very closely with our customers to to ensure we've got the right inventory to meet their requirements and from a channel perspective, we continue to monitor that we believe that.
That the inventory levels, there remain at fairly healthy levels.
Which I think bodes well for us as we as we go forward.
Our final question coming from the line of Harlan sur with Jpmorgan. Your line is open.
Hi, good morning, great job on the quarterly execution and strong results, especially on the margin front.
The U S defense spending budget is quite strong this year. It was strong last year it looks like the proposals from <unk>.
If we're spending levels to sustain at these current strong levels.
I believe the visibility here is very good because obviously these programs are very strategic in nature. So.
Does the team see further growth in your defense business next year and I know you can't disclose specific programs, but the strength you are seeing in defense are centered around what areas of the radars and weapons systems No com Uavs ground based airborne any color here would be great.
Sure.
And.
We view, our defense business as so small relative to the overall budget and growth opportunity.
And as I highlighted its an area of focus for the company part of our growth I have to say well will come from new account penetration and we do not have.
Strong relations with the major U S defense contractors as we should and so we're still working on that which is a very fundamental issue that we're making great progress resolving in fixing and when we do that we think will we'll start to see for the first time opportunities that we just hadn't seen before so the team is doing a great job.
U S sales force is absolutely phenomenal.
And they continue to impress.
Jack and I as to the type of opportunities and the quality of opportunities out there that they're digging out the other thing I'll highlight I'd highlight is we're not a sub system house, we are focused on component level or or high power amplifiers sub assembly type applications and we will only go after.
A subsystem if it's if we believe we have tremendous leverage from the chip point of view to.
To leverage into the the overall sub system.
Your question about what are the main applications. So.
Most of our defense business revolves around RF and microwave components. So it's primarily.
Discrete diodes.
RF and microwave mimics power devices and these are typically used in.
As you highlighted radar.
Radar mill Com.
Ground based radar shipborne radar.
We have <unk>.
Content to numerous missile applications.
That's growing and those are generally high volume applications as well. So the good news is we have a very diversified.
Business within the defense area, and it's just getting more diversified.
And the fact that we're now letting a lot of radar houses know that not only do we have best in class Gan on silicon carbide, but we're willing to build very high power amplifier for you because we have the expertise to do it.
<unk> makes the growth opportunity even that much more exciting.
So I think we're doing all the right things there.
As you know we highlighted on our last call the new relationship with the Air Force Research labs to bring in some very high frequency high power Gan on silicon carbide to our low manufacturing facility and we believe this process will have some of the best power efficiency.
The numbers in the industry so.
We are very focused on the defense industry and we do expect.
To win more market share.
Great and then from a.
Maybe switching from two or more product new product perspective, you know last call you guys talked about the potential opportunity for active copper cabling and the data center short reach you mentioned it today as well obviously, it's more economical person is asking about optical cabling and we're hearing more and more from some of your cloud data center.
Architects and customers talking about ACC.
Can you give us a sense in terms of what high performance analog solutions, we're developing for this new opportunity and maybe timing of a product introduction.
So.
We are engaged with the major customers that would want to build an active copper cable and we are following there.
Roadmaps.
These are so I don't necessarily want to get into the specific data rates or or construct per se.
But we are we are one year into this and we.
We would expect that if we're successful with some of our lead customers that it will provide some new production next fiscal year. So it is a very interesting area.
We are very excited about the volume. So these are generally.
You know very high volume applications.
We think.
We can solve problems that they haven't.
Had other vendors solve so we're bringing a new capability.
Maybe a better capability design capability to solve the problems, but generally speaking these are higher higher data rates.
I, probably shouldn't go into any more detail until we make formal announcements.
And I'm showing no further questions at this time I would like to turn the call back over to Steve Daly for any closing remarks.
Thank you in closing I would like to acknowledge our customers our suppliers and our hard working employees for making all of these results possible. Thank.
Thank you very much.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
Yes.
John.
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