Q2 2022 MACOM Technology Solutions Holdings Inc Earnings Call
[music].
Welcome to make come second fiscal quarter 2022 conference call.
This call is being recorded today Thursday April 28 2022.
At this time all participants are in a listen only mode.
I'll now turn the call to Mr. Steve Ferranti, <unk>, Vice president of strategic initiatives and Investor Relations. Mr. Ferranti. Please go ahead.
Thank you Olivia.
Good morning, and welcome to our call to discuss May Com's financial results for the second fiscal quarter of 2022.
I would like to remind everyone that our discussion today will contain forward looking statements, which are subject to certain risks and uncertainties.
Find 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 filings with the SEC.
Management 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 and related form 8-K, which was filed with the SEC today.
With that I'll turn it over to cold feet Daly, President and CEO of <unk>.
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 review our fiscal Q2 results. When Jack is finished I will provide revenue and earnings guidance for fiscal Q3, and then we will be happy to take some questions.
Revenue for the second quarter was $165.1 million and adjusted EPS was <unk> 68 per diluted share.
We continue to improve the quality of our earnings at both gross and operating margins increased sequentially.
We also generated strong cash flow ending the quarter with over 500 million in cash and short term investments, which is a record level.
Our financial performance reflects the numerous improvements we have made across many aspects of the business.
Overall demand for our products continues to increase.
Our book to Bill ratio for the quarter was one two to one representing the sixth consecutive quarter above one.
Our backlog is again at record levels, which is helpful. As we plan the remainder of fiscal 2022.
We believe that the strong Q2 bookings reflects market share gains market traction from our new products as well as long lead orders, which are being placed well ahead of the required ship dates.
Our turns business was up slightly to approximately 19% of our total revenue during the quarter.
The business metrics for our new products shows favorable performance in aggregate as a percentage of total revenue products less than three years old are contributing more to revenue today than in the past and with gross margins that are higher than our current corporate average.
These trends are in line with our strategy to build a diversified and highly profitable product portfolio.
Our team continues to work effectively to accelerate product and technology developments to meet our future goals, we are investing a new HR programs and benefits for our existing employees as well as expanding our workforce with additional design operations and sales staff.
I am pleased with how our team has been performing and what the amazing New talent, we are attracting to the company across all functions of our organization.
Revenue breakdown by end market for Q2 was as follows industrial.
Industrial and defense was $67 1 billion teller.
Telecom was $62 9 million and data center was $35 1 billion.
Data center and telecom revenues achieved strong double digit sequential growth, which was offset by a decline in <unk> revenues due to timing of shipments.
Additionally, we expect our top line growth in the second half to be slightly higher than in the first half of our fiscal year.
Now moving to our three end markets.
The industrial and defense markets have been a focus area for me calm because we believe these markets have the potential for significant revenue growth over the next few years.
Customers in these markets typically produce products with long life cycles, which can create an annuity like revenue stream from E com.
In part our strategy is focused around strengthening and expanding our high performance product portfolio to better address the highest frequency highest power and highest data rate opportunities across these markets.
<unk> customers are performance, driven and they look to adopt new technologies we.
We will engage this market with our proprietary semiconductor technologies, our IC design capability and our growing subsystem design capabilities.
Our continued focus on this market is uncovering numerous large opportunities in which our technology is a perfect match for the customers' needs.
We see opportunities with our new 0.14, Micron Gan on silicon carbide mimic process.
Our pure carbide high power amplifiers, our analog and mixed signal Ics and our specialty optical and RF subsystem products.
Our new products are creating a growing pipeline of meaningful opportunities involving a variety of ground airborne and ship based programs, including radar electronic warfare avionics and microwave communication applications and I am pleased that we are now engaged with some of our largest customers to insert <unk>.
<unk> connectivity technology in their applications.
I'll note, we maintain a long term perspective in this market because most defense programs take a long time to transition to production. However, the programs have long life cycles, and we are able to stacked up multiple programs with high dollar content, which makes the financial returns compelling.
I am pleased to announce that in Q2, we were awarded a multimillion dollar two year development contract to produce a 45 kilowatt transmitter utilizing our gallium nitride amplifier and phased array antenna technology.
Government contract with the Navy validates that our Gan amplifiers and phased array technologies are best in class.
Congratulations to the capture team for this award.
Our telecom end market revenue increased sequentially in Q2, following a strong Q1, we.
We continue to experience broad strength in demand across various telecom applications, including five G Metro long haul broadband access and broadcast video.
As a reminder, telecom is a very broad and diverse end market for may com spanning numerous communication protocols network architectures and apologies.
Today, we are only delivering a fraction of the overall opportunity for this market our.
Our primary long term growth drivers across these market opportunities will be new product introductions.
As an example, we recently announced availability of our 128, Giga baud trades and Pete it's amplifiers and modulator drivers for coherent networking applications.
These new products improve upon may comps already strong competitive position in these markets by supporting long haul metropolitan and data center interconnect or Dci applications.
This new product family includes high bandwidth low noise and low power consumption dual channel and Quad channel <unk> and Quad channel drivers that are designed to enable coherent transmit and receive systems that operate from 800 gigabit to one six terabits per second.
Additionally over the last several quarters, we have been gaining traction with five Oems and old ran equipment manufacturers for our RF portfolio of front end modules high power switches and amplifiers.
A number of our customers have recently moved programs to low rate initial production using a power amplifier products.
Here, we are providing a 100 watt 221, and 450 Watt peak power Gan on Silicon carbide amplifiers for small cell and macro base stations for both U S and international deployments.
The base station power amplifier market is large and comprised of numerous opportunities spanning different customers frequencies and power levels. We are just beginning to penetrate this market.
Demand for our Lightwave products for Telecom and access application also continues to grow, especially for our 20 <unk> lasers, we have multiple <unk> front haul customers and low rate production with our lasers, primarily for CW Dms six modulation schemes.
Our expectation is that production volumes will increase over the next six to 12 months.
Finally, our data center end market revenue was up in Q2 based on incremental demand from our high performance analog solutions, which include <unk> <unk> and driver products.
In March we attended the 2022 optical fiber conference or OFC in San Diego, where we had more than 10 product demonstrations to showcase our latest products.
For example, one of the demos include included a single chip laser array with eight CW lasers, each operating at different wavelengths.
The laser array utilized may comps etched facet technology and is ideal for co packaged optics.
This laser array was developed to work alongside one of our customers chipsets to enable connectivity at speeds as high as two terabits, making it ideal for AI or high speed chip to chip connectivity.
<unk> is currently engaged with several customers to enable data center interconnect requirements at 800 G and one six terabits.
With our next generation linear drivers and <unk>.
In some instances, we will support a linear interface architecture also known as direct drive to optimize performance of the entire signal path from host switch AC to the optical interface.
One of the first expected deployments will be for applications addressing deep learning and AI for high performance computing utilizing low latency infiniband networks.
And last May Com is pleased with the customer interest level and our recently introduced linear equalizers, we see growth opportunities in active copper cable applications at both 200 G and 400 gig data rates for high performance computing platforms.
The foundation of our growth strategy revolves around introducing new product lines, new technologies and raising the bar on semiconductor performance in areas, where we choose to compete.
We often use trade shows as a venue where.
Product announcements and for our teams to drive deadlines associated with these events.
IMS or international microwave symposium, which supports the RF and microwave industry is less than two months away.
During this event, we plan to unveil some of our latest products technologies and product lines.
At this year's event, we play it to demonstrate our highest power level amplifier.
And power amplifier, which delivers four five kilowatts of RF power almost one seven times higher than our two six kilowatt device, we introduced last year.
Our first eight watt <unk> massive mimo Gan on sic power amplifier modules or pants, which include driver stage Cmos power management, Ics and of Dougherty output stage.
We'll introduce the first Gan mimics products from our internal <unk> 0.14, Micron Gan on Silicon carbide process, specifically, a 10 watt ku band mimic chip.
We will also introduce our first wave guide packaged products, specifically on E band power amplifier module, which combined 16 of our 80 gigahertz mimics using a novel wave guide combined.
And last while we've been utilizing soi technology in our <unk> RF modules for some time, we are launching our first soi standard product of D. C that 67 gigahertz switch for test and measurement and Ied customers.
Perhaps most notably at IMS, we plan to demonstrate our first bar or bulk acoustic wave product.
<unk> technology is a passive silicon crystal filter technology used in most handset and wireless applications to filter unwanted signals.
We are not targeting commercial wireless applications or consumer electronic markets, but rather high performance industrial and defense Electronics. In addition, our team plans to implement novel semiconductor processing techniques to push the frequency performance of Bot technology.
<unk> technology is limited to about six gigahertz, and we plan to push our technology through 15 gigahertz.
Customers have a growing need to filter out high frequency signals and their microwave systems. Our goal is to enable solutions with filter base with filters based on our proprietary semiconductor processing techniques.
That IMS or chip scale package bought product will be showcased in two applications to channel switch filter bank and alongside our May comp comb generator to selected desired frequency.
It is difficult to estimate the size of this market, but we conservatively estimate the opportunity exceeds $100 million and we believe customers will be willing to pay a premium for our technology.
Before Jack reviews, our financials I would like to highlight that in March we celebrated our 10th anniversary as a public company.
Today May com is recognized as a trusted partner and I congratulate our entire team for their hard work and significant contributions to both our customers and the industries we serve.
Mark the anniversary, our marketing team updated and launched a new website with a modern look and feel which better organized as information it approves product and improves product navigation. So our customers can quickly find the information they need.
In summary, we have many compelling new processes underway world class IC designers and unique manufacturing and packaging capabilities I am confident we can continue to push the boundaries of semiconductor engineering.
Jack will now provide a more detailed review of our financial results.
Thank you, Steve and good morning, everyone. We.
We continued to build on our sound financial performance during our second fiscal quarter ended on April <unk> 2022.
Revenue for the second quarter was $165 1 billion up three 5% quarter over quarter.
On a geographic basis revenue from our domestic U S customers was approximately 45% of our fiscal Q2 results representing geographic diversity across our customer base.
From a supply standpoint, the environment continues to be challenging for our operations planning and logistics teams.
The recent resurgence of COVID-19 in Asia has resulted in additional lockdowns in various cities, which has an impact on some of our outside assembly and test suppliers.
Also shortages of certain key components and production capacity limitations within our supplier base is impacting our ability to ship product.
We expect these conditions to improve modestly in the second half of the fiscal year.
<unk> operations team has done an excellent job managing through this difficult environment, enabling us to meet our near term revenue goals.
Adjusted gross profit was $101 9 million or 61, 7% of revenue.
30 basis points sequentially.
Q2, adjusted gross margin came in towards the upper end of our guidance range based primarily on continuing operational improvements.
We are pleased with our growing gross margins and expect further improvements over time, albeit at slower rates.
Total adjusted operating expense was $51 million, consisting of R&D expense of $31 $8 million and SG&A expense of $19 2 million.
Total operating expense expenses were sequentially up $2 million from fiscal Q1, 2022, driven by an increase in R&D and staffing related costs.
While we anticipate modest increases in opex over time, as we grow our R&D capabilities invest in new technology development and expand our product portfolio, we do expect to maintain fiscal discipline over all of our discretionary spending.
Adjusted operating income in fiscal Q2 was $50 9 million up from $49 1 billion in fiscal Q1.
Adjusted operating margin was 38% for fiscal Q2 sequentially up from 37% Q1.
Depreciation expense for Q2 was $5 8 million and adjusted EBITDA was $56 $7 million.
Trailing 12 month, adjusted EBITDA was $213 9 billion as compared to $205 1 million in our prior fiscal quarter ending in December 2021.
Adjusted net interest expense in fiscal Q2 was $1 million down approximately $200000 from fiscal Q1, primarily driven by higher short term investment balances and the associated interest income.
Our adjusted income tax rate for fiscal Q2 was 3% and resulted in an expense of approximately $1 $5 million.
Our net cash tax payments were approximately $500000 for the second quarter up $300000 from fiscal Q1.
We expect our adjusted income tax rate to remain at 3% going forward.
Fiscal Q2, adjusted net income was $48 4 million compared to $45 4 million in fiscal Q1.
Adjusted earnings per fully diluted share was <unk> 68.
Utilizing a share count of 71 1 million shares compared to 64 of adjusted earnings per share in fiscal Q1.
Now moving on to operational balance sheet with cash flow items.
Our Q2 accounts receivable balance was $106 million up from $97 4 million in fiscal Q1.
As a result days sales outstanding were 55 days, our accounts receivable balance reflects an increase over prior periods, primarily due to higher revenue and the timing of shipments during the quarter.
Inventories were $93 4 million at quarter end up by $4 8 million sequentially inventory turns were two seven times down sequentially in Q2 from two eight times in the prior quarter.
These higher inventory levels are to support future revenue growth.
Fiscal Q2 cash flow from operations was approximately $42 5 million up $8 4 million from our prior fiscal quarter.
Capital expenditures totaled $7 1 million for fiscal Q2, as we further invested in our fabs facilities and R&D equipment.
We continue to expect our strategic capital investments for fiscal year 2022 to be in the range of $30 million to $35 million.
Free cash flow was $35 4 million for the second fiscal quarter up $6 4 million sequentially, mostly due to higher adjusted net income.
Now moving on to other balance sheet items cash cash equivalents and short term investments for the second fiscal quarter were $503 million up $25 3 million sequentially and $235 million or 88% from the previous year's second fiscal quarter.
We view, our cash and short term investment balances as a strategic asset that will help support future growth initiatives as we go forward.
With further improvements in trailing 12 month EBITDA, our second quarter gross leverage is currently two eight times down from two nine in Q1.
Further our net debt is now around $100 million and net leverage is currently below one.
Prior to our annual stockholder meeting in March and throughout the year, we conducted extensive investor outreach focused on better understanding the concerns and perspectives of our stockholders, including diversity governance and other topics related to ESG.
We discussed our ongoing companywide review of ESG related matters and initiatives with the goal of enhancing or creating additional policies programs and practices over time.
Finally, I would also like to highlight that last week, Moody's upgraded our corporate credit rating from B to could be one.
We view this as continued recognition of our proving operational and financial achievements during the past year as well as our ongoing and consistent efforts to improve the business. These.
These improvements across the business would not have been possible without the team work and dedication of the entire may come organization and I'd like to thank our team for their efforts.
I'll now turn the discussion back over to Steve.
Thank you Jack <unk> expects revenue in Q3 to be in the range of $168 million to $172 million.
Adjusted gross margin is expected to be in the range of 61% to 63% and adjusted earnings per share is expected to be between 68 and <unk> 72.
Based on $71 3 million fully diluted shares.
In Q3, when compared to Q2, we expect industrial and defense revenue to increase by approximately 5% to 10% and telecom and data center revenues to be relatively flat.
As I highlighted earlier, we expect our second half FY 'twenty to growth to outpace our first half FY 'twenty two growth.
In summary, we stand in front of a multibillion dollar Sam with a unique and growing technology portfolio. Our strategy is to further diversify our 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.
Thank you, ladies and gentlemen to ask a question at this time you will need to question Star then one key on your touch on Joe.
And a concentration of time, we ask you to please limit yourself to one question and one follow up.
Please standby will be compiled a kidney.
Now first question coming from the line of Quinn Bolton with Needham <unk> Company. Your line is open.
Hey, guys. Congratulations on the nice steady consistent results I wanted to just ask with the business mix shifting around a little bit what are your expectations for year on year growth by segment in fiscal 'twenty, two it sort of feels like.
The telecom business.
Maybe stronger than what you might have thought.
A quarter or two ago and.
I'm wondering if you still think data center is tracking to be up slightly fiscal year 'twenty two versus fiscal year 'twenty one.
Hi, Quinn good morning, Thank you for the question so.
Your comments are accurate.
In terms of our outlook for the full year.
We are seeing very strong growth from telecom and we expect that to continue.
Through Q3 and Q4.
And we do also expect Bull's eye and D and the data center to deliver year over year growth and we do believe we are on track to deliver a minimum of 10% growth for the full year.
We're seeing broad strength across all of our markets our book to Bill.
Across all market segments. This past quarter was again close to 1.2 individually let site.
So very strong broad.
Performance across all of the segments and we are on track.
Our original planning as we looked into the year for at least 10% growth.
Great and then my follow up question just on the data center business sounds like it came in a little bit better than expected in the March quarter, but I think you had talked about last quarter, having pretty solid backlog and your biggest challenge was sort of supply constraints I'm wondering if you could just sort of talk about the supply constraints.
Do you think youll be able to hit that very strong customer demand as you look into the September quarter on on the data center side.
So all indications are we will and as we sort of roll the math for the back half of the year, we see our data center business.
<unk> segment in Q4 being close to $40 million so.
In a lot of that is coming from improvements in supply chain, but with that said, we do see some positive trends within that segment, including as I highlighted in my comments.
Very strong interest in our linear equalizers for copper cables for both 204 hundred G.
We see that all of our Pam four.
<unk> segments or subsections of the datacenter are up.
We see all of our 400 G business growing.
And we're starting to get more involved with high performance computing at the higher data rates that I talked about so there's a lot of positive trends there within the data center that will certainly help our.
Long term growth.
Prospects.
And our next question coming from the line of harsh Kumar with Piper Sandler Your line is open.
Hey, guys. Congratulations on my part as well as solid execution in these kind of any troubling times.
Steve.
You seem to be very excited about the telecom business and that was and you cited a bunch of opportunities there, but I was just curious maybe if I was asked if I would ask you to stack rank your top one or two opportunities that you're most excited about within telecom, but are you seeing near to midterm. The most amount of growth will come from.
Yes, so I think thats a difficult question to answer because we have so many moving parts within telecom if I just look at the performance in Q2, the strength of the growth came from primarily <unk>, both on the RF product side as well as the optical side.
So that would include products like front end modules and then analog Ics for front haul and also we're starting to get traction with our lightwave components bolt on the laser side and the photo detector side.
Side of some of the the front haul platforms. So that's certainly supporting the growth and this is these are.
Product lines that we've talked about during the course of the year. So we're very pleased that things are coming together as we had expected.
We're also seeing growth from what we call access markets, which includes 10 G PON.
We have a very strong position with some of our analog chips within that market.
We are also starting to support that market with photo detectors, which is a content gain for that market for this year and later on this year and going into next year, we plan on adding lasers to that market, which will really.
Turn that market on from E Com and as you know historically when May com was supplying lasers to the two and a half G. PON market. There were quarters, where we were doing $10 million to $20 million of revenue per quarter, just for that market segment alone.
And then the last thing I would add is metro long haul business is also very strong right now.
Not only our legacy 32 gigabyte business, but also the new content for 64 gigabyte and as I highlighted in my script, we're introducing our 128 gigabyte products as well so we really have a nice position there.
The common denominator for all of these.
Markets is really infrastructure. We are we are getting good traction.
Within the infrastructure markets within telecom and.
No certainly quite pleased about that.
Thanks, Steve. Thank you for that color very helpful. And then this is a good segue into my next question.
You guys are on the work actually started launching lasers in selective markets shutting telecom is one which you highlighted already.
I was curious of the 40 million number that you cited for the fourth quarter for the data center business doesn't have lasers in it.
And then secondly can you help us think about understanding what the scope of your entry into lasers is and perhaps sham or Tam opportunity.
This entry into the variety of markets associated with lasers.
Thank you sure.
Yeah. So.
Yes, there is contribution of laser revenue within the datacenter segment and it really is in two areas. It's land W. D M, which is currently in production and we expect growth.
In the back half of the year with that platform and Thats, where the data center.
And then the other is CW team for winning market share and that we expect to also happen within the next six months.
So so that that sort of answers. Your question about is there laser revenue within the data center. So the answer to that is yes.
But more broadly.
We're looking at.
Telecom and specifically <unk> and we are we've been working for the last year and a half on gaining market share in and getting customers to qualify our product. We are seeing traction for CW D. M. Six and also by di platforms.
Bi directional optical links and.
We're very interested in this market because we believe may com has a competitive advantage because we're on four inch indium phosphide.
We do all of the testing of the laser.
And the leasing of the laser at wafer level, which is a differentiator.
Because our competitors cleaved the wafers and test after that so.
So we just have a far superior cost structure and so when we launch these lasers they.
They will be accretive to our gross margins. This is a very profitable part of our business.
Certainly it's helpful for us.
<unk>.
Our goal to increase gross margins and then the last thing I'll add is the laser or.
Our laser business is really a portfolio. So today, we sell fabry Perot and <unk>, which are generally good for two to 15 kilometer links we.
We sell CW lasers for folks that are using silicon photonics.
We are launching higher and higher power CW lasers, as well and we also have aspirations to extend into other types.
Types of laser classes, including <unk>.
Which is for the longer reach.
Applications and we were very attracted to <unk> because these have very strong price points and we also believe that there is a shortage.
Capacity in the email segment and so over the long term you're going to see more laser families coming out into more markets of course, there's other industrial markets that consume lasers, and we're continuing to do a better and better job there and I'll highlight by the way we recently just exceeded it.
10000 hour.
Qualification milestone for our DSP platform.
<unk>.
This platform is the foundation of our email business or future business, which would target the data center.
And our next question coming from the line of Charles <unk> with Stifel. Your line is open.
Yes.
This is Jeremy calling for Tori.
Congratulations on the execution here.
Just a follow up on the laser comments can you give us a quick.
Update us in terms of the competitive dynamics.
If there's been any changes in terms of.
Supply chain or recent geopolitical.
Impacts on the competitive landscape here.
Yeah. So.
Well first of all the laser segment is a very competitive segment and so we have we have U S companies. We compete with we have Asian based companies that we compete with Chinese companies that we compete with as well so it's very competitive, but I would say no theres really no.
There's really no shift we have we have seen some smaller companies discontinue.
Some of their product offerings.
The laser is really.
Cornerstone technology for optical links and customers are very careful about bringing vendors on for high volume applications.
Because of the laser stopped leasing the link.
Is it for the late so we have been making sure that when we step into this market, we lead with quality and reliability in that.
We want customers to know that we're studying some of the highest marks in terms of not only functionality, but reliability.
But to answer your question directly I would say no there's no real change in the dynamics, it's very competitive.
And when we entered this market we enter the market having analog solutions for the customers that includes drivers that drive the lasers as.
As well as Ti as that that are used on the receive side. So we have nice content within a lot of these optical transmitters and receivers and then the last thing I'll highlight is we still are the only company in the industry. That's running this type of product on four inch indium phosphide.
Yeah.
Got it thank you and maybe switching to the A&D side.
Can you tell us about any are any shift in terms of.
Demand that youre seeing there.
Just again in the current environment and maybe what are some of the key applications going forward. Thank you.
Sure well I would say.
There's really no changes in the environment, our customers continue to seek out advanced technologies for their.
Their platforms, but maybe I'll take a moment to just say a few more words about.
Our strategy within this segment.
We want to as I highlighted provide customers with the highest power highest frequency and highest data right.
Solutions and so on.
Earlier this week, we announced a fairly large contract a multimillion dollar two year development contract with the Navy to produce a 45 kilowatt effectively transmitter.
Using our Gan technology and so we think this is.
An important milestone for <unk> as we build out our capabilities to do multi chip assemblies in high very high power components.
Components and so we just think thats a great.
For example of the capability of May clubs engineering, It speaks to our thermal engineering, our power control to run the devices and of course, our ability to produce.
Phased phased array antenna system. So it's a nice project for us it's a multiyear project it will lead to more programs like this.
And the team is just doing a phenomenal job there.
And our next question coming from the line of Tom O'malley with Barclays. Your line is open.
Good morning, Thanks for taking my question I just wanted to ask specifically on the R&D side, you mentioned, some push out due to customer timing and you're obviously guiding that business up strongest of your three segments.
Is that related to the eye side or the <unk> side and traditionally you don't really have these big chunky.
Revenue bunch of accepted the defense Department, So I would assume it's there but any color on the moving pieces between March being weaker than June being a bit stronger here.
Sure maybe I'll say, a few words, Tom and then Jack can also add so.
Certainly.
We are as you highlighted.
Down I N D and that really had to do with operations rebalancing and re prioritizing shipments within the quarter based on customer priorities and as we highlighted as Jack highlighted.
In the script, we had a higher turns business.
We saw incremental demand for the data center coming in.
So.
Sensually, what we did is we had a mid quarter remixing of.
Priorities based on customer priorities, let's say and so that's really why.
Why.
Came down the way it did theres nothing structural no issues they'll execution issues.
Or anything like that it was simply a matter of resetting priorities during the middle of the quarter Jack.
Jack I don't know, whether you want to add to that or just the general trends on.
Yeah, and just just to add to that Tom.
Steve had mentioned the book to Bill across the business has been strong.
Specifically within R&D.
And we move some things around like we typically do during the course of the quarter. So we expect that strength that we're seeing going into Q3.
To remain as we go forward so.
Nothing nothing really specific to highlight things tend to move around throughout the business.
And and that's.
That's where we ended up here for the quarter and with our outlook going into Q3, Gotcha Gotcha, and then as a follow up I think theres a lot of concern out there, obviously with the China shutdowns, particularly particularly with the module makers could you just fill us in on the details you have or what youre seeing in terms of your supply chain there.
Is there any financial impact that you're recognizing in the results that you just gave us.
Are you seeing that improve or get a bit worse any color there would be really helpful as well.
Okay.
Sure. So just a few words about our business in China. So we have we have about four different offices in different cities most of those offices, our sales or application labs.
And so in areas like Shanghai that had been shut down we have a lot of our staff working from home in sheds and we do we do some planning and logistics and that's been fully operational even sort of on and off over the past two years, where we've had periods where folks need to work from home we.
We do not have any suppliers in China.
We have so we're not impacted if certain regions shut down.
It's really a focus on the customers and the sales and applications and so we've been able to push through it we've not been impacted.
Certainly.
At some level, there's a bit of a headwind there with the.
Parts of the country shut down but from our point of view our customers have been very active.
Our sales and applications teams have been very active and we've been fortunate to not be impacted the way some companies out with the city's shutting down.
And our next question coming from the line of Vivek Arya with Bank of America. Your line is open.
Alright, Thanks for taking my question, Steve I had one more on the IMT.
Segment, if I take a kind of a longer term historical view it seems like R&D tends to have a strong year, followed by a software layer. So that there seems to be that cyclicality.
And in the business and I am curious what is the right way to think about.
The growth.
The opportunity for I N D can this grow in line above or below kind of the 10% to 15% kind of growth rate that you think for the company as a whole.
I do and I think.
I'm not sure your comments about.
And on year on and off here or I don't know I don't.
I'm not sure that's accurate, but from our point of view I can tell you that.
May clubs I N G business, if you look back over the past five six years.
<unk> was very weak due to lack of attention.
And that changed in 2019, where we began to focus on the market and so what you see us doing is cross selling our existing portfolio, adding products and technologies that are attracted to that market and driving our sales force into the market to win contracts like we talked about the navy contract and we want to do more of.
This is a very very large market and where we've moved over the last three years, our revenue from being range bound really in the 30 to low $40 million per quarter.
You know from to the high forties to the fifties and now were.
Were in the seventies. So we believe this trend will continue.
Because we're throwing a lot of weight at this market.
Whether it's on the optical side, whether it's on the RF and microwave side or now even supporting customers with <unk>.
What I would consider small high end subsystems for very niche applications. So.
Over the long term as we've talked about our goal is to reach a $1 billion by our fiscal 25. It will be led by our telecom business first because it's so diverse.
All load by our our defense business or industrial and defense business and then last it would be.
Our datacenter business, primarily because the the solution set available for that market is limited compared to the other two.
So that's our general sense, its a huge market one of our largest opportunities and by the way as I highlighted in my commentary, we just launched our boss.
Technology for this market the industrial and defense market and if you were asked the question well why did you do that our answer would be we sell.
Some of the industry's best al gas.
High power pins switches to the market sitting right next to these components are filters of all different technologies and customers want to move away from ceramic filters right P DS or even cavity filters or tunable mimic filters and they wanted to move towards something smaller with higher performance and so to do that there needs to be innovation.
And so we've put ourselves on the track essentially to produce and innovate.
With a very high frequency bot technology, which would be the first for the industry and so that's why we've taken our first step into the market.
And we think that will again open up a whole new.
Window with growth opportunities.
And so that's just one example, the other example of course, which we've talked about for the past two years is really our 0.14.
Gan on Silicon carbide process, which will absolutely target phased array radar programs satcom programs and all sorts of microwave applications for I N D. So we're putting a lot of our focus on this market.
These customers have very sticky programs. So once we get into the program. So we believe that the revenue streams can last for.
Multiple years, which of course is a very different dynamic than what you might see in the data center, where.
You have programs turn on and turn off.
You know rapidly.
And so you know we're very attracted to the business attributes of the industrial and defense market.
And by the way one last comment on the industrial side.
We've recently had some nice wins inside of medical applications, where we are now moving from single component to multi chip assemblies to medical applications.
As everybody knows we automotive certified our fab above.
About six months ago, and this past quarter, we won an automotive platform for.
For Telematics program, which will go into production within the next six months, so a lot of interesting.
Activities within our R&D space and we do believe.
It will continue to be strong.
Got it very helpful and for my follow up Jack I was hoping you could.
Just to give us a sense for how we should think about our balance sheet. Our inventory I understand everyone is holding more inventory than than usual because of all the well known reasons. What is your target in terms of days of inventory and.
How does that impact your fab utilization and gross margins if there is an impact.
Yeah, and as we've discussed over the past.
Past few years inventory has been an area of focus for us.
And I think if you go back a few years, we brought our inventory levels down to.
What we thought were healthy levels over the past couple of quarters, there's been a bit of a build in our inventory for strategic purposes, and I think that's played out well for us in terms of supporting.
Future growth in revenue opportunities as they as they emerge but in terms of our long term goal I don't think we've established a longer term goal I think we have been around three times.
Come a little bit below that with some of the increases that we've seen in inventory, but I think right around that three times is where we've been.
It would be a healthy enough target.
And from a turns perspective.
With our improving gross margins.
Puts pressure on the on the inventory turns as well so it's a little bit of an uphill battle that we have been fighting overall when you look at turns with regard to the.
The margin improvement that we've had.
Our next question coming from the line of Harlan sur with Jpmorgan. Your line is open.
Good morning, great job on the quarterly execution and strong margins on the strong innovation profile, which obviously is going to drive the growth that's going to drive.
The margin profile kind of mid to longer term, where do you guys have a target to increase the number of new I believe its standard product introductions by about 35%. This year can you guys just give us some rough percentages like where the new products are focused on.
By end market I'd, just like to know where more of the R&D focus is as you think out over the next few years and maybe just kind of as a follow on to that you guys do have actually a pretty strong pipeline and believe or custom product development as well and most of these activities focused on your I N E business, primarily a defense related customers or do you have customer.
A lot of development programs in telecom and datacenter as well.
Harlan Thank you for the question.
It would be very difficult for us to break out R&D for you by end market or by product line.
Or or by section so.
That would be a lot of maybe sensitive information. So we would rather not say that but I will say.
So just some general comments, so our high performance analog business.
It is one of our largest segments and so you could imagine that that's that's receiving of a fair a fairly large percentage of our R&D dollars.
And that market has historically supported or that HPA business high performance analog business has historically focused on the data center and so part of our strategy is to expand their focus into industrial defense and more analog and mixed signal.
Type components outside of the data center and so that group.
Our goal is to expand that group into other markets and so I would certainly highlight that.
When you contrast that to one of ours.
Smaller.
Parts of our business, which would be our lightwave business, we really are that that business contains.
Three different technologies lasers, which we've talked about today, the photo detectors, and then silicon photonics and so we continue to invest cigna.
Significantly in all three of those segments.
And so two of the three segments today are generating revenues of lasers in the photo detectors.
And we're continually continuing to invest in silicon photonics. So.
I, probably wouldn't want to go any further than that other than to say that.
Our guiding.
Principal on investing in R&D really revolves around our strategic plan, where we've laid out.
<unk> technologies, we wanted to invest in in the near term the product lines that we wanted to expand as well as filling in gaps within the portfolio I mean, we recognize.
We have a small portfolio compared to our peers within our industry and so as we've talked about today during the prepared remarks, you're starting to see more and more new product lines coming out for the for existing and adjacent markets and we believe that is the that is the best way for us to Oh.
Grow the industry, but we don't necessarily want to.
Breakout.
With any more detailed than that I will say, what we're not doing we're not investing in sort of next generation DSP.
We will be very careful not to not to invest in a large.
Programs or systems that.
We have very low margins that is not interesting to us there's a lot of companies out there that produce optical and RF and microwave equipment and their financials are.
Weak and they generally struggle for.
For profitability and so we will absolutely pick and choose areas, where not only can we provide something differentiated but also.
It will meet our financial criteria of being.
Accretive to our profitability.
Thanks for the very insightful.
You guys continued to drive strong gross margin improvement, it's been a combination of mix manufacturing efficiencies and optimizations.
Will be stronger on the optimization front, but it actually it looks like your incremental margins are kind of now settling into a stable range of somewhere between 70, and 75%, which is where we would expect them to be given the richer mix of your products and also I know you guys have talked about mid to longer term target of mid <unk> gross margin. So we.
Would expect that you.
Your incremental margins to be in that 70% to 75% range, but it's just how we should think about the margin trajectory on continued revenue growth kind of in that sort of low to mid seventies type of incremental margin range.
Great question, and so maybe I'll say, a few words and then Jack can also contribute.
Our operations team our sales organization, our finance team has done a phenomenal job improving.
Improving the profitability of the business, including the gross margins through a combination of the things that you mentioned pricing execution yield enhancement programs working with our vendors to get better pricing all of the all of those things and more and that work continues every day.
The way we went.
When that is.
Flushed out the way, we will continue to push out push up the margins will be through innovative products.
And today with highlighted on the call. So many examples of.
Product lines or product sets that are truly best in class It will command higher gross margins and as as those.
Aliment start to layer onto our business. It will continue to push the margins up.
The reason why we do not give.
Target model is because it's very difficult to predict the timing and the mix of those things.
And the new products as everybody knows it takes.
Months, if not years to really kick in.
Just to move the needle both on the revenue and also on the gross margin line. So we would rather talk about the gross margin and operating margins retrospectively about look what we've done as opposed to trying to forecast one or two years down the road other than just say directionally, we are continuing to push the margins higher and the data that we can.
<unk> on our new products is very supportive of our goals.
You want to add to that Jack just to just to pile on a little bit more in terms of some of the internal initiatives that we have been going through and how those continue to contribute to the margin improvements that we've seen as well as the revenue increases that additional volume through the top line.
Is helping to drive incremental margins as well so it's really a combination of factors that.
That have supported us thus far and we think we will continue to support us as we as we go out into the future.
But it does become a bit more challenging as we continue to go forward with the improvements that we've made over the past few years.
Our next question coming from the line of David Williams with Benchmark. Your line is open.
Hey, good morning, Thanks for squeezing me in.
Just I guess, a couple of high level questions, but just kind of thing about the order book is still are still very strong book to bill, but have you seen any changes I guess the behavior of your customers or maybe their longer term planning just kind of given the volatility that we've seen in the marketplace over the last several weeks.
The short answer is no as we entered this month or as we're finishing out this month.
Orders continued to be strong across all the different market segments. So we've not seen any pullback or slowdown from from our customers. So nothing to report there.
That's it thank you.
And then a few others have commented on substrate constraints really on the high performance products I'm, just wondering if you're seeing anything similar there may be specific areas of constraints that could potentially be troublesome.
As we head to the second quarter.
Yes, so we have absolutely been afflicted by the substrate issues associated with capacity in the industry and it's hit.
Two parts of our business, we've talked about in the past the data center some of our high end products.
HPA products and also what we call connectivity products, which could be.
For example, cross point switches very highest switches.
So that is yes. So the answer is yes, we have been affected by that that has been built into our guidance over the past.
Two to three quarters, we talked about on our last call that issue, causing a backend.
Our backend.
Sort of.
Step up in our data center revenue.
And so that is that is still our current thinking and that's why we're going to see a significant step up in data center in Q4, which is some of those supply constraints being worked out.
You know make home will have access to the packaging that we need to ship our products.
It's something that will slowly get better over time, we've been taking actions to move away from certain technologies and to move our components and our products into other.
Other technologies that are suitable and so all of that engineering work has been happening behind the scenes and as we think about 2023, we think.
Things will slowly get better.
And it won't be it won't be an issue. So it's something that our business units do a great job managing that they're fully engaged.
And it's just one of those things that we're managing through.
Yeah.
Maybe it will take the next question please.
Our next question coming from the line of T. J Muse with Evercore. Your line is open.
Yeah. Good morning. Thank you for taking the question I guess a follow up question on the on the supply constraint side curious what your view was pre China Lockdowns.
In terms of when you thought things would normalize and how how that's been affected.
Due to the Lockdown was just trying to get a better understanding there.
Hey, C J, it's Jack just to.
Clarify no in my prepared remarks, I had some some commentary with regard to supply chain and I think that's just a.
To highlight those items still do exist, obviously, they've been evolving over time and there have been some more recent items that.
That have come up more specifically in China, and I think Steve had addressed that.
As earlier response to one of the questions part part of the prepared remarks was also for recognition to our operations team in terms of how well they've been able to manage through this over.
Over the past number of years really when you when you look back over time so.
No real major impacts to us over the past quarter versus versus where we were three months ago.
We did highlight that we were expecting some modest improvement as we work our way through the back half of the year, but it.
As always and as we but we've learned at sito always subject to change, but based on where we're sitting here today no real major change from from where we were a quarter ago.
Okay. That's helpful.
And as my follow up question.
Wanted to focus on aerospace and defense side of things.
You know obviously the world has changed a little less than what is at 62 days plus or minus.
And with NATO now.
Looking to actually hit their targets for defense spending have your conversations or your internal plans for engagement changed at all and how should we think about it.
The duration of design cycles, and when you might see a step up in that part of your business.
Sure so.
As we.
We talked about earlier, we really began to focus on the end market in 2019.
And we've been.
Continuing to invest in products technologies that we believe would be ideal for the customers within this segment and so that that is probably more important than that the current dynamic center that are happening today in the world.
And so I would just bring you back to that as being really the main the main point is that <unk> is improving.
The technologies for industrial and defense end markets.
And our sales and marketing teams have been doing.
Doing a great job engaging at all different levels these customers and so.
You know.
That's that's really the point I wouldnt want investors to think that because of the.
The activities in the Ukraine that.
There's going to be an uptick in our business or a windfall on a particular program I wouldn't think of it that way.
I would instead just recognized.
Recognize that this is an area you know one of three markets. It will over time be a very strong market for us continues to be a very strong market for us, but I wouldn't be.
I wouldn't focus on the current events is.
As something that might create.
Or a financial windfall for the company.
Our next question coming from the line of Richard Shannon with Craig Hallum. Your line is open.
Well, thanks, guys for taking my questions.
Steve I'd like to dive into the topic of Gan here I've had some positive commentary the last few calls here. It sounds like this is really building, particularly on the booking side.
You've also talked about a goal of getting to the company a $1 billion in a few years and wonder if you can give us a sense of of of how the backlogs building here and and and how you. How you think about the size of your game business relative to that goal out in a few years I mean can can be at 10%.
Of that total and how would you kind of think of it between your <unk> and telecom sectors.
Sure. So we have really.
Three parts of our Gan strategy, then I'll say just to point that out so the first part of our Gan actually four four segments of our games revenue.
The first is high frequency mimics using 0.1 for Gan on Silicon carbide that will address high frequency I N D and satcom.
Microwave radio links using Gan and those are those are can be multifunction mimics that wood.
It would be used on the transmit and receive side of of microwave systems.
The second piece is lower frequency, but very very high power.
You called out pure carbide and.
A year ago, we introduced the industry's highest power device to six kilowatts and at IMS in June we'll be demonstrating a four and a half kilowatt device and those will be targeting radar systems Jammers EW.
Anywhere where you want extremely high power and we will sell products to customers not only at the chip level, but also packaged or multi chip assemblies or what we call.
Pallets, where we take our very high power devices that we put other ancillary circuits around it drivers isolator and things like that combined or is.
So that's the second piece the third piece would be for telecom and all things wireless, which is primarily massive mimo and we'll be demonstrating.
And that's also our power.
Amplifier modules.
The industry within five G has moved from discrete amplifiers lineups drivers in Dougherty upward stages now to more combined power amplifier modules and we are right in the fight on that and we as I talked about.
We are gaining gaining traction and design wins for our small base stations, a macro base stations and.
Over the next year, we will start to get design wins on pumps, but the power amplifier modules.
And then <unk>.
All of those three segments that I've talked about our Gan on Silicon carbide and then the fourth item is Gan on silicon.
We continue to work on this technology and we continue to work with us on this technology.
S. T continues to make progress and so when that technology is ready we will step into the market where it makes the most sense and we have seen.
Different bands opening up at different power levels, arguably lower power levels that may gain on silicon actually more attractive as a solution than silicon carbide.
And so there may be instances in the next six to 12 months, where Gan on silicon is good enough.
To beat L demos and to beat.
Silicon carbide, so that has yet to play out but those.
At a high level those are the four.
Lanes that were in for RF power.
<unk>.
And so when you asked the question could that be 10% of our revenue well. This year, we should be somewhere in the range of 670 680 on the topline and so can we do $67 million of revenue again, the answer is absolutely and in fact, our RF power business is one of the fastest growing parts of our portfolio today I'll be.
From a small base, but the team is doing a great job. We continue to hire we just hired the dream team of PPD engineers that really know how to get into the weeds on.
On getting amplifiers to work inside of.
<unk> radios, and then when it moves to 60 and when.
You start to see the new frequencies come up at the higher bands.
This group is really going to help us out so we're big believers in RF power.
It's in our DNA and we look to win more market share over the next two years.
Steve Thanks for that great detail I'll ask a follow on question could be along I don't it tended to be but if one of your prepared comments you talked about an emerging subsystem capability in India can you talk to that are the strategic and financial implications of that and when we might see that.
Sure and I think we are we do recognize that some customers want to hand, the problem to us to solve especially in areas of high power, where you need specialized equipment and people that have experience dealing with it and so then the the navy contract that we talked about would be really an example of.
No.
In that direction, but we will move very carefully we did recently opened up a small design center in western mass.
Which is probably Massachusetts, which is primarily focused on building up the building blocks necessary to address this market.
And these engineers are expert at building multi chip assemblies working with wave guide after the higher frequencies and so this is something that will just start to emerge over time, there won't be a big.
Pivotal moment, it will be may com, starting to address <unk>.
More opportunities in the market, where we see that it's a perfect fit for our capabilities. What we don't want to go after as business, where you can go out to the market buy chips from five or six different semiconductor companies and then put together a solution.
We will build modules based on our proprietary technology in semiconductors, not other people's chips, and so that that filter.
Eliminates probably 75% of the opportunity so we will be very selective.
When we when we engage on a on a small sub system or a module opportunity.
Our next question coming from the line up.
With Westar capital your line is open.
Thank you.
I had a quick follow up Jack on the on the gross margin discussion just kind of thinking about the different segments and product segments and product mix.
You know as you think about Steve mentioned products less than three years old and it's starting to contribute more to revenue and higher margins on these new products that you guys are designing.
Can you remind us what the margin differentials are if any across the three product groups today and as you think about Q4 and datacenter.
Starting to really pick up or are there going to be any margin impacts from sort of the mix change over the next let's call. It you know.
Four to six quarters. Thank you.
Yeah, Thanks, Ruben yet from a from an overall gross margin perspective by each of the end markets, that's not something that that we break out.
We do look at the gross margins and there is a bell curve across our entire product portfolio, where we've got some that are obviously higher than the corporate averages and some that are lower.
Same holds true for the new product introductions that let Steve had referenced in his prepared remarks, there's going to be a spectrum of different gross margin profiles that those products have but we are looking to obviously focus on the ones with the stronger gross margins too to try it and focus on how we can do more of that we also focus on.
On some of the lower performing products, even the ones that are that we're introducing to make sure. We understand why they have below our margins that may be below our expectations are or may not even have the revenue.
Desires debt that we had going into the development cycles, but NPI and in overall gross margin is an area that we focus on across the organization and some of those.
Margin implications that we have come into play in terms of some of the production capabilities that we have within our own our own internal fab and our own internal test and assembly.
Facilities, and then there's other implications as well with some of the product that we have externally fab and how that might play out from an overall mix perspective as it relates to our overall gross margins.
Very helpful. Thanks.
And then just a quick follow up Steve I don't think you mentioned PON in your remarks today I know you had a 25 gig PON demonstration at OFC and I'm. Just wondering if you can give some update on where we are at 10 gig PON and kind of your perspective on where we're going to get to 25 gig and.
How that might impact your telco business.
Sure so.
10, G PON volumes continue to ramp and we see that with some of our product lines.
As we've talked about in the past our goal is to expand content within the platform.
So today, we have very strong driver business.
We are picking up market share with the photo detectors.
We will be introducing lasers.
Two customers, that's an ongoing activity.
And so generally speaking and then the last is a burst mode <unk>, which were.
We still have to do a little work on so generally speaking our PON business is for <unk> is growing it is an international market, it's not just China.
And we are strengthening our position within the market.
Thank you I will now turn the call back over to Mr. Daly for any closing remarks.
Thank you Olivia and closing we would like to thank our employees customers and suppliers for their continued support.
Have a nice day.
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Yeah.
Ladies and gentlemen, your desktop conference for today. Thank you for your participation you may now disconnect.
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