Q3 2022 MACOM Technology Solutions Holdings Inc Earnings Call
[music].
Yeah.
Welcome to make them start fiscal quarters 2022 conference call. This call is being recorded today Thursday July 28 2022.
At this time all participants are in a listen only mode.
Now I'll turn the call to Mr. Steve promptly make them Vice president of strategic initiatives and Investor Relations Mr.
Mr. Xu. Please go ahead.
Thank you Olivia good morning, and welcome to our call to discuss <unk> financial results for the third fiscal quarter of 2022.
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 $19 95.
Actual results may differ materially from those discussed today.
A more detailed discussion of risks and uncertainties that could result in those differences, we refer you to make com's filings with the SEC.
Management statements. During this call will also include a discussion of certain adjusted non-GAAP financial information.
Conciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related form 8-K, which was filed with the SEC today.
With that I will turn it over the call to Steve 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 Q3 results.
When Jack is finished I will provide revenue and earnings guidance for fiscal Q4, and then we will be happy to take some questions.
Revenue for the third quarter was $172 $3 million and adjusted EPS was <unk> 73 per diluted share.
Gross and operating margins increased sequentially in the third quarter, and we continue to generate strong cash flow ending the quarter with 536 million in cash and short term investments.
Our financial performance reflects ongoing business improvement along with the growing revenue contribution from new products within our portfolio.
The book to Bill ratio for the third quarter was one one to one which was the seventh consecutive quarter above one.
Backlog remains strong providing us with good near term visibility.
While we are pleased with the bookings I'll note that it is normal for our book to Bill ratio it periodically fluctuate below one.
Our turns business was approximately 15% of our total revenue during the quarter, which is in line with the last few quarters.
Q3 revenue breakdown by end market was as follows.
Industrial <unk> defense was $75 5 million telecom was $62 million and data center was $34 8 million.
<unk> revenue was up 12, 5% sequentially, while telecom and data center were relatively flat following a strong Q2.
These results were mostly in line with our expectations.
Industrial and defense remains a key area of opportunity from a club.
We believe this market has the potential for significant revenue growth over the next few years.
Within aerospace and defense applications, we expect growth to be driven by radar modernization programs electronic warfare applications unmanned aircraft systems avionics secure communication networks and satcom applications.
All of these areas are priorities within the broader U S defense budget and our critical programs within the various branches of the department of defense.
As a result, we expect opportunities within this market to remain robust for the foreseeable future.
Our telecom end market revenue saw a modest sequential decrease in Q3, following a very strong Q2.
Telecom is another broad market for me come at it includes broadband access networks passive optical fiber networks wireless networks, including five G Metro long haul optical networks and broadband satellite communication applications.
The primary driving force forces for growth across all of these applications are higher data rates and more bandwidth supporting increased computing power closer to the end users.
<unk> has a very diverse product portfolio to address the telecom markets, including our monolithic microwave integrated circuits mimic product line coherent drivers and Tia's small signal RF products RF power amplifiers high performance analog Ics and lasers to name a few product.
Lines.
Finally, our data center end market revenue was relatively flat in Q3. Following a strong Q2 performance based on continuing demand for our high performance analog solutions.
We are pleased to see modest revenue contributions from our new 25, <unk> laser portfolio and our expectation is for continued slow, but steady laser revenue growth and market share gains during the remainder of FY 'twenty two it throughout FY 'twenty three.
Customer interest in our recently introduced linear Equalizers remains high and we see growth opportunities in active copper cable applications, Apple 200, G and 400 gig data rates for high performance computing systems.
Yes.
I would like to highlight we recently updated our five year strategic plan.
It was the third annual update of our strategic plan and while we've made great progress executing over the past three years. We are pleased to have further refined and hold our compelling strategy with the goal of creating long term stockholder value our.
Our bottoms up strategic plan includes an in depth review of all elements of our business and establish a strategic goal and growth objectives through 2026.
The foundation of our strategic plan revolves around expanding our served addressable market.
By extending existing product line, introducing new product lines and raising the bar on semiconductor performance in areas, where we choose to compete.
Our goal is to provide compelling and differentiated solutions that help solve complex technical challenges for our customers, while driving highly profitable growth for <unk> com.
An important element of our strategy is to leverage our existing capabilities and technology portfolio to fight adjacent opportunities to expand our markets.
Some examples of this over the past couple of years have been our one four micron Gan on Silicon carbide process are pure carbide product line.
<unk> copper cable Ics JV caps and RF power amplifier pellets.
We believe thus far these new products have helped us expand our Sam by about 400 million to $500 million.
I'll note our market share in these product categories is negligible today, which provides us with a great opportunity for growth.
I'll also note a characteristic of our growth strategy is to target market opportunities that support our financial goal of achieving best in class profitability.
This requires developing many new and oftentimes michie semiconductor product lines to address these requirements.
It might be helpful. If I'd highlight a few recent examples which exemplified may com strategy.
At this year's International microwave Symposium, which was held in June we announced the expansion of our power amplifier product portfolio with the introduction of a seven kilowatt power amplifier operating in the 960 megahertz to one two gigahertz frequency range.
This product is based on May comps pure carbide Gan on Silicon carbide technology, and we believe it represents the highest power level RF amplifier and the industry.
This extremely high power level was achieved by combining novel high voltage circuit topologies with advanced packaging materials for improved thermal performance.
This product is ideal for high power and high voltage aerospace and defense applications, including radar and electronic warfare systems.
Our goal is to establish ourselves as a leader in RF power.
Second we are actively expanding our R&D teams and bringing new engineering design capability to make com.
We recently opened two design centers one in the east coast of the U S and one in Seoul Korea.
These actions of hiring more experts in analog and digital IC design, and adding new microwave subsystem engineering capability supports our future product development plans and initiatives.
<unk> best in class designers to support organic growth is a strategic priority.
And third we recently introduced a new optical time domain reflect a meter or OTR photo detector product line to support customers that utilize fiber connectivity in their defense industrial telecom systems or data center networks.
And OTR test instrument is used to measure of fiber optic cables optical loss and to identify the location of fiber cable break or performance problems.
Portable OTR test equipment is used during fiber network installation and OTR functionality can be embedded in remote fiber test systems to permanently monitor alive Telecom network or an operating system for any changes or failures.
We believe the field portable OTR test equipment market is growing due to the worldwide deployment upon <unk> optical networks.
To be clear the heart of an OTR as the indium phosphide based optical photo detector and our strategy is to be a leading supplier of OTR.
The detector IC based products here.
Here, we have utilized our proprietary internal MBE technology and photo detector IC design expertise to achieve industry leading results.
We plan to sell our OTR products with pig tailed fiber for an easy turnkey solution or in a rosa or chip on carrier formats, depending on the customer requirements and decide <unk> factor.
In recent months, we received two qualifications for leading OTR equipment manufacturers.
The three examples I just discussed show how may comments, addressing small and medium sized high performance applications with solutions that rely on our internal semiconductor process expertise and or our IC and system design and application expertise.
We believe more and more customers are viewing may com as a strategic supplier of high performance analog RF microwave and lightweight semiconductor solutions and we believe this is directly attributable to the strengthening of our product portfolio.
Today, we focus our budgets on R&D product development, and then engaging customers face to face with our regional and technical sales staff design engineers and technical leadership.
I'll note a key element of our strategy of strengthening and expanding our relationships with tier one and tier two Oems and we are making good progress in this area.
To a certain degree our strong bookings for the past seven quarters is in large part due to the outstanding execution and collaboration between our sales operations and business development teams and our customers.
Today, we see a growing trend of tier one and tier two customers, providing us with their latest requirements for gallium arsenide, and Gan mimics bar filters diode lasers, and analog and mixed signal Ics.
These development projects with our customers across all markets validate that our design capability products or new technologies are compelling.
Before I turn it over to Jack I would like to highlight we are cognizant of the uncertainties around the broader global macroeconomic environment.
And we do not presume to think our business would be immune from a global recession.
Our longstanding posture has been to run the business in a way, which enables us to remain both profitable and cash flow positive during all parts of the business cycle.
As such given the heightened economic uncertainty, we have and will continue to manage the business, particularly the capital investments and spending budgets very carefully.
I'll highlight however that we have very little consumer market exposure and we believe our defense business is typically decoupled from near term negative economic trends.
Additionally, we believe our business is relatively small compared to the semiconductor industry at large and growth can be supported by market share gains as we expand and ramp our latest products and technologies.
At a higher level, we believe the semiconductor industry growth over the long term supported by secular growth trends.
More specifically the drive towards more bandwidth faster data speeds higher frequencies and higher power levels, whether in radar electronic warfare broadband access networks <unk> or the data center play to make comp strength in RF microwave and optical.
In many cases addressing these markets requires advanced semiconductor technologies like Gan bulk acoustic wave or BARF filters advanced lasers, and detectors high speed analog Ics and high voltage capacitors.
In summary, we believe our position within the industry is improving due to our strengthening portfolio. We have many compelling new process technologies underway, our growing team of world class IC designers and unique manufacturing and packaging capabilities.
Confident we will continue to push the boundaries of semiconductor engineering and gain market share.
Jack will now provide a more detailed review of our financial results.
Thank you, Steve and good morning, everyone financial results for our third fiscal quarter ended July one 2022 remains strong and May Coms team continues to strongly perform in executing toward our business strategy.
Revenue for the fiscal third quarter was $172 3 million up four 3% quarter over quarter and exceeded our guidance range based on strength in the industrial and defense market.
On a geographic basis revenue from U S. Domestic customers represented approximately 45% of our fiscal Q3 results with continued diversity across our customer base.
Adjusted gross profit was $107 2 million or <unk> 62, 2% of revenue up 50 basis points sequentially.
Exceeding 62% gross margin represents another major milestone in improving our profitability.
Total adjusted operating expense was $53 $1 million, consisting of research and development expense of $34 million and selling general and administrative expense of $19 1 million.
As anticipated total operating expenses were sequentially up.
By $2 1 billion for fiscal Q2, as we continue to expand our R&D team and their capabilities.
We continue to carefully manage administrative spending as we support growth related investments across the business.
Adjusted operating income in fiscal Q3 was $54 1 billion.
Up from $50 9 million in fiscal Q2.
Adjusted operating margin increased 60 basis points sequentially crossing the 31% threshold to 31, 4% for fiscal Q3.
Depreciation expense for fiscal Q3 was $5 9 million and adjusted EBITDA was $60 million.
Trailing 12 month, adjusted EBITDA was approximately $224 million as compared to $214 million in our prior fiscal quarter.
Adjusted net interest expense for fiscal Q3 was $433000 down approximately $500000 from fiscal Q2, primarily driven by higher short term investment balances.
The associated interest income.
With increases in interest rates, we anticipate higher net interest expense during our next fiscal quarter ending in September .
Our adjusted income tax rate in fiscal Q3 was 3% and resulted in an expense of $1 6 million.
Our net cash tax payments were approximately $1 1 billion for the third quarter up $600000 from fiscal Q2, primarily based on our increases in profitability.
We expect our adjusted income tax rate to remain at 3% going forward.
Fiscal Q3, adjusted net income was $52 $1 billion compared to $48 4 billion in fiscal Q2.
Adjusted earnings per fully diluted share was <unk> 73.
Utilizing a share count of $71 1 million shares compared to 68 of adjusted earnings per share in fiscal Q2.
Now moving on to operational balance sheet and cash flow items.
Our Q3 accounts receivable balance was $106 6 million up from $106 million in fiscal Q2.
Reflecting our $7 $1 billion increase in revenue over the prior period.
As a result days sales outstanding as of the end of June were 56 days.
During the past three quarters, our quarterly revenue has increased by $17 million, which is the primary driver for the fiscal 2022 year to date increase of our accounts receivable balance of $22 million.
<unk>.
Inventories were $110 2 million at quarter end up from $93 4 million sequentially.
Inventory turns were two four times down sequentially in Q3 from two seven times in the prior quarter.
During fiscal year 2022, we have made strategic investments in various inventory items, such as manufacturing consumables substrates precious metals as well as critical wafer stocks and finished goods.
This strategic increase in inventory is expected to support our growing backlog, which we feel will provide additional stability in the current supply environment.
Fiscal Q3 cash flow from operations was approximately $44 million down $2 1 million sequentially, primarily from increases in working capital.
Capital expenditures totaled $6 6 million for fiscal Q3 with additional investments in fab capabilities and R&D equipment.
We expect our fiscal year 'twenty two capital expenditures to now be in the range of $25 million to $30 million due to the timing of receipt of certain capex items.
Next moving on to balance sheet items.
Cash cash equivalents and short term investments for the third fiscal quarter were $536 3 million up $33 $3 million sequentially.
With our continued cash generation and 5% increase in trailing 12 month EBITDA, our third quarter gross leverage is two seven down from $2 eight in Q2, our net leverage remains below one and our net debt is now $67 million.
We recognize that we are still in a net debt position. However, we are pleased that the increases in our cash and short term investment balances will provide us with new and expanding strategic options for future growth.
Finally, I would like to also note that this week, we published an updated environmental social and governance report, which can be found in the Investor Relations section of our May Com website.
The report highlights progress we've made in improving our ESG reporting metrics.
I will now turn the discussion back over to Steve.
Thank you Jack.
<unk> expects revenue in Q4 to be in the range of $175 million to $180 million. Adjusted gross margin is expected to be in the range of $61 five to 63, 5%.
And adjusted earnings per share is expected to be between <unk> 74, and 78 <unk>.
Based on 71 4 million fully diluted shares.
In Q4, when compared to Q3, we expect revenue for industrial and defense and data center to increase by mid single digit percentages sequentially and telecom to be relatively flat.
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.
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 financial 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, I'd like to ask a question at this time, you will need to press star one one.
And the contingent consideration of time, we ask that you. Please limit yourself to one question and one follow up please.
Please standby, while we compile the Q&A roster.
Our first question coming from the line of Tom O'malley with Barclays. Your line is open.
Good morning, and thanks for taking my questions. My first one is just related to the segments. It looks like with your guidance for September the datacenter business is declining slightly for the year, but the telecom business is looking a lot stronger than you. Initially expected could you just walk through the puts and takes of what's going on between those you mentioned some of the datacenter lasers ramping but any more color on what you saw.
Saw a little bit weaker in data center, and what Youre seeing a little bit stronger in telecom.
Sure Good morning, Tom.
Youre correct.
Terms of the trends that you've outlined.
I'll just also note that on a year over year basis, all three of our end markets were up it was up 6% data center was up 5% and telecom almost 30%.
And.
On a relative basis, we think for the full year.
Two possibly three of the markets will be up we think of the strongest market on a full year comparison will be our telecom business.
Again about 29% year over year growth industrial.
Industrial and defense mid single digits around 5% year over year growth in data center right now is trending to low single digit or flat performance on a year over year basis.
Given the variety of the products that we're selling of course and the diversity of our revenue there are a lot of puts and takes.
I think one thing to highlight inside the data center is that during the course of this year, we've seen significant movement of our 100 G C.
TWD import business from U S based customers over to Asia based customers and that trend is a favorable trend if it continues.
On the telecom side I would highlight that tremendous growth from telecom.
<unk> from access markets, including Teng PON and also a lot of strong growth in metro long haul. So I think those are.
Just a few key items that I would probably highlight.
As it relates to the three markets.
That's helpful and then in Europe .
Preamble you talked about your lack of consumer exposure and how the defense businesses.
Relatively protected from what you think would be a macro downturn can you talk about the broad based industrial business. When you look at that business do you think that that should track relative to GDP or do you think there's areas within the industrial business I think you've broken it out like 60%, 60% defense, 40% industrial in the past, but in that 40%.
Could you just talk about any areas that may outperform GDP and how you think that market.
How do you how do you think that segment may perform in a down market. Thank you.
Sure. So first I'm not sure if our growth rate will have a lot of track GDP. So I can't really address that but I would point towards some of the products that we're introducing for the industrial and defense markets.
This past June at the international microwave Symposium, we went through a whole range of product demonstrations and product announcements and I think I'll highlight a few of these because they demonstrate the focus of the company.
For example, we launched a new <unk>.
So why switch product line for test instrumentation, we launched our <unk> Gan on Silicon carbide mimic process. This is the process. We have been working on now coming up on two years that is focused on a wide range of satcom and.
Industrial and defense applications, we demonstrated a seven watt ku band mimic there. We also demonstrated a 10 watt E band amplifier again, focusing on satellite communications.
<unk> two satellite.
Communications, So just a real interesting technology. There, we also announced our new bar filter line, we demonstrated the switch filter bank L band.
Really targeting defense, the defense industry and some of the <unk>.
Next generation switch filter banks that customers are looking for so a lot of the focus of a lot of the work that we've been doing is really been targeting telecom at large a lot of the wireless.
Standards that are out there as well as high performance defense applications and so when we think about our future growth coming from the defense industry. It will be radar based platform. So it will be communication based platforms it will be.
Handheld and mobile radio high powered radios, so it will be jammers and UAV. So it's a very diverse.
Application set for our defense business on the industrial side, we've been making tremendous progress penetrating the medical market, we've been doing some next generation.
Functions, both on the discrete diode base technology as well as on our analog and mixed signal.
Technologies over the past year, we've been focusing some of our analog designers more and more on industrial applications and so that's been doing quite well.
And then the last thing I'll add is on the test and measurement industry.
This is an industry that needs to support the higher data rate applications.
And higher speed applications, whether it's in the compute market or the telecom market and May com is doing a tremendous amount of chip development for applications like memory testers or high speed analog testers or even optical testers and so the industrial market for us is.
Really it's a target rich environment.
And Theres certainly a lot of diversity there.
Our next question coming from the line of CJ Muse with Evercore ISI. Your line is open.
Yes. Good morning. Thank you for taking the question I guess wanted to focus first on data center.
I'll take your outlook for September is a little bit worse than what you thought three months ago, and when I look at kind of a growth trajectory over the last three years since about running at about a 4% CAGR. So would love to hear your thoughts as we move into fiscal 'twenty three and beyond.
Whether we should start to see a reacceleration in growth there and if so what are the key drivers that youre pointing to as well as our.
Or do you already see some of that business and your extended backlog.
Yes, so thanks for the question C J so.
We have definitely.
<unk>.
Revenue numbers that are below what our previous expectations were for the full year and even.
As we have looked at the business, we've seen shifts within our business there.
First before I talk about the moving parts within that market segment I will just highlight two things for.
For investors to remember, we did announced about a year ago that there would be about a $15 million deep.
Decrease in our data center business due to legacy programs falling off which included platforms like Powerpc.
And some of our networking products that were legacy AMC product lines.
When you add back that $15 million to our current run rate you would have over 10% growth.
The second thing I would highlight is that this is the one market of the three for May come that has been more challenged with supply constraint issues. Those challenges have been opening up we saw some nice growth in Q3 and also we're seeing good performance in Q4, so that's improving.
In terms of looking forward and where we think the growth will come from going looking at the fiscal 'twenty three.
Certainly our 400 GPM for business will be strengthening.
Like the fact that theres more and more work at 800 G.
Multichannel Ti.
TIAA and drivers for very high speed applications, we also see tremendous opportunities with coherent light.
And so as.
As our customers are looking to.
Extend the high high speed reach.
They do see limitations with Pam four so there is sort of a bit of a migration.
Over to <unk>.
NRC coherent application and then the last thing I'll add is there is some product lines that are just beginning to blossom within the data center market.
That would be our linear drivers, which are going to put a lot of pressure on DSP for short reach applications and our lasers.
This year, we have been very very active with design wins, not only for telecom markets, meaning PON and <unk>.
Markets, but also the data center, what we were surprised to see this year as many of the module manufacturers applicable module module manufacturers.
Interested in bringing our lasers into the data center.
And then as we think about the long term growth and some of the new technologies will bring to the data Center I think I announced on the last call that we had actually some <unk>.
Early successes with our new <unk> laser.
Laser technology and this is.
The price points in the market for <unk> lasers is very strong and we're very excited too.
Start to introduce that technology in the back half of 'twenty, three and as we enter 2004. So I do think there's tremendous opportunities there within the data center I will highlight we are absolutely staying in our lane and playing to our strengths. We have we are not interested in developing DSP chip.
For example, we're very focused on.
Providing customers analog chips that are high speed components that help them solve various problems and potentially be an alternative to DSP.
I'll, maybe add one other point, we have also noticed as.
More and more of our customers are working on co packaged optics.
Actually finding lots of interesting opportunities on the analog and on the optical side, including our photo detectors and our laser arrays, we've been demonstrating.
Chip eight eight laser.
Devices.
What you are getting a lot of interest in the market and we're also increasing the power levels of our CW laser products. So theres just a lot of interesting things going on so.
So we are quite bullish on the long term prospects for the data center.
Great thoughtful and thorough answer thank you.
As my follow up.
Just a quick modeling questions how should we be thinking about opex beyond the September quarter, and you talked about interest expense ticking higher how should we model that into September and beyond.
Yes, good morning T. J this is Jack.
As we've discussed in the past and as you may have seen here in our June quarter, there was a bit of an uptick in our operating expenses as we continue to invest primarily in R&D activities across the organization. So.
Depending on growth from a revenue perspective, as we've worked our way out into the future you will see a bit of an uptick.
In our sequential operating expenses on a go forward basis.
Then from a from an overall interest point of view, obviously interest rates are on the rise and what we're seeing here going into the fourth fiscal quarter or September quarter.
It will include basically the full quarter impact of the rate adjustment we had seen.
Back a month or so will go and then obviously, we will have some of the impacts from the rate increase that was announced yesterday. So that will drive some of the interest rates up from an expense point of view some of that will be mitigated as we go forward depending on short term investment returns.
And our next question coming from the line of Quinn Bolton with Needham Your line is open.
Hey, guys. Congratulations on the nice results, Steve you mentioned sort of acknowledging that the more challenging economic conditions. I'm wondering are you starting to see any changes.
In your customers' order patterns are weekly orders, becoming more variable on a week to week basis or are you seeing any push outs or adjustments to delivery schedules any cancellations or anything like that yet.
Thanks for the question and so this is something we've been very focused on and trying to look for let's say early trends of possible future softness.
And.
At the end of the day, we're not seeing that we're actually seeing continued strong bookings across all of the different end markets.
So that.
That's the good news.
I think we mentioned in the early remarks.
This was our seventh consecutive quarter of having a greater than one book.
Book to Bill.
I'll just also note one thing we have seen improvements on are some of the availability and lead times for our <unk>.
<unk> third party foundries, we're seeing.
Some of the process nodes that we use come down in lead time, and we think that would suggest that there is capacity opening up and we actually think this is a good thing it will allow us to bring some of our.
Manufacturing cycle times down.
So I would say that's the only noteworthy items some of our third party large silicon fabs are quoting slightly shorter lead times.
We see that as a benefit.
But in terms of the day to day business in the bookings.
I can say that we.
And we're keenly sensitive to.
The daily booking trends.
Do keep a close eye on it.
Perfect. Thank you. Thank you for that color wanted to also know just ask on the on the laser opportunity you've got lasers for PON lasers for fiber backhaul and now starting to emerge into the data center can you give us just of those three opportunities maybe relative size.
Our rank order.
It was one significantly larger than the others.
How do you how do you sort of see those those three opportunities for lasers ramping over the next couple of years.
It's an interesting part of our portfolio and the thing about our lasers as you highlighted we are actually focusing on.
Three different markets and now sort of board as Lidar is starting to emerge where we are seeing requirements.
Our requirements for very high power lasers, but of course, you've got the data Center <unk> got access and then you have telecom.
In terms of our portfolio.
As you know we have the fabry Perot lasers, which are good for the short just because we have the <unk>, which are for longer distances and now we're working on <unk>, which are for very long.
Distance applications.
<unk> does not today produce VIX holds.
And that is a large part of the market I can tell you from a customer base point of view.
We have.
Approximately 20 to 25 customers that are that we are engaged on that are qualifying various types of lasers, depending on the application, we're seeing qualifications with LR four were seeing qualifications.
Korea for.
WDM 12 for <unk>.
We're seeing cwt's six for five G.
And.
Certainly <unk> for by Daniel also.
Different data rates applications for <unk> actually higher data rates for mid haul.
So my point being is we have a lot of qualifications going on we have we have very few customers today that are actually in production, we see many customers beginning to ramp.
Were to pick one market, which is the largest market of the three I would say.
The PON market is actually very interesting market.
At two and a half G. PON the annual laser consumption was about 80 million lasers at its peak and we're going through a period today, where may com is one of the largest producers of two and a half G. PON lasers for the market and over the next two to three years, there is going to be a shift from two and a half to 10 G. And this is actually being driven not only by.
The China market, but also the global expansion of passive optical networks.
For fiber to the home.
So we plan on being a major participants in that market.
Can tell you today, our Teng PON laser revenue is almost zero, we're only in qualification phases.
We think that that market will turn on sometime in 'twenty three.
So I haven't sort of directly answered your question about which is the largest I think there is tremendous opportunities within each of the segments.
As some of the markets adopt silicon photonics or co packaged optics theyre going to want high power CW lasers, or theyre going to want laser arrays, and we are actively engaged with customers in both of those applications.
And then the last thing ill add about our laser portfolio as we expect the profitability of this product line to be accretive to our margins.
We have the advantage of being on four inch indium phosphide.
Our etch faceted technology allows us to do on wafer testing.
So we believe we have a cost advantage when they go into high volume markets.
And our next question coming from the line of Joy Steinberg with Stifel. Your line is now open.
Yes, Thank you and congratulations on the record operating margin.
Steve when you talked about.
Pam four.
You said you are happy to see 800 gig activity.
I was just wondering does that mean, some customers will be skipping 400, meaning going straight from two to four to eight.
Or is this more of a timing thing where the market is actually already starting to do some 800 gig designs.
I think it's very early.
Chartered so we're addressing.
The highest speeds and customers are coming to us for analog solutions.
And so that's the point I wanted to make there.
So I don't I don't believe customers will be skipping 400 G.
In fact.
400 G is.
Becoming.
Or is the majority of our revenue today within the data center and that's across a wide range of sub segment.
So we actually divide internally our data center revenue.
About nine different categories, depending on the distance the length of the speeds and.
When we look at our 400 G platforms, whether it's short reach Dr. Fr four or active copper cable to you then.
In all cases, we see the 400 <unk> revenue growing so we do have a very strong position.
From a product set point of view to address the market.
So I think that.
No I'm not suggesting that there are customers that are.
Skipping.
<unk>.
Very good thanks, Thanks for clarifying that my follow up.
<unk> or project.
They come is in striking distance now from from from no longer being.
Our net debt position and I was just wondering.
Once we get to that level, which will be very soon.
The company's capital management plans change.
Yes. This is Jack and good morning, so yes.
Yes, we as we look at our cash position and our net debt position as you highlighted and as I had indicated on the prepared remarks, we do view ourselves as still being in a net debt position.
We'll have to see how things go as we move forward.
We continue to make investments.
Internally throughout the organization and we believe our cash balance and where we sit today.
As a strategic asset that provides.
So Steve I don't know if you've got any other thoughts.
Yes, I think thats exactly right, Jack and I will just add that we do recognize that growing cash position as a strategic advantage and it is that is that cash position grows it will.
Allow us to have more options as we as we look forward so and.
And given the fact that we are either in or maybe soon to be in a recession, having a large cash position also.
Allows us to sleep well at night.
Excellent. Thank you.
Our next question.
And our next question coming from the line of David Williams with Benchmark. Your line is open.
Good morning, David are you there.
With your question.
Okay.
Our next question.
Our next question coming from the line of Matt Ramsay with Cowen Your line is open.
Yeah, Hi, guys. This is <unk> on for Matt Congrats on the Great results and guide here.
I was wondering if you guys could discuss on gross margins things are still progressing really incredibly.
I was wondering if you could dive into.
Where do you see levels.
From here or is the strength sort of being driven by timing or product mix wondering if you guys could explore that dynamic.
Sure Ethan and good morning, this is jack over so.
As we look at our gross margins, we have been pleased with the progress that we've made over the past couple of years in terms of those those improvements and as we've also discussed we have.
Continuous improvement culture here at May come so we're constantly striving to make improvements across the organization.
It's been a number of different things that we've done in terms of reducing scrap and waste.
Trying to improve yields across many if not all of our different product lines that we have both internally manufactured products.
Products as well as things that that we go to.
The outside folks on so we keep picking away at this and making those improvements we continually say, we'd like to see incremental improvements over time, but we know things don't always occur in a straight line and as our gross margins get up to this.
Higher than 62% range.
We understand that it can be a little bit more challenging as we go forward. So as we look out over the longer term slow and steady sequential improvement is our goal but.
But it's not always going to be.
Heading in that in that consistent direction.
One of the other things to think about as well.
Some of the new product introductions that we have and that's a core.
Element of our strategy is to introduce more products.
And in at higher gross margins that specify to some of our customer needs. So as we feather in some of those new products looking out over the longer term. We hope that will also be additive to our gross margins.
Understood.
And then I was pretty intrigued by.
Some of the commentary in the script on the OTR product line.
Given some of the recent qualifications.
Deployments of pawn five jobs optical networks continue I was wondering any insight into the time to revenue there.
Yes. So we just introduced the products recently, we actually had to go through about three different iterations of the photo detector.
To meet customer requirements qualifications as I highlighted in my script are starting now.
And.
We should expect a slow ramp like all of our different product lines over the course of the next 12 months and so we would expect to add.
Contribution.
In the near term and ramping up over time.
I'll just also note there that.
There are multiple markets that would use this type of functionality, including cost like you mentioned, but also metro long haul.
There is also various military applications whether it's.
Underwater cables or systems that are in active platforms that need to monitor electronics.
So it's a fundamental feature that's necessary in a lot of different optical <unk>.
Fiber applications and May com wants to be a leader in this area. We have some outstanding packaging technology, we have.
Dialed in the performance of these detectors they have to be very fast speed that we can identify if theres an issue on a fiber that's close to it.
<unk>.
Bend in the table of the fiber that is near itself.
You need to have a fast.
Effectively a fast switching photo detector to identify the distances between these these type of.
Events so.
It is also I'll just highlight a niche market. This is not a multi hundred million dollar market we.
From our point of view, we think the sand that somewhere between 20% and $40 million. So over the next few years, if we can win.
Reasonable portion of that market I think we will be doing well and just as Jack highlighted in those.
Your question about gross profit margins I think this is.
A perfect example of going into a niche market with a customized product.
And becoming a dominant supplier and the product line will meet may com's goals of increasing gross margins over time.
And our next question coming from the line of Mike <unk> with Jefferies. Your line is open.
Hi, Thanks for taking my question, Steve I had a question on the defense commentary you made I think you've always talked about it as a growth sector from E com.
Maybe I'm reading too much but it seemed like you highlighted in particular this quarter. So I'm wondering is that particularly good visibility on improving visibility and that sector now and maybe maybe as part of that if you could just step back since you have decades of experience in the defense market due to events like the Ukraine War guesses.
<unk>.
Do they typically lead to increased demand or visibility for component suppliers like may come. Thank you.
Thank you. So we are very pleased with the performance of our defence business across a lot of different applications. Historically may com was known to be a supplier of discrete diodes and in some instances mimics.
Which were mostly for RF and microwave applications and what we've been doing over the past three years is really branching out and introducing all the different technologies to our defense customers and absolutely getting well received so we're very excited about it as I highlighted in my script, we're also bringing a new design.
Ability to allow us not only to provide components, but also modules in multi chip assemblies are subsystems.
I think about six months ago, we highlighted a 45 kilowatt.
Contract a multimillion dollar contract from the Navy, we expect more of these type of activities over the next few years.
And getting involved in very large programs and this is something that they come with not doing four or five years ago.
Other thing I'll highlight since you talked about sort of general trends as I think it's warranted to bring up the chips Act.
Which as everybody knows the Senate passed this week.
And it looks like it should be signed into law sort of imminently.
And that provides about $53 billion to the semiconductor industry and chip stands for creating helpful initiatives to produce semiconductors and thats exactly what we do and we are really an ideal candidate to win funding.
The funding will flow through in many cases, Dod agencies or sponsors and so as we've been for the last few years.
Reestablishing and building new relationships with the major.
<unk> agencies that will help us as these chip dollar start to flow because theyre going to be looking to not only build out and improve and expanding factoring but theyre also going to be providing about $13 billion for semiconductor R&D and we wanted to be a major beneficiary of those funds and so.
We're very focused on defense, we have outstanding technology across many different technology areas, whether it's RF optical high speed analog.
Our RF power.
So we're certainly very excited about the market we've been able over the past three years to take the market that had been stagnant and running in about $40 million a quarter and now we are approaching $80 million a quarter and so.
That is certainly.
Due to just market share gains and going after new programs I wouldn't specifically relate any of this to any particular skirmishes like the Ukraine that you mentioned.
Certainly the world is not a safer place today and so as the challenges emerge for the.
The U S.
Generally drives electronics to higher frequencies, and higher power and higher data rates and.
These trends play to our strengths.
The fact that we are.
Moving ourselves to the edge of performance should drive our Dod business.
Very helpful. Thank you.
Thank you our next question.
Our next question coming from the line of Harlan sur with JP Morgan.
Good morning, Thanks for taking my question, so as a follow up to that.
Steve So several of your Fabs are asked 9100 D. There aerospace qualified I.
I think youre lower facility has <unk> sort of trusted fab status by the department of defense. So.
As you combine this with the hypo <unk> of the passing of the chipset Bill It does.
Does seem very likely that you guys are going to get access to the associated subsidy. So I know that proposals were requested by the department of Commerce. A few months back. So can you guys just give us a sense.
Base case, how much is the team requesting on subsidies Capex right now is about 4% to 5% of your revenue. So any subsidies will be a good boost free cash flows.
Yes, I, just think it's probably a bit too early to get to that level of detail.
For us to share that level of detail, but it is still certainly early in the process.
And I think Ive said I can just highlight that as we think about how we can help and where we would want to drive.
Funding it would be certainly towards.
Supporting our manufacturing facilities.
But it's also equally we're interested in working with different agencies to develop technologies for new programs and so it's that semiconductor R&D piece, which can come in a lot of different forms that can come in the form of process development.
Circuit design, a package technologies and so.
We want to make sure that.
We use this vehicle to help.
Any way subsidize our advanced R&D.
So I think youre right in your car.
It's about us being made up 9100, we have a trusted foundry facility.
We have a growing capability in this area and so.
It's just too early for us to talk about specifics until we have a better understanding of how the dollars will flow.
And maybe a good example of that.
Access to R&D dollars I mean, I think a good example of that right is there a 0.14 micron Gan on silicon mimic process that was transferred from the Air Force Research lab.
You also characterize this.
This technology is one of the key emerging growth drivers for the team.
Is the is the manufacturing process fully qualified and now it's running in the la facility as the manufacturing process fully qualified and given that this was a technology that was transferred from <unk> you guys limited to just doing custom and standard products children for defense related initiatives are you guys allowed to use this process for non defense related.
Standard and custom products and maybe even also offer the process to non defense related foundry customers.
Yes.
A great series of questions I'll try to answer all of them.
So just to highlight the 0.1 for Gan on Silicon carbide process that we transferred from the Air Force.
Paid for by makeup we used make Lam R&D dollars, there was no government subsidies or funding for that.
And that was the commitment we made to the airports because we felt it was strategic in nature. We wanted to build relationships. We wanted to begin a working relationship and that has been an absolute success.
And this is a this is a transfer of technology thats royalty free.
We're not paying the air force and we there's no royalties associated with it the second thing I'll highlight we are not.
We are not constrained by how we use the process, we can sell it into the commercial markets. In fact, that's exactly what the air Force wants they want to see the process go to volume production.
And it can also be used of course for.
Dod applications.
You generally start to get into limitations. When you start to do particular circuit designs, which could create limitations on on applications.
In terms of the qualification status. So the process is not yet qualified we expect to be qualified by year end.
Early Q1 of 'twenty three however, what we have qualified as are our PDK.
As the design tools necessary to start making chips and so our designers.
In our business development staff are off collecting requirements and designing devices because effectively the process is frozen.
And so.
That's the status we've been doing demonstrations with engaging customers we've been sharing all our data.
And I want to highlight that this technology is really a launching point for future technologies and as the chip dollars starting to flow.
Want to use some of those future dollars to go to shorter gateway.
And create.
New capabilities within high frequency Gan.
So it's really just step one in a long term program and we know there's U S competitors two major competitors that are producing hundreds of millions of dollars of revenue within this technology and today, we have zero revenue and so our goal is to very clearly step into the market with market share and drive.
<unk>.
Thank you and one for my next question.
And our next question coming from the line of Richard Shannon with Craig Hallum. Your line is open.
Hi, guys. Thanks for taking my question I just had one.
Yes.
Kind of covered a few of the comments you just made here in the last couple of minutes, Steve here, but I'll take a phrase you used earlier in the call here about staying in your lane I think in reference to not going after Dsp's, which I think most people would make sense.
And you've also talked about a lot of the opportunities that you have new markets youre being kind of niche, but it seems like with the potential from the chips Act.
Allow you to go after a little bit bigger bigger markets here and you just described.
I may have missed some of the detail here about markets, where the revenues are well into the hundreds of millions of dollars.
I guess my question do you Steve to maybe expand on your last answer here is that.
Staying in your land allow you to or allow you to go after much bigger markets in the past, especially with the chips Act money.
And maybe just expand on the last answer and I'll leave it at that thanks, Steve.
Yes, I do think that.
Well first of all we have a long term strategic plan as we talked about in that plan as a self funded plan we're not.
Betting our future strategy on winning dollars from the chip back for US. This is an accelerator that will allow us to do things faster edible provide.
Financial benefit.
And cash flow benefits of course, and it helped solidify long term relationships with major.
Agencies and customers.
So to the extent that.
We are successful when it funding it will be an accelerator and.
No.
Typically talked about our future plans are when we do decide to jump lanes, what what label jump into that will come later.
But there is potential certainly for us too.
Continuously expand our Sam and that is a key part of our growth strategy. Today, we we estimate our stance would be about $5 billion and we want to push that to about eight or $9 billion over the next few years and by only spending 130 or $140 million a year in R&D you can only do so much.
And so we have a very.
<unk> and.
Measured approach to stepping into markets. We know we can be successful in.
And again I'll just highlight that the chips act would only be an accelerator.
But it won't change our fundamental strategy.
Okay I appreciate those comments if that's all for me.
Thank you.
Thank you I will now turn the call back over to Mr. Steve Daly for any closing remarks.
Yes. Thank you in closing we'd like to thank our employees, our customers and our suppliers for their continued support have a nice day.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.