Q4 2022 MACOM Technology Solutions Holdings Inc Earnings Call
Welcome to make all this fourth fiscal quarter 2020 conference call. This call is being recorded today Thursday November three 2022 at this time all participants are in a listen only mode.
I will now turn the call to Mr. Steve <unk>, Vice President of <unk>.
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 fourth 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 as defined in the safe Harbor for forward looking statements contained in the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those discussed today for.
For more detailed discussion of the 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 a reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release related form 8-K, which was filed with the SEC today.
With that I'll turn it over the call to Steve Daly, President and CEO of May call.
Thank you and good morning.
I will begin today's call with a general company update after that Jack Kober, Our Chief Financial Officer, who will provide a more in depth review of our fourth quarter and full year results for fiscal 2022.
When Jack is finished I will provide revenue and earnings guidance for the first fiscal quarter of 2023.
We'll be happy to take some questions.
We finished our fiscal year with a solid financial performance revenue for Q4 was $178 1 billion and adjusted EPS was <unk> 77 per diluted share.
For the full fiscal year, ending September 32022 revenue was $675 million and adjusted EPS was $2 82 per diluted share.
This represents 11% year over year revenue growth at over 30% year over year growth in adjusted earnings per share.
These results demonstrate the strength and leverage in our business model.
Over the past four quarters, we have incrementally improved our gross margins and operating profits, resulting in improved cash flow. We finished the fiscal year with $587 million in cash and short term investments on our balance sheet.
FY 'twenty two was also a strong year for new product development with our R&D teams launching nearly 150, new products, an increase of approximately 15% year over year.
We believe many of these products will enable market share gains and support our near and long term growth targets.
There was a high level of excitement it may come because we have many new projects underway, our growing team of world class IC designers and unique manufacturing and packaging capabilities.
We'll continue to expand and build upon these competitive advantages in fiscal year 2023.
In Q4 book to Bill ratio was 1.0 to one and our turns business was approximately 10% of total revenue for.
For the full fiscal year, our book to Bill was one one to one.
Our backlog remains at near record levels entering fiscal 2023, providing us with a strong position to achieve our growth goals for the upcoming year.
To provide some additional context over the last three years, our backlog is up two five times translating to a 36% CAGR.
We believe our backlog growth over this timeframe is reflective of the market strength as well as may comps market share gains due to new product adoption.
However to be clear, we do not believe our business will be appealing from a global recession or market slowdown.
In fact recently, we are seeing softness in order flow and as a result, we are being cautious and believe our book to bill ratio could be at or below one this quarter.
Despite this we are optimistic about our prospects for fiscal year 2023 and beyond.
More and more customers are viewing may com as a strategic supplier of high performance analog RF microwave and Lightwave semiconductor solutions and <unk>.
We believe this is directly attributable to our strengthening product portfolio additions.
Additionally, we see a tremendous opportunity to better address our 5% to 6 billion dollar serviceable addressable market or Sam by continuing to expand our product lines and portfolio.
As a reminder, we maintain a diverse revenue base with little to no consumer exposure, which we believe is a strength and a business advantage for the company.
Our diversification spans product lines customers and end markets.
Slide 22, our top 10 customers represented 31% of our total revenue.
We had no direct customers greater than 10% of revenue and for the full year single product generated more than 2% of our total revenue.
Turning to our end markets fiscal Q4 revenue was generally as expected with industrial and defense at $78 5 million telecom at $62 million in data center at $37 6 million.
For the full fiscal year 2022 data center was flat.
<unk> unique technologies and customize fees.
Defense customer requirements, often pushed the limits of semiconductor performance because they are building systems that extreme frequencies high data rates and high RF or microwave transmit power levels in these challenging requirements aligned perfectly with may comps core competencies.
Our strategy is to further leverage these same technologies into the industrial markets to support test and measurement medical automation commercial radars and new automotive opportunities.
Our telecom and market revenue was flat in queue for during the quarter softness in five G was largely offset by strength in the broadband access segments.
For the year Telecom had a very strong growth performance growing 29% in FY 2002.
Drive for higher data rates and faster connections across Subsegments like five G wireless metro long haul <expletive>.
Hybrid fiber coax satcom and microwave networks plays directly into <unk> com strengths.
Are exceptional growth in telecom in FY twenty-two was broad based and driven by these strong and market dynamics, coupled with new product introductions and market share gains.
Our data center and market revenue was up in Q4, but flat overall for FY 2002.
As a reminder, our data center product portfolio includes our high performance analogue or HPA drivers in transit peanuts amplifiers or tia's for <unk> and Pam for.
Coherent drivers and Tia's Rosie R Cross switch products and legacy Ots Mappers Framers in addition to new product offering, including our linear Equalizers direct drive solutions and 25.
And 50 G CW lasers.
Today, we have a strong backlog in place for our cross switch solutions and LTN products, noting that these orders were impacted by supply constraints for the majority of FY 2002.
In many cases, we are the sole source supplier for these products.
Over the course of FY twenty-three, we expect new products to be the primary drivers for data set of growth for.
For example, our sales and marketing efforts for our new twenty-five GTP lasers, and <unk> CW lasers is just beginning.
Our linear equalizer products have started ramping during FY 2002, and will continue this year in support of high data rate applications, including Backplane inactive copper cable.
We are also beginning to see the proliferation of coherent optics in the access market with low cost tunable hundred G solutions.
All of these products represent incremental growth drivers of May clumps business.
As we have discussed in prior calls today, we engage selectively within the data center market focusing on areas, where we can leverage may comps competitive advantage of technology portfolio, including high performance analog Ics, an optical semiconductors, such as lasers and photo detectors.
We are a small but broad based supplier into the data center market.
We will continue to pursue this targeted engagement strategy and increasingly we will focus on finding attractive new opportunities outside the data center leveraging the same design resources and technologies.
We had many engineering accomplishments in fiscal 2022, and I would like to recap a few of these today.
We opened two new design centers located in Seoul, Korea in Western, Massachusetts, and staff that with industry leading talents.
R. One four gain on silicon carbide limit process is on schedule to be qualified and released to production at the beginning of next quarter.
Our fab in device engineering teams that doesn't remarkable work to meet schedule into achieved these results.
We know our customers are waiting for the first wave of product introductions.
<unk> launched may cause pure drive product line comprising of linear drivers and trends in pita sample of fires that targets single mode, and multimode 400 G. Pam four architectures.
This innovative chipset has been designed to support broad dynamic rages linear equalization and low noise amplification to enable direct connection to switch and server <unk>.
Working together is linear links to can support leading edge throughput while at the same time enables specialized functionality for each component and the data path such that power cost and latency can be minimized.
We believe this is disruptive technology is it can eliminate the need for a DSP in certain applications.
Or die of teams completed an important product qualification for a key automotive customer we expect more design wins from this and other automotive customers. In 2023 now that are low fat is automotive tier 16 94 nine certified.
We continued to push the boundaries of compiled semiconductor performance and high powered RF applications. We expanded our may comp pure carbide power amplifier product portfolio to include a seven kilowatt power amplifier, which we believe is the highest power part in the industry does.
Seven kilowatt product is ideal for high power and high voltage aerospace and defense applications, including EMP radar and electronic warfare systems is extremely high power level was achieved by combining novel high voltage circuits apologies with advanced packaging materials for improved thermal management.
Or lightwave team transitioned several customers from qualification status to production status on both photo detectors and twenty-five lasers.
We have slow but steady market penetration.
And notably are Whitewave engineering teams first measured results on our 100 G E milk products looks compelling.
And last we expanded our RF subsystems and module design capabilities for IMD applications.
Here, we will leverage our engineering expertise to provide customers with unique subsystem solutions based on May calms proprietary semiconductors.
As we focus on fiscal year 2023, our priorities include taking market share in gallium arsenide Ngai <unk> on silicon carbide mimics.
Diversifying our high performance analog icy business.
Maintaining our leadership position incoherent icy solutions for telecom and data center markets.
Continuing to gain content and market share and 10 G X G S Pan and other broadband access solutions for North American and European fiber to the home markets and upgrade cycles.
Continuing to expand our RF microwave logical and subsystems capabilities and win more amplifier and microwave assembly business.
Executing on recently awarded radar development programs.
Extending our competitive advantage by introducing new products based on may comps proprietary semiconductor processes.
Working with federal state and local authorities on securing shipped act funding to grow capabilities in our business.
Further optimizing the efficiency of our operations to approve profitability in cash flow.
And continuing to develop our employees careers. So that they can grow with the company as well as enhance our entire organization with attracting industry leading talent.
A central theme for fiscal year 2003 is to move quickly and capture market share.
In summary may come as a wide range of products and production today spending dozens of different product lines servicing thousands of customers.
Many of these products have log lifecycle produced revenues for years after that that introduced we've.
We view this diversity of technology products, and and market applications as an inherent strength of the company.
To provide abroad and stable revenue base.
Jack will now now provide a more detailed review of our financial results.
Thank you, Steve and good morning, everyone before getting into the details of our quarterly results I would like to summarize a few items associated with our fiscal year 2022 financials.
First.
Our order backlog grew by more than 20% during fiscal 2022, and our full year 2022 revenue grew by more than 11% over the prior fiscal year Sir.
Second we continued to expand our margins with our adjusted gross margin for the full fiscal year 2022 at 62% up 240 basis points from 59, 6% in fiscal 2021.
This is the first full fiscal year that our gross margin has exceeded 60% since may come with public in 2012.
In addition are adjusted operating margins for fiscal year, 2022 or inaccessible 31%.
Third our fiscal year 2022, adjusted net income was $201 million compared to $152 million in fiscal year 2021.
In fiscal year 2022, adjusted EPS was $2.82 compared to $2.15 in 2021 and more than 30% improvement.
And finally from an operational perspective May comes team of outstanding employees continue to remain focused on improving the performance of the business and executing our strategy as we move into fiscal 2023.
Now onto the quarterly results.
Revenue for the fiscal quarter was $178 $1 million $3, 4% sequentially based on modest growth from our data center and INP markets.
Q for completed another year of double digit growth for May come with fiscal year, 2022 revenue $675 million up from $607 billion in fiscal 2021.
On a geographic basis revenue from U S. Domestic customers represented approximately 50% of our fiscal queue for results and 47% for fiscal year 2022.
Up from 46% in both fiscal Q4, 2021 and fiscal year 2021.
Adjusted gross profit for fiscal Q4 was $111.5 million or 62.6% of revenue up 40 basis points sequentially.
Over the past fiscal year, we executed on many annual initiatives to improve yields reduce cycle times and optimize pricing, resulting in these improvements to our gross margin.
Going forward, we expect gross margin to continue to trend higher as we commence additional improvement initiatives and his new products contribute to our overall revenue mix.
Total adjusted operating expense was 54 $5 million, consisting of research and development expense of $35.3 million and selling general and administrative expenses $19 $2 million.
The 1.4 million dollar sequential increase and adjusted operating expense was primarily driven by the continued expansion of our R&D staff and hire employee related costs.
We plan to continue to invest in our R&D capabilities over the course of fiscal year, 2023, which will modestly grow our opex over the course of the year we.
We believe the investments we are making in R&D resources and technology will help us to continue to deliver new technologies and leading edge semiconductor solutions to our customers in the years ahead.
Adjusted operating income and fiscal Q4 was $56.9 million up from $54 $1 million in fiscal Q3.
Adjusted operating margin increased 60 basis points sequentially, reaching 32% in fiscal Q4.
Fiscal year 2022, adjusted operating income was $211 million compared to $173 million for fiscal 2021, representing a 24% year over year increase highlighting the operating leverage in our business.
Depreciation expense for fiscal Q4 was $6.1 million and $23.8 million for fiscal year 2022.
Adjusted EBITDA for fiscal Q4 was $63.1 million <unk>.
Trailing 12 months adjusted EBITDA was approximately $235 million as compared to $194 million last year, representing a 21% year over year increase.
Our fiscal Q4, we headed Justin net interest income of less than $100000 compared to net interest expense of approximately $400000 for fiscal Q3.
Fiscal year 2022, adjusted net interest expense was $2.6 million down from $11 billion in 2021.
Decrease in fiscal year, 2022, net interest expense, which driven primarily by the partial repayment and associated refinancing on our term loan in our prior fiscal year 2021.
As well as higher interest income from our increasing cash and short term investment balances.
Are adjusted income tax rate and fiscal Q4 was 3% and resulted in an expensive approximately $1.7 million.
Our net cash tax payments were approximately $400000 for the fourth quarter and $2 $2 million for fiscal year 2022.
We expect our adjusted income tax rate to remain in 3% for fiscal year 2023.
Next I would like to discuss a 200 million dollar non-cash tax benefit recorded on our GAAP financial statements during our fiscal fourth quarter.
Historically may come had recorded gap losses in our financial statements and had accumulated net operating loss and R&D tax credit carryforwards that could potentially be used to offset future Rica.
Due to our history of recorded gap income statement losses, and the limited potential for us to utilize these historical loss carryforward to offset the future income gap accounting rules historically did not permit us to reflect these loss carryforward as an asset on our financials.
Primarily as a result of our improving gap profitability, we have updated our financial pier in the fourth quarter of 2022, two now have substantially all of these tax benefits recorded on the face of our balance sheet as a deferred tax asset.
This adjustment resulted in a queue for non-cash tax benefit of approximately $200 million recorded on our GAAP income statements.
It's $200 million tax benefits was not included in our adjusted non-GAAP earnings for the quarter.
As of September 30th 2022.
Our net operating loss carryforward are approximately $645 million and are deferred tax asset balance is $237 million.
As I noted earlier, where the primary considerations for this accounting adjustment with that more recently, we have consistently generated positive income on a gap basis and expect to continue to generate GAAP income going forward.
For reference or GAAP net income was $38 million in our prior fiscal year 2021 at $444 million for our fiscal year ended September 2022, inclusive of the $200 million benefit from the tax adjustment I, just noted and a $118 million gain associated with the Q1 sale of an equity interest.
For fiscal Q4, adjusted net income was $55.1 million compared to $52 $1 million in fiscal Q3 a.
Justin earnings per fully diluted share with 77.
Utilizing a share count of 71.3 million shares compared to 73 of adjusted earnings per share in fiscal Q3.
Now moving on to operational balance sheet and cash flow items.
R. Q for accounts receivable balance was $101.6 million down slightly from $106 $6 million in fiscal Q3.
Mostly due to improved linearity during the quarter.
As a result days sales outstanding where 52 days compared to 56 days in the prior quarter.
Inventories were $115 million, a quarter end up sequentially from $110 $2 million.
During fiscal year 2022, we have continued to make strategic investments in various inventory items, including manufacturing consumables substrates precious metals as well as critical wafer stocks and finished goods to support our customer orders.
Inventory turns where two three times down sequentially in Q3 from two four times in the prior quarter.
Fiscal queue for cash flow from operations was approximately $60 million up 19.6 million sequentially.
This quarterly increase is primarily due to the timing of working capital payments as.
As a result for our upcoming first fiscal quarter of 2023, we expect our cash flow from operations to moderate and be below this high Q4 level.
Capital expenditures totaled seven $7 million in fiscal Q4.
Fiscal 2022, Capex of $26 $5 million was up from $18 million in fiscal 2021 attributable to fat and R&D spending.
We expect our fiscal 2000 twenty-three capex to be approximately $40 million as we continued to expand capacity and process capabilities at our domestic manufacturing locations and R&D facilities.
Next moving onto other balance sheet items.
Cash cash equivalents and short term investments for the fourth fiscal quarter or $586 $5 million up 52 million sequentially and up to $142 million or 70% from the same quarter in the prior year.
With our continued cash generation and the increase in trailing 12 month EBITDA, our fourth quarter gross leverage is two six times down from 2.7 in Q3.
Our net leverage remains below one in our net debt is now less than $20 million.
In summary, our business continues to perform well the quality of our earnings continues to improve and our cash flow remains healthy.
We are aware of the macroeconomic uncertainty currently impacting the semiconductor industry. However.
However, we maintain a strong balance sheet with ample cash to help fund our strategic goals.
We carefully manage our discretionary spending and expect to support healthy margins and remained cash flow positive over the course of these business cycles.
I will now turn the conversation back over to Steve.
Thank you Jack.
Hum expects revenue in fiscal Q1, ending December 30th 2022 to be in the range of $167 million to $182 million and adjusted gross margin is expected to be in the range of 61.5% to 63.5%.
And adjusted earnings per share is expected to be between 78 cents and 82 cents based.
Based on $71 $4 million fully diluted shares.
In fiscal Q1, we estimate.
Or modest growth across the three and markets as I have noted we maintain a long term perspective on executing our strategy. We are confident that we can continue to improve our financials and take market share of the months and years ahead.
Our product portfolio is stronger than it was a year ago. It for this reason we are confident that we can meet or exceed our targets.
Over the long term, we believe trends, including the drive towards more bandwidth.
Astor data speeds higher frequencies and higher power levels will support may clubs growth. These.
These trends will require higher performance levels from semiconductor suppliers, which means better analog designs specialized compiled semiconductor materials and manufacturing processing and innovative packaging solutions and strong system level knowhow.
<unk> is unique in our potential to bring all of these requirements together to provide our customers with the highest power highest frequency and highest data rate analog semiconductor and subsystems solutions in the market.
I would now like to ask the operator to take any questions.
Thank you, ladies and gentlemen estimated to ask a question you won't need to press star one.
Telephone keypad.
One moment please.
Now first question coming from.
<unk>.
Okay.
Yeah, Hey, guys, Hey, first of all guys solid execution, you know, we're seeing semiconductor companies just fall apart in this earnings season. So.
We appreciate a very steady any printing guy so with that.
Steve You did say that you are seeing you know you're seeing some softness in orders I wanted to understand.
First of all where you're seeing the softness and orders and then be we are cognizant now very very aware that this recessionary activity you're stuffed economic activity.
How do you perceive your longterm goal.
Call it the low teens growth.
Still you meant a valid mark for us to think about.
Thank you <unk> for the questions. So.
The softness that we talked about on the script.
In terms of bookings are fairly broad based I wouldn't necessarily call out any one particular segment as being sort of weaker than the other.
I'll highlight that our defense business is still holding and quite strong as well as some of the new design wins in the automotive market are also supporting the overall bookings and I just have to highlight that this was his Jack said the eighth consecutive quarter, where we had a book to bill.
Greater than one.
Which really allows us to set up ourselves for a strong fiscal twenty-three, which really leads to the second part of your question, which is our overall long term growth.
And goals and so as you know we don't give annual guidance.
We generally give one quarter at a time.
As I mentioned in my script, we feel like we are in a stronger position at the start of this year than we were last year, primarily due to the work we're doing to expand our Sam and the addressable markets, primarily driven by new product lines that we've been launching many of which we have talked about during the course of the year.
At the beginning of fiscal 21, we we set a target of greater than 10% year over year growth, we delivered 14%.
Beginning of fiscal twenty-two we also set the threshold at 10%.
We delivered 11% so we were happy about that and.
And as we think about fiscal twenty-three, we're really taking the same philosophy forward that we want to have at least 2% growth. However, you have to understand that.
Given the macro economic conditions that geopolitical risks.
Certainly some of the softness we're seeing in Asia, specifically China.
All of those items do provide I would say more uncertainty in terms of our targets.
In terms of fiscal twenty-three, but if you take a big step back and looked at our long term goals, which I think is more important we still do believe we can achieve $1 billion of revenue in our fiscal 25.
The math is quite simple if you just take our guide for Q1, and annualize that and apply an average growth rate of low single sorry, low double digit.
Growth rates, you get to $1 billion quite quickly. So we think we're doing all the right things that starts by increasing the number of new products and I can tell you from 2019% of 2022.
We have doubled the amount of products, we're launching on an annual basis and this will be the ultimate driver of our growth.
Okay. Thank you Steve very helpful. I had a follow up and then I'll get off the podium are you seeing any aspie pressures at all in any of your markets and then you've got a ton of strong.
Very strong new product activity can you maybe highlight for us where you feel which areas of the three and markets with the new products you feel very optimistic about sore throat. Thank you.
So the semiconductor industry is you know is very competitive and we're constantly seeing price pressures.
And so that is something that I think that the team is quite.
Capable of handling we try to optimize the value of our solutions to customers, we are not a price leader.
In terms of.
Chasing business at lower prices, we tried to differentiate ourselves and as you have seen over the last really two to three years as with introduce more and more products are gross margins are going up and and yes that some of that is due to operational improvements and supply chain management and.
Yield enhancement programs and whatnot, but it also speaks to the fact that the portfolio is getting stronger and more differentiated which allows us to command.
Stronger pricing and so we expect those trends to continue was Jack highlighted in his in his script and.
In terms of the the new products.
Or the NPI products that you referred to in what markets.
Or segments are we most excited about.
It's hard for me to sort of call out any one particular.
Area market or technology, because we have so many different things going on but I will say that we are really <unk>.
Turning a corner with our 0.1 for organ on Silicon carbide process, which will be introducing right. After new years, and so that is a major event for our company and we're very pleased about the performance of the process. We know the market's there and over the next two to three years it'll be a lot of fun to go out into the market and take Mark.
Sure. So I think the whole team is really excited about that.
Thank you one moment of our next question now next question coming from the lineup with Bank of America.
<unk>.
Thanks for taking my question, Steve I, just wanted to go back to the comment you made about the potential that the opportunity to grow perhaps the double digits.
This year and I was hoping you could give us some color by a segment, which segments do you think would help you'll grow faster or below that alright, or you think all three segments can grow in line with the bat.
An opportunity.
So I think.
It's very difficult for us to sort of communicate with.
Fidelity, where we think the year will end.
In terms of ultimately which markets will drive our growth if we can achieve high single digit and low double digit growth.
Across the mix of markets I think we'll be able to achieve our goal. So I don't want to necessarily call out any one particular item.
Or and market certainly everybody knows that five G is fairly soft right. Now we know that defense is strong and getting stronger are telecom business is doing quite well, primarily driven by product introductions.
As we mentioned during the course of the year that we expanded our soi product line, we're getting involved more and more and cable infrastructure and broadband access with a variety of control products amplifiers and filters.
Mentioned also on the on the optical side really interesting projects that we're working on including EMF lasers, which is very additive to our laser portfolio and again, when we think about lasers we.
We think about establishing a portfolio of functions that addresses not only data center in telecom, but also sensors and so we have a lot of interesting projects underway.
In and around Lazing and so we're excited about that.
For this coming year, so a lot of interesting projects I wouldn't necessarily highlight any one that will drive our growth.
So I guess I'll leave it at that.
Alright. The reason I asked that question is you know there was a big disparity and the relative grilled taste. So the <unk> different segments and physically 22, and the one I wanted to really.
Get your perspective on his industrial and defense the five per cent growth. Obviously last year. You grew 44. So compares that are are tougher, but how do we put this five per cent growth in the context of 15 20 per cent growth and industrial and defense savings that visa across the number of your other analog.
An industrial peers.
<unk> <unk>.
Wait I'm struggling as how to model growth in industrial and defensive coordinator.
Thank you.
Sure and.
I think it's important to put things in context that our industrial the defense business was range bound for many years and the sort of 40 to 50 million dollar a quarter range and that was due to lack of investment lack of focus and really the the strategy of the business and so.
When we went through our update.
Update of our strategy back in 2019.
We made a decision then to make industrial or defence, a priority and now fast forwarding to Q4 Q4 was actually the the record level of revenue for the company.
At $78.5 million, so that was a record quarter and we and going into this Q1, we're also expecting.
Either flatter modest growth on that.
And so we're actually quite pleased about IMD and we think we have sort of broken out and we're doing all the right things.
To continue to see reasonable growth, but in terms of long-term.
We think we're going to achieve the $1 billion by continuing to have solid performance with our telecom business as well as our business. So.
I think I would leave it at that.
Thank you Bye next question and then next question coming from.
Thomas.
Barclays to your line or something.
Good morning, guys. Thanks for taking my question I, just I just wanted to go back to a prior comment you made I think to an earlier question about the well known weakness in China is.
There any way you could contextualized the weakness that you're seeing the company specific weakness from from two quarters ago until now and then also we recently saw the on verified this come out and there was a large amount of Chinese optical companies that were actually on that list could you. Just you have any color on one if you've taken a look at that list.
To what you think the impact might be some of those customers were unable to ship in the future.
Sure.
Well, a few things about China first of all as everybody knows China is a very important market for the semiconductor industry I think in 2021, China imported $400 billion of semiconductor products.
Today May com's overall business, we we ship about 25% of our business and to China. If you go back and look at the last three year trend, that's actually been trending down and.
In 2020, we were just below $200 million and now that's trending towards.
About $175 million. So it's a it's an important market for us it's a diverse market for us. This past year, what may calm did as we actually did have a bit of restructuring and rebuilding and expansion of our team inside of China and as we think about our growth going forward. We recognize that there are some very interesting markets in China and.
<unk>.
Electric vehicles, and new energy markets that will require a wide range of semiconductor. So part of our go forward strategy is to certainly try to address some of those large markets that were not currently addressing today.
The second thing I'll add in terms of just overall export controls. So we take that very seriously whenever there's updates too.
Deny parties or entity lists of course.
We are very active and we would react immediately and address all of those changes and so there has been instances in the past where <unk>.
Companies have gone on the entity listed as a result, we do have to.
Take an impact and we see that our revenues dipped down you of course Huawei back in 2019, we were trending till about $20 million a year and now that's zero So I guess.
What I would say as as the as the regulations are updated we follow the regulations, it's hard for us to sit here today and makeup comments about how any particular change would impact our business other than we we adjust and follow the regulations.
Got it really helpful. And then just just to follow up on the island.
Business historically, I think you guys have given a breakout of 60 per cent defense 40 per cent of industrial with the moving pieces you would expect the defense would be a bit stronger as we go forward is the breakdown still 60 40 or have you seen those the relative sizing.
Those two pieces changed over the last couple of quarters. Thank you.
I think that ratio is about correct I think it's <unk>.
Reasonable ratio to use I think over the long term with some of the big programs were getting involved in with defense I would expect defense might actually grow beyond that 60 40 ratio.
Thank you one moment my next question.
Next question coming from the lineup sorry standard with Stifel. Your line is Nelson.
Yes, Thank you and.
<unk>, 62% gross margin for the full year, that's a that's a good good milestone.
The first question maybe.
Maybe I didn't quite catch this Steve but when you were doing a prepared remarks I think you said.
Sam a five to 6 billion I know in the past you've talked about 5 billion.
So I was just wondering why you said five to six and is that additional billion.
Is it coming it's obviously coming from the three segments, but obviously auto is now also becoming a segments I'm just wondering if you're going to start from sept bring that out.
As as its own Sam.
So you are correct that we are working hard to expand our Sam.
Sam numbers can be.
Can range, depending on what you include in the sand and what you don't so we generally tried to be a little conservative on our.
Ranging of Sam's.
What I will say is the growth is coming from new product lines and new technologies.
As you know over the last few years, we have launched a whole number of new product lines and so.
That Sam expansion is coming from.
Can a silicon carbide, it's coming from some of the optical products, including the Ot OTR products, we talked about on the last call.
The lasers that we're looking to introduce next year.
The list goes on so the Sam expansion in that 6 billion as a as a real target number.
Part of our strategic plan is to make sure that every year, we're adding new functionality to our portfolio and so you should expect that number to continue to grow.
Very good and that was my follow up.
For your data center business, I think make them spend a bit contrite and right. I mean this year you didn't see any growth Theobald a lot of others did and it does sound at the margin that you have a lot of new products coming in next year, especially the the <unk> social circles. So I'm just wondering based on what you see today, even if that market where to be.
Week next year could you still grow the data center segment based on your new products.
So we thank you, yes, and we think that that growth could actually achieve double digit and just to remind everybody. We had forecasted at the beginning of fiscal 22 that there would be about a 15 million dollar drop in legacy business within the data center market. So if you were to add that back into our $138 million of revenue you would have.
About 10% growth, but when we think about this coming year, we think about wrapping a lot of our 400 G products.
We we actually if we look at some of the dynamics right now we definitely see some of the N. R. Z platforms that we're involved in today being replaced with 400 G. P.
Platform, so short reach long reach.
As an area, where we are very strong as you know we launched our active copper cable.
Products last year, those will ramp in 2003.
And that will provide us some incremental growth.
And generally as the world starts to move to more and more to pay them for at the higher data rates. This is where our product line really shines. When you look at our drivers are tia's and now even our lasers.
Thank you one moment for our next question now next question coming from the line of <unk>.
<unk>, calling you on a cell phone.
Thank you very much good morning guidance.
If I wanted to ask I think we started the call with a question on just kind of some of the the order patterns that you're seeing and you guys have been above book to bill above one for awhile now, but you did mention maybe it would go below one in the coming quarter. So I just wanted to.
I have a bit of a clarification on the length of the backlog currently in I don't know in in revenue relative to the run rate and are you seeing actual.
Poor shouts or delays and or within the backlog or is it just sort of new orders book to bill is less than one thing.
Thanks So.
We we have a very high quality backlog.
And we're constantly.
Making sure that.
Orders that we're placing are are being placed within a reasonable amount of lead time, we don't typically put things on our backlog that extend beyond a year.
For some of our larger programs.
Will say that recently, we have seen a little bit of everything we've seen some cancellations on the on the margins with seeing pushouts with seeing <unk>.
But generally.
Becomes very customer specific in terms of what they are doing we've seen for example nature customers that were in high volume production cancel programs.
Certain of our market segments, and so yes, we are seeing a little bit of that.
At this stage, we think it's manageable and we even when we roll all of those numbers during the quarter, we still came out with a greater than one book.
A one book to Bill So we're happy about that so we are definitely seeing a pressure.
Pressure.
On the booking side.
Maybe Jack can add to the comments in terms of trends and also channel inventory and whatnot.
Thanks, Steve.
We have a fairly rigorous process here and we look at our our order in flow and our backlog over the course of of each period.
Time that we spend with our sales and operations team to make sure. We've got our fingers on the pulse of what's happening from an overall order backlog standpoint, and we have been very fortunate over the past.
The past couple of years in terms of the book to Bill across all three of the different and markets that we serve so it's been fairly well diversified in terms of the strength that we've been receiving from a from an orders point of view across those three different and markets and then on top of that in terms of when we look at our our backlog.
It's generally going out no more than one year. So in terms of it being time bound I'd say it substantially all of our our existing backlog in size is undergoing here at this stage.
Thank you both for all the detail there and it's really helpful. Jack I just wanted to I guess, Steve as well I just wanted it back up and kind of I mean, the last no semiconductor downturn at the same I guess, but they all have similarities and I I guess, Steve right. Before you came in and took over as CEO , we were kind of going through the last one.
In 2019, and there was a headwind that you mentioned from Huawei as well that that impacted the business back then and I just trying to kind of compare and contrast things look right. I mean, you guys are added what 13 points are so gross margin since then.
Now you've just finished a year at 31% off margin in the margin of 19 was basically.
Zero and.
You just flip sort of net cash positive. So I just wonder if you can maybe compare and contrast, the position that the companies and now versus the downturn bed.
The company Might've felt in the past and then any thoughts newer different on capital allocation now that that the balance sheets and a very very different place than it was in the past really appreciate any any big picture of thought there. Thanks.
Yeah. So.
Interesting question. So you are right no no two downturns are the same I guess so.
I guess, what we can talk about is why.
Why we feel like we're going to do better than most going forward I think that's an important part of your question and it really comes down to the diversity of our business.
Split almost evenly between domestic and international no greater than 10% customers are very few.
We have 2% of revenue on any one particular product.
And and the last three years with introduced over 400, new products and a whole wide range of product lines and so these are the best defenses. We can have as we think about.
Dealing with recessions in and potentially revenues that might go down in the future and so the last thing I'll add is that we run a very lean and mean.
Organization.
We we as Jack pointed out in his script, we keep a very careful lie on discretionary spending and waste in our operations our sales are finance.
Are planning and logistics teams shipping teams all do a phenomenal job working together to save the company money and so that allows us to invest in the things we want to invest and we think the best place for our cash right now is investing in the business.
We will be allocating as Jack highlighted.
More on a year over year basis of more capital spend.
A lot of that will be going into our fab here enrolled as well as Ann Arbor. So we think we have a solid position now if our customers start producing less products are cancelling programs of course, we will have an impact.
We will have to adjust our.
Our strategy and accommodate that so I think.
If I think about at the end of the day, where we stand today versus where we stood three years ago.
As Jack highlighted in his script, even if we go into a downturn may calm will remain profitable and cash flow positive and that is a major difference from where we were.
Three almost four years ago.
Thank you one moment please for our next question.
Next question coming from the lineup.
Bolton with me.
<unk>.
Hey, guys. Congratulations on the results and outlook I guess, Steve you've you've been through a number of cycles.
I guess I'm, just kind of wondering if you've had any quarters of of better than one book to Bill you mentioned some.
Some adjustments in backlog, an order softness, but I'm just kind of wondering you know.
Eight quarters of positive book to Bill what sort of suggest that you guys can continue to put up you know kind of flat.
Sequential growth through next year. So my question is how how long with this period of quarter weakness half. The last before you think you might start to see quarterly revenue start to trend down I mean can you absorb a quarter or two of a order weakness could you absorb more than a couple of quarters y'all, how how should we be thinking about.
You know what the impact on quarterly revenue might be at this period of weaker orders continues.
Yeah, probably one or two quarters is the short answer I mean, when you. When you are trending with a book to bills below one for too long it impacts your top line.
So I would say probably one to two quarters now.
As we as Jack also talked about we have a very very strong backlog and we're in a good position. So.
But it's probably in the range of one to two quarters.
Great. Thank you for that and then obviously a big big focus on new products and you mentioned about 150, new products. In 2022 do you have a target for twenty-three will it be about that same level of do you expect to grow it and.
Physical twenty-three.
So we do have targets that we have internal targets.
And the expectations should be for more new products next year, we're not ready to sort of put that number out there I can tell you that our entire organization revolves around new product introductions. For example, when you walk through this facility here in Lowell, Massachusetts, There's monitors and all the different conference rooms, and cafeteria and it basically has.
Product launch schedules and releases an actual performance two quarterly goals and so the entire organization is focused on moving products out the door and it's not just R&D that needs to support that it's logistics. It's people building prototypes, it's technicians in the labs that need to test the products. So.
Suffice to say that we have an expectation that there will be more.
But we also keep an eye on quality, we're not just launching products for the sake of.
Increasing the number of products in our portfolio. These have to be better products that our competitors and that's the standard we hold ourselves to add one interesting fact is about 20% of our revenue today comes from products that were launched less than three years ago. So that speaks to the.
The work that the team is doing to launch compelling products that are taking market share.
Thank you one moment for our next question now next question coming from the lineup Harlan So with J P. Morgan your line or something.
Yeah. Good morning, Thank you innovation new products, obviously has been a big driver for the team. Your standard protocol friends are complemented I believe by some pretty cute custom programs.
Customer pipeline look heading into physical punishment can you just give us. Some examples of a few of the key programs and maybe if you can just give us a rough sense of the mix of customers a percentage of the total revenues.
Yes, and so we encourage all of our engineering organizations to enter into a custom chip developments.
And so we're doing that at the diode level, we're doing it at the mimic level, we're doing it with our analog MC signal devices across all the different areas and so we.
We highly.
Highly value that those engagements because now customers are willing to fund you to develop a solution that specific to them to their programs.
We don't particularly breakout.
The amount of.
Development dollars, we're getting or or we haven't really sized.
That that type of our business. So we don't really want to break that out here today, but it is an important piece and I can tell you that generally speaking all of our different engineering organizations have probably anywhere between one and five custom developments going on some of those are customer funded most of them are.
Some of them are done for the right reasons because their strategic accounts.
So absolutely probably.
Response, probably busier than ever in terms of customer development work.
Great. Thank you and then in data center, we keep hearing more and more about.
Active copper cable are active electrical cable.
For 400 gig early 800 gig within rack between rock connectivity.
Especially as as switching architecture right moves to 26 and at some point 52 <unk> per second feels.
Feels like the direct attach kind of just runs out of steam right and so you talked about this contributing to growth here in fiscal 2003.
When you guys are targeting at with your dinner Equalizers can you remind me are you guys also supplying the C D R, except as well and how many cable vendors have you guys qualified with an roughly how big is this market opportunity.
So.
I think there's a lot of hype around active copper cable and.
And so we don't want to put fuel in that fire, but we look at the opportunity with our ACC or linear equalizers as just.
A product in our portfolio and so there's customers that.
For short reach do not want to use optics they want to.
Use.
Basically keep the keep the signal and an electrical form and run run the higher data rates over copper and so we have some really elegant.
Linear equalizers that get the job done that work up to in some in some cases 10 meters.
And so these these chips do not have <unk>, they're not re timed.
These chips can support Pam for 100 GB per lane and we're now developing 200 per lane as well. So we we have a very unique position in the market.
We can't necessarily disclose how many cable manufacturers, we're dealing with but we do believe given the strength we have with.
Equalization and signaled integrity that we are fast becoming the go to supplier for these type of solutions now our solutions are not dumbed down dsp's or <unk>.
Solutions at some of our competitors are having these are these are low current low latency.
Low cost.
Chips that get the job done for short reach.
Mmk and our next question coming from the lineup see Jamie estimate Evercore. Your line is helping.
Good morning. Thank you for taking the question I guess another question on your revenue outlook for fiscal twenty-three.
You've clearly talked about aspirational goals of of you know high single digits low double digits.
But at the same time, you know highlighted that you're not immune to kind of a macro weakness that were sick. So.
A way to kind of.
Parse your portfolio that is.
Cyclical versus secular and if I kind of throughout.
Semi revenue world of down 5% to 10% in calendar twenty-three, what what would you guys kind of do in that type of environment.
So that's a very difficult question for us to answer.
I'm not sure we could.
Give you something that would be meaningful here so.
All I can sort of highlight is that we're launching more and more products, we as a priority for the business. We believe taking market share is a great way to.
Buck the trend sorta speak and that's what we're working on so.
<unk> is is not a bellwether of the semiconductor industry were quite small so the semiconductor industry goes one way above.
Up or down we won't necessarily go in the same direction just due to the nature of our portfolio of our customer base.
The things that we're working on is a priority. So it's very difficult to answer that question with with something meaningful.
We'd probably get it wrong.
No. That's that's helpful. Appreciate it I guess, maybe as my follow up regarding the chips Act and it sounds like.
There'll be greater clarity February kind of time frame.
Curious in terms of kind of your your your focus capex or or R&D related.
And how you would see that over time.
Helping helping your business.
So we're very active with efforts too.
When chip acts funding.
And we've had multiple engagements with various government agencies over the last four to five months.
And it in a nutshell you can breakdown our ask if you will.
To really four different categories. One is overall modernization and capacity expansion of our wafer fab as a priority the second would be funding for advanced process development.
Working on next generation processes, whether it's higher power or or higher frequency.
Or whatnot. The third is an element where we want to develop package technologies that are currently being purchase offshore and we would want to establish an onshore capability for some assembly and test and then the last element is really workforce enhancement and <unk>.
Winning funds to support <unk>.
Stronger engagements with universities and bringing in.
Mortality to the company. So those are the sort of the four pillars that we're focused on which we believe aligns with the intent of the chips Act.
And as you know, it's a little unclear right now.
Timing and the methodology and the scale.
That will that will ultimately flow down so a lot of those things are being worked out.
I think it's something that will continue to update everybody on in physical twenty-three.
But but we don't expect funding.
Let's say in the in the first half of 2003, we suspect it's beyond that timeline.
Thank you next question coming from the line of <unk>.
Melissa Fairbanks, which Raymond James and I'm just hoping.
Hi, guys. Thanks for squeezing me in at the last minute I will trim my left [laughter]. Accordingly, maybe just following up on some of the trips Act I was just wondering how much of the investment is how many of your customers are approaching you in terms of nearshoring or onshoring activities.
With some of your future Capex investments I know by definition without a good defense business already is there you have a pretty robust supply chain domestically, but but just wondering if you're sensing a shift in your customers requirements for for that supply chain.
Yeah. As you know we are in multiple markets I think some customers care deeply about the topic and others don't so it's hard for us to sort of breakout and quantify.
Quantify that for you, but to your point, yes. There is some U S defense customers that cared deeply about supply chain and where things are being built in processed and whatnot. So to the extent that we.
We can support their concerns with chip back funding will do that but as a general overlay. We look at this opportunity to accelerate things that we would want to do any ways and so that that has.
The focus of expanding our investing in our business has to be a long term strategy because once the chip back money comes in rolls through do you still have to be profitable and grow and have have a good business plan around whatever you just invested in and so that's really what's driving our decision and thinking regarding.
<unk> asks that we have around the chips act and by the way the other caveat I'll put out there is there is no guarantee that will win a single dollar.
We believe we are a candidate a strong candidate, but it's a process and.
Certainly carries risks.
Got it thanks very much.
And can our last question coming from the line up.
Make sure it's Shannon with Great, Let me a line or something.
[laughter] great. Thanks, guys for taking my question I'll, just ask one here [noise] excuse me talked about I'm, having the Gannett silicon appoint one for micron ready here I think introducing it early next year, but maybe you could talk about the early customer casement terrific seem inappropriate to talk about a pipeline here what should we.
[noise] expect if any and revenues and physical twenty-three and then how does this compare broadly with the the ramp an opportunity with with your silicon carbide products as well thanks.
Yes. Thank you so.
We have been careful not to.
Promote the technology before it's fully qualified and we're just getting to the point, where we're completing successfully completing our H tall or high temperature life testing and all the data looks good and things are falling well into place. So really we're just starting to.
Release, Pdk's and design kits to strategic customers that want to use our process is a foundry as well as our design team really during the course of fiscal 22 was running a whole wide range of designs just to gain experience on the process and so all of those things will come together at the beginning.
Calendar twenty-three, we do expect to have.
A reasonable launch where will have compelling products will be hitting all the major.
Defense frequency bands as well as satcom bands.
High powered devices so.
In terms of revenue expectations for twenty-three.
Don't necessarily want to break anything out I think it will be a slow slow ramp.
So you should expect modest and all the incremental gains and revenue but.
We need to enter the market wind sockets and then.
Ramp those programs with our customers and in terms of how we compare this opportunity to our lower frequency pure carbide I think they are equally exciting I mean, we are having tremendous success with our with.
With our low frequency pure carbide products, which are generally targeting very high power and lower frequency and know what the 0.14 process will be targeting higher power and higher frequency.
So very different technologies equally exciting.
Okay and can I'm showing no further questions at this time I would now like to send to call back over to Mister Steve Daily for any closing remarks.
Thank you <unk>.
In closing I'd like to acknowledge the hard work and dedication of all of our employees that make these results possible. Thank you very much have a nice day.
Okay.
That doesn't call conference for today. Thank you for your participation you may now disconnect good day.
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