Q1 2023 MACOM Technology Solutions Holdings Inc Earnings Call
The conference will begin shortly.
Lower Johan during Q&A, you can dial star one one.
[music].
Okay.
Welcome to make comes first fiscal quarter 2023 conference call.
This call is being recorded today Thursday February 2023.
At this time all participants are in a listen only mode.
I will now turn the call to Mr. Steve <unk>.
Vice president of strategic initiatives and Investor Relations.
Please go ahead.
Thank you Olivia good morning, and welcome to our call to discuss May Coms financial results for the first fiscal quarter of 2023.
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 more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to make comps filings with the SEC.
Management statements. During this call will also include discussions of certain adjusted non-GAAP financial information.
A reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related form 8-K, which was filed with the FCC today.
With that I'll 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 provide a more in depth review of our financial results for the first quarter of fiscal 2023.
Revenue for our first fiscal quarter of 2023 was $181 million and adjusted EPS was <unk> 81 per diluted share.
Our financial performance translated to strong cash flow from operations of $38 million and we ended the quarter with $595 million in cash and short term investments on our balance sheet.
Our book to Bill ratio for Q1 was <unk> nine.
This was the first time in eight quarters that our book to Bill was less than one.
Our turns business or revenue booked and shipped within the quarter was approximately 13% of our total revenue.
<unk>, our sales team executed well in Q1, albeit in a challenging market environment.
On our last earnings call, we highlighted that demand was weakening and our three end markets today.
Today I can report that the business environment has not improved.
For this reason, we expect our Q2 book to bill ratio to be less than one.
Weakness is most prevalent at our largest five G telecommunications and broadband access infrastructure customers as well as many of our data center customers.
Generally speaking our major customers in these markets are slowing orders and they are focused on reducing inventory levels.
Beyond our main customers broadly speaking demand is also weak however.
However, one bright spot is that our industrial and defense end market continues to perform well and demand for our products is strong.
Additionally, our backlog entering fiscal Q2 remains at historically high levels. Despite the current softness in bookings.
I think it's important to emphasize that we balance our short term financial goals with a long term perspective and despite the current slowdown we remain confident in our strategic plan and our future growth prospects.
<unk> is positioned to capitalize on a number of secular trends across our end markets related to growing bandwidth needs and increasing data rates, which in turn drive the need for higher power levels and higher frequency transmission signals.
Our customer systems are more complicated than ever before and they need specialized suppliers like may com to provide high performance solutions.
Many of our products have long life cycles and produce revenue for years after they've been introduced with the potential to generate best in class financial returns.
We view the diversity of our technologies products and end markets as an inherent strength of our company, helping to provide financial stability.
And finally, the quality of competitiveness of our products released to the market over the past few years is outstanding and it continues to improve.
Turning to our end markets for fiscal Q1, industrial and defense revenue was $77 2 million down one 8% sequentially Telecom was 61 5 million down 8% sequentially and data center. It was $41 5 million up 10, 2%.
Sequentially.
The sequential growth in data center. It was driven by a combination of increased shipments of our cross point switches and networking products, both of which had been supply constrained during much of FY 'twenty two along with a modest increase in our high performance analog portfolio.
While we see softness and current large production programs, we remain engaged in a wide range of exciting new opportunities, which we believe will drive <unk> future success I.
I would like to highlight a few recent engagements to illustrate the breadth of our customer base and applications.
All of these wins have multimillion dollar revenue potential.
Our <unk> team continues to be a leader in the market for discrete control products and diodes circuits, including high power switching and high powered Limiters, we have secured a new high power limit our socket on an aegis shipboard radar platform.
<unk> has also won new sockets on automatic told detection platforms and achieved two design wins on an automotive wireless communication system.
Our high performance analog or HPA team continues to diversify their revenue. It has successfully penetrated a tier one U S defense OEM with custom IC design wins.
The application is a mobile manpack high power radio. They also secured a large IC development contract from a major customer to support next generation DDR memory test infrastructure.
Our <unk> team is actively supporting various U S based radar and satellite system requirements that utilize our trusted foundry and gallium arsenide technologies.
Specifically, our mimic team has won close to $10 million and development contracts across a wide range of customers functions and solutions.
Our metro long haul design team is supporting data center customers that are designing next generation coherent light or ZR light systems, and we have one on API 200 G driver in TIAA socket to support a major U S. Internet service provider with production ramping this fiscal year.
These wins validate that our products and solutions are compelling and that may come as a trusted partner to support critical or long term programs.
These examples also illustrate we are gaining market share in our core markets. Most of these wins are coming from new products and we believe a portion of our future growth will come from our most recently introduced products, which everyone knows takes time to ramp up.
As an example, we are excited to be sampling, our new 10 G X GFS PON laser and customers have confirmed the product meets their system requirements.
This market is a high volume market and while today, we have no laser sales in the <unk> <unk> PON, we expect that to change over the next 12 months.
In addition, our Lightwave team continues to successfully engage with customers on 20, <unk> DSP design wins.
More and more of our customers are completing their requisite 5000 hour module <unk> qualifications, which is which is required by the ISP or network end users. These wins will support future revenue beyond Q2.
I would like to review a few key activities across the business.
First our engineers sales and applications team will be attending the optical fiber conference or OFC in March.
We will be highlighting our latest products to our customers and hosting eight live product demonstrations at our booth, including we will demonstrate a 200 <unk> <unk> solution to support one six terabits OSF Pam module designs. Our chipset solution includes may comps industry, leading coherent drivers and trends.
And Pete it's amplifiers, along with a new photo detector offerings 200 G per lane applications are the leading edge of high speed data throughput in the industry today.
We will also demonstrate may comps pure drive solution for optical connectivity in conjunction with switch hardware from a leading U S. A <unk> supplier.
Pure drive solution comprises of our linear driver and trans impedance amplifier designed specifically for single mode, and multimode painful architectures that operate up to 800 G.
Our innovative chipset has been designed to support broad dynamic ranges linear equalization.
And low noise amplification to enable direct connection to switch and server Asics.
This solution represents industry, leading low power low latency solutions for 100 G per lane optical communications.
As previously announced approximately two years ago, we established a company priority to transfer our <unk> four micron Gan on Silicon carbide mimic process from the Air Force Research labs to our wafer fab in Massachusetts with the goal to commercialize the technology and make products for our aerospace.
Fence and commercial customers.
I am happy to announce that the process is being released to production. This month we.
We are excited to now offer our customers a state of the art Gan on Silicon carbide technology with industry, leading power density.
In parallel with the transfer activities are IC design engineers have been designing products on the process and we will begin introducing these products later this month.
Our flagship mimic product from this process, which is available for sampling in sale today is the MAA PC Mp's Zero-zero, three 8-K band power amplifier designed for satellite uplink applications.
This mimic amplifier provides 10 watts of output power and delivers power added efficiency or PAA performance, which is comparable with the best products in the market today.
This process will support mimics that operate up to about 40 gigahertz, including power amplifiers low noise amplifiers high power switches and transmit receive Ics as well as beam forming Ics. We are very excited about achieving this production release and product launch milestone.
I congratulate the entire team for getting it done on schedule and on budget. We believe this process opens a $300 million segment at the high frequency Gan on silicon carbide mimic market.
As you may have seen in our press release issued earlier today I am pleased to announce May com has entered into a definitive agreement to acquire the assets and operations of all SaaS.
Semiconductor manufacturer located near Paris, France.
<unk> has a 40 plus year heritage in three five materials and specializes in gallium arsenide and gallium nitride epitaxy wafer processing and integrated circuit design.
The <unk> team comprises of approximately 100 employees, including process engineers skilled IC designers and technicians and wafer production staff.
Today, the company has a small portfolio of differentiated products and compelling compound semiconductor processes suitable for microwave and millimeter wave applications and telecommunications aerospace and defense.
This acquisition provides numerous strategic benefits to make com.
First <unk> high frequency processes and products expand and strengthen <unk> portfolio. So we can better address our target markets are mixed team have spent years developing and refining their proprietary 100 nanometer 16 nanometer mimic processes and we plan to build upon their expertise.
Today, they offer very high frequency products, including true time delay radar core chips high power amplifiers as well as low noise amplifiers that have industry, leading performance Sim.
Simply put ohmic produces products that typically operate at higher frequencies that may comps.
Second <unk>.
All mixed material in epitaxial growth expertise is world class and we believe strengthening our material science expertise and epic growth knowledge and manufacturing capabilities is strategic.
Increasing our in sourcing of etsy growth across our entire business has the potential to simplify our supply chain increase our gross margins on certain products and improve our products performance all of which improve our competitive advantage.
Third ohmic represents a significant revenue growth opportunity historically <unk> serviced a small customer base, many of whom were foundry customers.
We believe we can grow their customer base and associated revenues significantly.
Revenue growth will also come by leveraging May clubs larger IC design team onto their processes to accelerate expansion of their standard products portfolio and by emphasizing custom chip development work at major Oems.
We are also confident our larger global salesforce can gain market share with their existing products.
Note several of <unk> processes and products are already qualified by the European Space Agency, our Isa for satellite use.
Fourth we see an opportunity to fully utilize their idle six inch wafer manufacturing capability to improve gross margins and profitability on both <unk> and may comp products, while they have purchased and installed a six inch wafer production line. They have not yet transitioned their production to the six inch line.
Today <unk> all production on their three inch line, and notably May comps, Massachusetts Fab is a four inch fab.
And finally this acquisition significantly expands may comps European presence, which will enable us to better serve European based customers, which is a strategic focus for us having an engineering and manufacturing operation inside the EU will enable us to better access.
Wide range of customers in aerospace telecommunications industrial and automotive markets, we have a strategic goal to increase our European business to offset any potential future geopolitical headwinds from other regions.
The acquisition is structured as an asset purchase for consideration of approximately $38 5 million euros may come will purchase <unk> assets and operations using existing cash on hand.
The purchase includes omics existing business operations intellectual property real estate and facilities.
We expect the transaction to close during May comps second fiscal quarter. However, I would like to highlight that the transaction is subject to regulatory approvals and customary closing conditions.
Jack will now provide a more detailed review of our financial results.
Thanks, Steve and good morning, everyone.
The first quarter of fiscal 2023 was in line with our expectations with sequential improvements in revenue as well as record operating margin and earnings per share.
Revenue for the first quarter was $180 $1 million up 1% quarter over quarter. The sequential increase was driven by a modest increase in data center revenue.
On a geographic basis sales to domestic U S customers represented approximately 49% of our fiscal Q1 results compared to 50% in the fourth fiscal quarter of 2022.
Q1 sales to China customers represented approximately 23% compared to approximately 26% for both our Q4 and full year fiscal 2022.
I would also like to highlight that sales to European customers over the past four quarters has been approximately 6% and as Steve highlighted focusing on growing revenue in this region is a strategic priority for us.
Adjusted gross profit was $112 7 million or 62, 6% of revenue flat sequentially.
As we've discussed in the past may come utilizes a flexible manufacturing model, leveraging our LOE and Ann Arbor, Fabs as well as third party foundries.
This allows us to access a portfolio of proprietary leading process technologies and also provides financial leverage as business cycles change.
Total adjusted operating expense was $53 9 million consisting of R&D expense of $33 9 million and SG&A expense of $20 million.
Total operating expenses were down sequentially by $600000 from fiscal Q4, 2022, due to slightly lower R&D expenses.
Adjusted operating income in fiscal Q1 was $58 8 million up from $56 9 million in fiscal Q4.
Adjusted operating margin was a record 32, 7% for fiscal Q1 sequentially up from 32% in Q4.
We are closely managing our operating expenses as we balance investments in the business, while maintaining profitability.
Over the longer term, we see leverage in our operating model as we introduce new products and they contribute to future revenue growth.
Depreciation expense for fiscal Q1 was $6 million and adjusted EBITDA was $64 $9 million trail.
Trailing 12 months adjusted EBITDA was $244 7 million as compared to $234 8 million.
In Q4 fiscal 2022.
Adjusted net interest income for fiscal Q1 was $1 million.
Up from $40000 in fiscal Q4.
The higher returns on our growing portfolio of short term marketable securities more than offset the increased interest expense associated with our floating rate term loan.
Our adjusted non-GAAP income tax rate in fiscal Q1 remained at 3%.
And resulted in an expense of approximately $1 8 million, our cash tax payments were $300000 for the first quarter down slightly from fiscal Q4 2022.
We expect our adjusted income tax rate to remain at 3% for the remainder of fiscal year 2023 and into fiscal year 2024.
Okay.
Q1, adjusted net income was $58 million compared to $55 1 million in fiscal Q4.
Adjusted earnings per fully diluted share was <unk> 81, utilizing a share count of 71 4 million shares compared to <unk> 77 of adjusted earnings per share in fiscal Q4.
Now moving onto balance sheet and cash flow items.
Our Q1 accounts receivable balance was $112 million up from $101 6 million in fiscal Q4.
As a result days sales outstanding were 57 days compared to 52 days in the prior quarter.
Our accounts receivable balance reflects an increase over prior periods due primarily to the increase in sales and the timing of shipments in the quarter.
Inventories were $121 3 million at quarter end up by $6 4 million sequentially.
We had a modest increase in certain finished goods due to customer requested delivery postponements occurring during the quarter.
Inventory turns were two two times in Q1 down slightly on a sequential basis from two three times in the prior quarter.
The quality of our inventory remains strong and based on lower customer orders and shortening lead times, we expect to reduce our net inventory balance as we progress through fiscal year 2023.
Fiscal Q1 cash flow from operations was approximately $38 3 million as we've noted on our prior call we.
Experienced a sizable increase in cash flow from operations during our September quarter due to the timing of working capital items and our current fiscal Q1 figure represents a moderated operating cash flow level.
Capital expenditures totaled $9 6 million for fiscal Q1 up from $7 7 million in the prior quarter.
We plan to continue to make capex investments to expand our fab capacity and expand technical process capabilities over the next few quarters.
We still expect fiscal 2023 capex to be in the range of $40 million.
As we've done in the past, we will continue to carefully manage our capital spending balancing investments in new technologies process development capabilities and efficiency programs with the overall profitability of the business.
In addition to pursuing chipset funding I would also like to highlight that we expect the chips Act to provide an advanced manufacturing investment tax credit of 25% for certain of our capital expenditures placed into service. After January one 2023.
This tax credit will apply to certain qualifying capital items and we do not expect the associated cash from these credits to be received until fiscal year 2024.
We expect these tax credits will be recognized as an offset to depreciation expense overtime and as such we do not anticipate this tax credits have a material impact on our financials for fiscal year 2023.
Cash cash equivalents and short term investments for the fiscal first quarter were $594 7 billion.
Up from $586 5 million in fiscal Q4 2022.
Our first quarter gross leverage is down to less than two five and our net debt is now less than $10 million.
I would also like to highlight that during the quarter that may come team has engaged in our annual stockholder outreach to better understand and discuss governance items with our top stockholders as we approach our annual meeting on March 2023.
Before turning it back to Steve I would like to note a few items first our Q2 guidance includes plans to manage our discretionary spending down by approximately 10%, including reduced variable compensation outside service fees and supplies expense to name a few.
Through these efforts, we expect to support healthy margins and remain cash flow positive over the course of these business cycles.
Second become as excited to acquire <unk> valuable European based operation.
New and differentiated technology as well as a dedicated and talented workforce and we believe to be a favorable valuation.
In the short term from a financial perspective, ohmic should not have a meaningful impact on our revenue or EPS. However longer term as we invest in the business. We expect that it will provide growth and profitability opportunities, which will drive additional stockholder value.
I look forward to 2023, and the continued investments may come plans to make in our people plant and processes and also to welcome the <unk> team to make them.
I will now turn the discussion back over to Steve.
Thank you Jack May come expects revenue in fiscal Q2, ending March 31, 2023 to be in the range of $166 million to $170 million <unk>.
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 76 and <unk> 80 based.
Based on $71 5 million fully diluted shares.
This guidance does not include any revenue contributions or financial impact from the planned <unk> acquisition.
In Q2, we expect our sequential industrial and defense and data center revenues to be down slightly and the balance coming from weakness in our telecommunications business 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.
In the months and years ahead, our product portfolio is stronger than it was one year ago, and we are confident we can meet or exceed our targets.
I'd now like to ask the operator to take any questions.
Thank you ladies and gentlemen.
Ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
And the consideration of time, we ask that you. Please limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Now first question coming from the line of Quinn Bolton with Needham Your line is open.
Hey, guys congratulations on the.
Strong 2022 results I guess as we look into the first part of 2023, obviously youre guiding down for March on.
Weakness in demand and some inventory correction, but do you have a sense how long do you think that inventory correction across your end markets will last do you think thats largely.
First half of the calendar year event and you see a recovery in revenue as you look into the second half of the year or can you give us any sort of sense as how you think the revenue pattern may look this year.
Yes, good morning acquaintance, so it's really difficult for us to be.
Giving guidance on customers' inventory trends, so I think thats something that we would struggle to give an accurate answer on.
When we so that's the sort of the first part of your question and then when we look at the balance of our fiscal 'twenty three and we look at the markets in our backlog and make projections.
What we're thinking is at least two of our three markets will be up we believe <unk> industrial and defense.
We will continue to grow during the course of the year.
And we also believe that our data center will continue to do well and should certainly grow on a year over year basis. The one area that we're probably most concerned about is the telecom as.
As everybody knows we had a very very strong.
2022, with 30% growth.
And so this year, we do see.
That weakening as I mentioned on my prepared remarks.
<unk> and broadband markets are weak at the moment and it's difficult for us to understand when those might turn and the other point I'll make is generally speaking there is a macro.
Overhang on many of our markets and so it's difficult for us to make these.
Longer term projections.
I hope that answers your question Quinn.
Thank you, Steve and then I guess.
Either for Steve or Jack I guess as you look at the <unk> acquisition it sounds like they maintained.
Our manufacturing.
Operations with with the fixed expense of operating.
The three inch fab, plus having an idle six inch fab and so I guess can you just walk us through sort of the impact as you close that transaction. It sounds like there is enough revenue through.
Through that fab that largely offset any fixed expenses of maintaining those operations is that the right way to think about it.
I think that is.
That's right I think you should think of their overall revenue run rate at sort of that 1% to 2% of our total revenue. So it's it's.
A very low number today and so our plan is as we talked about to not only build out the product line market. The product line globally globally, but also begin to migrate their products to the six inch line and in doing all of that.
We think that the business has tremendous potential.
For growth and let me just maybe highlight if I could.
This is the first acquisition that the May comp New management team has done.
And I, just like to say that the.
The rationale for this acquisition.
I think are important for investors to understand.
<unk> brings to make carbon expertise that we don't currently have today.
As everybody knows we just launched to production our one four or 100 and 140 nanometer process Ohmic is working on hundred nanometer and 16 nanometer and even 40 nanometer. So that they are further along.
In developing and producing those products, which would take me com years to do so tremendous amount of time spent or saved by bringing <unk> into the may come portfolio second they have a tremendous barriers of entry. They they have an incredible epitaxial growth capability, which is quite unique.
They have developed some very interesting metal contact technology to approve high frequency performance.
Which will very much complement the work that we're doing.
This business is also not a commodity business. These products will have high margins high asp's.
And we will be targeting medium term.
Small to medium niches and when we look at the market opportunity, we size that to be about $100 million Sam.
So our goal is to take this business today that arguably is hovering just below breakeven and we want to drive it to be a growing profitable part of our business that will take time, but we think when we're successful we will be in a leadership position at the millimeter wave frequencies and.
We look forward to that.
That position.
Thank you and one woman one moment please for our next question.
Next question coming from the line of Tom O'malley with Barclays. Your line is now open.
Hey, guys. Thanks for taking my question. So when I look out into the year you are talking about relative strength in the industrial and defense business.
I would expect you've heard some other.
Are those of your peers talk about some weakening on the industrial side.
Could you just talk about if youre seeing any changes in ordering patterns there.
And then secondly, as you look into the out quarter clear Theres a big reduction.
Opex to kind of get to the midpoint of your guide could you talk about where that's coming from it's pretty substantially you guys have been good at that in the past, but just want to understand how it's declining so quickly. Thank you very much.
Thank you Tom So I'll take the first part of that question and then Jack can handle the second piece as you know last year for Bay Comm Industrial and defense was a was a record year and I believe Q4 may have even been Q4, FY 'twenty two was a record quarter and where we're seeing.
<unk> opportunities to grow.
Most of this is coming from gaining market share.
Not only in defense, but also industrial and we've talked over the last year or two that we believed over the long term. It would continue to be a strong end market for us. So we think we're doing a lot of good things in this market. We actually are projecting that that market will grow low single digits for the full year.
In terms of the industrial ordering pattern I think there are pockets of weakness for sure.
But generally speaking.
What we see as the larger companies are burning down their inventories, while the medium and smaller companies are continuing to order.
On a regular sort of more normal basis, and then before I turn it over to Jack about the Opex I'll just highlight that.
As we mentioned in the script, we focus very much on short term financial performance as well as long term financial performance and the team here at <unk> Com has done a super job dealing with that day with Huawei went on the entity list. When we had to deal with Covid shutdowns and then while we had to deal with now the macro.
Global issues and the softness in the industry. So we have a very talented team that is ready to address issues as they come and try to get in front of them and that's a little bit of what you are seeing as we think about Q2 and throttling back some of our spending so we were ready for this we were not surprised by.
The current environment, and we're taking actions to address those and Jack can add some detail to that and I guess just to build upon that and then to address your question spending Tom it's really maintaining that.
Continuous improvement and maintaining the profitability of the business those have been key.
Attributes of the business and that ripples through to all levels of the organization, but with regard to some of the discretionary spending items that I was referring to that flows into the operating expense line. It also flows into some of the things we're doing from a cost of goods perspective.
As we look at our guide going into Q2 I touched upon a couple of things in my prepared remarks, including outside services and variable compensation and things like supplies.
But there's a number of different things that we're doing across the organization, obviously with our top line coming down a bit theres things like commissions, which will be coming down. So there's a series of items that are contributing to that and I think one other thing is we've looked at the business we're continually looking to assess.
The way the organization comes together, we did have a what I would call a minor staffing reduction.
<unk> the consolidation of a small.
Design Center that we had so some of those items are also contributing to the the Opex savings that you were referring to.
Thank you guys.
Thank you our next question.
Our next question coming from the line of Vivek Arya with Bank of America. Your line is open.
Hi, This is Blake Friedman on for Vivek. Thanks for taking my question.
Focusing on revenue from a geography perspective based on your comments it seems like sales to China customers were down about 10% sequentially in the quarter can you quantify the potential headwind heading into Q2 or in general can you provide any commentary on demand trends by geography.
Yes. This is Jack Blake with regard to the China revenues I think we had mentioned that China represented 23% of our total revenue compared to 26% back in Q4 and for our full fiscal year. So.
Down quite as steep as what you were referring to but.
Yes.
It's an area that we thought was worth noting.
Yes.
And I'll bet understood.
Yes, just add to that comment so China continues to be a strategic market for may come we see a lot of growth opportunities not only with our high performance analog products, our laser lightwave products, but also a lot of the RF and microwave components that we sell it to the industrial markets. There. They also have.
Some emerging markets, including Green energy and electric vehicles, and so we're constantly looking for opportunities to break into.
Those applications with our technology and then since you brought up the issue of geography, I just wanted to sort of highlight again that we believe that there is tremendous growth opportunities in Europe , and setting up a manufacturing facility in a wafer fab in the backyard of some major Oems inside of the European Union.
It will help us take our European based revenue, which is about 6% up into the double digits.
Got it understood. Thank you and then just as a quick follow up on past calls I believe you mentioned a $1 billion revenue target I think we believe this fiscal 'twenty five just given the weaker macro weakening macro today, just curious if there's any adjustment to that target.
Well, we're not changing the target of $1 billion, we're still confident we can hit that and as we've talked about in the past that as an aspirational goal I think what's changed here in the last number of months is really the timeline associated with that given the current climate I think it's reasonable to assume that.
We will be shifting.
The timing of that $1 billion of revenue.
Out in time, and so we haven't fully reviewed that.
I will highlight that our targets comes through a.
A very detailed bottom up analysis, which typically is aligned with our strategic planning process and so I would suspect in the July and August timeframe. When we complete that cycle will be evaluating where we think we'll be in fiscal 'twenty five in fiscal 'twenty six but it's fair I think to your point, it's fair to assume that.
<unk>.
The environments are providing a headwind, which one would conclude would push that out in time.
Thank you one moment please for our next question now.
Next question coming from the line of harsh Kumar with Piper Sandler Your line is open.
Yes, Hey, Thanks, guys. I. Appreciate you guys are clamping on on an opex to maintain profitability as investors. We do appreciate that very much.
Jack and Steve I wanted to ask about gross margins they were steadily going up for a while and announced the last couple of quarters.
<unk> been kind of stuck in the 60 to $62 five kind of range, but I know you have plans and aspirations to be.
To be higher than that but I was curious just mid term to long term what would be some of the things that might make that margin go up.
To maybe the mid Sixty's and potentially that shambaugh, and then I have a follow up.
Sure. So I'll take the first part of that question and maybe Jack can add on so.
We are I think the gross margins that were.
Delivering today really represent the.
The business and the portfolio that exists today and the way, we're going to drive our margins from the low <unk> to the high <unk> is through new product development and products that can come in at a higher price.
Examples would be the entire ohmic portfolio, where these are the highest frequency products in the market.
Leading cutting edge performance that <unk> portfolio would be an example of a.
Business that we would expect to come into our portfolio that would drive margins up and be accretive.
Our 140 nanometer Gan process that we just announced as we talked about that's a $300 million Sam that we'll be addressing and we believe that our latest products coming from that process will drive margins up. So are our theme here. It may com has the highest frequency highest power and highest data rate.
And if we stay on that edge within the markets and the technologies that we develop we will be successful driving the margins up and so that is.
Thematic Lee how we will do it I'm not sure we're going to be driving margins up by operational and execution issues.
Maybe there's additional.
Potential there but.
Moving to the next phase is about.
The technology and the strength of your differentiated products.
Yes, I can certainly help us.
Right.
And just to add to that harsh in terms of our gross margins as we work our way forward. We've been pleased with some of the progress we've made over the past number of quarters I think if you look back over.
Seven or eight quarters, we've been above that 60% number and have made sequential improvements and with our flexible manufacturing model that we have with certain of our products being fabs internally and certainly them also going out to third parties that provides us with some protection over the varying different business cycles that allows us to.
To ramp as well so that kind of protects our overall gross margins from a from a gross margin point of view from as we look at our operations and all of the contributions that the teams have been making over the past couple of years, we feel like we're in a much stronger place and and those improvements that we've made will continue as we go forward.
Thanks, guys and for my follow up I wanted to go back to a question that Tom O'malley asked earlier.
So maybe frame you phrase the question a little bit differently in the core industrial space. The hard core industrial space, where you play there are not too many companies that are calling out any weakness in that they are all much most of the other sort of industrial carriers are calling out weakness in consumer.
So I wanted to understand if maybe it's a function of the growth you had last year or youre actually starting to see some some issues with one or two customers or if it's broader based than that where maybe we should.
<unk> put our blinders on and start focusing on that area is something of interest, but just curious if you could provide some more color around that.
Yes, and I think it's really.
Comes down to May com specific industrial business, which may be different than.
Some of the bellwethers that service that industry with Microcontrollers or large <unk>.
<unk>.
We have.
So so that would be the first point I think youre seeing may.
<unk> specific performance.
We sell for example into door openers sensors medical equipment.
Test and measurement so.
I would say that those markets have been performing well for may call them, and we expect that to continue.
But we don't consider ourselves really a bellwether so I wouldn't read a lot into our trend.
The fact that were maybe deviating from industry trends.
Thank you.
Next question coming from the line of David Williams with Benchmark. Your line is open.
Hey, good morning, Thanks for the question and congrats on the execution here.
I wanted to ask maybe first just kind of about China and some of the demand and there was a question on this earlier, but I.
Thinking more about the demand environment as we head into the second quarter, maybe into the back half of the year. It feels like the freedom of movement, there and once we kind of get through some of this COVID-19 impact that feels like a market that could rebound fairly quickly and just kind of curious how youre seeing that if that's a possibility and if that could potentially be an upside that we can look forward to.
Yes. Thank you for the question so.
We think it is possible and there could be some upside.
But with that said, we are taking probably a little bit more of a conservative view.
Just coming off of Chinese new year, we haven't really.
People are sort of getting back to work we have been monitoring.
The inventory levels within the channel in China, and we're seeing some positive trends there, but quite frankly, we think it's way too early to call, which way China is going to go over the next three to six months.
But I do think.
There is the potential of it improving theres also the potential that things will remain at or at a muted pace. So.
They were going to counter that is we're going to continue to introduce products. Obviously, we're going to focus on North America and Europe .
But also when when China really starts to open up when we can.
Said more and more of our staff into China to engage with customers. We think that's that will be the.
The activity that really ignites better growth and stronger revenue from E com.
The Covid overhang has really slowed down and hampered our ability to engage customers directly.
Today May Com has about just under 100 employees in China.
We operate in four different cities. These are typically.
Sales and application centers that are visiting customers and they've been doing a great job keeping may come in front of customers, but we also feel like we need to rotate our.
Business development folks and application engineers into drive that growth. So if that happens towards the middle of the calendar year.
We think good things will fall from that.
Great color. Thanks, so much for that and then maybe for my follow up is just around the data center and any areas of particular weakness or or maybe strength that youre seeing and maybe anything from a customer or even areas that are better or worse or just kind of color. There would be helpful. I think.
Yes so.
Just one point I want to make about the datacenter in our revenues this year.
Because we are hearing a lot of and seeing a lot of negative trends inside the data center, but we actually think our revenue will.
<unk> reasonably strong this year because a lot of the products. We couldnt ship last fiscal year, we will roll into this fiscal year and so that will provide.
A growth opportunity for May come and that includes many of our cross point switches that had.
Complex packaging or substrate materials.
Included in the products. So supply chain is improving that is helping our revenue. This year for the data center outside of that I would say generally speaking the debt.
Short reach.
And our Z platforms that we're on whether it's.
These these markets or these applications have been relatively weak.
That has been offset by an increase in our Pam four.
Activity in business. So for example.
Seeing reasonable growth in tier one and <unk> four.
<unk> paying for applications.
It's I would say that there is a mix it really depends on the customer.
Where we are positioned at that customer for example, we had a very large.
Platform, we were in last year.
<unk>.
<unk> application that we know that revenue will be in our our forecast. This year. So things are constantly moving.
Depending on the market environment in which of our customers are winning business and then the last thing I'll point out is that we do feel like in general there is a significant amount of inventory.
At our customers and that our customers' customers and so this will also provide a bit of a headwind.
For a lot of our.
Electronic.
<unk> devices <unk> drivers TIAA is things of that nature.
Yes.
Thank you.
Our next question coming from the line of.
Sorry, Sandberg with Stifel. Your line is open.
Yes, Thank you and good morning.
Steve I was hoping you could talk a little bit more about <unk> and where the revenues are today. So I mean, it sounds like maybe it's a $10 million business.
Should I assume that that's primarily in satellite today and.
As you as you obviously grow this business both satellites there'll be sort of the debt.
The main segment or are there other areas, where you intend to introduce in technology as well.
Right. So I just wanted to be a little careful about talking too specifically about.
Their business given we haven't closed the deal yet so.
There is a tremendous amount of information on their website I would encourage everybody to visit ohmic dot com.
Actually lists some of their legacy customers and what Youll see based on that public information is really a blend of.
Satellite manufacturers some.
North American and European Defense Oems, so because they've been operating on a three inch line they have typically been targeting.
Satellites.
Satellite manufacturers as well as defense applications and so as we think about the business in the future we want to bring them into the high volume commercial worlds, including many different markets that may call on today is already in but not at the higher frequencies.
Remember their products can operate up.
Up to W. Band, So it's just a.
The company, a great opportunity to grow, but you're you're thinking about it the right way generally speaking there they're in satellite in defense applications today.
That's very helpful and a quick question on sort of business dynamics. So you mentioned you turned about 30.
14% this quarter I know, there's been nothing normal go yes, I think that the industry, but.
Is sort of 15% to 20% terms, where you expect that business to run at going forward and maybe you can even comment on how much turns you moved to get to the midpoint of your guidance for the March quarter.
So we have seen an increase in the turns business last quarter I believe it was 10% or the quarter before Q1.
And then in Q1 it was 13% so we do see a trend of increasing.
Turns business, we think this is coming from.
The fact that lead times are coming down cycle times are coming down many customers are now waiting in buying knowing that suppliers like may com have inventory. So that we're on the other side of that curve, where people are not placing long lead orders there actually.
Returning to a let's say a more normal dynamic and performance.
Really comment on what percent were booked to meet our current targets I would say that we're following the same methodology that we have in the past in terms of looking at our backlog, making assumptions on what we think will book and ship within the quarter.
So, but we are seeing that trend.
Book to Bill increase and we think Thats, a good thing and I'll just highlight.
One of I think an important point here, which is.
We had a tremendous booking.
Performance last fiscal year, we had a $1 one to one book to Bill for our fiscal 'twenty, two and everybody knows in Q4, we had a book to Bill of one and done last quarter nine. So we are in a very strong position regarding our backlog.
Don't have consumer exposure, our top 10 is about 30% of our total revenue and no big 10% customers and no one product is more than 2% of our revenue. So we truly have a very diversified business.
So I think that's important to note.
Yes.
Thank you and our next question coming from the line of.
Matt Matt Ramsey with Cowen Your line is now open.
Hey, Good morning, guys. This is Sean Mclaughlin on for Matt. Thanks for taking the question congrats on a nice quarter.
I wanted to ask.
Dig a bit deeper on the Gan on sic process that you mentioned and first congrats forgetting that across the finish line.
But on the <unk>.
$300 million long term opportunity there.
I know that.
Yeah.
That's sort of the long term addressable market, but if you could just maybe scale initial expectations in terms of.
Time to revenue and then.
Sort of ramp into that opportunity that'd be helpful.
Sure so.
That $300 million.
Sam that we're identifying is primarily.
Defense related aerospace and defense.
As well as maybe the second key market, we want to address is satellite communications, whether it's uplink downlink or satellite to satellite. So these are the markets that we will focus on.
The defense.
Market as you know is a slow moving market. So it will take time to get the design wins in turn.
The technology into product revenue.
As I think about this year and we do some modeling. So we're just announcing today, we're starting to sample this month.
I would expect to see a non material amount of revenue.
Probably starting to appear in Q4 of this fiscal year and rolling into the beginning of fiscal 'twenty four so no material contribution. This year. This is really a growth opportunity for 2020 fiscal 'twenty four 'twenty five and in terms of what those numbers might be I think it's way too early to tell.
Okay.
Yes that makes.
Makes sense Super helpful and then.
Maybe a different part of the Gan World.
Wanted to ask a broader long term question on telco.
It sounds like 2023 is going to be a difficult year, but one of your peers had commented that the gan transition in RF power specifically it was may be accelerating and gaining more traction over all demos and I was wondering if you.
You are seeing similar trends and how may that impact your opportunity set going forward. Thanks.
Right well if that's if that's true then that would certainly support.
May com strategy, we today do not sell demos.
We focus on gallium arsenide HPT.
And of course Gan so.
To the extent that different market segments are focusing on again I wouldn't consider that a good thing from a com I would also highlight that when we look at the overall gain opportunity you have the commercial and communications sector and you have industrial and defense and we believe that those markets are about equal in size.
But the profit is on the defense side of the line and we are very focused on that.
Yes.
Thank you and our next question coming from the line of Steve.
J Muse with Evercore ISI. Your line is now open.
Yes. Good morning, I was hoping you could speak a little bit to kind of cyclical metrics.
I guess as you think about the three different businesses and perhaps the sub segments within each how are you thinking about kind of normalization of lead times.
Backlog.
And I guess.
What normal visibility will look like once we kind of get through inventory.
Section and whatever kind of potential shortages that remained.
Great. Thanks for the question. So it's hard to summarize that in aggregate because of our diverse portfolio as well as the technologies.
As you know we're building and manufacturing.
Two terminal diodes, all the way up to our Pam four DSP, so the manufacturing cycle.
The test time, the backend time all of these are very different across the portfolio.
And our customers know that so depending on where we're selling our products our customers have very different ordering patterns.
So when we think about normalized normalized environment.
I just think it's hard to parse that here.
So I'm not sure I can really answer your question specifically.
I guess, what I'm trying to get at is how much of your I guess relative optimistic view for 'twenty three is based on kind of current backlog.
Versus not.
So I would say that it's not necessarily based on backlog. It's based on looking at the markets because we still need to book a significant a significant amount of business to achieve the goals that we need to so we are we're making assumptions based on a bottoms up.
Sales forecast, where we identify customers and programs and part numbers and in speaking with customers getting an understanding of their future demands and so when we talk about the fiscal year.
That's the data, we're looking at not not specifically and only our backlog.
And so as you go out in time as you can imagine there is more risk and that's one of the reasons why we generally don't give full year guidance.
Clearly.
In this environment I think it would be even more difficult to give full year guidance.
Great. Thanks, so much.
Thank you.
Thank you one moment please for our next question.
And our next question coming from the line of Richard Shannon with Craig Hallum. Your line is now open.
Well, thanks, guys for taking my question maybe.
One digging into the telecom side of the business, Steve I'm checking my notes and I hopefully I got them correctly, you are calling out the areas of weakness here with five <unk> in broadband.
To confirm that you're not seeing in other areas within telecom, specifically clearance and then within those two weaker segments fiber and broadband are you seeing different dynamics here either.
Either by.
Differences in customer activity levels of inventory or expectations on windows businesses returned to more normal patterns.
Right. So I would say that if I heard you correctly are we seeing weakness in coherent was that your question.
Yes, I'm wondering if that was hard area probably yes.
Yes.
I'd say that we are definitely seeing a bit of weakness.
Merrily due to inventory adjustments.
And then when we look at the weakness in <unk> and broadband there are very different dynamics, there are very different markets, particularly.
Particularly in broadband we have large CATV customers that we believe have a significant amount of inventory.
That's really the the the back story with broadband and then on <unk>. We think there is.
Inventory burn down from our major customers, primarily on the RF side, So front it things like front end modules our amplifiers.
Yes.
Okay perfect. That's great and then following up on the topic of Opex I may have missed the kind of theme here, but are you talking about some reductions here going into the March quarter here.
They sell mostly structural in nature.
Just wanted to make sure. That's the case here and then is there a pattern we should we should see from a from a absolute dollar basis going through the rest of the year.
Yes, Richard this is Jack I would say a majority of the items are not structural or is some of that in there in our guide going into Q1, but it's more on the discretionary side as you look to what we're doing from a from an opex standpoint.
Having said that as you look a little bit further out there will be some some rebounding as some of those discretionary items are pushed out into future periods, but.
Amongst all the things that we do here, we want to make sure we're maintaining an appropriate level of profitability. So we will be judicious with.
All of our spending as we go forward.
Okay.
Thank you and I'm showing no further questions at this time I would now like to turn the call back over to Mr. Steve Daly for any closing remarks.
Thank you in closing I would like to thank our employees for their contributions this past quarter. We look forward to closing the acquisition and welcoming the <unk> team to make com 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 and lower Johan during Q&A you can dial one one.
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The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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