Q3 2023 MACOM Technology Solutions Holdings Inc Earnings Call
Welcome to make them start just go quarter, 20th 23 conference call <unk>.
This call is being recorded today Thursday August 3rd 2023.
At this time, all participants onto listen only mode.
Mr. <unk> May comes Vice President's such as an initiative and Investor Relations. This as a fraud as you. Please go ahead.
Thank you Olivia.
Good morning, and welcome to our call to discuss Bay comes financial results for third 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 a 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 may comes filings with the F. C C.
Management statements. During this call will also include discussion of certain adjusted non-GAAP financial information a reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release every Lady form 8-K, which was filed with the SEC today.
With that I'll turn it over to call Steve Daily President C. E O of makeup.
Thank you and good morning.
I will begin today's call with the general update on our business.
That Jack Kolber, our Chief Financial Officer will provide a more in depth review of our financial results for the third quarter of fiscal 2023.
I will then provide revenue and earnings guidance for our fourth fiscal quarter, and we will be happy to take some questions.
Revenue for the third quarter of 2023 was $148.5 million and adjusted EPS was 54 cents per diluted share.
Cash flow from operations was approximately $46 million and we ended the quarter with $588 million in cash and short term investments on our balance sheet.
Our team did an excellent job in meeting our business and financial objectives, albeit in a challenging market environment.
We are especially pleased with our cash flow as we manage our way through the down part of the cycle.
A book to Bill ratio in Q3 was 0.9, which was a significant improvement over Q2.
Our total company backlog decreased slightly quarter over quarter, although what remains at a healthy level.
The bookings growth was driven primarily by our data center in defense customers.
Our turns business or revenue booked and shipped within the quarter represented approximately 80% of our total revenue which is approaching historical norms.
While we are encouraged by the improvement in bookings the broader demand environment remains weak in several of our served markets and in particular with the telecom and markets.
I'll note that customer cancellations and push out requests have slowed which is a positive indicator. However, I would still characterize overall industry inventory levels as high with many customers still carrying excess inventory.
Our external sales channel inventory did decrease in Q3, and we plan to manage our external sales channel inventories down again, thank you for.
Turning to our discussion of our end markets for physical Q3.
Industrial or defence revenue was 83.5 million up sequentially and it was a company record.
Within the I M D market demand for May calms products remains robust and we continue to see numerous secular drivers within both the industrial and defense markets, which have the potential to drive slow, but steady growth for may calm over the coming years.
Applications include new satellite networks within the D O D U.
New Isa or active electronically stared antenna radar deployments.
Electronic warfare applications secure communications.
Very high frequency electronic sensors.
These applications require progressively higher frequency levels more bandwidth and higher power levels in smaller form factors, which plays directly to may calms competitive strikes.
Our goal is to expand our Sam within the I M D market and to establish differentiated products that span analog Ics mimics and R. F and microwaves sub systems are.
Portfolio has multiple growth initiatives, which were previously discussed including our high frequency 0.14, Gan process low frequency may calm pure carbide power amplifier products off filters kv caps, ruggedized photonic subsystems and R. F amplifier palettes.
A recent acquisition of linear Communications group is an example of our Sam expansion initiatives.
As previously highlighted the linearized their team brings may calm, new design and manufacturing capabilities and microwave predistortion products for Satcom satellite payloads as well as microwave photonic subsystem products for defense applications.
Over the past three decades, the Linearize our team has developed an outstanding reputation in the satcom industry and forged strong relationships with many leading T. W. T manufacturers tier one U S defense Prime contractors Satcom ground station Oems and satellite manufacturers.
This acquisition strengthens our market position within the defense industry, India and improves our ability to capitalize on the estimated incremental 250 million dollar Tan.
Since closing the acquisition in March we have initiated new R&D activities to combine our proprietary semiconductor technologies with linear risers system design expertise to create more differentiated solutions for our combined customers.
The industrial market continues to expand with new applications, including by way of example, traffic monitoring radars automotive sensors, such as Lidar industrial wireless IRT platforms factory automation in robotics, and wireless and laser based instruments for medical applications.
Patients.
In short we continue to build a unique differentiated product portfolio of R. F. It microwave millimeter wave and optical capabilities for the market while.
While programs and the I D. Mark it take a long time to enter production. The programs typically have long life cycles, and carry healthy margins, which ultimately create attractive financial returns.
Revenue for the telecom and market was 38.3 million down 29% sequentially.
Global Telecom markets remain very challenging with weakness in China slowing five G. Five G deployments in the U S.
And elevated inventory levels at CATV and Metro long haul customers.
Our telecom bookings had been week for most of fiscal year twenty-three and their current levels. We believe we are under shipping to and demand.
In spite of the current market weakness, we continue to view telecom as an attractive market with large and diverse longterm growth opportunities.
We believe this market has the potential to be one of our faster growth markets. Because design cycles are fast volumes are high and customers typically select products based on performance rather than price.
<unk> com has compelling products for the telecom market from our diet and mimic portfolio to our analog the iced teas and optical our auto electric in like icy products.
Well this year's order demand has been weak our sales team and I've been doing a great job, finding new customers and applications, which will drive our future growth.
We believe our telecom revenues will improve in the near term when infrastructure deployments increase and as customers and sales channel inventory is depleted.
New product introductions remain the core aspect of our growth strategy in the telecom market as an example over the past few years, we have expanded our portfolio to include high power switch and Elena modules to serve five G base stations, including macro cell small cell and mass.
Mimo activate a tennis systems and frequency bands up to six gigahertz.
We've also developed a product line of high power transmit and receive front and modules or femmes that operate in the five G. F. R. Two microwave frequency bands, which consists of multi stage P. A's L N as in a TR switch and directional couplers.
<unk> R F and microwave icy design expertise.
Is compelling.
Our chip designers have the ability to utilize a wide range of gas Gan SLI in Cmos processes for both internal and external fabs. It as a result, we're able to select the process, which achieves leading product performance.
While this capability is ideal for five G. Radio's our growth strategy is broader than the five G infrastructure market and our product line managers use the same technology to target other high volume applications, where we can differentiate.
For this reason, we see a large telecom growth opportunity for may costs over the next few years.
Data Center revenue was $26 6 million in Q3 down to 31% sequentially we.
We still see excess inventories impacting customer demand at lower 25, G and hundred G data rates. However.
However, during the quarter, we were pleased to see customer demand for our 400 G and 800 G products start to accelerate and this near term trend will provide an opportunity for significant quarter over quarter growth.
We have also seen an uptick in 200 G short reach Pam for demand to address some new U S cloud deployments.
May com has a focused product portfolio for the data center to support high speed analog connectivity in our products are used an optical transceivers active optical cables and active copper cable applications.
May calm has been a leader in supporting the analog linear drive architecture across Infiniband, an Ethernet protocols, because we believe linear drive in certain applications can provide lower latency and reduced power consumption compared to DSP based solutions we.
We believe our solutions are gaining traction in the market, especially at the higher data rates.
As an example are linear drive products can support new deployments in artificial intelligence machine learning and high performance computing.
Hyperscale operators are in the early stages of 400 G and 800 G deployments today and these customers are actively looking for ways to reduce complexity D C power and cost.
We believe we are well positioned to capture a portion of the market with our analog solutions.
I would now like to review a few key events during Q3.
First we continue to focus on developing cutting edge semiconductor processes.
In support of this effort, we were awarded a contract with the United States Air Force Research Labs are AFR L.
To develop advanced semiconductor process technology related to gallium nitride on silicon carbide.
The contract will support May calms, the research and development on process technologies used in millimeter wave mimic products we.
We believe this contract underscores may calms technical leadership and commitment and high power millimeter wave Gan on silicon carbide, and it will enable us to strengthen our competitive edge.
This is a multi year contract that it has a total value of around $4 million.
Our strategy is to provide customers with the industry's best performing high frequency gas and Gan mimic products future mimic products from advanced processes represent the large growth opportunity for may come over the next two to five years.
Historically mimics had been among the most profitable products within our portfolio.
Second we are pleased to announce that during the quarter. We were awarded platinum supplier status by a U S based tier one defense contractor and we were named as a global preferred supplier by a leading Japanese test and measurement company.
Customer satisfaction is at the center of May Calms business strategy and these awards are a great recognition of our success and servicing these customers.
I would like to congratulate the sales teams application engineering operations in all of the other critical members of the May calm team, who helped make these awards possible.
Third we are pleased that during the quarter. We formally established that may calm European semiconductor center outside of Paris, France, Dissenter bolsters, our European presence and provides a manufacturing platform from which we can build upon to expand and better serve our European customers.
The center also brings us an amazing team and a portfolio of high performance mimic products.
And finally I would like to note that the integration of linear communication group acquisition is on schedule and our teams have been excited to start collaborating together to win new business.
Before I turn the discussion over to Jack I would like to review one more item.
At mid July the management team updated its longterm strategic plan.
As a reminder, in July of 2020, we initiated a longterm new planning process and this year was our fourth revision of the plan.
As you would expect the strategic plan analyses our capabilities the markets and potential areas for Sam expansion. It reviews, our current technology portfolio product Roadmaps competitive landscape SWOT analysis, and formulates, a roadmap for growing revenue and profitability at a detailed product line level.
We believe that an in depth long-term planning is essential for a semiconductor business and this is a critical element of how we manage the company.
We believe our strategy will strengthen and diversify our business and provide may calm the ability to capture market share.
We are excited to scale the business it achieve $1 billion in revenue.
Jack will now provide a more detailed review of our financial results.
Thank you, Steve and good morning, everyone.
Ah results for the third quarter of fiscal 2023 were within our guidance for the period.
Revenue for the third quarter was $148.5 million down 12% quarter over quarter.
The sequential decrease was driven by weakness in telecom and data center markets with a slight sequential increase in industrial and defense.
Put a geographic basis sale to domestic customers represented 49% of revenue flat sequentially say.
Sales to China based customers were 16% of revenue down from 20% in our fiscal second quarter.
Despite sales declines in China, we continue to see additional growth opportunities in Asia and Europe .
Adjusted gross profit was $89.2 million or 61% of revenue down 200 basis points sequentially, driven by lower absorption of some of our fixed cost with the lower Q3 revenue levels.
They come utilizes a flexible manufacturing model leveraging our eternal wafer fab as well as third party foundries, which we believe will provide financial leverage as the business cycles and revenue improve.
Total adjusted operating expense was $52.2 million, consisting of R&D expensive $33.2 million and SG&A expensive $19 million.
As expected or total operating expenses were sequentially up by $3.6 million, mostly due to the incremental expense from our acquisition of linear riser and the establishment of our European semiconductor center in France.
Adjusted operating income in fiscal Q3 was $37 million down from $56.6 million in fiscal Q too.
Adjusted operating margin was 24.9% for fiscal Q3 sequentially down from 33.4% in queue to.
Going forward, we expect our operating margins to improve as revenue recovers.
Depreciation expense for fiscal Q3 was $5.8 million and adjusted EBITDA was $42.8 million.
Trailing 12 month, adjusted EBITDA was $233.1 million compared to $253 million in Q2 fiscal 2023.
Adjusted net interest income for Q3 was $2.8 million up roughly $700000 from fiscal Q2 on higher investment portfolio returns, partially offset by higher interest expense on our term loan.
Our adjusted non-GAAP income tax rate in fiscal Q3 remained at 3% and resulted in an expensive approximately $1.2 million or.
Our cash tax payments were $1.2 million down from $1.4 million in the second quarter of fiscal 2023.
We expect our adjusted income tax rate to remain at 3% for the fourth quarter of fiscal year, 2000, twenty-three and through fiscal year 2024.
Fiscal Q3, adjusted net income was $38.5 million compared to $56.7 million in fiscal Q too.
Adjusted earnings per fully diluted share with 54 cents utilizing a share count of 71.4 million shares compared to 79th of adjusted earnings per share in fiscal cute too.
Now moving on to balance sheet and cash flow items.
Q3 accounts receivable balance was $105.9 million down from $121.8 million in fiscal Q2, with our <unk> our days sales outstanding remaining at 65 days.
The decrease in our accounts receivable balance is primarily due to the timing of outstanding receivable collections as well as lower sales in the quarter.
Inventories were $139 million at quarter end up by 7.1 million sequentially.
Primarily due to inventory balances acquired through our European Semiconductor center acquisition as well as increases expected to support future data center revenues.
Inventory turns where one seven times in Q3 down slightly on a sequential basis from 2.0 times in the prior quarter.
I would like to note that our turns business was the highest since our fiscal second quarter of 2022, and our book to Bill also improved during the quarter both of which we believe are positive indicators that will support improving inventory turns as we progress through fiscal 2024.
Fiscal Q3 cash flow from operations was approximately $45.8 million compared to $32.5 million of fiscal Q too.
The increase was due in part to increased accounts receivable collections.
Capital expenditures totaled $3.3 million for fiscal Q3 down from $6 million in the prior quarter.
Our full year 2000, twenty-three Capex is now estimated to be $25 million based on the timing of payments and as we balance our capital spending with the growth and profitability of the business <unk>.
Continued capital investments in our Fabs manufacturing capabilities as well as process and product development initiatives remained strategic priorities for us.
Cash generation continues to be an important priority for us as we manage through changing business cycles and despite the challenging demand environment in Q3, we generate a cash flow from operations of $45.8 million and approximately $117 million a year to date.
[noise] cash cash equivalents and short term investments for the fiscal third quarter, where $587.6 million up from $577.3 million in fiscal Q2 2023.
During the third fiscal quarter, we utilized approximately $37 million of available cash to acquire the assets utilized to establish our European semiconductor center located in France.
Today, our net debt remains less than $50 million and our gross leverage is approximately 2.6 times.
Before turning the discussion back to Steve I would like to note a few additional items.
Steve mentioned, we opened our new May come European semiconductor center or <unk> at the end of May and look forward to integrating the differentiated technology and dedicated workforce. We do not expect that ese will have a meaningful impact on our revenue in 2023, and it's the associate and its associated operating expenses.
Will result in slight EPS dilution.
However, we are excited that it brings us new products technology manufacturing and customers.
We are also pleased to announce today that we have paid off the $121 million that remained outstanding on our term loan.
The term loan did not come due until May 2024, however, with increasing interest rates and are consistent quarterly cash generation. We felt it was appropriate to put this outstanding floating interest rate debt behind us and reduce our net interest expense by approximately $600000 per quarter.
And finally.
Steve mentioned, we completed our five year annual strategic planning process during the quarter, which we believe will result in increased stockholder value I.
I will now turn the discussion back over to Steve.
Thank you Jack May calm expects revenue in fiscal queue for ending September 29th 2023 to be in the range of $148 million to $152 million.
A justice gross margin is expected to be in the range of 59% to 61%.
And adjusted earnings per share is expected to be between 53, and 57 cents based on 71.5 million fully diluted shares.
Sequentially in queue for we expect revenue and IMD and telecom to be down and data center up.
And finally as you may have seen in a press release issued yesterday I am pleased to announce the appointment of Wayne Struble as senior Vice President advanced semiconductor technology.
New or newly created position reporting to me.
<unk> will be a key contributor to the development and management of our semiconductor technology roadmap wait is over 40 years of experience in the RF microwave engineering.
In our effort microwave engineering and has served as of May calm distinguished fellow of technology since joining may calm and 2010.
I would like to congratulate weighing on this well deserved promotion and the entire management team and I look forward to working more closely with him going forward.
I would now like to ask the operator to take any questions.
Thank you, ladies and gentlemen to ask a question and you wanted to pass Star one one on your telephone annually by name to be announced.
Question.
One again.
The next time, we ask you please limit yourself to one question and a lifestyle up please.
Anyway, Sir.
And now the first question coming from the line up.
C N N or something.
Good morning, guys and thanks for taking my question I guess my first question and it's something that you've highlighted since you took over the company Who's just a strategic review process. In July you mentioned the billion dollars again can you just give us up any update on the on the timeline. There could you talk about just the overarching growth drivers that get you to.
That billion dollars in just the framework that you put together over the last month. That's Gonna Guide you from this point over the next couple of years.
Sure Good morning, Tom So.
The timing of that is in the our fiscal 26 or early 2007 timeframe, which is about a year or year and a half behind what we had sort of originally stated.
A year ago, primarily due to the softness in the market is slowing things down this year.
When we look at our growth trajectory, we want to achieve at least our 10 year historical <unk>, which is about 14%.
When we look at what's going to be driving our growth, it's primarily a new product driven not necessarily acquisition driven.
And I think more importantly, when we start to look at the P&L at that $1 billion billion dollars $3 run right.
We see in EPS close to $5 and so part of our strategy is to make sure that we are growing profitable revenue that secretive to the business model.
In terms of the specific product lines are segments that you know that we're focused on it's really the same markets that we've been speaking about over the past few years, certainly we believe telecom over the longterm will drive growth.
Followed by industrial or Defence and then the data center.
And then the framework that I talked about Israeli some of those details that I spoke of in my prepared remarks, it's really an external review of market dynamics looking.
Looking at our capability to design and and and then positioning the company in a market, where we know we can be successful.
Helpful and this and then something I get some more shorter term to me overarching question there, but it looks like the data center was a lot stronger, particularly well into the September quarter, you mentioned, specifically higher speed connections at 408 hundred G is that the area of the data center business that you're seeing accelerate and could you talk.
About different areas, where you are seeing traction with those appointments. Thank you.
Okay, you're correct that we are predicting a.
Strong growth and our fourth quarter for the data centre business. In fact, we think it will be so strong that will have year over year growth it within the segments.
So this would represent five years in a row, where the data center and market is growing so we're happy about that the growth is primarily coming from 408 hundred G short reach applications.
Typically it's 100 G per lane.
And we have a very strong position with some of our latest products that are that are ramping quite quickly we have not seen a general recovery in the lower data rate applications.
Sort of the standard a four by 50 G. Eight by 50 G type applications, where we see the growth is primarily short reach hundred G per lane Ah. Some of these products are supporting linear drive applications are most if not all of the business is coming from paying for.
Four protocols.
And so we do expect that you know good things in the in the quarter.
Thank you and our next question coming from your line of <unk>.
<unk>.
Yeah. Good afternoon. Good we're sorry. Thank you for taking the question I guess first question just to follow up on your account. Please question with a data center you. Just highlighted you know your year growth, which means you know roughly 10 million plus.
Plus growth sequentially and I guess can you speak to kind of a trend that you're seeing in terms of <unk> kind of I guess, a I got a set of transfer versus kind of you know based case and is there enough kind of spending on this high speed connectivity related on my eyesight to sustain you know <unk>.
<unk> data center you go through the calendar here.
Right. So our primary focus for product development within the data center is analog solutions as well as optical photo detectors and lasers that those are those really the three areas that we focus on and so wherever we can find an application.
Whether it's applicable transceiver CPO inactive optical cable or even act of electrical copper cable we want it we want to sell our products into those applications. We have definitely seen an increase in what we would consider AI related.
[noise] deployments and applications and we've seen many examples where customers are excited too perhaps reduce the diameter of a copper cable by electrifying it.
And running it at a higher data rate over you know a slightly longer reach than they could have otherwise.
That's been a growth area for us and that of course, the linear drive as we've talked about in the past has many advantages over a dsp's solution and so we are seeing a bit of a convergence around this type of architecture and this is typically in areas, where where you have.
100, <unk> 100 gig.
Switch effectively and you have 100 gig optical and so this is an example, where may complicate insert you know one or two or maybe three or four different products that go into these applications and the key here really for the customer is there's no gearbox lower power.
Your consumption lower latency and lower cost and so.
Of course, the challenges designing these optical channels with just equalization or.
You know an analog Ah solution for signal integrity is very difficult. So the design process is complex.
And we've been working with major Oems.
To support the growth of this part of our business.
<unk> very helpful. I guess, maybe a broader cyclical question you talked about.
Book to Bill almost to one you know versus 0.5 last quarter.
Turns normalizing you know it looks like you know backlog somewhere close to $300 million is still strong or are you, suggesting that we're nearing a bottom for the totality of your business or what it would take a few more quarters for telecom to to bought them.
So we.
We try not to call the bottoms, let's say, because we really don't know and what we can say based on where we are today that.
For a year over year comparison, two of our three markets will be up <unk> will be up data center will be up and telecom will be down somewhere between 20 and 25%.
And as I highlighted in my comments that the Ah inbound new business and that.
It has been quite weak this year for telecom, we do expect at some point that will turn.
We see certainly great opportunities in the satcom market.
With the deployment of a wide range of different satellite platforms, which we believe can provide you know certainly near term growth opportunities but.
But it's very difficult for us to say sort of where the bottom is and what might happen you know three or six months from now.
Next question coming from the line up sorry.
<unk>.
Yes. Thank you good morning, and congrats on the the order turn around here, Steve you talked about being able to support Infiniband and Ethernet. So you also said that for next quarter. It sounds like most of the world's gonna come from Penn for so.
Does that mean in kindergarten is kind of further out if you could just add any color that that'd be great.
Yeah. So most of our well I would say more than 50 per cent of our data set of revenue over the past few quarters has been paying for related.
And so we see that trend continuing as we as we go into the.
Our fiscal 24, so I would I would certainly highlight that point the other point I would make frankly is I'd infinite Pan Infiniband add Ethernet are both pay them for.
Perfect. Thank you and that's a follow up you mentioned, China revenue, 16% is that Kid dominantly pollen at this point or do you still have some in a base station business. There you know just just trying to understand you know originally where the risks are and so on and so forth would that that's 16% revenue.
Well I would say there's been abroad decrease in or China based business, it's primarily on the optical side and five G related and so I would say that's the area that's the weakest.
Areas, where we see support would certainly be in some parts of you know.
Some five G networks, we are supporting at a at a low level, but there's no doubt that this year is going to be a down year for our China business and as it starts to come back it will be it will come back primarily due to the recovery from our data center in optical customers.
Thank you next question coming from the line of.
I come in with BNP Paribas, the line or something.
Yeah. Thank you good morning.
Wanted to follow up on data center for a second I just wanted to <unk>.
Confirm.
Are you, suggesting that David Hare is up year over year in the fiscal fourth quarter or for physical 2023 as a whole.
And I have a follow up.
Sure. So from a data center point of view going into the queue for.
It would be up certainly quarter over quarter significantly as well as your over a year.
I would say very strong double digit quarter over quarter and high single digit year over year.
And just to highlight that.
The the color of our data center revenue has shifted quite a bit this fiscal year. The first half strength predominantly K from shipping backlog that was constrained in fiscal twenty-two due to supply issues and we cleared out a lot of that backlog in the first half than in Q3.
Effectively hit an air gap, where there was very little demand on what I would consider a base business to the inventory issues and now what we're starting to see is growth and demand for our higher data rate products for 408 hundred G that is just starting to kick in so when you add all of that up when you hold Somali.
Get his growth year over year and growth quarter over quarter for the fourth quarter.
Yep.
Thank you for that I guess.
Is there anything to read into your prepared remarks on slowing sales in China is a reduction due to general market malaise in five of infrastructure is he just called out or are you seeing competitive pressures. There could you just clarify on that that would be very helpful. Thank you.
For so that you're perfectly clear there will be full year year over year growth for our data center that is what we're expecting.
And then answering your question about China, So China Ah Ah revenues, there had been trending down pretty much all year. We started I think in Q1 about 20% to 23% of our business was China based and now it's in the mid teens.
Most of that is due to five G. In front hall weaknesses as well as as we just talked about the data center.
I would say that there's always been a very competitive dynamic in China and that that competitive dynamic I would say is increasing their certainly more and more focus on supplying locally and having local vendor supplied the local.
Oh, yes, and so I would say that that that trend is increasing in some of that is due to geopolitical reasons.
We have not been D focusing our efforts on China.
Today's still some of the major telecom.
Suppliers until the optical optical networks and.
And whatnot are based in China. So we'll continue to service the market, we're not pulling back per se.
However, I would also add that we are focused on developing our revenues in other areas, including Europe and that's one of the main reasons why we decided to establish facilities in manufacturing inside of the E U.
Thank you next question coming from the line.
Alan Lee said junior with J P. Morgan.
<unk>.
Yeah, Good morning, and thanks for taking my question and I got to see the inflection order activity, but can be quite noisy right. During this period of sort of macro weakness, but it looks like dynamics is stabilizing light is reflected by the decline in order then push-ups.
According to date here in September bookings, continuing to rise sequentially and what's the turns assumption embedded in your September quarter Guide.
So we were certainly very pleased with our 0.9 book to build in the third quarter and I would say that we've started the fourth quarter with a strong bookings and it certainly would be our expectation that we can be somewhere.
Around the 0.9 to one book to Bill this quarter, that's our expectation, we'll we'll see how August and September go a lot of these programs that are coming in are also program related large programme related so in some instances we have good line of sight, but I think your point about the Choppiness and is absolutely.
There as I highlighted the telecom market is still very very weak.
See that many of our major customers still are carrying tremendous levels of the inventory, including CATV customers.
Regarding your question about the Turds you know I think we're gonna have similar turns level in queue for as we had in Q3.
Thank you for that and then congratulations on the close of the only the it looks like they're all questions are going to become the hub of the European semiconductor sector is the may come team when can be transferring some of it's in a calm originated gas and <unk> based on your next technology to the all mixed up including your 0.1 for my <unk>.
<unk>, what's the revenue potential out of their current three inch manufacturing ninth.
So thanks, Thanks for that comment and question. So just to highlight we have we've had operations in Europe , we have a fairly large facility in Cork, Ireland, where we have a design centre, we do quality and reliability testing and we have a fair amount of sales and finance and administration.
Supporting a lot of our international business. So Cork is certainly today the main hub of May calm and certainly in Europe .
We've also had a design centre in Sofia, France for over 10 years, and they've done a super job supporting a lot of our high performance analogue product development, and then adding Ah Ah Ah wafer fab and Ah Ah Ah a group that is expert at very high frequency a millimeter wave process.
Technology really complements the portfolio, we do not have any plans to transfer any of our technology that we're running here, including the 0.14 micron process to France, instead, we will continue to build and develop.
The technologies that they've been working on and as a priority move some of those process technologies from the three inch line to a six inch line we.
We haven't explicitly said what the revenue potential is of that that we probably wouldn't want to say that that that that level of detail, but what I can tell you is right now that is that fat is underutilized has we see a tremendous opportunity for growth.
And our sales team in our business development teams are very actively really turning the business around and we see that will be a nice growth vector for us over the next one to two years.
Thank you and our next question coming from the line of you think Arya with Bank of America online or something.
Hi, This is blake treatment onto the back thanks for taking my question.
Just kind of want to focus a little bit more on the queue for God I know you get color around data center. If you can provide the sequential commentary maybe for the industrial and defense in telecom business the magnitude of the declines in each of various that'd be helpful.
Sure I I I'll say a word on that it that may be Jack can add in so as we as we've talked about we do expect very strong data center growth and we expect I N D will be down in the sort of mid single digits in telecom and.
Somewhere between 10% to 15% down sequentially and Jack I don't know, whether you want to add to that yeah. I think I would just add we've we've developed a fairly strong backlog over the past couple of years and we've we've eaten into that although but over the past couple of quarters. So [noise] I think with regard to some of those.
Through through this Q4 time period, but once again as I had mentioned, we do have a fairly strong backlog that supports the business going into Q for in depth and beyond.
Got it and then just kind of following up on that maybe specifically on the industrial defense side.
Might not the certainly across the industry you know several vendors observing some kind of digestion and in the core industrial space. I was just I know this segment is kind of about 50, 60% defense. So I was maybe kind of you know, hoping you can kind of provide more specifics, maybe what you're seeing specifically on trying to <unk> zeitung on areas and corn dusk.
<unk> market that could be a little bit weaker or stronger versus the others.
Yeah, I would say in general or industrial businesses as weak and will remain weak in the in the near term and most of the growth that we're getting in the segment is coming from defense programs.
Primarily radar programs.
Communication programs I think we mentioned on last quarter's calls some heavy demand for international radio is coming out of Europe .
We have some content in so I the I part of I D. Today is weak I talked about in my prepared remarks, some of the new applications that we are going after within the eye portion there.
But generally speaking, it's weak and and the other thing I would add is we're not really a good bellwether of the industrial.
And market, it's one of the smaller parts of our portfolio getting like this is Jack I would just add that some of the inherent business that we have going through from a defense perspective that can be lumpy at times and I think the other item when you look at our industrial in defense.
And market is that it's quite diverse there's you know a number of different things that work its way into the the industrial category as well so that helps us.
From a stability standpoint as well.
Thank you and our next question coming from the line now.
<unk>, calling the line or something.
Thank you very much guys good morning.
Not to go back to the data center stuff like that.
You can't get through a call now without saying a I a few times, so what kind of got turned over there.
Wanted to ask about your your 408 hundred gig.
Portfolio, and particularly you you mentioned the linear drive differentiation versus Dsp's, maybe you could expand on that a little bit more from a technical perspective and also how you were thinking about the the the penetration of linear drive into those data center markets, where we are today.
Where that can go over time and what it represents is sort of a dollar.
Dollar Tam for your company.
Sure so.
Try to provide a bit more detail so.
Where we see linear drive working is when you have 100 gig electrical lane matching up with 100 gig optical lane, that's that's the ideal application.
So you can run that at you know you can run that at 400, you can run that at 800.
Run that at 1.6.
Terabits as well.
And when you use a linear drive architecture, you you're effectively removing the function of the DSP or a C D or from the module and you're you're having the the switch.
Effectively manage the interface deal at the interface within the module if it's a module.
So there's benefits and doing that just from latency cost power consumption.
And so that.
Those are the benefits and you can eliminate the DSP and still be an applicable form. So you can use this for active optical cables you can use us for pluggable cables.
And so there's there's customers liked that option because then they can use many vendors to support their deployments.
What it requires is certainly a switch.
Sick that and it requires now the module manufacturer to work very closely with the switch vendor we.
We demonstrated it OFC a few months back.
Three different module manufacturers with an interop with a tomahawk five Ah switch.
So that was ideal for primarily short reach and that's where you know may calm has historically service the short reach market. That's just sort of the lane that we're in.
Okay, and what we sell it to that market are drivers and Tia's, primarily and Equalizers. So those are the sort of the three product sets. These are highly integrated silicon chips that have all sorts of creature features on them. So that the customers can turn the knobs they need to term to get the.
Get the product working and so where we stand right now as we have we have production at 100 G and we are pretty far along with 200 G per lane as well.
Thank you for all that that that detail it really do appreciate it.
Follow up I think it.
It is encouraging to see book to Bill up to 0.9, I think you guys indicated close to to one hopefully for the the September quarter I.
Maybe you could give a little bit of color. If you could on on the three segments and how book to Bill was training in each of those are are are are some while ahead of one at this point and and what what those products might be in and are there certain and markets, where we're still coming off the 0.5 than we were last quarter and working our way back up.
Right well the <unk> as as in Q3, we will see the same behaviors in queue for it will be primarily industrial or defence and data center, driving the bookings growth or or recovery, let's say, we still see tremendous weakness across many of our telecom and segments.
Cable tester measurement five G. These are still very weak don't expect to recover again the fourth quarter.
In terms of the products that certainly many of the products that we've talked about in the past a lot of our mimic products a lot of our hi, and gas and Gan products for military applications was a wide range of those are really supporting the growth within the defense sector.
We think about 2024.
Growth drivers for love product set point of view would certainly be.
<unk> began as we think 2024 will be a great year for us.
We launched the 0.14 micron process about six months ago into production and our teams are in the process of getting their first design wins, which will turn into production next year.
Certainly on the data center side, we think in 2024 there'll be more high data rate applications coming to their potential.
Potentially ramping up and then in the Telecom area you know the only real bright spot for US right now is what we're doing in the satcom market both.
The ground side and on the satellite side.
Thank you and our next question coming from the line.
<unk>.
Yeah mine is Nelson.
Yeah, Hey, Hey, Steven and Jack had a quick one Steve when you when you need to talk to about your long term drivers you mention the order of Telecom industrial and then data center.
As you tried to get into your billion dollars go by F Y 26, or the 527 is that how you're thinking about growth to that billion dollar number or was that just a random order on it and if I can flip the question. If that's not the correct order what is the correct order as we think about this.
Yeah. So that is the correct daughter, that's the way, we think about it, but where where oftentimes wrong [laughter] more often wrong then right. When we make forecasts. So you have to take that with a grain of salt, but when we look at our R&D spending and we look at the projects that are in our pipeline and where we want a position that <unk>.
Company, we see that there's a lot of variability within the telecom space that is very attractive to us and so we liked the diversity we liked the long tail of customers that we can approach.
And it plays to a lot of our strengths. So we do end up spending a fair amount of are already dollars developing chips for that and market.
Segment, and this year will have great year over year growth for the full year.
And the smallest piece of our business is the data center I realize we get probably the most questions about the data center, but as I highlighted we do have a narrow focus on the data center, where we focus on analog solutions for short reach where we can insert you know high performance Ah Ah connectivity chips.
Or lasers and detectors that is our strategy. There. So that's a fairly narrow focused strategy.
Thank you for what are towards you'll get things wrong. All the time too so I wouldn't be too hard on your style from [laughter] follow up you are seeing some plenty gonna pick up in the data center space. The kind of tend you're talking about typically don't go away and a quarter or two so is it a fair sanction to think that.
The activity and hundred I'm, sorry, the activity and 408 hundred should stick around for a handful of quarters.
As you look maybe past the next quarter and and a little bit more beyond.
It is possible and it's very difficult for us to say and we have certainly seen in the past.
Examples where programs ramp up very quickly and then they ramped down very quickly. So we have to be cognizant of that so while we're certainly excited about all the great things, we're doing with within the data center. We also recognize that it can be a very volatile business.
Thank you and our next question coming from.
David Williams with benchmark your line or something.
Good morning, Thank for taking the question. So you just quickly I guess on the magnitude of the inventory depletion that you still see needs to happen in the channel and you you've talked about I think you've mentioned tremendous a few times. So it sounds like a fairly heavy level of inventory digesting still needs to happen, but just wonder if you thought that.
For us.
Yeah sure I'll make a comment and then certainly maybe Jack and add to it and as everybody knows the site the manufacturing cycle times for many of our products.
Can be in the range of six months, maybe longer maybe shorter depending on the fab and the technology and.
As everybody knows just two quarters ago, we had a run rate of $180 million. So when you're looking at our inventory today and you really relate that to sort of $180 million run right. You can see that we are as Jack said carrying excess inventories at today's level, but if but not necessarily for maybe one or two quarters ago.
So we are going through a digesting period, where we need to move that inventory out into.
Into the market and.
Part of what we're also doing is making sure that our channels are.
Not carrying excess inventory and so we are we are definitely managing that down and we wanted to see more depletion is Jack maybe you can add to that I think as we had discussed in some of our prepared remarks were working closely to monitor what's out in the channel.
And making sure we understand where things are going there. We have had some positive trends over the past quarter that that are somewhat encouraging, but we will continue to monitor that and with regard to may comes inventory I described the uptick that we've seen some of that uptick is associated with some of the acquisitions that we've brought on board when you look back over.
In the past year, but we're also continuing to.
To purchase inventory to support our backlog and I think most notably the data center backlog that we have.
Great. Thanks.
And in the past, we've talked about the flexibility and the model on the expense side and just hoping you could give us a little more thoughts in terms of modeling and what's appropriate and if you're if you're restraining growth or development efforts here just kind of to the software demand environment.
Yeah. So we've been we've been pleased with the gross margin performance of the business you know in light of the slow down over the past few quarters we've.
We've made a fair amount of structural changes to the to the business.
To.
To manage the improvements that we've seen over the past couple of years from an overall gross margin standpoint. So.
We do have the flexible manufacturing model as I had described with some of the products being manufactured in house in our internal Fabs and others that go to third party so that helps us.
In terms of being able to mitigate some of the costs that that we have with with a portion of them being.
Essentially variable and then I think the other the other piece that that I would like to highlight is our internal manufacturing.
<unk> are generally medium volume, we don't carry the same large overheads like some of the Mega Fabs have so that helps protect us too in in periods, where there may be a slowdown and then as we look look out into the future and hopefully as we get back to some of the higher run rates that we were at from an overall revenue perspective, I think that will support improving.
Gross margins as we go forward.
Thank you and our next question coming on.
When both of them with me.
<unk>.
It's just a quick clarification on the 400 800 gig is that almost entirely optical or you're starting to see copper applications are active copper cables, starting to take off within that higher speed Pam for business.
We see both and some of our.
Chips are.
Four lanes of 100 on a single chip.
And you can use two of those to achieve 800 and the other thing I'll note, which is sort of a benefit of the linear drive approaches that can really work with a whole variety of architectures within the module, whether it's a silicon photonic based solution, whether it's <unk>.
And also penfil lithium diabase, so whatever whatever technology the module vendor wants to use.
We can support those in <unk>.
Including pixels as well if I didn't mentioned that so very very flexible technology from may comps point of view.
And follow up on linear drive it sounds like you're you're comments, it's mostly in the Ethernet around Tomahawk five but infiniband. It seems like it's much more close channels you have effectively one vendor I. Thank god that dominates that market. So it would seem to me that that could.
Could be a pretty significant opportunity for when you drive where do you where do you think we are an adoption of linear drive in the market.
So we <unk> I would agree that we can service both.
Sides or both protocols and we I think we in fact demonstrated a.
Solution using Ah Ah Infiniband application and <unk>. So yes, we are we're supporting that as well.
Thank you and our next question coming from.
Richard Shining with Craig Hallum urine or something.
Hi, guys. Thanks for taking my questions. So you don't Wanna fall upon a phony responses to an earlier question again, I think you mentioned, you're expecting a great year fiscal 24, maybe if you can help us understand those dynamics and maybe even quantify what you see is the opportunity for your for that in in that year.
Sure and I'll I'll sort of define great as we developed a process and now we're selling it [laughter] so that will start selling it in 2024. So we're starting at zero four or one for a micron process.
And we are getting design wins, and we expect to see growth in that fiscal year. So that's R. Right now that's our definition of great. That's a win and so our sales team our business development team are fab engineers are excited to make that happen.
We haven't put a fine.
The goal our internal goals and we haven't shared that externally and and I think it's premature to do that but.
But we just look at that as another vehicle for growth we have the full support for a major Oems here in the U S that want to use the technology.
We're doing some novel things regarding R&D as I mentioned on my prepared remarks, including bringing in sort of next generation process steps to improve performance.
Beyond what we currently have.
So certainly we think next year will be a great year for can.
Okay perfect. Thanks for that detail and last question for me data Center here I just wanted to verify thank you set up I just want to verify as all the upside here you're seeing is on the analog side or you're seeing any upside come in with lasers are obviously had some great discussion last few quarters on on what you're thinking about your laser portfolio, but it seems like.
It's all analogue oriented can you confirm if that's what you're what you're seeing.
I would say it's true the growth is coming from the analog side and I would characterize our physical twenty-three is.
Building year for our optical products, where lots of design is and lower revenue than we had expected.
So that's been a disappointment however, the team is making progress winning those design wins not only Ah at Coutts here in the U S. But also in China and we're also working on new laser categories, including E M LS and a raise.
That are you know we have a lot of interest in on that so.
But to your point, yes, the the growth for this year for this quarter in the data center is driven by analog solutions.
Thank you and I'm not showing any further questions and to get this time I would now like to turn the call back over to an existing daily planet closing remarks.
Thank you and closing I would like to thank our team for their continued hard work and dedication.
A nice day.
Ladies and gentlemen teleconference. Today. Thank you for your participation you may now disconnect.
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