Q4 2023 MACOM Technology Solutions Holdings Inc Earnings Call
Okay.
Welcome to me comes sport fiscal quarter of 2023 conference call.
This call is being recorded today Thursday November 19, 2023 at this time all participants are in a listen only mode.
I'll turn the call to Mr. Steve Ferranti <unk>.
Vice President of corporate development and Investor Relations Mr. Ferranti.
Please go ahead.
Thank you Olivia good morning, and welcome to our call to discuss May comps fourth fiscal quarter and fiscal year 2023 financial results.
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 $19 95.
Actual results may differ materially from those discussed today.
For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to <unk> filings with the SEC.
Management statements. During this call will also include discussion of certain adjusted non-GAAP financial information a reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related form 8-K, which was filed with the SEC today.
With that I'll turn it over the call to Steve Daly, President and CEO of makeup.
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 fourth quarter and full year results for fiscal 2023.
When Jack is finished I will provide revenue and earnings guidance for the first fiscal quarter of 2024.
We will be happy to take some questions.
Revenue for Q4 was $150 4 million a.
A slight increase over the prior quarter.
Adjusted EPS was <unk> 56 per diluted share and operating cash flow was approximately $50 million.
For the full fiscal year, ending September 29, 2023 revenue was $648 million and adjusted EPS was $2 70 per diluted share.
Fiscal 2023 revenue and EPS were both down 4% year over year.
We completed two small but strategic acquisitions in fiscal 'twenty, three which combined contributed approximately 2% to our total fiscal year 'twenty three revenue.
During the fiscal year, we eliminated all of our remaining short term debt and funded these acquisitions using cash recently generated by the business.
We ended the fiscal year with approximately $515 million in cash and cash equivalents.
In Q4, our book to Bill ratio was one one to one and our turns business or orders booked and shipped within the quarter was approximately 16% of total revenue.
These are positive trends and notably Q4 bookings improved across all three of our end markets.
Improvements were led by pockets of strength that certain defense and data center customers.
Our total company backlog increased slightly quarter over quarter and it remains at a healthy level.
We are starting the new fiscal year in a strong position.
Okay.
While we are pleased with the recent improvement in total bookings and certain markets orders remained weak in Q4.
Demand continues to be weak in telecom and to a lesser degree in certain parts of the industrial markets and we remain negative on the near term outlook for these markets. However, more positively we see growing demand in data center aerospace and defense as well as in satellite communication markets.
Fiscal Q4 revenue by end market was as expected with industrial and defense at $79 2 million datacenter at $40 5 million and telecom at $30 6 million.
R&D was down 5% sequentially data center was up 52% sequentially and telecom was down 20% sequentially.
Notably our top 10 end customers represented approximately 30% of our total revenue in fiscal 2023, and no one customer was more than 10% of our total revenue.
We maintain a highly diversified customer base consisting of thousands of customers.
Industrial <unk> defense was a strong market for us during fiscal 2023 and revenues achieved a historic level.
Fiscal 2023 represented our third consecutive year of growth within the <unk> market with 8% year over year growth.
In fact over the last three years horizon, Ied revenues achieved an 18% compounded annual growth rate.
We believe our growth initiatives for this market are on track.
Core to our strategy is expanding our serviceable addressable market or Sam within the IUD market by launching compelling new products.
As a reminder, examples of new growth initiatives, which we have discussed in prior quarterly calls includes our new <unk> Gan on silicon carbide process Kilovolt capacitors are kv caps and BARF filters. These product lines are still in the early stages of their growth and product life cycles.
One important area of the market, we are supporting as the RF over fiber segment and these applications customers convert RF or microwave signals into light by directly modulating a linear laser.
This resulting signals can be transmitted over fiber with minimal signal degradation or loss versus traditional coax cable.
<unk> provides a lower weight and more secure transmission compared to coax.
RF over fiber is ideal for demanding applications like Satcom ground station networks distributed antenna systems and many defense applications like secure communications critical GPS systems, and radar systems, all of which require high reliability and long life cycles, while operating in harsh.
Environments.
<unk> strength in microwave and optical design laser and detector technologies, and Ruggedized packaging and subsystem manufacturing capabilities positions positions us for growth in this segment of the defense market. We are seeing a growing number of long term program opportunities today.
Another area of focus for me calm and industrial and defense is further penetrating the test and measurement market.
A notable recent new product introduction for this market segment as our optical clock recovery, our OCR solutions here.
Here are high performance connectivity team is leveraging leveraging our five our high speed optical receivers and high performance analog design expertise.
<unk> <unk> can be used in our customers' production test environment to validate their performance of their short reach 400, G and 800 gig optical transceiver products.
Yeah.
Our telecom end market revenues continues to be weak in fiscal year 2023 telecom was down 24% year on year.
Weakness in this market is broad based spanning most of our larger subsegment sub segments, including <unk>.
Metro long haul cable infrastructure and passive optical networks.
That said, we believe the secular growth drivers for telecom remain intact global telecom infrastructure needs to expand capacity to carry to carry higher data rates and more bandwidth all while having lower latency.
As an example recently a U S carrier completed field trials in New York State, which demonstrated one two terabits per second of data over a single wavelength of long haul and the long haul metro application as part of an ongoing fiber optic upgrade may comp supported this trial with our products.
One segment in the telecom market, which we believe is growing as broadband satellite communications or satcom and.
And many of these ground and satellite systems operated microwave or millimeter wave frequencies, which plays to our expertise.
Telecom remains an attractive and diverse market and we see numerous opportunities to expand our position in this market.
Our data center end market revenues grew sequentially in Q4.
In addition for the full fiscal year 2023 data center revenues grew by 6% year over year growth that was primarily driven by high data rate short reach applications.
The data center market continues to provide growth opportunities for <unk> com and we expect new product introductions will be the primary growth driver for us in this market.
We are focused on designing and producing industry, leading cross point switches.
<unk> and laser drivers for a wide range of applications.
Our strategy is to be the first to market with data rates jumped to higher speeds.
As an example, we recently announced and demonstrated an industry, leading 200 G per lane Trans impedance amplifier, our TIAA for short reach applications and a 200 G per lane linear equalizer for use at active copper cables.
Both products will support 160 deployments.
Data center architectures continue to evolve we believe many of today's deployments requires significantly more short reach optical and or copper cable to make connections are high performance connectivity team offers an industry leading portfolio of products at 50, 102 hundred <unk> per channel to support.
These requirements.
And some applications our solutions enable lower cost lower latency and lower power consumption versus traditional solutions. Additionally, our linear equalizer products enable copper interconnects to be extended and reach and it's a higher speed applications previously a market segment addressed with more expensive.
Active optical cables are alcs and flexible transceivers are.
Our solutions have been tested with the latest generation of switches <unk> available in the market today and our customers are pleased with the performance.
Given we are at the start of a new fiscal year I would like to review our long term strategy briefly recap some of last year's accomplishments and review our priorities for fiscal 2024.
Simply put our strategy is to focus on the highest power highest frequency and highest data rate applications in our three core markets.
We align our R&D and product development resources around these themes and then using our annual strategic planning process established near and long term goals to strengthen our portfolio competitiveness and to position the company for future success.
Our goal is to have our technical teams work closely with our customers to provide unique options for them to consider.
By leveraging a wide breadth of unique technologies with world class manufacturing strengths. We believe we can attract many customers and gain additional market share.
We believe customers will seek out suppliers, who can over the long term become strategic partners.
During last year's Q4 earnings call, we outlined our priorities for fiscal 'twenty three our.
Our team made meaningful progress against those stated priorities.
As a reminder, a central theme we communicated it then was to capture market share in 'twenty. Three we believe we have been gaining market share by increasing our new product offerings, expanding our technology base and strengthening our presence in certain geographic regions.
As I've mentioned, a key component of our strategy involves building a portfolio of compelling semiconductor processes to support high frequency and high power applications.
The opening of our May Com European Semiconductor center expanded our manufacturing capacity added epitaxial growth expertise bolstered our European presence and strengthened our design teams.
This acquisition supports our strategic goal to establish a leadership position and very high frequency semiconductor mimic process technologies and products.
While this was a relatively small acquisition, we believe it is strategic and it brings us tremendous growth potential.
We are confident our strategy will enable higher than average return on invested capital and therefore support our goals of establishing exemplary profitability and cash flow.
It's supportive diversifying our revenues geographically, we are expanding our sales efforts across Europe.
During Q4, we attended the European microwave we can Berlin, where we hosted a number of live demonstrations at our Booth, which featured our latest products and technologies in.
In addition, we are pleased that the European space Agency or <unk> recently completed a site visit at our France facility.
We intend to build new relationships with major organizations and customers across Europe with the goal of driving long term revenue growth diversifying our customer base and adding further stability to our overall business.
During the year, we introduced 170 standard products, an increase an increase of 15% compared to last year. We also had great success with our custom IC development activities and we supported a wide range of customer funded projects with.
We recognize that continued investments in expanding our design engineering, new product prototyping and engineering test capabilities will ensure we move quickly and rapidly bring products to market and ultimately gain market share.
As we look ahead to fiscal year 2024, we anticipate that the rate of new product introductions will further accelerate in fact, we believe it is possible to launch 50% more products in FY 'twenty four compared to FY2023.
As we focus on fiscal year 'twenty four our priorities include extending our leadership in RF and microwave applications.
<unk> market share on gas and Gan mimics.
Continuing to gain traction with our high speed analog solutions for short reach data center applications.
<unk> the integration activities of our recent and pending acquisitions.
Driving additional growth of our RF power analog and lightweight product areas.
Building out and growing our module and subsystems business and select high performance markets.
Ensuring management challenges develops and rewards employees and supports their needs to ensure they have a long and enriching career at May com and.
And last managing the business and strategy to enable us to achieve record earnings for the future.
In summary May com has a wide range of products in production today.
Many of these products have long life cycles and can produce revenues for years. After they've been introduced we viewed these business attributes as an inherent strength of our business model.
And last I'll note that may come in we'll speed have been working collaboratively on a carve out of their RF business over the past few months I will now I would like to thank the integration planning teams.
From both companies for their great work, our integration planning efforts include aligning the team we are hiring their organizations and the ERP and other data systems with May comps infrastructure. So we are fully operational and independent at closing.
No doubt this transaction will be a win for May com Jack.
Jack will now provide a more detailed review of our financial results.
Thank you, Steve and good morning, everyone.
Before getting into the details of our quarterly results I would like to summarize a few items associated with our fiscal year 2023 financials.
As Steve noted fiscal 2023 was down approximately 4% from a top and bottom line perspective.
Despite this we've been able to maintain adjusted gross margins in excess of 60% with full year fiscal 2023, adjusted gross margin of 61, 3%.
During fiscal 2023, we have maintained solid and consistent cash flow generation, which has allowed us to close and fund two strategic acquisitions with available cash and also pay off the remaining $121 million balance of our term loan that was scheduled to mature in may 2024.
Now onto our Q4 quarterly results as well as some additional commentary on our full fiscal year 2023 and outlook on fiscal year 2024.
Revenue for the fiscal fourth quarter was $154 million up one 2% sequentially based on growth in our data center end market.
On a geographic basis revenue from U S. Domestic customers represented approximately 46% of our fiscal Q4 results down from 49% in fiscal Q3.
We've been working to geographically diversify our business and are pleased to have a healthy mix of U S and international based revenue opportunities.
On a fiscal year 'twenty three annual basis revenue from U S. Domestic customers represented 48% up slightly from 47% in the prior year.
A notable trend is our fiscal year 'twenty three revenue from the China market decreased while revenue to our European based customers grew compared to the prior year.
Adjusted gross profit for fiscal Q4 was $93 million or 61% of revenue essentially flat from the third quarter.
Total adjusted operating expense for our fourth fiscal quarter was $53 1 million <unk>.
Consisting of research and development expense of $33 $8 million and selling general and administrative expense of $19 $3 million.
The modest sequential increase in adjusted operating expense was primarily driven by incremental costs from our recent acquisitions, partially offset by lower spending across the remainder of the may come base business.
Depreciation expense for fiscal Q4 was $6 3 million and 24 million for fiscal year 2023, essentially flat on an annual basis.
<unk> asset base includes a variety of production and research and development equipment that we are continuously working to optimize which has helped to keep our capital expenditures and the associated depreciation expense relatively stable over the years.
Adjusted operating income in fiscal Q4 was $37 2 million.
Up slightly from $37 million in fiscal Q3.
For fiscal year 2023, adjusted operating income was $189 6 million compared to $211 million for fiscal 2022, resulting in a 200 basis point reduction in adjusted operating margin compared to fiscal 'twenty two.
For fiscal year 2024, our team plans to further integrate and optimize our acquisitions further executing on incremental synergies and cost savings while running the entire business with a continuous improvement mindset and working to increase our operating margin over the course of the year.
For fiscal Q4, we had adjusted net interest income of $4 $2 million compared to net interest income of approximately $2 8 million in fiscal Q3.
Fiscal year 2023, adjusted net interest income was $10 million compared to.
<unk> expense of $2 6 million in 2022.
The increase in fiscal year 2023, adjusted net interest income was driven primarily by higher yields on our short term investment balances.
Our adjusted income tax rate in fiscal Q4 was 3% and resulted in an expense of approximately $1 2 million.
Our net cash tax payments were approximately $100000 for the fourth quarter and $2 9 million for fiscal year 2023.
We expect our adjusted income tax rate to remain at 3% for fiscal year 2024.
As of September 2009 to 2023, our deferred tax asset balance was $218 million as compared to $237 million at the end of fiscal 2022.
We anticipate further utilizing our deferred tax asset balance through fiscal 2024 and into fiscal 2025, helping to keep our cash tax payments relatively low over these periods.
Fiscal Q4, adjusted net income increased to $40 1 million compared.
Compared to $38 5 million in fiscal Q3.
Adjusted earnings per fully diluted share was <unk> 56, utilizing a share count of $71 8 million shares compared to <unk> 54 of adjusted earnings per share in fiscal Q3.
Now moving on to operational balance sheet and cash flow items.
Our Q4 accounts receivable balance was $91 $3 million down from $105 9 million in fiscal Q3, due to improved shipment linearity and strong collection activity during the quarter.
As a result days sales outstanding were 55 days compared to 65 days in the prior quarter.
Inventories were $136 3 million at quarter end down sequentially from $139 million.
Inventory turns were one eight times up sequentially in Q4 from one seven times in the prior quarter.
We recognize that our inventory balance is relatively high and associated turns continued to be relatively low however, the quality and mix of our inventory is strong and continues to support our strategic backlog.
Fiscal Q4 cash flow from operations was approximately $54 million up.
Up $4 5 million sequentially.
Capital expenditures totaled $5 8 million in fiscal Q4.
Fiscal 2023 annual Capex of $24 7 million decreased slightly from $26 5 million in fiscal 2022.
Our operations and facilities teams are very disciplined and do a great job managing our capital expenditure budget.
As we move into fiscal year 2024, we expect our capital expenditures to be in the range of $30 million to $35 million for the full year.
Next moving on to other balance sheet items.
Cash cash equivalents and short term investments for the fourth fiscal quarter were $514 $5 million.
Down $73 1 million sequentially, driven by the $121 million pay down of the remaining term loan.
I am pleased to note that at the end of our fiscal year 2023, we were in a net positive cash position of approximately $25 million after closing two acquisitions and paying off the term loan.
Our balance sheet and cash generation remains sound and we continued to exercise leverage over our operations and discretionary spending to support may comes target margins through ongoing cyclical pressure.
In summary fiscal 2023 was a solid year for May come and I am proud of our team's performance and accomplishments and believe the diverse resilient portfolio. We have built will support future growth of the business.
In addition, we are working with both speed to close our previously announced acquisition of their radio frequency business before the end of December.
As we have previously discussed we expect the RF business to be immediately accretive to <unk> non-GAAP earnings and this acquisition is not expected to change may comps long term adjusted gross margin goals of being above 60%.
We also expect the business to generate enough cash to provide a 100% return at the purchase price and around three years.
We believe that based on the structure of the transaction actions to be taken prior to closing as well as post closing synergies, we will be able to improve the current gross margins of the wolf speeds RF business.
That said given may comms and will speed RF business as current revenue levels, we anticipate modest gross margin pressure immediately following closing at certain post closing synergies will take time to realize.
We believe the acquisitions announced during fiscal 2023, we'll be strategic from a comps capacity capability and customer base for fiscal year 2024 and beyond.
I'll now turn the conversation back over to Steve.
Thank you Jack <unk> expects revenue in fiscal Q1, ending December 29, 2023 to be in the range of $149 million to $153 million.
Adjusted gross margin is expected to be in the range of 59% to 61% and adjusted earnings per share is expected to be between 55 and 59 based.
Based on $72 2 million fully diluted shares.
In fiscal Q1, we expect industrial and defense and telecom revenues will be down or flat quarter over quarter.
And data center revenues will be up 10% quarter over quarter our.
Our guidance does not include any contributions from the pending acquisition of all speeds RF business, which we expect to close prior to the end of December.
We maintain a long term perspective on executing our strategy and we are confident that we can continue to improve our financials and take market share in the months and years ahead.
Our level of engagement with leading customers is improving and we have a robust opportunity pipeline in short we believe may come will be bigger stronger and more profitable in fiscal 2024.
I would now like to ask the operator to take any questions.
Certainly ladies and gentlemen at this time, if you'd like to ask a question you wanted to Westar one one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
The consideration of time, we ask that you. Please limit yourself to one question and one follow up please standby, while we compile to Kenny roster.
And our first question coming from the line of toys and work with Stifel. Your line is now open.
Yes. Thank you.
First question is on the industrial and defense.
Especially in near term, Steve you said Theres, some puts and takes there.
Especially in industrial perhaps some areas still doing okay, but others perhaps.
So.
Could you just elaborate on which sub segments that are holding up versus those that may potentially be seeing some weakness.
Sure I would say in general across the board our defense business is strong so that segment is doing quite well.
It's our expectation that that that.
Strength will continue as we move into 2024 on.
On the industrial side I would say that there's probably three areas that I would call out as being weak one would be the medical segment, which we support primarily with.
MRI systems and things like that are second would be general sensors. These could be automotive traffic sensors or industrial sensors, and then the third would be our supporting the general RF and microwave test and measurement segment, where we see.
Our major customers.
Demand is quite weak.
Yes, that's very helpful and as my follow up.
Jack.
We're not including any financials from the Bulks.
Acquisition this quarter, although obviously it sounds like it's going to close this towards the end of the quarter, but you mentioned some gross margin pressure initially.
Maybe expand on the magnitude of that I mean are we talking about maybe a couple of hundred basis points or should we start to think about more.
More dilution than that.
Yes, Thanks, Cory and I think you're referring to the EDA will speed RF pending acquisition, so I think sorry I apologize.
Alright, yes, I wanted to make sure we were aligned yes, there may be some slight dip that we may see as we worked through the closing, but wouldnt expect that to be that significant to last for a longer duration or our gross margin story remains intact and our expectations are to be backup.
Into the 60% range and even as we work our way through the closing and shortly after that time period.
Possibility that we could remain above the 60%, but theres just a lot going on that we need to digest as we work our way through the closing period and integration time period.
Thank you and our next question coming from the line of David Williams with the Benchmark Company. Your line is open.
Hey, good morning, Thanks for taking my questions and congrats on navigating this challenging environment.
I guess I guess first maybe on the data center business do you expect to see any seasonality there and how long do you think discontinuation up demand can be sustained as it is it throughout 2024 do you see a period in which we might see maybe a step back in the data center, maybe slow a bit for you.
Okay.
Thank you for the question David So.
The data center, which is today, our smallest segment is probably our most volatile segment.
And I would I would probably characterize the revenue as dependent on ramps ramp ramping up and ramping down as opposed to seasonality sort of calendar based seasonality.
Today, what we see is.
Certainly we saw this quarter very strong growth.
Primarily from short reach applications and we believe that.
That growth will continue as we are guiding 10% growth this quarter.
Off of tremendous growth with growth in Q4, as we look into 'twenty, four and even into our fiscal 'twenty five.
This strength will remain but there will definitely be a shift from.
What today is let's.
Let's say 400, 800 gig demand to more one six terabits based demand and we feel we're on that cutting edge. So we do believe there'll be volatility over the next 24 months as things turn on and turn off but generally speaking, we think we're well positioned.
And we will have a good 24, and we will see how things shake out in our fiscal 'twenty five.
Alright, thanks for the color.
And then just if I recall most of the Wolf speed acquisition. Most of the products are expected to kind of flow through that industrial side. How do you think about this segment just kind of given the macro.
Macro weakness you are seeing and we've been hearing about on the industrial side anything changed there in terms of your short term thinking and synergies or other fundamentals.
Well, yes.
We have a lot of thoughts about the <unk> business and I really don't want to comment on sort of the how they characterize their business today and we will certainly do that on our next earning call. When we talked very specifically about perhaps some of the changes we're going to be making in some of the focus is our focus that will make but I would highlight that it's a <unk>.
Very strategic.
Acquisition for us.
They have compelling technology and growing markets, whether its A&D industrial or telecom.
Tremendous built in customer base today that really spans our industry.
And they have a real strong.
Portfolio of high voltage lower frequency process technology that today may com does not have.
So we're very excited about it we've been working with the management team as Jack mentioned, we've gone through and.
<unk> done a lot of work to make sure that the resources that we bring over.
Support our growth as well as financial targets.
We think we've done a reasonable job they're trying to.
Sort of pick the team that will.
Ensure success in the future so very excited about that but I really can't comment about.
Exactly their business today, and we'll talk more about that after the close.
Thank you.
And our next question coming from the line of Quinn Bolton with Needham Your line is open.
Hey, guys I'll Echo my congratulations on steady execution in a challenging market.
But as Steve wanted to kind of follow up on the data Center question you guys have seen some some pretty strong growth in September and forecast to continue grow in December.
Immediately up off a low base, but it sounds like the transition to 400 800 in the future one six.
Modules is driving a lot of that growth and I guess im wondering on the PMD side of the business are you benefiting from a move back to more discrete pmt's that are silicon germanium or compound semiconductor based rather than Cmos based as we move to those higher speeds do you see that.
<unk> trend to higher speeds benefiting your PMD portfolio.
Right. So I would say that a few things.
Certainly the trend to the higher data rates is an area, where we want it.
Position ourselves, we use a wide range of process technologies, not just silicon base, but also three five based and so we'll make sure we bring the right technology to bear on the application. So I don't necessarily want to comment any further in terms of what what flavors or what process of technology were used.
For certain applications Thats a competitive.
That's competitive information, let's say.
The other thing I'll highlight is we have while we are seeing very strong growth on the higher data rates we are seeing.
A lot of weakness at the lower data rates, including the NRC, both at $25 100 G.
Whether it be.
Aoc's or plug a hole.
<unk> for the data center.
So the data center, our data center business is shifting its a bit of a mixed bag.
But the good news is we have some real bleeding edge technology for those.
PMT is that you mentioned, specifically the <unk> of the drivers the equalizers.
And we've really built out a really nice portfolio, there and I have to highlight that within each one of these product categories. There is multiple products, we find that our customers are designing their systems.
A very unique way so oftentimes.
We target applications.
In target footprints that are unique to those sockets and.
Given the speeds in the data rates, we feel like that.
So sorry. So this is not a commodity product, it's not something that's easily removed from a platform, let's say.
And so for that reason.
Very attractive business attributes.
And then my follow up question on the data Center business.
I wanted to ask you about the linear gluggable are just linear drive optics.
Feels like at recent trade shows that you talk show in open compute summit.
Everybody in the industry seems to be a geology net debt. There has been progress made on linear optics and just kind of wondering if you could give us an update as to what youre seeing on the linear side and when you may start to see linear driver linear optics, starting to move to production.
Applications. Thanks.
Thanks, Quinn, so certainly in our fiscal 'twenty four.
Is when youre going to really start to see linear drive kick in and I would just add to that that linear drive is not for all applications. It's really four applications, where you have either 100 G or 200 G per lane.
So in <unk> by 100, or an API 200 is sort of the optimal case.
Not being a short reach applications. So some of the other applications like <unk>.
<unk> hundred 50 G.
Those those type applications are going to continue to use DSP and gearboxes and thats really not an area of the market. We're focused on so I would just highlight that linear drive is not for all applications, it's not going to eliminate the necessity of dsp's within the data center I think it's applicable in search.
Applications and those are the applications that we're focused on.
Thank you.
And our next question coming from the line of Karl Ackerman with BNP Paribas. Your line is open.
Yes. Thank you gentlemen, two questions if I may as well I guess, the complete Datacom theme could you remind us which portion of your products are at 25 gig per lane and below I asked because im hoping you can juxtapose the demand trends you're seeing across hyperscale.
Versus on Prem Enterprise campus applications.
So 25 or below would be products like a clock and data recovery type products. It could be what we call combo chips, which could be a CVR and driver of CVR and TIAA I would say that's the bulk of the type of product, we sell it to that market than sort of a second degree to that would be.
Some of our lightwave products, including some of our lasers.
Yes.
Okay.
Okay. Thanks, Thanks for that Steve.
I guess pivoting to telecom then.
How should we think about the linearity of your telecom segment outlook in fiscal 'twenty four or over the next couple of quarters I asked because.
Several of your end customers suggest a mixed recovery, but noted an inventory overhang for.
<unk> Transceivers that may extend into mid 2024, So just curious to hear your thoughts on that segment. Thank you.
We're defining telecom your focus on the optical.
Segment or the long haul so in this case, we would in our vernacular we call that metro long haul business. We do think that there will be pockets of strength in 2024 with our metro long haul business, we see that some of those.
<unk> networks are being upgraded and also.
As I mentioned in my script, we're participating in some of those.
Those transitions.
I'll just highlight that these newer platforms are at 130 gigabytes, So theyre extremely high frequency.
The equipment is extremely expensive and that's an area, where we want to position ourselves.
Thank you.
And our next question coming from the line of.
<unk> <unk> with Raymond James Your line is open.
Thank you. Good morning, guys couple of questions, Steve first on little bit longer term question you talked about.
Market share gains contributing to fiscal 'twenty three growth could you maybe elaborate on that.
I guess sub segments, what end markets you are.
We're seeing market share opportunities I guess, what are the market share opportunities.
Opportunities at last fiscal year, and how should we think about.
Going forward.
Sort of opportunities do you see and what sort of I guess top line contribution.
Spectrum share gains.
Sure so the <unk>.
First thing I would just.
Just highlight is that we have a very diverse business and we don't typically see a significant portion of revenue on any one product. So when we talked about gaining market share.
A lot of small and medium sized wins at a lot of different customers. So I'll just highlight that right up front, certainly we are gaining market share in industrial and defense.
18% CAGR over the past three years that is due to the company's renewed focus on the market primarily.
It's based on doing more custom development work.
Doing modules and subsystems.
For certain applications and so.
We are really very focused on that market today that market is.
About 50% of our total business at least it was in fiscal 'twenty, 349%.
And we think we have leading technology that would.
It will be.
Great interest to the major Oems across this this space. The second thing I would highlight is we're definitely gaining market share in satellite communications, both in ground stations as well as on the satellite themselves with our various components. So that's an area where we are definitely.
Focus we think this sub segment of the market will grow for us in fiscal 'twenty four.
And.
Sort of.
Related to that is something I mentioned in the script, which is RF over fiber, which is a very attractive application within not only commercial communication systems, but also defense applications and so those are just three general areas that we're focused on but remember it's all about the new products and so to the extent we can.
More and more products every year.
That will be the driver for our growth in this past year, we did 15% more new products in the prior year.
And I mentioned in my script, our goal for fiscal 'twenty for us to do 50% more new products and certainly that takes into account.
The closing of the will speed team in December and then adding their contributions to our metrics. So we are right. We are a product driven growth company.
Got it.
Thanks for that answer.
Jack on the book to Bill it's good to see.
I guess it came in at one one.
And just trying to get some color on where youre seeing the most improvement.
Being driven by any particular sub segment.
And I see that data center youre guiding for growth, but if you could just give us some color on <unk>.
What's driving this improvement because the other two segments seems to be just chugging along at the bottom and if anything maybe some declines in industrial so just wondering what's driving the improvement in book to Bill.
Yes.
With regard to the book to Bill we have challenges as Steve had mentioned in some of his prepared remarks that we had gone through but if you look at some of the strength that we had seen here in the current quarter much of that was around <unk>.
As well as data center bookings that have come in and some of these are longer term type delivery arrangements. So they have longer lead times. So youll see some of that benefit us as we work our way through fiscal year 'twenty four.
Thank you and our next question coming from the line of Harlan sur with Jpmorgan. Your line is open.
Good morning, Thanks for taking my question and telecom. It just seems that all aspects of wired and wireless infrastructure spending continues to be at low levels.
Obviously, making it.
A little bit difficult for you guys to clear some of the excess inventories, but it does seem like quarter over quarter declines are shrinking. So does it feel like the telco business is at a bottom after three to four quarters of under shipping consumption.
Things like orders started to sort of flatten out here in telco.
So unfortunately, I don't know the answer to that question Harlan.
You are correct that the telecom our telecom segment has come down significantly.
In fact, I think that the.
Performance, we had in Q4 was.
At a three or four year low so.
A few quarters ago, we were in the low $60 million run rate.
We had been in that we had been at that run rate for four quarters.
No.
We really can't.
Say what.
A lot of confidence what that where that's going and sort of in the broader sense.
Year over year down, 24%, when we look out into our fiscal 'twenty four.
We think that the data center will continue to be a strong market for us we think the defense market will be.
A strong market for us.
And we are the most worried about the telecom market, we think that certainly it's weak now in.
When it turns and how it turns and who turns has yet to play out.
Yes, I appreciate that.
And then on the data Center segment. In addition to the strong demand pull for AI, which is obviously driving a lot of strong demand for 100 gig per channel solution and some of you guys.
Ben.
One large cloud and hyper scale all of that up until this point in time has not started their broader.
The center footprint upgrade to 400 gig, which is more like 50 gig per channel is that U S. Clare finally, starting to deploy 400 gig or it's still most of the data center strength for you guys still around AI and maybe some incremental networking capacity build outs.
Yes.
Without talking customer specific I would say that the strength that we're seeing.
We saw it in our fiscal 'twenty three and we think we will continue to see will be.
At the higher data rates, So 200, 408 hundred short reach multichannel.
<unk> that can support those data rates.
And then we have different levels of penetration at different accounts.
And we're by no means omni present in the in the industry.
We're a small player, but we have we have solid relationships not only with some of the ASIC manufacturers, but also the merchant DSP manufacturers, we want to support them.
They are offering a DSP, we want to make sure that we have are.
Drivers and Tia's designed in as referenced components if possible.
That's where we're positioning ourselves.
Our focus and then again I'll just highlight that we've done a lot of work over the past three to four years developing our laser portfolio that would be competitive in.
We have a variety of lasers in low rate production right now.
It's been a bit disappointing in the past 12 months in terms of getting getting sort of a breakout for that product area, but we have we have some great technology, there, including CW lasers, which can support silicon photonics and also laser arrays, which can support NEK.
Next generation.
Systems.
Thank you.
And our next question coming from the line of Mark <unk> with Jefferies. Your line is now open.
Hi, Thanks for taking my questions.
Had a couple.
I did have a question on the.
The 50% increase Steve you you suggested that will speed is adding into that which is why it's higher. So is there. So would we think about a normal productivity improvement of another 15%.
Organically and then the balance added from Wolfe speed I'm wondering if you are accelerating on what appears to be.
A.
A kind of a.
Flattish or slightly growing R&D expense base.
Yes, so I would say theres sort of two pieces there.
We will have a full year contribution from our <unk>.
European semiconductor centers, so there's there's a.
A segment of products or a grouping of products that will come to market in 2024, so that was not there.
In 'twenty three.
Then of course there'll be a will speak contribution and then there'll be some modest growth from our existing base may com I think that's the way you should really look at it I'll just add that a lot of the work that our linear.
Module systems group does.
We don't really include those in the product count most of their work is custom development and.
Not not made.
Alex.
Got you Okay. That's helpful and then.
And if you look at your revenues here like peak to trough.
Assuming things don't go down from here it looks it looks like your peak to trough revenues down 18% can you share with US your view to what extent is that decline in inventory correction versus.
Just a drop off of.
End market consumption of your products. Thank you.
Thanks, Thanks for the question so.
I think certainly inventory as an element of it. There is also end demand and you see major carriers.
Throttling back some of their spending so theres certainly.
Shifts within the.
And end user community, let's say in certain segments of the telecom specifically.
Generally speaking industrial and defense budgets are going up and we will continue to go up so that will be a <unk>.
<unk> benefit to our business.
We're in a good spot in the data center for the next few years.
On telecom.
There is broad based weakness.
Due to a variety of reasons some of which you highlighted.
We are not good at predicting the future and we would definitely get it wrong. So we're aware of the situation where as a result of that we're being very conservative with our financials. We're focused on generating cash as Jack highlighted we have been very reserved on our capital spending.
When we look at making investments we want to make sure we get good returns whether that is <unk>.
Investments internally or looking at targets and acquisition so.
This is the time when you want to be sort of conservative in.
And generate cash and that's our that's our posture as a company.
And with that if we can continue to grow our portfolio and strengthen the portfolio I think we will do just fine.
Yes.
Thank you.
And our next question coming from the line of.
Robert Kwan with Piper Sandler Your line is now open.
Hey, guys. Thank you for taking the question. This is Robert on for harsh Kumar here.
You guys talked about a little bit on.
China customers and revenue.
Decreasing and shifting over to Europe can you said shed some more light on how youre thinking about that geography, and whether or not.
Bounce back or any sort of recovery matters in your forecast going forward.
So any updates on that would be nice thank you.
Thanks for the question. So we are definitely forecasting conservatively when it comes to growth within the China region.
We today have facilities in four different cities.
Have about 85% to 90 employees there that are focused on growing our telecom business, our data center business.
There's still a significant amount of hardware that's supporting global networks. That's manufactured designed and manufactured in China. So we will continue to have a strong presence and grow our presence to make sure that we're gaining market share in that area.
That said, we are definitely investing in other areas to strengthen up our overall.
<unk> global footprint and so.
We recognized a few years ago that we need to strengthen our.
Our position within Europe that was one of the drivers for our acquisition to open up a small fab and we now call that may come European Semiconductor center, and we want to build off of that so in our minds, having a balanced portfolio of products customers and geographic revenue as the.
<unk>.
And.
But to the extent that.
China continues to be.
Be a major player in the markets. We're in we will continue to support them.
Thank you.
And just on the cost side as well as my follow up.
How should we be thinking about opex contribution.
Maybe the revenues come back to more normalized levels following.
This inventory correction.
I guess for.
We are in and around beef.
30% op margin.
Going.
Before this.
Any color on recovery, there would be would be helpful as well.
Yeah.
Sure maybe I'll say, just a comment and then pass it to Jack.
More complete answer I would just highlight that the team here at <unk> Com did a great job managing our total opex and if you compare our total opex from fiscal year 'twenty two to fiscal year 'twenty three it's almost flat.
Total opex and so.
That's a credit to the work that.
The finance organization, our operations R&D, everybody has really stepped up to try to manage overall expenses and we will continue to carry this footing Jack do you want to add to that.
Helpful. Stephen and we do take a very disciplined approach to our operating expenses and a lot of those operating expenses are within our research and development area and as Steve had mentioned.
And as earlier response, making sure we're getting returns from our investments in those R&D.
Opex numbers that we're spending is a critical area of focus for us, but along the way we continue to make some some structural type changes to our overall organization too to continue to optimize it and thats, resulting in the stability we've seen in our operating expenses.
And I'll also add with fiscal year 'twenty three we had two new acquisitions come online and we were able to absorb some of the additional operating expenses that came through those businesses by being disciplined with our our base business. So yes, I think theres still still some leverage that we have obviously as the topline grows we will be at.
Some operating expenses, but I think we'll be very disciplined as we were going back to fiscal year, 2020, one and into 'twenty. Two when we were growing the top line and we were growing the operating expenses at a much lower rate.
Then our revenue growth so more of the same as we continue going into fiscal year 'twenty four.
Thank you.
Our next question coming from the line of.
<unk> with Bank of America. Your line is open.
Hi, This is Lauren guy on for Vivek. Thanks, So much for taking my question.
Ill just start with noting that inventory dollars seem to come down sequentially in the quarter could you just speak a little bit on how you're managing inventory and utilization during the downturn and if you could give any comments segment specific on how inventory, okay that'd be great. Thank you.
Yes, no problem Laurie with regard to inventory we were pleased with some.
Some of the reduction that we had seen here in the current quarter things continued to be challenged.
Our careful in terms of where we invest our inventory dollars as well we had.
Noted this a couple of quarters back where we did see a bit of an uptick in our inventory and some of that was to support some of the orders and backlog that we had coming through so.
It's a careful balance as we work our way through the cycles here in terms of maintaining the appropriate levels of inventory to support our customer needs.
But but we've got a number of different metrics that we look to across the business.
That we're working to try and manage and I'll also add that we did have the two acquisitions that had come to us over the past fiscal year. So that was a bit additive to our inventory balances as well and we're working through some of the integration with with those businesses as well and hopefully we will see further refinement and improvement in some of the inventory metrics as we go.
But we are keeping a constant eye on.
The dynamics that we have across the business. So it's something that we pay close attention to.
Okay, great. Thank you and for my follow up just wondering how are you thinking about recent industry consolidation between momentum and cloud light in optical transceivers, how does that kind of impact your component first strategy.
I don't think it changes our overall strategy.
Okay. Thank you.
Thank you.
Thank you.
Next question.
And our next question coming from the line of Matt Ramsay with TD Cowen Your line is open.
Hey, guys. This is Shawn lockman on for Matt just two quick ones from me.
First off.
I was wondering if you could talk about the long term model a little bit more I know that you guys at one point had.
Billion dollar revenue target and that got pushed out a little bit, but I think it also came with maybe a double digit growth rate expectation.
A lot has changed since then but just wondering how youre thinking about it from here.
Thanks for the question Sean So.
Achieving $1 billion of revenue is a question of not if but when.
No.
And when we originally put that out there we had targeted.
Our fiscal 'twenty five.
It was going back maybe about 18 months or two years ago, and certainly there's been a lot of headwinds in the industry that have slowed us down. So we definitely over the past few quarters have stepped back from that target.
Given given our growth rate declining year over year, certainly that makes sense.
Right now we have a run rate of about $150 million.
If you annualize that and then Ed will speed onto that you can see may com getting into the low 700.
$1 million run rate.
Just by simple math and then Ah.
10% growth rate on that.
A few years gets us into that $1 billion revenue range.
So I think it's.
Our Crystal ball Sorta says sometime in the late 25 or 26 timeframe is not unreasonable that would mean that we would have to put up some pretty strong growth numbers, so theres tremendous risk associated with that so.
But when we think about planning and execution and focusing on positioning ourselves.
We that is the goal that we're targeting and I'll highlight that the way we're going to get there is expanding our Sam and we're adding very new vectors of growth to our portfolio and that should allow us to achieve these targets and the other thing I'll highlight is we will not sacrifice profitability for growth we are focused on.
On earnings per share.
As I mentioned and Jack mentioned $2.70. This year, we generated close to 200 million of net income for the full year and as we grow over the next two to three years, we want to grow the top line.
More importantly, we want to grow the bottom line and our model should support that our model consists of internal unique process technologies and products and going to the Merck.
Merchant market and being and running sort of a fabless business model. So we make.
Make full use of all of the major foundries on the Silicon side Global foundries tower jazz TSMC.
And others.
So we think we have a strong fighting chance to achieve our targets.
But there's lots of dynamics and lots of lots of wood to chop between now and then.
Thanks, Steve Thats really helpful. And then very quick clarification on the RF acquisition from Wolfe speed. There are there any regulatory impediments to closing that or is it just.
Getting the paperwork in order thanks.
So there were two regulatory hurdles, which we have gone through one of the HSR waiting period, which expired in the second was a U K approval, which was received so.
After that it's just making sure that will speed and May com.
Do the final work on on aligning.
Aligning so that when we close we will be operational and this is rather unique most companies would acquire a business and that integrate.
We are organizing in a way to have a lot of planning upfront. So that when we close it can be an instantaneous integration sort of speak.
And so we have.
Outside of that there is nothing stopping this.
Thank you.
And I assume we have a question from salaries.
From Stifel. Your line is now open.
Yes, just two quick follow ups.
So Steve first of all are you commented a little bit on the laser business, but I know, it's been a bit sort of fits and starts there and I'm. Just wondering is it a is it a market issue is it a yield issue is it because the technology is so unique just just trying to understand.
When the laser business could that could really start to to grow.
So we may com was very late to the market with our 25 G. DSP laser portfolio and so it's I would put put it in the category of timing and then when we really had our portfolio of established and we're selling it in the market.
Our timing just was not good in terms of generations and focus of a lot of the transceiver companies, we're starting to break through some of that and we're starting to gain traction.
So we don't see a performance issue, we don't see a yield issue, it's not a cost issue. Its really just knocking out the competition sort to speak and that takes time and it is taking more time than we had originally thought.
The other thing I'll add is as we go into the next fiscal year.
We are adding.
We plan to add <unk> to the portfolio. So this will mean CW lasers, FP lasers, DSP lasers, and <unk>, we do not manufacture of <unk>.
But we are the next add onto the product line will be <unk>, which generally speaking are considered high value lasers and they.
They generally command higher price points.
That's great and one quick one for Jack.
Churns this quarter should we sort of assume a similar level as you achieved in the September quarter.
Yes, I think you're referring to are.
Our turns business, where we receive orders and ship them in the same quarter, where <unk> been in the.
I'd say the mid teens, so I think thats, a safe assumption as we go forward.
Great. Thank you very much and congrats.
Thank you.
Thank you I'll now turn the call back over to Mr. Steve Daly for any closing remarks.
Thank you in closing I would like to thank the entire <unk> com team for their outstanding effort and commitment during fiscal 2023 may come is fortunate to have such hardworking and dedicated employees, which make these financial results possible and we all look forward to welcoming the <unk> team to make com I'm confident that together we can achieve.
Great results.
Thank you.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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