Q1 2024 MACOM Technology Solutions Holdings Inc Earnings Call

Welcome to me comes first fiscal quarter of 'twenty 'twenty four conference call.

This call is being recorded today Thursday February 1st 2024.

At this time all participants are in a listen only mode.

I will now turn the call to Mr. Steve Rossi make him as 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 Com's financial results for the first fiscal quarter of 2024.

I would like to remind everyone that our discussion today will contain forward looking statements, which are subject to certain risks and uncertainties as defined in the safe Harbor for forward looking statements contained in the private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those discussed today for.

For a more detailed discussion of risks and uncertainties that could result in those differences, we refer you to make com's filings with the SEC.

Management statements. During this call will also include a discussion of certain adjusted non-GAAP financial information 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 over the call to Steve Daly, President and CEO of makeup.

Thank you and good morning.

Before I review the quarter's results I would like to acknowledge the passing of John Ocampo, Our chairman this past November.

His contributions to the semiconductor industry educational institutions and charitable organizations help make the world a better place.

His vision to make May come a world class company lives on.

Now I will provide a general company update.

After that Jack Kober, our Chief Financial Officer will provide a more in depth review of our first quarter results for fiscal 2024.

When Jack is finished I will provide revenue and earnings guidance for the second fiscal quarter of 2024, and then we will be happy to take some questions.

Revenue for Q1 was $157 million adjusted EPS was <unk> 58 per diluted share and operating cash flow was approximately $33 million.

<unk> Com's core business was essentially flat quarter over quarter, but in total our revenue grew by four 5% sequentially, including approximately $6 million from the wall speed RF business acquisition, which closed on December 2nd 2023.

We ended the quarter with approximately $463 million in cash and short term investments on our balance sheet.

Our business remains healthy and profitable and we continue to generate strong cash flow, while improving and future growth opportunities.

In Q1, our book to Bill ratio was <unk> nine to one and our turns business or orders booked and shipped within the quarter was approximately 26% of total revenue.

Separately, our acquired RF business included a significant amount of backlog, which provides us increased visibility over the next few quarters.

Fiscal Q1 revenue by end market was as expected with industrial and defense at $77 million datacenter at $49 5 million and telecom at $30 6 million.

For the quarter <unk> was down 3% sequentially data center was up 22% sequentially and telecom was flat sequentially.

We maintain a highly diversified customer base, consisting of thousands of customers across a broad range of end markets and our strategy is to further diversify and expand our geographic and industry exposure.

We continue to see new growth opportunities in all our end markets.

Industrial <unk> defense is our largest market and has been steadily growing over the past few years.

Defense orders remained robust while industrial orders remain weak.

Overall revenue was down sequentially in Q1, primarily due to weakness in the industrial markets. We believe the long term trends for our IMT business are favorable and our growth strategies are working.

Our focus over the last few years has been on.

Building out and improving the competitiveness of our established mimicking diode product lines to cover more functions power levels and higher frequency ranges.

Expanding our addressable market opportunity through organic and new technology developments like kv caps, BARF filters and high frequency Gan.

Adding new product categories, such as RF over fiber.

And cross selling our optical and high speed analog product lines.

In total we address a wide range of applications within the I'd market, our opportunity pipeline with major defense customers is robust and our capture rate for future business looks strong.

Our data center end market revenues grew sequentially in Q1 demand continues to be very strong within 100 G per lane 400, G and 800 G short reach optical connectivity solutions.

Customer demand for shipments exceeded our expectations during our Q1 and Q4 as certain customers ramped up production.

Given the fast growth rates in shipments in the past two quarters, we are anticipating reduced shipments in Q2.

However, our current expectation is that the demand for high speed products will remain steady over the next couple of quarters.

May comps linear product portfolio continues to grow we recently announced the addition of a new dual channel laser driver and trans impedance amplifier or TIAA products supplementing our existing portfolio of four and eight channel products.

These products feature high bandwidth broad dynamic range and low noise to enable linear applicable or <unk> solutions and targeted applications and form factors.

These new solutions can provide a cost and power optimized solution for SSP Didi and SSP 112 optical form factors targeting Ethernet fiber channel and Infiniband applications.

We are also seeing the opportunity to further expand and other high volume applications by implementing linear drive connectivity and network interface cards or Nyx to support 100 G per lane optical to switch to server connections.

Finally, our R&D teams are actively engaged in developing the next generation solutions at 200 <unk> to further enable one six terabits per second applications.

We support a broad spectrum of applications, including DSP based solutions linear applicable optics and coherent.

The full breadth of May Coms high performance analog and photonics capabilities will be on display at this year's optical fiber conference or OFC in San Diego in March.

Our team is planning a variety of live demonstrations, including multiple hardware examples of 100 G per lane linear applicable optical or LPL module solutions showing interoperability.

200, <unk> single mode fiber, <unk> and 200 G active copper cable solutions.

These products will support high speed opportunities, including the latest disaggregated data center architectures.

Overall demand in our telecom end market continues to be weak with revenues down approximately 50% compared to just four quarters ago.

<unk> weakness is broad based spanning most of our larger market sub segments, including five G Metro long haul cable infrastructure and passive optical networks and in many of these markets customers continue to reduce inventory or suffer from weak demand.

While we remain cautious on certain portions of the telecom market. We are excited about the expansion of our technology portfolio and customer engagements within telecom.

We believe telecom remains an attractive and diverse market for <unk> com. It provides opportunities to differentiate based on product quality and performance.

As data speeds continue to increase across wireless wireline cable and satellite networks globally, we see numerous opportunities for may com and of course, we believe our RF power product line is well positioned to capture market share.

And over time, we expect to be much larger a much larger player in this market.

Yes.

We also believe the satcom, Portugal portion of the telecom market. We will continue to provide exciting opportunities for <unk> com in FY, 'twenty, four and beyond and.

And we see an expanding Sam for ground terminals gateways and space based hardware.

We can provide these customers unique high performance IC and module solutions based on proprietary semiconductor process technologies and capabilities.

In addition, we added to our already growing space in Satcom portfolio with the acquisition of linear communication group. This acquisition added design capabilities and solid state power amplifiers, or <unk> and Standalone linear rises for ground station and satellite applications.

We expanded our capabilities last year and millimeter wave frequencies with the opening of our May comp European Semiconductor Center, MSC, which recently received European space Agency qualification on certain of its key semiconductor processes and products.

And finally, we continue to expand our RF microwave and millimeter wave Assembly and test capabilities for special microwave components and sub assemblies for satellite military test equipment and other high performance applications.

We leverage our custom mimic in analog Ics with specialized PCB materials and unique interconnect technology and assembly techniques to create smaller sized solutions compared to our competition.

On a related note, we look forward to participating in the upcoming satellite conference in Washington DC in March.

The conference provides our team an opportunity to engage with various satellite manufacturers and industry groups to discuss requirements for traditional defense and commercial satellite constellations.

We see a great opportunity to support new commercial constellation's targeting high speed broadband internet connectivity and direct to sell applications.

We believe our comprehensive product portfolio is ideal for this market segment, which requires optical RF millimeter and microwave technologies from the IC component level up to the subsystem level.

I would like to update investors on our recently closed acquisition of Wolf speeds RF business.

We are excited to take ownership of this compelling technology and product portfolio and advance its ongoing business activities. The.

The acquired process technologies and products are highly complementary to our existing portfolio and support our goal of Sam expansion within our target markets are.

Our Gan on Silicon carbide RF product portfolio is now one of the most advanced and complete portfolios in the industry.

We estimate the RF Gan market to be a $2 billion, Sam and forecasts predict the market will grow to approximately $3 billion by 2027%, primarily driven by the increased adoption of Gan and defense and commercial wireless applications.

Our RF Gan portfolio now supports a wide range of low frequency applications, including ground based radar systems electronic warfare, and terrestrial communication systems as well as very high frequency applications, including various Dod systems, and terrestrial and satellite communication systems.

We believe our <unk> team has industry, leading depth and experience.

And I am confident we can disrupt the industry with further Gan EPPY semiconductor process and IC design innovation, which will ultimately lead to market share gains in the years ahead.

Speaker Change: A few other comments regarding the transaction.

First prior to closing we identified significant synergies and took actions to enable the business to meet an important objective to improve profitability and to be accretive to our bottom line.

And based on our current projections, we believe the acquisition will modestly contribute to our earnings in Q2.

Of course, we still have a great deal of work ahead of us to improve the overall profitability of the product line.

Second our respective integration teams established a plan to enable the acquired business to be fully operational within May come immediately after closing we met our goal in a few days after the closing the RF business was operating within May comms systems environment, including <unk>.

HR ERP and financial reporting systems.

And most important over the next 12 to 18 months, we expect to make meaningful progress on improving operational efficiencies profitability and expanding revenue within the RF business.

Speaker Change: In summary May Com now has a wider range of products than ever before many of these products have long life cycles and will produce revenue for years. After they've been introduced we view these business attributes as an inherent strength of our business model.

Before I turn the discussion over to Jack I would like to welcome Raj Shanmugarajah, an independent director to our board.

<unk> brings extensive telecommunications hardware expertise and decades of industry experience to make com. He.

Harsh V. Kumar: He was previously the president and CEO of Acacia.

Raj Shanmugarajah: Leader in coherent products and components, which was acquired by Cisco in 2021.

Raj Shanmugarajah: The management team and the board of directors look forward to working with Raj <unk>.

Jack will now provide a more detailed review of our financial results.

Thank you, Steve and good morning to everyone.

Revenue for the fiscal first quarter was $157 1 million up four 5% sequentially based on growth in our data center end market.

Jack: Revenue in Q1 included approximately $6 million, which was a partial month contribution from the RF business, which closed on December <unk> 2023.

On a geographic basis revenue from U S customers represented approximately 44% of our fiscal Q1 results.

Adjusted gross profit for fiscal Q1 was $93 1 million or 59, 2% of revenue compared to 61% in fiscal Q4.

The decrease was due to the RF business acquisition, which had gross margins lower than may comps corporate average.

The adjusted operating expense for our first fiscal quarter was $54 $5 million, consisting of research and development expense of $35 7 million and selling general and administrative expense of $18 8 million.

Total operating expenses were sequentially up by $1 4 million, mostly due to added R&D expense from the acquired RF business, partially offset by lower discretionary spending.

Adjusted operating income in fiscal Q1 was $38 $6 million.

Up from $37 2 million in fiscal Q4 2023.

Jack: Adjusted operating margin was 24, 5% down 20 basis points from fiscal Q4.

Jack: We see opportunities for improving our operating leverage over the course of fiscal year 2024, as we continue to focus on operational excellence and exercise discretionary spending discipline across the entire business.

Jack: Depreciation expense for fiscal Q1 was $6 2 million and adjusted EBITDA was $44 $7 million.

Trailing 12 months adjusted EBITDA was $193 2 million.

Adjusted net interest income for fiscal Q1 was $4 $6 million roughly $400000 higher than the prior quarter due to favorable yields on our short term investment portfolio.

We expect interest income to decline slightly next quarter based on the lower cash balance following the RF business acquisition.

Okay.

Our adjusted income tax rate in fiscal Q1 was 3% and resulted in an expense of approximately $1 $3 million.

Our net cash tax payments were approximately $900000 for the first fiscal quarter.

We expect our adjusted income tax rate to remain at 3% for fiscal year 2024 and into fiscal year 2025.

Jack: Fiscal Q1, adjusted net income was $41 8 million compared to $40 1 million in fiscal Q4 2023.

Adjusted earnings per fully diluted share was 58 utilizing.

Jack: Utilizing a share count of $72 3 million shares compared to <unk> 56 of adjusted earnings per share in fiscal Q4.

Based on the applicable accounting rules, our diluted share count was $72 3 million for Q1, including approximately one third of the 712000 shares issued to the seller in connection with the RF business acquisition.

Our Q2 diluted share forecast of 73 million will include all of the shares.

Now moving onto operational balance sheet and cash flow items.

Our Q1 accounts receivable balance was $101 $1 million up from $91 3 million in fiscal Q4, 2023, primarily due to incremental December revenue from the acquired RF business. As a result days sales outstanding were 59 days compared to 55 days in the prior quarter.

Inventories were $159 5 million at quarter end up sequentially from $136 3 million.

Inventory turns were one six times down sequentially in Q1 from one eight times in the prior quarter.

The sequential increase in our inventory balance and associated decrease in turns were a result of the acquired RF business.

This incremental inventory will support the business as strategic defense industrial and communications infrastructure customers.

We expect to improve inventory turns within the RF business in the coming quarters as we will now manage wafer starts and other material purchases for the RF business.

Fiscal Q1 cash flow from operations was approximately $33 $1 million down from $50 4 million sequentially due to increases in working capital items and one time acquisition related cost paid during the quarter.

As we look forward in fiscal year 2024.

We will remain focused on cash generation and we expect our cash flow from operations to exceed our Q1 level.

Capital expenditures totaled $4 7 billion for fiscal Q1.

During fiscal year 2024, we expect our capital expenditures to be in the range of $30 million to $35 million for the full fiscal year.

Jack: Even with our expansion of our operations, we continue to effectively manage our capex budgets.

Next moving on to other balance sheet items cash cash equivalents and short term investments for the first fiscal quarter were $463 3 million down $51 $2 million sequentially, driven by $75 million of cash consideration paid for the acquisition of the RF business, partially offset by cash generated from the base.

Makeup business.

Prior to handing the call back to Steve I would like to provide some additional commentary on the recently acquired RF business.

We see many opportunities for our combined teams to drive revenue growth and achieve operating excellence as we go forward in.

In addition, as previously noted the RF business will dilute our gross margins in the near term. However, we do expect the acquired business to be accretive to our Q2 non-GAAP earnings.

As we improve operational execution realize additional post closing synergies refined business strategies and accelerate the introduction of new products. We expect our consolidated corporate adjusted gross margins to return to historical levels in excess of 60%.

I will now turn the call back over to Steve.

Steve: Thank you Jack <unk> expects revenue in fiscal Q2, ending March 29, 2024 to be in the range of $178 million to $184 million.

Operator: Welcome to NACOM's 1st Fiscal Quarter 2024 Conference Call. This call is being recorded today, Thursday, February 1st, 2024. At this time, all participants are in the family mode.

Adjusted gross margin is expected to be in the range of 56% to 58% and adjusted earnings per share is expected to be between 56 and <unk> 62.

Based on 73 million fully diluted shares.

Operator: I will now turn the call over to Mr. Steve Ferranti, Maycombe's Vice President of Corporate Development and Investment Relations. Mr. Ferranti, please go ahead. Thank you, Olivia.

Steve: In fiscal Q2, we expect <unk> and telecom revenues to increase sequentially by approximately 20% and 50% respectively compared to the prior quarter date.

Stephen Ferranti: Good morning and welcome to our call to discuss MACOM's financial results for the first fiscal quarter of 2024. 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 State Harbor for Forward-Looking Statements, which contains the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today.

Data center revenues are expected to be that to be down 15%.

Two final comments on May comps base business.

Steve: First we see ongoing weakness in the telecom and industrial markets throughout 2024, and we expect our base business to be flat in Q2.

That said, even with the weak markets. We believe we can modestly grow our base revenues and profits in the second half of FY 'twenty four.

Stephen Ferranti: For more detailed discussion of risks and uncertainties that can result in those differences, we refer you to NACOM's 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 is provided in the company's press release and related Form 8K, which was filed with the SEC today. With that, I'll turn over the call to Steve Daly, President and CEO of Maypower. Thank you, and good morning.

Second I'll note at current revenue levels May Comms base business gross and operating margins are under pressure relative to prior periods as revenues recover in our base business that we expect to return to prior profit levels.

I would now like to ask the operator to take any questions.

Thank you ladies and gentlemen.

To ask a question you will need to press star one on your telephone and weak brand name to be announced to withdraw. Your question you May Press Star one again.

Steve Daly: Before I review the quarter's results, I would like to acknowledge the passing of John Ocampo, our chairman, this past November. His contributions to the semiconductor industry, educational institutions, and charitable organizations help make the world a better place. His vision to make Maycom a world-class company lives on. Now, I will provide a general company update. After that, Jack Kober, our Chief Financial Officer, will provide a more in-depth review of our first quarter results for fiscal 2024. When Jack is finished, I will provide revenue and earnings guidance for the second fiscal quarter of 2024, and then we will be happy to take some questions. Revenue for 2-1 was $157 million, adjusted EPS was $0.58 per diluted share, and operating cash flow was approximately $33 million. Maycom's core business was essentially flat quarter over quarter, but in total, our revenue grew by 4.5% sequentially, including approximately $6 million from the Wolfspeed RF business acquisition, which closed on December 2, 2023. We ended the quarter with approximately $463 million in cash and short-term investments on our balance sheet.

In consideration of time, we ask that you. Please limit yourself to one question and one follow up.

Please standby, while we compile the Q&A roster.

And our first question coming from the line of Thomas O'malley with Barclays. Your line is now open.

Good morning, guys and thanks for taking my question I guess the first one is on data center. So in your prepared remarks, you kind of talked about very strong growth in the.

In the September and December quarter, and kind of taking maybe a little bit of a breather from that in the March could you just describe the dynamic there is that.

Steve: <unk> inventory position being worked down as that demand slowing and then could you talk about is this a temporary pause in March or do you think that.

Things remain weak for longer than just one quarter.

Sure Good morning, Tom.

Maybe I'll make a few comments about the overall data center market and then we can talk about the revenue trends. So we are definitely seeing a lot of activity.

Across our customer base as it relates to.

Moving to the higher data rates, so with that as a general trend where there is incredible amount of work at both 400 800 gig solutions.

Steve Daly: Our business remains healthy and profitable, and we continue to generate strong cash flow while improving on future growth opportunities. In Q1, our book-to-bill ratio was.9 to 1, and our terms business, or orders booked and shipped within the quarter, was approximately 26% of total revenue. Separately, our acquired RF business included a significant amount of backlog, which provides us increased visibility over the next few quarters. Fiscal Q1 revenue by end market was as expected, with industrial and defense at $77 million, data center at $49.5 million, and telecom at $30.6 million. For the quarter, I&E was down 3% sequentially, Data Center was up 22% sequentially, and Telecom was flat sequentially.

We are providing products for those solutions in production today that has been driving our growth over the past couple of quarters.

Included in that is contributing products that we call linear drive products and while it's still very early we do see increased <unk>.

Steve: Interest in this product set in this architecture for.

These systems.

And so we're continuing to work with industry and customers to better understand how to use those type solutions and so ultimately we think that will add further growth as we move into the year and even into next year.

The other trend I would highlight is with the 100 gig <unk>, becoming more omni present across the market.

We think that will stimulate more demand.

Steve Daly: We maintain a highly diversified customer base, consisting of thousands of customers across a broad range of end markets, and our strategy is to further diversify and expand our geographic and industry exposure. We continue to see new growth opportunities in all our end markets. Industrial defense is our largest market and has been steadily growing over the past few years. Defense orders remain robust, while industrial orders remain weak.

For the sort of in the traditional architectures.

Our goal as a company is to focus on analog solutions we.

We want to have the <unk>.

Best.

Drivers Tia's Equalizers in linear drive products Cross point switches servicing the highest data rates. We believe we have one of the best signal integrity teams in the industry and we're very focused on NPI as it relates to other new product development.

Steve Daly: Overall, I&E revenue was down sequentially in Q1, primarily due to weakness in the industrial market. However, we believe the long-term trends for our I&E business are favorable, and our growth strategies are working. Our focus over the last few years has been on building out and improving the competitiveness of our established MIMIC and diode product lines to cover more functions, power levels, and higher frequency ranges, and expanding our addressable market opportunity through organic and new technology developments like KD Taps, BHA filters, and high-frequency GANS.

Now most of our.

Revenue in backlog like I mentioned is at the higher data rates.

We have a very strong backlog at 800 gig today.

We have very good visibility into our lead customers ramp schedules and as they're bringing hardware and they're beginning to modulate some of the shipments. That's why we're dipping down in Q2, but I would highlight that we actually as a company.

This past Q1, it was actually a record level.

A level of shipments into the data center at just about $50 million just under $50 million.

Steve Daly: Adding new product categories, such as RF over fiber, and cross-selling our optical and high-speed analog product lines. In total, we address a wide range of applications within the IED market. Our opportunity pipeline with major defense customers is robust, and our capture rate for future business looks strong. Our data center and market revenues grew sequentially in Q1. Demand continues to be very strong for 100G per lane, 400G, and 800G short-reach optical connectivity solutions.

So we're not really surprised or concern that there'll be a dip down.

We think the long term trends are favorable we expect to see moderation in Q3 and Q4 as other programs come online.

Steve: So while we're not giving guidance to for Q3 and Q4.

We have an expectation that we will remain or build upon the levels that we're seeing in Q2.

Very helpful. Thank you and just as a follow up when you guys closed the Wolf acquisition or when you. When you first talked about guidance you had talked about $150 million a year a year in revenue contribution obviously things get a little messy with a stub, but if I'm doing my math right here it looks like in March if you're talking about that.

Steve Daly: Customer demand for shipments exceeded our expectations during our Q1 and Q4 as certain customers ramped up production. Given the fast growth rates in shipments in the past two quarters, we are anticipating reduced shipments in Q2. However, our current expectation is that demand for high-speed products will remain steady over the next couple of quarters. Maycom's linear product portfolio continues to grow. We recently announced the addition of a new dual-channel laser driver and transimpedance amplifier, or TIA, products, supplementing our existing portfolio of four- and eight-channel. These products feature high bandwidth, broad dynamic range, and low noise to enable linear pluggable or LPO solutions in targeted applications and form factors. These new solutions can provide a cost- and power-optimized solution for SFP-DD and SFP-112 optical form factors targeting Ethernet, Fiber Channel, and InfiniBand applications.

Core business. The way you are the wolf is around $24 million, which is just a little bit below that $150 million run rate could you talk about one is that 150 kind of like a more of a run rate where that business is growing into that or whats going on with that acquired asset where it's a little bit below that run rate right now. Thank you.

Yes so.

The point of announcement of the transaction in August.

Until December when we closed.

The run rate for that business has declined it was over $40 million and it's come down to about a $30 million run rate.

When we look at our Q2 guide.

We are including in that $30 million contribution from the <unk> business, plus or minus a little bit.

Steve: So youre correct in your sort of comment that things have come down a bit that is primarily due to the telecom portion of the business being weaker than let's say it was six months ago.

Steve Daly: We are also seeing the opportunity to further expand in other high-volume applications by implementing Linear Drive Connectivity in Network Interface Cards, or NICs, to support 100G per lane optical-to-switch-to-server connections. Finally, our R&D teams are actively engaged in developing the next generation solutions at 200G per lane to further enable 1.6 terabits per second applications. We support a broad spectrum of applications, including DSP-based solutions, linear pluggable optics, and coherence.

But then when we look at.

The returns and the contribution and the cash generated by the business I have to just highlight number one we acquired a business that was fundamentally losing a lot of money it was.

It had very high expenses.

Very high material costs, and so we fundamentally changed the way that business is running.

Through the acquisition process that I talked about so when it actually came in to May com.

In the first full quarter it will it will.

Steve Daly: The full breadth of NACOM's high-performance analog and photonics capabilities will be on display at this year's Optical Fiber Conference, or OFC, in San Diego in March. Our team is planning a variety of live demonstrations, including multiple hardware examples of 100G per lane linear pluggable optical or LPO module solutions showing interoperability, 200G single-mode fiber LPOs, and 200G active copper cable solutions.

At about a penny in Q2 as our as our.

As our thinking and that is really the beginning.

As we look at the cash that will be generated over the next 12 months and then the following 12 months, we see that this business in the next 12 months can easily generate $20 million in that ballpark and then year to certainly in the mid <unk> in year three in the mid 40, so when we add those numbers up we get.

Pretty close to our purchase price.

Steve Daly: These products will support high-speed opportunities, including the latest disaggregated data center architecture. However, overall demand in our telecom end market continues to be weak, with revenues down approximately 50% compared to just four quarters ago. Demand weakness is broad-based, spanning most of our larger market sub-segments, including 5G, metro long-haul, cable infrastructure, and passive optical networks. In many of these markets, customers continue to reduce inventory or suffer from weak demand.

Steve: What we need to do as a business is number one we need to grow the top line, we certainly need to address the margins as the business has come in to make them as Jack pointed out with gross margins that are significantly below may comps corporate average.

We don't see that we have to spend a lot of capital to do the work on this business.

Steve: So we're actually quite excited and I'll also highlight that when this management team took over running may come back in 2019 that first quarter, where we provided results our gross margins were below 40%.

Steve Daly: While we remain cautious on certain portions of the telecom market, we are excited about the expansion of our technology portfolio and customer engagements within the telecom market. We believe the telecom market remains an attractive and diverse market for Macom, and it provides opportunities to differentiate based on product quality and performance.

Steve: And it took us eight quarters to get the business to 60% and another five quarters to get the business to almost 63% and so we plan on running that same program on this business, which is today at a run rate of.

Steve: Somewhere in $120 million and growing.

Steve Daly: As data speeds continue to increase across wireless, wireline, cable, and satellite networks globally, we see numerous opportunities for makers. And, of course, we believe our RF Power product line is well positioned to capture market share, and, over time, we expect to be a much larger player in this market. We also believe the SACCOM portion of the telecom market will continue to provide exciting opportunities for MACOM in FY24 and beyond, and we see an expanding SAM market for ground terminals, gateways, and space-based hardware. We can provide these customers unique high-performance IC and module solutions based on proprietary semiconductor process technologies and capabilities. In addition, we added to our already growing space in the SAPCOM portfolio with the acquisition of Linear Communication Group. This acquisition added design capabilities in solid-state power amplifiers, or SSPAs, and stand-alone linearizers for ground station and satellite applications.

And from a.

Business point of view.

We have an incredible team.

Credible technologists.

Arguably number two in the U S as a merchant supplier of RF power Gan.

It's an amazing fit to make comment and our team feels like we were just handed a bazooka and we're ready to go into the market and do some serious damage.

Thank you and our next question coming from the line of Quinn Bolton with Needham Your line is open.

Quinn Bolton: Hey, guys. Thanks for taking my question I guess I wanted to follow up on the on the Wolf business.

Just to try to size the opportunity there obviously, it's coming in below core may come.

Quinn Bolton: You mentioned that core may come margins are under pressure relative to the recent past just just given the industry conditions should we be thinking the core business probably in the 59 ish percent range and then Wolf takes you down to the to the guidance of 56, I think that to 58 for the quarter is that kind of the right ballpark just to be thinking about.

Where that base business.

Maybe settling in the near term.

Steve Daly: We expanded our capabilities last year in millimeter wave frequencies with the opening of our MECOM European Semiconductor Center, MESC, which recently received European Space Agency qualification on certain of its key semiconductor processes and products. And finally, we continue to expand our RF, microwave, and millimeter wave assembly and test capabilities for special microwave components and sub-assemblies for satellite, military, test equipment, and other high-performance applications. We leverage our custom MIMIC and analog ICs with specialized PCB materials and unique interconnect technology and assembly techniques to create smaller-size solutions compared to our competition.

Right so our.

Our modeling and our data right now and recent.

Quinn Bolton: Looking at the business as well as.

The trends my comments revolved around coming off that peak of just under 63% and when we were at $180 million run rate for the core business. We're now at $151 million run rate for the business and it's come down to 60%. We don't expect it to go below 60% for the core business. So.

I think you can then sort of back into the.

Gross margins on the <unk> side, which would get you.

Two gross margins and sort of the low 40% and Jack I'll turn it to you if you want to add to that.

That was a good summary, I guess just to follow up Quinn.

Steve Daly: On a related note, we look forward to participating in the upcoming satellite conference in Washington, D.C., in March. The conference provides our team an opportunity to engage with various satellite manufacturers and industry groups to discuss requirements for traditional defense and commercial satellite constellations. We see a great opportunity to support new commercial constellations targeting high-speed broadband internet connectivity and direct-to-sale applications. We believe our comprehensive product portfolio is ideal for this market segment, which requires optical, RF, millimeter, and microwave technologies from the IC component level up to the subsystem level. I would like to update investors on our recently closed acquisition of Wolfspeed's RFB. We are excited to take ownership of this compelling technology and product portfolio and advance its ongoing business activities.

There's many things that we've done to structurally improve the base may com business from an overall cost perspective that have helped to helped to preserve that 60% gross margin number that that Steve was referring to so expectation is as we go forward, we'll be able to apply some of those same things that we've done with the base business.

To the Wolf speed acquired business and that will help support us and then with with some lift from a revenue perspective on the base business as well as with the acquired business that will help improve margins as we go forward.

Got it and then follow up question was just you guys.

Quinn Bolton: I guess Wolfe will continue to operate that fab for the first two years and so.

Quinn Bolton: Is there anything that handicaps, you from being able to get into that fab to start to run your processes or to try to drive higher yields I mean are you somewhat.

Steve Daly: The acquired process technologies and products are highly complementary to our existing portfolio and support our goal of spam expansion within our target market. Our Xanon silicon carbide RF product portfolio is now one of the most advanced and complete portfolios in the industry. We estimate the RF CAN market to be at $2 billion SAM, and forecasts predict the market will grow to approximately $3 billion by 2027, primarily driven by the increased adoption of CAN in defense and commercial wireless applications. Our RFK portfolio now supports a wide range of low-frequency applications, including ground-based radar systems, electronic warfare, and terrestrial communications systems, as well as very high-frequency applications, including various DoD systems and terrestrial and satellite communications

Constrained with what you can do while the fab is being operated by Woolford, you think you've got free access to the fab you can start to implement your blocking and tackling your know how to start to improve those yields.

Immediately post close.

Sure so.

I'll provide a lot of.

Background information to help answer that question so.

We have today, a foundry relationship with will speed, where we buy wafer.

Wafers out effectively a fixed price.

So that's point number one and that will stay in place until the fab conveys in about two years.

<unk>.

We'll speed as part of the transaction we made there was.

A significant portion of $50 million of stock.

Moving to <unk>. So they are now an equity holder in May com.

Steve Daly: We believe our VANT team has industry-leading depth and experience, and I am confident we can disrupt an industry with further GAN-EPI, semiconductor process, and IC design innovation, which will ultimately lead to market share gains in the years ahead. A few other comments regarding the transaction. First, prior to closing, we identified significant synergies and took actions to enable the business to meet an important objective, to improve profitability and to be accretive to our bottom line. And based on our current projections, we believe the acquisition will modestly contribute to our earnings in Q2. Of course, we still have a great deal of work ahead of us to improve the overall profitability of the product line. Second, our respective integration teams established a plan to enable the acquired business to be fully operational within MACOM immediately after closing.

Aligning our.

Our strategic goals.

Third we have something called a fab operating committee, which is comprised of both will speed and may comp staff, who will work together to implement change in the fab with will speed support.

And as you can see.

Then there.

It's beneficial for them to improve execution in yield because it lowers their cost of wafers, they're selling to us. So everybody's goals are aligned and so it's.

We're just coming out of the gate, it's been two months, we have an amazing working relationship with the staff.

And North Carolina, both inside the fab in their technologists and whatnot around the fab. So we will be able to affect change, but there's there is boundary conditions and I want to be clear that there is there a structure around that to make sure that we're able to do that and so that is that was an important part of that.

Steve Daly: We met our goal, and a few days after the closing, the RF business was operating within Maycom's systems environment, including IT, HR, ERP, and financial reporting systems. And, most important, over the next 12 to 18 months, we expect to make meaningful progress on improving operational efficiencies, profitability, and expanding revenue within the RF business. In summary, MAKOV now has a wider range of products than ever before.

Transaction from E Com and we were able to have a great meeting of the minds on how to do that so that would certainly address making improvements inside the fab when you move outside the fab and you look at the back end Assembly and test as well as all of the other inbound material costs associated.

The business, we have full control over that so we can make changes to <unk> contracts. We can look at yield enhancement on assembly and test and we can bring the full force of May com to the back end, which is a significant part of the Cogs to effect change and we're doing that immediately.

Steve Daly: Many of these products have long life cycles and will produce revenue for years after they've been introduced. We view these business attributes as an inherent strength of our business model. Before I turn the discussion over to Jack, I would like to welcome Raj Shanmugaraj, an independent director, to our board.

<unk> has a great team over in Malaysia, a great team out in Morgan Hill.

Jack Kober: Raj brings extensive telecommunications hardware expertise and decades of industry experience to MACAW. He was previously the president and CEO of Acacia, a leader in coherent products and components, which was acquired by Cisco in 2021. The management team and the board of directors look forward to working with R.O.D. Jack will now provide a more detailed review of our financial results. Thank you, Steve, and good morning to everyone.

They are rolling up their sleeves with the <unk> staff and we're going to work. So there's many pieces that will will be focused on.

And then the other item I will just highlight that Theres also business related practices that we will change and we'll bring in line with the way may come runs its business. For example, we don't like to rely on distribution channels, we like to deal with our major customers.

Jack Kober: Revenue for the fiscal first quarter was $157.1 million, up 4.5% sequentially, based on growth in our data center and market. Revenue in Q1 included approximately $6 million, which was a partial month contribution from the RF business, which closed on December 2, 2023. On a geographic basis, revenue from U.S. customers represented approximately 44% of our fiscal Q1 results. Adjusted gross profit for Fiscal 2-1 was $93.1 million, or 59.2% of revenue, compared to 60.1% in Fiscal 2-4. The decrease was due to the RF business acquisition, which had gross margins lower than Maycom's corporate average.

Direct and we would rather engage and sell the full product line and so we'll be looking at optimizing distribution.

The use of distribution for selling these products will certainly be looking at all the contracts that have been put in place whether it be long term purchase agreements or foundry agreements. We would certainly want to make sure that we can form that to the may comp standards. So we certainly have a lot of work to do and as Jack mentioned and I highlighted.

<unk>.

This is going to not be.

And instantaneous gratification Theres, just a lot of hard work here and youre going to our thinking as youll see incremental improvement over time, and if we do that it will meet our financial targets and also.

We will begin to dominate in the market.

Jack Kober: The adjusted operating expense for our first fiscal quarter was $54.5 million, consisting of research and development expense of $35.7 million and selling, general, and administrative expense of $18.8 million. Total operating expenses were sequentially up by $1.4 million, mostly due to added R&D expense from the acquired RF business, partially offset by lower discretionary spending. Adjusted operating income in fiscal Q1 was $38.6 million, up from $37.2 million in fiscal Q4. Adjusted operating margin was 24.5%, down 20 basis points from fiscal Q4. We see opportunities for improving our operating leverage over the course of fiscal year 2024 as we continue to focus on operational excellence and exercise discretionary spending discipline across the entire business. Depreciation expense for fiscal Q1 was $6.2 million, and diluted EBITDA was $44.7 million.

Thank you and our next question coming from the line of Vivek Arya with Bank of America Securities. Your line is now open.

Thanks for taking my questions and thank you for giving the color around the steps.

Required to drive on the cost synergies I was wondering if there is a way to quantify.

When you think the combined entity can get to that 60% or so.

Both margin level is that an eight quarter type timeline as you described in your historical activities or should we think about.

Different than something you can do.

<unk> faster.

So.

We don't have sharp answer for you on that.

Starting in the low <unk>, we'd like to exit our fiscal year close to 50, if we can get to a 49% to 50% for this business segment.

Quinn Bolton: Going into our fiscal 'twenty, five I think that would be a win.

Quinn Bolton: So thats, where sort of head down focused on pulling all the levers we can to make that happen.

So I can't necessarily put a timeline on it.

Our end target, but I can tell you in the near term we plan on making significant.

Changes and part of that also will have to do with the mix that we will have to do with the amount of growth that comes through the business.

Jack Kober: Trailing 12 months adjusted EBITDA was $193.2 million. Adjusted net interest income for Fiscal 2-1 was $4.6 million, roughly $400,000 higher than the prior quarter due to favorable yields on our short-term investment portfolio. We expect interest income to decline slightly next quarter based on the lower cash balance following the RF Business Act. Our adjusted income tax rate in fiscal Q1 was 3% and resulted in an expense of approximately $1.3 million. Our net cash tax payments were approximately $900,000 for the first fiscal quarter.

And so there's just a lot of factors there that make it difficult to to give you that firm answer but.

Quinn Bolton: But I can say this we do fundamentally understand the business when we look at the industry and we look at competition and we look at their gross margins, we know that Theres a lot of room to go with this technology.

Yes.

Alright, and then.

Can you give us a sense for what is the core may come.

Industrial and defense revenue that Youre guiding to in the March quarter, and where do you see the trough on the industrial side I realize it's.

Its tough given all of the cyclical.

Headwinds, but.

What is sort of the core may come industrial you're guiding to in video see the trough for that business I think you mentioned something about the back half.

Jack Kober: We expect our adjusted income tax rate to remain at 3% for fiscal year 2024 and into fiscal year 2025. Fiscal Q1 adjusted net income was $41.8 million compared to $40.1 million in Fiscal Q4. Adjusted earnings per fully diluted share was 58 cents, utilizing a share count of 72.3 million shares, compared to 56 cents of adjusted earnings per share in fiscal Q4.

Speaker Change: Company. So I was just hoping you could give us some color. So we can model that business nicely.

Sure I'll start with that and then Jack can add so going into Q2, our base business the.

The industrial and defense, we think will be up about five or 6%.

Think telecom will be up about eight or 9% and we know that the data center will be down about 15%. So that is for the core business now when you compare that to my commentary for the full business industrial and defense going in Q2 will be up 20% telecom 50%.

Jack Kober: Based on the applicable accounting rules, our diluted share count was $72.3 million for Q1, including approximately one-third of the 712,000 shares issued to the seller in connection with the RF Business Act, and our Q2 diluted share forecast of 73 million will include all of them. Now, moving on to the Operational Balance Sheet and Capital Awareness. Our Q1 accounts receivable balance was $101.1 million, up from $91.3 million in fiscal Q4, 2023, primarily due to incremental December revenue from the acquired RFBIS. As a result, these sales outstanding were 59 days compared to 55 days in the prior quarter. Inventories were $159.5 million at quarter end, up sequentially from $136.3 million. Inventory turns were 1.6 times, down sequentially in Q1 from 1.8 times in the prior quarter.

And data center.

Aim at that 15% drop obviously, the big step up in the aggregate numbers are due to the <unk> contribution of that $30 million and it's essentially evenly split between the two market segments.

Jack you want to add to that I think the only other item to add was with regard to the industrial piece of that business. So I think we've been discussing how the industrial piece has been been down for us over the past couple of quarters.

That's something that we continue to manage but I think we've been we've been pleased with the performance on the defense side of the business, which which is really supportive things within that end market and weak we continue to see opportunities on the defense side to ultimately drive improvements in that end market as we go forward.

Thank you and our next question coming from the line of harsh Kumar with Piper Sandler Your line is open.

Jack Kober: The sequential increase in our inventory balance and associated decrease in turns were a result of the acquired RFB. This incremental inventory will support the business's strategic, defense, industrial, and communications infrastructure customers. We expect to improve inventory terms with the RF business in the coming quarters as we will now manage wafer starts and other material purchases for the RF. Fiscal Q1 cash flow from operations was approximately $33.1 million, down from $50.4 million sequentially due to increases in working capital items and one-time acquisition-related costs paid during the quarter.

Harsh V. Kumar: Yeah, Hey, guys. Congratulations on closing the deal and looking forward are you guys doing an excellent job on integration.

Steve I did have a question a follow up on kind of what Vivek was just asking about you said book to Bill for the business was 0.9 in the December quarter sounds like if I take your guidance of the core business being roughly flattish is it fair for me to assume that the book to Bill is now very close to one.

And if you are talking about a recovery in your business in the back half and the book to Bill start to climb.

The reason why I asked that historically when the book to those thoughts a client like that signals a bottom is it fair for me to assume that your industrial business is bottoming out right about now.

Jack Kober: As we look forward in fiscal year 2024, we will remain focused on cash generation, and we expect our cash flow from operations to exceed our Q1 level. Capitalist Venues totaled $4.7 million for fiscal Q1. During fiscal year 2024, we expect our capital expenditures to be in the range of 30 to 35 million for the full fiscal year. Even with our expansion of our operations, we continue to effectively manage our Catholic budget. Next, moving on to the other balance sheet items. Cash equivalency short-term investments for the first fiscal quarter were $463.3 million, down $51.2 million sequentially, driven by $75 million of cash consideration paid for the acquisition of the RF business, partially offset by cash generated from the base maker.

Plus or minus a quarter.

So a couple of things the Youre right. The book to Bill if we just go back a quarter or two so in Q3 of our fiscal 'twenty three it was <unk> nine.

And then we ended fiscal 'twenty three with the book to Bill of one one and then this past quarter. It was up <unk> nine.

Okay. So.

The weakness.

It was really telecom.

And to a certain degree data center related.

And the strength was.

So the segment that was the strongest was.

Primarily driven by the day.

And it was we had some very good bookings there.

As Jack said, our industrial business was still remains weak.

Jack Kober: Before I hand the call back to Steve, I would like to provide some additional commentary on the recently acquired RF system. We see many opportunities for our combined teams to drive revenue growth and achieve operating excellence as we go forward. In addition, as previously noted, the RF business will dilute our gross margins in the near term. However, we do expect the acquired business to be accretive to our Q2 non-gap earnings. As we improve operational execution, realize additional post-closing synergies, refine business strategies, and accelerate the introduction of new products, we expect our consolidated corporate adjusted growth margins to return to historical levels in excess of 60%. I will now turn the call back over to you. Thank you, Jack.

Sure, where we're able to call a bottom per se.

But we feel that we can.

Move the base business.

During Q3, and Q4 I mean, we've been out of 151.

Million now for a few quarters right. So.

Whether we're at the bottom or not it's just so hard to tell so I.

I really can't say anything more than that.

Fair enough, thanks, Steven and I did have a follow up on another question that was asked earlier on your data center strength.

Harsh V. Kumar: Wherever we look we see this generative AI driving compute memory and it would imply that connectivity is rising which is really good for you guys. It seems like you've got the products.

You talked about strong demand, but you are talking about slippage I think you said this quarter in March and I think you said.

Maybe potentially slipping into the June quarter, as well is that correct about March and June quarters, and then B is that simply you are aligning your shipments to customer needs, which would imply that the customers are weak or is there something else going on.

Steve Daly: Maycom expects revenue in fiscal Q2 ending March 29, 2024 to be in the range of $178 to $184 million. Adjusted Gross Margin is expected to be in the range of 56 to 58 percent, and Adjusted Earnings Per Share is expected to be between 56 and 62 cents based on 73 million fully diluted shares. In fiscal Q2, we expect I&E and telecom revenues to increase sequentially by approximately 20% and 50%, respectively, compared to the prior quarter. Data center revenues are expected to be down 15%. Two final comments on Mekong's base business.

So theres a lot of moving parts in the data center first.

Terms of the back half of 'twenty four our fiscal 'twenty four.

When we look at the data center business, we think that there's opportunities for growth exactly what that will be we're not we're not able to say today second there is an there is an overhang right now in the data center business of the lower data rates 25 gig a lot of the traditional NRC.

Harsh V. Kumar: Alex that we sold into being certainly very very weak.

Operator: First, we see ongoing weakness in the telecom and industrial markets throughout 2024, and we expect our base business to be flat in Q2. That said, even with the weak markets, we believe we can modestly grow our base revenues and profits in the second half of FY24. Second, I'll note at current revenue levels, Macom's base business gross and operating margins are under pressure relative to prior periods. As revenues recover in our base business, we expect to return to prior profit levels. I would now like to ask the operator to take any questions. Thank you, ladies and gentlemen. To ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced.

We're not expecting to really come back in any earnest in the back half.

We think the growth in the back half will be at the higher data rates.

Third what Youre seeing here really is movement around the major customers and their ordering patterns as they start to ramp up and hit steady states and so as we've seen many times in the data center. There is prime the pump and drive ramps and then pump the brakes.

And that's where in that little bit of a moat I think in Q2, we're now.

A lot of our lead customers are digesting a lot of the inventory.

Before they do another step up the other thing I'll highlight is these parts do have long lead times and so the customers know that so as we start to move into this quarter and begin beginning of Q3, we'll have very good visibility into the back half of the year, but I will say and to your point the trends are very supportive of our.

Operator: To withdraw your question, you may press star 1 1 again. For consideration of time, as you please limit yourself to one question and one follower. Please stand by while we compare the cameras. And our first question comes from the line of Thomas O'Malley with Barclays Millennials. Good morning, guys, and thanks for taking my question. I guess the first one is about the data center. So in your prepared remarks, you kind of talked about very strong growth in the September and December quarters and kind of taking, you know, maybe a little bit of a breather from that in March. Could you just describe the dynamic there?

Our core strategy, which is focusing on the higher data rates.

And we have a compelling product line, we think.

We have some of the best drivers and <unk> in the industry.

We have been seeing.

Harsh V. Kumar: <unk> not only from.

Let's say the major customers, but we're also seeing pull from the cloud.

Harsh V. Kumar: Folks themselves, where they're beginning to become believers that linear drive.

Harsh V. Kumar: Can have a place in their networks.

And the last point I'll make about the datacenter as everybody knows with the with the new architectures of these systems. There is an incredible amount of short reach optical or or.

Or electrical connectivity or cables, so the Sam.

Steve Daly: Is that, you know, inventory positions being worked down? Is that demand slowing? And then could you talk about, is this a temporary pause in March, or do you think that, you know, things remain weak for longer than just one quarter? Sure. Good morning, Tom.

In this area is growing rapidly and there's been lots of.

Publications for various folks talking about port counts or whatnot, but theres just tremendous growth that folks are predicting.

And so we'll see if that comes to fruition, but we feel like we are in a good spot.

Thank you.

And our next question coming from the line of Carl.

Steve Daly: Maybe I'll make a few comments about the overall data center market and then we can talk about the revenue trend. So we are definitely seeing a lot of activity across our customer base as it relates to moving to higher data rates. So that is a general trend where there's an incredible amount of work at both 400 and 800 gigabit solutions. We are providing products for those solutions in production today. That has been driving our growth over the past couple of quarters. Included in that are contributing products that we call linear drive products.

Carl: I'm sorry with Jpmorgan. Your line is now open.

Good morning, Thanks for taking my question and congrats on getting the RF business the acquisition closed.

The newly acquired <unk> business in Telecom you guys had expected a slight decline in the December quarter, marking sort of five quarters of consecutive declines it looks like <unk>.

<unk> was actually down more than that.

The December quarter, obviously, we know wired and wireless infrastructure trends continuing to be weak, but for March you actually thinking 18, 9% sequential growth. So do you guys believe that the business has bottomed and maybe telco sort of bounces along the bottom beyond the March quarter.

Steve Daly: And while it's still very early, we do see increased interest in this product set, in this architecture for, you know, these systems. And so we're continuing to work with industry and customers to, you know, better understand how to use those types of solutions. And so, ultimately, we think that will add further growth as we move into the year and even into next year. The other trend I would highlight is that with the 100GX30s becoming more omnipresent across the market, we think that will stimulate more demand for them, sort of, in traditional architectures. So our goal as a company is to focus on analog solutions. We want to have the best drivers, TIAs, equalizers, linear drive products, and cross-point switches to service the highest data rates. We believe we have one of the best signal integrity teams in the industry.

So.

Possibly so the telecom market for US has three three.

Three areas that are positive right now number one is.

Metro long haul, where we see ramp ups of.

130, gigabyte systems very early but.

There's a lot of spending and pull for our products in this market.

Carl: Second is satcom satellite communications.

We are seeing growth in.

And many opportunities to expand our business in this area.

So that is absolutely supporting our near term revenues, we are starting to see some amount of.

Carl: Growth in China for small cell deployments and front haul.

Demand, let's say modest but it is an improvement over where we were a quarter or two ago, but to your point you are right. We are we have come down significantly from over 60 million to now this past quarter $27 million.

Steve Daly: And we're very focused on NPI, as it relates to that or new product development. Now, most of our revenue and backlog, like I mentioned, is at higher data rates. We have a very strong backlog at 800 gigabytes today. We have very good visibility into our lead customers' ramp schedules. And as they're bringing hardware in, they're beginning to, you know, modulate some of the shipments. That's why we're dipping down in Q2.

Carl: A lot of the growth we had in 'twenty two 'twenty three was cable infrastructure that's essentially.

Gone away.

We had a lot of revenue with PON passive optical networks, we are today shipping.

Alex into pond at a very muted level, it's not zero, but it's quite low so.

Carl: The last point I'll highlight is <unk> is still a very important market for <unk> and while a lot of people are quite negative about telecom, we actually are reinvigorated and quite excited about.

Steve Daly: But I would highlight that, as a company, this past Q1 was actually a record level of shipments into the data center at just about $50 million, just under $50 million. So we're not really surprised or concerned that there'll be a dip. We think the long-term trends are favorable, but we expect to see moderation in Q3 and Q4 as other programs come online. So while we're not getting guidance for Q3 and Q4, we have an expectation that will remain or build upon the levels that we're seeing in Q2. Very helpful.

Being able to bring the RF power business from Wolfe speed into a hole.

Arrange of customers.

Is that either they were not engaged in or where we want to grow the positions where they were engaged and so we believe that.

Together, we can gain more market share in the <unk> market space together and so that's part of our core strategy.

I appreciate that and then maybe just a quick update on our linear driver because it seems like it.

There will be more demand for these types of solutions as the industry moves to 160 speak later this year because.

Steve Daly: Thank you. And just as a follow-up, when you guys closed the Wolf acquisition, or when you first talked about it, you talked about $150 million a year, a year and then revenue contribution. Obviously, things get a little messy with this stuff.

The DSP based upon 16 modules consumed so much power so maybe give us an update on the traction that we need to drive on the current 100 gig per lane upcoming 200 gig per lane and the team actually shipping solutions in high volume production.

Steve Daly: But if I'm doing my math right here, it looks like in March, if you're talking about that, Thank you. Uh, yeah, so, from the point of announcement of the transaction in August until December when we closed, the run rate for that business has declined. It was over $40 million, and it's come down to about $30 million.

Right. So a few things there is a lot of work going on in the industry for interoperability at 100 G per lane for linear drive. So that is that is really the state of the industry and so you are starting to see.

Various.

Publications in fact, there was a I think the industry get together.

Steve Daly: When we look at our Q2 guide, we are including in that a $30 million contribution from the Wolfspeed business, plus or minus a little bit. So you're correct in your sort of comments that things have come down a bit. That is primarily due to the telecom portion of the business being weaker than, let's say, it was six months ago. But then when we look at, you know, the returns on the contribution and the cash generated by the business, I have to just highlight, number one, we acquired a business that was fundamentally losing a lot of money. It was – it had very high expenses, very high material costs, and so we fundamentally changed the way that business was running through the acquisition process that I talked about. So when it actually came into MACOM in the first full quarter, it will add about a penny in Q2, is our thinking. And that is really just the beginning.

I think it was in October where you had.

Some of the major cloud companies presenting data showing a bit error rate and functionality of linear drive systems actually showing system level data and the data is compelling.

So now what needs to happen of course to support this is more switches being available not just the tomahawk five but other platforms, whether it's Cisco silicon one or others.

So there needs to be more switches that can handle the linear drive because the <unk> needs to support the linear driver chip that we make so.

That is the state of that business.

We feel like we're right on the edge of that discussion and our high performance connectivity team is doing a phenomenal job there.

Steve Daly: As we look at the cash that will be generated over the next 12 months and then the following 12 months, we see that this business in the next 12 months can easily generate $20 million in that ballpark, and then year two, certainly in the mid-30s, and year three in the mid-40s. So when we add those numbers up, we get pretty close to our purchase price. What we need to do as a business is, number one, we need to grow the top line. We certainly need to address the margins, as the business has come into Maycom, as Jack pointed out, with gross margins that are significantly below Maycom's corporate average. We don't see that we have to spend a lot of capital to do the work of this business.

Carl: When you talked about 200 gig per lane.

We will as I mentioned in my script will be demonstrating some products there in that regard and so we are of course also very active.

I think there is less.

Activity right now in that area. There are certain constraints a lot of the first generation 200 gig per lane will be single mode fiber using.

Silicon Photonics and <unk> in that.

We think before the volumes kick in it has to switch over to <unk>.

Laser.

Don't make big sell lasers at 200 gig I'm not sure.

It's very early days for that but there's things that need to come together in the ecosystem to support Super High volume 200 gig.

And it's still very early so.

Again, it's something that we're focused on.

We will be positioned well.

Steve Daly: So, we're actually quite excited, and I'll also highlight that when this management team took over running Maycom back in 2019, in the first quarter where we provided results, our gross margins were below 40%. And it took us eight quarters to get the business to 60% and another five quarters to get the business to almost 63%. And so we plan on running that same program on this business, which is today at a run rate of somewhere in the 120 million and growing. And from a business point of view,

When our customers want to ramp up those technologies.

Thank you.

Our next question coming from the line of David Williams with the Benchmark Company. Your line is now open.

Hey, good morning, and let me add my congratulations on the closing of both.

I guess my first question has just been.

Around that acquisition has there been anything any surprises either positive or negative.

You've come across and maybe just kind of touch on what you've done in terms of in terms of integrating that into the business things.

Sure.

I would say that no there was really no surprises we spent from.

While we spent a fair amount of time in due diligence to get to know the people to staff the organization the infrastructure.

Steve Daly: We have an incredible team, incredible technology. Arguably number two in the U.S. as a merchant supplier of RF power GANS. It's an amazing fit to Mekong, and our team feels like we were just handed a bazooka, and we're ready to go into the market and do some serious damage. Thank you for watching.

<unk>.

Had just a great engagement with the <unk> team so.

So the post close there was no real surprises as I highlighted in the script most companies will acquire a company that integrate after closing.

Had set up our planning process to allow us to execute that integration the day after we closed essentially.

Operator: Please subscribe to our channel, and our next question will come from the line of Quinn Bolton with New Hammy when it's open. Hey guys.

And I have to really think that will speed team as well as our team for working so well together I will say that the customers and the industry seems to be very receptive of this change. They now recognize that given may com is very focused on RF and microwave that it's a perfect fit and a lot of the things that were on the drawing board for <unk>.

Operator: Thanks for taking my question. I just wanted to follow up on the Wolf business, you know, just to try to size the opportunity there. Obviously, it's coming below core MECOM.

Jack Kober: Steve, you mentioned that core MECOM margins are under pressure relative to the recent past, just given industry conditions. Should we be thinking the core business probably in the, you know, kind of 59-ish percent range, and then Wolf takes you down to the guidance of 56, I think, to 58 for the quarter? Is that kind of the right ballpark just to be thinking about where that base business may be settling in the near term? Right, so our modeling in our data right now, in recent, in looking at the business, as well as the trends, my comments revolve around coming off that peak of just under 63%. And, you know, when we were at 180 million run rate for the core business, we're now at 151 million run rate for the business, and it's come down to 60%.

Next generation <unk>.

<unk> our products. We can now together implement is a priority. So I think the customers will benefit from that.

But I would say generally speaking no surprises there is certainly a lot of heavy lifting that we need to do as Jack and I have talked about.

The team the management the production workers are application staff are amazing.

A very strong footprint across Europe.

With their sales and applications team.

A stronger then we win that we had so we're really excited about that very strong team in China.

And some great manufacturing capabilities not only in North Carolina, but also in California, where Theyre Morgan Hill facility.

Jack Kober: We don't expect it to go below 60% for the core business. So, I think you can then sort of back into the gross margins on the Wolfspeed side, which would get you to gross margins in sort of the low 40%. And, Jack, I'll turn to you if you want to add to that. I think that was a good summary, I guess, just to follow up, Quinn.

Has essentially a state of the art Assembly.

Factory.

Great color there. Thank you and then maybe Jack you've talked about the flexibility in the model on the expense side can you kind of maybe talk about what your expectations are as you kind of go through and get.

Jack: And get this fully ramped and you make the find the synergies.

Jack Kober: There are many things that we've done to structurally improve the base NACOM business from an overall cost perspective that have helped to preserve that 60% gross margin number that Steve was referring to. So, you know, expectations as we go forward are that we'll be able to apply some of those same things that we've done with the base business to the Wolfspeed acquired business. And, and that will help support us. And then, with some lift from a revenue perspective on the base business, as well as with the acquired business, you know, that'll help improve margins as we go forward. I got it.

As we expected and just how should we be thinking about the expense side. Thank you.

Yes.

Thanks, David and I'm, assuming you're referring to the the operating expense side. So.

As we closed out the December quarter that was only a partial quarter from an operating expense point of view. So as we look forward. We'll obviously have a full quarters worth of operating expense with the acquired business, but I think one of the one of the things to look to in terms of how we manage the business right. We want to make sure. We're also leveraging.

Many of the costs that we are currently incurring from up from our May comp point of view so certain of that was already factored into the we'll call. It the acquisition model as we as we played this out so.

Steve Daly: The follow-up question was just... You guys, I guess Wolf will continue to operate that facility for the first two years, and so is there anything that prevents you from being able to get into that facility to start to run your processes or to try to drive higher yields? I mean, are you somewhat constrained with what you can do while the fad is being operated by Wolf, or do you think you've got free access to the fad and you can start to implement your blocking and tackling, your know-how to start to improve those yields, you know, immediately post-close? Sure, I'll provide a lot of background information to help answer that question. So, we have today a foundry relationship with Woolspeed where we buy wafers at effectively a fixed price. So that's point number one, and that will stay in place until the FAF takes over in about two years. Second, Wolfspeed, as part of the transaction we made, there was a significant portion, $50 million of stock, given to Wolfspeed.

Out of that work was done upfront and or prior to closing so from an overall expense perspective, we think we've got a pretty good handle in terms of where we're at today.

Similar to what we've worked through with with May come from an operating expense perspective, we want to make sure we're going to continue to refine things and and better leverage our overall operating expenses as we go forward. So I think if you look at the guide that we've put out there and some of the other directional information you can see that.

That will probably be making some some some pretty good progress from where that business was historically from an overall operating expense perspective, but I think we're feeling pretty good in terms of where we're at now and look to obviously build upon that as we go forward.

Thank you.

Next question coming from the lineup.

Joe <unk> with Raymond James Your line is now open.

Thank you good morning, guys. Thanks for sneaking me in.

My question is on the data Center first question Steve.

You talked about some lumpiness in the near term I'm just trying to understand.

Steve Daly: So they are now an equity holder in MACOM, aligning our strategic goals. Third, we have something called the FAB Operating Committee, which is comprised of both WolfSPEED and Macon staff who will work together to implement change in the FAB with WolfSPEED support. And it, as you can see, it's within their, it's beneficial for them to improve execution and yield because it lowers their cost of the wafers they're selling to us. So everybody's goals are aligned.

The mix of your business in terms of a lower speed versus higher speed, obviously, the higher speed.

The market itself is growing nicely, but at the same time.

To what extent the lower speed weakness I'm trying to understand to what extent this is cyclical versus something structural and where do you see that lower speed annual business bottoming per year.

Steve Daly: And so it's, you know, we're just coming out of the gate; it's been two months. We have an amazing working relationship with the staff in North Carolina, both inside the FAB and their technologists and whatnot around the FAB. So we will be able to effect change, but there are boundary conditions, and I want to be clear that there's structure around that to make sure that we're able to do that. And so that was an important part of the transaction for Macon, and we were able to have a great meeting of the minds on how to do that. So that would certainly address making improvements inside the FAB. But when you move outside the FAB and you look at the back end, assembly, and test, as well as all of the other inbound material costs associated with the business, we have full control over that. So we can make changes to OSAT contracts. We can look at yield enhancement on assembly and test, and we can bring the full force of Macon to the back end, which is a significant part of the COGS, to effect change. And we're doing that immediately. Wolfspeed has a great team over in Malaysia, and a great team out in Morgan Hill.

So I think it's.

When you talked about the lower speeds, we do think that there is there will be it.

A couple more years of 100 gig per lane demand for what I would call our traditional.

100, GSR for Ocs and some of the.

Jack: 100, <unk> Dr. One things like that so we think there is still a good amount of legacy business out there and we will continue to be demand there, but what we definitely are starting to see is as the next generation switches come out.

People want to run at the higher data rates of 408 hundred gig some of them are jumping right to 800, and so what we see today is a the vast majority of our revenue is at the four or 800 gig Pam four.

Applications and these are typically short reach so you're talking about less than 100 meters.

It could be less than 500 meters.

Steve Daly: They're rolling up their sleeves with the Macon staff, and we're going to work. So, you know, there are many pieces that we'll be focused on. And then the other item I'll just highlight is that there are also business-related practices that we will change and bring in line with the way Macon runs its business. For example, we don't like to rely on distribution channels.

Speaker Change: And then the other thing I'll highlight.

Just sort of related to that is some of the trends with metro long haul because we also see a similar thing there now we do lump metro long haul into telecom, but we definitely see that the 32 gigabyte <unk>.

Products will also in the next year or two start to ramp down as people bring up 64 gigabyte.

Which is roughly 400 gig is.

Steve Daly: We like to deal with our major customers directly, and we would rather engage and sell the full product line. And so we'll be looking at optimizing distribution, the use of distribution for selling these products. We'll certainly be looking at all the contracts that have been put in place, whether it be long-term purchase agreements or foundry agreements. You know, we would certainly want to make sure that we conform those to Macon standards.

As the majority of that and they're starting.

Some are actually starting at 130 gigabyte. So you see this data rate migration to higher speeds I think it's slow and gradual I actually think since the run rates of our lower data rate.

Speaker Change: Revenue is so low and the growth of the higher data rates are so high I think the worst is behind us as it relates to <unk>.

Having a step down because of.

Let's say, a 25 gig platform going end of life.

Got it thanks for that and then my next question is about your RMB business Steve.

Steve Daly: So we certainly have a lot of work to do, and as Jack mentioned and I highlighted, this is going to not be, you know, an instantaneous gratification. There's just a lot of hard work here, and you're going to, our thinking is you'll see incremental improvement over time. And if we do that, it will meet our financial targets and also, you know, we will begin to dominate the market. Thank you, and our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.

Speaker Change: Investor and community side, I think we understand how to kind of think about it.

Industrial business Randy.

Speaker Change: With defensive more program based on company specific so you kind of take a look out to the next 12 to 18 months can you talk about whats your how youre thinking about your defense business growth inaugurating new programs that are kicking in.

Just from a modeling standpoint, what is the organic growth rate for this business. The way you guys think about it.

Operator: Thanks for taking my questions and thank you, Steve, for giving the color around the steps required to drive all the cost synergies. I was wondering if there is a way to quantify when you think the combined entity can get to that 60% or so gross margin level. Is that an eight-quarter, you know, type timeline as you described in your historical activities, or should we think about something different and something you can achieve faster?

Yes.

Speaker Change: I would say that if we can achieve high single digit growth rates on a CAGR basis.

That would be great I think the last three or four years, it's been about 18%.

So we've been.

Speaker Change: Making a lot of great moves with <unk>.

Capturing programs being more aggressive cross selling some of our capabilities into the defense market.

Steve Daly: So we don't have a sharp answer for you on that. You know, we're starting in the low 40s. We'd like to exit our fiscal year close to 50, if we can get to 49 or 50% for this business segment. Going into our fiscal 25, I think that would be a win. So we're sort of head down, focused on pulling all the levers we can to make that happen.

Most of our defense business, historically has been RF and microwave related at the chip or packaged level and part of our strategy has been to slightly go up the value chain and build.

Multifunction assemblies for customers using all of our chips and that strategy is working quite well.

Steve Daly: So I can't necessarily put a timeline on our end target, but I can tell you in the near term, we plan on making significant changes. And part of that also will have to do with the mix; that will have to do with the amount of growth that comes through the business. And so there's just a lot of factors there that make it difficult to give you that firm answer.

And then of course with full speed a significant.

A portion of the <unk> business is for defense.

And primarily for transmitters and radar systems.

So with both speed and May comp, we believe we can do higher levels of integration, we can capture more market share.

Steve Daly: But I can say that we do fundamentally understand the business. When we look at the industry and we look at competition, and we look at their gross margins, we know that there's a lot of room to go with this technology. And then, can you give us a sense of what the core MECOM industrial and defense revenue that you're guiding to in the March quarter? And where do you see the trough on the industrial side?

Better service the customer the customers in this segment together.

So.

We're in all sorts of different types of platforms with the core <unk> business with the RF power coming online our Sam just increases further.

From a GAAP point of view just to remind everybody. We will speech technology is ideal up through about 14 or 15 gigahertz up through expand let's say they have.

Jack Kober: I realize it's, you know, it's tough given all the typical headwinds, but what is sort of the core MECOM industry you're guiding to and where do you see the trough for that? I think you mentioned something about a backup recovery, so I was just hoping you could give us some color so we can model that business that I. So I'll start with that and then Jack can add. So going into Q2, our base business, the industrial defense business, we think will be up about 5% or 6%. We think telecom will be up about 8% or 9%. And we know that the data center will be down about 15%. So that is for the core business. Now, when you compare that to my commentary for the full business, industrial, and defense going forward, you know, in Q2, it will be up 20%, telecom 50%, and data center, you know, the same at that 15% drop. Obviously, the big step up in the aggregate numbers is due to the Wolfspeed contribution of that $30 million, and it's essentially evenly split between the two market segments. Jack, do you want to add something?

Theyre very high voltage high power processes, So if you're building a.

You would want to buy one or a full speed or what it may comps products. As an example of a new application that is very relevant today.

And then of course.

The necessity to upgrade electronic warfare and jamming systems. They all require high power transmitters and this is right in our wheelhouse so great.

Great technology, we're very active.

We will conservatively say high single digit growth, but we've been beating that and.

If things go well then we hope to stay on that that CAGR.

Run rate.

Speaker Change: Thank you.

Our next question coming from the line of tourist Steinberg with Stifel. Your line is open.

Yes. Thank you.

First of all for my sincere condolences on the passing of our.

Tourist Steinberg: Chairman Ocampo.

Our first question Steve.

Stephen it's really related to what you just talked about so if we think about the wildfire off business. It sounds like it's going to sort of contribute 50 50 between R&D.

Jack Kober: I think the only other item to add was with regard to, you know, the industrial piece of that IND business. So I think we've been discussing how the industrial piece has been down for us over the past couple of quarters. That's something that we continue to manage, but I think we've been pleased with the performance on the defense side of the business, which has really supported things within that end market, and we continue to see opportunities on the defense side to ultimately drive improvements in that end market as we go forward. Thank you, and our next question comes from the line of Harsh Kumar with Piper Samuel. Your line is open.

And telecom, but as we think about the growth.

That business will that also be very similar do you expect sort of the contribution to be similar to both of those segments.

Okay.

So I think theyre going to be different and I think.

When we look at the <unk> portfolio as it exists today they.

They have a very strong telecom business, which is down right now because of weak <unk> and we have great potential there to capture more market share together and turn that around.

Operator: Yeah, hey, guys. Congratulations on closing the deal. And, you know, looking forward to you guys doing an excellent job on integration. Steve, I had a question, a follow-up to kind of what Vivek was just asking about. You said your book to bill for the business was 0.9 in the December quarter.

They have a great foundry business, which is a combination of commercial and defense.

And we believe we can continue to grow that business.

And then they have.

Our product line of <unk>.

<unk> discrete devices and mimics we believe theyre mimic product line is way too small we want to throw the full force of our mimic designers at their processes and take higher value products to the customers. So we would expect and our strategy will be to grow the mimic portion of.

Steve Daly: Sounds like, if I take the guidance of the core business being roughly flat, is it fair for me to assume that the book to bill is now, you know, very close to 1? And if you're talking about a recovery in your business in the back half, then the book to bill starts to climb. The reason why I ask is that historically, when the book to bill ratio starts to climb like that, it signals a bottom.

Their.

Portfolio.

<unk>.

Tourist Steinberg: Assigning resources to develop products to go after customers aggressively that will be a corporate priority for us and that we think that is one of the best ways.

Steve Daly: Is it fair for me to assume that your industrial business is bottoming out right about now, plus or minus a quarter? So, a couple things, Steve, you're right, the book-to-bill ratio, if we just go back a quarter or two, so in Q3 of our fiscal 23, it was.9, and then we ended fiscal 23 with a book-to-bill of 1.1, and then this past Okay, so, the weakness, looking at the bookings, was really telecom and, to a certain degree, data center-related. And the strength was, you know, so the segment that was the strongest was I&D, primarily driven by D. And it was, you know, we had some very good bookings there. So, as Jack said, our industrial business still remains weak.

To a capture market share be improved profitability.

And see growth grow the revenue with what is a <unk>.

Tourist Steinberg: Product line that today is just too small.

So when we roll all that up we will just have to sort of wait and see there's a lot of factors beyond our control regarding some of the run rates of their big programs and of course, we're still getting to know the programs and understand them and.

As though we'll speed management team works with our team and we go together to customers and learn about.

The programs will be able to sort of refine our thinking.

Got you.

Tourist Steinberg: Yes, this business has tremendous potential to grow.

If you look at the $2 billion Sam for Gan about half of that we believe is defense related.

Steve Daly: I'm not sure we're able to call a bottom, per se, but we feel that we can move the base business during two, three, and two, four. I mean, we have been at 151 million now for, you know, a few quarters, right? So, whether we're at the bottom or not, it's just so hard to tell.

Tourist Steinberg: So we want a big piece of that.

Speaker Change: That's very helpful and as my follow up and I know people are asking a lot of questions about the sort of step down in data center.

But could you give us a little more color on maybe the so let's say, it's a $200 million business now how much of that is lower data rate versus higher data rate and.

And are you starting to see any seasonality in that business or is that still way too early.

Steve Daly: So I agree, I can't say anything more than that. Fair enough. Thanks, Steve. And then I did have a follow-up question that was asked earlier on your data center strength. You know, wherever we look, we see this generative AI driving compute memory, and it would imply that connectivity is rising, which is really good for you guys. Seems like you got the product.

Yes, I would just say one thing about People's concern about our data center business. So our data center business back in 2019 was about $115 million and on the trajectory that we're on right now that business is probably going to be.

Above $175 million to $200 million I mean, that's that's kind of the range. This is going so.

We're very happy that every year, we've been able to grow the business now we also like to say all the time that this is the most volatile part of our business ramp we see ramp ramps go up and ramps go down and that is definitely just what you are signing up for.

Steve Daly: I think you talked about strong demand, but you are talking about slippage, I think you said this quarter in March, and I think you said maybe potentially slipping into the June quarter as well. A, is that correct about the March and June quarters, and then B, is that simply you aligning your shipments to customer needs, which would imply that the customers are weak, or is there something else going on? So there are a lot of moving parts in the data center. First, in terms of the back cap of 24, our fiscal 24, when we look at the data center business, we think that there are opportunities for growth. Exactly what that will be, we're not able to say today. Second, there's an overhang right now in the data center business for lower data rates, 25 gigabits per second, a lot of the traditional NRZ products that we sold into being certainly very, very weak. That We're not expecting it to really come back in any earnest in the back cap.

Youre seeing a little bit of that over the last three or four quarters, where we've had a tremendous ramp up and now we're having a pause.

Speaker Change: We don't read too much into what we have.

At the higher data rates were gaining exposure.

Across the industry.

As the <unk> technology is adopted it plays to our favor and we know that the the sheer volume of short reach connections is increasing and so these are the I think these are the themes that we believe are most important I would not call. This business seasonal I think it's very much related to deployments.

And the.

The folks that are making the data center infrastructure.

Winning business and rolling out large clusters or infrastructure, it's it's more program related than seasonal.

Steve Daly: We think the growth in the back cap will be at higher data rates. Third, what you're seeing here is really movement around the major customers and their ordering patterns as they start to ramp up and hit steady states. And so, as we've seen many times in the data center, there's prime the pump and drive ramps, and then pump the brakes. And that's, we're in that little bit of a mode, I think, in Q2, where now a lot of our lead customers are digesting a lot of the inventory before they do another step up.

Thank you.

Speaker Change: And our next question coming from the line of Carl.

Carl: <unk> with BNP Paribas Your line is open.

Carl: Yes, Thank you gentlemen for squeezing me in.

Two if I may.

First.

I suppose Jack.

Carl: Ah well or Steve could you address whether you have enough capacity today.

Carl: To support.

50 gig per lane 100 gigabit per lane and could it be 200 per month for short reach applications.

Steve Daly: The other thing I'll highlight is these parts do have long lead times, and so the customers know that. So, as we start to move into this quarter and begin the beginning of Q3, we'll have very good visibility into the back half of the year. But I will say, and to your point, the trends are very supportive of our core strategy, which is focusing on higher data rates. And we have a compelling product line. We think we have some of the best drivers and TIAs in the industry.

And whether you are actually seeing and customers begin to co invest in the supply chain to support continuity of supply.

So we just to remind everybody the.

High performance analog.

Products that we produce are using third party foundries not internal make home foundries. So in this case, we're dealing with.

The global Giants that produce high performance Cmos or by Cmos or silicon germanium and so.

Steve Daly: We have been seeing pulls not only from, let's say, the major customers, but we're also seeing pulls from the cloud folks themselves, where they're beginning to become believers that linear drive can have a place in their networks. And the last point I'll make about the data center, as everybody knows, with the new architectures of these systems, there's an incredible amount of short-reach optical or electrical connectivity or cables. So the SAM in this area is growing rapidly, and there's been lots of... publications from various folks talking about port counts and whatnot, but there's just tremendous growth that folks are predicting. And so we'll see if that comes to fruition, but we feel like we already deserve it, and our next question coming from the line of... Harlan Firth, and J.P. Morgan, your line is now open. Hi, good morning.

Carl: We typically don't view our requirements as moving the needle inside of these fabs.

A small pla.

Player in what is typically very large fabs and our volumes are really not material to their overall business. So I would say that we're not too concerned about capacity, what we have to be concerned about as lead time.

In planning so that as I mentioned this is a volatile business. So when the music stops we don't want to be holding a lot of parts. So we have to plan very carefully ramp ups steady state.

Programs diversifying those parts across a lot of customers and then ramping down and then the way we manage that with customers as we provide them long lead time, so that we can buffer and reduce some of that inventory risk, but I would say generally speaking we do not have a capacity problem here.

And on the back end regarding <unk>.

Or testing a lot of these <unk>.

<unk> are bare die flip chip or bumped in some cases packaged so no issues there from a capacity point of view.

Operator: Thanks for taking my question and congrats on getting the RF business for acquisition closed. XT, the newly acquired RF business in telecom, you guys had expected a slight decline in the December quarter, marking sort of five quarters of consecutive declines. It looks like total revenue was actually down more than that in the December quarter. Obviously, we know wired and wireless infrastructure trends continue to be weak.

And then the third thing I'll mention is we have great relationships with our third party foundries.

And when we see high demand we're on the phone, we're talking to them and making sure that they can clear the road for us if that's necessary. So it's really priority and planning.

Yep, Thanks for that Steve.

For my follow up thank you for providing the core growth of telecom in March, but how do you see that market this fiscal year and within telecom.

The wharf acquisition gives you both scan as well as LD Moss product gives.

Steve Daly: But for March, you're actually thinking eight to nine percent sequential growth. Could you guys believe that the business has bottomed, and maybe telecom sort of bounces along the bottom beyond the March quarter? So, possibly, the telecom market for us has three areas that are positive right now. Number one is Metro Long Haul, where we see ramp-ups of 130 gigabyte systems very early, but there's a lot of spending and pull for our products in this market. Second, is SAPCOM, Satellite Communications.

It gives you the full suite of antenna components were telco operators can implement.

Really <unk> and <unk> LTE her carrier infrastructure and so.

The caution to that is.

Will you also prioritize all demos and if so how are you thinking about that particular end market the carrier infrastructure market that's appear as well. Thank you.

Thank you, yes, you are correct to say that LD Moss as part of the portfolio and we will continue to provide those products to customer.

Steve Daly: We are seeing growth in many opportunities to expand our business in this area, so that is absolutely supporting our near-term revenues. We are starting to see some amount of growth in China for small cell deployments and front hall, you know, demand, let's say. It's modest, but it's an improvement over where we were a quarter or two ago. But to your point, you're right, we've come down significantly from over 60 million to now, this past quarter, you know, 27 million. A lot of the growth we had in 22 and 23 was cable infrastructure. That's essentially, you know, gone away.

We basically when we visit customers and we look at requirements.

It becomes clear through conversation with what the best process technology is and so we definitely have those conversations and if LD moss as more appropriate that will certainly offer that we are not.

Wedded to one over the other.

And the <unk> infrastructure, what you're typically seeing is higher frequencies you are seeing requests for higher efficiency.

And typically Gan has the edge there.

So that has been the trend over the past few years and this in this market now with that said, we may come to our base may come we still produce.

Steve Daly: We had a lot of revenue with PON, Passive Optical Networks. We are today shipping products into PON at a very muted level. It's not zero, but it's quite low.

MOSFET and.

High power devices in our fab here Silicon MOSFET and so we sell these products into avionics and a lot of defense systems, and we've been selling them for decades.

Steve Daly: So, the last point I'll highlight is, you know, 5G is still a very important market for MACOM, and while a lot of people are quite negative about telecom, we actually are reinvigorated and quite excited about being able to bring the RF power business from Wolfsby into a whole range of customers that either they were not engaged in or where we want to grow the positions where they were engaged. And so, we believe that together, we can gain more market share in the 5G market space together. And so that's part of our core strategy. I appreciate that and then maybe just a quick update on linear drives because it seems like there will be more demand for these types of solutions as the industry moves to 1.6T speeds later this year because the DST base 1.6T model consumes so much power, so maybe an update on the traction of linear drives on the current 100 gigabytes per lane upcoming 200 gigabytes per lane and is the team actually shipping solutions in high volume production today? Right, so just a few things.

So we look at LD Moss as a great technology for avionics and some defense systems, some communication systems, where they prefer that.

That technology, and so we will actually be moving and focusing our sales force to sell demos across all things wireless.

Yes.

Okay.

Thank you and I'm showing no further questions at this time I will now turn the call back over to Mr. Daly for any closing remarks.

Thank you in closing I would like to thank our employees suppliers and customers for making these results possible.

As we move into 2024, we're excited to service the RF and microwave markets with our bigger and stronger RF power team. We're excited to be involved with cutting edge data center applications for next generation high speed infrastructure and to service our growing satcom market. We will continue to work as a team to meet our customer needs and to execute.

Our strategy.

You very much.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

Steve Daly: There is a lot of work going on in the industry for interoperability at 100G per lane for linear drive. So that is, that is really the state of the industry. And so you're starting to see various publications. In fact, there was, I think, an industry get together. I think it was in October, when you had some of the major cloud companies presenting data showing bit error rates and functionality of linear drive systems, actually showing system-level data.

Okay.

Okay.

Yes.

Okay.

Okay.

Okay.

Steve Daly: And the data is compelling. So now, what needs to happen, of course, to support this is more switches being available, not just the Tomahawk-5, but other platforms, whether it's Cisco, SiliconOne, or others. So there needs to be more switches that can handle the linear drive because the ASIC needs to support the linear drive chip that we make. So that is the state of that business. We feel like we're right on the edge of that discussion.

Okay.

Okay.

Carl: Okay.

Okay.

Yeah.

Okay.

Okay.

Okay.

Carl: Okay.

Yes.

Okay.

Yes.

Steve Daly: And our high-performance connectivity team is doing a phenomenal job there. When you talk about 200G per lane, we will, as I mentioned in my script, will be demonstrating some products there in that regard. And so we are, of course, also very active. I think there's less activity right now in that area because there are certain constraints.

Okay.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Yes.

Hum.

Okay.

Okay.

Steve Daly: A lot of the first-generation 200G per lane will be single-mode fiber using silicon photonics and EMLs. And that, we think, before the volumes kick in, it has to switch over to a VXL laser. And we don't make VXL lasers at 200G.

Okay.

Okay.

Yes.

[music].

Carl: Okay.

Okay.

Okay.

[music].

Steve Daly: I'm not sure that, you know, this is very early days for that. But there are things that need to come together in the ecosystem to support super-high-volume 200G, and it's still very early.

<unk>.

Operator: Again, it's something that we're focused on; we think we'll be positioned well when our customers want to ramp up those technologies. And our next question, coming from the line of David Williams at the Benchmark Company, Ilana Shelton. Hey, good morning, and let me add my congratulations on the closing. I guess my first question would be, around that acquisition, have there been any surprises, either positive or negative, that you've come across, and maybe just kind of touch on what you've done in terms of... Sure. I would say that, no, there were really no surprises.

Steve Daly: We spent from, you know, well, we spent a fair amount of time doing due diligence to get to know the people, the staff, the organization, the infrastructure, and had just a great engagement with the Wolfspeed team. So, you know, sort of post-close, there were no real surprises. As I highlighted in the script, most companies will acquire a company and then integrate it after closing. We had set up a planning process to allow us to execute that integration the day after we closed, essentially. And I have to really thank the Wolfspeed team, as well as our team, for working so well together.

Steve Daly: I will say that customers and the industry seem to be very receptive to this change. They now recognize that, given Macon is very focused on RF and microwave, that it's a perfect fit. And a lot of the things that were on the drawing board for next-generation processes or products, we can now together implement as a priority. So, I think that customers will benefit from that. But I would say, generally speaking, no surprises.

Steve Daly: There's certainly a lot of heavy lifting that we need to do, as Jack and I have talked about. The team, the management, the production workers, and our application staff are amazing. They have a very strong footprint across Europe with their sales and applications team. They are stronger than we were, so we're really excited about that. Very strong team in China and some great manufacturing capabilities, not only in North Carolina but also in California, where their Morgan Hill facility is essentially a state-of-the-art assembly factory. Great color there, thank you.

Jack Kober: And then maybe Jeff, you talked about the flexibility in the model. Bye, and maybe talk about what your expectations are.,,,,,,,, I'm and Steve Daly.

Steve Daly: Thank you. Thank you. Thanks, David, and I'm assuming you're referring to the operating expense side, so as we closed out the December quarter, that was only a partial quarter from an operating expense point of view, so as we look forward, we'll obviously have a full quarter's worth of operating expense with the acquired business. I think one of the things to look to in terms of how we manage the business, we want to make sure we're also leveraging many of the costs that we are currently incurring from a MACOM point of view, so certain of that was already factored into the, we'll call it the acquisition model as we played this out, so a lot of that work was done up front and or prior to closing, so from an overall expense perspective, we think we've got a pretty good handle in terms of where we're at today.

Steve Daly: Similar to what we worked through with MACOM from an operating expense perspective, we want to make sure we're going to continue to refine things and better leverage our overall operating expenses as we go forward. So, I think if you look at the guide that we've put out there and some of the other directional information, you can see that we'll probably be making some pretty good progress from where that business was historically from an overall operating expense perspective, but I think we' Thank you. And our next question, coming from the line-up, Srinivasa with Raymond James, UNSW. Thank you. Good morning, guys. Thanks for squeezing me in.

Steve Daly: My question is about the data center. First question: Steve, you talked about some lumpiness in the near term. I'm just trying to understand the mix of your business in terms of lower speed versus higher speed. Obviously, the higher speed, the market itself is growing nicely, but at the same time, to what extent the lower speed weakness is cyclical versus something structural, and where do you see that lower speed and a business bottoming? So, I think it's... When we talk about the lower speeds, we do think that there will be a couple more years of 100 gigabit per lane demand for what I would call our traditional 100 GSR4 AOCs and some of the D.R. 100G, D.R.

Steve Daly: 1, things like that. So we think there's still a good amount of legacy business out there, and there will continue to be demand there. But what we definitely are starting to see is as the next generation switches come out, people want to run at the higher data rates, 400 and 800 gigabits. Some are jumping right to 800.

Steve Daly: And so what we see today is the vast majority of our revenue is at the 400 or 800 gigabit PAM-4 applications, and these are typically short reach. So you're talking about less than 100 meters, or could be less than 500 meters.

Steve Daly: And then the other thing I'll highlight, just sort of related to that, is some of the trends with Metro Long Haul because we also see a similar thing there. We do lump Metro Long Haul into telecom, but we definitely see that the 32 gigabyte products will also, in the next year or two, start to ramp down as people bring up 64 gigabytes, which is roughly, you know, 400 gigabytes is the majority of that. And they're starting, some are actually starting at 130 gigabytes. So you see this data rate migration to higher speeds. I think it's going to be slow and gradual. I actually think since the run rates of our lower data rate revenue are so low and the growth of the higher data rates is so high, I think the worst is behind us as it relates to, you know, having a step down because of, let's say, a 25 gigabit platform going end of life. Thanks for that!

Steve Daly: And then my next question is about your IND business, Steve. I mean, you know, I was on the industry and community side. I think we understand how to kind of think about the industrial business fairly well. The difference is more program-based and company-specific.

Steve Daly: So, as you kind of take a look out to the next, you know, 12 to 18 months, can you talk about, you know, what's your – how you're thinking about your different business growth, you know, are there any new programs that are kicking in? I mean, just from a modeling standpoint, you know, what is the organic growth rate for this business, the way you guys are doing it? Yeah, I would say that if we can achieve high single-digit growth rates on a CAGR basis, that would be great. I think the last three or four years, it's been about 18%.

Steve Daly: So we've been, you know, making a lot of great moves with capturing programs, being more aggressive, and cross-selling some of our capabilities into the defense market. However, most of our defense business historically has been RF and microwave related at the chip or package level. And part of our strategy has been to slightly go up the value chain and build multi-function assemblies for customers using all of our chips. And that strategy is working quite well.

Steve Daly: And then, of course, with Wolfspeed, a significant portion of the Wolfspeed business is for defense, and primarily for transmitters and radar systems. So with Wolfspeed and Macom, we believe we can do higher levels of integration, we can capture more market share, and we can just better serve the customers in this segment together. So, you know, we're in all sorts of different types of platforms with the core Macom business, and with the RF power coming online, our SAM just increases further. From a GAM point of view, just to remind everybody, Wolfspeed's technology is ideal up through about 14 or 15 gigahertz, up through X-band, let's say. They are very high voltage, high power processes. So if you're building a radar that wants to knock down or a transmitter that wants to knock drones out of the sky, you would want to buy one of Wolfspeed's or one of Macom's products as an example of a new application that is very relevant today. And then, of course, this depth to upgrade electronic warfare and jamming systems. They all require high power transmitters, and this is right in our wheelhouse.

Steve Daly: So great technology, we're very active; we'll conservatively say high single-digit growth, but we've been beating that. And if things go well, then, you know, we hope to stay on that, that tagger, you know, run rate. Thank you. And our next question comes from the line of Tore Svanberg speaking with the people here on his own. Yes, thank you, and let me first offer my sincere condolences on the passing of Chairman Ocampo.

Steve Daly: First question, Steve, and it should be related to what you just talked about. So if we think about the World Firehouse business, it sounds like it's going to sort of contribute 50-50 between IMB and Telecom. But if you think about the growth of that business, will that also be very similar? Do you expect the contribution to be similar to both of those segments?

Steve Daly: So I think they're going to be different, and I think when we look at the Wolfspeed portfolio as it exists today, they have a very strong telecom business, which is down right now because of Week 5G, and we have great potential there to capture more market share together and turn that around. They have a great foundry business, which is a combination of commercial and defense, and we believe we can continue to grow that business. And then they have a product line of FETs for street devices and MIMICs. We believe their MIMIC product line is way too small.

Steve Daly: We want to throw the full force of our MIMIC designers at their processes and take higher-value products to customers. So, we would expect, and our strategy will be, to grow the MIMIC portion of their portfolio in terms of, you know, assigning resources to develop products to go out to customers aggressively. That will be a corporate priority for us, and we think that is one of the best ways to, A, capture market share, B, improve profitability, and C, grow the revenue of what is, you know, a product line that today is just too small. So, when we roll all that up, we'll just have to sort of wait and see. There are a lot of factors here beyond our control regarding some of the run rates of their big programs.

Steve Daly: And, of course, we're still getting to know the programs and understand them. And as the Wolfspeed management team works with our team and we go together to customers and learn about, you know, the programs, we'll be able to sort of refine our thinking. But, yes, this business has tremendous potential to grow. You know, if you look at the $2 billion SAM for GAN, about half of that, we believe, is defense-related. And so we want a big piece of that. That's very helpful.

Steve Daly: And as I follow up, and I know people are asking a lot of questions about the sort of step down in data center, but could you give us a little more color on maybe the, so let's say the $200 million business now, you know, how much of that is lower data rates versus higher data rates? And, and, you know, are you starting to see any seasonality in that business? Or is that still way too early?

Steve Daly: Yeah, I would just say one thing about people's concerns about our data center business. So our data center business back in 2019 was about 115 million. And on the trajectory that we're on right now, that business is probably going to be above 175 million to 200 million. I mean, that's kind of the range this is going to go into.

Steve Daly: So we're very happy that every year, we've been able to grow the business. Now, we also like to say all the time that this is the most volatile part of our business; ramp, we see ramps, ramps go up, and ramps go down. And that is definitely just what you're signing up for. And you're seeing a little bit of that over the last three or four quarters where we've had a tremendous ramp-up, and now we're having a pause.

Steve Daly: We don't read too much into it; we have, you know, at higher data rates, we're gaining exposure across the industry. As the LPO technology is adopted, it plays to our favor. And we know that the sheer volume of short-reach connections is increasing. And so these are the I think these are the things that we believe are most important. I would not call this business seasonal.

Steve Daly: I think it's very much related to deployments. And the folks that are making the data center infrastructure, winning business, and rolling out large clusters or infrastructure. It's more program-related than, and, and. And our next question, coming from the line of Carl Ackman with B&P Paradise, the line is open. Yes, thank you, gentlemen, for squeezing in, too, if I may.

Steve Daly: First, I suppose, Jack, well, or Steve, could you address whether you have enough capacity today to support 50 gig per lane, 100 gig per lane, and could it be 200 gig per lane for short-reach applications, and whether you are actually seeing end customers begin to co-invest in the supply chain to support continuity of supply? So we, just to remind everybody, the high-performance analog.., products that we produce are using third-party foundries, not internal Macon foundries. So in this case, we're dealing with, you know, the global giants that produce high performance CMOS or BiCMOS or silicon germanium. And so, um.

Steve Daly: We typically don't view our requirements as moving the needle inside of these fabs. We're sort of a small player in what are typically very large fabs, and our volumes are really not material to their overall business. So I would say that we're not too concerned about capacity. What we have to be concerned about is lead time in planning, because, as I mentioned, this is a volatile business. So when the music stops, we don't wanna be holding a lot of parts.

Steve Daly: So we have to plan very carefully, ramp up steady state programs, diversifying those parts across a lot of customers, and then ramping down. And then the way we manage that with customers is we provide them with long lead times so that we can buffer and reduce some of that inventory risk. But I would say, generally speaking, we do not have a capacity problem here. And on the back end regarding OSAT or testing, a lot of these products are bare die, flip chip, or bumped, in some cases packaged. So there are no issues there from a capacity point of view.

Steve Daly: And then the third thing I'll mention is that we have great relationships with our third-party foundries. And when we see, you know, high demand, we're on the phone, we're talking to them and making sure that they can clear the road for us if that's necessary. So it's really priority and planning. Yeah, thanks for that, Steve.

Steve Daly: For my follow-up, thank you for providing the core growth of Telecom in March, but how do you see that market this fiscal year? And, you know, within Telecom, the Wolf acquisition gives you both GAN and LDMOS products. It gives you the full suite of antenna components where telco operators can implement 5G and R and 4G LTE for their infrastructure. And so, the question to that is, you know, will you also prioritize LDMOS? And if so, how are you thinking about that particular end market, the carrier infrastructure market, this year as well?

Steve Daly: Thank you. Yes, you're correct to say that LDMOS is part of the portfolio, and we will continue to provide those products to customers. We basically, when we visit customers and we look at requirements, it becomes clear through conversation what the best process technology is. And so we definitely have those conversations, and if LDMOS is more appropriate, then we'll certainly offer that. We are not wedded to one over the other.

Steve Daly: In the 5G infrastructure, what you're typically seeing is higher frequencies. You're seeing requests for higher efficiency, and GAN typically has the edge there. So, that has been the trend over the past few years in this market. Now, with that said, we, NACOM, our base, NACOM, we still produce MOSFETs and high-powered devices in our fab here, silicon MOSFETs. And so, we sell these products to avionics and a lot of defense systems, and we've been selling them for decades. And so, we look at LDMOS as a great technology for avionics and some defense systems, some communication systems where they prefer that technology.

Steve Daly: And so, we'll actually be moving and focusing our sales force to sell LDMOS across all things wireless. Thank you, and I'm showing no further questions at this time. I will now turn the call back over to Mr. Daly for any closing remarks.

Steve Daly: Thank you. In closing, I would like to thank our employees, suppliers, and customers for making these results possible. As we move into 2024, we're excited to service the RF and microwave markets with our bigger and stronger RF power team. We're excited to be involved with cutting-edge data center applications for next-generation high-speed infrastructure and to service our growing SATCOM market. We will continue to work as a team to meet our customers' needs and to execute our strategy.

Operator: Thank you very much. Thank you. Thank you. Thank you. Thank you. Thank you for your participation. You may now disconnect.