Q2 2024 MACOM Technology Solutions Holdings Inc Earnings Call
Welcome to make on the second fiscal quarter of 'twenty 'twenty four conference call.
This call is being recorded today Thursday may 2nd 'twenty 'twenty four.
At this time all participants are in a listen only mode.
I will now turn the call to Mr. Steve Rossi make them, especially difficult for development and Investor Relations. Mr. Ferranti. Please go ahead.
Steve Rossi: Thank you Olivia.
Steve Rossi: And welcome to our call to discuss May comps financial results for the second fiscal quarter of 2024.
Steve Rossi: 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.
Steve Rossi: Actual results may differ materially from those discussed today for more detailed discussion of the risks and uncertainties that could result in those differences. We refer you to make com's filings with the SEC.
Steve Rossi: Management statements. During this call will also include discussion of certain adjusted non-GAAP financial information a reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related form 8-K, which was filed with the SEC today.
Steve Rossi: With that I'll turn it over to call, Steve Daly, President and CEO of makeup.
Stephen G. Daly: Thank you and good morning.
Stephen G. Daly: I will begin today's call with a general company update after that Jack Kober, Our Chief Financial Officer will review, our Q2 results. When Jack is finished I will provide revenue and earnings guidance for fiscal Q3, and then we will be happy to take some questions.
John F. Kober: Revenue for Q2 was $181 $2 million and adjusted EPS was <unk> 59 per diluted share.
John F. Kober: We ended the quarter with approximately $476 million in cash and short term investments on our balance sheet.
John F. Kober: Our business remains healthy and profitable and we continue to generate strong cash flow, while investing in future growth opportunities.
John F. Kober: We expect our net income and associated cash generation to increase in the second half of our fiscal year compared to the first half.
John F. Kober: In Q2, our book to Bill ratio was 1.0 to one and our turns business or orders booked and shipped within the quarter was approximately 20% of total revenue.
John F. Kober: This was a notable quarter for new orders and our team did a great job securing two large future programs, which I will discuss in a few moments.
John F. Kober: Despite the sequential bookings improvement, we still see weakness in our telecom and industrial end markets.
John F. Kober: Fiscal Q2 revenue by end market was as expected with industrial and defense at $90 9 million Telecom at $47 2 million and data center at $43 1 million.
John F. Kober: Was up 18% sequentially and telecom was up 54, 1% sequentially.
John F. Kober: 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 across all our end markets.
John F. Kober: Yeah.
John F. Kober: Industrial and defense is our largest market and it has been steadily growing over the past few years.
John F. Kober: Defense orders remained robust while industrial orders remains weak.
John F. Kober: We believe the long term trends in our IND business are favorable and our growth strategies are working.
John F. Kober: Our focus over the last few years has been on building out our engineering capabilities. So we can better serve our defense customers. For example, we approach our defense customers as a merchant supplier of high performance IC components.
John F. Kober: In doing so we offer standard and custom IC and packaged solutions to support their needs.
John F. Kober: We embraced custom design projects, which we view as a great way to build strong relationships with our customers' engineering teams.
John F. Kober: We also offer defense customers access to our wafer foundries and technology.
John F. Kober: In some instances our defense customers have their own wafer fabs and IC designers, but they are inclined to use Dod trusted foundries like may com to access differentiated process technologies.
John F. Kober: And we offered to design and manufacture custom component module and subsystem solutions, but only in areas, where we have high may come IC content and true subsystem expertise, which typically revolves around millimeter wave very high RF microwave power filtering or switching.
John F. Kober: And specialized fiber optic subsystems.
John F. Kober: I would now like to highlight a few trends that were seeing and believe will be favorable to our IND business.
John F. Kober: We are seeing accelerated development of electronic warfare systems.
John F. Kober: Increased production rates upgrades or expansion of existing radar systems.
John F. Kober: Addition of features to existing integrated battlefield defense systems to improve performance.
John F. Kober: And investment in new technologies to address the threat of drone attacks, including the use of very high RF power and microwave signals.
John F. Kober: We are seeing an increased number of large opportunities across these areas.
John F. Kober: As an example in Q2, our team secured design wins in low rate initial production orders from a tier one defense OEM on a very large new defense program.
John F. Kober: We believe we won this competitively bid program due to our unique in house semiconductor technology, and our ability to rapidly scale production.
John F. Kober: While the current purchase orders are a few million dollars in size. We believe this fast moving program has the potential to be a leading contributor to our IND growth over the next few years.
John F. Kober: Our opportunity pipeline with major defense customers is robust and our capture rate is strong.
John F. Kober: And finally as noted in our press release issued on March 19th May Com received quality and best supplier Awards from Northrop Grumman one of the largest defense contractors in the U S.
John F. Kober: Northrop Grumman has thousands of suppliers and a limited number of companies were selected for a special recognition during.
John F. Kober: During the event May Com was one of five suppliers to received multiple awards and I congratulate our dedicated quality engineering operations and sales teams for earning these prestigious awards.
John F. Kober: Our data center end market continues to be an exciting and dynamic market with significant growth opportunities.
John F. Kober: We believe demand is growing for 100 gig per lane 408 hundred gig short reach optical connectivity solutions.
John F. Kober: For this reason our current expectation is the demand for high speed products will drive steady growth during the second half of our fiscal year.
John F. Kober: Today, our 100, <unk> multimode and single mode drivers in Tas and active copper solutions are in high volume production.
John F. Kober: The vast majority of these shipments are supporting the industry's deployment of 800 G Interconnects.
John F. Kober: Our engineering team is actively engaged in developing next generation solutions at 200 gig per lane to further enable one six terra terra bit applications.
John F. Kober: We are pleased that we have secured key design wins and first production orders for our 200 gig <unk> chipsets for 160, Interconnects and we expect to begin ramping deliveries in mid fiscal 2025.
John F. Kober: We believe high speed connectivity will be ubiquitous and spread to applications outside the data center, including automotive telecommunications and general networking infrastructure.
John F. Kober: Related to this expansion it is noteworthy to highlight at this year's optical fiber conference in San Diego in March or OFC, we demonstrated with partners optical Pcie solutions based on our laser driver and Tia's targeting disaggregated computing applications.
John F. Kober: Interest in May comms linear products portfolio continues to grow my comments one of the founding partners of the linear applicable optics LPL multi source agreement, our MSA formed by industry, leading companies to develop the specifications required to enable an ecosystem for <unk> solutions.
John F. Kober: <unk>.
John F. Kober: We support a wide range of data transmission protocols, including NRC, Pam for coherent and pcie.
John F. Kober: Full breadth of May Coms high performance capabilities was on display in March at OFC.
John F. Kober: Areas that sparked particular interest where the demonstrations of our 200 G per lane single mode fiber LPL, our 200, <unk> active copper cable solutions and optical Pcie solutions.
John F. Kober: These products will support high speed data opportunities, including the latest disaggregated data center architectures.
John F. Kober: Finally demand for our legacy Ethernet data center products, which has become a smaller part of our revenue is now modestly improving and we are pleased to see some positive trends.
John F. Kober: Our telecom end market is showing improvements in certain areas.
John F. Kober: While the macro environment for carrier <unk> investments is weak we are seeing platform shifts at our lead <unk> customer, which may result in revenue growth opportunities for <unk> com over the next 12 months.
John F. Kober: In addition, we see the opportunity to gain market share at certain key accounts, where we currently have limited penetration.
John F. Kober: Overall, we are excited about the opportunities in <unk> in spite of the current market dynamics.
John F. Kober: In addition, as <unk> networks are being rolled out we are finding opportunities in adjacent applications such as distributed antenna system networks. Our das networks at <unk> system combines multiple radio bands such as LTE with five G. It acts as a repeater to provide local but strong full.
John F. Kober: Harrier coverage dipped.
John F. Kober: Deployments are typically inside buildings or in a private enterprise our campus like environment.
John F. Kober: The systems are designed with high performance wideband, RF and optical components, which plays to make comps strengths.
John F. Kober: The cable TV and wired broadband market remains very weak we believe the cable TV market is in a transition between DOCSIS three one and <unk> four point out.
John F. Kober: <unk> is engaged with these Oems who are currently qualifying solutions for DOCSIS. Four however, there is uncertainty in the timing of market deployments and adoption. So we have set a low revenue growth expectation for DOCSIS four point out over the next one to two years.
John F. Kober: 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.
John F. Kober: We believe telecom remains an attractive and diverse market for may come 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.
John F. Kober: And over time, we expect to be a larger player in this market.
John F. Kober: We also believe the stock comp portion of the telecom market. We will continue to provide exciting opportunities for may calm 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.
John F. Kober: Process technologies and capabilities.
John F. Kober: I am pleased to announce that in Q2, we were awarded a contract worth approximately $55 million from a major satellite manufacturer.
John F. Kober: The contract, which also has the option for the customer to purchase an additional $25 million of hardware represents one of the larger commercial contracts in May com's history.
Speaker Change: I congratulate our business development and engineering teams on this win.
Speaker Change: Our novel high frequency process technologies, and unique IC design and manufacturing capabilities helped to solidify this large award.
Speaker Change: Ultimately, we believe our solution will enable our customers to achieve superior system level performance compared to the competition.
Speaker Change: This multiyear contract has two phases of design phase, which will last about nine months and a production phase which starts late in our fiscal 2025 and is expected to run for approximately 18% to 24 months thereafter.
Speaker Change: As a practice because long term customer contracts can be subject to certain inherent risks. We typically do not include orders that have deliveries beyond a 12 month horizon in our reported quarterly bookings. So only $3 million of disorder was included in my previously mentioned Q2 book to Bill ratio.
Speaker Change: I would like to take a moment to update investors on our pursuit activities for chip and Science Act federal funding.
Speaker Change: As previously discussed through the department of Commerce, we are pursuing support and funding for a potential foundry modernization and expansion project.
Speaker Change: Because this process is under review we are unable to comment further on the specific activity.
Speaker Change: Separately through the Department of Defense, we are also pursuing technology development funding.
Speaker Change: The Dod has created eight regional innovation hubs it may come as a hub member or core partner in five of eight of these hubs.
Speaker Change: This part of the chips Act is referred to as the Microelectronics comments program and its goal is to accelerate commercialization of new semiconductor technologies that are of military importance.
Speaker Change: The Microelectronics comments program established a network of technology hubs designed to accelerate domestic hardware prototyping and lab to fab commercialization of semiconductor technologies as well as develop the U S based semiconductor workforce.
Speaker Change: Earlier. This month May com was awarded a multiyear contract valued at up to $11 4 million through one of these hubs.
Speaker Change: The focus of this contract is advancing Gan technology for RF and millimeter wave applications.
Speaker Change: While this award is relatively modest in size. It represents our first chip to Act award and we are pleased to participate in the project.
Speaker Change: Investors should expect that we will continue to pursue additional technology development funding and areas that are critical to the Dod and also in line with our technology roadmap and strategy.
Speaker Change: In summary, there have been a number of very positive results within the business. This fiscal year that we believe help set may come up to have a strong fiscal 2025 from a revenue growth and profitability standpoint. These include one executing a strategy that focuses on market positioning to.
Speaker Change: Capitalize on trends advanced technology development strengthen our franchise and differentiate ourselves from the competition to win market share.
Speaker Change: To securing key design wins in the data center end market to participate in next generation advanced architecture, Rollouts, three winning large new multiyear programs in defense and commercial satellite programs.
Speaker Change: Some of these are amongst the largest program awards and May comps history.
Speaker Change: We expect these will start to contribute to revenue in fiscal year, 2025, and 2026 timeframe.
Speaker Change: For gaining market share in telecom by leveraging our RF power teams, leading gantt capabilities.
Speaker Change: Five winning new higher level sub assembly business, leveraging may comps unique semiconductor content and system level expertise and last of course always focusing on improving productivity and profitability.
Speaker Change: We are excited about the future and confident in our plan to achieve our goals Jack will now provide a more detailed review of our financial results.
John F. Kober: Thank you, Steve and good morning, everyone.
John F. Kober: Revenue for the fiscal second quarter was $181 2 million up 15, 3% sequentially based on growth in our industrial and defense and telecom end markets.
John F. Kober: Our IND and telecom revenue was supported by the first full quarter of revenue contribution from the acquired RF business.
John F. Kober: On a geographic basis revenue from U S based customers represented approximately 44% of our fiscal Q2 results flat sequentially.
John F. Kober: Adjusted gross profit for fiscal Q2 was in line with our expectations at $103 5 million or 57, 1% of revenue compared to 59, 2% in fiscal Q1 2024.
John F. Kober: Two items impacted the quarter's margins one.
John F. Kober: Mix associated with the Wolf speed RF business acquisition and to under absorbed costs, primarily at our low wafer fab.
John F. Kober: As we move forward through continuous improvement actions and grow our revenue we expect to drive our consolidated gross margins to be closer to 60%.
John F. Kober: Total adjusted operating expense for our second fiscal quarter was $63 $3 million, consisting of research and development expense of $40 1 million and selling general and administrative expense of $23 2 million.
John F. Kober: Total operating expenses were up sequentially by $8 7 million, primarily due to the full quarter of expenses associated with acquisitions.
John F. Kober: Adjusted operating income in fiscal Q2 was $40 2 million up from $38 6 million in fiscal Q1 2024.
John F. Kober: Adjusted operating margin was 22, 2% compared to 24, 5% in fiscal Q1 2024.
John F. Kober: Depreciation expense for fiscal Q2 was $7 3 million up from $6 3 million in fiscal Q1, 2024, driven by a full quarter of the acquired RF business.
John F. Kober: Adjusted EBITDA was 47 4 million up $2 6 million or approximately 6% sequentially.
John F. Kober: Trailing 12 months adjusted EBITDA was $178 $5 million.
John F. Kober: Adjusted net interest income for fiscal Q2 was $4 4 million roughly $200000 lower than the prior quarter, primarily due to lower average investment balances during the quarter due to recent acquisitions.
John F. Kober: Our adjusted income tax rate in fiscal Q2 was 3% and resulted in an expense of approximately $1 3 million.
John F. Kober: Our net cash tax payments were approximately $1 7 million for the second quarter.
John F. Kober: We expect our adjusted income tax rate to remain at 3% for the second half of fiscal year 2024 and into fiscal year 2025.
John F. Kober: Fiscal Q2, adjusted net income was $43 2 million compared to $41 8 million in fiscal Q1 2024.
John F. Kober: Adjusted earnings per fully diluted share was <unk> 59, utilizing a share count of $73 3 million shares compared to 58 of adjusted earnings per share in fiscal Q1 2024.
Speaker Change: I would now like to spend a few moments discussing some of the items that resulted in the increase to our diluted share count over the past quarter.
Speaker Change: Our diluted shares increased by approximately $1 million from December 2023 to the end of our fiscal March quarter, primarily for two reasons.
John F. Kober: First our March quarter diluted share count included a full quarter impact from the 712000 shares issued on December 2nd 2023 in connection with the RF business acquisition.
John F. Kober: Second due to accounting rules, our diluted share count increased by approximately 400000 shares as a result of our average stock price being above the strike price of our convertible notes for a portion of the quarter.
John F. Kober: In total these two items represented approximate 1% increase in our share count compared to the prior quarter.
Speaker Change: Now moving on to operational balance sheet and cash flow items.
Speaker Change: Our Q2 accounts receivable balance was $120 million up from $101 million in fiscal Q1, 2024, primarily due to higher revenue contribution from the RF business.
Speaker Change: As a result days sales outstanding were 60 days compared to 59 days in the prior quarter.
Speaker Change: The acquired RF business contributed approximately $14 million to the sequential increase in accounts receivable for the quarter.
Speaker Change: Inventories were $177 8 million at quarter end up sequentially from $159 5 million.
Speaker Change: The sequential increase was primarily driven by the acquired RF business and will enable us to continue to ramp new programs customers and revenue.
Speaker Change: Inventory turns were one eight times up sequentially in Q2 from one six times in the prior quarter.
Speaker Change: We expect inventory turns to improve throughout the remainder of fiscal 2024, as we continued to optimize wafer starts and material utilization.
Speaker Change: Okay.
Speaker Change: It is also important to note that we have been actively reducing inventory balances held at certain of our channel partners in the past four consecutive quarters.
Speaker Change: Fiscal Q2 cash flow from operations was approximately $18 2 million down from $33 1 million sequentially.
Speaker Change: There were two notable one time cash flow items in the quarter.
Speaker Change: A working capital increase of approximately $14 million associated with a full quarter's activities of the RF business acquisition.
Speaker Change: And payments for acquisition related expenses of approximately $9 million, which were accrued in prior fiscal quarters.
Speaker Change: Going forward in fiscal Q3, and Q4, we expect our quarterly cash generation to be in excess of $35 million.
Speaker Change: Capital expenditures totaled $5 1 million for fiscal Q2.
Speaker Change: Even with May comes expanded operational footprint, we will continue to carefully balanced capital expenditures with our revenue depreciation expense and income.
Speaker Change: We expect our fiscal year 2020 for capital expenditures to be between 30% to $35 million.
Speaker Change: Next moving on to other balance sheet items.
Speaker Change: Cash cash equivalents and short term investments for the second fiscal quarter were $476 4 million.
Speaker Change: Up $13 1 million sequentially driven.
Speaker Change: Driven by net cash from operations again in fiscal Q2, or $476 4 million of cash equivalents and short term investments exceeds the book value of our $448 million convertible note debt.
Speaker Change: Finally, I would also like to recognize the teamwork and dedication of the entire May come organization and thank you all for your efforts to help grow and support the business.
Speaker Change: Ill now turn the conversation back over to Steve.
Steve: Thank you Jack <unk> expects revenue in fiscal Q3, ending June 28, 2024 to be in the range of $187 million to $193 million adjust.
Steve: Adjusted gross margin is expected to be in the range of 56% to 58%.
Steve: And adjusted earnings per share is expected to be between $63 69.
Steve: Based on 74 million fully diluted shares.
Steve: In fiscal Q3, we expect revenue in all markets to be up sequentially.
Steve: We believe data center will lead with low double digit growth followed by telecom with mid single digit growth and industrial and defense with low single digit growth.
Steve: We believe we can achieve modest sequential improvements in revenue and operating profit over the remainder of fiscal 2024.
Steve: And over the longer term as revenues in our telecom and industrial business recover and as our margin enhancement activities continue we expect gross margins to trend back towards 60% with operating margins above 30%.
Speaker Change: I would now like to ask the operator to take any questions.
Speaker Change: Thank you, ladies and gentlemen to ask a question you want me Crestar one one on your telephone and weekly name to be announced.
Steve: And as an uptime. If you please limit yourself to one question and one follow up please.
Steve: Please standby.
Steve: Roster.
Colin O'Malley: Now first question coming from the line of comments O'malley with Barclays. Your line is open.
Colin O'Malley: Good morning, guys and thanks for taking my questions I just wanted to start off with the progress thus far on the RF acquisition.
O'malley: You guys clearly had some milestones laid out for when you would take over that fab, but in the intermediary period of time you were talking about maybe running some more of your lines you now have the the business under your roof further.
Colin O'Malley: First full quarter can you can you talk about what's going on there thus far and then in terms of what Youre able to do in terms of getting that gross margin profile to where you want it to be.
Colin O'Malley: What steps are you taking to do that because I would assume it's a large portion of kind of where the headwind on gross margins right now. Thank you.
Speaker Change: Thank you Tom.
Colin O'Malley: As everybody knows we closed the acquisition about four months ago, and I can report that the customer engagements have been outstanding.
Colin O'Malley: Our RF team and the the Wolf speed RF team.
Colin O'Malley: Have been meshed together in the team is settling in and working well together.
Colin O'Malley: So we're very pleased about the level of collaboration with all the new employees that came over to May come.
Colin O'Malley: I can also say that the work that's being done in our operations organizations is really truly world class that includes.
Colin O'Malley: Working with the team in Morgan Hill, with the backend manufacturing capability that came over with the transaction as well as our team in Malaysia.
Colin O'Malley: Had a team in Malaysia, and we will speed up the team and we brought those two teams together to support a lot of the high volume.
Colin O'Malley: Demand.
Colin O'Malley: I would say that from a from an integration point of view, we're doing quite well.
Colin O'Malley: As it relates to looking at the gross margins and taking steps to improve the gross margins I think we have a lot of work to do I can tell you that our team has laid out a long list of action items outside of the fab to address a lot of the.
Colin O'Malley: The areas that we have full control over but then when you move into the fab as I think I mentioned on our last call.
Colin O'Malley: We have to operate within a certain framework, which is defined by the fab operating committee, which is comprised of both will speed and may comp staff and this team is really looking at the day to day operation of the fab.
Colin O'Malley: Setting priorities setting up various projects.
Colin O'Malley: <unk> com.
Colin O'Malley: Controls the wafer starts in the mix.
Colin O'Malley: And also the amount of development versus production and so.
Colin O'Malley: Really it's early it's early innings, let's say, we're still establishing a good working relationship inside the fab.
Colin O'Malley: We have always felt with this transaction that the biggest risk.
Colin O'Malley: With the transaction is really.
Colin O'Malley: Making improvements operational improvements related to the fab and that is certainly a work in progress, but I can report, we're very happy with the results. We have an outstanding working relationship with the <unk> team and as Jack mentioned in his script, we expect incremental.
Colin O'Malley: <unk> and the gross margins.
Colin O'Malley: Really starting now and going into our fiscal 2025, and then the last thing I will just highlight is.
Colin O'Malley: The business itself is hitting all of the key markers that we wanted from a from a revenue and an operating profit point of view.
Colin O'Malley: So we're very pleased with the performance and the financials of the business to date.
Speaker Change: Thanks for the thorough response.
Speaker Change: Second one is broader as well.
Speaker Change: And not looking for exact guidance, but just wanted to hear your thoughts. So do you guys have historically said that you expect telecom to kind of be your fastest growing business and if you look at kind of the fiscal year 'twenty four and how it's tracking.
Speaker Change: That data center business is going to be a big leader in terms of growth. So when you look at fiscal year 'twenty. Five do you still think that telecom is going to be a leader in your growth or are you seeing some of these opportunities in data center kind of come on at least in the near term in terms of this year and next year come on so quickly that that may be the leader in growth. When you look at fiscal year 'twenty five.
Speaker Change: I think thats a good question.
Speaker Change: As we take a step back and look at our telecom business and our data center business. They are about the same size right now.
Speaker Change: Within a few million dollars.
Speaker Change: On a quarterly basis.
Speaker Change: So we do think over the long term.
Speaker Change: The telecom will outgrow datacenter just due to the.
Speaker Change: The amount of different opportunities in different market segments. So we think over the long term.
Speaker Change: <unk>.
Speaker Change: That will be the leading market over over datacenter now with that said.
Speaker Change: The data center market is doing really well, we're having a great year. This year, we expect as I talked about in my script, a very strong year next year.
Speaker Change: The data rates are going higher and this makes it more complex in terms of fielding solutions.
Speaker Change: Due to the sort of the changes going on inside the datacenter. We find that there is a tremendous amount of opportunities for short reach high data rate connectivity and that's where.
Speaker Change: We play and then the industry is trying to bring on different ways to solve the same problem and that's why I spoke about the <unk> MSA, which is really the industry coming together and saying how do we make.
Speaker Change: On optical ora or a copper link that uses less power and we are absolutely right in the IND.
Speaker Change: And the mix of that and what we're very happy to see us.
Speaker Change: Growing.
Speaker Change: Number of companies, joining the MSA, leading networking companies, leading module manufacturers and even leading chip companies and so.
Speaker Change: We think over the long term that will be a tailwind to our business.
Speaker Change: Thank you.
Speaker Change: Next question coming from the line of harsh Kumar with Piper Sandler Your line is open.
Harsh V. Kumar: Yeah, Hey, thanks, guys. Congratulations once again solid quarter solid guide.
Harsh V. Kumar: I was going to ask this later on but since you were talking about LPR last just right now Steve there.
Harsh V. Kumar: There was a big debate at the OFC around LBO, everybody was showing at you everybody was wanting to get there.
Harsh V. Kumar: But it seems like the luminaries in the networking world had doubts and they expressed it pretty openly.
Harsh V. Kumar: We all know the benefits are there, but I'm just curious how you see the path of adoption of the ERP on the market. It would be fantastic for you and a handful of other players really bad for some guys that may dsp's, but I was curious how you see the adoption happening and what the impediments out at this point in time.
Harsh V. Kumar: Sure.
Speaker Change: Well a few things first you have to understand that the <unk> solution.
Harsh V. Kumar: That we're working on is being done in the context of a broader portfolio of products for the market.
Harsh V. Kumar: So whether <unk> kicks in or not.
Harsh V. Kumar: Isn't going to change our.
Harsh V. Kumar: The opportunity set let's say inside the data center.
Harsh V. Kumar: Don I don't want investors to feel like we're evangelizing LPL, we're not we see it as an interesting.
Harsh V. Kumar: Product set that is very similar to the current analog solutions that we sell today in active optical cables.
Harsh V. Kumar: And also it's sort of a cousin to wire.
Harsh V. Kumar: 200 gig electrical solutions for accs.
Harsh V. Kumar: So with that said.
Harsh V. Kumar: I think it's going to take time I think what you see in the industry right now as people showing examples of links working and meeting the bit error rate requirements at significantly lower power lower latency and a lower cost compared to DSP. So I think it will take time.
Harsh V. Kumar: The first step is to have the industry come together and create interop specs. So that the hardware people know exactly what the switching the server people want from a specification point of view and that work is really happening. This year. So it's true that there are a lot of companies showing examples of hardware working in the lab.
Harsh V. Kumar: <unk>, that's very different than making $10 million to $20 million links and so the concept needs to mature and we think that will take time.
Harsh V. Kumar: A certain part of the work that we're doing at May comps. So I just wanted to highlight that it's an activity. We think it's an important activity. It's in line with our analog solutions that are pushing higher and higher data rates, but I don't want folks to believe that.
Harsh V. Kumar: If <unk> doesn't work then our datacenter revenues wont grow.
Speaker Change: Of course, thank you for the color, Steve and then.
Speaker Change: We're hearing good things in data center.
Speaker Change: I was curious if you could just maybe give us an idea of how you see your data center trending I know you said telecom grows bigger and the longer term, but perhaps in the near to midterm, maybe you could comment to the extent you're comfortable with the prospects of your data center business.
Speaker Change: Yeah, that's it thanks.
Speaker Change: Yes, I think in the near term, we're going to do quite well and we're building backlog with lead customers were seeing.
Speaker Change: 800 gig the leaders at 800 gig have a very strong position in the market and we're part of that supply chain and we see it now spreading to other.
Speaker Change: Isps and other folks building the hardware. So the 800 gig business for May Com right now is very strong.
Speaker Change: Are basically short reach 100 gig per lane, mostly <unk>.
Speaker Change: And so we think that that business will continue to grow then we get to layer on basically solutions for one six terabits and Thats, where our 200 gig per lane.
Speaker Change: <unk> come in for next generation and we're starting to build backlog for those solutions.
Speaker Change: So we think going into 2025 800 gig solutions will grow our position at $1 six will grow we think.
Speaker Change: We will have more diversity in our revenue.
Speaker Change: By customer next year, which is a good thing.
Speaker Change: And then.
Speaker Change: Adding to that we're also seeing.
Speaker Change: Some traction with our 400 gig ZR light.
Speaker Change: Four.
Speaker Change: The 12 to 15 kilometer reach.
Speaker Change: In and around the data center and we have good content on some of those platforms. So we think the near term is looking very good however.
Speaker Change: We as we always say, it's the most volatile part of our portfolio. It turns on quickly and it turns off quickly.
Speaker Change: There is a it's a fast paced environment and so it can be volatile and so we always temper expectations, but.
Speaker Change: Given the trajectory I think this year will be one of <unk> best years in terms of.
Speaker Change: Total revenue in the data center, it should be at a record or near.
Speaker Change: Our record year.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Question coming from the line of Quinn Bolton with BMO Company. Your line is open.
Nathaniel Quinn Bolton: Hey, guys. Thanks for taking my question wanted to follow up on the data center opportunity.
Nathaniel Quinn Bolton: One of the big things that seem to come out of OFC is that.
Nathaniel Quinn Bolton: Starting to see potential.
Nathaniel Quinn Bolton: Potentially a pretty large ACC opportunity at 200 gig per lane to connect Gpus together in.
Nathaniel Quinn Bolton: Across somewhere between eight to 16 racks it.
Nathaniel Quinn Bolton: It sounds like this opportunity.
Nathaniel Quinn Bolton: Could reach into the tens if not exceed $100 million as it ramps and wanted to see how it may come as positioned excuse me if you guys.
Speaker Change: You guys think that that's it.
Speaker Change: Significant opportunity for <unk> for you as you look into <unk>.
Speaker Change: Fiscal or calendar 'twenty five.
Speaker Change: Well, we certainly heard and saw the same things at OFC.
Speaker Change: So I don't think we would disagree with the fact that there's a big opportunity there.
Speaker Change: So we'll have to wait and see on that I guess would be the best thing to say Quinn. So it is a big opportunity there as more customers coming online at the higher data rates, which plays to our favor we have a lot of different products and form factors and solutions for these customers.
Speaker Change: But you have to understand that there is still a lot of work being done a lot of testing a lot of qualification.
Speaker Change: And we think that this year will really be the year, where we can.
Speaker Change: Secure.
Speaker Change: <unk> positions.
Speaker Change: 200 gig ACC, but I would say that yes, there is an opportunity I think.
Speaker Change: We're seeing the same things you are.
Speaker Change: Great. Thank you for that and then.
Speaker Change: You called out a couple of the larger programs.
Speaker Change: In your prepared comments.
Speaker Change: And you mentioned something about that that sort of helps accelerate or drive pretty strong growth in fiscal <unk>.
Speaker Change: 25, I know you haven't given guidance for 25, but I think the street was already looking for 25 to be probably back in your long term CAGR of 10% to 15% I'm kind of wondering does this push you potentially to the high end or above that range as some of these new programs.
Speaker Change: Ramp to volume.
Speaker Change: Well potentially but it's as things are ramping up we have to remember things are also ramping down and there is also uncertainty associated with the market and our customers run rates and whatnot. So I would not want to signal sort of our target for next year.
Speaker Change: I think there are certainly models out there that people can look at.
Speaker Change: But.
Speaker Change: Our point of view, what we're seeing this year is.
Speaker Change: Good performance in the back half as we're guiding into Q3.
Speaker Change: All three markets are up our data center business will be up by double digit telecom mid single digit.
Speaker Change: We are building very strong backlog is as I highlighted that large contract.
Speaker Change: As significant in the bulk of that.
Speaker Change: Revenue will begin at the mid mid year, a bit of a middle of our fiscal year 'twenty five.
Speaker Change: So potentially.
Speaker Change: Potentially we could have a very good year next year, but we're not really giving more specific guidance than that.
Speaker Change: Thank you.
Speaker Change: Our next question coming from the line of Karl Ackerman with BNP Paribas. Your line is open.
Karl Ackerman: Okay. Thank you.
Karl Ackerman: It sounds like telecom and beginning to recover.
Karl Ackerman: Yes.
Karl Ackerman: Hey, Carl this is Carl this is Jack we're having trouble hearing you.
Karl Ackerman: Yeah.
Karl Ackerman: Okay.
Speaker Change: Can you hear me now.
Speaker Change: Yes, better okay.
Speaker Change: Okay, great. Thank you so it sounds like that telecom is beginning to recover a bit sooner than what some of your peers have suggested is the near term performance in June.
Speaker Change: And your outlook for fiscal 'twenty, five primarily by satellite products.
Speaker Change: Or is it broader than that thank you.
Speaker Change: Okay.
Speaker Change: Right, So I think our.
Karl Ackerman: It's.
Karl Ackerman: I think every company has a different position within the telecom markets and so.
Karl Ackerman: I think we are.
Karl Ackerman: We're just.
Karl Ackerman: Our behavior is very different than maybe what our competitors are doing and so we have a lot of very specific things happening within the telecom and market that are favorable.
Karl Ackerman: We talked about the large satcom business.
Karl Ackerman: That we announced this large award we I mentioned that we are seeing some shifts in some of the production run rates at <unk>.
Karl Ackerman: Some of our existing <unk> base station customers and some growth opportunities. There I think that's very specific to make com it doesn't necessarily reflect what's going on in <unk>.
Karl Ackerman: And.
Karl Ackerman: I also mentioned of course that cable is very weak and we expect it to be weak. So we don't think that's going to be helping things.
Karl Ackerman: Next year.
Karl Ackerman: The other sort of bright spot that I might mention is our metro long haul business is also beginning to improve.
Karl Ackerman: We had some great product releases recently, including 130, gigabyte coherent IC, which is.
Karl Ackerman: Just starting mass production and that supports.
Karl Ackerman: Connectivity up to one two terabits per second.
Karl Ackerman: So that's that's going to be a tailwind.
Karl Ackerman: I think the legacy Metro long haul business is relatively weak, but we also are seeing.
Karl Ackerman: Strength in some of our.
Karl Ackerman: 800 gig ZR applications in that space as well so.
Karl Ackerman: And then the last thing I'll mention is PON is very weak from.
Karl Ackerman: Our general point of a general comment.
Karl Ackerman: Our thinking is it will remain weak for at least another few quarters.
Karl Ackerman: So I wouldn't necessarily say that we're a bellwether of what's going on in telecom, our markets and our product set is very different than our closest peers.
Speaker Change: Very helpful. Thank you.
Karl Ackerman: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question.
Speaker Change: Our next question coming from the line of <unk> with Stifel. Your line is open.
Speaker Change: Yes.
Stifel: Could you share with us the contribution from the acquisition in the quarter.
Stifel: On the industrial defense being up 18% sequentially was that all organic or did that also include some of the.
Stifel: Acquisition.
Speaker Change: Yes, so maybe I'll I'll say, a few words and Jack can also add so I think we mentioned on our last earnings call that we expected.
Speaker Change: The <unk> business to contribute about $30 million this quarter Q2.
Speaker Change: And.
John F. Kober: So that what that was about the amount. They contributed this quarter was it was a little bit higher than that.
John F. Kober: So very happy about that.
John F. Kober: And then in terms of the growth that we're seeing this quarter Q3 to Q Q2 to Q3.
Speaker Change: And then.
Speaker Change: And then the balance of that is really spread between.
Speaker Change: The telecom and the IND markets and it's.
Speaker Change: It's both it's both will speed business or the RF business and May com business.
Speaker Change: Or said differently the may comp base business is beginning to improve.
Speaker Change: Very good.
Speaker Change: Yes.
Speaker Change: Go ahead, Jack and then and then just to add I think we had discussed.
John F. Kober: The acquired RF business being profitable and generating.
John F. Kober: Some bottom line. So we did see that come through as expected for the for the full quarter here in the March time period.
John F. Kober: Very good and as my follow up Steve You. Just mentioned you expect data center to potentially reach a record year, if im not mistaken the record was 173 and.
Steve: And you just guided to a $50 million quarterly run rates I mean wouldn't you be above that record for this year on lesser.
Steve: I'm misreading some potential volatility in the business for the back half.
Speaker Change: Yes, I think.
Speaker Change: I was looking at the last five years Tori.
Steve: I think the number you are quoting is probably back in 2016 or 17 of sort of the high watermark for the data center.
Speaker Change: And so I have to caveat my comments to being back to 2019.
Tori: Got it so maybe.
Speaker Change: Because of that how.
Speaker Change: How should we think about the volatility of the data center business grew very strongly for two quarters last year. Then it took a breather this last quarter and now starting to grow again, so is that sort of the cadence going forward sort of like two quarters of strong growth of about one digestion any any other types of visibility there will be helpful.
Speaker Change: Well I think you hit the nail on the head, it's a very volatile end market and we can't control that volatility. So I think investors need to expect continued volatility over time.
Speaker Change: Long as the trend line is showing that.
Speaker Change: Overall, the business is growing and becoming more diversified.
Speaker Change: We will be able to manage that business. So.
Speaker Change: You're certainly right that it can turn on and off you typically see that when the Isps release large orders into the supply chain as they are doing a build out or you see that when they're moving from one data rate to another.
Speaker Change: Some people are saying that the speed of these transitions is increasing.
Speaker Change: And so we're trying to keep up with all of that but yes. You are exactly right. The data center is certainly a volatile end market.
Speaker Change: We have a very conservative approach to forecasting and managing the business. So that we don't get ahead of ourselves in terms of investor expectations.
Speaker Change: Thank you.
Speaker Change: Next question coming from the line of <unk> <unk>.
Raymond James: Raymond James Your line is now open.
Raymond James: Good morning, guys. Thanks for taking my question.
Raymond James: One of the questions.
Raymond James: On the data center.
Raymond James: I think copper connections are becoming more and more important.
Raymond James: AI.
Raymond James: Gains approximate especially clusters.
Speaker Change: <unk> is gaining traction.
Speaker Change: But the way you think about it maybe.
Speaker Change: And your positioning because we keep hearing that it could be hundreds of millions of dollars of opportunity longer term. So I just wanted to hear your thoughts on how you think about the ACC market in particular.
Speaker Change: And how you're positioned to capture and leverage.
Speaker Change: That potential.
Speaker Change: Yes, well, we certainly.
Speaker Change: Here are the same things and what we're trying to do is make sure that we have.
Speaker Change: The best.
Speaker Change: <unk> in the market to capture market share to work with all of the cable manufacturers worked directly with the the network folks.
Speaker Change: Work with people that are designing next generation switches working with people that are struggling too.
Speaker Change: Improved signal integrity.
Speaker Change: And so that is where we sit in terms of our position in the market.
Speaker Change: You are correct to say that there is a lot of copper deployed in the data centers.
Speaker Change: More and more of that's becoming electrified to carry higher speed.
Speaker Change: Data and the limitation is certainly distance.
Speaker Change: You can get it to work very well at over short distances.
Speaker Change: But as you go longer distances, you need to have most likely switchover to.
Speaker Change: And active optical cable or a plug a hole solution and use a DSP, especially if its a long link. So I think there is a spot inside of the data centers for active copper cable.
Speaker Change: You have to recognize that the history of our datacenter revenue has always revolved around analog solutions.
Speaker Change: And the active copper cable and products that we're designing is exactly that its an analog solution, which which makes adjustments in terms of the signal integrity through the copper.
Speaker Change: It's also.
Speaker Change: Early in the cycle and.
Speaker Change: And we think over the next few years.
Speaker Change: There is certainly great potential, it's probably one of the highest volume.
Speaker Change: Products in the data center, especially due to the reconfiguration of the data centers. These days.
Speaker Change: And so yes, we are we see the opportunity we're very sober about what that means to make com and how much revenue will generate.
Speaker Change: There is competition there will be more competition.
Speaker Change: And so we think we're in a lead position from a technology point of view and we will work hard to try to keep that.
Speaker Change: Thank you very helpful. And then just one clarification.
Speaker Change: On the cable weakness that you mentioned.
Speaker Change: Maybe you can help us.
Speaker Change: Understand how much exposure you have to cable market in <unk>.
Speaker Change: You seem to think that even next year.
Speaker Change: Market could remain weak just wondering what's.
Speaker Change: Given that level of visibility is why do you think I mean, you talked about DOCSIS, four probably not ready or not.
Speaker Change: Technology issue with more of a market demand issue any color would be helpful. Thank you.
Speaker Change: Yes, we have about maybe five to 10 different product lines that we sell into cable infrastructure and so we follow the industry very carefully.
Speaker Change: During Covid, we saw a huge run up of production.
Speaker Change: <unk> from our cable customers.
Speaker Change: Many of which today are sitting on a tremendous amount of inventory.
Speaker Change: So we think that all of that inventory needs to bleed down with sort of the current generation.
Speaker Change: When we look at the market and the financial models have a lot of sort of this industry. It's struggles.
Speaker Change: It struggles to make money, let's say and so it's a difficult market and theres a lot of pressure coming online in terms of alternative solutions, including PON fiber to the home.
Speaker Change: Satellite solutions and whatnot.
Speaker Change: So.
Speaker Change: I can tell you today, our cable revenue was close to zero.
Speaker Change: And so that's the good news so if anything turns on or comes back.
Speaker Change: Then.
Speaker Change: That will be a tailwind for our revenue but.
Speaker Change: We think that it's going to be some time, we think that the.
Speaker Change: The hardware manufacturers want to continue to sell the DOCSIS three product because they have a tremendous amount of inventory and that could last for a couple of years.
Speaker Change: Before people start investing and it's a big it's a heavy lift to launch DOCSIS four into the market.
Speaker Change: So we will have to wait and see.
Speaker Change: We continue to engage the customers we have some great differentiated technology.
Speaker Change: And.
Speaker Change: As we think about the next three years.
Speaker Change: Like I mentioned, we are keeping our expectations very low.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of Peter Peng with Jpmorgan. Your line is open.
Peter Peng: Hey, good morning, guys and thanks for taking my question I wanted to touch on the gross margin and what your expectations are for the recall for the.
Peter Peng: But we will see our business that you were in the low 40, then there's plans to maybe bring that up to 50% as we exit so is that still on track and then just on the overall.
Peter Peng: How do we think about gross margin kind of moving forward.
Speaker Change: Yeah, I'll say, just a word on other than Jack.
Speaker Change: Answer to your question so.
Speaker Change: We look at this as a long term project to improve their gross margins.
Speaker Change: In a similar way to what we've what we really did as a company over the last few years.
Speaker Change: Moving may com's gross margins, which were in the.
Speaker Change: Low to mid fifties up to above 60% and we had to do a lot of work internally.
Speaker Change: Operationally yield enhancement programs.
Speaker Change: Managing costs associated with high volume production.
Speaker Change: And so our team is very skilled at taking a business that has.
Speaker Change: Underperforming gross margins and improving them and so that is part of what we're going to do.
Speaker Change: And the last thing I'll say before I turn it over to Jack is we do want to.
Speaker Change: Let investors know that this will take time, it's not there's no magic bullet here that will all of a sudden move there mark the RF power business up.
Speaker Change: To let's say, 60% or above there is multiple pieces inside of that business that will be addressed on a case by case basis. Jack maybe you can add to that just to provide some additional color. We do have numerous margin and yield enhancement programs that are that are occurring throughout the entire may come.
John F. Kober: <unk> in addition to what we're doing more specifically with the acquired <unk> business.
John F. Kober: And then if you take a step back just overall from a gross margin standpoint, there is a number of things that we have going as well from a from a new product introduction standpoint, and we've talked about this a bit in the past with our new product introductions, having gross margins higher than the corporate averages for for May come so that'll be another area that we can.
John F. Kober: To focus on as we go forward that will will support improving margins as we work our way into the future, but it will take time.
John F. Kober: Things don't happen overnight, there's a lot of hard work that goes into it but.
John F. Kober: Going back to where Steve had mentioned.
John F. Kober: Our goal would be to to approach its similar to the way we approach things back in the 2020 through 2023 time period with.
John F. Kober: Looking to make incremental improvements across the business overtime.
Speaker Change: Got it thank you.
Speaker Change: And then for your data center can you.
Speaker Change: I'll provide some color on what's the exposure to more of the higher speed lane products versus the more legacy and then as we think about the 1216 products what kind of is there any content gains that you guys are expecting from this.
Speaker Change: Yeah.
Speaker Change: Yes, so the.
Speaker Change: Just sort of looking at the recent quarter I can say that the vast majority was servicing 800 gig applications.
Speaker Change: So more than 50%.
Speaker Change: The legacy business.
Speaker Change: Has been improving as I mentioned in my comments that includes.
Speaker Change: 100 gigs CW DM for long reach type applications, we have seen some strength there also.
Speaker Change: One.
Speaker Change: It has been showing some improvements.
Speaker Change: So the legacy business is moving in the right direction, nothing Earth shattering, but certainly we are seeing positive trends there.
Speaker Change: In terms of the content for the one six.
Speaker Change: Primarily revolves around <unk>.
Speaker Change: Laser drivers and trans impedance amplifiers that those are the those are the two functions that we want to sell into the <unk>.
Speaker Change: These.
Speaker Change: Into this hardware.
Speaker Change: Also it's not just on the optical side. It's also on the active copper cable side.
Speaker Change: Our customers want to move 1.6 over copper if it's possible.
Speaker Change: We're certainly up for the challenge.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: I'll turn the call back over to Mr. Steve Daly for any closing remarks.
Stephen G. Daly: Thank you in closing I would like to thank our employees customers and suppliers for making these results possible.
Stephen G. Daly: We are excited to be involved with new R&D programs in cutting edge data center applications for next generation high speed infrastructure and to service the growing satcom market.
Stephen G. Daly: We will continue to work as a team to meet our customers' needs and execute our strategic plan.
Speaker Change: You will have a nice day.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, this conference for today. Thank you for your participation and you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.