MACOM Technology Solutions Holdings, Inc. (MTSI) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the M/A-COM Technology Solutions Fourth Quarter and Fiscal Year 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Tuesday, November 5, 2013. I would now like to turn the call over to Leanne Sievers of the Shelton Group, the Investor Relations agency for MACOM. Leanne, please go ahead.

Good afternoon, and welcome to MACOM Technology Solutions fourth quarter and fiscal 2013 earnings call. I'm Leanne Sievers, Executive Vice President of Shelton Group, MACOM's Investor Relations firm. With us today are MACOM's President and Chief Executive Officer, John Croteau; and Senior Vice President and Chief Financial Officer, Conrad Gagnon. If you have not received a copy of the press release, you can access the copy under the Investor Relations section of MACOM's website at www.macomtech.com. There is also a slide presentation that we'll be using in conjunction with today's call that may be accessed through the webcast link on MACOM's website and is also posted as a PDF in the Investor Relations section. Before I turn the call over to Mr. Croteau, I’d like to remind our listeners that management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. And therefore, we refer you to a more detailed discussion of the risks and uncertainties that could result in those differences in the company's filings with the Securities and Exchange Commission, including its Form 8-K filed today and its quarterly report on Form 10-Q filed on August 5, 2013. In addition, any projections as to the company’s future performance represent management’s estimates as of today, November 5, 2013. MACOM assumes no obligation to update these projections in the future, as market conditions may or may not change. Additionally, the company's press release and management's statements during this conference call will include discussions of certain non-GAAP measures and financial information. These financial measures and a reconciliation to GAAP and non-GAAP results are provided in the company's press release and related current report on Form 8-K, which was filed with the SEC today and can be found at the Investor Relations section of MACOM's website. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 30 days in the Investors Relations section. And now, I'd like to turn the call over to MACOM's President and CEO, John Croteau. Mr. Croteau, please go ahead.

Thank you, Leanne; and welcome, everyone, and thank you for joining us today. I'd like to do today's call a little differently this quarter. We have exciting new that accelerates our growth strategy that we believe will be transformative, industry defining and something that will reshape MACOM for years to come. So today, we'll start with Conrad, our CFO, running through the results for the quarter, followed by the guidance for fiscal Q1. I'll then provide some additional color on our results and guidance, and then dive into the big news. Conrad?

Thank you, John; and good afternoon, everyone. During the course of my comments, as well as those made by John, with the exception of revenue, all income statement amounts and percentages will be discussed on a non-GAAP basis. These non-GAAP measures are provided to enhance understanding of our core operating performance, and a reconciliation of each to the most comparable GAAP measure is included in our earnings press release circulated earlier today for your reference. With that in mind, let me now begin a review of our financials for the fourth quarter of fiscal 2013. Revenue was $83.7 million, an increase of 2%, compared to $82.2 million in the third quarter of 2013 and an increase of 12% compared to $74.6 million in the fourth quarter of 2012. Revenue for the fourth quarter was within our range of expectations, driven primarily by increased sales of our standard catalog products across multimarket and ANG markets. Gross profit in the fourth quarter was $38 million or 45.4% of revenue, compared to $37 million or 45% of revenue in the prior quarter, representing a 40 basis points sequential improvement. Gross profit in the prior-year quarter was $32.7 million or 43.9%. Our focus continues to be on improving gross margin through increased sales of higher margin products as well as the ongoing benefits of channel and operational efficiencies. In terms of operating expenses for the fourth quarter, total operating expenses were $21 million, compared to $20.8 million in the prior quarter and $17.4 million in the prior-year quarter. Looking at investments in new products. Research and development expense for the fourth quarter was $10.1 million. This compares to R&D expense of $9.7 million in the prior quarter and $7.6 million in the prior-year quarter, which included a $0.9 million of incrementally favorable foreign research credit, which reduced R&D in the prior-year quarter. R&D as a percentage of revenue represented 12.1% in the fourth quarter, compared to 11.8% in the previous quarter and 10.2% in the prior-year quarter. Selling, general and administrative expenses were $10.9 million, compared to $11.1 million in the previous quarter and $9.8 million in the prior-year quarter. SG&A as a percentage of revenue represented 13% in the fourth quarter, compared to 13.5% in the previous quarter and 13.2% in the prior-year quarter. Income from operations was $17 million or 20.3% of revenue. This compares to $16.2 million or 19.8% of revenue in the prior quarter and $15.3 million or 20.5% of revenue in the prior-year quarter. Turning to income taxes. Our effective income tax rate for both the fourth quarter and the prior quarter was 29%. Our fourth quarter net income was $12 million or $0.25 per diluted share, compared to third quarter net income of $11.5 million or $0.24 per diluted share and net income of $10.4 million or $0.22 per diluted share in the prior-year quarter. The share count used to compute EPS was 48.5 million shares for the fourth quarter, 48.2 million shares for the third quarter, and 47.4 million shares in the fourth quarter of 2012. Turning to the results for the fiscal year. Revenues were $318.7 million, compared to $302.2 million in fiscal 2012. The year-over-year increase of 5.5% was the result of higher demand in our automotive end market, partly offset by lower ANG in multi-market revenue with Networks being approximately flat year-on-year. Gross profit for fiscal 2013 was $142.6 million or 44.8% of revenue, compared to $137.6 million or 45.5% of revenue in fiscal 2012. The primary driver of the 70 basis point decline in gross margin was a shift in product mix, with higher sales of lower gross margin products in our automotive application and lower sales of our higher gross margin products in A&D and multi-market. Operating income for fiscal 2013 and for fiscal 2012 was $61.9 million or 19.4% and 20.5%, respectively. Our effective income tax rate for fiscal 2013 was 27.4% and compares to 31.7% in fiscal 2012. As a reminder, the second quarter of fiscal 2013 included a one-time benefit related to the reinstatement of the U.S. federal R&D tax credit in January 2013, which enabled us to recognize related tax credits arising from calendar year 2012. Net income for fiscal 2013 was $44.9 million or $0.93 per diluted share on 48.1 million shares and included a $0.02 per share benefit from the one-time tax credit. Net income in fiscal 2012 was $42.1 million or $0.94 per diluted share on 44.9 million shares. Turning to the balance sheet. As of September 27, 2013, our cash and cash equivalents were $110.4 million. This represents an increase of $25.9 million from September 28, 2012. Cash flow from operations for the fourth quarter was $8.6 million, compared to $13.4 million in the third quarter and $9.1 million in the fourth quarter of 2012. Cash flow from operations for the fiscal 2013 was $49.4 million and for fiscal 2012 was $35.4 million. During the quarter, we increased our revolving credit facility from $150 million to $300 million, which can be further increased by $125 million subject to certain conditions. Accounts receivable of $63 million compares to $55.2 million at the end of the prior quarter and $54.2 million at the end of the prior fiscal year. Day sales outstanding represents 68 days, compared to 61 days at the end of the prior quarter and 66 days at the end of the prior fiscal year. The DSO increase was largely driven by the timing of shipments within the quarter. Inventory was $54 million, compared to $54.7 million in the prior quarter and $57.5 million in the prior fiscal year. Inventory turns were 3.4, compared to 3.3 in the prior quarter and 2.9 in the prior fiscal year quarter. Capital expenditures were $5.1 million in the fourth quarter and $11.8 million or 3.7% of revenue for the full fiscal year. Depreciation expense on property and equipment for the fourth quarter was approximately $2.5 million. Turning to our guidance. MACOM's fiscal year 2014 is a 53-week year. We have elected to insert the additional week in our first fiscal quarter, which ends January 3, 2014, in order to take advantage of the holiday season in what tends to be a period of slower activity in late December and early January. We currently expect revenues to be in the range of $80 million to $85 million, non-GAAP gross margin between 44% and 46% and non-GAAP earnings per diluted share between $0.23 and $0.26 on an expected 48.6 million shares of outstanding. As of today, we have already shipped or are presently firm booked for 84% of that midpoint of our revenue range. I'll now turn the call back over to John, who will provide further details on the quarter and the acquisition of Mindspeed.

Thank you, Conrad. As Conrad pointed out, we had another solid quarter of taking share with more than 10% sequential growth at our catalog business, driven primarily by sales in multi-market. Our renewed focus on our core catalog business has now resulted in 4 straight quarters of sequential revenue growth. Taking a closer look at our revenue by market, 26% of our fourth quarter revenue was from Networks, 28% from aerospace and defense, 25% from automotive and 21% from multi-market. Multi-market was up 17%, and aerospace and defense was also up 2% this quarter despite a challenging macroeconomic environment. Automotive played out exactly as expected, slightly down, owing to Fourth of July pull-ins into Q3 by Ford, which we had mentioned last earnings call. Revenue into the Networks market was down 3% sequentially, driven by significant softening in our cable TV business. We saw sizable reductions in order intake, which affected Q4 shipments and which we expect will continue through Q1. This was largely offset by 7% sequential revenue growth into wireless backhaul and more than 10% sequential growth in our [indiscernible] electronics business. We continue to take share in wireless backhaul with major design wins for our eBand power amplifiers as well as with our 18 and 23 gigahertz power amplifier portfolio. Much like our peers who are also affected by year-end seasonal effects, we expect soft demand in fiscal Q1, driven by continued softness in cable TV. In addition, we expect a temporary pause in radar shipments in Q1, with order backlog showing full recovery in Q2. With that, I'd like to now talk about today's big news. As Leanne mentioned, you can access the slide presentation on the Investor Relations section of our website as part of the webcast or as a PDF. As you may have read, this evening, we announced the definitive agreement for the acquisition of Mindspeed Technologies based in Newport Beach, California. This move promises to be transformative for MACOM and is a major milestone in the company's long history. The proposed transaction will not only reposition our company, further elevating us as a leading supplier of high-performance RF and microwave solutions, but we believe it also redefines our small corner of the semiconductor industry and the competitive landscape for years to come. Our primary strategic interest in Mindspeed lies in the company's high-margin, high-performance analog business. This acquisition will transform MACOM into a leading global provider of 100G optical solutions and underscores our core growth strategy in the optical and networking markets. Concurrent with our proposed acquisition, Mindspeed is in advanced discussions with a potential buyer for its wireless business, which it plans to sell prior to the closing of our transaction. Mindspeed's high-performance analog portfolio, consisting of market-leading crosspoint switches, optical physical media devices and low-power signal conditioners, diversifies our business into the adjacent enterprise market and we believe aligns perfectly with MACOM's business model, offering gross margins approaching 70%, long product life cycles and sticky customer relationships. Targeted to close in December, we've entered into a definitive agreement to acquire Mindspeed for $5.05 per share and a cash tender offer. The transaction is valued at $271.7 million for Mindspeed's $132 million in trailing 12-months revenue, excluding Mindspeed's wireless business, as well as nonrecurring revenue and $23.9 million of cash equivalents as of September 27, 2013. It's important to understand that the acquisition will be immediately accretive to our non-GAAP gross margin, operating margins and earnings per share in the first full quarter following the closing. With substantial expected synergies coming from corporate overhead, SG&A and planned divestment or restructuring of nonperforming businesses, we currently estimate the transaction will be between $0.15 and $0.20 accretive to our earnings per share in fiscal 2014 and between $0.25 and $0.30 accretive in fiscal 2015. It may not be intuitively obvious to investors, but Mindspeed is highly complementary and compatible to MACOM and can serve as an accelerant to our growth strategy moving forward. They have a long and successful history and deep customer relationships servicing the communications industry. While you may know Mindspeed more for their communications processors voiceover IP and more recently their forays into wireless, the fact is that nearly half of their revenue comes from high-performance analog products for high-speed switching and signal conditioning and next-generation network gear. That part of the business is fully complementary to our portfolio and fits perfectly in our model, sticky value-added products and technologies with gross margins approaching 70%. Over the past year, you've heard me say that we'll spend our M&A dollars to accelerate our growth strategy in 100G optical. And well, Mindspeed is a perfect fit. We believe their strong position with blue-chip communications customers aligns perfectly with our growth ambitions in optical as well as the broader enterprise and networking spaces. Within 100G, MACOM will become the only vendor addressing all segments, long-haul metro and data centers, with a complete portfolio of physical media devices, modulator drivers, transimpedance amplifiers and clock and data recovery circuits, based on all requisite technologies, helium phosphite, gallium arsenide, silicon germanium, all of them. Strategically, the acquisition makes MACOM a much deeper, much broader and more globally diversified force in our corner of the industry. Mindspeed's silicon germanium-based capability will allow us to address new applications and additional system content in our core RF and microwave customers and applications. Mindspeed's market position and strong presence in the Asia Pacific will allow MACOM to broaden our customer base and deepen our customer penetration in this critical part of the world going forward. To top it all off, we fully expect that the acquisition will be highly synergistic and immediately accretive to MACOM's gross margins, operating margins and earnings per share in the first quarter following the acquisition with what we think will be plenty of room for expansion along all fronts going forward. Within the overall Mindspeed portfolio, our primary interest lies in the company's high-margin, high-performance analog business as well as its mature voiceover IP business. These comprise more than 60% of revenues, are highly profitable with 65% to 75% gross margins and have strong technology leadership positions in their respective product and market spaces. Mindspeed has built leadership positions in optical physical media devices, crosspoint switches, signal conditioners, and voiceover IP for enterprise applications. For this reason, we will adopt these businesses and care and feed them forward, if anything, higher than previously anticipated growth in profitability. Mindspeed also has a communications processor business which currently does not align with MACOM's long-term strategic focus. Therefore, options of this business will be explored while continuing to support its customers. Finally, as mentioned earlier, concurrent with our proposed acquisition, Mindspeed is in advanced discussions with a potential buyer for its wireless infrastructure business, which it plans to sell prior to closing. In the event the wireless business does not sell, it will be restructured and wound down while continuing to support its customers. One benefit of this transaction will be to diversify our end-market exposure, the value of which has become evident over the past year. Adding a substantial new revenue stream in central office enterprise equipment should help to weatherproof our business, reducing exposure to capital spending fluctuations in any 1 market, whether it be wireless carrier CapEx, DOCSIS cable-TV rollouts, or lumpy radar programs as were seen in this quarter. Therefore, upon closing of this deal, we intend to report Mindspeed revenues in enterprise as our fifth end-market. Mindspeed has been thriving in the enterprise space for decades, dating back to its roots as Conexant and Rockwell Semiconductor. Their customer base is a veritable who's who list in various communication sectors, from telecommunications to video broadcast systems. Each of these industries is continually challenged to keep up with new demands for bandwidth, new applications and new usage models, such as cloud computing, IPTV, video-on-demand and 4K UHD TV video streams. Applications from Mindspeed's high-performance analog products include high-speed transports switching and signal conditioning and optical modules, line cards, switch cards, backplanes and system chassis. Mindspeed boast technology leadership with the with industry's fastest crosspoint switches, which play a vital role in managing network latency. Latency is the primary value driver in these markets and applications in a world of exponentially increasing data density and numbers of connected devices. As many of you know who've been following MACOM, 100G optical is one of the growth drivers that we've identified for the company going forward. We're in the early stages of an anticipated decade-long buildout of 100G networks in infrastructure that's extremely rich in high-performance, high-value semiconductor content from companies like MACOM. To date, we've established a leadership position for 100G modulator drivers that are used in long-haul applications. These products require compound semiconductor technologies, like Indium phosphide, and gallium arsenide, which is right in our wheelhouse. We believe adding Mindspeed's complementary silicon germanium products and technology will allow us to expand in several dimensions simultaneously. First, we intend to extend into adjacent metro, data center and 100G Ethernet applications, so transmission distances less than 10 kilometers. These are some of the highest growth areas for 100G overall. From our customer's perspective, MACOM will be a clear vendor of choice with leading solutions across their breath of applications and full scope of product requirements. This should enable MACOM to capitalize fully on the buildout of 100G optical infrastructure worldwide. From a customer perspective, the merger of 2 strategic vendors of choice in their respective fields of expertise offers latent value. Mindspeed, like MACOM, is viewed by their long-term customers as a strategic partner that delivers key technologies that enable their own products roadmaps. I believe the combination of MACOM and Mindspeed will produce a totally different animal that no one from our RF and microwave industry or from the high-performance analog world has been able to create. Combined, we think we can solve problems that no one else can address. In addition, the opportunity to service Mindspeed's unique customers and applications with MACOM technologies and products, and vice versa, can be transformative. I've already described the opportunity in the 100G optical space. The same holds true for other high-growth applications, like millimeter wave, satellite communications and microwave AESA radars, to name a few. The combination of Mindspeed and MACOM will bring depth and breadth and what we expect to be significant upside to our growth aspirations. Dating back to our early days as Microwave Associates supplying magnetrons into the first microwave radar systems after World War II, MACOM's roots lie in the U.S. aerospace and defense industry. We've certainly made progress expanding into commercial markets, like cable-TV, wireless backhaul and optical infrastructure that are now sourced heavily out of China as well as Japan and Korea; 27% of our sales are now generated out of that region. By comparison, Mindspeed is light-years ahead of MACOM, if you can pardon the pun; 70% of Mindspeed's sales come out of Asia Pacific. For decades, they've had a well-developed sales channel and deep customer relationships that can accelerate the penetration of MACOM's RF and microwave portfolio in that region. Again, this promises upside to our growth aspirations if this plays out as we hope. The same holds true from a technology perspective. Mindspeed brings along a highly complementary technology base that effectively doubles our addressable market for MACOM's core RF and microwave business. MACOM has traditionally served as the highest performance part of the RF microwave market, which we estimate to be about 25% of the overall $9.5 billion sale. That part, shown here in blue, requires the use of compound semiconductor technologies, like gallium arsenide or gallium nitride, and a broad catalog of standard functional products because it's a highly fragmented market. Mindspeed brings with it silicon-based technologies, notably silicon germanium, that have evolved to similar performance levels and enabled much higher degrees of integration and application specificity. That's shown here in green. Applications that achieve greater scale and volume tend to play to the economic advantages of silicon germanium, that is, low unit costs at the expense of high development expense. With the potential acquisition of Mindspeed, MACOM will become the first RF microwave vendor that can service customers, markets and applications with truly world-class capabilities from gallium arsenide and gallium nitride to silicon germanium. The upside potential to our growth plans is again very substantial. That brings us to our combined financial model going forward, the best part yet. If you look at the last 12 months performance from Mindspeed, alongside MACOM, excluding Mindspeed's wireless business and nonrecurring revenue, it adds $132 million of revenue at 63% gross margin. This would yield a blended LTM adjusted gross margin of 50% for the combined entity. We see plenty of room for further margin expansion, depending on strategic decisions and MACOM's gross margin progression as already planned. Taking into account synergies, mostly in corporate overhead, SG&A and underperforming businesses, we believe we can improve operating margins for the combined entity minimally by 400 basis points. For that reason, you can see why we're excited about the accretive nature of this transaction in all respects. Gross margin, operating margins as well as earnings per share. In summary, I'm personally excited, in fact thrilled, to bring home this transaction to MACOM stakeholders. It's transformative in so many ways, bringing depth as well as breadth to the MACOM portfolio, technologically, geographically and bulking up in our target markets. We will be positioned to become a supplier of choice in 100G, with leadership positions across long-haul, metro and data center applications and covering the full scope of physical media requirements. We can, thus, capitalize fully on the decade-long buildout of 100G optical infrastructure worldwide. To top it all off, we believe the transaction will be highly accretive to gross margins, operating margins and the EPS within the first quarter after closing. We have identified strong synergy potential, which we plan to execute to within the first 100 days of the combined company. Thanks, everyone, for listening. I will now open the call for questions. Operator?

[Operator Instructions] And it looks like our first question are in queue will come from the line of Mark Delaney with Goldman Sachs.

I was hoping you guys could help us first understand as you think about integrating Mindspeed, what can the top line of the Mindspeed portfolio be going forward? I think maybe [indiscernible] the different buckets even within areas that you want to keep, like voiceover IP. I believe there are maybe some different growth rates tied to very high-growth areas, maybe some products that aren't growing quite as fast within Mindspeed that you could maybe address and holistically how we should think about the growth rate going forward?

Sure. So again, the 2 areas that we're really focused are the high-performance analog piece and the voiceover IP piece. Voiceover IP is actually a mature business for Mindspeed. It's in cash cow state. And I think it has a long tail to go. So that is not going to grow. It will decline, but over an extended period. The high-performance analog piece I think has a lot of room for growth. They've demonstrated growth consistently over recent years. Our ambition would be actually to care and feed for them to accelerate that growth. They have a lot of very interesting design wins and applications that have not yet seen the light of day, in addition to the strong position that they already have. So I think the starting point with the $132 million of the trailing 12-month revenues is really just a starting point.

Okay, that's very helpful. And then just within the synergies that you guys are talking about. Can you just help us understand where exactly your assumptions on synergies are coming from? It wasn't completely clear to me since I know on the communications processor business, which you may eventually divest, margins that are -- the gross margins there are lower. So I'm just trying to understand where -- between COGS and OpEx where the assumed synergies are coming out of?

Sure. I'd suggest thinking about it 3 ways. First, and most obvious one is corporate overhead. We have the opportunity to consolidate 2 public companies into 1. That is quite substantial. SG&A is another area. There's a large opportunity to consolidate our respective SG&A expense rates. And then the underperforming businesses, the obvious 1 wireless, on a path to rapid divestiture. We had hoped that we would actually be public with the buyer at the announcements of the definitive agreement here. But it should close before we close on our transaction. And then the other area, the communications processor business, is a nice business for them. It just doesn't fit as well with us. When you look at wireless and comps processor, that has been a very intense area of investment, which at the end of the day doesn't make sense for us to continue. And when you pull those off, what you'll find is very, very strong opportunity for synergies between the 2 companies. I'm reluctant to quantify those. But I think you can see those cooked into the bottom line of our EPS accretion targets.

Our next phone question will come from the line of Harlan Sur with JPMorgan. Harlan Sur - JP Morgan Chase & Co, Research Division: Mindspeed's HPA segment certainly appears to be a great complement to your products and end markets focus. If I look at it from sort of an installed infrastructure corporate culture perspective, right, things like technology development, design methodology, go-to-market, customer engagement perspective, how similar or dissimilar are they from MACOM and do you anticipate much work in integrating both companies?

Actually, a very insightful question, Harlan. From an engineering standpoint, I don't think there's much room for integration or -- I mean the design methodologies that they use for the silicon-based products that they do, which are much higher integration levels of integration than MACOM has traditionally done. That's pretty much a bolt-on with the business unit intact. And I don't think there's any need or desire to integrate that. From a sales and operation standpoint, I think there's enormous room for best practices. We have a cultural belief that best athletes and best practices rule the day. And I think what we're going to find as we dig in -- in fact, the early indications through the management meetings is that there's plenty of best practices that I think will bring MACOM to the next level. And from an operational standpoint, I think early indications are that some of the operational focus that has been applied at MACOM in the years since John Ocampo's buyout can actually improve COGS, operational efficiencies. So I think there's -- try to get it through the talk here, lots of runway for further improvements on all fronts. Harlan Sur - JP Morgan Chase & Co, Research Division: Okay, great. Good to hear. And then does the trailing 12-month revenue and gross margin profile of the combined companies, I think you guys said $451 million and 50%, respectively, include the comps processor business of Mindspeed? Because your commentary seems to indicate that you're going to look for strategic options for the segment as well. And does your $0.15 to $0.20 accretion next year include the contribution from the comps processor business?

So if we find a nice home for the comps processor business, gross margin will be more accretive. That tends to be at the lower end of their gross margin range. And the accretion scenarios on the earnings per share, that will be at the expense of EPS accretion. But the numbers that we quoted are actually worse cases, assuming that we find a buyer. Harlan Sur - JP Morgan Chase & Co, Research Division: And if you, let's say, that you find that there are no strategic options for the comps processor business, does the MACOM team just wind this business down over time?

Yes, I think there's a long runway. First of all, let me say, I believe there is extremely high likelihood that there are some very interested buyers. We'll know that probably before closing. And I would hope to be able to communicate some action on that even before our closing. But the -- in the scenario -- in the unlikely scenario where there isn't a buyer, we just need to fully support customers through the life of their programs. In our operations models, including the synergies, it's based upon supporting customers through their production lives. So like I said, I mean, if anything, that's more accretion from an EPS standpoint. It's just it's cleaner for all stakeholders if we find a nice home. Harlan Sur - JP Morgan Chase & Co, Research Division: Okay. Just my final question. So Mindspeed clearly had a leadership role in networking, enterprise and data center within their HPC and VOIP segments. Can you just give us a sense how big this end market is as a percent of their total HPA business? Is it 80% is networking and data center? Is it 70%? Any color there would be great.

I genuinely apologize, I can't speak to the size of their SAMs yet. I need to get the business in before I can speak knowledgeably about that.

Our next phone question will come from Tore Svanberg with Stifel. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: First question is on technology. John, I was hoping you could talk a little bit about manufacturing here because you, obviously, getting more into the silicon germanium markets. I assume that's nothing that you can potentially install in your own pad [ph]. But help me understand a little bit how the manufacturing is going to look like for the combined?

Yes, I don't anticipate any meaningful changes to the Mindspeed supply chain. They have a long -- and they are close cousins with the Tower Jazz operation based upon their common roots in Conexant. That is a fabulous relationship as I understand it. And I don't anticipate any need from that supply chain standpoint to change. We have identified some conceptual efficiencies that we can get in terms of package vendors over in Asia. But it's certainly, as you point out, not something that we would -- this type of business is not the type of business that you want to support from an internal supply standpoint on either front end or back end. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: Very good. And I know it's still early days here. But is the longer term goal potentially to start adding both sets of technologies into perhaps a module type solutions and subsystems? Because I'm just trying to think longer term adding RF together with silicon, is that something that your customers are asking more and more about.

Absolutely. In fact, we have some really, really exciting customer wins already with combined silicon germanium, gallium arsenide solutions. In some cases, packaged together in modules. In other cases, as chipset solutions. I had hoped that I would have one of those very exciting customers public before this call. But to be honest, this deal took all of our bandwidth over the past month or 2. But the direct leverage and synergy of putting together those kind of solutions is where we really think in our core business of RF and microwave applications, whether it be satellite communications, whether it be AESA radar systems, the opportunity for cross-leverage, having the full boat of technologies, from GaAs, GaN, SiGe, all in the bag of tricks, can really elevate us to a different level in the industry. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: Very good. One last question I don't want to sort of certainly get away from the acquisition announcement. But on your earnings report, you talked about an inventory correction in cable TV, could you just elaborate a little bit more on that? It sounds like that's going to continue in the December quarter, but any more detail that you can share with us would be helpful.

Yes. So about mid-quarter, we saw a precipitous decline in order intake in the cable TV area. Our biggest customer order rates dropped in half, and it was -- wasn't just one customer. It was across the board. And I'll point to -- if you look at some things -- other people are announcing in the industry -- some people use Entropic as kind of a reference point in this area. Entropic announced at their last call 20% sequential decline. Cisco in their last earnings call announced that 40% sequential decline in set-top box shipments. It's that kind of dramatic drop that we saw. It impacted our revenue in that part of our business by 13% down quarter-on-quarter, so it's not insignificant. And that was only for part of the quarter. So we think it's really going to be tough road to hoe for the next 90 days. By the way, we speculate that this has to do with transitions in the DOCSIS standards. Finally, the DOCSIS 3.1 spec was announced, I think, last week. It was released. And it may be that we're dealing with transitions set-top boxes, which I would suspect might extend more than one quarter. Not sure, but I don't think we're in this alone by any means.

[Operator Instructions] And our next phone question will come from Steve Smigie with Raymond James. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: If I look at my Mindspeed model here and look at the high-performance analog business, I certainly have a decent amount of growth built in going to 2014 for the HPA. Clearly, clock and data recovery, crosspoint switches, stuff like that looks pretty exciting going into future. But already assuming their CCP business drops pretty meaningfully into next year, obviously, that carries some of the stuff that you're not interested in. Can you talk a little bit about how we should think about the opportunity on the CCP side? Is there stuff that you're just going to walk away from and already have some decline built in there? So would what happens there just sort of be a natural drop in that revenue? Or are you going to take sort of aggressive action to sort of cut some of that potential revenue there from the stuff that you don't want to deal within that CCP business?

Yes, I think, Steve, it's too early for me to be commenting about how we're going to manage subsets of the HPA portfolio on a go-forward basis. I can tell you in aggregate with all the puts and takes with any business, including theirs, they're predicting growth this year and very healthy growth within that segment. So I'm not sure if -- even if I could answer the question knowledgeably, I think it would be inappropriate to do so. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Right. The HPA, I agree on the growth. I was more just on the other business that it's outside of the voiceover IP stuff. There were parts that you were not interested in. And I was just wondering are you guys going to sort of actively walk away from revenue -- stuff that you don't want is really kind of where the question is coming from? Or do you just let it drift down naturally, yes?

I'm sorry, if I just said CPC. You mean CPE. Okay. Yes, on the communications processor, no, it's not an issue under any circumstance of walking away from revenue. Absolutely supporting all customers and very strong design wins, I mean, that's been a strength of Mindspeed for many, many years. And it's not about actively shutting down healthy businesses. Our comment about pursuing strategic options is all about the fact that -- I mean to be blunt MACOM is an a communications processor company by background. The HPA business fits from a financial model standpoint and from an overall solution standpoint far more adjacent. And I think there are wonderful places where the CPE business can thrive. But in the event that it stays in our portfolio, there's no need to be extreme or religious in any respect. I think it's all about continuing to generate revenues in that space as long as possible. And perhaps a very healthy life like the voiceover IP business. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, great. And just, Conrad, if I could ask, I think you mentioned you're sticking an extra weekend. And I just was curious. I'm not sure if I heard you correctly. Is that in this sort of calendar fourth quarter that we see that extra week.

That's correct, Steve. This year our year ends on the Friday closest to the end of September. This coming year happens to be a 53-week year. And we had to select a quarter to have that extra weekend. So we opted with the December quarter because it's light in the market. The holidays, both Christmas and New Year's, fall on midweek. It's a Wednesday, and it just seems appropriate given the demand and supporting our customers that we could take that 14th week and not really impact anything dramatically. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Right. So in terms of thinking about that, normally that's, okay, an extra week like 7% or something like that. But because of the holiday is it fair to think that maybe on the revenue side it's only like 4% or 5% as compared to sort of typical seasonal norms?

I would say you have to be cautious because whether it's the 6% or 7% or 4%. Both from a supply as well as demand standpoint, we see that last week of the year typically very soft. And because, as Conrad said, both holidays fall in the middle of the week, our 13th and 14th week will be Christmas week and then New Year's week. So we're concerned both -- frankly as much from supply of our vendors as well as from a demand from our customers standpoint. The other thing that it gives us the opportunity to do is to manage OpEx back to a 13-week equivalent. So I think that's -- it's fortuitous the way the holidays fall into the Wednesdays mid-week this year. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Right, that makes sense. And not to ignore MACOM completely here, given the excitement about the acquisition, but I was wondering if you could talk a little bit about the aerospace business and about air-based radar. Obviously, I know short term there may be a little bump; but more importantly, can you talk about how significant that air-based radar is relative to the overall aerospace and defense business. Is it 50% of that business? And should we think about that as air-based is the most significant portion of radar? So obviously you talked about doing like seaborne radar. But I'd have to imagine that the air-based is the most significant portion too?

Yes, I would say the majority of our radar business today is actually not airborne. It's ground-based. It's air traffic control, weather radar and such. It's not -- the airborne radar I think you may be referring to is the stuff that we announced in our last quarter with Northrop Grumman. And I would say radar is heavily driven by power transistors today. We actually have for next-generation power transistors and core chips for X-Band AESA radar systems. So it's going to be a very, very nice growth business for us for decades to come. But I would say the way to think about our aerospace and defense business today is it's very heavy cataloged product off a very broad-based of customers and applications. And I think that may be the reason why as we focus back in that core business we continue to be able to demonstrate growth; again 2% sequential growth again this quarter on the back of catalog sales that were over 10% up. So it's not so much application-specific radar in that part of the portfolio today. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: If I could sneak one more in. Because catalogs obviously doing well. You guys are capturing share there, reinvigorating that business. How much of the business mix these days is, say, catalog versus -- obviously, [indiscernible] is not and MIMICs is not. How much of the mix is catalog because it seems to be seeing above normal growth?

Yes, I'd say in previous quarter -- I didn't do the calculation. Maybe someone will do it while we're talking here, but it's been about half of our business over previous quarters. And it's probably slightly above half because we continue, in light of some of these headwinds, like the cable TV is a great example this time, we grew over 10% in the catalog business this time. So we grew a few percent in total, over 10% in the catalog stuff. So it's testament -- I just love these catalog franchises. It's weatherproof, tends to be weatherproof, if you focus on i., It's a core strength of ours. So I think we're doing a good job extracting growth where in aggregate the market is not growing. So it's something I'm actually quite proud of to be honest.

Our next phone question will come from Richard Sewell with Stephens.

This is Richard in for Harsh. I guess starting with the new VOIP business for Mindspeed. You mentioned that it's a mature market and declining. Can you give us any color on the kind of trajectory that you're looking at on this decline?

Yes, I should be cautious about any kind of forward-looking statements on Mindspeed's business again were only a definitive agreement. Maybe at closing we can help shape some of those models.

Okay, fair enough. And then for my follow-up, looking at your go-to-market strategy, are there any changes as Mindspeed generates a large percentage of revenues from Asia versus MACOM that has historically has had a bigger percentage from the Americas?

Yes, I think this is one of the very, very large latent opportunities for this. I mean you look at it from an accretion standpoint, just from a last 12-month basis, adding the synergies, it's a sweet deal to be honest. But where I get thrilled about this is the synergy on the technology front with the silicon germanium competency and the Asian sales force. As we all know, especially the Networks market, as opposed to the aerospace and defense, for instance, is -- and in the enterprise sector are all very heavily sourced out of Asia. My experience coming into the company a year ago is our sales channel is still in early stages of development, where theirs is a very mature. I think the opportunity to address some of those core blue-chip customers in that region just goes up by an order of magnitude. And the ability to then leverage that broader sales footprint into the broader customer base goes up dramatically as well. So I am very much looking to the soft synergies. The hard synergies, in terms of OpEx, we've got clear line of sight we'll execute to in the next 100 days. But the soft synergies on the upside potential is where this thing gets really exciting.

Great. And then if I can sneak in one last one. Catalog has done well over the last few quarters. Do you expect the strength to continue in the December quarter? Or what are the puts and takes there?

Yes, I think it is definitely going to continue to do well. How well it continues to surprise us, quite frankly. If the cable TV business didn't fade in the past quarter, dropping, we would have been right up at the top end of guidance on the back of the catalog business. It's hard to predict the future all the time in terms of broad-based businesses. And frankly, the headwinds with the cable stuff are just really difficult this quarter to offset. But I'm confident that quarter-by-quarter we continue to find new customers, new business. We have reinvigorated our broad-based distribution channel with dramatic increases percentage-wise, leveraging that broad customer base. So I'm bullish, but it's hard to quantify.

And presenters, at this time, I'm showing no additional phone questions in the queue. I'd like to turn the program back over to Mr. Croteau for any additional or closing remarks.

Okay, thank you. In summary, I'm very pleased with our continued execution as represented by our 4 consecutive quarters of revenue growth, despite the challenging macroeconomic environment. In addition, our proposed acquisition of Mindspeed further underscores our growth strategy in the commercial communications market and transforms MACOM into a global leader of 100G optical solutions. As we look to fiscal 2014, we remain focused on executing our growth strategy and expanding margins, while further leveraging our operational efficiencies and capitalizing on the expected synergies from the acquisition. Lastly, Conrad and I plan to be on the road in the coming month meeting with investors. So please be sure to contact us if you would like to arrange a meeting. We want -- I'd like to thank everyone again for joining us today on the call, and I look forward to reporting our continued progress next quarter. Operator, you may now disconnect the call.

Understood, sir. And thank you, presenters, and thank you, ladies and gentlemen. Again, this does conclude today's call. Thank you for your participation, and have a wonderful day. Attendees, you may now all disconnect.