Good afternoon, and welcome to MACOM's Fiscal First Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. As a reminder, this conference call is being recorded today, Tuesday, February 5, 2019. I will now turn the call over to Steve Ferranti, Vice President of Investor Relations at MACOM. Steve, please go ahead.

Thanks, Josie. Good afternoon, everyone, and welcome to MACOM's first fiscal quarter 2019 earnings conference call. Joining me today are MACOM's President and Chief Executive Officer, John Croteau; and Senior Vice President and Chief Financial Officer, Bob McMullan. If you have not yet received the copy of the earnings press, you can obtain a copy on MACOM's website at www.macom.com under the Investor Relations section. Before I turn over the call to John, I would like to remind everyone that management's prepared remarks and answers to your questions contain forward-looking statements, which are subject to certain risks and uncertainties. Because actual results may differ materially from those discussed today, MACOM claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. For more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOM's filings with the SEC, including its current report on Form 8-K filed today, its annual report on Form 10-K for the fiscal year 2018 filed on November 16, 2018. Any forward-looking statements represent management's views only as of today, February 5, 2019, and MACOM assumes no obligation to update these statements in the future. The Company's press release and management statements during this conference call will include discussions of certain adjusted non-GAAP measures and financial information, including all income statement amounts and percentages referred to on today's call unless otherwise noted. These financial measures and a reconciliation of the 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 and can be found on 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 at least 30 days in the Investor Relations section of MACOM's website. And with that, I'll turn over the call to John for his comments on the quarter.

Thanks, Steve. Welcome, everyone, and thanks for joining us today. I'll begin today's call with an overview of our first quarter results for fiscal 2019. I'll then turn the call over to Bob McMullan, our CFO, who will review our financial performance in further detail. I'll conclude today's prepared comments by discussing key in-quarter milestones related to our secular growth drivers and close the call with guidance for the second fiscal quarter of 2019. Jumping right into the numbers, revenue for the fiscal first quarter was $151 million, roughly flat sequentially. Adjusted gross margin was 56% and adjusted earnings per share was $0.20 at the midpoint of our guidance range.. Overall, this was a solid quarterly performance in the phase of a challenging macro environment. I would like to thank the entire MACOM team for their efforts during the quarter. Before turning it over to Bob to review our Q1 financial results in more detail, I would like to provide a few comments on the current market. Like everyone else, we are currently navigating through several macroeconomic and trade-related prospects. In spite with this, we believe that the second half of calendar 2019 will improve underpinned by the onset of some major infrastructure build outs, most notably in 5G. Based upon conversations with our cloud customers, there is clearly some inventory digestion underway in the datacenter and supply chain. Seasonally speaking, the early part of the year normally trends at lower visibility as or slow going into Chinese New Year. This year trade tensions and recent geopolitical events have exacerbated the situation. In the datacenter optical module supply chain, which has traditionally had a heavy manufacturing presence in China, uncertainty around tariffs and trade restrictions has disrupted order patterns. Cloud customers orders have slowed as they burn off inventory and reassess their long-term manufacturing footprint. Some of the smaller module makers looks to be exiting the space entirely. Additionally, in the industrial markets, we started seeing sluggishness consistent with the macro slowdown that our larger analog peers have been reporting. The net result is that after four consecutive quarters of 8% plus sequential growth in our I&D business, we are anticipating a down quarter in fiscal Q2. These factors are all reflected in our future guidance. To be clear, we view all of these issues as short-term and temporary in nature despite geopolitical and trade-related headwinds, end-market demand was healthy for the year as a whole with 5G in particular expected to drive a rebound as we get into the latter part of the year. I’ll talk more about this later in the call. At this point, I would like to turn it over to Bob for a more in-depth review of our fiscal first quarter financials.

Thank you, John. Good afternoon everyone. Fiscal Q1 continued the trend of improving results for MACOM overall. Adjusted EBITDA increased to $30 million, up 13% sequentially and 41% year-over-year. GAAP cash flow from operations was positive $3 million reduced by an increase in working capital of $14 million. This increase was due to seasonal impacts of many of our calendar year end customers which extended the timing of payments of accounts receivable. Capital expenditures were $12 million, thus MACOM generated negative free cash flow of $9 million as MACOM continues to invest to meet demand and capacity requirements of emerging opportunities and the negative timing effect of increased working capital. Total cash, cash equivalents and short-term investments decreased by $7 million sequentially and totaled $186 million. Revenue in fiscal Q1 was $151 million, up 15% year-over-year from $131 million and flat sequentially. Excluding $12 million of LR4 revenue in fiscal Q1 2018, revenues grew 26% year-over-year. MACOM has one more quarter comparison with the LR4 business. Revenues by end-market, telecom was $50 million and 33% of total revenue, down 10% year-over-year and down 5% sequentially excluding the LR4 revenue telecom grew 15% year-over-year. Datacenter was $43 million and 29% of total revenue, up 24% year-over-year, down 6% sequentially. Industrial and Defense was $57 million and 38% of total revenues, up 41% year-over-year, up 9% sequentially. To note, this was a first fiscal quarter in which Industrial and Defense was MACOM’s largest end-market. Adjusted gross profit and gross margin in fiscal Q1 was $85 million and 56% of revenue respectively, compared to $70 million and 54% of revenue respectively year-over-year and $83 million and 55% respectively on a sequential basis. Operating expenses, total adjusted operating expenses were $63 million, compared to $57 million year-over-year and $64 million sequentially. Adjusted operating expenses…

Thanks, Bob. Now I will provide an update on our segment growth drivers, starting with Cloud Data Centers. We share the view that demand should recover in the second half of 2019. Our cloud customers have said they expect to burn-off inventories within the next quarter or so. The current macroeconomic slowdown and inventory digestion does not change the fundamental need for high speed connectivity in datacenters. Cloud operators revenue streams and growth strategies depend on ultra high speed links between server racks and across their datacenters. We are still in the early innings and transitioned to 100 Gig and ultimately higher data rates inside the datacenters. Customers forecasts for 2019 and 2020 bear this out predicting strong growth in the years ahead for 100 Gig CWDM4 and PAM-4 in spite of the slow start into this year. We continue to make solid progress in commercializing our 25 Gig lasers. Customers want for a current generation of products have been very positive and we are in various stages of qualification across multiple customers. We are not actively negotiating share allocations for 2019. Similarly, we continue to make solid progress commercializing our PAM-4 and L-PIC investments as we work with customers and suppliers to scale these into high volume production. We expect each of these new product lines to incrementally contribute to revenue growth this year independent of the current trade where inventory dynamics in data centers. Finally, I would like to note that all of these opportunities are additive to our current datacenter business. So the aftermarket normalizes, we are well positioned with some earnings growth, It's only an issue of ramp rate and timing. Next, the Global and Homeland Defense. Over the last 90 days, we’ve seen tremendous progress in the sensor program as it moves closer towards fruition.…

[Operator Instructions] Thank you. And our first question will come from the line of Quinn Bolton with Needham & Company. Your line is open.

Hey guys. I understand it’s kind of a challenge in first half of the calendar year. You went through a number of drivers for the second half including the datacom recovery, the launch of 5G both for optical backhaul as well as the gain on silicon. Just kind of wondering as you look at those various opportunities, does one outshine the others? Or did they all sort of contribute pretty nicely, just trying to think about what the biggest driver to second half recovery could be?

It’s a tough question to answer, Quinn. As much as the time hold out on us in the next – in the front half of the year, I think it’s all going to be coming back in the back half. One of the things that is now crystal clear is 5G across multiple parts of our portfolio is happening in a big way. In fact, I will give an example. In our telecom business, one big bright spot is Metro Long Haul portfolio grew 7% sequential and it looks like close to 20% to next quarter. Those are all initial 5G deployments. So, 5G can be happening. Datacenter, we talked to the cloud guys. They are talking about bringing up inventory within this quarter or next. So that should be coming back and looking like growth in the industrial stuff is in a similar state and when we put together full quarters of 8% plus sequential growth, it looks like we get challenge front year for a quarter and now will be coming back, I think we did 40% growth in I&D, as for year-on-year . So it’s I think the second half of the year is actually going to be quite nice.

Got it. And then, just, Bob, you mentioned some expenses here in the first calendar quarter in support of programs launching in the second half of the calendar year. Should we think about OpEx maybe being at a near-term peak in March as you support the development of those programs and then as you get closer to launch, those expenses tail off?

Exactly, Quinn. We have some major tape outs that are happening in our fiscal Q2. Now, we forecasted those to hit our P&L in Q2. They could push that one lower than, but the concept is right is would be the peak of expenses.

Thank you. And our next question comes from the line of Tim Savageaux with Northland. Your line is open.

Hi, good afternoon.

Hi, Tim.

Wanted to follow-up on that Metro Long haul comment and kind of drill down a bit, because that’s certainly is consistent with what we’ve been seeing across the rest of the ecosystem. In terms of the strengths, looking at your – you did declined sequentially in telecom, do we assume that Pon or other markets are a driver there? And what sort of outlook would you have for the – I think you just said, Metro Long haul up 20% sequentially. Want to make sure I heard that right. And how do those dynamics work in terms of overall segment guidance for the market for that?

Yes, as you know, Tim, we don’t guide by segment, but I can give you my color. The way to describe is, we just had further and further deteriorating visibility as the quarter proceeded. We have very low visibility right now. So it’s hard to predict as we felt we opened up our guidance range as well. And you are right, Metro Long haul being up in the other parts of telecom portfolio and Pon with some of the other telecom things that did get classified as telecom also showed weakness, I would say, normally going into Chinese New Year, visibility is low. It’s exceptionally low right now. And a lot of that exposure is frankly China. So, it’s just hard to call, to be honest. That exporters are to call, I think we have to see how lot of geopolitical issues and trade tariffs play out. Until that happens, it’s going to – I just don’t – I don’t anticipate improving this visibility.

Okay. And if I could follow-up on the datacenter side, I’d assume that the inventory digestion we’ve seen, a lot of datapoints in that regard thus far. Is on the IC side, I wonder if there has been any change to the trajectory of your ramp in 25 Gig lasers if that’s been impacted by this kind of inventory situation as well?

Yes, it absolutely is, anytime we have new products ramps in the midst of a pause inventory digestion. The effects of the consuming inventory rather than buying new products. We are proceeding with all the customer qualifications, but frankly speaking, some of our early anticipated ramp for our lasers was customers based in our manufacturing in China and I think it’s very hard to predict what is going to be going on. We saw the deteriorating visibility in order books. We reached out for the cloud customers and they confirmed that they are absolutely sitting on inventory that they need to earn now for the next quarter or so. So, I think they are sitting on the side at this point waiting to see how all the trade situations plays out before they get back into placing orders. This is the best intelligence we have at this time.

Thank you. And our next question comes from the line of Blayne Curtis with Barclays. Your line is open.

Hey guys, this is Tom O'Malley on for Blayne Curtis. Just looking on to the March guidance, you guys gave some color on the different segments. You mentioned industrial and defenses, some sluggishness there and then you just talked about datacenter being a little slower. In terms of the vectors of those three businesses, could you try to help us get a picture of which one is down more than the other? I mean, obviously you called out industrial defense first and there has been some nice growth there, but just giving us a better picture of how those business lines trended to March?

I think – I appreciate the question. You get to the issues of the precision of our forecasting ability, it's hard to really call one down stronger than the others. They are all down for distinctly different reasons. So, it’s hard to call which one would be first. I would say, the I&D right now is in a interesting situation coming off four very strong quarters of sequential growth 8% plus. We’ve seen sluggishness is the right word. Some of our industrial – our customers are like our power transistors that those order kind of dry up and that we are kind of exposed. We have that impact to the export for the aerospace customers. That’s kind of impacting the down quarter. That said, we have actually seen in the last few weeks uptake in our diode products and LMICs in terms of order intake. So, there is – it is starting some life, but it’s still too close to call at this point. The other stuff, I mean, it’s just a matter of core visibility to be honest. So it’s hard to really predict what the degree of precision.

Great. That’s fair enough. And then, just a little more color, you guys talked about your PAM4 product kind of layering in, in the second half this year. Could you just talk about how your progress is with that product and where you think you are going to win versus some of the competition? Obviously, there is a couple of guys out there today with solutions. What makes you guys win versus those existing suppliers? Thanks.

Yes, so, very good question. I think one thing that I would point out that I don’t think is well understood is, we are truly a semiconductor component supplier. We don’t supply transceivers. So where the money is this year, very clearly and where the first adoption mainstream semiconductor volumes are is in our 100 Gig. So we are fixated on holding a very strong share position in 100 Gig. Frankly, the guys who matter in terms of network OEMs, module guys and so on in currently a high consolidated supply chain in datacenters. We’ve got a fabulous position. So that’s where our focus is. I think there is some confusion where we get lumping with other people who are fixated on 400 Gig, 400 Gig for the next two three years since they get to Tomahawk 4 timeframe. 400 Gig is really a transceiver business. It has a nice transceiver business at that level. But frankly the customer forecast for the next two three years we are not fixating on 400 Gig. There are other things that we are doing in 400 Gigs where if that makes sense in a transceiver business, but we are fixated on ramping the 100 Gig. And that is perfectly happening in the second half of the year.

Thank you. Our next question comes from the line of C. J. Muse with Evercore. Your line is open.

Yes, good afternoon. Thanks for taking the question. In your prepared remarks, you talked bit on GaN on Silicon. I am curious if you could kind of walk through where you are and provide an update on guide activity and I guess, given foundry arrangement can you kind of walk through, I wish to think about revenue opportunity and gross margin profile near-term?

Yes, so, it’s like a three or four maybe question, so on the GaN on silicon opportunity as I reported last quarter, when we recover the patents and get them signed back probably some more accurate description from Infineon, some of the major customers opened up with the advanced forecast and we are very pleasantly surprised. From a dollar content standpoint, it’s three times bigger than the opportunity in the 3G and 4G cycles which is very encouraging. It’s happening in this year. We are active with the programs that are meaningful in terms of ramping that growth. And it’s 100% right now an operational scaling issue in getting volume wafer supply. We are talking about wafer units which are in excess of the industry supply of – lost in the previous cycle. When I say industry supply, in my days, it was NXP Infineon and Freescale, three very large volume suppliers and we are sitting in a position where we need to be able to enable a supply chain that is greater wafer supply than most. So it's frankly a very challenging operational issue. One that 70s that I think is lost on many people is, if you have fundamental patents, then you will implicitly have the responsibility to wind up the supply chain. So it's been the focus of our efforts over the past quarter and I look forward to reporting on a lot of that progress in the coming weeks and months.

Great. Just a quick follow-up to Bob. How should we think about OpEx trajectory into June and beyond? And you did speak to perhaps, I guess, some one-time cost, maybe moving through June from March. But just would love to hear a level how to cascade OpEx through the year for you guys?

Thank you, C. J. for the opportunity. So we are going to – as we talked about peak as we have some in product and mass costs that are absorbed and we are forecasting to be complete in our fiscal second quarter. It pushes off into Q3. That impacts a level of EPS and why we have a bit of a wider guidance and traditionally for EPS. But there were also carryover to fiscal Q3 would be probably – it has a lot more visibility for this to come through in Q2. So the peak of operating expense is because we are expensing some assets. It is in the range of $64 million and that will come down again timing of which and how close to get to the $64 million in Q2 versus pushing some out to Q3. But we continue to see operating expenses come down from a peak level of $64 million forecasted or implied in the guidance we’ve given.

Thank you. [Operator Instructions] And our next question comes from the line of Tore Svanberg with Stifel. Your line is open.

Yes, thank you. John a question on the datacenter business. I do appreciate the visibility is low there. But as we think about this inventory digestion, do you think that continues to improve this quarter or do you get a sense that would kind of be more on the stabilization?

Well, I'll give you the exact feedback different cloud customers talked about bringing up inventory this quarter versus next quarter. So I think it’s different between the two. I think we have a two quarter issue around here. Whether this is the bottom or the June quarter is a bottom remains to be seen. I would say t he visibility is just reportable at this point. So it’s hard to call. I mean, to be honest, it’s just hard to call. So when you start materializing, what I would hope is that when the trade issues slightly get higher, as there might be some movement. People seem to be talking a lot and really make a lot of decisions. I think people are just sitting on the sidelines. So we can think about who their long-term supply chain partners are. I think, there is a lot of different ways that can go how the trade issues plays out.

That’s clear and as my follow-up for Bob, Bob, do you have a CapEx forecast for this fiscal year? And are you kind of done now with some of the bigger CapEx events?

Tore, excellent question and thank you. So, we are in a $16 million range approximately to be spent for the balance of the year. As you may remember, I've talked about a commitment we’ve made with ST that's getting finalized. That is in the range of about $23 million that's influencing that amount of spend for the CapEx for the year. A portion of that should begin in this quarter. It’s not all going to happen in one check, so to speak. It will happen over a couple quarters here in Q2 and Q3 it’s probably finished but that enables and it’s critical to enhance wafer production in the levels to meet not only the balance of fiscal or calendar 2019, but importantly for the ramp in 2000 of wafer requirements. We are working with ST very closely on that as we talked about. So that is an important and critical investment. We have some others as well as we go through that we are not necessarily itemizing and I think our model is 5% of revenues and I think as we get into next year, with improved revenue, we will be back into that model target range, 5% of revenues for fiscal 220, excuse me 2020.

Thank you. And our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.

Hi, this is Timothy Sweetnam on for Mark. And maybe sticking with the cash flow dynamics. Free cash flow was negative in the quarter and this is due in part to the timing impacts for capital items that the company talked about. I was wondering if you could help us understand how we should think about free cash flow dynamics for this current quarter?

So, excellent question. That’s very low as I just mentioned the timing of the ST investment and the CapEx here at $23 million. It’s possible that customer is one-time and not a CapEx as we are still negotiating the characterization of that. But it’s going, the money is going to buy equipment in the fab in Sicily. So we will be – if you assume that full $23 million is expended in the quarter we will be about 10 million to $12 million negative cash flow in fiscal Q2. And with the 60 again is the number there for the year, we will be cash flow positive. I am not giving the number at the moment, but for the year we will be free cash flow positive.

That’s helpful. Thank you. And then, MACOM talked about its analog products such as expense being lumpy to the 5G and the company mentioned positive momentum there. Can you help us understand the content opportunity that 5G base stations specifically from your products and what the company believes MACOM’s market share is?

Sure, so we have two sides that we tend to refer as our receive side. So we are talking about AlGaAs and HMIC as our technology that go into that. But there is insertion loss meaning better receptivity for the fab. And there is really three paradigms I would say it’s sub-6 gigahertz high power base stations. They maybe 5G frequency bands where they tend to be a more a non-massive Mimo, but a Mimo configuration then there is massive Mimo which is lower power per element, but higher volume and on the 30 millimeter wave. We actually have arguably more exciting opportunity in millimeter waves that we will be talking about in the coming weeks Mobile World Congress. So, all three of those are great positions, again, the base station customers are actively sponsoring us. Very, very favorable comments in terms of what that low insertion loss provides them in terms of antenna performance. It basically improves the range of the antenna and the share position is – it’s early days yet. We are not ramping the volume, but we are fairly confident in all three of those. We are going to have what I aspire to as – I call preeminent share position, number one. But we are going to see where the share is captured in terms of which customers capture which share, but we've got a great position in all things happening.

Thank you. Our next question comes from the line of Richard Shannon with Craig-Hallum. Your line is open.

Hi, John, Bob. Thanks for taking my question. Maybe a question John, on the datacenter side, you talked for a number of quarters about your opportunity in developing a transceiver design, I think you had a – I guess, I would call the license a couple quarters ago. Just wanted to get an update of what’s going on with that customer and your success with any other follow-on customers?

I would say, I am reluctant to talk about specific customers and telegraph exactly what their business is doing. But I would say our overall solutions program reference designs for starting the CWDM but moving on to PAM4 is one – is it has very strong momentum in terms of f enabling customers. One of the issues that we are trying to navigate is, some of those early customers are based in China and they are subject to some of these uncertainties in terms of what share they are going to be able to capture supplying out of China. But we are now developing latest engagements are actually outside of China. So, there is nothing that China-specific other than the fact that if you are going for a high volume, low cost manufacturing there is a gravitational force in China. Now this gravitational force – I would say, in China, if the tariff is going to implemented. So, it’s that’s part of the whole complexity that I was referring to in terms of lack of visibility. It has nothing to do with our model of enabling transceiver guys. It’s just a lack of visibility in terms of geopolitical issues in that overall news on our supply chain.

Okay, that’s fair enough. My follow-on question regarding the GaN deployment, you had – in the response to the prior question you had talked about the difficulty, complexity of building up the supply chain. Maybe if you can help us understand with the what are long haul of in terms of making that happen and how much of that is under your control versus not and whether the complexities of geopolitical situation have an impact there, as well?

From a supply chain standpoint, arguably that the fact that we are partnered with ST, a global manufacturer with footprint outside of the US is probably a favor – politically a favorable thing to our Chinese customers. If you refer to the geopolitical issues I would say, when you say totally under our control we are in very close partnership with the relationship with the ST executive team that has never been stronger. I wouldn’t say that’s under our control. Certainly, the enthusiasm, I think that you will hear from ST reflects our whole enthusiasm and actually have the opportunity to introduce them some of the big lead customers. And I think they were very pleased with what they heard in terms of what the demand profile is. But at this point, I will describe that situation has nothing to do with demand. It has everything to do getting this equipment that Bob referred to qualified and producing wafers in an very high volume. And it’s not getting higher production lines, but there is a couple of steps that are again specific, compound semi specific. It’s dropping right into the interesting footprints in their factories. So it’s not like factories have to be built, but it is a significant operational challenge, but it’s similar to my experience working at NXP, ST is a world-class semiconductor manufacturer.

Reaching at a point, I haven’t to this before in the discussions around the ST capital expenditures, but in line and in timing with our investment STMicro is making a substantially larger investment. So this is a partnership that has since coming together for the CapEx. But this is a multi-year commitment on the part of STMicro to this business.

On the catch of wafer equipment and specific equipment is greater on their side.

Much greater on their side.

To be clear, it’s not like we are footing the bill alone. So, yes, I mean, it’s growth actually scaling semiconductor wafer manufacturing at this point.

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to John Croteau for closing remarks.

Very good. Thank you. Before closing out today's call, I would like to mention several upcoming investor events and trade shows that we will be attending. First, we will be at the Goldman Sachs Technology and Internet Conference on February 12, in San Francisco, then over to Mobile World Congress in Barcelona February 25, through 26 where we will be hosting a group event for investors and analysts at 2:00 PM on Monday, February 25 and also hosting one-on-one meetings. Finally, we will be attending OFC in San Diego on March 5 and 6 and we will be hosting one-on-one meetings there as well. If you'd like to arrange a meeting at any of these events, please email us at ir@macom.com. That concludes today's remarks. Operator, you may now disconnect the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.