MACOM Technology Solutions Holdings, Inc. (MTSI) Q3 2024 Earnings Report, Transcript and Summary

Welcome to MACOM’s Third Fiscal Quarter 2024 Conference Call. This call is being recorded today, Thursday, August 1, 2024. [Operator Instructions] I will now turn the call over to Mr. Ferranti, MACOM’s Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Olivia. Good morning, and welcome to our call to discuss MACOM’s financial results for the third fiscal quarter of 2024. I would like to remind everyone that our discussion today will contain forward-looking statements which are subject to certain risks and uncertainties as defined in the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOM’s filings with the SEC. Management’s statements during this call will also include discussion of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the company’s press release and related Form 8-K, which was filed with the SEC today. With that, I’ll turn over the call to Steve Daly, President and CEO of MACOM.

Thank you and good morning. I will begin today’s call with a general company update. After that, Jack Kober, our Chief Financial Officer, will review our Q3 results. When Jack is finished, I will provide revenue and earnings guidance for fiscal Q4 and then we will be happy to take some questions. Revenue for the third quarter of fiscal 2024 was $190.5 million and adjusted EPS was $0.66 per diluted share. During the quarter, we generated over $40 million of free cash flow, and we ended the quarter with approximately $521 million in cash and short-term investments on our balance sheet. Our business remains healthy and profitable, and we continue to generate strong cash flow while investing in future growth opportunities. In Q3, our book-to-bill ratio was 1.1:1. In our turns business, where orders booked and shipped within the quarter was 21% of our total revenue. Booking trends are one of the most important metrics we track as they are a leading indicator of future revenue. We recognize bookings can be volatile. However, we are pleased that this is the third quarter in a row that our bookings improved. It’s also the second time in 12 months that we achieved a quarterly book-to-bill ratio of 1.1. New order demand was strongest in our I&D and Data Center end markets. Q3 revenue performance by end market was as expected, with Industrial and Defense at $90.9 million, Telecom at $50.6 million and Data Center at $49 million. For the quarter, Data Center was up 13.6% sequentially, Telecom was up 7.1% sequentially and I&D was flat sequentially. I’ll note that our I&D business had record revenues in the prior quarter. Industrial and Defense is our largest market, and our I&D revenues have been steadily growing over the past few years. We believe the secular trends for the I&D market are favorable and our growth strategies are working. Our focus over the last few years has been strengthening our engineering capabilities to better serve these customers. For example, we approach our Defense customers as merchant suppliers of high-performance IC components. In doing so, we offer standard and custom IC and packaged solutions to support their needs. We embraced custom design projects, which we view as a great way to build strong relationships with our customers’ engineering teams. We also offer our Defense customers access to our wafer foundries in approximately 20 proprietary process technologies. In some instances, our Defense customers have their own wafer fabs and IC designers, but they are inclined to use DoD trusted foundries like MACOM to access differentiated process technologies. And we offer to design and manufacture custom component module and subsystem solutions, but only in areas where we have high MACOM IC content and true subsystem expertise, which typically revolves around millimeter wave, very high RF or microwave power, filtering and switching and specialized fiber optic subsystems. On last quarter’s call, I highlighted electronic warfare radar anti-drone and integrated battlefield systems as 4 examples of defense applications, which can utilize MACOM’s technology. We see a number of large opportunities across these and other application areas at our major Defense customers. As a reminder, our focus has been and will continue to be developing products and technology for the highest frequency, highest power and highest data rate applications. We are pleased that our newest technology and latest products are being evaluated and adopted by leading defense OEMs and government customers. And finally, I’m pleased to announce that during the quarter, we were awarded a special development contract from the U.S. Air Force. Under the contract, we will conduct research and development on microwave filter technologies using novel epitaxial and semiconductor processing. We are excited to begin the work, and we believe our efforts will help improve the performance of next-generation defense systems, which require more precise filtering. We are pleased to see that our Telecom end market revenues have stabilized, albeit in a generally weak environment for a few of our core submarkets. I’ll note, we are not seeing signs of a broad telecom recovery. However, as noted last quarter, we are seeing platform shifts at our lead 5G customer, which may result in revenue growth opportunities for MACOM over the next 12 months. In addition, we believe we are gaining market share at certain key 5G accounts. While global 5G network CapEx spending may have peaked, we are still excited about the growth opportunities in 5G networks. Our existing customers are providing MACOM more opportunities on the transmit and receive side of 5G radios as well as the high-speed digital and optical portions of the network. A bright spot in the telecom market is Satellite Communications, or SATCOM. We see opportunities to sell our products into a growing number of satellite constellations, which are delivering broadband Internet and direct to sell services to global customers. These systems typically operate at microwave or millimeter wave frequencies which plays to MACOM’s strengths. The Data Center end market continues to be a dynamic market with significant growth opportunities. The industry’s movement to higher data rates, combined with increasing number of interconnects that are required for next-generation networking and high-performance computing applications, are creating meaningful opportunities for MACOM. For example, a single compute cluster could use hundreds of thousands of cores or GPUs across hundreds of equipment racks. Connecting everything together requires large volumes of fiber optic and/or copper interconnects, creating a potential opportunity for MACOM. Within these complex compute architectures, there are typically a wide range of connectivity requirements, including GPU to GPO, switch to switch, network interface card or NIC to switch and DCI links. Connectivity requirements can vary by customer, including linked distance, protocol and physical medium. As a result, our strategy is to bring to market a product portfolio that offers solutions for short- and long-distance connections, utilizing NRZ, PAM4, coherent modulations carrying Ethernet, PCIe or other customer proprietary protocols. We designed high-speed analog chips to support both single mode and multimode fiber optic deployments, using DML, VCSEL or EML lasers as well as silicon photonic modulators with CW lasers. And of course, we offer analog products that support both retimed and linear architectures, or said differently, we can sell our ICs to work in conjunction with DSPs or to replace DSPs. We believe there is a fast pace of innovation within the data center industry. For example, today, 400G and 800G data center systems operating at up to 100 gigabits per lane are being deployed utilizing our products. At the same time, these systems are being designed, production ramped and deployed, we are also seeing new and increasing demand for our 200 gig per lane chipsets for both 800G and 1.6T applications. As part of the deployment of 200G per lane network architectures, we see our customers designing and adopting 200G per lane linear pluggable optics, or LPO, and active copper cables, or ACCs, in their networks to improve latency, thermals and power consumption. Our products can be very helpful in these applications, and they have been well received by leading customers in this space. As we look ahead, we see growth in our Data Center business being driven primarily by our 100G and 200G per lane solutions across optical and copper. Demand for our legacy Ethernet data center products at 25G and 50G per lane, which has become a smaller part of our Data Center revenue, has recently shown modest improvements, and we are pleased to see these positive trends. And finally, as 100G per lane and 200G per lane products become a reality, our engineering teams have already started designing the next-generation products to support 3.2T applications. And now I’d like to discuss a few recent highlights. In June, we attended the 2024 International Microwave Symposium, which was one of the most important trade shows of the year for MACOM. We use this venue to showcase our latest diode, RF power and MMIC product lines. This year, we organized 14 product demonstrations at our booth with products from across our core business units as well as from our recent acquisitions. Some of these demos illustrate how our recent acquisitions and their associated technologies integrate seamlessly into our core portfolio and business. For example, we demonstrated a 100-watt C-band GaN-on-silicon carbide power amplifier MMIC with 57% power-added efficiency in an over-molded package in conjunction with the silicon PMIC, or power management IC. We believe this is one of the highest efficiency power amplifiers in its class, and our team was able to combine the GaN-on-silicon carbide technology from the recent RF business acquisition, together with our silicon power management IC technology designed by our analog designers. We demonstrated GaN-on-silicon low noise amplifier, or LNA, with one of the fastest recovery times in the industry, processed at our new French wafer fab. The combination of low noise figure, superfast recovery time and ruggedness make our LNAs attractive for use in radar and electronic warfare. We are pleased that our North American applications and sales teams have successfully introduced the product line to new customers that can exploit the key features of this existing product. And finally, we demonstrated our Linearizer technology together with our GaN amplifier pallet technology to highlight how it’s possible to simultaneously optimize linearity, power-added efficiency and output power in SATCOM applications. These are just 3 examples of where our M&A strategy has created a 1 plus 1 equals 3 results. I’ll note, we are very pleased with the progress we are making with our recent acquisitions, and I especially want to acknowledge the strong support from Wolfspeed over the past quarter. I would like to take a moment to update investors on our pursuit activities for CHIPS Act Funding. As reported previously, MACOM completed the full application process for our Lowell, Massachusetts wafer fab. Today, I can report we also completed the full application process for the RTP, North Carolina wafer fab. Congratulations to our capture team for developing these plans, completing the documentation and putting forward compelling applications. In addition to pursuing domestic government funding, we seek French state and European Union funding to support capital investments and technology development projects at our MACOM European Semiconductor Center, or MESC, near Paris, France. Our small but strategic semiconductor center is located in the heart of Europe and is ideally situated to support European telecom, industrial, automotive and defense customers. I’ll note, since the acquisition in the spring of 2023, our teams have been actively working to bring online and qualify MESC’s existing 6-inch wafer production line. We expect this activity to increase our manufacturing capacity while lowering manufacturing costs. As a reminder, our goal of modernization and expansion of our facilities is driven by our long-term strategy to make MACOM stronger and more competitive, and it is not dependent on external funding. Before turning the discussion over to Jack, I am pleased to report that in July, we completed an update to our 5-year strategic plan. We believe that detailed long-term planning is essential to be successful in the semiconductor industry. And while our plan is confidential, I can share that it revolves around a few central themes, which are: one, to focus on market positioning to capitalize on trends; two, execute advanced technology development; three, strengthen our franchise; and four, always look for ways to differentiate ourselves from the competition in order to win market share. Our long-term goal is to build a unique, best-in-class and diversified semiconductor portfolio, which enables MACOM to capture a larger share of the market. We are excited about the future and confident we can continue to gain market share. Jack will now provide a more detailed review of our financial results.

Thank you, Steve, and thanks to everyone for joining the call this morning. Revenue for the fiscal third quarter was $190.5 million, up 5.1% sequentially based on growth in our Data Center and Telecom end markets. Industrial and Defense markets were flat sequentially. On a geographic basis, revenue from U.S. domestic customers represented approximately 46% of our fiscal Q3 results, up from 44% in fiscal Q2. Adjusted gross profit for fiscal Q3 was $109.5 million or 57.5% of revenue, up 40 basis points sequentially, increasing from 57.1% in Q2. I would like to highlight that our operations team has been able to control costs and also execute improvement plans across the entire company, including within our recently acquired businesses, helping to increase our gross margin. As we implement additional operational improvements, grow our revenue and better utilize our wafer foundries, over time, we expect our gross margin to get back to prior levels of 60% or better. Total adjusted operating expense for our third fiscal quarter was $63.9 million, consisting of research and development expense of $41.5 million and selling, general and administrative expense of $22.4 million. Total operating expenses were up by $600,000 sequentially, primarily due to R&D investments in new product initiatives. Adjusted operating income in fiscal Q3 was $45.6 million, up from $40.2 million in fiscal Q2 2024. Adjusted operating margin was 24%, up 180 basis points from fiscal Q2. The sequential increase was driven by higher revenue, improved gross margin and management of our operating expenses. Depreciation expense for fiscal Q3 was $7.3 million, essentially flat on a sequential basis. Adjusted EBITDA was $53 million, up $5.5 million or approximately 12% sequentially. Trailing 12 months adjusted EBITDA was $188.6 million. Adjusted net interest income for fiscal Q3 was $4.8 million, roughly $450,000 higher than the prior quarter, primarily due to growing cash and investment balances. Our adjusted income tax rate in fiscal Q3 was 3% and resulted in an expense of approximately $1.5 million. Our net cash tax payments were approximately $1.7 million for the third quarter. We expect our adjusted income tax rate to remain at 3% for fiscal year 2024 and through fiscal year 2025. Fiscal Q3 adjusted net income was $48.9 million compared to $43.2 million in fiscal Q2 2024. Adjusted earnings per fully diluted share was $0.66 utilizing a share count of 74.2 million shares compared to $0.59 of adjusted earnings per share in fiscal Q2. I would like to highlight that during the third quarter, as a result of our average stock price being above the strike price of our convertible notes, our diluted share count increased by approximately 1% as compared to the prior quarter. Now moving on to operational balance sheet and cash flow items. Our Q3 accounts receivable balance was $106.8 million, down from $120.2 million in fiscal Q2 2024. As a result, days sales outstanding were 51 days compared to 60 days in the prior quarter. Inventories were $190.7 million at quarter end, up sequentially from $177.8 million. Inventory turns were 1.7x, down sequentially in Q3 from 1.8x in the prior quarter. The sequential increase in our inventory balance was driven by anticipated higher demand within our Data Center business, the timing of certain program shipments and also inventory builds to support future revenue. We feel the quality and mix of our inventory is strong and continues to support our strategic backlog. We expect inventory turns to improve next quarter as our revenue increases. Additionally, over the last 5 quarters, we have continued to reduce channel inventories held at certain of our partners. Fiscal Q3 cash flow from operations was approximately $49 million, up from $18.2 million sequentially due to higher adjusted net income and improved AR collections. We expect cash flow from operations in the fourth quarter to be in excess of $35 million. Capital expenditures for the first 9 months of fiscal 2024 totaled $17.3 million. We have a rigorous approach associated with our capital expenditure process, which helps to ensure we are only spending on projects that are absolutely necessary and also meet our required returns. We expect our fiscal year 2024 capital expenditures to be approximately $25 million, primarily due to investments in manufacturing facilities and R&D initiatives. Next, moving on to other balance sheet items. Cash, cash equivalents and short-term investments for the third fiscal quarter were $521.5 million, up $45.1 million sequentially, driven by net cash from operations. Comparing our cash and short-term investments to the book value of our convertible notes, we are now in a net cash position of more than $70 million. As previously noted, we recently completed our long-term strategic planning process, and our management team is focused on developing and executing a compelling strategic plan that will drive stockholder value over time. Our plan sets out a strategy to expand our SAM, grow the business beyond $1 billion in revenue, increase profitability while generating positive cash flow. I will now turn the conversation back over to Steve.

Thank you, Jack. MACOM expects revenue in fiscal Q4 ending September 27, 2024, to be in the range of $197 million to $203 million. Adjusted gross margin is expected to be in the range of 57% to 59% and adjusted earnings per share is expected to be between $0.70 and $0.76 based on 75 million fully diluted shares. We expect sequential revenue growth in all of our end markets. We expect Data Center will lead with low to mid-teens growth followed by Telecom and Industrial and Defense with low single-digit growth. Based on these Q4 projections on a full year basis for FY ‘24, we would expect Data Center to be up approximately 35%, I&D up around 10% and Telecom to be down slightly year-on-year. I would now like to ask the operator to take any questions.

[Operator Instructions] Now, first question coming from the line of Quinn Bolton from Needham & Company. Your line is open.

Hey, guys. It’s [indiscernible] for Quinn Bolton. Thank you for taking my questions. Two questions from me. First, could you share where you are in the qualification process for active copper cables?

Sure. So that really depends on the customer and the data rate and the particular application. So it really varies. We have customers ramping up our products. We have customers qualifying our products, and we have customers just starting to design with our products. So it really depends very much on the customer, their application and of course, the data rate.

Okay. Thanks. And then you talked about share market – excuse me, you talked about market share gains in 5G. And then more specifically, last quarter, you talked about market share gains in the base station power end market. I was wondering if you could size those opportunities. Thanks.

Sure. So the 5G RF power opportunity for us is significant. Today, the vast majority of the revenue that we have in 5G is on macro base stations, so higher power devices, generally products that are above 20 watts in power. And we see a tremendous opportunity to really tap into the massive MIMO platforms, which over time may be a larger portion of the market. So I would say that over the next 3 to 5 years, we could more than double our RF power revenue, that market is there. Some people look at the GaN RF power market as sort of a $2 billion to $3 billion market. About half of that being in Industrial and Defense and the other half being in Telecom, primarily 5G. And so we are today only winning – or our market share, let’s say, is very small compared to the overall market size. And we think that there’s opportunities, not only on the macro side to gain market share as well as the MIMO, but also in Industrial and Defense.

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

Hey, guys. First of all, congratulations again on solid, solid execution. I had two as well. Let me follow-up on the question that was just asked, but in a slightly different way. So you acquired the Wolf business and admittedly, the market is sort of stagnant. Can you talk about what the low-hanging easy opportunities are for you to be able to grow into the Telecom space? Is it just sockets that you’re winning because Wolf was not interested or focused on that business? Or is there something else going on that you can do to try and grow that business? And then I have a follow-up.

Right. So there’s no doubt that Wolfspeed was a significant player in the RF power markets for telecom as well as on the defense side. And so coupling with MACOM has really allowed us to get more scale. We have a larger engineering team. Collectively, we are seeing more opportunities. So that speaks to the comments I made about gaining market share. There also has to be additional work done on execution and also on technology development to make sure that we stay at the forefront of performance within the telecom market. So I think over the next 2 to 3 years, you’ll definitely see next-generation GaN processes coming to market that are even more competitive than what we have today. So it’s a combination of engaging customers more completely with a better, stronger portfolio. It’s better execution in terms of supporting existing customers and existing volumes as well as technology development to stay on that leading edge. And by the way, I would apply the same core themes to the Defense side as well as the Telecom side.

So can I – I had a follow-up on that. I think in the commentary, Steve, you mentioned that you might be able to double the business in 3 to 5 years. This is Telecom where the market is supposedly nothing happening at a broad level. There hasn’t been a lot of investment. So is that all coming from share gain, predominantly just sort of refocusing and better operations under MACOM? I just want to understand what will be the driver? Or is it a function of the fact that your share is so small that doubling is not a big deal?

Well, it’s kind of a combination of both and understand that while the Telecom or – the OEMs that are building these 5G radios, generally speaking, are building the same volume of radios. What’s changing though is the density of the RF radio itself. So there’s more channels, there’s more opportunities to get content. So while the overall number of radios is sort of staying the same, the number of channels is increasing. And one thing that still exists is that there are many regions of the really of the globe that have capacity limitations. And so the deployment of 5G is not just for new coverage, it’s actually to expand capacity. So I just want to highlight that. And then the last thing I’ll say is there’s really not that many GaN suppliers that are qualified to support this market. And we want to be a leader and certainly be one of the leading companies doing that.

Thank you. And our next question is coming from Vivek Arya with Bank of America. Your line is open.

Thanks for taking the question. Steve, I was hoping we could dig into the Data Center. And what is the mix between what one would consider AI versus non-AI? I think people would look at whatever 400 or 800-gig plus components and call them AI generically. So if we have to segment your data center business that way, what is it right now? And what was it last year?

Yes. So that’s – it’s an interesting question. So we don’t typically speak publicly about the end application of where we’re selling our products and whether it’s in, say, a traditional configuration of a data center deployment or whether it’s more of a newer, let’s say, AI clusters. So we don’t parse our revenue that way publicly. It’s clear that there are tremendous opportunities on both sides, both on the traditional Ethernet. As I highlighted in my prepared remarks, we are seeing an uptick in 25G and 50G deployments for the sort of traditional Ethernet. But we’re also seeing increased interest and demand for 100G and 200G products. And certainly, those higher data rate products are tending to be on the more sophisticated applications.

Okay. And then for a follow-up, I think you – with this – I think you said book-to-bill 1.1 was, I think, closer to parity last quarter. Which areas are you starting to see the pickup? Are these kind of more company specific? Or you think this is more kind of a recovery in some of these areas? And conversely, which areas do you think are still muted? I think you called out telco are still sort of being in a muted state right now.

That’s right. And looking back on Q3, we saw the Data Center bookings being the strongest within the three market segments, then followed by Industrial and Defense and the weakest was Telecom. So collectively, we were very pleased to have a book-to-bill of 1.1. And as I highlighted, this is certainly a leading indicator. We do expect on a quarterly basis there to be variation. Sometimes, we’ll book a large contract that is a 12-month or 18-month contract. So that factors into the timing of the revenue in the future quarters. But I would say, generally speaking, solid Industrial and Defense, mostly on the Defense side is where we’re seeing strength. Strong demand in Data Center. And as I pointed out, Telecom is relatively weak with the exception of the SatCom industry where we have a lot of activity and a lot of engagements for really on a lot of large programs. One of which I discussed last quarter, which was a contract that we were awarded for $55 million. That contract is in the development phase right now, and we expect those revenues to begin to flow towards the end of our fiscal ‘25.

Thank you. And our next question is coming from the line of Karl Ackerman with BNP Paribas. Your line is open.

Yes, thank you. I have two as well, if I may. Just following up on that, with regard to the satellite opportunity, you spoke about the SatCom opportunity last call. Any update on timing that program? It sounds like it’s still on track for the end of fiscal ‘25. But how about new opportunities here within SatCom? Could you talk about some of your discussions and opportunities that you see within that business? Thank you.

Sure. So I certainly can say that we are actively engaged with a wide range of customers within the space, looking at supplying at the chip level, the module level to support their particular needs. We are seeing that there’s more activity with direct to cell-type systems and constellations, and we want to be engaged in that, and these are satellite platforms that operate not only at millimeter wave but also at cellular bands. And so we want to participate in that – those payloads and support those customers. So I would say we’re very active. Additionally, on the ground station side through our business unit of linear module systems, as you know, most of the transmitters in the ground are either using TWTs or SSPAs. And many of those customers prefer to use a linearizer to get more power and more efficiency out of the transmitter. And so you can imagine, as there’s more satellites going up, there’s more ground stations communicating and those deployments or that infrastructure also demands more linearizers. And so we’re active at the chip level, on the satellite end, on the ground side and all the way to the module level. So very active there. We have really a very compelling capability of technologies, including the MESC technologies, which is very high frequency, power from our North Carolina and the RF power Wolfspeed acquisition. And of course, all of this is supported by really best-in-class manufacturing, where we are one of the few companies that can produce high-volume, low-cost millimeter wave or microwave transceivers onshore in the U.S. at very competitive process. And so our customer base, not only commercial customer base, but also our defense customer base likes this.

Yes. Thank you, Steve. For my follow-up, I was hoping a pivot back to datacom. Could you talk about the breadth of engagements you have with perhaps linear pluggable optics? And then secondly, could you perhaps discuss whether your linear equalizers would be used in scale-out compute deployments? Or could they be mainly for scale-up or interact applications? Thank you.

Yes. So the LPO, or linear pluggable optics, sort of opportunity is significant for MACOM. As you may know, there was a MSA or a consortium – an industry consortium that was brought together within the last year with all of sort of the leading members of the industry. MACOM was one of the founding members of the MSA. And really the purpose of this organization was to create a standardization in an interop spec for LPO so that it could be broadly adopted by the industry. And so we are heavily engaged in that. We’re talking to sort of the who’s who of end users, switch manufacturers, module manufacturers, enterprise system OEMs, and we’re certainly right in there supporting the industry as it looks to try to adopt LPO broadly. And so we do think there’s a big opportunity. We think that it’s not only at 100-gig, but also potentially 200-gig. And we think that the higher the day rate, the more interesting this solution gets. And just as a data point to do a 1.6T modules, some people talk about over 30 watts of power necessary to run the module. If you select an LPO solution, that could be in the range of 10 watts. So that’s a significant power savings. We happen to have the chips that support that implementation. So you can be sure that we are working with the leaders to try to adopt get them to adopt our solutions. But I will highlight that this is very early. The traditional classic approach is using DSPs, and that’s why I also highlighted that our very high-speed chips are also being used and deployed today with DSPs. And so we’re able to play both sides of the market with our leading analog solutions. And then in terms of linear equalizers and ACC, this is sort of a cousin to LPO, where you want – you see some customers wanting to not use optical, but stick with copper and electric. And so electrifying cables is really what their mission is. And that has certainly been proven at the lower data rates. We have done that. We have been shipping product. And so now we are working at the higher data rates for the same or similar applications. And so it’s fair to say that we have solutions at 100-gig for sort of 5-meter ranges and 200-gig for just a little bit shorter reach and very interesting product line, lots of engagement. We do expect some significant growth in the next 12 to 18 months in this area.

Thank you. And our next question is coming from the line of David Williams with The Benchmark Company. Your line is open.

Hey, good morning. Thanks for taking my questions. I guess, Steve, I wanted to ask a little bit about your SIFO business and kind of where you’re seeing the adoption and where you think that can go over time? Just how big a portion do you think that could become overall part of the business there?

And you’re referring to silicon photonics, SIFO, just to be clear?

Yes.

Okay. So I would say that this is an area that, over the past few years, we have been deemphasizing and we made a strategic decision to focus on other parts of the market. And so over time, we have been spending less on silicon photonics. I would say that our experience trying to get product in the market was painful. And so we have decided to limit our activity with silicon photonics only for high-value applications, which are primarily in defense. So we want to work with customers that want to work with us on specialized non-standard silicon photonic applications. So we are sort of tapping out of the commercial market with silicon photonics. With that said, we support many customers that are implementing silicon photonics. And if a module for an optical application is using silicon photonics, they still need a driver and they still need a transimpedance amplifier, and they also need a CW laser. And so these are 3 pieces to the puzzle that we do sell into these applications. But at the end of the day, we spent a lot of money for many years investing in silicon photonics. It really didn’t pan out. And so we pivoted our strategy over the past few years to focus on defense and very specialized applications.

Okay. Great. Thanks for the color there. And then secondly, maybe just on the bookings and maybe how your customers are thinking. We’re hearing of some caution at least on the ordering patterns. I’m just curious if you’re seeing any caution? Or do you feel like we’re through all of the destocking and that customers are becoming maybe a little more optimistic about the demand trends maybe through the next several quarters? Thank you.

Thank you for the question. I think it really depends on the market. We see some end markets that we believe there’s limited or no demand. And so it’s not an issue of clearing channel inventory. It’s the fact that there’s just no demand. There’s no catalyst either through CapEx spending or infrastructure deployments. And so there’s many markets that are down, and we would expect them to stay down until there’s a catalyst. And so – then we have other customers that are extremely busy, not only ramping up existing programs, but launching new programs. And I would say that applies to many of our Defense customers. We are extremely busy in supporting a whole wide range of applications in the defense industry. The industrial market is, I would say, similar to your comments, it really depends in terms of what those particular customers are producing, whether it’s test equipment or factory automation or sensors for automotive applications or traffic tolling. So it really depends. From our point here, we don’t feel like there’s an inventory overhang in our business. We think we’re now pretty much sort of reacting to end market demand. And as Jack said in his comments, we have been bringing our inventory level down over the past few quarters. I think you said five quarters. And so our channel inventory has been really brought down to manageable levels. And now we’re really looking for catalysts of end applications and demand. And then the last thing I’ll say is we have a very diversified business. We don’t have a lot of customer concentration. We have thousands of customers. We’re a global supplier. And our strategy is to create an even more diverse portfolio. Our growth story, ultimately, is a product-driven growth story. We’re in a very – we stand in front of a very large market. Today, we think it’s about $6 billion to $7 billion. We think our market will grow to about $9 billion to $10 billion in the next 3 to 4 years. And our goal is to launch more products, capture more market share, optimize our sales and applications to make sure that we’re able to address the customer needs and be fast to market. And these are some of the core things that we work on. And if we do all of those things, we think we’ll have favorable booking trends over the long-term.

Thank you. And our next question is coming from the line of Tore Svanberg with Stifel. Your line is open.

Yes. Thank you. And congrats on the steady execution here. So my first question, Steve, I know that when you do your 5-year plan, it’s obviously – there’s a lot you can’t disclose. But I know you have sort of a stale SAM number out there. It’s $5 billion. I assume that number has grown quite a bit since you shared that with investors. And if you do have a number, could you also potentially let us know what it is by segment at this point?

Yes. So, it’s sort of timely question. And I would say that the work that we have done is – and I just – and as I commented a moment ago, we do believe that our SAM is expanding. We think it’s a high-single digit expansion rate over the next 3 years to 4 years. So, that would put our SAM in about 4 years to 5 years around $9 billion to $10 billion mark. We are very hesitant to breakout the SAM by end market. There is a lot of assumptions and there is – it really depends where you draw the line. We see many companies talk about extremely large SAMs, and we scratch our heads trying to figure out how they get to that number. And so we take sort of a different approach, which is be more conservative on how we size the market opportunity and do so sort of what the bottoms-up approach. But with that said, the way we are going to increase our SAM is by adding more product lines. And if you look at our portfolio today, we have six business units. They have very, very different technologies. If we look ahead 3 years, 4 years, 5 years from now, we would expect to have significantly more business units with more diverse technology, which would allow us to capture more market. There are many parts of the industry that we are not tapping into. And we put together an internal plan to really take actions to go after those markets in a way where we feel we can be successful. And by the way, a great example of reallocation of capital is what I just talked about on silicon photonics. We were beating our head against the wall, not making forward progress. And finally, we decided to pivot and use those same R&D dollars to do something else where we had an increased probability of success, perhaps a shorter time to revenue and in front of a large market.

That’s great perspective. And as my follow-up, I think MACOM sits in a very unique position, because as you mentioned, you can participate in optical and in copper, I am now [ph] specifically asking about data center infrastructure. As we go to 1.6, and I know you said your engineers are now working for 3.2. How do you see that mix evolving between optical and copper? Do you think it will stay the same, or will it skew in one direction or the other?

So, I think it’s too early to tell. Copper has its limitations. But if you think about volumes and where the interconnects are within the data center, typically it’s the shorter reaches that have the highest volume. And so that could suggest that copper could win. But that has yet to be proven out. There is a tremendous cost savings if you stay out of optical, obvious for many reasons. So, if you can come up with an elegant electrified copper cable, then you would want – the customers would want to use that. But there are limitations. And so it really depends on the reach. It depends on the data rate. And remember, as things go to higher and higher data rates, copper will again have another set of challenges. And so we believe you can get copper to work at 200-gig per lane. We know that. We have real examples of that. And so to get to 1.6T, obviously, you are using multiple lanes of 200-gig per lane, whether that’s the same, that work can be done and be successful at 400-gig per lanes, we will have to wait and see. But I think there is going to be a mix. I think that our contribution with our analog chips will always be complementing the DSP universe. Today, the retime solutions are the majority of the market, and we don’t participate in that. We are participating on the analog side. And we seem to be, in our opinion, a leader with analog solutions, and we have early adopters, not only at 100-gig, but also 200-gig, and we want to maintain that leadership position over the next 3 years to 4 years.

Thank you. And our next question is coming from the line of Peter Peng with JPMorgan. Your line is open.

Hi. Good morning guys and thanks for taking my questions, and congrats on the solid quarter. I just kind of want to follow-up on the question asked, but ask differently. Is there any – I guess as you look at your 5-year, any changes on your thoughts about the growth of the end market? I know historically, you always emphasize that telecom is going to be one of the fastest growing. But just given how strong data centers and some of the opportunities there, are there any updates on that?

No, there is no changes on our general thinking that over the long-term, and we are talking 5 years to 10 years that we believe that I&D and telecom will be the leading markets. Now, with that said, you have seen MACOM since 2019 have data center business that was running at about $115 million a year, that fiscal year. And this year, we are going to be just under $200 million. So, we have almost doubled the data center revenue in 5 years. And obviously, we would like to do that again over the next 5 years. But we will have to wait and see how that pans out. The reason why we think telecom over the long-term will be a larger market is because of the diversity within the space. As we talked about, you have SatCom, 5G, you have a whole range of wireless applications, many of which today we are not involved in, and we want to get involved in them. We also believe adopting more analog and mixed-signal silicon solutions for markets such as automotive or other wireless applications is an area that we can be successful. So, we just think that the overall opportunity, the diversity within the telecom market is larger than the opportunity that we see in the data center.

Great. Thank you. And my follow-up question is just on your gross margin. Talk about getting back to 60% over time. Maybe you can just walk us through, whether some of the low-hanging fruits get there? And how likely are we going to get back to those 60% levels in, say, over the next six quarters to eight quarters?

Yes. Peter, this is Jack. Thanks for the question. So, in terms of the timeline, I think that’s to be determined. We have been over that 60% gross margin number in our more recent past. Obviously, there are some things that have occurred within the business, including the acquisition activity that we had where we brought in some business that had below MACOM historic gross margin amount. So, I think we have shown over the years that we can improve our gross margins through a lot of operational activities that we are doing and a lot of focus on the business in terms of how we go to market from a customer perspective, from a new product introduction perspective, these things are driving higher gross margins. But I think if you look over the near-term, our expectation is we will continue to make sequential improvements from a gross margin standpoint. There is a lot of activities that we have got lined up through the acquisitions as well as some of the things that we just do from a day-to-day basis here at MACOM to try and improve our gross margin. So, it is an area that we focus quite heavily on and think there continues to be more opportunities to drive overall operating margin improvements as well as we look at the business.

Thank you. And our next question is coming from the line of Srini Pajjuri with Raymond James. Your line is open.

Thank you. Good morning guys. A couple of questions. First, on the data center market, we have been hearing about 1.6T cycle starting fairly soon. Steve, maybe you can talk to the readiness of the, I guess ecosystem, especially the optics side? And then maybe help us understand how your own content benefits from as we go from, I guess 400, 800 to 1.6? And then I guess on the other hand, some of the DSP suppliers seem to be integrating some of the analog components. I am just curious, on one hand, you have LPO, that’s probably a new opportunity for you. But on the other hand, we see, I guess more integration. So, I just want to hear your thoughts on that whole dynamic. Thank you.

Right. So, on the – for 1.6T on the optical side, what you see typically our EML solutions for single-mode applications and maybe silicon photonics, it’s sort of two camps there. But if it’s an EML solution, to be clear, we don’t have an EML product in the market today. We are actually working on it. We have 200-gig EML in test right now. But I think that’s going to be a tall hurdle for MACOM to get over there, today are probably three, maybe four different laser suppliers that have 200-gig EMLs. So, that – they are in the market today. They are getting the wins. On the – so on the silicon photonics side, you are going to need a CW laser. We make CW lasers. We have a wide range of lasers that – and so there is an opportunity for MACOM today on CW lasers. So, then the last piece that we would contribute on would be the receive side in the Photodetector. We believe we have leading technology for our Photodetector performance, not only at 100-gig, but also at 200-gig. And so we will have to wait and see if we are successful, but I would say that our timing for the market is not that bad, and we will have to wait and see how that works out. And then of course, on the analog side, depending on the customer, you might have a customer building a traditional module – sort of a pluggable module using a classical approach with a DSP. We are seeing mostly these 200-gig per lane platforms using external components today that may change in the future. But today, I can tell you that for the most part, because these EMLs need to be driven with a significant voltage level, they are preferring – customers are preferring to use external drivers and TIAs. That may change in the future. We have seen that happen at the lower data rates at 25G and 50G, and even in some instances at 100-gig per lane. For some 800 gig modules, we see DSPs in the market with integrated drivers that do the job. And so we certainly understand that. But I just want to highlight that there is kind of opportunities depending on the different applications. When you look at 1.6T for active copper cable, so there is obviously try to get the job done without a DSP, and we think we have a solution working there. The last thing I will mention is typically the 1.6T are single mode applications. When you look at multi-mode applications at 100-gig per lane, I think you are seeing on the optics side, VCSEL, heavy VCSEL demand and some might argue there is even VCSEL shortages at 100-gig. We are not sure that, that will remain the case as new entrants come into the market. But again, we don’t make VCSEL, so we don’t really have a play on that. I am not sure I answered your full question. If I missed something, please follow-up.

That’s very helpful, Steve. Thank you. And then on the telecom front, Steve, I know it’s two quarters of a decent growth here. I know you said it’s probably not a reflection of the broader demand. Just curious as to what exactly, what specifically is driving that growth? Is it more wireless versus wireline, or do you have any new programs, or is there share gains? And if you can speak to, I guess sustainability of that growth as we go into I guess the next few quarters, that would be helpful? Thank you.

Yes. I would say that the two areas that stand out would be SatCom driving growth as well as increased volume shipments into 5G radios on the transmit side. So, those are the two areas that are driving our growth. The wireline market is quite muted right now, so that would be cable infrastructure and sort of by extension PON for some of the overseas markets. So, the growth is really on the wireless side.

Thank you. And our next question is coming from the line of Thomas O’Malley with Barclays. Your line is open. Thomas O’Malley: Hey guys. Thanks for taking my questions. Sorry, if I am bouncing across a couple. But I just kind of wanted to get an update on the Wolf acquisition. Obviously, you guys are starting to execute once again pretty well off the bottom on the gross margin side. But when you kind of originally laid out the plan there, you are kind of co-running the fab. Ultimately, you are going to start putting your own products in, but that takes time. But if you could help kind of break out how much of the gross margin improvement from kind of the March timeframe to the September timeframe where we are today, is a function of that improvement versus just general volume coming back? That would be super helpful.

Thanks Tom. We probably don’t want to break out the particulars on the business. We look at this as a product line, and so we don’t by – because of that, we don’t break out publicly the improvements at the product line level. With that said, we are absolutely delighted with the work we are doing with Wolfspeed. We have a fab operating committee, which is a joint group that basically works with all of the day-to-day activities in the fab, some of the MACOM is on part of this committee. So, we have people that are hands-on, engaged in the day-to-day running of the business and supporting and getting ready for that fab transfer in the future. So, that includes getting an understanding of how material is running through the fab, what the priorities are, what the wafer starts are, what are the pinch points and issues in the fab that might need to be addressed. And so we are sort of taking an approach where we are here to help, and we are going to do whatever it takes today to improve overall performance in the fab. And so I think Wolfspeed and MACOM have a really nice working relationship to make sure all of that happens. And so with that, I think we are seeing signs of improved performance. I would say that the output of the fab is increasing. We have seen some general benefits on yields, both inside the fab and outside the fab, including some of the back-end assembly and tests that we are doing. And so we are in the early stages of working to improve the overall gross margins of the business. And I would say we are pretty much on track with that. And maybe Jack can speak to the broader issue about our trajectory of gross margins.

Yes. Tom, and as I had indicated earlier, there is a number of things that we are doing across the entire organization, including the acquisitions, but also the legacy MACOM businesses to help try and improve the gross margins. The new product introductions is definitely an area that we look to where those new products that are coming off the line generally have higher gross margins than the corporate average. So, those are helping to shape things for us as well in terms of that improvement that we have been seeing and hope to see as we go forward from an overall gross margin point of view. Thomas O’Malley: Helpful. And then just one more as a follow-up, so Steve, if you were to rewind 12 months ago and kind of look at this year, I think you would have said that your expectation what’s for telecom to grow. Obviously, the world has changed and you are kind of ending up fiscal year ‘24 down slightly. When you look at kind of the recovery in telecom, which I don’t think we are hearing much from anyone that sounds positive, do you think that into the fiscal year ‘25 that what’s occurred is kind of a destruction of demand, or do you think that you are kind of pushing this out until the next fiscal year? And could you just give your best estimate just based on today when you think that recovery may pick up? Obviously, you had a couple of quarters of sequential growth, but the more substantial recovery there just because it’s been a bit and it clearly is pushed out a little bit. Just would love your thoughts.

Yes. I think that, unfortunately it’s probably the former case of your comment about end demand not being there is probably our posture today. And so as you highlighted, year-over-year, we are going to be down slightly in telecom. We are certainly way off of the highs where we were doing over $60 million a quarter. But as we talk about the growth and adding new products and winning large contracts that will kick in next year, we think next year could be a reasonable year for low-single digit growth. There will be new cycles coming on. Obviously, we just talked about the Wolfspeed acquisition, that’s a major – really strengthens MACOM’s portfolio in a major way. And there will be new markets and opportunities. So, I think that, collectively, we like what’s going on. We are at a bottom. A lot of the older telecom programs, legacy programs have gone down. And from our point of view, we are going to assume that they are not coming back, and if they do great, but we are moving on to the next applications.

Thank you. And our next question is coming from the line of Richard Shannon with Craig-Hallum. Your line is open.

Great. Thanks for giving me at the end of the call here. I guess a couple of questions for you, Steve. The first one is in data center. I wanted to get a sense of any changes in visibility if you are seeing orders farther out here. We are seeing obviously some strength in the higher-end AI-related part of this market here. And I guess maybe more specific point to this question is, we have seen a number of suppliers, components and modules into the high end of the market. With the volatile results, we see large clusters has deployed and see a couple of good quarters and then it falls off. Curious to the degree to which you are worried about that kind of volatility, or do you see it more of a monotonically increasing outlook here going out for, say, the next year or so?

So, typically the data center sockets that we are winning are high-volume sockets. And so there is a lot of planning that goes into that. Jack talked about increasing inventories with the expectation of future revenue growth. I would say our visibility is pretty good into the market. So, our customers know what our manufacturing lead times are, and they have to plan accordingly and they don’t want to take that risk on their production lines, if they don’t have parts and they can’t ship. That’s sort of a disaster. So, we have been working with customers to make sure that we build secure backlog in this regard. But you do highlight a very important point, which we have talked about sort of every quarter, which is the data center can be very volatile. And that’s sort of the nature of the market where you see large orders deployed when – from the ISPs when there is demand or when they are getting ready to build out new infrastructure. So, that volatility flows down. Now, the good news is, we are at the beginning of a 100-gig ramp, because remember, the Tomahawk 5 switch just came out about a year ago or just getting out there in the market, which means the entire ecosystem needs to switch over to 100-gig. So, that will generally be 800-gig Ethernet, which is the core of the market, that is the mainstay. And then you add on top of that some of the advanced technologies at 200-gig per lane coming in and layering on as well. It’s a pretty good setup for MACOM. But I do want to – I agree with your – the core of your question, which is could there be volatility, and we would always say, yes, there could be. But we are at the beginning of a switchover from the lower data rates to the higher data rate.

Okay. Great perspective there, Steve. My second question, a very simple one here, you guided the I&D segment for low-single digit growth sequentially here in the quarter. Is there any major difference in the industrial part versus the defense baked into that?

Generally, no.

Okay. Perfect. That’s all for me. Thank you.

Thank you. And with that, I will now turn the call back over to Mr. Steve Daly for any closing remarks.

Thank you. In closing, Jack and I would like to thank the entire MACOM team for their continued dedication, which has made these results possible. We will continue to work as a team to meet our customers’ needs and to execute our strategic plan. Thank you and have a nice day.

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