MACOM Technology Solutions Holdings Inc (MTSI) 2016 Q1 法說會逐字稿

Good afternoon, and welcome to the M/A-COM Technology Solutions fiscal first quarter 2016 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Tuesday, January 26, 2016. I will now turn the call to Leanne Sievers of Shelton Group, the Investor Relations agency for M/A-COM. Leanne, please go ahead.

Good afternoon, and welcome to M/A-COM Technology Solutions first quarter 2016 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, M/A-COM's Investor Relations firm. With us today are M/A-COM's President and Chief Executive Officer, John Croteau, and Senior Vice President and Chief Financial Officer Bob McMullan. If you've not yet received a copy of the press release, you can obtain a copy on M/A-COM's website at www.MACOM.com under 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 and answers to your questions contain forward-looking statements which are subject to risks and uncertainties. Because actual results may differ materially from those discussed today, M/A-COM claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. And refers you to a more detailed discussion of risks and uncertainties that could result in those differences in M/A-COM's filings with the Securities and Exchange Commission, including its current report on Form 8-K filed today and annual report on Form 10-K filed on November 24, 2015. Any forward-looking statements represent Management's views only as of today, January 26, 2016, and M/A-COM assumes no obligation to update these statements in the future.

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 of GAAP to 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 M/A-COM'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 Investor Relations section of M/A-COM's website. Now I'll turn the call over to M/A-COM's President and CEO, John Croteau. John, please go ahead.

Thank you, Leanne. Welcome, everyone, and thanks for joining us today. I'll begin today's call with an overview of our first quarter results for FY16, and then turn the call over to Bob McMullan, our CFO, who will review our financial performance in further detail. I'll then conclude today's prepared comments by providing a summary of our execution during the quarter, followed by guidance for the fiscal second quarter of 2016.

Straight to the results. I'm pleased to report that for our fiscal first quarter of 2016 revenue was $115.8 million, which includes $4.6 million of revenue contribution from the stub quarter of the recent FiBest and Aeroflex/Metelics acquisitions. Gross margin came in at 58.7%, with net income coming in at $21.8 million or $0.40 earnings per diluted share. All were in line with our previously announced range of expectations, with earnings contribution essentially neutral for the stub period from the acquisitions.

All in all, our business performed as expected, as revenue across Networks, Multi Market and Aerospace and Defense came in essentially flat quarter on quarter. That said, we achieved a major milestone for the core M/A-COM business, achieving 60% gross margin, excluding the two recent acquisitions. Two years ago, we set 60% as our target operating model, and gross margins have steadily progressed as new high-margin products have fueled our growth. Achieving 60% gross margin was no easy feat, so I'd like to congratulate our engineering, operations and business teams on achieving this defining milestone.

We believe that gross margins, including the Aeroflex/Metelics and FiBest businesses, will recede for a few quarters and then lift back to the 60% level as we realize COGS synergies and factory consolidation through 2016. These acquisitions will end up solidly accretive, and our target operating model remains 60% gross margin and 30% operating margin.

Now let me turn it over to Bob to review our fiscal first quarter financials in more detail.

Thank you, John, and good afternoon, everyone. During the course of my comments as well as those made by John, all income statement amounts and percentages will be discussed on a non-GAAP basis and are provided to enhance the understanding of our core operating performance. A reconciliation of each figure to the most comparable GAAP measure is included in today's earnings press release.

Before I review our reported results for the fiscal first quarter, I will provide the results adjusted to exclude the stub period contributions of FiBest and Aeroflex/Metelics acquisitions. Revenue was $111.2 million, gross margin was 60%, fully diluted EPS was $0.39. This compares to revenue guidance of $110 million to $114 million, gross margin guidance of 58% to 60%, and fully diluted EPS of $0.37 to $0.40 per share.

Reported revenue, including the contribution from acquisitions, was $115.8 million, representing a sequential increase of 2.8%, compared to revenues of $112.6 million in the prior quarter and an increase of 19.9%, compared to $96.6 million in the fiscal first quarter of 2015. Revenue by end markets were Networks $83 million and 71.7%, A&D $18.3 million and 15.8%, and Multi-market $14.5 million and 12.5%.

Gross profits in the fiscal first quarter was $68 million or 58.7% of revenue, compared to $64.6 million or 57.4% of revenues in the prior quarter and $54.9 million or 56.8% in the fiscal first quarter of 2015. The gross margin quarter-to-quarter improvement of 130 basis points resulted from the contribution of higher-margin product mix, partly offset by lower gross margins from the acquisitions.

In terms of operating expenses for the fiscal first quarter, total operating expenses were $40.3 million compared to $38.4 million in the prior quarter, and $33.8 million in the prior year's quarter. Research and development expense for the fiscal first quarter was $21.5 million. This compares to R&D expense of $19.3 million in the prior quarter, and $17.8 million in the fiscal first quarter of 2015. R&D as a percentage of revenue represented 18.6% in the fiscal first quarter, compared to 17.1% in the previous quarter and 18.4% in the prior year's quarter.

Selling, general and administrative expenses for the fiscal first quarter was $18.8 million. This compared to SG&A expense of $19.1 million in the prior quarter, and $15.9 million in the prior year's quarter. SG&A as a percentage of revenue represented 16.2% in the fiscal first quarter, compared to 17% in the previous quarter and 16.5% in the prior year's quarter.

Income from operations was $27.7 million or 23.9% of revenue. This compares favorably to $26.2 million or 23.3% of revenues in the prior quarter, $21.2 million or 21.9% of revenue in the prior year's quarter. Operating margin improved 60 basis points due to lower variable compensation expense in the fiscal first quarter compared to the prior quarter.

EBITDA, or earnings before interest, taxes, depreciation and amortization, was $33.5 million, up from $29.9 million in the prior fiscal quarter, and up from $24.6 million in the prior year's quarter. Interest expense of $4.1 million in the first quarter was flat compared to the prior fiscal quarter, and down from [$4.3 million] (corrected by company after the call) in the prior year's quarter. The year-over-year decrease was due to lower outstanding debt level. As we guided, we've recorded other income of $2 million related to a consulting contract that runs for the next two years.

Turning to income taxes, our effective income tax rate for the fiscal first quarter was 15%, which is also our normalized rate for FY16. This tax rate was consistent with the prior fiscal quarter, and down from 18% in the fiscal first quarter of 2015.

Our fiscal first quarter net income was $21.8 million or $0.40 per diluted share compared to fiscal fourth-quarter net income of $18.8 million or $0.34 per diluted share, and net income of $14.4 million or $0.29 per diluted share in the prior year's quarter. EPS grew sequentially 17.7%, and 37.9% over the prior year, as we continued to leverage margin expansion to deliver EPS growth at significantly higher rates than revenue growth.

The share count used to compute EPS was 55 million shares for the fiscal first quarter of 2016 and the fiscal fourth quarter of 2015. And 49.2 million shares in the fiscal first quarter of 2015.

GAAP cash flow from operations was $15 million in the fiscal first quarter, while first quarter non-GAAP net income was $21.8 million. The difference is primarily due to the growth of operating assets, less a lower tax rate.

I'd like to turn to the balance sheet now. At the fiscal quarter end, our cash, cash equivalents and short-term investments were approximately $77.6 million, down from $161.9 million, including the impact of $87 million expended for the two acquisitions during the quarter.

Accounts Receivable were $92.5 million, compared to $84 million at the end of the prior quarter. Days Sales Outstanding were 73 days, compared to 68 days at the end of the prior fiscal quarter. Inventory was $101 million, compared to $79.9 million in the prior fiscal quarter. Inventory turns remained at 2 times, unchanged from the prior fiscal quarter.

Long-term debt was $342.2 million, inclusive of acquired capital leases, and we had our $130 million of availability in an undrawn credit line. Capital expenditures in the fiscal first quarter were $6.2 million or 5.4% of revenue, compared to $6.6 million or 5.9% of revenue in the fiscal fourth quarter. GAAP depreciation expense on property and equipment for the fiscal first quarter was approximately $3.9 million, as compared to $3.8 million in the prior quarter and $3.4 million in the prior year's quarter.

I will now turn the call back to John.

Thanks, Bob. I'd like to start with an update on our laser capacity expansion efforts. I'm proud to say that we've met our stated goal of doubling yet again laser capacity by January 2016. Our Lowell facility is now fully qualified for the first of three high-volume runners, and serving demand in our most cost-sensitive PON business. This quarter, we expect to fully qualify the remaining two PON products in Lowell. Not only will this solve what has been a particularly acute capacity problem in the industry, but it will provide surge capacity that allows our customers to avoid the need to build buffer inventories or double or triple order products. We believe Lowell will also yield a cost structure that enables M/A-COM's further market share expansion through 2016.

To fully appreciate the significance of this milestone, you have to look one step ahead to our qualification of lasers for use in 100G data centers. Which, much like PON, is a cost-driven market. We expect that our cost structure, quality and sheer capacity in Lowell for lasers for 100 gig data centers will serve as the first in a series of disruptive moves in this explosive emerging market. If you attend our Analyst Day on March 10 in New York, you will see the full scope of our data center strategy laid out in further detail.

Speaking of data centers, 100 gig optical is no longer a matter of speaking in future tense in data centers. Today, we announced a multi-million dollar order from AOI that spans the full scope of our 100 gig portfolio. We believe that our current data center backlog taken in its entirety is traceable to demand from all major cloud service providers. This speaks to our strategy of being a pure play supplier of high-speed analog and photonic components at 100G, 200G and 400G for a pluggable coherent technology such as CFP2-ACO, and for emerging direct detect systems. We are agnostic, serving CWDM, PSM-4 as well as PAM-4 if indeed it becomes relevant in data centers.

Okay, moving onto active antennas. Last week, we announced that prime contractor Northrop Grumman has entered into a five-year exclusive teaming agreement with M/A-COM aimed at winning major defense programs by employing our tile arrays. This agreement is a major milestone in our plan to monetize seven years of work with MIT Lincoln Labs on civil radar innovations. Northrup has identified M/A-COM's tile arrays as the solution of choice for winning future domestic and foreign military programs. We expect the cost advantage our solution affords and the combined strength of M/A-COM Northrup team to translate into substantial wins for Northrup, and game changing revenue for M/A-COM's A&D business over the next five years.

Now let me touch briefly on our GaN program status. Last quarter, we described how our new base station team delivered complete production-worthy reference designs, and convinced the premier base station OEMs that our GaN on silicon was ready for prime time. Those engagements have since progressed to commercial discussions, with a broad scope of program opportunities now open to us at three major base station OEMs. We hope to disclose more details of those engagements around Mobile World Congress and at our Analyst Day in March.

Our remaining gate on the path to revenue remains successful process and product qualification at one or both of our target wafer production facilities. We will know a lot more over the next four to six weeks, again, leading up to our Analyst Day in March.

In summary, I am proud of the execution by our team as a whole last quarter, delivering solid organic performance amidst seasonal headwinds, complemented by our ability to close on two tuck-in acquisitions.

Before I move on to guidance, I would like to mention that on a go-forward basis we will report one set of numbers fully inclusive of M/A-COM, Aeroflex/Metelics and FiBest operations. We will not report these acquisitions separately. We anticipate the next few quarters to be ones of transition, as we complete the integration of these newly acquired assets and realize COGS synergies. We expect that our gross margin will be slightly diluted during this period, but we will still see accretion in EPS.

Now moving over to guidance. For the fiscal second quarter ending April 1, 2016, M/A-COM expects revenue to be in the range of $128 million to $132 million. Adjusted gross margin is expected to be between 56% and 59%, and adjusted earnings per share between $0.42 and $0.45 on an anticipated 56.5 million diluted shares outstanding. For context, six months ago, we reported our fiscal third quarter with $130.7 million in revenue, 54% gross margin, and $0.42 EPS, inclusive of our former automotive business. Comparing those results with our second-quarter guidance, I am proud to say that five months following the automotive divestment we've replaced that revenue and EPS contribution and repositioned the Company with higher quality of revenue, faster growth, and stronger earnings potential.

I'd like to close today's scripted remarks by thanking the team for another quarter of solid execution. Operator, you can now open the call to questions.

(Operator Instructions)

Blayne Curtis of Barclays.

Hi, guys, thanks for taking my question. John, I know you didn't want to break out the acquisitions, but I was wondering maybe a different way so you could talk about the direction of your organic business into the March quarter in any color that you want to provide. Obviously, you could take this stub that you broke out in December and do math, I just wanted to make sure I was doing the right math.

Sure. Everything on the optical side of the business, which is nearly 50% of the Company, looks very strong. Forward-looking growth prospects short-term, medium-term, long-term.

The PON business, we have been supply constrained on the laser side, as you know. That remains unbounded in terms of revenue potential.

The good news is fiber back haul is back strong, and it is entirely our ability to ramp and capture production this quarter and next, in Q2 and Q3. The long haul business continues to grow, we're moving into metro. And as we announced today with AOI today, we are actually seeing data center demand materialize. That was a several million dollar order from AOI.

So optical looks great. I think the outlook for A&D and multi market, exclusive of the Metelics acquisition, is a little cloudy. We saw demand in last quarter and backlog remained pretty much flat, within a few hundred thousand. So it's unclear -- I think certainly things have bottomed out, and on a forward-looking basis, it is only up from here.

That's helpful. And then just on the gross margin, you said obviously it would be depressed for a couple quarters until you get the cost synergies. Does the 56% to 59% level, the midpoint of that, is that what you're saying is depressed and you should think about flat at that level, and then maybe you could just talk about how much these synergies could be and where you think the gross margins get back to?

Sure. So that midpoint is indeed depressed. Relative to the fact that we just did 60% on our core business. So it's disappointing hitting 60% and then receding at all.

But we believe the core business, exclusive of the acquisitions, will continue to operate at 60% plus minus 100 basis points. And actually continue lifting, to be honest. I would say -- I'm sorry what was the second part of the question?

I wondered if you could give any color in terms of the synergies, timing and where the gross margins would get back to.

So within the calendar year, hopefully within the fiscal year, we will get all of the COG synergies, and those businesses will be operating at our model of 60/30. So we genuinely think it's a matter of a couple of quarters before we get back to the operating model.

Great, thanks guys.

No problem.

Vivek Arya of Bank of America Merrill Lynch.

Thank you for taking my question. John, maybe just following along to that question. So on the gross margin side, there is an impact near term, but you said you expect to get there hopefully some time this fiscal calendar or hopefully fiscal year. On the operating margin side, also you think you can get to the 30% target within this calendar year?

Yes, so both FiBest and Metelics were operating with relatively modest OpEx. The problem they had was on the gross margin for both businesses, and it's the reason why, frankly, we got them for very attractive valuations.

And the ability to realize COG synergies was well defined, very clear action items. The reason why this is going to take a few quarters is there are actually factories that get impacted to realize the COG synergies, and you can't do that within 100 days. But certainly, we will get them in that 60/30 model.

Got it. And then as we look out the next couple of quarters, I think in the past, you had mentioned three clear growth opportunities for the Company. Whether it was GaN or optical, or your defense programs.

Given all the turmoil in the market -- so optical you did speak to, but what about GaN and the defense programs? Do you think they are on track to provide some contribution in the back half of this year, or has the ongoing market turmoil changed the timing as to when you might benefit from those new opportunities?

Absolutely zero change in the last quarter in terms of the outlook for both the GaN program and the active antenna programs. And I would say no change, meaning it is unclear whether we can impact our fourth fiscal quarter, which by the way ends in September. So it is that much more of a challenge for us within this fiscal year.

But I would say on the optical side of things, we have all of the growth actions in place that give us confidence that we could replicate the kind of growth we saw last year. Without the contribution of any of those top-level hyper-growth opportunities.

Got it. And lastly in optical, do different end markets provide different gross margin contributions? So I think you mentioned PON, you mentioned back haul and long haul. So how do you balance the growth versus different gross margin profile in these different opportunities?

Actually the real magic there is the answer is there isn't a material difference. We have a cost structure in the stuff that we ship into the PON market that is spectacular, and we are delivering gross margins consistent that what we are doing in long haul.

And I would say data center is where the financial model may change a little bit. It is that much more concentrated in terms of the cloud service providers. But I am personally fixated on continuing to expand the operating margin.

Gross margin may be a variable for some of the big massive businesses, but data centers, if that were to happen, would literally double the size of our Company. So I think for the M/A-COM that exists now and the growth opportunities in the current optical markets, there really isn't a material difference between the different segments.

Got it, thank you.

You're welcome.

Gabriela Borges of Goldman Sachs.

Yes, good afternoon. This is Mark Delaney asking questions on behalf of Gabriela. I appreciate the time.

John, I was hoping first you could elaborate a little bit more on some of the comments you were making on the data center and optical business. I think you said you could replicate the kind of growth that you did last year. And I want to understand, was that just a piece of the network segment or were you trying to talk about the overall networks and enterprise segment which I think was up about 49% in FY15?

Networks now is up well over 70%, if I'm not mistaken. Optical is approaching 50%, if not at 50%. And the way to think about it is, if we were to grow that 50% as we did last year, that alone would match our 24% top line growth.

And I'm not saying the other things are destined not to grow, I am just saying there's so much growth potential across all of the segments of optical. And those are customers and programs that are in motion, and we're not talking about futures, we are talking about present tense, we're talking about orders being captured, OEMs we share commitments, so that juice is real. Like I said, we have a high rate of confidence that we are going to replicate the kind of growth we did last year.

You mentioned data center backlog giving you confidence in your market share. Are you guys willing to disclose what your backlog is?

No, we don't as a matter policy disclose our backlog, but that was a several million dollar order. It's not a meaningless order.

Now I shouldn't -- I should be clear, we are not implying that the inflection point for the mass adoption of 100 gig and data centers is there, but the initial engagements and the initial traction for 100 gig is -- it's walking before you run. And given the amount of content that we are capturing and that gives us the confidence that our ambitions to drive it to the mass market adoption that we are on the right track.

Maybe I could ask that just a little bit differently and focus in on the laser piece of the business. Now that you have been getting that capacity up, has there been any change in the pace of orders for your laser business? I know you talked about risk of double or triple ordering, I'm just wondering if you guys have gotten more capacity online, if you have seen any fall off in orders?

No, not at all. In fact, customers are still pounding on us for allocation. And we're dealing with very difficult conversations with customers that haven't been happy that we couldn't supply even more.

So there is no indication whatsoever. I'm highly confident there has been no double and triple ordering. There's no buffer inventories with our customers or in the channel.

Because if that were the case, we would not have the kind of conversations with our customers that we've had. And we are also very confident that our sales and operations team has been in the field with the major customers in the matter of the past few weeks, and agreed-upon share commitments and ongoing revenue contributions. So I think it's going to be a very smooth transition out of the supply constraint to the unlimited supply condition.

And then lastly for me. On active radar, I know there's the military and a commercial component to that. Can you just help us think about 2016 and 2017 revenue potential from active radar for the Company?

Yes. So 2016, the real mover is the airborne retrofit program that we have that we had the initial production shipment last quarter that is being built up. And then some time in the second half of our fiscal year, the orders will flow and the shipments will begin on a steady state basis for ongoing production of those aircraft retrofits.

That will be the primary contributor for the A&D growth, I wouldn't call it a game changer, but it is material growth on top of our catalogue A&D business. The tiles are the thing that is very difficult to predict.

I'm glad that we managed to get Northrop public in terms of that is the defense prime that is committed to the tile-based programs. It is just impossible to predict which programs they capture for which tile-based designs. That will become clearer as we go through the year.

I can say I'm extremely confident that by 2017, there will be an inflection point and a game changing revenue for that business, the A&D business. It is just -- the good news is, we are on the leading edge of these new secular trends, the bad news is, it is very difficult to predict the front end of those ramps, those hockey sticks.

Understood, thank you very much.

You are welcome.

Harlan Sur of JPMorgan.

Hello, good afternoon. Thanks for taking my question, and nice job on the quarter with the execution. On the partnership with Northrop Grumman for the tile-based active-array technology, is this more for airborne or ground-based defense applications? And I know it is hard near term to call the timing of it, but if you look at over the lifespan of the five-year agreement, what is your estimate on the total potential dollar opportunity for this one engagement?

The total opportunity for the tiles, we believe very much that we could double the existing size of the Company on the back of that alone in that five-year time horizon. Because in the latter half of that, you get the civil radar deployments, the Empire program, beginning to ramp in the front end of that, where really towards the middle of it you end up with the defense programs with Northrop Grumman ramping. And it is very -- the ASPs are very large, these are large assembled products.

Very consistent with our financial model, by the way. So it is genuinely got the juice both on the civil and defense side to be several hundred million dollars for us in that five-year horizon. Time is the critical variable there.

And is the Northrop opportunity more airborne or ground-based defense systems?

So the tiles from a form factory standpoint don't fit into an air frame. But a lot of the technology and a lot of the principles do apply.

So we do have airborne activity with Northrup. But I wouldn't call it the same thing as the Empire-based tiles.

Got it, okay great. And then a question for you, Bob. Given the FiBest and Aeroflex acquisitions, how should we think about the OpEx step up in the March quarter, and then how do you expect that to trend through the remainder of the calendar year?

Harlan, the implied growth of our business including the acquisitions is about $2 million a quarter going forward. If we hit a major inflection point on revenue, then it could go up a little higher. But for next quarter it is $2 million.

Okay. And then past - - - is that how we think about it for the remainder of the calendar year? $2 million step up, or is that just for the March quarter?

Just for the March quarter. As you know, we only give guidance for the current forward quarter. It could go up little bit more in the back half of the year, but for next quarter it is $2 million.

Any identifiable OpEx synergies associated with the two acquisitions?

Definitely, one more so than others. But the majority of the synergies is a cost of sales for both companies, both acquisitions. So that's why we are comfortable and confident of our ability to get back to that 60% gross margin.

All right, thanks a lot.

You are welcome.

Harsh Kumar of Stephens.

Hi, guys. Got a couple here. John, question for you, the deal with AOI this morning, how does that jive with what you do with FiBest?

My understanding is FiBest makes modules for data center. Correct me if I'm wrong, I don't know AOI very well, but I think they do something very similar. Maybe you could help explain how the two fit for you within your corporate structure and business opportunity?

Yes, it's a good question. It's a point of subtlety, I guess. One of the things that we are very clear when we announced the acquisition last quarter, and especially one-on-one with all of our customers is, this is not primarily an integration play.

Its primary purpose is to get our arms around the entire optical chain, including the lenses, and being able to deliver more refined and more cost-effective and higher-performing solutions. Whether customers take those components and build their own optical modules or if they want to source for certain programs, our TOSAs and ROSAs from what was previously known as FiBest. We genuinely don't care, we remain primarily a component supplier and it's all about doing a better job with components.

It is becoming clearer since the acquisition being out with more customers, where customers on the telecom side as well as datacom side would prefer to go with a off-the-shelf solution as opposed to their own. And it really differs by customer to customer.

But I would generalize by saying, they are just some programs that they would prefer to buy rather than make. And it's not an all or nothing, and it's not competing with our customers. Like I said, if they use our components, we are not inclined to compete.

Got it. Understood, thank you for that clarity, John. And then maybe one for Bob.

Bob, the guidance of 57.5% versus your goal of 60%. I understand you're going to take out costs of the two acquisitions at the gross margin level. Would we expect steady improvement, or would you work on the cost structure and then all of a sudden just get it done and get it fixed?

How should we think about the gross margin between now and let's say your September quarter? Steady or just a major uptick at some point in time?

Well, without giving forward guidance beyond next quarter, it will be steady.

Steady, okay, great. That is helpful. And then, John, back to you, sorry to go back and forth. The metro market is happening for you now.

It seems like, based on commentary, you've got some revenue streams and some opportunities at this point in time. But wondering if you could characterize your total available market and how you see the growth in that market?

So it is very difficult to generalize, because the dynamics in PON our profoundly different than long haul and long haul morphing over to the metro deployments. And now with data center kicking in, initially using some of the same components. It is very, very tough to isolate the difference. I would say the more meaningful comment I can make is metro is at least the size of the long-haul opportunity. Long haul, we entered midpoint with -- as the designs were going, we established, I don't know, for argument's sake, 40% share.

We have a much greater share on the metro side now. Probably doubled that, we believe we have about 80% design win share. So we're very well positioned.

There a lot of analysts that come out and say that metro is about twice the size of long haul, which would be nice. And arguably, that could be two times larger market in place of the share, arguably four times our run rate previously on long haul. Regardless, there is a lot of juice in it for growth through the course of this year and next.

Understood, guys. Thank you so much.

You are welcome.

Tore Svanberg of Stifel.

Yes, thank you. Now my math may be a little bit off here, but just looking at your guidance, it seems like the core business is flattish. And again, does that assume the optical business continuing to grow, but then maybe some weakness in A&D and multi market?

No, there is growth in the business excluding the acquisitions. I would describe it differently. In our course of guidance, especially in the first combined quarter of operations, we try to be very cautious in terms of guiding.

There's a lot of moving parts when you are integrating companies and integrating operations, and there's certainly the possibility for revenue leakage or delayed shipments and what have you. So I would say that the optical business continues to grow quarter on quarter looking forward, the A&D and the multi-market stuff, like I said, the visibility is still not quite there.

We believe things are probably up, but dwarfed, frankly, by the growth of opportunity with the optical for the next quarter, in fact for the whole year. But the real question is judgment in terms of caution about how the integration goes.

That's really helpful, John. And you talked about having already pretty decent backlog with the cloud guys 400 gig data center. Does that backlog suggest initial ramps perhaps in the second half of the year, and then maybe an inflection point starting next year?

That is my guess. Like I said, you have to walk before you run and this is the year of walking for 100 gig in data centers. And there is clearly demand.

Clearly, the cloud service guys and the people who we have backlog with are moving forward with those 100 gig programs. So again, seeing them walk, leads you to believe that they're running will come sooner rather than later. And to be honest, it is comforting when you stop talking future tense and start talking present tense about things like data centers.

Yes. And a question for Bob. Bob, your inventories, they came in at $192 million, obviously there's some acquisitions, some of the capacity expansion there.

But is this the peak you think as far as days are concerned? Or maybe you could talk a little bit about how you plan to manage the inventories next few quarters.

Tore, they do look up significantly quarter over quarter. $16 million is related to the acquisitions, of that $16 million, $3 million is a step up to fair market value under purchase accounting. So it's a little -- I would say it's at a peak relative to the operations of the business.

Sounds good. Thank you very much, guys.

You are welcome.

Mark Lipacis of Jefferies.

Hello, thanks for taking my questions. A couple questions on the 100 gig and the data center market. John, you suggested that we are not quite at the knee in the curve for mass adoption in the data center.

What has to happen to hit that curve? Is it a matter of price point, or are customers just feeling comfortable that the products work? And if it is the price point, where are we with the price point of the 100 gig modules, and where do think it has to get to get to that volume?

It's a fascinating question. I can give you my crystal ball. Speculation.

But I would describe the current state of 100 gig in data centers as modified telecom products attempting to fit into datacom. Where as the datacom market is actually profoundly different than telecom. In telecom, people expect decades of use in field reliably, and they pay for it.

In datacom, they literally have a three-year life, and then they pull them out and refacilitate the data centers. So you have to design -- ultimately, you have to design for costs, rather than long-term reliability.

So it's just a different set of product instantiations. But I would say we are in the early stages of beginning to apply some of that technology. If you come to our Analyst Day, we're actually going to be outlining a lot of the details of exactly how we're going to cost optimize for data center deployments.

And it's that generation of product which would be discussed, and I think we will be sampling pretty much most, if not all of it, in that timeframe. So in the next 90 days which would lead to cloud structures, which we believe can hit those inflection points.

To answer your question more directly, the rule of thumb, the cloud service guys keep saying $1 per gigabit. So $100 for a transceiver that may or may not be the real target. But it's certainly not where the telecom price points have been, which is several integer multiples above that price. But again, to get there, you really have to design for the data center with a cost optimized solution set.

That is helpful, thank you. And a follow-up if I may. On the AOI announcement, they're sourcing your PMD and using their own laser diode. But are the lasers from Binoptics, are those shipping into 100 gig modules?

And if so, what kind, is it 4x25, or how should we think about BinOptics participating in the 100 gig data center market? That's all I had, thank you.

No problem. So absolutely our laser business, our photonic solutions business previously known as BinOptics, is actually well positioned. That is actually a time dimensional answer as it relates to AOI. Initially, the designs were locked down before we had gotten our 25 gig lasers to full production and qualification.

That is slated for this quarter, consistent with all the other stuff that we talk about our qualifications in Lowell. And as those become qualified, as we understand that they're going to cut over to M/A-COM supplied lasers, but that is not gating the revenue and the solution set from getting to market even before we are ready with the laser.

Thank you.

Very good, thank you.

Steve Smigie of Raymond James.

Great, thanks a lot. I was just following up, there was some news I think recently out of Sprint that they may turn to doing some more microwave back haul for some of their towers or small cells. And I was just curious, you guys have or had a pretty decent high-margin set of products for microwave back haul.

Have you heard of that as an opportunity for you guys? If not, is that something you could pretty actively get involved with?

That's an interesting question. I had not heard that. I apologize.

We still have a very healthy microwave back-haul business. It is nice, it is high-margin, it comes and goes with the wireless CapEx. I think from my personal standpoint, the fiber back haul -- one of the things that became apparent is when we picked up the laser business. You just see how prevalent fiber back haul is compared to wireless. And so a lot of our focus, frankly our management focus, goes towards fiber rather than wireless.

But if Sprint is going to deploy wireless, that may be indeed a great opportunity for us. So thanks for the heads up.

Great, thanks. And then on AOI, in terms of your win there, in terms of the TIAs and CDRs, et cetera. Can you give us any color about why they selected you versus competition there?

I don't want to feel like I am smug -- - talk like I'm smug, but we've just got a great set 100 gig products. Whether it's the CDRs, the modulator drivers, TIAs, lasers as we bring those on, some of the other things that we'll be talking about at our Analyst Day. Very competitive products, competitively priced, proven in the fields, so high performing.

And at AOI would describe it -- they accurately perceive us as long-term committed to making the data center opportunity a reality. And by the way, they are not the only ones. I think everybody who is participating in data centers sees M/A-COM as a viable supplier/partner in helping realize their ambitions in data centers.

Great. And I don't want to push too hard, but you just got the I think the 25 lasers out. At what point does a 50 gig laser become important, and when would you think you might have something like that out?

I would be purely speculating on -- we are so fixated on getting 25 gig out, we don't see any urgent -- I have not heard of any urgency of getting a 50 gig laser out in the short to medium-term. It may will be there, but I just have not heard it from our business unit.

Okay, fair enough. And it's partly just asking, as you mentioned in you're press release, you guys say you can do PAM-4 and stuff in there. A lot of argument around which standards are going to take off.

You seem to think you are agnostic. Is there one or the other that you think your strongest at, that you can most quickly jump onto, or does it not really work that way?

We generally don't care. We have got PAM-4 designs, the observation we make is where all the action is CWDM and PSM-4 because it is backward compatible. There's no latency issues, you can upgrade smoothly from the past to the future and ongoing. So that's where the action is.

There's designs, there's latent business opportunities with PAM 4. But, and make no mistake about it, when you get to 200 and 400 gig, PAM-4 is very clearly the solution of choice. It's just short-term in data centers, what we are focused on is providing the analog and photonic content which is genuinely agnostic, we couldn't care with the modulation scheme is in the DSPs.

Okay. And could you talk a little bit about what the Aeroflex growth potential is, and what the motivation was there to bring those guys in?

Yes. To the first order, it's a classic consolidation move. They had a large number of factories, servicing really to a really modest business, we had about 50% share in microwave diodes, they had about 25% share. So to bulk up into a preeminent position with lots of COG synergies -- and by the way, their product portfolio is very complementary to our own, it's not like you are competing with the exact same products. So it really fit very nicely, so there is growth opportunity. I would call it latent growth opportunity, specifically they have a very strong competence and capability and installed infrastructure to do GNS. So GaAs as space in high rel devices.

So the latent opportunity is to take the M/A-COM portfolio and be able to qualify it and provide it to the broad market. We think that there is about a $200 million SAM for that product, but again, first, that's a slam dunk; buy a business at about 1X revenues and be able to drive those synergies within the year. The growth is icing on the cake.

Okay. The last on is just on multi market. Clearly, other areas have probably greater opportunities. I was just curious how we should think about multi market going forward, is it more user cash cow or is still some interesting stuff going on there?

As you know, multi market ends up beneficiary of a lot of the investments that we drive in the networks in A&D. So a great example is our GaN investments driving into base stations drives technology and that we productize into devices for things like RF energy. These are ISM bands, whether its plasma lighting or industrial heating and cooking applications and so on, which will end up being reported as multi market.

So it's not -- you don't invest in multi-market technology and products as a front, it is icing on the cake. In fact, there is a lot of people believe that multi-market opportunity for that particular technology is as big in the medium term as the base station opportunity.

And that's not just -- so you get the GaN, you've got a lot of stuff that we do in A&D which produces monolithic microwave ICs, MMICs. And with the ability to drive those into multi market and replace what had previously been serviced by Hittite before they were acquired, I would say in the medium to long-term, it is a very lucrative growth story. It is just without big targets like big base station guys or big prime defense contractors, it is not a short-time to revenue story.

Okay, great. Thanks very much.

You are welcome.

Richard Shannon of Craig-Hallum.

John and Bob, thanks for taking my question and maybe just a couple for me. I will ask again on the announcement for the applied optics here today. A few quick questions around that.

Is this the actual first customer you have for these TIAs as drivers of CDRs for datacom or just The first announced one? Is this relationship exclusive in any way, and what over time period do you expect this initial order to ship? Is this a couple quarters or a year time frame, or any characterization you can offer would be great.

Yes, so I would say this is not the first backlog that we have in data centers. We have the other guys, obvious candidates who have component design wins that are using our 100 gig servicing the other cloud service guys.

This happened to be a very large order, it's several million dollars. AOI has clear customer engagement that people are probably aware of, and very substantial short-term ambitions.

I would say what I expect is the revenue to be realized over a two-year -- two quarter period for that particular order. And then continue on, it's not like it is one and done.

Okay. And again, I wouldn't guess these to be exclusive, but is there any exclusivity implied or actual one that's a relationship?

None whatsoever.

Okay, I didn't think so. Second, related to your PON lasers. I think you mentioned you qualified one variance of the new products in your little fab, and said you are working on two others.

Can you repeat -- I think you mentioned something about timeframe expecting to have those samples completed. Is that something within this quarter? Could there even potentially be revenue shipping this quarter from that?

Absolutely. So these are all three close siblings. Different flavors, DFB and FB lasers for EPON and GPON. In fact, I believe one of them gets qual'ed by extension.

So it is -- and there's volume material flowing through our Lowell factory now servicing demand. The one thing I should say is, never really talked about it before, but I'd point out that customers have to qualify these products.

Moving from a factory in Ithaca at 3-inch to a 4-inch factory and supply chain in Lowell is not a trivial qualification for customers. So that's what we have been working on in parallel with our own qualifications. And that's reason why you don't see, frankly, a big step function in revenue instantly with the capacity coming on.

Okay. But I guess to be clear, the -- after the first laser just qualified, have you included any material revenues from these follow-on two lasers in this quarter's guidance?

Yes.

Okay, great. That's all the questions for me, thank you.

You are welcome.

Quinn Bolton from Needham & Company.

I just wanted to come back to the 100 gig datacom opportunity. Obviously, you have got the AOI announced in with a lot of the TMD parts. Just wondering if you could size a dollar content for us, and I think we all see various datacom forecasts in terms of the number of ports, 100 gig ports, that may be needed over the next several years.

But I'm trying to get a sense just on the PMD offering that you have currently shipping. Is that $10 of content per module, or could it reach into the hundreds? And then just a follow-up question on the lasers.

I know you said you were going to qualify the 25 gig lasers here in the March quarter. How long will it take to get those into production? Is this there another say six to nine months as the module guys take those qualified lasers and get them into production, or can you move pretty quickly to production if the demand is there? Thanks.

So let me start with the easy one first. So I would say it's one quarter to revenue and volume production for 25 gig lasers. So assuming everything goes as planned, and everything so far has been going as planned in Lowell, so we have a very high degree of confidence.

I would say the thing I have got to be careful about is, I really don't like to talk about ASPs, specifically in sales to named customers. That is so inappropriate. I would say it's not in the $10s, it's in the $100s given the current state of 100 gig technology.

Again, we are using, largely reusing telecom products in the datacom application. But saying anything more than that, to be honest, would be inappropriate.

Understood. Thanks very much, John.

You are welcome.

I'm showing no further questions at this time.

Very good. Thank you, operator. Before closing out today's call, please note that M/A-COM will be attending Morgan Stanley's TMT conference on February 29 in San Francisco.

As reminder, our Analyst Day will be March 10 in New York. To request an invitation to our Analyst Day or be notified of the next time that we plan to be in your area for investor meetings, you can e-mail us at IR@MACOM.com. Operator, that completes today's call, you may now disconnect.

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.