MACOM Technology Solutions Holdings Inc (MTSI) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to MACOM Technology Solutions fiscal fourth-quarter and 2016 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Tuesday, November 15, 2016. I will now turn the call over to Leanne Sievers of Shelton Group, the investor relations agency for MACOM. Leanne, please go ahead.

Good afternoon, and welcome to MACOM Technology Solutions fiscal fourth quarter and 2016 earnings conference call. I am Leanne Sievers, Executive Vice President of Shelton Group, MACOM's investor relations firm.

With us today are MACOM's President and Chief Executive Officer, John Croteau, and Senior Vice President and Chief Financial Officer, Bob McMullan. If you've not yet received a copy of the earnings press release, you can obtain a copy on MACOM's website at www.MACOM.com under the Investor Relations section.

Before I turn the call over to Mr. Croteau, I would 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, MACOM 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 MACOM's filings with the Securities and Exchange Commission, including its current report on Form 8-K filed today, annual report on Form 10-K to be filed on November 24, 2015 and quarterly report on Form 10-Q filed on July 27, 2016. Any forward-looking statements represent management's views as of today, November 15, 2016, and MACOM 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 adjusted non-GAAP measures and financial information, including all income statement amounts and percentages referred to on today's call unless otherwise noted. These financial measures and a reconciliation of GAAP to adjusted non-GAAP results are provided in Company's press release, and related current report on Form 8-K, which was filed with the SEC today, and can be found at the Investor Relations section of MACOM's website.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for at least 30 days in the Investor Relations section of the MACOM's website. And now, I'll turn the call over to MACOM'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 fourth quarter and fiscal year results for 2016, and then turn the call over to Bob McMullen, 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 and year, followed by guidance for the fiscal first quarter of 2017. Straight to the results.

I'm pleased to report that for our fiscal fourth quarter of 2016, revenue exceeded the top end of our guidance at $152.7 million, with adjusted gross margin coming in above the midpoint at 58.5%, with adjusted earnings coming in at $0.54 per diluted share. Looking at our end markets, networks was up 5% sequentially on the back of strong growth in metro long-haul, that more than made up for expected weakness in access and backhaul. Aerospace and defense grew 18%, and multi-market was up 10% sequentially. In total, revenue grew 7% sequentially, and 36% over our fiscal fourth quarter of last year 2015.

This caps our third year of outperformance, in which we delivered 32% compound annual revenue growth, which more than doubled revenue over that three-year period. Adjusted gross margin improved 970 basis points over those same years, and more importantly, we expanded adjusted earnings per share by 47% compounded annually over that time period.

This is testament to our balanced and diversified portfolio of investments across three secular growth drivers, and within those secular growth drivers, which consistently delivered results in all market conditions, and allowed us to outgrow our industry by integer multiples. Now let me turn it over to Bob for to review our fiscal fourth quarter financials in further detail.

Thank you, John, and good afternoon, everyone. MACOM has again delivered a premier fiscal year 2016 financial results, growing revenues 29.5% to $544.4 million, expanding adjusted gross margin 62 basis points to 58.1%, leveraging operating expenses to deliver adjusted EPS growth of 49.3%, or $1.91, generating GAAP cash flow from operations of $79.2 million, up 135% and representing 75% of non-GAAP net income, improving free cash flow to $47.1 million, and 45% of non-GAAP net income while continuing to invest in the growth of our business. From my perspective, an excellent year from a financial point of view.

Now to the fiscal fourth quarter. Revenue was $152.7 million during the fiscal fourth quarter, growing 35.6% over 2015 fiscal fourth quarter, and increasing sequentially 7.3% over $142.3 million in the prior quarter. Revenue by end markets in the fiscal fourth quarter, networks $109.7 million and 71.9% of total revenues, up 5% sequentially.

Multi-market $21.6 million and 14.1% of total revenues, up 10.3% sequentially. And aerospace and defense $21.4 million, and 14% of total revenues, up 18% sequentially. As we noted in our last earnings call, MACOM's A&D business is expected to grow in fiscal year 2017 at double MACOM's target annual revenue growth rate of 20%.

Of the total network revenues in the fiscal fourth quarter, total optical revenues were $80.6 million, up 5% sequentially led by long-haul, metro, and datacenter revenue growth, up 49% in the fiscal fourth quarter over fiscal third quarter. Non-GAAP gross profit and gross margin in the fiscal fourth quarter was $89.3 million and 58.5% of revenue, respectively, expanding from $64.6 million and 57.4% of revenues, respectively over Q4 of the prior fiscal year, and $81.5 million and 57.3%, respectively on a sequential basis.

Adjusted gross margin quarter-to-quarter improved as gross margins from our fiscal year 2016 acquisitions increased. Adjusted gross margin excluding our fiscal year 2016 acquisitions continue to exceed 60% MACOM's target gross margin rate at 61%. In terms of operating expenses for the fiscal fourth quarter, total non-GAAP operating expenses were $51 million, compared to $38.4 million in the prior fiscal year, and $46.6 million in the prior fiscal quarter.

Adjusted operating expenses were 32.8% over Q4 of the prior fiscal year, and 9% sequentially, primarily due to higher variable expenses. Adjusted R&D and SG&A expenses were $27.4 million and $23.6 million, respectively in the fiscal fourth quarter.

Non-GAAP income from operations and operating margins were $38.3 million and 25.1% of revenue, up 46.5% and 7.7%, respectively. Over Q4 of the prior fiscal year, $26.2 million and 23.3% of revenues respectively, and sequentially up 9.7% and 2.2% from $34.9 million and 24.5% of revenues, respectively. Adjusted operating margins expanded 190 basis points Q4 over the prior year, and 60 points over the prior fiscal quarter.

Interest expense increased to $5 million due to the increase of our term B debt by $250 million, starting in the last month of the fiscal fourth quarter. Other income of $1.9 million represents revenue from a consulting contract from our auto business divestment that continues through fiscal year 2017, where we provide technical assistance to the buyer as requested from time to time. Our normalized non-GAAP income tax rate for the fiscal fourth quarter was 15%.

This tax rate was consistent with the prior fiscal quarter, and the fiscal fourth quarter of 2015. We did not pay cash taxes in the fiscal fourth quarter. We did receive a $1.5 million refund during the fiscal fourth quarter.

Our fiscal fourth quarter non-GAAP net income and EPS were $30 million and $0.54 per fully diluted share, respectively, growing from $18.8 million and $0.34 in Q4 of the prior fiscal year, and $27.9 million and $0.51 per fully diluted share in the prior fiscal quarter on a sequential basis. Non-GAAP net income grew 59.5% over fiscal year 2015, and 7.7% over the prior fiscal quarter.

Fiscal fourth quarter adjusted EPS includes the effect of one month's additional interest expense from our term B offering, which we did not anticipate in the adjusted EPS guidance announced in our last earnings call. Absent this additional interest expense, our adjusted EPS for the fiscal fourth quarter would have been $0.56 per diluted share, the midpoint of our guidance.

The share count used to compute non-GAAP EPS was 55.3 million fully diluted shares for the fiscal fourth quarter. Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization was $44.9 million, up 50.2% from $29.9 million in our fiscal year 2015 fourth quarter, and up 6.67% from $42.1 million sequentially.

GAAP cash flow from operations was $24.9 million in the fiscal fourth quarter, as compared to $5.5 million in the fiscal year 2015 fourth quarter, increasing 352%, and up from $19.2 million sequentially. Fiscal fourth quarter cash flow from operations represents 83% of non-GAAP net income, up from 29.3% in the fourth quarter of fiscal year 2015, and 69% sequentially. After deducting capital expenditures, free cash flow was $17.6 million, or 59% of non-GAAP net income in the fiscal fourth quarter, approaching our target free cash flow percentage as non-GAAP net income of 60%.

Turning to the balance sheet, at fiscal quarter end, our cash, cash equivalents and short-term investments were approximately $356.8 million, up $266.2 million over the fiscal third quarter, including $243 million net proceeds from our term B financing closed on August 31. Accounts receivable were up over prior fiscal quarter to $108.3 million, up from $92 million sequentially. Day sales outstanding were 65 days, compared to 59 days at the end of the prior fiscal quarter.

Inventory was down $114.9 million, compared to $117.1 million in the prior quarter. Inventory turns were 2.2 times, compared to 2.1 times in the prior fiscal quarter. Long-term debt was $576.3 million, inclusive of acquired capital leases, and the previously noted term B financing proceeds.

We have $130 million of availability in an undrawn credit line. Capital expenditures in the fiscal fourth quarter were $7.2 million or 4.7% of revenue, compared to $7.1 million, or 5% of revenue sequentially. Related depreciation expense for the fiscal fourth quarter was approximately $4.7 million, as compared to $5.3 million in the prior quarter.

Our investments and capital expenditure exceed our current levels of depreciation expense, reducing our operating cash flow. We generated positive free cash flow of $47.1 million in fiscal year 2016, including capital expenditures of $32.1 million.

Before I turn the call back to John, as is customary based on our review of geographical distribution of FY17 anticipated taxable income, we have determined our non-GAAP income tax rate for fiscal year 2017 will be 12%, commencing in the first fiscal quarter of 2017. Back to you, John.

Thanks, Bob. Let's dive right into our optical performance during the quarter. In aggregate, revenue from our optical businesses grew 5% sequentially, and now constitutes 53% of our total revenue. Revenue from our metro long-haul business grew 49% sequentially. Put in context, revenue from our optical businesses grew 96% over the past year, across the entire portfolio from Metro Long-haul, Access Backhaul and Datacenters.

As expected, PON was essentially flat quarter on quarter. Looking ahead, visibility remains poor, as we expect a seasonally soft Q1, including the usual year end inventory management effects over in China. In addition, fiber backhaul declined consistent with industry-wide reports of weakness in wireless infrastructure.

Despite the recent softness in demand, we expect both of these markets to cycle back, as the inventory correction completes after the Chinese New Year. Tenders have already been awarded, which we believe will revive demand in 2017.

More than offsetting this weakness, our metro long-haul business saw a blow-out quarter, with 49% sequential growth, with high visibility into continuing strong demand through the first half of next year. By our estimates, our leadership position includes over a 60% market share across Linear, as well as Limiting drivers, CFP2 as well as QSFP-28, CFP-DCO as well as -ACO, and across all protocols including NRZ, LR4, PSM-4, PAM-4 and CWDM. We believe this strength across products, regions and protocols, combined with our new-found breakout in datacenters will more than compensate for any short-term weakness we see in PON our backhaul.

We've also concluded that our datacenter business is now large enough, and important enough as a growth vector, that it merits that we speak to it separately going forward. So switching over to datacenters, we're proud to report that in fiscal year 2016, we enabled over 1 million 100G modules going into datacenter and enterprise applications.

This number is beyond even the largest TAM reported by any of the market analysts to date, and includes leadership positions in laser and VCSEL drivers, CDRs and TIAs. What's even more exciting, is that we believe this is just the beginning of a ramp that will see demand for 100G connectivity within datacenters triple over the next four years.

By our estimates, based on detailed bottoms-up analysis by customer, we've achieved over 60% share of the high-performance analog content going into these applications. Moving into the second half of 2017, we expect to more than double port shipments into these applications. We expect that with 100G optical market will continue to exceed current analysts forecasts over the next two to three years, primarily driven by cloud datacenter demands for high bandwidth connectivity.

Building on top of this strong foundation of high-performance analog content, today we announced volume production of our family of 25 gig lasers for 100G connectivity across all datacenter protocols including CWDM, LR4 and LAN/DWDM. These lasers leverage our heavily patented Etched Facet technology, and combined with our wafer scale manufacturing provide a combination of cost and capacity that's unmatched by incumbent laser suppliers.

Lasers are only the first step into photonics, as we intend to build our leadership on the analog side, and ride the anticipated tsunami of demand for bandwidth within cloud datacenters. Next spring, we expect to ship the industry's first integrated CWDM laser and photonic integrated circuit or L-PIC, further expanding our related SAM by a factor of 4.

With that forthcoming commercial release of the L-PIC, MACOM's leadership position will span all semiconductor content, from the switch to fiber. Most importantly, these breakthroughs from MACOM have been recognized by the major cloud service providers. We're now viewed as a strategic asset that's poised to provide the critical optical products and technologies that help achieve very aggressive cost targets, and enable mass deployment of 100G transceivers in datacenters.

Now with growing visibility into that opportunity in datacenters, we believe that the inflection point for this ramp is, if anything, pulling in from what we laid out at our 2016 Analyst Day. To close out my comments on the optical businesses, it's important to note that our optical models stand in stark contrast to those who service the captive needs of one standard, one part of the network, or one transceiver supplier. Our success is much closer tied to secular growth, the insatiable demand for bandwidth in today's cloud-connected apps economy. That's why we believe our optical success is sustainable over the short-, medium-, and long-term.

Now moving on to Active Antennas, and the first wave of MMIC success. As we predicted last quarter, we saw a breakout in aerospace and defense, as well as our catalog multi-market business on the back of high-performance MMIC portfolio. Now the really great news here is that we now expect our RF and microwave businesses to join optical, as an equally strong growth driver moving forward. The numbers speak for themselves.

Revenues from our A&D and multi-market businesses grew 18% and 10% respectively, quarter-on-quarter further diversifying our growth vectors. We've successfully positioned MACOM to be the beneficiary of consolidation in our small corner of the semiconductor industry. These high margin monolithic microwave ICs, or MMICs, fall right into our wheelhouse. Our strategy is to regain preeminent share from traditional competitors like the Hittite, TriQuint, RFMD and Microsemi as they undergo consolidation.

Delivering on our renewed and sustained investment in R&D, we announced 27 new MMICs products last quarter. This portfolio establishes a new benchmark of parametric performance compared to the incumbent offerings, highlighting our leadership position across low noise amplifiers, VCOs, gain blocks, wideband amplifiers, mixers and more.

More importantly, Tier 1 customers across satcom, military communications, industrial, medical, test and measurement have been actively soliciting us to replace prior generation products from other suppliers. Underpinned by existing purchase orders and customer forecasts, we now expect A&D to deliver twice the growth rate of our target operating market model through fiscal year 2017.

This initial growth wave comes on the back of MMICs, not yet Tiles, as we outlined on our Analyst Day. Visibility has improved such that inflection point in this first wave MMIC opportunity is if anything, pulling in from what we outlined at our Analyst Day last March.

Now let's move over it again. Last quarter, we passed a number of key gates, realizing our ambitions with GaN. First, we successfully completed qualification of our Gen4 process. With this, we now have purchase orders in hand, with two key base station OEMs for initial production in the March quarter.

Before I dive deeper into that exciting news on the customer front, let me make some quick comments on recent legal developments. Six months ago, we highlighted Infineon's attempt to gain access to our burgeoning market for GaN RF products by improper means. It was regrettable, that they attempted to engage in such strong-arm and bullying tactics, and from the outset, we had full intentions to vigorously protect our rights.

As many of you know, two weeks ago the court issued a very favorable ruling for us, that granted MACOM a preliminary injunction against Infineon. The court's decision confirmed MACOM's continuing exclusive rights to certain GaN on silicon RF fields under its license agreement with Infineon.

Now let me emphasize here, this sends a message, not only to Infineon, that we take protecting our IP rights and the interest of our shareholders very seriously. Defending our intellectual properties is core to our success, and we plan to vigorously litigate this case to its rightful conclusion.

Now coming back to our customer engagements. As I said, we have purchase orders in hand from two key base stations OEMs for initial production ramps that are scheduled to begin after the first of the year. That's our second fiscal quarter of 2017.

These solutions service mainstream frequency bands at 1.8 and 3.5 gigahertz, not the low-volume emerging bands that have been serviced by GaN to date. Achieving performance and functionality that's unachievable by incumbent LDMOS technology, our solutions deliver 6 points of better efficiency over LDMOS based designs in 55% less board space.

This enables our customers to increase data throughput capacity by 1.5X to 2X, by adding more channels to the remote radio head without changing its physical size or weight. Better efficiency can also save hundreds of millions of dollars in annual energy costs while operating in the field.

As we achieve cost parity with LDMOS in volume production, MACOM's Gen4 GaN power transistors will have a capability to uniquely meet the carriers need to improve data capacity, without adding significant costs to their hardware -- again, within mainstream base stations and the LTE frequency bands. So summing it all up for GaN, we're now poised with performance attributes of GaN, combined with the commercial manufacturing scale and cost structure to disrupt a mainstream part of a $1 billion LDMOS market and bay stations. We're now far enough along in our GaN efforts, with visibility into our end customer deployments that confirm that the ramp, similar to optical and MMIC, is if anything pulling in what we articulated during our Analyst Day.

With that, let's talk about next quarter guidance. As we've seen in previous years, the December quarter is expected to be seasonally flat. With the fiscal first quarter ending December 30, 2016, we expect revenue to be in the range of $150 million to $154 million, which is still up more than 30% year on year. Adjusted gross margin is expected to be between 57% and 59%, and adjusted earnings per share between $0.54 and $0.58, utilizing a 12% adjusted income tax rate on an anticipated 56.5 million fully diluted shares outstanding.

Wrapping things up with the fiscal year, with the close of 2016, we've now posted three years of unprecedented growth and profitability. We've delivered 32% compound annual growth, more than doubling revenue over the past three years. Adjusted gross margin improved 970 basis points over that same period. Most importantly, we have expanded adjusted EPS by 47% compounded annually over that time.

In summary, our model has clearly demonstrated the ability to deliver growth and profitability through good times and bad. Our business is diversified among multiple secular growth drivers, and within those secular growth drivers. We complement organic growth with disciplined and rigorous execution on acquisitions.

This has enabled us to sustain high growth rates year after year, and consistently through all market conditions. Furthermore, with added visibility into our next phase of growth drivers, datacenters, MMICs and GaN, we believe fiscal year 2017 holds the potential to deliver yet another year of similar growth and profitability.

Operator, you can now open the call to questions.

Thank you, sir.

(Operator Instructions)

Harlan Sur, JPMorgan.

Good afternoon, guys. Good to see the diversification in the business driving some growth here. OpEx was up almost $4.5 million sequentially, or up almost 10% sequentially. I guess, overall trying to figure out is, what drove the significant growth? Is there some near-term opportunity that the team is focusing on, because you did guide OpEx relatively flattish for the September quarter? And then, how should we think about the OpEx trajectory on a go forward basis? And then, I have a follow-up question.

Sure, Harlan. We settle our incentive compensation plans in the fourth quarter, and obviously, we had a pretty good year. So, as we go into guidance, we don't -- we have certain parts of the -- where we know where we are, and we have at this point, Board approval on everything, and finalize those numbers. So a variable item that we absorbed in the quarter. Going forward though, a portion of that represents -- that increase you mentioned of about $4.5 million represents -- a portion of it is the variable cost, so you will see expenses flat or slightly up in the fourth quarter, based upon the guidance we gave.

Okay, great. And then congrats on completing the Gen4 qual, and getting orders from your two lead base station customers. You talked about receiving, sort of initial production orders from these customers, which will most likely hopefully start to fire in the March quarter. So help us understand, if all goes well there, when does the MACOM team really start to turn the spigot on, and start to drive more, larger, more production type levels of shipments into these two base station customers. Is it second half of calendar 2017, how do we think about that ramp now that you've got fully qualified?

Absolutely. So that those initial production dates are in the March quarter, but it's in the second half of the year, that the ramp really turns on hard. The one thing, now these are the initial programs, with two specific solutions for those customers. What I mentioned last quarter, is those are platforms, that are poised to be able to proliferate within those customers to more and more programs. And what I would anticipate is, depending on our performance in terms of delivery and so on, that could actually start hitting critical mass, and really proliferating in the second half.

So we're cautiously optimistic. I can tell you those two customers are extremely passionate about adopting and deploying our GaN for various reasons, and with very, very strong value propositions that they believe in quite deeply. So it's -- we're off to the races, frankly.

Great. Just one last follow up. On the success of the catalog MMIC business. I mean, this has been part of the, I think, the diversification story, right? Because it's driven growth across A&D, it's driven growth across multi-markets. You're getting solid design win traction across both. You talked about some of your competitors here. How is the team winning here? I mean, what is MACOM's differentiator here? Is it performance, is it costs, is it integration? Help us understand what are some of the major drivers of success here?

Typically not costs or integration. MMICs are relatively a small scale integration. It is definitely performance. We've targeted next generation parametric performance across each of these product families. But I think equally importantly, we've positioned ourselves to kind of be on deck, that as similar competitors have hit bumps in the road, and are now focused elsewhere for various reasons undergoing consolidation.

We have literally got a who's who of customers, who frankly view us as the last guy standing, who is really seriously and strategically committed to this category of product, and across multiple versions of MMICs. MMICs is a general generic category, but it's any one of a dozen product categories I'd say. But that type MMIC -- I mean, that to put it in context, Hittite before they were acquired, had about a $200 million MMIC business. And to put in context, after 10 years under Tyco, MACOM had $20 million MMIC business. So the playing field here is wide open for us, not just in the context of Hittite. But the other guys I mentioned, to be able to really dramatically expand our share, and drive growth in what is otherwise a modestly growing market.

Great. Thank you.

You're welcome. Good question.

Thank you. Our next question comes from CJ Muse of Evercore.

Yes, good afternoon. Thank you for taking my question. I guess, first question on the gross margin guide, it's down ticking a little bit, curious if that's just a function of the slight top line decline and/or mix shift? And then, I guess bigger picture, thinking about the growing mix of GaN datacenter, and continued strength in MMIC into calendar year 2017. How should we think about gross margin uplift through the year?

CJ, so the guide again, is subject to mix, not necessarily revenue level. We are still cautious in the transition. We've had improvement as I mentioned in my remarks, with respect to the 2016 acquisitions. There's still a bit of a burden, carry into next quarter, and that lends itself to the guidance. And there's some things that are very positive. We've completed the integrations and the swap-outs from the manufacturing at the two plants we're closing, will be moved til the end of that quarter. So I think it's a -- we're just a little in line from the -- making that all work. We saw improvement, the five best, which we noted, as now using more of our components, has improved and there is still some improvement there as well.

To the bigger question over the year, I think as we look forward, and the mix continues to move, and the growth rates that we experienced this past year continue, and the mix of products that we have -- these are at or better than corporate average as we introduce them. So as we have stated, we are still confident -- timing a bit in question, but not very long-term, some place over the fiscal 2017 time frame will get overall for the Company at that 60% growth margin level.

Yes, if I could build on that a little bit. Some of the areas that we're talking about being seasonally soft over in China, counter-intuitively are some of our highest margin business. So not only is there seasonality on the top line, but there's a seasonality impact on the mix.

That's very helpful. And I guess, as my follow-up, can you talk about planned use of proceeds with that term B refinancing?

Yes, so excellent question, CJ. We have been monitoring the debt markets over the course of the last 12 months. We came upon a market situation that was very, very favorable. We matched the terms of the original term B loan we did in 2014, in May of 2014.

That offering was extremely well-received, we could have raised another $100 million, but not necessarily in line with our overall debt management and leverage targets that we want to stay to, but we took an opportunity to reload. We've talked about the finishing of the integration of our existing acquisitions, and as obviously, we're looking to expand through acquisition. And if the opportunity is there, we have a regular pipeline that we, that is more or less a backlog. It doesn't mean everything in the pipeline is actually a transaction, but we're ready to move forward.

That's helpful. If I could just sneak one last in, what should we be thinking about for interest and other expense for the December quarter? Thanks so much.

Yes, the incremental increase in interest expense is on an annual basis, is about $12 million. It is a floating rate loan. Now markets and debt rates have gone up a little bit, but longer term, I anticipate to stay reasonably in the same level. So it's about $3.5 million to $4 million a quarter.

Thank you. Steve Smigie, Raymond James.

Great. Thanks a lot, and I'll add my congratulations on some solid results here.

Thanks.

Yes, sure. I was wondering if I you could talk little bit more about the GaN business and the opportunity there? It seems like we're about to really hit the stride in terms of the ramp there. Just more in the context of a multi-year scenario, can you give some thoughts as it looks today, and as that could change over time, where do you hit 25% of the market GaN, 50%, 100%? And is it necessarily all cannibalistic of LDMOS, or can it be just additive as well?

Well, I guess, there's scenarios where it's additive. Our observation is where a year or two ago, it was more of a technology evangelism state. I think universally, even the LDMOS guys have acknowledged and recognize the fact that the market is ready for a wholesale transition. I think there's differences of opinion about how quick it will move.

My observation is, in the past for instance, the transition from prior VDMOS and other technologies to LDMOS, once they start moving, they move fast. And it's not unrealistic to say, that we could grow into a natural share condition. This market has operated with kind of a duopoly or oligopoly type supply condition, and I would expect that we could grow into that position over the next three years. Our aspiration is to be a very clear number one. And I think given the position we have, now validated legally in terms of the intellectual property that we hold, for what is realistically the only version again that can supply the mainstream part of the industry.

I think we're very well-positioned to do so. We've got the support teams in place. We have the value proposition is very clearly demonstrated to everybody who matters, and the customers no longer even question that.

I think the remaining challenge we're going to have, which is the challenge you always want to have, is being able to scale that operationally from a production standpoint, both wafer supply and backend assembly and test. It's not trivial to be able to supply millions of units of this class of device. But we've got the team on board now, that's been there, done that with previous generations of technology. So there's no question, we're out of the gate in the fiscal second quarter, and it's going -- I think it's could be quite a ride.

Yes, that's great. And yes, just a quick follow-up on that, was that you mentioned, that the lawsuit that you got the injunction. What are the next steps on that? And then, my real follow-up question was, on the new lasers that you introduced, it seemed like you got something 70% share I believe on PON. What's the opportunity here for the new lasers? Could you get a similar share level? Thanks.

Sure, so in terms of the outlook of the litigation with Infineon, once -- I mean, common practice is once you achieve the preliminary injunction, it's game, set, match. And I think, one would hope that rational minds would prevail, and we'd reach settlement. But you never know, I mean, it could drag on for two years, which, it is what it is. I can tell you the dominant majority of the stuff that we really cared about in the litigation, that we we're passionate about, has already been awarded as part of the preliminary injunction. So we're off to the races, and that's -- if anything, just a distraction frankly, on a go forward basis.

On the other issue, in terms of the opportunity with 25 gig lasers, I would say, our value proposition and the economic benefit of etch facet technology in datacenters is -- potentially dwarfs that of EFT and PON. And the reason is, where in PON, we were displacing incumbent vendors with very mature technology, very stable technology that they had been supplying, albeit with a superior cost structure and capacity capability, in datacenters there are no entrenched competitors. In fact, the people who've been supplying to date are -- have been supplying basically repurposed telecom lasers, which really aren't optimized for the costs or capacity that's required for datacenters.

The Etch Facet technology, I mean, we meet from a parametric performance standpoint, everything that the incumbents do. But for a small fraction of the price, these are very rich ASPs, there's a lot of economic leverage to deliver to our customers, to be able to drive the cost structure. As we talked about in our Analyst Day, we have the opportunity with the self-aligning EFT, the safety stuff to leverage. And in the second calendar quarter, the June quarter, we'll be rolling out production of the L-PICs, which profoundly change the cost structure for that front-end analog photonic content for datacenters.

So that is a breakout for us this year, that is not unlike the kind of growth driver we had with PON last year, where PON is kind of saturated, and will be a cash cow funding all this stuff. Datacenter is just an absolutely a fantastic opportunity, all on the back frankly, of the etch facet technology.

Great. All right. Well, congrats again, thank you.

Thank you.

Blayne Curtis, Barclays.

Hey, guys, this is Tom O'Malley on for Blayne Curtis. Can you provide some color on what segments are stronger and weaker, heading into the December quarter?

Yes, so metro long-haul ends up strong. We have good visibility. The real issue with that is shaping from a seasonality standpoint, a lot of the orders have been placed for delivery after the first of the year. So it's really a timing standpoint. That's why I said the year-end inventory effects totally predictable from our past.

PON remains soft. Ever since -- for the last three years, since we had Mindspeed on board, they came in and educated us that PON was always seasonally soft. The explanation is, people tend to not dig up the ground during the winter season to lay new fiber. So there's a demand seasonality with the addition of the inventory effects.

So a couple of our key optical markets, just seasonally soften, but they come back roaring in the March quarter. The one, slight thing there is, you have Chinese New Year that tempers that a little bit, and then the June and September quarters are boom quarters -- as you look at the past four quarters we delivered, that's been we would anticipate a very similar shape. On the A&D business, we've continue to progress the MMICs, the design adoption, the customer adoption remains strong. We have some element of seasonality there, but less so.

Thanks a lot. You guys spent a lot of time talking about MMIC, but how is ground-based radar arrays progressing, and can you give us an update on the progress in Norman, Oklahoma?

Yes, so we shipped, we completed the shipment of production unit that's being assembled, and it's going to be installed in Norman, Oklahoma. I haven't heard that that has been completed. It may have been, but I don't tend to track that field trial. I can tell you there is a lot -- red hot activity among our customer base, and people preparing to respond to RFPs, preparing to be able to ship production for that radar installation.

I think the very interesting development in the past week, is with the new administration talking about infrastructure investment. There's nothing more logical for infrastructure from our standpoint, than doing what'S drastically needed in the US, which is upgrading the aircraft control infrastructure, and weather forecast infrastructure. So by all sense of customer activities, in terms of preparation, partnering, that's looking more and more real. But again, the caution we have, short-term, we have explosive growth opportunity in advance of that, as we articulated on the back of the MMIC content. So we don't have to wait for Tiles to drive our growth for next year.

Great. Thanks a lot, guys.

You're welcome.

Thank you.

(Operator Instructions)

Tore Svanberg, Stifel.

Yes, thank you, and nice execution. The first question is on GaN. So John, based on our due diligence, we're starting to see GaN popping up in people's supply chain. And I'm just wondering how you kind of balance that, because on the one hand, that could mean an acceleration of maybe GaN coming earlier? But then on the other hand, you got to sort keep an eye on all the IP out there, so how do you balance those two?

Yes, so I can tell you when -- there's a lot of people talking GaN, they talk a good game. If you look at the actual operational requirements to deliver RF power transistors into that market, it is notoriously -- it's a roller coaster, and unpredictable. In my previous life, I saw demand increases, literally doubling within 30 days. You have to have a supply chain, which is CMOS-like in nature, meaning you have to be working out of factories that can handle surge capacity, and be able to deal with just even just regular capacity, and be able to scale up and down both ways.

That is exactly what GaN on silicon does, and which we uniquely, and underscored with the legal developments over the past quarter, we uniquely have, customers recognize that. There are some kind of early generation niche programs, new frequency bands that have been serviced by GaN on silicon carbide. But realistically, from a supply chain and cost structure standpoint, those sources, regardless of who it is, simply aren't prepared to be able to handle the mainstream. That's why, fundamentally what we are doing, is we're attacking the heart of that $1 billion market, not the periphery.

Very good. And a question on the optical business, you talk about 60% share of the high-speed analog. And I was just wondering, would that refer to drivers, TIAs, and CDRs across all standards, or was that more of a comment, in regards to certain of those components, for certain standards?

No. In fact, I want to emphasize, that's across all standards. We're not talking about some -- playing statistical games, where in some narrow niche we have large market share. This is across all standards, all products, all protocols, 60%.

Very good. And last question, you mentioned you are now going to be breaking out datacenter. So I assume you are going to be breaking out datacenter revenue starting in the December quarter, is that the way I should think of it?

Yes. We will be -- just like we started talking about PON and metro long-haul, providing color on the overall dynamics, we'll be doing that on datacenters on a go forward basis. When we actually rolled up the datacenter number, it ended up frankly, larger, and larger growth than we anticipated. It is over-growing PON basically. Our investments are almost 100% in datacenter, in that category of product.

And the opportunity for further growth, just in that category is great. But the fantastic thing is, there is yet again, the same TAM available for the lasers, sitting right next to the high-performance analog content. And as I mentioned with the EFT technology, we're extraordinarily well-positioned, arguably even better positioned to capitalize and command even greater market share with that. And right behind that, is the silicon photonics that we had, the L-PICs that we had talked about at the Analyst Day, which are -- we have wafers in line, that we expect to be shipping production.

So it's that close. It's reason why I made the comment, that if anything, time lines are pulling in. I didn't even anticipate that we would be this far along with the analog, never mind the lasers and the silicon photonics. So I think that's going to be a very hot topic, not just in the December quarter, but throughout 2017 and beyond.

Excellent. Very good. Thank you, guys.

You're welcome.

Vivek Arya, Bank of America.

Thanks for taking my question. I had one longer term, and one question on fiscal year 2017. So on the longer term side, the concern with optics in the past has been, that it's been -- that there has been a lot of boom/bust cycles, that's why there isn't one large optics vendor. But this cycle, every optical vendor appears to be doing quite well. So maybe the question is, what is different about this cycle, versus what we have seen in the past? Why is this cycle more sustainable? And if everyone is doing well, who's losing share? Or is it just that the pie is getting so much bigger, that everyone can do well for some time?

No, I think there are some losers. I'm reluctant to talk about the competitors that aren't performing very well. I can tell you -- in our part of the market, the guys who we view as a sustainable position, will be Inphi in terms of the analog content. So it really is down to -- they with us, on the metro long-haul side.

Semtech tends to compete more on the PON and moving into the datacenter space for the analog content. We're -- there's no question, we are right now in a very sweet spot, as it relates to metro build outs layering on top of long-haul build outs. I guess, you can make an argument that it's more sustainable, given the fact that the exploding demand for bandwidth is real this time. And customers are already talking about moving on to 400 gig, 400G, and they're still in the process of deploying 100G. So there seems to be an insatiable demand.

That said, our working assumption is each one of these segments within optical will have its day. PON, 2.5 gig PON, may soften for a bit. 10 gig PON is right behind it, but there's typically, you can have a valley before the peak with 10 gig. That's okay. Metro right now is carrying the day.

The whole datacenter thing opportunity for us, with cloud service providers is arguably as big as everything we've done so far on the telecom service provider side. So that's -- and that's a totally different CapEx driver. So we assume that the boom and bust will remain, that's characteristic for the markets, and our answer to that is to diversify.

Yes, and just to add to that point, Vivek, we play in all geographies with multi-diversity of carriers. So Japan, China, North America, Europe, we're probably, as John says, the leader, but we're also the most diversified in terms of markets.

Yes, and there is another dimension, a subtlety here, Vivek, we passionately adhere to a component model. We don't have to sell everything to everybody, and by no means do we leverage people out with bundling things. We have customers who build their own lasers, and we're more than happy to sell them our high performance analog stuff, and they respect us for it. So and same thing, when we bring the roll out, merchant markets looking for photonic stuff, they can use our stuff or not.

So and customers respect us for that. We know our position. We have TOSAs, ROSAs, but we only address the sub segments in the market, and the customers and opportunities that are high margin. And the rest of the people, we use our capability as a reference design.

We coach, and work with our customers, to help them do a better job using our components, using our optical sub assembly expertise. So it's, I think, we've got a very different model from what a lot of other people are pursuing. I'll leave it that way.

Got it. Very helpful. And then, as my follow-up question, I think you recently raised some money. And I think M&A has been one preferred use of cash in the past. But just strategically, given the growth opportunity in front of you, would you prefer to continue to do sort of smaller tuck-in technology type transactions? Or do you think there's an opportunity to take the next step, and do something larger than what you have done before?

I think, we have done both. We've done transactions of various sizes. We're not shy, we're not meek and mild. But at the same time, we're not megalomaniacs.

To us, it's all about discipline. We want to pay the right price. The asset regardless of the size should be accretive, it should be accretive to gross margins, should be accretive to operating margins, should be accretive to earnings. And there aren't a lot of those assets available out there. But when they become available, at the right price, you can sure as hell bet that we're going to act.

Yes. And the other point is, as we talked about in integrating these acquisitions, we don't talk so much about the investment that's been going on over the past -- GaN has been multi-year investments, where once these products turn on, that investment mode is behind us, as it is in the 25 gig laser for example, and we're just selling product. So we have capacity to do other things.

Thank you.

You're welcome. Great question.

Thank you. Our final question comes from Quinn Bolton of Needham.

I had just two quick questions on optical, and then one on the new products. So just on the -- a clarification on the optical John, the 60% share you have in TIAs and drivers, was that a long-haul metro comment, or was that datacenter, or was it inclusive of all those segments?

Two independent comments, they both happen to be 60% share. So one is on metro long-haul, 60% share across all standards, so again whether it's limiting or linear drivers, whether it's ACL versus DCL, all standards again. We're playing no games, in terms of taking subsets of the TAM, and claiming high percentages. So it's across everything.

And then separately, the revelation we came to, is our HPA - this is the ex Mindspeed stuff. Kind of behind the scenes, we haven't talked a lot about it, didn't want to telegraph a competitive move. But they really shifted from a focus on PON, which is -- a very cost constrained, in that product category, more of a commodity, over to datacenters. And they've had a breakout in the past year. When we added things up, bottoms up from customers, we realized two things.

One is, from everything we could see, we had 60% share of all analog content across all those. And at the same time, the numbers added up to enabling over 1 million units, 1 million ports, which is in excess of what anybody reported that has been hit. So it's clear that datacenter, that 100 gig connectivity within datacenter is off to the races unequivocally, which is fantastic news, and in this first wave of products, being the analog content, we've already established a great position.

Great. Thanks for the additional detail. And then, just on the optical business, I know you said that the long-haul metro grew 49% quarter on quarter. I think you said PON was flat, datacenter obviously grew. Just wondering, was there part of the business outside of, I guess, fiber backhaul that was soft? I guess, with all that growth it -- I would have thought you might have had better than 5% sequential growth in optical. I'm just wondering if I missed something?

PON is an equally big number. And that, as we had predicted remained flat, flat quarter on quarter, so that kind of diluted the growth. So as -- but the fiber backhaul was not inconsequential amount of business that we had, that softened, at the same time as PON. And that's what brought the number down to 5%.

Got it, okay. And then, just lastly, obviously you talked about great new opportunities in MMICs, in datacenter lasers, in GaN on silicon. And I'm just wondering, if you just look at calendar 2017 for those three opportunities, are they all sort of roughly the same revenue opportunity? Does one significantly overshadow the others? I'm just thinking, now each of those sound like they could easily become $10 million to $20 million opportunities over the course of the year. Just wondering if I'm thinking about that the right way, in terms of contribution to the top line?

Interestingly, we're just going through the analysis, looking at some of these SAMs, and they each add up to -- in the 2019 time frame, pretty clearly $1 billion round number in terms of TAM/SAM opportunity. So and we're extremely well-positioned, for the reasons I described in the scripted remarks. In each one of those, predicting how big they are, and even here, you start getting into predicting the minds of your customers, and how quickly they move.

But I'll give you -- I'll leave you with this interesting concept. We've been fully invested in datacenters. We've been fully invested in GaN. We've been fully invested in MMICs with negligible revenue contribution.

The operating leverage, as those things turn on, and add on top of the growth drivers that have brought us to date, notably the metro long-haul stuff. It's layers upon layers of growth contribution, that we don't have to materially add -- you do have to add some, but I think we can limit operating expense increases, to arguably half the rate of sales increases, and we can blast through that 30% operating margin, and really march over the coming years to 40%. And that's very real. I mean, all the things that are talked about, have real first tier customers, valid value propositions, and what's before us now, is almost entirely operating scaling operations. Which as I said before, is the problem you want to have.

Thank you John.

You're welcome.

Thank you. And at this time, I would like to turn the call back over to John Croteau for any closing remarks. Sir?

Great. So before closing today's call, I'm pleased to announce that we recently hired Steve Ferranti, as VP of Investor Relations. Steve comes to us with a long-standing relationships within the financial community, which is the by product of his time at Skyworks, as well as his years of experience as a sell-side analyst. This is a new position within MACOM, and it's aimed at helping to further enhance investor's understanding and appreciation of MACOM's growth opportunities, and ultimately enhancing shareholder value.

I'd also like to add that, to highlight several investor conferences we'll be attending over the next few months. We will be at the Raymond James Technology Conference in New York on December 5 and 6, followed by the Barclays Global TMT in San Francisco on December 7 and 8. We also plan to attend the Bank of America Merrill Lynch conference in Boston on December 15, and Needham's conference in New York on January 10 and 11. If you'd like to request a meeting while we're in your area, please email us at IR@MACOM.com. That concludes our remarks, and we appreciate you joining today's call. Operator, you may now disconnect the call.

Thank you, sir, and thank you, ladies and gentlemen. You may disconnect your lines at this time. Have a wonderful day.