MACOM Technology Solutions Holdings Inc (MTSI) 2012 Q4 法說會逐字稿

Good afternoon and welcome to M/A-COM Technology Solution Holdings fourth quarter and fiscal 2012 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for a question-and-answer session. As a reminder, this call is being recorded, today, Tuesday, November 13, 2012.

I would like to turn the call over to Leanne Sievers of Shelton Group, the investor relations agency for M/A-COM Tech. Leanne, please go ahead.

Good afternoon, and welcome to M/A-COM Technology Solutions Holdings Inc fourth quarter and fiscal 2012 earnings conference call.

I am Leanne Sievers, Executive Vice President of Shelton Group, M/A-COM Tech's investor relation's firm. With us today are M/A-COM Tech's Chief Executive Officer, Chuck Bland; Chief Financial Officer, Conrad Gagnon; and President, John Croteau. Before I turn the call over to Mr. Bland, I'd like to remind our listeners that management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response your questions.

Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties that could result in those differences in the Company's filings with the Securities and Exchange Commission, including its form 8-K filed today and its quarterly report on form 10-Q filed on August 7, 2012. In addition, any projections as to the Company's future performance represents management estimates as of today, November 13, 2012. M/A-COM Tech assumes no obligation to update these projections in the future as market conditions may or may not change.

Additionally, the Company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP a non-GAAP terms. These financial measures and the 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 Securities and Exchange Commission today, and can be found in the investor relations section at M/A-COM Tech's website at www.macomtech.com. 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 relation section of M/A-COM Tech's website.

Now I'll turn the call over to M/A-COM Tech's CEO, Chuck Bland. Mr. Bland, please go ahead.

Okay. Thank you, Leanne.

Welcome everyone, and thank you for joining us today. I'd like to begin today's call with an overview of our fourth quarter and full year results, as well as review of our end markets and the progress we are making on our new product development efforts. Then I'll turn the call over to Conrad Gagnon, our CFO, who will review in detail our financial performance. I will then conclude today's prepared comments by providing our guidance for the fiscal first quarter of 2013 before opening the call for questions. Our fourth quarter revenue was $74.6 million, representing a 3% decrease over the prior quarter and a 5% decrease year-over-year. Non-GAAP gross margin was 43.9%, and non-GAAP net income was $10.4 million or $0.22 per diluted share.

Our revenue and earnings per share results were within our previously announced range of expectations; however, our gross margin results were slightly lower than our expectations, primarily due to higher than expected warranty expense for our automotive products and an unanticipated start-up manufacturing costs associated with a new radar program. We believe both issues are largely behind us, and we are now in full production on the radar program with improved yields this quarter. On a market basis, 28% of our fourth quarter revenue was from networks, 30% from aerospace and defense, and 42% from multi-market. We released 25 new products in the quarter, 13 in networks, 8 in aerospace and defense, and 4 in multi-market.

Reflecting on the past year, we achieved record annual profits, demonstrating solid execution by the M/A-COM Tech team in a challenging macroeconomic environment. We delivered fiscal 2012 non-GAAP operating profit of $61.9 million, up 19% from the prior year, on total revenue of $302.2 million, which was down 3% from the prior year. Our revenue from the networks market year-over-year was down 11%, while revenues from both aerospace and defense and multi-market grew modestly year-over-year at around 1%.

We believe the revenue decline in our networks market was primarily driven by a near-term slowdown in telecom carrier spending, and we still see longer-term growth prospects in networks, due to anticipated spending increases by the telecom carriers to satisfy the growing demand for faster data rates and network capacity by consumers and enterprise users.

We continue to make R&D investments in the networks market in order to expand our product portfolio and grow through market share gains. In point-to-point wireless backhaul applications, we've take our market-leading chipset approach that we introduced in the 38-gigahertz frequency band, and expanded it into the 42-gigahertz as well as the 18- and 23-gigahertz frequency bands, which we just announced earlier this month. The addition of these lower frequency band chipsets nearly doubles our adressable market in point-to-point. Similarly, we are focused on delivering new products for next generation 40- and 100-G optical networks, as well as mocha 2.0 and DOCSIS 3.1 cable TV applications.

In the aerospace and defense market, we experienced a slight uptick in fiscal year 2012 revenue, primarily driven by increased product sales in the ground-to-satellite communication devices, which was partially offset by the lumpiness we experienced throughout the year in sales of our products for radar systems. While the prospect of potential sequestration in 2013 is a sobering one for anyone supplying US defense market, we believe that the diversity of US defense-related sockets we supply, as well as the fact that many of our dual use aerospace defense radar products are also supplied to civil air traffic control and weather radar applications, somewhat tempers this risk for M/A-COM.

Our growth strategy in the defense ICN module market remains focused on gaining share by leveraging our domestic fab capacity, and using our commercial product development techniques to develop cost effective solutions to an increasingly price sensitive aerospace and defense customer base. One example of this strategy in action is our recently announced portfolio of gallium nitride power devices in plastic packaging. Traditionally, these devices are housed in expensive ceramic packages, but through innovative device design and package integration, we've demonstrated industry-leading electrical and thermal performance of gallium nitride in low-cost surface-mount plastic packaging.

We see multiple applications for this first-to-market innovation, including radar, military communications, and public safety. Lastly, our multi-market business grew modestly over the year, primarily driven by growth in the automotive sector. In Particular, we experienced an increase in sales for our patented GPS module to Ford, our only greater than 10% direct customer, which accounted for about 16% of our fiscal 2012 sales. Multi-market also includes our projects for test and measurement, industrial, scientific, and medical applications, where RF microwave and millimeter wave semiconductor solutions are gaining prevalence.

Given the high mix, low volume nature of many applications within this market, wherever possible we leverage designs from that networks and aerospace defense markets to develop general purpose products that are well-suited for catalogue sales in our distribution and e-commerce channels. In the past year, we started introducing a family of such products from amplifiers buyers to power detectors in ultra-small, low-cost packaging to extend our portfolio of over 2700 products. In summary, we remain committed to our core strategy of developing new and innovative products that solve our customers' most complex needs. As evidence of that commitment, we released 119 new products in fiscal 2012.

Some of our more exciting products we introduced include a family of low-phase noise VCOs to complement our highly integrated chipsets for wireless backhaul radios, single, dual and quad channel optical modulator drivers for 100-G fiber-optic networks, cable-TV variable gain amplifiers for docsis 30 and 31, filters for mocha 11 and 2.0, a line of high-powered switches, switch limiters, and phase shifters for civil and military radar systems, and lastly a wide range of power amplifiers, hybrid VCOs, CMOS drivers for mil com and sat com applications.

We currently have 115 products in development with our typical design cycles ranging from 8 weeks to 18 months. We remain focused on generating growth, driving margin expansion, and improving our operational efficiency. We finished the year with $84.5 million in cash and investments, no debt, and an untapped credit line of $150 million. With our strong financial position and robust product line, we are well-positioned to capture future growth opportunities.

Now I would like to turn the call over to Conrad Gagnon, our Chief Financial Officer.

Thank you Chuck, and good afternoon everyone.

During the course of my comments, as well as those made by Chuck, with the exception of revenue, all income statement amounts and percentages will be discussed on a non-GAAP basis. Unless otherwise indicated, each reference will be to an amount or percentage that excludes stock-based and other non-cash compensation, intangible asset amortization, restructuring costs, optimized litigation costs, fair value adjustments, amortized financing costs recorded as interest expense, as well as certain income tax items.

With that in mind, let me now begin with a review of our financials for the fourth quarter of 2012. Revenue was $74.6 million, a decrease of 3.3% compared to $77.1 million in the third quarter of 2012, and a decrease of 5.4% compared to $78.8 million in the fourth quarter of 2011. While, as Chuck mentioned, revenue in the quarter was within our range of expectations, we continue to see softness in macroeconomic headwinds generally across all markets. The revenue split among our three primary end-markets in the fourth quarter was networks 28%, aerospace and defense 30%, and multi-market 42%.

Gross profit in the fourth quarter was $32.7 million, or 43.9%, of revenue, compared to $36.1 million, or 46.8% of revenue in the prior quarter, and $35.3 million, or 44.8% in the prior year quarter. As Chuck mentioned, our gross margin results were slightly below our range of expectations, due to higher warranty expense for our automotive products and unanticipated start-up costs associated with a new radar program.

A decrease in gross margin quarter-over-quarter, and as compared to the year ago quarter, was primarily due to a less favorable product mix, with higher sales of lower gross margin products in our automotive applications. Our long-term focus continues to be on improving gross margins through increased sales of higher margin new products, market growth in channel strategies, as well as further cost reductions. In terms of operating expenses for the fourth quarter, total operating expenses were $17.4 million, compared to $18.8 million in the prior quarter, and $21.4 million in the prior year quarter.

Looking at investments in new products, research and development expenses for the fourth quarter were $7.6 million, and included $0.9 million of incrementally favorable foreign research credits, which reduced our total R&D expense for the period. R&D expense in the prior quarter was $8.8 million, and in the fourth quarter of 2011 was $10.5 million. R&D as a percentage of revenue represents 10.2% in the fourth quarter, compared to 11.4% in the previous quarter, and 13.3% in the prior year quarter. We plan to continue investing in R&D to further the advancement of our new product development efforts.

Selling, general, and administrative expenses were at $9.8 million, compared to $9.9 million in the third quarter of 2012, and $11 million in the prior year quarter. SG&A as a percentage of revenue represented 13.2% in the fourth quarter, compared to 12.9% in the previous quarter, and 13.9% in the prior year quarter. The decrease in SG&A over the prior year period was primarily related to higher professional fees incurred in the prior year quarter as part of preparations for our IPO.

Income from operations was $15.3 million or 20.5% of revenue. This compares to $17.3 million or 22.5% of revenue in the prior quarter, and $13.9 million or 17.6% of revenue in the prior year quarter. We remain focused on improving operating margin through gross margin improvement and further managing operating expenses.

Our fourth quarter net income was $10.4 million or $0.22 per diluted share, compared to third quarter net income of $11.8 million or $0.25 per diluted share, and net income of $8.9 million or $0.21 per diluted share in the prior year quarter. The share count used to compute EPS was 47.4 million shares in the fourth quarter, 47.8 million shares in the third quarter, and 42 million shares in the prior year quarter.

Turning to the results for the fiscal year, revenues were $302.2 million, compared to $310.3 million in fiscal 2011. The year-over-year decrease of 2.6% was primarily the result of softness in macroeconomic headwinds in the networks market, partially offset by continuing strength in sales of our multi-market products for automotive applications.

Gross profit for fiscal 2012 was $137.6 million or 45.5% of revenue, compared to $133.8 million or 43.1% of revenue in fiscal 2011. The 240 basis point improvement in gross margin was primarily due to lower manufacturing expenses, primarily offset by the impact of lower volume and less favorable product mix. Operating income for fiscal 2012 was $61.9 million or 20.5% of revenue, compared to $51.9 million or 16.7% of revenue in fiscal 2011. The 380 basis point improvement in operating profit was primarily a result of higher gross margin and further managing our operating expenses.

Our effective income tax rate for fiscal 2012 was 31.7% and compares to 35% in fiscal 2011. Net income for fiscal 2012 was $42.1 million or $0.94 per diluted share on 44.9 million shares, compared to net income in fiscal 2011 of $33.2 million or $0.80 per diluted share on 41.7 million shares.

Turning to the balance sheet, as of September 28, 2012 our cash and cash equivalents were $84.5 million, an increase of $6.9 million from the prior quarter ended June 29, 2012, and an increase of $38.9 million from September 30, 2011. Cash flow from operations for the fourth quarter was $8.9 million, and for fiscal 2012 was $35.2 million. We have no debt, and last week we increased the capacity of our revolving credit facility from $125 million to $150 million for additional liquidity. Accounts receivable of $54.2 million compares to $50.6 million at the end of the prior quarter, and $46.2 million at the end of the prior fiscal year. Days sales outstanding represents 66 days, compared to 60 days at the end of the prior quarter, and 53 days at the end of the prior fiscal year quarter. The DSO increase is largely driven by the timing of shipments within the quarter.

Inventory was $57.5 million, compared to $53 million in the prior quarter, and $52.5 million in the prior fiscal year. Inventory turns were 2.9, compared to 3.1 in the prior quarter, and 3.3 in the prior fiscal year quarter. Capital expenditures for the fourth quarter were $2.2 million or 2.9% of revenue, compared to 5% of revenue in the prior quarter, and 5.2% of revenue for fiscal year 2012. Depreciation on property and equipment for the fourth quarter was approximately $2.5 million.

I will now turn the call back over to Chuck, who will provide our business outlook for the first quarter of fiscal 2013.

Thanks, Conrad.

In the first quarter ending December 28, 2012, M/A-COM Tech currently expects revenue to be in the range of $72 million to $77 million, non-GAAP gross margins between 44% and 45% percent, and non-GAAP earnings per diluted share between $0.19 and $0.23, based on an expected 48 million shares outstanding. As of today, we have already shipped or are presently firm-booked for 92% of the midpoint of our revenue range. As we've stated in the past, firm-booked orders means orders that have already shipped during the quarter, or that we have a related customer order in hand with a scheduled delivery date falling within the remainder of the fiscal quarter. Such orders may or may not be cancelable and reschedulable by the customer.

While we will not give specific full-year guidance, we are seeing improvement in selective areas in our target markets, and this, coupled with our new product and market penetration strategies, leads us to believe our fiscal year 2013 revenue will reflect an increase over fiscal year 2012.

I'd now like to open the call for questions. Operator?

Thank you.

(Operator Instructions)

I have a question from Blayne Curtis of Barclays. Your line is open.

Good afternoon, guys. Within the flat guidance, I was wondering if you could talk about the particular segments you talked about that you felt things were starting to improve. Are there any segments that you expect to up, or is it fairly flat across the board.

And then if you could just talk about your largest customer, you saw a big move there. Do you expect any other big moves?

Sure, I will take that question. This is John.

Basically, we are seeing kind of a broad-based weakness in aerospace and defense and networks down, we estimate, down 3% to 4% for the next quarter. The strength is really in the automotive sector. This isn't just the GPS telematics module, but also some switch products for collision avoidance. The rest of the multi-market business is similarly seeing a little bit of softness as well.

I see, and then on the gross margin, you talked about that you are improving the yields on the A&D product. The warranty costs that you had, is that also correcting itself into the summer?

Yes, Blayne. This is Conrad. Yes, as a result of our discussions with Ford regarding field repairs, our gross margin last quarter was impacted by about 50 basis points for repair costs, warranty repair and that's behind us. It has corrected itself.

And then maybe just --

And Blayne, on the radar, just to be clear. We had began producing this product offshore, and we had some start-up problems, and we had -- it hit the -- I think, Conrad, about 30 basis points.

30 basis points.

We fixed that last quarter. We caught up, we met the customer's demand. That problem is behind us too, but the two together accounted for about 80 basis points in our margin for this quarter.

And then just continue on the outlook for A&D, obviously all markets are soft. If you could just talk about, is that one radar project that you were waiting for? And then if you just commented on the health of kind the commercial aerospace that had taken a dip down for you last quarter?

Let me do the radar and then I'll let John talk --

Sure.

We have talked about the $5 million radar order that booked for the fourth quarter. That order is still booked, but the customer has moved about half of it out to Q1.

Of the $5 million, we will probably deliver about $2.5 million in the -- I'm sorry into Q2. The $2.5 million will move this quarter, the quarter that we're in, and $2.5 million will move in the quarter ending March 31. The order's still solid, it's just that he's seeing soft demand on his side, or a slowdown in the program and he's moved it out to next quarter. In terms of general market conditions, I'll let --

Sure. In terms of the general market conditions, in fourth quarter, the softness in aerospace and defense was really broad-based within the catalog portfolio. So it was no particular customer or product in specific, or piece of business. Looking forward for Q1, the one thing that really stands out is a piece of Asian radar business that we've referred to in previous quarters, that Chuck and the folks have talked about. Other than that, things look pretty flat.

Got you. Thanks, guys.

Our next question is from Harlan Sur of JPMorgan.

Hey guys. Thanks for taking my question.

In the December quarter, I'm just curious how is your broadband segment trending? One of your largest MoCA customers guided their setbox business to grow in December. Wondering if this is driving part of the growth for multi-markets in December. And more importantly, as MoCA 2 -- starts to ramp next year, if you can give us a sense on how well the Mekong team is positioned with your two largest customers there.

Sure. I would say from a quarterly revenue standpoint, I can't speak to December specifically, but the consumer-oriented nature of the set-top box business is actually down. It's on the weaker side for first fiscal quarter.

In terms of positioning for MoCA 1 versus MoCA 2, we are well-positioned in the MoCA 2 segment with filters and amplifiers in many of the customers I believe you're referring to. I think in general the way I would describe it for our CATV business and broadband business we're moving more towards an infrastructure focus and away from the subscriber side devices, notably set-top box. So we see a fabulous opportunity with a few new products that we introduced this quarter, an edge clam variable gain amplifier, likewise reverse pamp variable gain amplifier, which are well-positioned for docsis 31 and MoCA 2. As the network gets upgraded to two gigahertz bandwidth. So I think it is all good news for us.

Great. I think on the last call the team was talking about the ramp of its 42-gigahertz smart set chipset ramp. Did that materialize in the fourth quarter? And how is that going to trend here in the first quarter?

Yes. I would say, first of all, the product is ramping. I would suggest that it is not ramping as fast as we had hoped. It is really focused primarily for production in our Chinese customers.

42-gigahertz tends to service Europe in the metro areas, metro cities, and carrier spending is still somewhat weak in that part of the world. So I would say it is not performing as well as we had hoped, but not because we don't have the design wins and the market share, but simply because of the end market dynamics right now.

The real growth that I anticipate in the next quarter or so is as we move down in the frequency bands, down to 18 and 23 where we can expand into South America, some in China, as well as India. We've also got some great new products that we've been introduced for PAs, power amplifiers, in the 13-gigahertz and 15-gigahertz bands, which starts getting us into long haul. We're very judicious in what parts of that market we operate, because we want to be targeting the higher margin opportunities, but with long haul, that gets into India and China as well. Our footprint continues to expand with new products, and I would say from design win and customer penetration standpoint, all points are positive.

Great, and then --

This is Chuck. The one thing that has been kind of interesting for us is we have talked before, I think in the March call. People said gee, everybody's looking for a strong second half, what are your customers telling you? I think we responded then that the customers are telling us, but we haven't seen the orders. As you know, over the last two quarters, we've seen a lot in increase in our book and ship business, versus customers placing long leadtime orders.

What's encouraging for us right now is that we're starting to see our second quarter backlog begin to build a little faster than we would have normally anticipated. So customers are going back to ordering on longer lead times -- lead time order pattern, than they have in the past. That is why I think we are bullish about starting to see some recovery in the, particularly networks and aerospace and defense, because we're starting -- it won't affect this quarter, but we're seeing some strength for next quarter.

Great, and then just my last question. If we take a look at the upcoming fiscal year, fiscal 2013, I think, Chuck, you had mentioned a potential outlook for growth. I was wondering if the team can just qualitatively talk about growth in your three segments in fiscal 2013?

Which segments will be growing the fastest? Which segments may be declining? If you could, maybe articulate some of the specific programs or product areas that are going to be driving much of the incremental growth?

Well, we don't give annual guidance. It would be hard to quantify, probably at the level you'd be comfortable with, particularly given the fiscal cliff and everything else, how they're going to deal with sequestration and everything else. I think we could talk, maybe John, you could talk in general terms about which markets you see the most potential in.

Sure.

Assuming a level playing field.

Yes. So let me give some color. Obviously avoiding some of the quantitative assertions.

Cable TV and broadcast, we look to be kind of a flat year for us. We've got some transitions in the set-top box moving to MoCA 2 where we have a little less content, as well as growth in the new products on the infrastructure side. Those kind of offset and you'll leave basically a flat year, what we anticipate.

Point-to-point is a big growth area for us. We have a fabulous footprint, as I said, in 42-gigahertz and 38-gigahertz. Now we have moved down to the frequency bands that are more mainstream. We have the right customers with the right design wins in the right position. That's really a leadership position for us. That is definitely a very solid growth area.

The opto business, opto-electronics grow as a percentage-wise quite strong, but on a small number. It's still the early days, et, for that business.

In aerospace and defense, it is really growth across all the segments. Mil com is battlefield radios as well as sat com, as well as both domestic and international programs. Very solid base there of customers and design wins, new product NPD.

On multi-market, we view it as kind of a flat to slightly down year. We have got some consumer-ish type business that we did -- decided not to pursue a year ago, which brings the top level number down a little bit. Good news is the margins grow up accordingly, and again, very strong year for growth on the automotive side.

As I said, the GPS telematics module continues to exceed our expectations. There's actually other automotive business that's looking very favorable, products going into collision avoidance. I would say everything is up, good to great. Flat, pretty much for the CATV broadband business, and a slight down on the catalog business.

Great. Thanks John, thanks Chuck.

You next question is from Mark Lipacis of Jefferies. Your line is open. I believe Mark drop off the call.

Our next question is from Tore Svanberg of Stifel Nicolaus. Your line is open.

Yes, thank you. First of all, Chuck, you mentioned that customers are starting to order a little bit further out. I am just wondering, is that a result of new programs, or are inventories too low, or are they actually starting to see demand coming back?

I'm not sure I know the answer to that. I think we see it as just a general increase in confidence among the customer base, to make sure they're putting their foot -- where before they just naturally expected us to have the inventory on hand and we could respond. As you noticed, we increased our inventories from -- by converting whip to finished goods, our -- the value of our inventory went up.

I think is just a general, how I want to say, confidence among the customers that they need to put their orders in to make sure that they are there when they need them. We don't see it just a new products. It's been kind of across the board in just about every one of our business segments, we're starting to see a backlog build sooner, not necessarily bigger, but the backlog is building sooner than it would have otherwise, and historically.

Very good. As I look at the point-to-point business next year, should I assume that 42-gigahertz and 38-gigahertz will sort of be responsible for the growth in the first half, and then maybe the lower frequencies will come in the second half? Is that how I should look at it?

Yes. I think that's a fair assumption, a fair description.

Okay. Conrad, how should we think about gross margin mix for fiscal 2013? It looks like you have a lot of moving parts. You have higher margin business is growing, but you also have the automotive business growing. How should we think about gross margin mix as we move throughout the year?

Well, Tore, I would just caution, we only provide guidance for one quarter out, which we have done. Generally speaking, we see opportunities as the new products continue to be introduced and as that ramp, as new products ramp up, we expect margins to correspondingly improve because of our -- the nature of the product introductions that we have.

Okay. Last question on R&D, you had a credit this quarter. As we look at next quarter, should we sort of go back to the run rate in the previous quarter, or do you have some other potential credits coming as well?

Yes. I think the -- going back to traditional quarters, because there was an incremental benefit of $900,000 this quarter.

Sounds good. Thank you so much.

Thank you.

Next question is from Quinn Bolton of Needham & Company. Your line is open.

Hi, perhaps for Chuck or John. Can you give us some sense within the aerospace and defense business, how much is more sort of radar or commercial applications rather than pure defense? Just trying to get some sense of what the sequestration overhang may be on the purely military part of your business.

Yes. Well, we have disclosed in the past that military sales in total make up about 10% of our total sales, which would -- which is a -- makes up about one-third of the aerospace and defense business in total. The other 20% is radar, and although some of those parts go into military radar, a large percentage of our radar goes into air traffic control and weather radar applications.

We have relatively modest exposure to sequestration. In fact, we see it is an opportunity because we have such a small market share that even if it gets smaller, we're going to be able to continue to grow our share of that business.

Great, and then just a second clarification on the radar business. You had mentioned that there's about a 30 basis point hit to margin since you ramped a new program. Is that the $5 million contract that sort of caused that hit? Or is it another radar program that you are shipping?

No, it was the $5 million. We started shipping product late last quarter, late in the quarter that just ended, and the bulk of the shipments happen this quarter and next quarter, but it was that product line. We built that product before the United States, and we got it qualified, and we moved the production offshore, and we had a start-up problem with the offshore manufacturer that took us a little while to get -- as the product line ramped into production, and the volumes increased, we experienced some yield problems that we got on -- our operations people got on quickly and got fixed last quarter.

Okay, and then just knowing that you've got that $5 million contract that's split roughly 50/50 between fiscal first and fiscal second quarter. As you look out to the third quarter, understanding obviously you're not going to be giving specific guidance for the third quarter, but do you see the A&B business dropping off in the third quarter once you have completed that shipments? Or do you have other programs that can kick in and sort of make up for the completion of shipments to that particular radar program?

Sure. I would say certainly that program drops off, but that business, by it's very nature, is very lumpy. We have lots of other programs, not just radar, but satellite.

So I will add to Chuck's previous comment. The other part of the commercial aspect of aerospace and defense is actually satellite, commercial applications for satellite. So it can be things like cargo tracking and so on.

We do not see, in aggregate, any drop-off after that $5 million program. There is lots of fill in other things. As I said, we see only growth this year in aerospace and defense.

Great. Then just lastly, just you guys increased the size of the revolver. It is untapped. I'm assuming that you have the revolver there primarily for M&A, given you're actually cash flow positive, no debt currently. Should we be thinking about the most likely scenario where you would tap that revolver would be to fund strategic M&A transactions, should you find one that makes sense?

Yes, that's exactly why we have that. We are generating between, I think, $30 million and $50 million a year in free cash flow. Our capital spending requirements, we've talked, being 3% 4% per year of revenue, which means it would be somewhere between $9 million and $15 million a year. We certainly don't need that revolver to fund operations.

Given our stock price where it is at, if we came across an acquisition, we certainly wouldn't use equity to do the deal. The cost of capital where it is at, we think there's some attractive opportunities out there. We screen multiple ones each quarter, but that is why that is in place. You are right.

Great. Okay. Thank you.

Thank you. Next question is from Harsh Kumar of Stephens. Your line is open.

Yes. Hey, guys, a couple of quick question. First of all, on a long-term basis, Chuck, with revenues in the mid-$70s million kind of range, what are some of the things that you can do to grow margins at these levels? Let's just assume that the markets don't pick up dramatically over the next year or so. What are some of the things that you can do to pick up margins? How much can we expect the margins to up over the next 12 months, 15 months?

Well, we've got a really sharp, aggressive, young Vice President of Operation who assures me there's some more operating efficiencies we can get out of our operations. I think we're thinking anywhere from 150 to 200 basis points of additional yield improvement, and we've got one more facility, or some other offshore facilities that we might be able to consolidate and save some money there. Most of our margin improvement over the last few years has been as a result of operating efficiencies. I really thought we'd exhausted that, but he has me convinced there's another 200 basis points that we can get over time.

The real growth in our margins to get to our long-term operating model of 55% is from new products. We talked about wanting 30% of our revenue in any quarter coming from products released in the last three years. This quarter it was 35% of our revenue came from products released in the last three years.

But you have to remember, many of the products we've released were started in 2009, 2010, and 2011. Those are not -- those products do not have the same profit profiles that products that we started in 2011 and 2012. Although we're releasing a lot of new product and it's making up a large percentage of our revenue, they are not 60%, 65% margin products, the bulk of them are not. The new ones we released in the last nine months have been, but the ones released in the 27 months before that were not.

Over the next year or two, you're going to see these new products, the ones we've already introduced begin to ramp, and introduce more new products that have the kind of margin profile that our new R&D team is able to handle. You're going to see the margin width comes from the introduction of those new products.

How much -- how much will we see? That is difficult to predict because our customers, although we continue to win, I mean, we're still sole-sourced in many 38-gigahertz and 42-gigahertz applications. Our products are still winning sockets, but our customers, they're not achieving the sales ramp that they originally proposed to us. If we could get the markets moving, I think we're going to see a catch-up from the products we already have spec'd in, and then we're going to see some ramp from additional products that we introduce over the next six to nine months.

Got it, Chuck. Thank you.

And then you sound pretty excited about a couple of the markets that you mentioned, point-to-point, aerospace and defense, looks like satellite you're excited about. I assume that the margins for those products, generally above your corporate margins, outside of even new product line-up?

Yes. In general, if you look at our RF business, it has margins north of 50%, on average. The products that we are excited about, the ones we're pushing now, for instance the products we've released in the last six to nine months, all have margins north of 60%. So, yes, we are very excited about those opportunities.

Fair enough. Thanks, guys.

Thank you. Your next question from Elizabeth Howell of Raymond James.

Hi, thanks. I'm calling in for Steve Smigie.

If you could just go into a little more detail on what you saw on your 10-gig, 40-gig. 100-gig products. Sounds like they did pretty well, but any detail on the segmentation between the groups, and where you see this market growing to would be great.

Well, we are continuing to see -- our focus when be brought Optomai was on 100-gig. We thought that the 10-gig market had more than enough competitors and was being adequately served. We chose not focus on 40-gig because our feeling was that the market would move quickly from 10-gig to 100-gig as they upgraded their networks.

That's, I think, largely proven to be true. I mean, we are starting to see a lot more ramp on our 100-gig products. For the interim, we've released some 40-G products, because our customers have said, gee we like your 100-gig, but if you're going to be 100-G, if you're going to be in the market, we expect you to be a full line supplier. So we've recently started to develop and release some 40-G products.

I'd say the strength in our demand is coming from 100-G, although we're seeing some modest demand from our 40-G products too. As John mentioned earlier, I mean, we're seeing growth rates on 50%, 60%, 100% quarter-over-quarter, but we're starting from a relatively small base. The margins on those products are north of 70%. Does that answer your question?

Yes, that is great.

Okay.

And then just moving to the auto segment. You said Ford was 16% of revenue. I think that compares to 12% in the prior year.

What percent of revenue do you want to cap this, and also can you sort of just describe what you saw for autos in the quarter? We're seeing some conflicting reads on this market from semis. So while you all are seeing contained strength there, some mentioned weakness. Just wondering if you saw increasing competition, or if autos are looking to move beyond moving sole-sourcing (multiple speakers) products?

Right. Yes, that is the issue for us. I mean, we are sole-sourced on that part, so it is difficult for us to cap demand without shutting down Ford lines. I think we are going to end of delivering what Ford wants.

The good news is it's 100% outsourced. So there's effectively unlimited capacity with no incremental capital investment on our part. So we can -- our outsource vendor is an experienced automotive supplier. They understand these rapid ramps and some changes in demand.

We expect Ford will continue to grow. It is difficult to determine exactly how much because they are expanding their product line, the number of vehicles that this particular part is offered on, as well as geographically they're expanding. And the speed at which they do that determines the demand. We certainly expect it to be bigger in 2013 than it was in 2012. How much bigger is difficult to predict.

Okay, great. Just last one. Is your percent of auto revenue pretty much the same as your percent of Ford revenue, or that larger?

It's predominately our auto revenue is Ford, but there are other parts in there that typically have -- we talked about this before. Our other parts that we supply, John talked about radar and bumper collision avoidance systems. Those parts typically have margins in the 50% to 60% range. The automotive business for us isn't bad, it's just the majority of the automotive parts we supply, we've disclose this, has margins in kind of the mid-20%s.

So as that business grows, it obviously has a negative impact on our overall gross margin. But, and just to make sure everybody still remembers this, the operating expenses to support that business are relatively minor, probably less than 5% of sales. So it is a great product for us in that it delivers about 20% to our operating margin line.

It falls short of our 30% operating margin target. Our long-term operating market is 55% gross margins, 25% in operating expenses, putting 30% to the operating income line. So it falls short of that, it's a great cash cow for us.

Great. Thanks very much.

Our next question is from Mark Delaney of Goldman Sach. Your line is open.

Yes, thank you very much for taking the question. Congratulations on the good quarter, guys.

Yes, first, was just a bigger picture question, John. I know you left NXP, and that company's been doing very well. So I was hoping you could help us understand what gave you the confidence to join M/A-COM?

Well, I mean, to be honest it was a superb fit. I always knew M/A-COM here in the Boston area. It's a great Company. It's very well-positioned, in my mind, in the right place at the right time with the right technologies feeding a couple of very exciting secular trends, growth trends in the industry.

On the network side you have the explosion of bandwidth that's just driving all kinds of demand in high performance RF and microwave needs. Likewise, on the defense and aerospace side, whether its satellite, battlefield communications, or UAV, unmanned aerial vehicles, lots of growth, lots of opportunity.

And the phase that M/A-COM is entering now, looking for growth, very much plays to my industry experience as well as my skill set. So it is a great fit, and I will use a very direct analogy on the reason why I'm so comfortable. M/A-COM right now, in terms of industry position and ambition with gallium nitride, is very much exactly the position that I inherited it at NXP with LDMOS. We made that a big industry success, and I think M/A-COM is well-positioned to do the same with gallium nitrate. It's like I said, very comfortable, and I feel like I've been able to step in in the past 30, 45 days and hit the ground running.

That's very helpful color. Thank you for that.

Second question, I was hoping you guys could help me understand where the utilization rate is on the factory and what the plans are for that going forward?

Well, we try to hold are fabulization around 80%, and we do that on purpose because it makes it easier. It makes the turnaround time quicker for our development through R&D. Last quarter the fab ran right at 80%.

Okay, thank you for that. Then my last question, do you guys have any color on where inventory levels are at your customers?

Well, they are declining. We know some customers, particularly our Asian customers, had over-ordered, and they some of the orders that they had placed on us, particularly in the fiscal third quarter and fourth quarter were pushed out. They kept delaying. Some of them took some product late last -- late in the June quarter, and some took some in the fourth quarter. But we think the inventories are becoming more in balance. On the distribution channel, I don't know, John, do you have any --

Distribution is flat. So not growing, not declining, And I think one of the things we're dealing with is year-end inventory management at some of our key customers, particularly over in Asia. I think, I would suspect that we will see a rebound in the first calendar quarter, our second fiscal quarter.

Great. Thanks very much. Good luck guys.

Thank you. Next question is from Tore Svanberg of Stifel Nicolaus. Your line is open.

Thanks. I just had a few housekeeping ones. Conrad, the share count was up about 1 million shares, or will be up 1 million shares next quarter. Just wondering how we should think about the share count beyond that.

I think that would be reflective throughout the balance of the year, Tore. I would use that same amount.

Okay, very good.

The share count would be flat, is what I am trying to say.

Tore, for your modeling, we target, for equity inside the Company, as you know, we believe all employees should have stake in the game when it comes to our stock price and act like shareholders. We target around 1% dilution annually to limit our total net dilution to less than 1% for employee equity grants. That's really the only use of equity that we would see over the next 12 months.

That is helpful. The tax rate for fiscal 2013, will it stay here in the low 30%s?

It will be 29%, is what we are modeling for the fiscal year 2013.

Okay, last question. Inventory days were up a little bit, 125. Will it start to come down here? What are some of your production plans next couple of quarters to potentially get that down a little bit?

Yes. We might see inventories grow modestly for the next one or two quarters. We continue to focus on finished goods conversion. We just started carrying products at whip. We want to make sure that we have the -- we can be responsive to customers when they order. So we might see one or two more quarters of modest inventory gains and increases, and then begin to decline after that.

Sounds good. Thank you very much.

Thank you. Our next question is from Harlan Sur of JPMorgan. Your line is open.

Thanks for taking my follow-up question. I don't think any quarter this year has exhibited anything close to normal seasonality.

However, can you guys just articulate what is the normal seasonal trend for your business in the March quarter? I know that you have some potential tailwinds, like the radar upgrade and potentially a better demand environment for your point-to-point business, and maybe [disty] as well. But just wanted to know, in a more normalized environment, what is the seasonal trend in the March quarter?

We really don't have much seasonality in the business. What you are seeing, I think, as you said, it's been difficult. You characterized it as seasonality, I would characterize it as just uneven market demand throughout the quarter, particularly with our radar business that tended to come in fits and starts.

In general, our business, like I say, is not affected by seasonal trends. We don't have, for instance, we're not big in the handsets. So you don't see the big Christmas rush in September and October as everybody builds their handset business. I think what we are expecting, our stronger performance in the latter quarters, primarily because of the recovery in market demand, not due to any seasonality.

Got it. Then my last question, and John touched a little on this, but the team has introduced a plethora of new products based on your GaN technology. Can you just talk about what applications you're targeting with your GaN products, and are these products already shipping to customers? Maybe talk about your GaN technology relative to competitive offerings out in the market today?

Sure. Basically the gallium nitrate technology that we have in the first phase of announcements has to do with targeting radar applications. It is, again, on silicon carbide, which is a very much performance-driven part of the portfolio rather than cost-driven part of the portfolio. So that plays to aerospace and defense.

When you talk about that part of the portfolio and key selling points, where first the market with GaN and plastic, plastic packaging, the economics in a lot of these power applications have a lot to do with the package rather than the die. The real benefit, though, with plastic has to do with size and weight. So for instance, if you talk about unmanned aerial vehicles, UAVs, drones, weight and size are huge factors. We seem to have a very firm position there.

As we bring out the rest of the portfolio, we see, again on silicon being a major play. Not as much cost differentiated, although it is definitely lower cost than silicon carbide. But very good linearity, great opportunities for network build-outs and upgrades in the cable TV, broadband space. We see some other interesting opportunities percolating now as well.

What you should expect from us is really kind of a broadbased portfolio from high-power finals, silicon carbide through integrated mix, that's monolithic multi-wave ICs. So a bit more integrated versions thereof. It is a very exciting area for us right now, and I think we're just at the very tip of the iceberg.

Okay. Thank you very much.

Your next question is from Mark Lipacis of Jefferies. Your line is open.

Great. Thank you for cycling me back in. 92% of the quarter is shipped or shippable. How does that compare with the last several quarters at this point in the quarter?

Yes, Mark, Conrad. Last quarter at this time, this particular time of month, we were at about 90%. We were in the high 80%s in previous quarters. We are encouraged that we are at 92% this quarter at the midpoint.

Okay. And then the customers are -- Chuck, you said the customers are booking out farther. Is that due to the lower customer inventories, is it good product cycle, better demand expectations what do you think is driving that?

I have not personally talked to the decision-makers, I guess, that are actually placing the orders. But my sense from talking to our market people is it's just general increase in confidence. Our customers are seeing the orders, they are putting orders on us sooner to make sure that the product is there so they can meet their end demand.

In the past, as we talk, our book and ship business increase substantially over the last two quarters, which really was an inability of the industry to forecast. So there were a lot of, I got an order, how fast can you get me the product? I think the industry seems to be returning back of a more normal order lead time now, which we'll continue to increase inventories in response to book and ship business over the next two quarters, but we kind of see it kind of leveling out by the time we get to midyear next year.

It's not because your lead times are extending, right? I mean, your inventory turns declined, actually, right?

Right. Well, actually, if you look, our units in inventory probably stayed the same or went down slightly, but the value added in inventory went up because the percent of our total inventory that was being carried as finished goods increase versus the amount we typically carry in whip.

I understand, but you're not signaling to your customers that your lead times are stretching?

No. No, not at all.

Okay. Then, Conrad you said, I think you gave the cash flow from operations for the quarter. Did you give what the CapEx during the quarter was, just so we can have the free cash flow number?

I did. And it was 2.9% of revenue.

Okay, great. Thank you, that is all I had.

Okay, very good.

Thank you, and this is the Q&A portion of today's conference. I'd like to turn the call over to Management for any closing remarks.

Okay, thank you. I want to thank everyone for joining us today. In closing, I look forward to further expanding our business in fiscal year 2013, and believe we are well-positioned with our new product pipeline and operating efficiencies to support revenue growth, margin expansion in the coming year.

Also, John, Conrad, and myself are attending the JPMorgan One-On-One Tech Day in Boston on Thursday, and I'd enjoy meeting with any of you who plan to attend. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.