MACOM Technology Solutions Holdings Inc (MTSI) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to M/A-COM Technology Solutions Holdings' second-quarter of fiscal 2013 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, April 30, 2013.

I would now 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's, second-quarter of fiscal 2013 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, M/A-COM's investor relations firm.

With us today are M/A-COM's President and CEO, John Croteau; and Chief Financial Officer, Conrad Gagnon.

Before I turn the call over to Mr. Croteau, 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 to 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 annual report on Form 10-K, filed on November 28, 2012.

In addition, any projections as to the company's future performance represents management's estimates as of today, April 30, 2013. M/A-COM 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 and 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 at the Investor Relations section of M/A-COM'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 Relations section of M/A-COM's website.

And now, I'd like to turn the call over to M/A-COM's President and CEO, John Croteau. Mr. Croteau, please go ahead.

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 second-quarter results and then review our end markets and the progress we continue to make towards executing our growth strategy.

Once completed, I'll turn the call over to Conrad Gagnon, our CFO, who will review our financial performance in further detail. I'll then conclude today's prepared comments by providing our guidance for the third fiscal quarter before opening the call for questions.

Revenue for the second quarter was $77.8 million, which was slightly above midpoint of our guidance, and represents a 3.7% sequential increase. Our four end markets performed as expected, with our new 100G optoelectronics products driving the growth in the quarter, as we successfully delivered on our backlog.

Non-GAAP gross margin was 44.5%, which was at the midpoint of our guidance. Non-gap net income was $11.7 million, or $0.24 per diluted share; and we finished the quarter with $103.3 million in cash and cash equivalents, no debt, and an untapped credit line of $150 million.

Taking a closer look at our revenue by market, 28% of our second-quarter revenue was from networks, 26% from aerospace and defense, 26% from automotive, and 20% from multi-market.

Networks, as expected, was up from last quarter, driven largely by sales of our optoelectronics products. Specifically, our new portfolio of modulator drivers and TIAs with 100G applications gained significant momentum as we executed on our orders from last quarter.

We believe that with our broad portfolio of targeted products, M/A-COM is well positioned to benefit from a decade-long build-out of the 100G fiberoptics market.

Sales into the aerospace and defense market were flat, and we have not seen any impact of sequestration on our business. Likewise, the automotive business performed as we expected, and we continue to believe that any future growth opportunities in this market will be contingent on market share gains by [fort].

Our core standard catalog parts continue to demonstrate firm demand. These products are usually sold through distribution. [multibill] and our key distribution partner was positive for the second fiscal quarter and through April, so we remain cautiously optimistic moving forward.

Building upon the past three years of improvement in the gross margin and operating income, we have identified further areas for operational refinement. As a result, this quarter we are implementing a minor restructuring that will help improve COGS, as well as redirect future investment from lower-margin to higher-margin opportunities.

In summary, the overall business environment remains challenging. However, we believe our strong execution matched by our commitment to operational improvements will deliver broad-based growth next quarter and for quarters to come, which is consistent with our strategic plan.

With that, I'll now turn the call over to Conrad to discuss our financial results for the second quarter of 2013.

Thank you, John, and good afternoon, everyone.

During the course of my comments, as well as those made by John, with the discussion of revenue, all income-statement amounts and percentages as well as cash flow from operations will be discussed on a non-GAAP basis. These non-GAAP measures are provided to enhance understanding of our core operating performance, and a reconciliation of each to the most comparable GAAP measure is included in our earnings press release circulated earlier today for your reference.

With that in mind, let me now begin with a review of our financials for the second quarter of fiscal 2013. Revenue for the second quarter was $77.8 million, an increase of 3.7% compared to $75 million in the first quarter, and slightly up compared to the $77.5 million in the second quarter of 2012.

The sequential growth in revenue was primarily driven by increased demand for our new 100G optoelectronics products. Gross profit in the second quarter was $34.6 million, or 44.5% of revenue, compared to $33 million, or 44% of revenue, in the prior quarter, representing a 50-basis-point sequential improvement.

Gross profit in the prior-year quarter was $37 million, or 47.7%. Our long-term focus continues to be on improving the gross margin through increased sales of higher-margin products, market growth and channel efficiency, as well as further cost reductions.

In terms of our operating expenses for the second quarter, total operating expenses were $19.7 million compared to $19.2 million in the prior quarter and $19.1 million in the prior-year quarter.

Looking specifically at investment in new product, our research and development expense for the second quarter was $9.7 million compared to $9.5 million in the prior quarter and compared to $8.7 million in the second quarter of 2012.

R&D as a percentage of revenue represented 12.4% in the second quarter compared to 12.7% in the previous quarter and 11.2% in the prior-year quarter.

Selling, general, and administrative expenses were $10.1 million compared to $9.7 million in the prior quarter and $10.5 million in the prior-year quarter. As a percentage of revenue, SG&A represented 12.9% in both the first and second quarter and 13.5% in the prior-year quarter.

Income from operations was $14.9 million, or 19.1% of revenue. This compares to $13.8 million, or 18.4% of revenue, in the prior quarter and $17.8 million, or 23% of revenue, in the prior-year quarter. We expect operating margins will expand over time, as we reach our 25% OpEx model and gross margins expand through the growth of higher-margin products and the benefit of operational efficiency.

Turning to income taxes, our effective income tax rate for the second quarter was 21.5% compared to 30% in the first quarter. Our second-quarter results benefitted from a lower tax rate due to the reinstatement of the US Federal R&D Tax Credit in January 2013, enabling us to recognize related tax-credits arising from calendar year 2012. The second-quarter results included the benefit from this one-time tax credit in the amount of $0.02 per share. The effective tax rate for the remainder of the fiscal year is expected to be 29%.

Our second-quarter net income was $11.7 million, or $0.24 per diluted share, and compares to first-quarter net income of $9.7 million, or $0.20 per diluted share and the prior-year quarter net income of $12.1 million, or $0.28 per diluted share.

The share count used to compute EPS was 48 million shares for the second quarter, 47.6 million shares for the prior quarter, and 42.8 million shares in the prior-year period.

Turning to the balance sheet, as of March 29, 2013, our cash and cash equivalents were $103.3 million, which represents an increase of $10.8 million for the quarter. Cash flow from operations for the quarter was $13 million compared to $14.4 million in the previous quarter and $9.9 million in the prior-year quarter. We have zero debt and a revolving credit facility of $150 million for additional liquidity.

Accounts receivable of $49.6 million represents 58 days sales outstanding, which compares favorably to $52.1 million and 63 days sales outstanding at the end of the prior quarter.

Inventory was $57.2 million, a $1.4-million decrease from $58.6 million in the prior quarter. Inventory turns were 3 in the second quarter compared to 2.9 in the prior quarter.

Capital expenditures in the quarter were $3.1 million, or 4% of revenue, compared to 2.1% of revenue in the prior quarter. Depreciation on property and equipment for the quarter was $2.6 million.

As John noted, we are implementing a restructure in the June quarter to further improve operational efficiencies and cost of goods sold, as well as to redirect OpEx toward higher-margin products.

The cash charge for the restructure to be reported in our June quarter is estimated to be between $1.1 million and $1.3 million. The Q3 benefit to gross margin is estimated at 25 basis points and is included in our guidance.

I'll now turn the call back over to John, who will provide our business outlook for the third quarter of fiscal 2013.

Thanks, Conrad.

In the third quarter ending June 28, 2013, we are currently expecting revenues to be in the range of $78 million to $82 million, non-GAAP gross margin between 44% and 46%, and non-gap earnings per diluted share between $0.22 and $0.24 on an expected 48.1 million shares outstanding.

As of today, we have already shipped or are presently firm-booked for 86% of the midpoint of our revenue range.

Operator, you may now open the call for questions.

Yes, sir.

(Operator instructions)

It looks like our first question comes from the line of Mark Delaney with Goldman Sachs. Please go ahead. Your line is now open.

Yes. Thanks very much for taking the question. John, I was hoping you could elaborate a little bit more on your comments about the order trajectory. I understand the book-to-bill from your distributors was positive and remained so in April. Could you talk a little bit more about the bookings transfer, the entire business, and reconcile that with the commentary on how firm-booked you are relative to your June quarter guidance?

Sure, Mark. Our book-to-bill, actually, across all the business was greater than 1. We tend to use the distribution number as more of an indicator of the broad-based demands, rather than just the [murder pole] customers.

And consistent with that, we consider the next quarter to be a growth quarter, modest growth. We're cautiously optimistic; and with a little over 86% firm-booked, we're very much on track for hitting that midpoint of 80.

Thank you for that. For my followup -- I understand you're taking some incremental steps that are going to help your gross margin in the third quarter. And there were some prior things that I think were underway, such as targeting better yields and some new product introductions. So if you put the new actions together with some of the prior initiatives that you had on the gross margins, can you just help us understand what sort of drop-through we should expect going forward?

Yes. Our model still remains intact of incremental -- drop-through on incremental revenue for a gross profit line of 60%. This minor restructuring we referred to in operational efficiencies are really just continuing activity that we've had over the past three years. I think in previous calls, we talked about -- you know, as much as 200 basis points we thought we could improve operating efficiencies over the coming year, year and a half; and this is part of that exercise.

Thank you. Good luck.

Thanks.

Thank you, sir. Our next question comes from the line of Harlan Sur with JP Morgan. Please go ahead. Your line is now open.

Hey, guys. This is [Saka Chelize] for Harlan Sur. [Three things you could show the] quarter, within the gross guidance, I was wondering if you could talk about the particular segments, perhaps what segments are improving and what you expect to be fairly flat across the board for the quarter?

I'm sorry. Is your question about forward-looking, or for the next quarter, or --?

For the next quarter, yes.

Well, the growth that we're predicting is pretty much across all end markets and all product categories, with the exception of automotive. Our Ford business continues to be flat. We actually were flat within 1 percentage point, so there's good planning for you.

In any case, on a forward-looking basis, nothing really stands out, in terms of a primary growth driver. It's really broad-based, like I said, across the aerospace/defense networks, the various network sub-segments, as multi-market; and it's between standard products as well as the application-specific products, so it's a little bit encouraging that we're not being driven by one particular segment.

Okay, thank you. And then, just wondering about the second half of 2013. I was wondering if the team can just talk qualitatively about the growth in your four segments for the second half of this year.

We don't have too many leading indicators on a forward-looking demand. We hear the rumors that everybody hears about second-half calendar 2013 recovery in markets like the wireless infrastructure segment. I would say everything we see is not inconsistent with that, but it's too early to really see the orders build in support of that.

Okay. Thank you.

Thank you, sir. Our next question comes from the line of Harsh Kumar with Stephens. Please go ahead. Your line is open.

A couple of questions, John, something similar to the line of what was just asked. I guess, let me ask the same question another way. What are you most excited about as you look to the back half? I've got to think networks are somewhere in there, but what else are you excited about for the rest of year?

I would say the networks and the multi-market stuff are two areas that really stand out as the real growth drivers. Networks -- you know, we've talked a lot about the success we've had in the 100G optoelectronics segment. We've had our first customers ramp into production, and that's really kind of breaking the ice for more customers turning on. So I think not just through the second half of this year but through the coming years, arguably for the next decade, I think that's going to be a wonderful growth driver.

At some point, the point-to-point market will recover. We have no indication that that is in the coming quarter, but again, we hear the same rumors that everybody does that the second half of the calendar year will lift.

And then the other thing that's very much encouraging for me is our standard catalog products -- you know, the demand through not just distribution but across all our end markets, both OEM as well as distribution -- that is steadily growing and picking up pace. And like I said, that's when I really get encouraged. So it's not any particular one segment, as it was for the past quarter; but broad-based lift is -- it would be nice if some of these headwinds turn into tailwinds for once.

Definitely. And kind of getting a little deeper into your answer, John -- outside of networks, are there any tremendously bright spots -- I apologize, outside of opto and the network side, clearly you're taking share there with some new lines. But outside of opto, is there anything else in network that excites you?

There's no question. I think we've made some major progress behind the scenes, not yet realized in revenue, but breakthroughs at one of our top point-to-point customers, in terms of driving share of wallet at one of the major point-to-point customers. But again, that's going to take a few quarters to be realized.

CATV, we're well positioned, but the DOCSIS 3.1 deployment is -- you know, while key decisions will be made this year, the revenue won't be realized until the latter part of 2014, it looks like.

So that's -- while it's a bright spot, it's not a short-term bright spot. And then there's a lot of absolutely wonderful things happening in our aerospace and defense business, which we hope in the coming quarters we can talk about more publically, and that's revenue that will be realized a further out in time. So the answer is really time-dimensional.

And I want to ask you an interesting question. We cover a couple of other companies in the defense space, John. They have all said the same thing. They haven't seen an impact from the sequestration. I was trying to pick your brains and see why that may be. Is it simply too early? Or is it simply that the electronics part is immune from that? And then I'll get back in line.

I would -- I mean, this is pure speculation, so -- you know, my sense is we simply are not that exposed. M/A-COM once upon a time would have been heavily exposed to the defense sector. We're not so much today. It's 10% of our total revenue, and even at 10%, it's spread so wide. What I would worry about is -- for instance, if we had big radar programs. Our radar business today is largely air traffic control and weather radar. If it was defense radar in the presence tense with sequestration, with big, [lumpy] business, you can have a big material impact.

We just -- that's not the nature of our defense business today. And we've been keeping a very close eye on the products that we sell into the defense applications. And as I said, there's absolutely zero indication of any impact so far.

Okay. Good to hear. Best of luck, guys. I'll get back in the line.

Great. Thanks.

Thank you, sir. Our next question comes from Tore Svanberg with Stifel. Please go ahead. Your line is now open.

Yes, thank you. A few questions. Just to clarify on the restructuring that you're implementing -- you get an immediate 25-basis-point improvement to gross margin this quarter; but is there a specific number that we can also add for subsequent quarters?

Sure. We project that it's about 300,000 per quarter in savings and cost of goods sold.

Excellent. Very good. And on the question on aerospace and defense -- I guess another way of asking the question there is, could you actually potentially see some benefits from sequestration? I'm thinking more outsourcing from your customers. Have you had more dialog with them, or is that still too early?

I think it's just too early to say. I certainly wouldn't be declaring upside on the back of sequestration at this point.

Very good. Looking at your optoelectronics business, obviously it's now ramping with one customer. As we look at the second half and into the next fiscal year -- I mean, what inning are we in, here? I think -- I'm just trying to understand the magnitude of this ramp that we're going to see for the next six quarters.

I don't think we're just in the first inning. I think we're in the first at bat. I mean, this --.

Okay.

I had a chance to get out and meet with some of our elite customers in the space over in Asia this quarter; and they were talking about -- this is a decade-long build-out. This is not a flash in the pan with the 100G build-out. And so this is going to be like 10G. It's going to be literally measured in a decade or more.

So I think -- you know, the way to think about our progress this quarter is -- the way these things work is, in the infrastructure space, field reliability and product qualification is a very, very big deal. As you can imagine, no OEM wants to put product in the field that is ultimately determined to be unreliable. So they go through very, very rigorous qualification.

And what happened this quarter was, we got through that qualification with one of the most respected market-share leaders in that space, and that is a trigger, we believe, for the rest of our customers to be stepping in with both feet and ramping over the coming quarters. And like I said, this is going to turn into a very long life cycle of what we think will be a very nice business for us.

Very good. Just last question, on point-to-point and that business potentially recovering -- like you said, it seems to be a lot of chatter that maybe the second half could see a recovery there. But when you talk to your customers, are they talking about any specific regional deployment? I'm thinking 4G in China or 3G in India. Is there any of those discussions going on?

Yes, I mean, there's constant discussions going on. My personal experience in this space in this life and my previous life is -- you know, our customers, even the market-share leaders, frankly, have very little visibility, themselves. The lead times they operate on are incredibly short, and when the triggers are pulled, the delivery is very rapid.

So I made the comment last quarter, and I stand by it, I'm out of the business of declaring recovery in this segment until, in fact, we see it.

That's very fair and helpful. Thank you so much.

You're welcome.

Thank you. Sir. (Operator instructions).

Our next question comes from Steve Smigie with Raymond James. Please go ahead. Your line is now open.

Thanks a lot for letting me ask my questions here. Just with regard to the point-to-point discussion we've been having here -- I think that's some of your highest-margin business. So if you do get that [snap-back], it seems like it could significantly change the trajectory of your margins. If you saw, say, a pick-up in the back half, could you continue to invest in some of the higher-end 70-gigahertz solutions in addition to, I think, some of the more intermediate side that you've been talking about? Because it seems like that could also add pretty meaningful margin in addition to what you already have out there.

Sure. I mean, we have launched -- I think this quarter we announced our first E-band power-amplifier product. So, in a very strong leadership position in that space. We absolutely invest and intend to maintain the technology high ground in that space.

The issue we deal with, though, is, from an overall [Sam] standpoint is, it's a modest market, modest opportunity space. And the way I look at the networks market is, I invest in customers, not necessarily just products. So we have customers where -- you know, when they commit to us with a large share of wallet, we commit to them, not just cherry picking the high end but being a strategic supplier and a mainstream supplier, in fact, ultimately the number-one supplier in the space.

We will maintain the technology high ground, but we'll also end up with a blended business that's lucrative, both from a top-line as well as a gross-margin standpoint.

Great. With regard to, let's say, China, it seems like there's a lot of opportunity there for you guys. And we have a new Chinese administration in place that seems to have been holding up some of the deployments as we waited for a new administration to come in over there. Have you started to hear any rumblings that some of those projects you've been looking at are maybe starting to accelerate a little bit, in terms of radar?

I would say my -- oh, on the radar side? Or are you talking about --?

Well, any projects; but I thought -- you're doing some work, for example, at the radar at airports. But it could be other applications, as well.

There's no question. We see some very nice orders coming in for this quarter and future quarters. Things seemed pretty cold last year and into the early part of this year; and they certainly have a feel of warming up a bit.

I did get a chance to meet with our top Chinese customers as part of the travel over to Asia, and there's no question that the general environment is improving.

Okay. And then just some of the standard catalog products -- I know you'd gotten very strong reception for those products for multiple decades from your customers. Can you take those relationships and add additional products to that? Or is that not really how you're going to try to leverage your portfolio there?

No, you hit the nail on the head. We have -- the beauty of M/A-COM here is that we have decades of customer relationships and a very broad portfolio and customer reach that I think, frankly, other companies in the industry can only dream of. And to be able to build out our portfolio of products that were kind of overlooked over a decade during the [Tyco] years, as we build those out -- you know, it's low-risk business.

We get customer access. It's technology that's in our wheelhouse. I mean, to be frank, you just have to deliver the products that customers want. So I think -- one of brightest spots -- to take nothing away from some of these vertical markets -- one of the brightest spots for M/A-COM in the future is building out that standard product business.

Great. And just sort of a similar-type question -- it seems like you're getting some nice traction with the 100G -- I believe that was the trans-impedance amplifier. Are there adjacent product categories you think you can address (inaudible) again, another pretty high-margin category. You seem to be getting some nice traction there.

Actually, our biggest strength is on the modulator-driver side. We also have TIAs, and we do well with those, but where we're really driving is on the modulator-driver side.

And indeed, we're looking at broadening our product footprint as much as possible, now that we've established ourselves in this segment, where, frankly, M/A-COM had previously had no presence. So that -- you know, when we talk about freeing up investment for higher-margin opportunities, that's part of the equation.

Great. Thank you.

You're welcome.

Thank you, sir. And at this time, I'm showing no additional questioners in the queue. I'd like to turn the floor back over to John Croteau for any additional or closing remarks.

Very good. I want to thank everyone again for joining us on today's call, and I look forward to reporting our continued progress next quarter.

One last comment. Conrad and I will be attending several upcoming events, including the Jefferies Conference on May 7 in New York, the JP Morgan Conference in Boston on May 14, and the Barclays conference May 22 in New York. If you plan to attend any of these events, we'd love to welcome the opportunity to meet with you.

Operator, you may now disconnect the call.

Thank you, sir. Thank you, ladies and gentlemen, for participating. This does conclude today's conference. You may now disconnect and have a wonderful day.