MACOM Technology Solutions Holdings Inc (MTSI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the M/A-COM Technology Solutions Third Fiscal Quarter 2013 Financial Results. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host today, Leanne Sievers with the Shelton Group. Please proceed.

Good afternoon and welcome to M/A-COM Technology Solutions Holdings, Inc. Third 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 quarterly report on Form 10-Q filed on May 3, 2013.

In addition, any projections as to the Company's future performance represent management's estimate as of today, July 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's statements during this conference call will include discussions of certain non-GAAP measures and financial information. 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'll 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 third quarter results and then review our end markets and the progress we continue to make towards executing on our growth strategy. Once completed, I'll turn the call over to Conrad to review our financial performance in further detail. I'll then conclude today's prepared comments by providing our guidance for the fourth fiscal quarter before opening the call for questions.

Revenue for the third quarter was $82.2 million, slightly above the high end of our guidance and represents a 5.7% sequential increase. Non-GAAP gross margin of 45% was at the midpoint of our guidance and the non-GAAP net income of $11.5 million, or $0.24 per diluted share, was at the high end of our guidance. We finished the quarter with $115.6 million in cash and cash equivalents, an increase of $12.3 million and no debt.

Taking a closer look at our revenue by market, 27% of our third quarter revenue was from Networks; 27% from Aerospace & Defense; 27% from Automotive; and 19% from Multi-Market. During the quarter, we saw a surge in demand for our catalog products, driven mainly by strong sales across Aerospace & Defense, Networks, as well as Automotive markets.

Automotive sales outpaced our expectations quarter-on-quarter, which we believe was driven by [pull-ins] at Ford's European factories to avoid any supply delays stemming from the Fourth of July holiday in the US. Going forward, we continue to believe that any near-term growth in this market would be contingent on market share gains by Ford and end market growth.

Sales into the Networks market grew a modest 3% quarter-on-quarter. We have yet to see any meaningful recovery in the wireless infrastructure space and continue to approach this market with caution. Optoelectronics remains a key focus area for growth.

During the quarter, we had several design wins at tier 1 and tier 2 system and subsystem companies in Asia and the US for 100G coherent, 100G submarine, and CFP and CFP2 module applications. We believe that these design wins, along with our high performance product portfolio, position us well for the anticipated decade-long build-out of the 100G fiber optics market.

Sales into Aerospace & Defense grew 9% quarter-on-quarter. We continue to see no impact of sequestration on our business and we believe that sales growth in this market is a direct result of market share gains. Additionally, we continue to strengthen our strategic relationships in this area, and I'd like to give you some additional color on three recent developments that we believe position us for future success in the rapidly growing landscape of the modern battlefields.

First, this morning we announced that M/A-COM has been selected by Northrop Grumman to supply market-leading monolithic microwave-integrated circuit technology for the development of next-generation X-band radar systems. Northrop Grumman is a premier supplier to domestic and foreign programs for airborne surveillance and sensor systems used across multiple airborne platforms. For this reason, we believe that Northrop Grumman has the potential to become one of our largest direct customers within the next two years.

Second, we recently announced that ELTA named M/A-COM a strategic partner for the development of commercial and aerospace and defense systems. Based in Israel, ELTA has a long history of providing surveillance and reconnaissance systems and smart munitions to customers worldwide. We believe that ELTA also has the potential to join the ranks as one of our largest direct customers in the years to come.

Third, we recently executed a strategic licensing agreement with GCS that further positions us as a leader in gallium nitride, which we believe will be the industry's next disruptive technology. The agreement creates the industry's first dual-source domestic supply chain for GaN technology. These 0.5 micron, 0.25 micron, and 0.15 micron process technologies are a deal for commercial and defense applications ranging from RF jammers to millimeter-wave satellite links, from five to 500 watts and from small handheld military radios to massive seaborne radar rays.

The agreement establishes M/A-COM as the only Company in the industry that can provide customers with a true dual-source for high performance GaN devices, enabling a sustainable and reliable supply chain that ensures long-term surety of supply, thus removing one of the remaining barriers to mainstream adoption of GaN technology.

In review, we are successfully executing on our growth strategy. Our renewed focus on our core catalog business has resulted in three quarters of sequential growth, which is a result of taking market share despite an overall challenging environment. We are securing strategic vendor selections in our target markets to drive medium to long-term growth and we are making strategic investments in next-generation technologies and associated supply chains, which we believe position us to outperform the industry for years to come.

With that, I'll turn the call over to Conrad to discuss our financial results for the third 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 exception of revenue, all income statement amounts and percentages 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 include 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 third quarter of fiscal 2013.

Revenue for the third quarter was $82.2 million, an increase of 5.7% compared to $77.8 million in the second quarter and an increase of 6.6% compared to the $77.1 million in the third quarter of 2012. The sequential increase in revenue was driven by growth across our A&D, Networks and Automotive end markets with Multi-Market relatively flat sequentially.

Gross profit in the third quarter was $37 million, or 45% of revenue, compared to $34.6 million, or 44.5% of revenue in the prior quarter, representing a 50 basis point sequential improvement. Gross profit in the prior year quarter was $36.1 million, or 46.8%. Our focus continues to be on improving gross margin through increased sales of higher margin products, market growth, and channel efficiencies as well as the ongoing benefits of operational efficiencies.

In terms of our operating expenses for the third quarter, total operating expenses were $20.8 million, compared to $19.7 million in the prior quarter, both of which represent 25.3% of revenue and compared to operating expenses in the prior year quarter of $18.8 million, or 24.3% of revenue.

Looking specifically at investment in new products, our research and development expense for the third quarter was $9.7 million, flat with the prior quarter and compared to $8.8 million in the third quarter of 2012. R&D as a percentage of revenue represented 11.8% in the third quarter, compared to 12.4% in the prior quarter and 11.4% in the prior year quarter.

SG&A expenses were $11.1 million, compared to $10.1 million in the prior quarter and $9.9 million in the prior year quarter. As a percentage of revenue, SG&A represented 13.5% in the third quarter, compared to 12.9% in both the prior quarter and the prior year quarter.

Income from operations was $16.2 million, or 19.8% of revenue. This compares to $14.9 million, or 19.1% of revenue, in the prior quarter and $17.3 million, or 22.5% of revenue, in the prior year quarter. We expect operating margins will expand over time along with gross margin as a result of increased revenue from higher margin products and the benefit of further operational efficiencies.

Turning to income taxes, our effective income tax rate for the third quarter was 29%, compared to 21.5% in the prior quarter. As a reminder, the prior quarter included a one-time benefit related to the reinstatement of the US Federal R&D Tax Credit in January 2013, which enabled us to recognize related tax credits arising from calendar year 2012.

Our third quarter net income was $11.5 million, or $0.24 per diluted share, and compares to the prior quarter net income of $11.7 million, or $0.24 per diluted share, which included a $0.02 per share benefit from the one-time tax credit. In the prior year quarter, net income was $11.8 million, or $0.25 per diluted share. The share count used to compute EPS was 48.2 million shares for the third quarter, 48 million shares for the prior quarter, and 47.8 million shares in the prior year quarter.

Turning to the balance sheet, as of June 28, 2013, our cash and cash equivalents were $115.6 million, which represents an increase of $12.3 million since March 29, 2013 and $31.1 million since September 28, 2012. Cash flow from operations for our third quarter was $13.4 million, compared to $13 million in the prior quarter and $8.1 million in the prior year quarter. We have zero debt and a revolving credit facility of $150 million for additional liquidity.

Accounts receivable of $55.2 million represents 61 days sales outstanding, which compares to $49.6 million and 58 days sales outstanding at the end of the prior quarter. Inventory of $54.7 million, representing 3.3 turns, compares to $57.2 million, or three turns, in the prior quarter.

Capital expenditures in the third quarter of $2 million, or 2.4% of revenue, compares to 4% of revenue in the prior quarter. As we expand into GaN wafer fabrication, we will increase our investment in intellectual property and capital expenditures, and we expect to incrementally spend $3 million to $5 million on this initiative in the fourth quarter of fiscal 2013. Depreciation on property and equipment for the quarter was $2.5 million.

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

Thanks, Conrad. For the fourth quarter ending September 27, 2013, we're currently expecting revenue to be in the range of $82 million to $86 million, non-GAAP gross margin between 45% and 47%, and non-GAAP earnings per diluted share between $0.24 and $0.26 on an expected 48.3 million shares outstanding. As of today, we have already shipped or are presently [firm booked] for 84% of the midpoint of that revenue range.

Operator, you may now open the call for questions.

Thank you. (Operator Instructions). Our first question comes from Frank Keller with Barclays. Please go ahead with your question. Frank, your line is open. Could you try pressing your mute button?

Hey, guys. Thanks for taking the call, [quarter and guide here]. Just a quick question for you on gross margins in the quarter and then looking forward. Just kind of need to get your thoughts on the moving pieces there. I know that you're seeing some strength in Automotive; that had been somewhat of an overhang on gross margins in the past and it doesn't appear to be anymore. So I just kind of wanted to get your thoughts around your solid gross margin guidance for September, if you could, please. Thank you.

Sure, Frank (inaudible). Yes, actually in terms of the gross margin, as you know, our model is 60% drop through to gross profit on incremental revenue. We were slightly below that in the third fiscal quarter because we had unexpected strength due to seasonality at Ford. So it's slightly below the model. On the outlook for the fourth quarter growth, we're actually above the 60% model because of that seasonality swinging back in favor of the higher margin part of the portfolio growing.

Okay, that's great. And then, I wanted to get your thoughts on -- I guess you started to answer it because you were talking about the seasonality in Automotives business. But just wanted to kind of get your thoughts on the trajectory for growth there, assuming sort of end markets like Networks and Aerospace & Defense, what are going to be the drivers into September? Thanks.

Yes. When we looked at the growth in the third quarter, about half of the upside above our midpoint guidance came out of Automotive. Not just Ford, but for the most part Ford, and that was related to, as I mentioned in the scripted part of the call, the seasonality effect as it related to European factories on the Fourth of July; that was unanticipated behavior from Ford. I would say on a go-forward basis I think we're going to see a little bit of a correction in the other direction on Automotive.

Networks, we're very, very cautious, as I mentioned. We don't see any kind of meaningful recovery in the wireless infrastructure space. Cable, the CATV business is still awaiting the DOCSIS 3.1 upgrade. Optical is performing well for us. We're kind of in the pre-production volume levels and stepping up in coming quarters to production levels, and that would be beyond the fourth quarter, I should say.

So Networks is -- and it was up a modest 3%, which isn't bad. The real surprise was the strength we had across out catalog portfolio, really spanning all of these end markets. And notably, Aerospace & Defense were up 9% in that particular end market, which in light of sequestration was a surprise even to us. We felt we were relatively immune -- relative is the operative word there. But sure enough, delivering 9% growth and a surge in catalog demand was wonderful and it was really due to turns business. We had very strong turns within the quarter and our short-term demand remains into the fourth quarter very strong.

All right. Well, thanks, guys. That's really helpful. I appreciate the time.

You're welcome.

Our next question comes from Harlan Sur of JPMorgan. Please go ahead with your question.

Hi, good afternoon. Thanks for taking my question and nice job on the quarterly execution. A question on your catalog products. Obviously, a very important part of the portfolio, core part of the business. Is the team actively trying to improve the attach rates of your catalog products to certain of the more program-specific products and applications that you're going after? Are you gaining more dollar content with higher catalog attach rates? And if you are, maybe if you can quantify the improvements that you've seen in attach rates, let's say, over the past three to four quarters.

Yes. Actually, Harlan, I would actually suggest, given our history, which you are very well aware of, I would describe our business as actually quite the opposite. We have a tremendous footprint with our catalog products throughout thousands of customers. And our game is all about increasing our share of more of the system-level integrated [MIMICs], and that is a central part of our growth strategy.

I think one of the refinements to our strategy over the past quarter is we've really identified the end market growth areas, things like the microwave X-band radar space and millimeter wave satellite communication space, which are growing much faster than the end markets. And those are the areas where we really fixate on trying to increase our share of wallet and, as you describe, attach rate for the more integrated MIMICs.

And by the way, Northrop Grumman is a poster child for that success and is exactly the way I'd describe our historical business and the ability to step up and be a mainstream MIMIC supplier is a very big deal for us.

Great to hear that. And then, also good to see the dual sourcing arrangement with GCS that you announced last week and the GaN manufacturing. Obviously, as you said, important for operational continuity and then I know it's also important to some of your customers that may require domestic manufacturing.

I think my question here is that with the GaN technology in-house, can M/A-COM now develop their own processes and sort of custom tailor certain aspects of the GaN technology to better serve your customer's performance requirements? And then, maybe if you can just help us quantify roughly how big your GaN-based products are as a percent of your total revenues today and how big do you expect that to be maybe looking out over the next 12 months or so?

I don't have the numbers in front of me about what our GaN business would be in 12 months, but I would say -- describe it that the revenues today are minimal. We have over 25 customers, probably over 30 active customers now for the GaN portfolio, but those are still in the early stages of design wins -- not design wins, but pre-production. So certainly on a go-forward basis it's going to be a very substantial driver for our growth. It's just that we're still in the relatively early stages.

To get to the first part of your question, you had asked about do we have the ability to differentiate at the [point of technology] level? The answer is yes, absolutely, definitively. That said, I personally do not believe that that is a primary consideration in the short to medium-term. We have done extensive benchmarking of GaN technology available throughout the industry from various foundries and proprietary suppliers, among competitors. And the first approximation, the level -- the degree of differentiation at this juncture is minimal.

This deal with GCS was all about getting a supply chain that can actually enable volume production. And I'll point out Northrop Grumman as a very good example of where the issue lies. They require domestic supply and control over the domestic supply chain for decades. The types of programs they service last for decades.

And regardless of whether it's an earthquake in California, tornadoes in Texas, tornadoes or thunderstorms or hurricanes in Massachusetts or typhoons, supply -- continuity of supply is front-and-center, not just for Aerospace & Defense, but I can tell you vendor qualification for the major Networks guys globally. Multiple sources of supply is a requirement for things to go mainstream. And moving from the first generation of what you might call [beaker fabs] to real mainstream volume production capability with dual sources is -- was to me, in my experience, one of the remaining barriers to mainstream adoption.

Great. And then, my last question is for Conrad. Obviously, as John mentioned, your incremental follow-through on the gross margins is going to come in better than [60]% in your September quarter guidance. How much of that is mix related versus continued improvements in manufacturing costs and operations? Thank you.

Okay. Harlan, the restructuring initiative that we put in place this past quarter has an additional approximately 10 basis points in the September quarter. So the balance of the contribution will be relative to mix and higher margin products that start to come in.

Good to hear. Thank you very much.

Thank you.

Our next question comes from Mark Lipacis with Jefferies. Please go ahead with your question.

Thanks for taking my questions. On the surge in the catalog orders, we've heard that from a number of other broad-based companies and I was hoping that you'd share your view on to what extent is this end market demand just getting better versus a seasonal impact versus the supply chain tightening up for some people and that motivating kind of a restocking of inventories.

When you look at the book-to-bill ratios within our distribution partners, my interpretation is we're really bouncing along the bottom. If there's a recovery, it's a very soft recovery. It's certainly not snapping back. And in terms of inventory levels, similar comment, it doesn't feel that it's an end market demand-driven artifact.

Our sense, if you look at -- and we track very closely, as you would expect -- our peers' announcements, we see the end market is very consistent with our peer guidance and our peer results. I really attribute our ability to grow sequentially here, of getting back in the game of keeping our eye on the ball in our catalog business, previously and appropriately we have a lot of exciting growth opportunities for our more application-specific investments, which are thoroughly appropriate and do pay off and will pay off big-time, but certainly not to the exclusion that we can grow share for our core business.

And a lot of the pieces of business that we have been landing are things which I would say are things that we just wouldn't have paid as close attention and landed in the past. It's through the accumulation of a lot of singles and in-field hits that we've been able to evolve the business forward in the past few quarters. It doesn't feel like it's in some kind of macro recovery within our target customers.

Fair enough. The second question, John, on the optical 100 gig of build-out, could you give us your view on how this plays out over the next five years or so? What are the kind of boxes that you expect to be deployed into? Where in the network are you going?

Well, we tend to be on the long haul side and not in the data centers as much, and I would say that's with our existing product portfolio. One of the things we're really looking to do is broaden our footprint. That is the one bright spot, in my opinion, within -- certainly within the Network space of end market -- a healthy end market condition. So I would say it's really that part of the market where we're currently focused, but I'm reluctant to comment further about where we aspire to be in the future.

Fair enough. Last question, on the wireless infrastructure side, and you're not alone on this. It seems like we've just been waiting for good (inaudible) for such a long time here. What do you think is going on here? Why is it taking so long to get these orders in what most view to be a secular growth market? Thank you.

Okay, no problem. So my take is certainly there are indications that in the US and in China -- China Mobile specifically -- there are capital investments and build-outs. So there's -- the people who service that base station part of the market benefit from those. I would say -- and I've described in the past, our business is really in the point-to-point radios. Wireless tend to be at the higher frequency bands, which are shorter haul, high margin, high value opportunities.

And it's sad to say Europe shows no signs of recovery. If anything, it's looking to be getting worse. We heard that in Europe, the European Commission just put in price caps for mobile roaming within the EU nations, as much as 36% reduction in maximum charge for data usage. My fear, my concern is that that is further going to compress and push out any investments in infrastructure spending in Europe. So it's one of the reasons why we say in general wireless infrastructure, and specifically European point-to-point business, we remain cautious.

Very helpful. Thank you.

(Operator Instructions). Our next question comes from Harsh Kumar with Stephens, Inc. Please go ahead with your question.

Hey, guys. Thank you. This is Richard in for Harsh. Kind of going back to the optical, are you seeing that predominantly in Asia, or are there other regions that are benefitting from that?

So, our -- we have nine active customers across all regions. I'd say some of the first guys that turned on to the pre-production volumes tended to be based in Asia, but they service demand globally, and notably in the US. So, the end market demand, I would describe as global. I would say that our sales initially were more skewed towards Asia, but I think as all nine ramp to full production it will be very much a balanced market for us.

Great for that color. And then, my second question was kind of going for your gross and op margin target. What are the puts and takes to get there, and are you still confident that those are achievable?

There's no question. In fact, one of the interesting things, we just went through an analysis and rather than focusing on the low end of the margin portfolio in the Automotive business, when we did the analysis we found that close to a quarter of our revenue today is over 70% gross margins -- 23.5% to 24% of our business is over 70%. Empirical evidence is all of the new products that I saw released this quarter had gross margins in excess of 70%.

So the reality is we're investing heavily -- I won't say exclusively because I want to reserve flexibility, but we're really investing in growing that 70% part of the portfolio. We used the 60% drop-through because it's not only that growing. Also, our base business at the lower margins is also growing, and it's really a blend of those two that we come out, at least in the short-term, with 60% drop-through.

Great. Thank you, and congratulations.

Oh, thank you very much.

Our next question comes from Tore Svanberg with Stifel. Please go ahead with your question.

Hi, this is Erik Rasmussen in for Tore. Nice results on the quarter. I want to get back to the [coms] infrastructure. I know that we -- you kind of addressed it a few times, but you remain cautious on it, not seeing any sort of recovery. But for us, and when it comes to M/A-COM, what sort of milestones should we be looking for as pertains to you and your opportunity in this segment?

Well, our strongest position in wireless infrastructure is in point-to-point radios at the 38 and 42 kilohertz bands -- gigahertz bands, I should say, which are relatively short haul, high data rate, which ends up highly correlated to the European market. There are some build-outs, we understand, in Southeast Asia that will be using the same bands. So it's really -- our business is not exclusively, by any means, but heavily tied to the European -- hold to the European market.

And then, in general, the concerns I would have beyond that is as what was perceived by -- certainly by me as well as many others as a temporary downturn as it goes on to a second year, I start -- especially with news of some of the major OEMs suffering from gross margin compression, I start worrying about the overall health of the recovery, even in the long run. That doesn't mean that we don't take that business very seriously and we don't maximize our share, but it just gives you more reason for caution.

Thank you. Maybe just then, staying in Networks, obviously you benefited lately from your success in the 100G opto market. How big is this business today? Can you comment on that? How do you see this business ramping in the coming quarters or years?

Well, I don't mean to be dodging about it, but we don't report what the granularity down the product level. But I would say that we are in the early stages of ramp. We're very much in the pre-production phase. The analyst reports that we see are very consistent with the forecast that we see from our customers. Analysts like [dell-oil] predict a compound growth of 75% for the coming years, kind of in two or three years. So it's a high growth segment -- or I should say end market which is experiencing unquestionably strong capital investment.

So, there's a lot of juice in it and we're just at the very early stages of what we believe could be a decade-long build-out.

Great. Thanks for that. And then, you've mentioned in your Defense business you're not really seeing any sort of impact from sequestration, and you haven't just because of the markets that you serve there and your exposure. Do you think, though, in terms of that dynamic, have things bottomed? Are you seeing recovery? I know you announced earlier today you went with Northrop Grumman, which was a nice win, but can you just comment just on what you're seeing?

I have to be careful in using the correct words. We see no impact from sequestration. That said, given what we've seen our peers indicate in terms of the effect of sequestration, I suspect there has been some effect of sequestration on our business. We just can't see it. So, maybe without sequestration we would have grown north of 9%, whereas in the presence of sequestration we grew only 9%.

It's difficult for us to see it because we have a very diffuse business through many, many customers in that space. We do not have highly concentrated business in specific MIMIC platforms like we will have in the future with Northrop Grumman. So that's good news and bad news. The bad news is we don't have that large revenue today; the good news is we're not exposed as others might be to sequestration.

Really, what we saw was a very high degree of turns business and very healthy demand for us, selling through direct and through distribution. And beyond that, it's hard to really judge the end market health, to be honest.

Okay, thanks. And maybe if I could squeeze one more in, for Conrad. The OpEx went up considerably, specifically SG&A. What -- can you just -- what drove this and what are the expectations for OpEx in future periods? Thank you.

Sure, certainly. The OpEx increase were driven -- some of them were sales-related. Sales were up, selling costs were up, increased costs for outside professional services as we prepare for SOX [compliancy], some tax work, and some seasonality in marketing communications with regard to trade shows that we -- a major trade show we participated in this quarter.

So, SG&A ran at 13.5%, compared to 12.9% in the prior quarter. And in total, the OpEx of [25.3%] of revenue was the same this quarter as in the prior, which is well within our OpEx model. So our target is 25%, and this could vary from 25% to 26% in any given quarter. So that's the color I'd like to offer.

Thank you very much.

Our next question comes from Quinn Bolton with Needham & Company. Please go ahead with your question.

Hi, John and Conrad. Congratulations on the results and guidance. I apologize, I missed part of the prepared comments. But just first wanted to ask, last quarter or two I think you'd seen sort of the turn in the catalog business and it certainly seems like that is playing out in the revenue line. Was just wondering if you still have similar visibility in that broader catalog business heading into the September quarter that you did, say, a quarter ago.

Yes. So the turns business was -- in the prepared remarks -- so yes, we indicated that's where the strength came and that's what really drove us towards the upper end of our guidance. And that has continued into this quarter. It's the reason why we're guiding for growth in the fourth quarter. The one caution I would give is the shape of the demand is high turns business, short lead times, so it's hard to kind of extrapolate that into the first quarter and make any general comments about overall market recovery. The visibility is low, so we remain cautious on a go-forward basis. But certainly, the level of firm book, the order book we have, is consistent with the growth that we put into the guidance.

Okay, great. And then, just on the Northrop Grumman and some of the other relationships you've announced recently, are you seeing just a greater use in partnerships or perhaps a trend towards outsourcing potentially as an effect of sequestration, or do you think that these types of transactions would have happened regardless of what's going on with the Defense spend?

Yes. I would only say ELTA is relatively immune to the sequestration issue. But certainly, Northrop Grumman would be exposed to it. And actually, sequestration has had -- or any overall market trends I don't think had any impacts, good or bad, on this particular breakthrough for us.

The background there is Northrop was looking to move to a much more balanced supply chain. They were overexposed in terms of their previous vendor base and they looked around and I think if you spoke to them they would say M/A-COM was the obvious choice. We have domestic control over our production. We have decade-long history and decade-long legs to our production, which is exactly the kind of supply model they need. We have the technology base that they needed and we had the design capability and we had the -- finally, the ability to invest in MIMICs, where during the Tyco years M/A-COM just took it -- Tyco took M/A-COM out of the game.

So now that we're back in the game, this is arguably just a rebalancing to share that we otherwise could have and should have had. A lot of great execution on our engineering side. I don't want to take anything away from all the hard work and success. In fact, all of the commitment on the Northrop Grumman side helped make it a success as well, but I think it had a lot more to do with supply chain dynamics than anything else.

Great. And then, just lastly, on the optical business. I know your existing products and design wins are mostly targeted to the long haul or submarine markets, but your data center is probably going to be a pretty big area over the next few years. I was just wondering, are you looking at technologies, whether it's parallel receivers or laser drivers, that could target some of the data center applications as data center moves to 100 gig?

Yes. I don't want to sound facetious here, but we're looking at everything in 100G and moving not just with organic growth and broadening our footprint in organic approaches as well. As I said, if you were to ask me what my [Pareto] is of priorities for M&A activity, I would say gallium nitride technology leadership and 100G leadership would be the two that stand out bar none. But I think the market's going to happen quicker than we can really stay on top of organically, so it's a logical thing for us to be looking around at acquisition opportunities.

Okay, great. Thank you.

Our next question comes from Steve Smigie of Raymond James. Please go ahead with your question.

Great, thanks a lot. Just following up on the Northrop win, as you said, you had [addition] to good engineering, some supply chain strength there, and Northrop was looking to diversify. So, can you talk about who it was that you were able to beat there, to give some sense to the competitive environment? And could you talk about maybe how many people you had to beat out there to secure that win, just some more competitive color?

Well, I think -- I'll refrain from mentioning the competitor by name. But the one that I'd point out is it was a relatively [monopolous big] supply condition, and so I'll leave it to you to discover who it is.

Okay, fair enough. I was just trying to see if it was like multiple people that you were taking it from -- sounds like one major player. And then, on the dynamic between investing at the high end but also trying to get the legacy products going again, could you talk a little bit about how you make the decisions to allocate resources there?

And I guess a little bit on the low end, what's different that you're able to drive more singles and doubles than you used to? Is it more showing up at conferences, committing more R&D resources to your clients, committing more capacity? What's driving the low end and how do you balance those resources?

When I talked about our [poor] catalog business, like a lot of companies [with strikes] in broad-based portfolios, it's actually in many cases the older vintages that are the highest margin and highest opportunities. And it's not about new products. Yes, there's some mix of new products, but it's largely how you engage customers both commercially and technically, how you service those customers commercially and technically. And when the call comes in for the order or the call comes in for pricing or technical support, you have to be on top of it with a very high capture rate.

And so I would say in terms of growing that base business, every incremental dollar is a nice contribution. And whether it's 70% margin or 50% margin or 60%, it doesn't matter, it's nice and it contributes to EPS growth.

It's an entirely different thing to invest heavily in low margin products, and that we avoid. This is where we focus our energy, on 70% plus margin, not exclusively because there are certainly situations where --for in a particular Networks market, for instance, there may be customers who, from a supply chain standpoint, want you to take a share of modest margin business in return for a good, healthy share of the high margin business. So the way I look at it is we don't invest one product at a time, we invest one business at a time. But in general, we really reserve our heavy R&D dollars for 70% plus margin business.

Okay, that's very helpful. I appreciate that. The last question is on military-related businesses. Obviously, there's been sequestration and yet it seems like certain electronics firms have done reasonably well considering. And I was hoping you could talk a little bit about your aspirations there. If electronic content is increasing, how do you get increasingly involved with that? And how does it make sense that the electronics firms are doing so well here despite the sequestration cuts? Thanks.

In general, if you're talking about companies that are fully penetrated at maximum share in a very mature state, the overall impact of sequestration has a very real impact, which is unavoidable. There's no place to run and hide. We are not in that situation. During the Tyco years, back five years ago and 15 years ago, the Company did not invest in sustaining what is our natural share in that military air space, defense market. Consequently, only 10% of our sales today are in defense-related business. And I would say a more natural condition probably would be more like a third of our business, so there's --.

And Northrop is a good example. The amount of business we do relative to their purchase level is historically -- recently anemic compared to what we can really establish as we establish that MIMIC business and become appropriately a good, strategic supplier with our fair share of business.

The other thing I'd point out is sequestration is very real. In many cases, more conventional parts of the military are impacted. But I can tell you, whether it's secure broadband communication with frequency hopping, battlefield communications is front-and-center. That's going to happen under any condition. UAVs, a very healthy market, those need to communicate, they need radar systems.

So there's programs which are new, which coming from a relatively small share, that we can ride the wave of these new programs and end up with a more appropriate share for M/A-COM supplying the defense industry -- the US defense industry. We can drive a lot of growth for this Company in the presence of fairly onerous sequestration.

Okay, great. Thanks very much.

Our next question -- sorry. Our next question comes from Harlan Sur with JPMorgan. Please go ahead with your question.

Thanks for taking my follow-up. And just to follow-on the A&D segment, obviously, I think you've got pretty good visibility as it relates to sort of some of these big program wins. Maybe not as good visibility on the timing of those ramps and, as you mentioned, you've got some [keen new] relationships on the defense side. But looking out over the next 18 to 24 months as some of these programs start to fire, are they more Aerospace-related? You've done well with commercial radar and satellites. Are they going to be more Defense-related? Do you still see that sort of two-thirds Aerospace, one-third Defense mix holding or changing over the next couple of years? It seems like from your prior comments you think that maybe the Defense business might become a bigger part of the mix.

I would say both are very healthy growth areas. The commercial Aerospace piece, whether it's the satellite communications or air traffic control, weather radar, you're talking about entirely new deployments of air traffic control radar systems. We are using technologies and we're extraordinarily well positioned with our new gallium nitride power transistors, so we can really benefit from that and drive very, very nice growth on top of our historical run rates.

That said, on the Defense side, as I was just describing, relative to our natural share of that market, we are dramatically underpenetrated. I can't speak to the details of the program wins and so on, but you're talking about transformative levels of revenue and gross margin contribution relative to our current size.

Great. Thanks, John.

You're welcome.

I'm not showing any other questions in the queue at this time. I'd like to turn it back over to Mr. John Croteau for closing comments.

Great. In summary, you're beginning to see our growth strategy take shape near-term. Our focus remains on taking market share, which has so far yielded three quarters of sequential growth despite a challenging macroeconomic environment. Medium-term, we believe our growth will be fueled by new strategic customers and networks in Aerospace and Defense such as Northrop Grumman and ELTA as they ramp into production. Long-term, we believe M/A-COM is positioned to reshape and outperform the industry with the first sustainable supply chain for gallium nitride technology.

Conrad and I plan to be at the Morgan Stanley conference on August 21 in Boston. If you plan to attend this conference, we welcome the opportunity to meet with you. And I want to thank everyone again today for joining us on today's call and I look forward to reporting our continued progress next quarter. Operator, you may disconnect the call.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your conference; you may now disconnect. Good day.