MACOM Technology Solutions Holdings Inc (MTSI) 2013 Q4 法說會逐字稿

Good afternoon, and welcome to the M/A-COM Technology Solutions fourth-quarter and fiscal-year 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.

If anyone should require operator assistance during today's program, you may press star then 0 on your Touch Tone telephone for a live operator. As a reminder, this call is being recorded today, Tuesday, November 5, 2013.

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

Good afternoon, and welcome to M/A-COM Technology Solutions fourth-quarter and 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 Chief Executive Officer, John Croteau; and Senior Vice President and Chief Financial Officer, Conrad Gagno.

If you've not received a copy of the press release, you can access a copy under the investor-relations section of M/A-COM's website at www.macomtech.com. There is also a slide presentation that we'll be using in conjunction with today's call that may be accessed through the webcast link on M/A-COM's website and is also posted as a PDF in the investor-relations section.

Before I turn the call over to Mr. Croteau, I'd like to remind our listeners that Management's prepared remarks 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 August 5, 2013.

In addition, any projections as to the Company's future performance represent Management's estimates as of today, November 5, 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 to GAAP and non-GAAP results are provided in the Company's press release and related current report on Form 8-K, which was filed with the SEC today and can be found at the investor-relations section of M/A-COM's website.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 30 days in the investor-relations section.

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, and welcome, everyone, and thank you for joining us today.

I'd like to do today's call a little differently this quarter. We have some exciting news that accelerates our growth strategy that we believe will be transformative, industry-defining, and something that will reshape M/A-COM for years to come.

So today, we'll start with Conrad, our CFO, running through the results for the quarter, followed by the guidance for fiscal Q1. I'll then provide some additional color on our results and guidance and then dive into the big news. Conrad?

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 included in our earnings press release, circulated earlier today for your reference.

With that in mind, let me now begin a review of our financials for the fourth quarter of fiscal 2013.

Revenue was $83.7 million, an increase of 2% compared to $82.2 million in the third quarter of 2013, and an increase of 12% compared to $74.6 million in the fourth quarter of 2012.

Revenue for the fourth quarter was within our range of expectation, driven primarily by increased sales of our standard catalog products across multi-market and A&D markets.

Gross profit in the fourth quarter was $38 million, or 45.4% of revenue, compared to $37 million, or 45% of revenue in the prior quarter, representing a 40-basis-point sequential improvement. Gross profit in the prior-year quarter was $32.7 million, or 43.9%.

Our focus continues to be on improving gross margin through increased sales of higher-margin products, as well as the ongoing benefits of channel and operational efficiencies.

In terms of operating expenses for the fourth quarter, total operating expenses were $21 million, compared to $20.8 million in the prior quarter and $17.4 million in the prior-year quarter.

Looking at investments in new products, research-and-development expense for the fourth quarter was $10.1 million. This compared to R&D expense of $9.7 million in the prior quarter and $7.6 million in the prior-year quarter, which included $0.9 million of incrementally favorable [foreign-research] credits, which reduced R&D in the prior-year quarter.

R&D as a percentage of revenue represented 12.1% in the fourth quarter, compared to 11.8% in the previous quarter and 10.2% in the prior-year quarter.

Selling, general, and administrative expenses were $10.9 million, compared to $11.1 million in the previous quarter and $9.8 million in the prior-year quarter.

SG&A as a percentage of revenue represented 13% in the fourth quarter, compared to 13.5% in the previous quarter and 13.2% in the prior-year quarter.

Income from operations was $17 million, or 20.3% of revenue. This compares to $16.2 million, or 19.8% of revenue, in the prior quarter, and $15.3 million, or 20.5% of revenue in the prior-year quarter.

Turning to income taxes, our effective income tax rate for both the fourth quarter and the prior quarter was 29%.

Our fourth-quarter net income was $12 million, our $0.25 per diluted share, compared to third-quarter net income of $11.5 million, or $0.24 per diluted share, and net income of $10.4 million, or $0.22 per diluted share in the prior-year quarter.

The share count used to compute EPS was 48.5 million shares for the fourth quarter, 48.2 million shares for the third quarter, and 47.4 million shares in the fourth quarter of 2012.

Turning to the results for the fiscal year, revenues were $318.7 million, compared to $302.2 million in fiscal 2012. The year-over-year increase of 5.5% was the result of higher demand in our automotive end market, partly offset by lower A&D and multi-market revenue, with networks being approximately flat year on year.

Gross profit for fiscal 2013 was $142.6 million, or 44.8% of revenue, compared to $137.6 million, or 45.5% of revenue, in fiscal 2012. The primary driver of the 70-basis-point decline in gross margin was a shift in product mix, with higher sales of lower-gross-margin products in our automotive applications and lower sales of our higher-gross-margin products in A&D and multi-market.

Operating income for fiscal 2013 and for fiscal 2012 was $61.9 million, or 19.4%, and 20.5%, respectively. Our effective income tax rate for fiscal 2013 was 27.4% and compares to 31.7% in fiscal 2012.

As a reminder, the second quarter of fiscal 2013 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.

Net income for fiscal 2013 was $44.9 million, or $0.93 per diluted share, on 48.1 million shares, and included a $0.02-per-share benefit from the one-time tax credit. Net income in fiscal 2012 was $42.1 million, or $0.94 per diluted share on 44.9 million shares.

Turning to the balance sheet, as of September 27, 2013, our cash and cash equivalents were $110.4 million. This represents an increase of $25.9 million from September 28, 2012.

Cash flow from operations for the fourth quarter was $8.6 million, compared to $13.4 million in the third quarter and $9.1 million in the fourth quarter of 2012. Cash flow from operations for fiscal 2013 was $49.4 million and for fiscal 2012 was $35.4 million.

During the quarter, we increased our revolving credit facility from $150 million to $300 million, which can be further increased by $125 million subject to certain conditions.

Accounts receivable of $63 million compared to $55.2 million at the end of the prior quarter and $54.2 million at the end of the prior fiscal year.

Day sales outstanding represents 68 days, compared to 61 days at the end of the prior quarter and 66 days at the end of the prior fiscal year. The DSO increase was largely driven by the timing of shipments within the quarter.

Inventory was $54 million, compared to $54.7 million in the prior quarter and $57.5 million in the prior fiscal year. Inventory turns were 3.4 compared to 3.3 in the prior quarter and 2.9 in the prior fiscal-year quarter.

Capital expenditures were $5.1 million in the fourth quarter and $11.8 million, or 3.7% of revenue, for the full fiscal year. Depreciation expense on property and equipment for the fourth quarter was approximately $2.5 million.

Turning to our guidance, M/A-COM's fiscal year 2014 is a 53-week year. We have elected to insert the additional week in our first fiscal quarter, which ends January 3, 2014, in order to take advantage of the holiday season, at what tends to be a period of slower activity in late December and early January.

We currently expect revenues to be in the range of $80 million to $85 million, non-gap gross margin between 44% and 46%, and non-GAAP earnings per diluted share between $0.23 and $0.26, on an expected 48.6 million shares outstanding. As of today, we have already shipped, or are presently firm booked, for 84% of that midpoint of our revenue range.

I'll now turn the call back over to John, who will provide further details on the quarter and the acquisition of Mindspeed.

Thank you, Conrad. As Conrad pointed out, we had another solid quarter of taking share, with more than 10% sequential growth in our catalog business, driven primarily by sales and multi-market.

Our renewed focus on our core catalog business has now resulted in four straight quarters of sequential revenue growth.

Taking a closer look at our revenue by market, 26% of our fourth-quarter revenue was from networks; 28% from aerospace and defense; 25% from automotive; and 21% from multi-market.

Multi-market was up 17%, and aerospace and defense was also up 2% this quarter, despite a challenging macroeconomic environment. Automotive played out exactly as expected, slightly down, owing to Fourth of July [pull-ins] into Q3 by Ford, which we had mentioned last earnings call.

Revenue into the networks market was down 3% sequentially, driven by significant softening in our cable TV business. We saw sizable reductions in order intake, which affected Q4 shipments, and which we expect will continue through Q1.

There was largely offset by 7% sequential revenue growth into wireless backhaul and more than 10% sequential growth in our [opto] electronics business.

We continue to take share in wireless backhaul, with major design wins for our E-band power amplifiers, as well as with our 18- and 23-gigahertz power-amplifier portfolio.

Much like our peers, we are also affected by year-end seasonal effects. We expect soft demand in fiscal Q1, driven by continued softness in cable TV. In addition, we expect a temporary pause in radar shipments in Q1, with order backlogs showing full recovery in Q2.

With that, I'd like to now talk about today's big news. As Leanne mentioned, you can access the slide presentation on the investor-relations section of our website, as part of the webcast or as a PDF.

As you may have read, this evening we announced a definitive agreement for the acquisition of Mindspeed Technologies, based in Newport Beach, California. This move promises to be transformative for M/A-COM and is a major milestone in the Company's long history.

The proposed transaction will not only reposition our company, further elevating us as a leading supplier of high-performance RF and microwave solutions, but we believe it also redefines our small corner of the semiconductor industry and the competitive landscape for years to come.

Our primary strategic interest in Mindspeed lies in the company's high-margin, high-performance analog business. This acquisition will transform M/A-COM into a leading global provider of 100G optical solutions and underscores our core growth strategy in the optical and networking markets.

Concurrent with our proposed acquisition, Mindspeed is in advanced discussions with a potential buyer for its wireless business, which it plans to sell prior to the closing of our transaction.

Mindspeed's high-performance analog portfolio, consisting of market-leading crosspoint switches, optical physical media devices, and low-power signal conditioners, diversifies our business into the adjacent enterprise market, and we believe aligns perfectly with M/A-COM's business model, offering gross margins approaching 70%, long product life cycles, and sticky customer relationships.

Targeted to close in December, we've entered into a definitive agreement to acquire Mindspeed for $5.05 per share in a cash-tender offer. The transaction is valued at $271.7 million for Mindspeed's $132 million in trailing 12-months revenue, excluding Mindspeed's wireless business, as well as nonrecurring revenue, and $23.9 million of cash equivalents as of September 27, 2013.

It's important to understand that the acquisition will be immediately accretive to our non-GAAP gross margin, operating margins, and earnings per share in the first full quarter following the closing.

With substantial expected synergies coming from corporate overhead, SG&A, and planned divestment or restructuring of non-performing businesses, we currently estimate the transaction will be between $0.15 and $0.20 accretive to our earnings per share in fiscal 2014 and between $0.25 and $0.30 accretive in fiscal 2015.

It may not be intuitively obvious to investors, but Mindspeed is highly complementary and compatible to M/A-COM and can serve as an accelerant to our growth strategy moving forward. They have a long and successful history and deep customer relationships, servicing the communications industry.

While you may know Mindspeed more for their communications processors, voice over IP, and more recently their forays into wireless, the fact is that nearly half of their revenue comes from high-performance analog products for high-speed switching and signal conditioning in next-generation network gear.

That part of the business is fully complementary to our portfolio and fits perfectly in our model -- sticky, value-added products and technologies with gross margins approaching 70%.

Over the past year, you've heard me say that we'll spend our M&A dollars to accelerate our growth strategy in 100G optical. And, well, Mindspeed is a perfect fit. We believe their strong position with blue-chip communications customers aligns perfectly with our growth ambitions in optical, as well as the broader enterprise and networking spaces.

Within 100G, M/A-COM will become the only vendor addressing all segments, long-haul, metro, and data centers, with a complete portfolio of physical-media devices, modulator drivers, transimpedance amplifiers, and clock and data recovery circuits, based on all requisite technologies -- indium phosphide, gallium arsenide, silicon-germanium -- all of them.

Strategically, the acquisition makes M/A-COM a much deeper, much broader, and more globally diversified force in our corner of the industry. Mindspeed's silicon-germanium-based capability will allow us to address new applications and additional system content in our core RF and microwave customers and applications.

Mindspeed's market position and strong presence in Asia-Pacific will allow M/A-COM to broaden our customer base and deepen our customer penetration in this critical part of the world going forward.

To top it all off, we fully expect that the acquisition will be highly synergistic and immediately accretive to M/A-COM's gross margins, operating margins, and earnings per share in the first quarter following the acquisition, with what we think will be plenty of room for expansion along all fronts going forward.

Within the overall Mindspeed portfolio, our primary interest lies in the company's high-margin, high-performance analog business, as well as its mature voice-over-IP business. These comprise more than 60% of revenues, are highly profitable with 65% to 75% gross margins, and have strong technology leadership positions in their respective product and market spaces.

Mindspeed has built leadership positions in optical physical media devices, crosspoint switches, signal conditioners, and voice over IP for enterprise applications. For this reason, we will adopt these businesses and care and feed them for, if anything, higher than previously anticipated growth and profitability.

Mindspeed also has a communications-processor business, which currently does not align with M/A-COM's long-term strategic focus. Therefore, options for this business will be explored, while continuing to support its customers.

Finally, as mentioned earlier, concurrent with our proposed acquisition, Mindspeed is in advanced discussions with a potential buyer for its wireless-infrastructure business, which it plans to sell prior to closing. In the event the wireless business does not sell, it will be restructured and wound down, while continuing to support its customers.

One benefit of this transaction will be to diversify our end-market exposure, the value of which has become evident over the past year. Adding a substantial new revenue stream in central-office enterprise equipment should help to weatherproof our business, reducing exposure to capital-spending fluctuations in any one market, whether it be wireless carrier CapEx, DOCSIS cable TV roll-outs, or [lumpy] radar programs, as we're seeing this quarter. Therefore, upon closing of this deal, we intend to report Mindspeed revenues in enterprise as our fifth end market.

Mindspeed has been thriving in the enterprise space for decades, dating back to its roots as Conexant and Rockwell Semiconductor. Their customer base is a veritable who's-who list of various communication sectors, from telecommunications to video-broadcast systems.

Each of these industries is continually challenged to keep up with new demands for bandwidth, new applications and new usage models, such as cloud computing, IPTV, video on demand, and 4K UHDTV video streams.

Applications for Mindspeed's high-performance analog products include high-speed transport switching and signal conditioning in optical modules, line cards, switch cards, backplanes, and system chassis. Mindspeed boasts technology leadership with the industry's fastest crosspoint switches, which play a vital role in managing network latency.

Latency is a primary value driver in these markets and applications in a world of exponentially increasing data, density, and numbers of connected devices.

As many of you know who've been following M/A-COM, 100G optical is one of the growth drivers that we've identified for the company going forward. We're in the early stages of an anticipated decade-long build-out of 100G networks and infrastructure that's extremely rich in high-performance, high-value semiconductor content from companies like M/A-COM.

To date, we've established a leadership position for 100G modulator drivers that are used in long-haul applications. These products require compound semiconductor technologies, like indium phosphide and gallium arsenide, which is right in our wheelhouse.

We believe adding Mindspeed's complementary silicon-germanium products and technology will allow us to expand into several dimensions simultaneously.

First, we intend to extend into adjacent metro, data center, and 100G Ethernet applications, so transmission distances less than 10 kilometers. These are some of the highest growth areas for 100G overall.

From our customers' perspective, M/A-COM will be a clear vendor of choice, with leading solutions across their breadth of applications and full scope of product requirements. This should enable M/A-COM to capitalize fully on the build-out of 100G optical infrastructure worldwide.

From a customer perspective, the merger of two strategic vendors of choice in their respective fields of expertise offers latent value. Mindspeed, like M/A-COM, is viewed by their long-term customers as a strategic partner that delivers key technologies that enable their own product road maps.

I believe the combination of M/A-COM and Mindspeed will produce a totally different animal that no one from our RF and microwave industry or from the high-performance analog world has been able to create. Combined, we think we can solve problems that no one else can address.

In addition, the opportunity to service Mindspeed's unique customers and applications with M/A-COM technologies and products, and vice versa, can be transformative. I've already described the opportunity in the 100G optical space. The same holds true for other high-growth application, like millimeter-wave satellite communications and microwave AESA radars, to name a few.

The combination of Mindspeed and M/A-COM will bring depth and breadth and what we expect to be significant upside to our growth aspirations.

Dating back to our early days as Microwave Associates, supplying magnetrons into the first microwave-radar systems after World War II, M/A-COM's roots lie in the US aerospace and defense industry.

We've certainly made progress expanding into commercial markets like cable TV, wireless backhaul, and optical infrastructure, that are now sourced heavily out of China, as well as Japan and Korea. 27% of our sales are now generated out of that region.

By comparison, Mindspeed is light years ahead of M/A-COM, if you could pardon the pun. 70% of Mindspeed's sales come out of Asia-Pacific. For decades, they've had a well-developed sales channel and deep customer relationships that can accelerate the penetration of M/A-COM's RF and microwave portfolio in that region. Again, this promises upside to our growth aspirations if this plays out as we hope.

The same holds true from a technology perspective. Mindspeed brings along a highly complementary technology base that effectively doubles our addressable market for M/A-COM's core RF and microwave business.

M/A-COM has traditionally serviced the highest-performance part of the RF and microwave market, which we estimate to be about 25% of the overall $9.5 billion sale. That part, shown here in blue, requires the use of compound semiconductor technologies, like gallium arsenide or gallium nitride, and a broad catalog of standard functional products because it's a highly fragmented market.

Mindspeed brings with it silicon-based technologies, notably silicon-germanium, that have evolved to similar performance levels and enable much higher degrees of integration and application specificity. That's shown here in green.

Applications that achieve greater scale and volume tend to play to the economic advantages of silicon-germanium. That is, low unit cost at the expense of high development expense.

With the potential acquisition of Mindspeed, M/A-COM will become the first RF and microwave vendor that can service customers, markets, and applications with truly world-class capabilities, from gallium arsenide and gallium nitride to silicon-germanium. The upside potential to our growth plans is, again, very substantial.

That brings us to our combined financial model going forward, the best part yet. If you look at the last 12 months' performance from Mindspeed alongside M/A-COM, excluding Mindspeed's wireless business and nonrecurring revenue, it adds $132 million of revenue at 63% gross margin. This would yield a blended LTM-adjusted gross margin of 50% for the combined entity.

We see plenty of room for further margin expansion, depending on strategic decisions and M/A-COM's gross-margin progression, as already planned.

Taking into account synergies, mostly in corporate overhead, SG&A, and underperforming businesses, we believe we can improve operating margins for the combined entity minimally by 400 basis points.

For that reason, you can see why we're excited about the accretive nature of this transaction in all respects -- gross margin, operating margins, as well as earnings per share.

In summary, I'm personally excited -- in fact, thrilled -- to bring home this transaction to M/A-COM's stakeholders. It's transformative in so many ways, bringing depth as well as breadth to the M/A-COM portfolio -- technologically, geographically, and bulking up in our target markets.

We will be positioned to become a supplier of choice in 100G, with leadership positions across long-haul, metro, and data-center applications, and covering the full scope of physical media requirements. We can thus capitalize fully on the decade-long build-out of 100G optical infrastructure worldwide.

To top it all off, we believe the transaction will be highly accretive to gross margins, operating margins, and EPS within the first quarter after closing. We have identified strong synergy potential, which we plan to execute to within the first 100 days of the combined company.

Thanks, everyone, for listening. I will now open the call for questions. Operator?

(Operator instructions) Mark Delaney with Goldman Sachs.

Thanks very much for taking the question, and congratulations on announcing the deal.

Thanks, Mark.

I was hoping you guys could help us first understand -- as you think about integrating Mindspeed, what can the top line of the Mindspeed portfolio be going forward? I think -- maybe within some of the different buckets, even within areas that you want to keep, like voice over IP -- I believe there are maybe some different growth rates with some tied to very high-growth areas, maybe some products that aren't growing quite as fast within Mindspeed that you can maybe address and -- holistically how we should think about the growth rate going forward?

Sure. So, again, the two areas that we're really focused are the high-performance-analog piece and the voice-over-IP piece. Voice over IP is actually a mature business for Mindspeed. It's in a cash-cow state, and I think it has a long tail to go. So that is not going to grow; it will decline, but over an extended period.

The high-performance-analog piece, I think, has a lot of room for growth. They've demonstrated growth consistently over recent years. Our ambition would be, actually, to care and feed for them to accelerate that growth. They have a lot of very interesting design wins and applications that have not yet seen the light of day, in addition to the strong position that they already have.

So I think the starting point with the $132 million of the trailing 12-month revenues is really just the starting point.

Okay. That's very helpful. And then, just within the synergies that you guys are talking about, can you just help us understand where exactly your assumptions on synergies are coming from? It wasn't completely clear to me, since I know -- in the communications-processor business, which you may eventually divest, gross margins there are lower. So I'm just trying to understand where, between COGS and OpEx where the assumed synergies are coming out of.

Sure. I would suggest thinking about it three ways. First and most obvious one is corporate overhead. We have the opportunity to consolidate two public companies into one. That is quite substantial.

SG&A is another area. There's a large opportunity to consolidate our respective SG&A expense rates. And then the underperforming businesses -- the obvious one, wireless, on a path to rapid divestiture.

We had hoped that we would actually be public with the buyer at the announcement of the definitive agreement, here, but it should close before we close on our transaction.

And then the other area, the communications-processor business is a nice business for them. It just doesn't fit as well with us. When you look at wireless and [comms] processor, that has been a very intense area of investment, which at the end of the day doesn't make sense for us to continue.

And when you pull those off, what you'll find is very, very strong opportunity for synergies between the two companies. I'm reluctant to quantify those, but I think you can see those cooked into the bottom line of our EPS-accretion targets.

Great. Thank you and good look.

Thank you very much.

Harlan Sur with JPMorgan.

Good afternoon, and congratulations on the announced acquisition. Mindspeed's HPA segment certainly appears to be a great complement to your products and end-market focus. If I look at from an installed-infrastructure, corporate-culture perspective, things like technology development, designing methodology, go-to-market, customer-engagement perspective -- how similar or dissimilar are they from M/A-COM? And do you anticipate much work in integrating both companies?

Actually -- a very insightful question, Harlan. From an engineering standpoint, I don't think there's much room for integration -- I mean the design methodologies that they use for the silicon-based products that they do, which are much higher integration -- levels of integration than M/A-COM has traditionally done -- that's pretty much a bolt-on with the business unit intact. And I don't think there's any need or desire to integrate that.

From a sales-and-operations standpoint, I think there's enormous room for best practices. We have a cultural belief that best athletes and best practices rule the day. And I think what we're going to find as we dig in -- in fact, the early indications through the management meetings is that there's plenty of best practices that I think will bring M/A-COM to the next level.

And from an operational standpoint, I think early indications are that some of the operational focus that has been applied at M/A-COM in the years since John Ocampo's buyout can actually improve COGS, operational efficiencies.

So I think there's -- I tried to get it through the talk, here -- lots of runway for further improvements on all fronts.

Good to hear. Then, does the trailing 12-month revenue and gross-margin profile of the combined companies -- I think you guys said $451 million and 50% respectively -- include the comms-processor business of Mindspeed, because your commentary seems to indicate that you're going to look for strategic options for this segment, as well. And does your $0.15 to $0.20 accretion next year include the contribution from the comms-processor business?

So if we find a nice room for the comms-processor business, gross margin will be more accretive. That tends to be at the lower end of their gross-margin range. And the accretion scenarios on the earnings per share -- that would be at the expense of EPS accretion. But the numbers that we quoted are actually worst case, assuming that we find a buyer.

And if you -- let's say that you find that there are no strategic options for the comms-processor business, does the M/A-COM team just wind its business down over time?

Yes. I think there's a long runway. First of all, let me say, I believe there is an extremely high likelihood that there are some very interested buyers. We'll know that probably before closing, and I would hope to be able to communicate some action on that even before our closing.

But in the scenario -- in the unlikely scenario where there isn't a buyer, we just need to fully support customers through the life of their programs in our operations model, including the synergies. It's based upon supporting customers through their production lives.

So like I said, if anything, that's more accretion from an EPS standpoint. It's just, it's cleaner for all stakeholders if we find a nice home.

Okay. Just my final question. Mindspeed clearly has a leadership role in networking, enterprise, and data center within their HPC and VOIP segments. Can you just give us a sense how big this end market is as a percent of their total HPA business? Is it 80% as networking and data center, or is it 70%? Any color there would be great.

You know, I genuinely apologize. I can't speak to the size of their [sams] yet. I need to get the business in before I can speak knowledgeably about that.

Okay, great. Thank you.

Tore Svanberg with Stifel.

Congratulations on the announcement. First question is on technology. John, I was hoping you could talk a little bit about manufacturing, as you're obviously getting more into the silicon-germanium markets. I assume that's nothing that you can (inaudible) in your (inaudible). But help me understand a little bit how the manufacturing is going to look like for the combined (inaudible)?

I don't anticipate any meaningful changes to the Mindspeed supply chain. They have a long and -- they're close cousins with the Tower-Jazz operation, based upon their common routes in Conexant.

That is a fabulous relationship, as I understand it, and I don't anticipate any need from that supply chain standpoint to change. We have identified some conceptual efficiencies that we can get, in terms of package vendors over in Asia.

But it's certainly, as you point out, not something that we would -- this type of business is not the type of business that you want to support from an internal-supply standpoint, on either front end or back end.

Very good. And I know it's still early days, here, but is the longer-term goal potentially to start adding both sets of technologies into perhaps module-type solutions and subsystems? Because I'm just trying to think longer term, and adding RF together with silicon, is that something your customers are asking more and more about?

Absolutely. In fact, we have some really, really exciting customer wins already with combined silicon-germanium, gallium-arsenide solutions. In some cases, it's packaged together in modules, in other cases as chipset solutions.

I had hoped that I would have one of those very exciting customers public before this call, but to be honest, this deal took all of our bandwidth over the past month or two.

But the direct leverage and synergy of putting together those kind of solutions is where we really think in our core business of RF and microwave applications, whether it be satellite communications, whether it be AESA radar systems -- the opportunity for cross leverage, having the full boat of technologies from [gafgan, siggy] -- all in the bag of tricks, can really elevate us to a different level in the industry.

Very good. One last question. I don't want to necessarily get away from the acquisition announcement, but on your earnings report, you talked about an inventory correction in cable TV. Could you just elaborate a little bit more on that? It sounds like that's going to continue in the December quarter. But any more details you can share with us would be helpful. Thanks.

So about mid-quarter, we saw a precipitous decline in order intake in the cable TV area. Our biggest customer order rates dropped in half, and it wasn't just one customer. It was across the board.

And I'll point to -- if you look at some things other people are announcing in the industry as -- some people use Entropic as kind of a reference point in this area. Entropic announced at their last call 20% sequential decline.

Cisco in their last earnings call announced a 40% sequential decline in set-top box shipments. It's that kind of dramatic drop that we saw. It impacted our revenue in that part of our business by 13% down quarter on quarter, so it's not insignificant; and that was only for part of the quarter.

So we think it's really going to be a tough road to hoe for the next 90 days. By the way, we speculate that this has to do with transitions in the DOCSIS standards. Finally the 3.1 spec was announced, I think, last week it was released.

And it may be that we're dealing with a transition in set-top boxes, which I would expect might extend more than one quarter. I'm not sure, but I don't think we're in this alone, by any means.

That is very helpful. Thank you, John, and again, congratulations on the acquisition announcement.

Thank you very much.

(Operator instructions) Steve Smigie with Raymond James.

Thanks a lot, and congratulations on the deal here. If I look at my Mindspeed model, here, and look at their high-performance analog business, I certainly have a decent amount of growth built in going to 2014 for the HPA. [It's clear] the clock and data recovery, crosspoint switches, stuff like that looks pretty exciting going into the future. But already assuming their CCP business drops pretty meaningfully into next year, obviously that carries some of the stuff that you're not interested in. Can you talk a little bit about how we should think about the opportunity on the CCP side? Is there stuff that you're just going to walk away from? And I already have some decline built in there, so would what happens there just sort of be a natural drop in that revenue? Or are you going to take aggressive action to cut some of that potential revenue there from stuff that you don't want to deal with within that CCP business?

I think, Steve, it's too early for me to be commenting about how we're going to manage subsets of the HPA portfolio on a go-forward basis.

I can tell you in aggregate, with all the puts in takes, with any business, including theirs. They're predicting growth this year, and very healthy growth within that segment. So I'm not sure, even if I could answer the question knowledgeably, I think it would be inappropriate for me to do so.

With the HPA, I agree (inaudible). I was more -- just on the other business that -- it's outside of the voice-over-IP stuff. There was parts that you were not interested in, and I was just wondering, are you guys going to sort of actively walk away from revenue of stuff that you don't want is really kind of where the question is coming from.

Oh, I'm sorry --.

Or do you just let it drift down naturally?

I'm sorry. I thought you said CPC. You mean CPE. Okay. On the communications processors, it's not an issue under any circumstance of walking away from revenue. Absolutely supporting all customers and very strong design wins -- I mean, that's the strength of Mindspeed for many, many years. And it's not about actively shutting down healthy businesses.

Our comment about pursuing strategic options is all about the fact that -- I mean, to be blunt, M/A-COM is not a communications-processor company by background. The HPA business fits from a financial-model standpoint, from an overall-solutions standpoint far more adjacent. And I think there are wonderful places where the CPE business can thrive.

But in the event that it stays in our portfolio, there's no need to be extreme or religious in any respect. I think it's all about continuing to generate revenues in that space as long as possible. And perhaps, you know, a very healthy life like the voice-over-IP business.

Okay. And just, Conrad, if I could ask -- I think you mentioned you're sticking in an extra weekend, and I just was curious -- I'm not sure I heard you correctly. Is that in this calendar fourth quarter that we see that extra week?

That's (multiple speakers). This year, our year [run zimes] on the Friday closest to the end of September. This coming year happens to be a 53-week year. And we had to select a quarter to have that extra week in, so we opted with the December quarter because it's light in the market. It's the holidays -- both Christmas and New Years fall on mid-week at the Wednesday; and it just seemed appropriate, given the demand and supporting our customers that we could take that 14th week and not really impact anything dramatically.

Right. So in terms of thinking about that, you (inaudible) extra week, 7% or something like that. But because of the holiday, is it fair to think that maybe on a revenue side it's only 4% or 5% as it compares to typical seasonal norms?

I would say -- you have to be cautious, because whether it's the 6% or 7% or 4% -- Both from a supply as well as demand standpoint, we see that last week of the year typically very soft. And because, as Conrad said, both holidays fall in the middle of the week, our 13th and 14th week will be Christmas week and then New Years week. So we're concerned both -- frankly, as much from supply of our vendors as well as from the demand from our customers standpoint.

The other thing that it gives us the opportunity to do is to manage OpEx back to a 13-week equivalent. So I think that's -- it's fortuitous the way the holidays fall into the Wednesdays, the mid-week, this year.

That makes sense. And not to ignore M/A-COM completely, here, given the excitement about the acquisition, but I was wondering if you could talk a little bit about the aerospace business and about the air-based radar. Obviously -- I know short term, maybe a little bump, but more importantly, can you talk about how significant that air-based radar is, relative to the overall aerospace and defense business? Is it 50% of that business? And should we think about that as air-based is the most significant portion of radar? So obviously, you talked about doing like [C-born] radar. But I have to imagine that the air-based is the most significant portion, too.

I would say the majority of our radar business today is actually not airborne; it's ground-based. It's air-traffic control, weather radar, and such. It's not -- the airborne radar I think you may be referring to is the stuff that we announced last quarter with Northrop Grumman.

And I would say radar is heavily driven by power transistors today. We actually have our next-generation power transistors and core chips for X-band AESA radar systems. So it's going to be a very nice growth business for us for decades to come.

But I would say the way to think about our aerospace and defense business today is, it's a very heavily catalogued product, off a very broad base of customers and applications. I think that may be the reason why -- as we focus back on that core business, we continue to be able to demonstrate growth -- again, 2% sequential growth against this quarter on the back of catalog sales that were over 10% up. So it's not so much application-specific radar in that part of portfolio today.

If I could sneak one more in. Catalogs obviously doing well. You guys are capturing share there, reinvigorating that business. How much of the business mix do you think is the catalog versus -- obviously you have [auto] that's not and [mimics] is not. So how much of the mix is catalog, because that seems to be seeing above-normal growth?

I would say -- in previous quarters -- I didn't do the calculation -- maybe someone will do it while we're talking here, but -- but it's been about half of our business over previous quarters; and it's probably slightly above half because we continue -- in light of some of these headwinds -- like the cable TV is a great example this time -- we grew over 10% in the catalog business this time.

So we grew a few percent in total, over 10% in the catalog stuff. So it's testament -- I just love these catalog franchises. It's weatherproof, tends to be weatherproof if you focus on it. It's a core strength of ours.

So I think we're doing a good job extracting growth where, in aggregate, the market is not growing. So it's something I'm actually quite proud of, to be honest.

Thanks very much.

Richard Sewell with Stephens.

This is Richard in for Harsh. Congratulations on the acquisition. I guess, starting with the VOIP business from Mindspeed -- you mentioned that it's a mature market and declining. Can you give us any color on the kind of trajectory that you're looking at on this decline?

I should be cautious about any kind of forward-looking statements on Mindspeed's business. Again, we're only at definitive agreement. Maybe at closing we can help shape some of those models.

Okay, fair enough. And then, for my followup, looking at your go-to-market strategy, are there any changes as Mindspeed generates a large percentage of revenues from Asia, versus M/A-COM, that historically has had a bigger percentage from the Americas?

I think this is one of the very, very large latent opportunities for this. I mean, you look at it from an accretion standpoint, just from a last-12-month basis. Adding the synergies, it's a sweet deal, to be honest.

But where I get thrilled about this is the synergy on the technology front with the silicon-germanium competence and the Asian sales force -- as we all know, especially the networks market, as opposed to the aerospace and defense, for instance, is -- and the enterprise sector are all very heavily sourced out of Asia.

My experience coming into the company a year ago is, our sales channel is still in early stages of development, where theirs is very mature. I think the opportunity to address some of those core blue-chip customers in that region just goes up by an order of magnitude. And the ability to then leverage that broader sales footprint into the broader customer base goes up dramatically, as well.

So I'm very much looking to the soft synergies. The hard synergies, in terms of OpEx, we've got clear line of sight we'll execute to in the next 100 days. But the soft synergies on the upside potential is where this thing gets really exciting.

Great. And then if I can sneak in one last one -- catalog has done well over the last few quarters. Do you expect the strength to continue in the December quarter? Or what are the puts and takes there?

Yes, I think -- it is definitely going to continue to do well. How well it continues to surprise us -- quite frankly, if the cable TV business didn't fade in the past quarter, dropping, we would have been right up at the top end of guidance on the back of the catalog business.

It's hard to predict the future all the time, in terms of broad-based businesses. And frankly, the headwinds with the cable stuff are just really difficult this quarter to offset. But I'm confident that quarter by quarter, we continue to find new customers, new business.

We have reinvigorated our broad-based distribution channel with dramatic increases percentage-wise, leveraging that broad customer base. So I'm bullish, but it's hard to quantify.

Great. Good luck, guys.

And presenters, at this time I'm showing no additional phone questioners in the queue. I'd like to turn the program back over to Mr. Croteau for any additional or closing remarks.

Very good. Thank you.

In summary, I'm very pleased with our continued execution, as represented by our four consecutive quarters of revenue growth, despite the challenging macroeconomic environment.

In addition, our proposed acquisition of Mindspeed further underscores our growth strategy in the commercial-communications market and transforms M/A-COM into a global leader of 100G optical solutions.

As we look to fiscal 2014, we remain focused on executing our growth strategy and expanding margins, while further leveraging our operational efficiencies and capitalizing on the expected synergies from the acquisition.

Lastly, Conrad and I plan to be on the road in the coming months meeting with investors, so please be sure to contact us if you would like to arrange a meeting.

I'd like to thank everyone again for joining us today on the call, and I look forward to reporting our continued progress next quarter. Operator, you may now disconnect the call.

Understood, sir. And thank you, presenters, and thank you, ladies and gentlemen. Again, this does conclude today's call. Thank you for your participation, and have a wonderful day. Attendees, you may now all disconnect.