MACOM Technology Solutions Holdings Inc (MTSI) 2014 Q3 法說會逐字稿

Good afternoon, and welcome to M/A-COM Technology Solutions fiscal third-quarter 2014 financial-results conference call. (operator instructions) As a reminder, this conference call is being recorded today, Tuesday, July 29, 2014.

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

Good afternoon, and welcome to M/A-COM Technology Solutions fiscal third-quarter 2014 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, Bob McMullan.

Before I turn the call over 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; its annual report on 10-K filed on December 5, 2013; and its restated financial statements filed on Form 8-K on July 3, 2014.

In addition, any projections as to the Company's future performance represent Management's estimates as of today, July 29, 2014. 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 a 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 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 at least 30 days in the investor-relations SEC of M/A-COM's website at www.macom.com.

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'll begin today's call with an overview of our third-quarter results and then turn the call over to Bob McMullan, our CFO, who will review our financial performance in further detail.

I'll then conclude today's prepared comments by providing an overview of our strong execution in the quarter, followed by guidance for the fiscal fourth quarter.

Diving straight into the results, revenue for the third quarter was $112.4 million. Non-GAAP gross margin was 51.7% with non-GAAP net income of $15.8 million, or $0.33 earnings per diluted share.

During the quarter, revenue in earnings per share came in at the high end of guidance, with non-GAAP gross margin improving 240 basis points from the prior quarter and 670 basis points year over year, due to growth of our high-margin products and sales of CPE business.

This represents our 7th sequential quarter of non-GAAP gross-margin improvement and a major milestone as we cross the 50% gross-margin threshold, rounding out yet another quarter of solid execution by the M/A-COM team.

We expect to continue to reap the benefits of our sustained investments in R&D, targeting high-growth, high-margin opportunities with disruptive technologies.

Looking at our results for the quarter, growth was strong sequentially and broadly distributed across end markets. Excluding the CPE business, networks grew 14% quarter on quarter, driven largely by optical.

Aerospace and defense was up 12% due to a recovery across defense and commercial sectors. Multi-market was up 13%, and automotive performed as expected, down slightly based upon what we believe are normal fluctuations in production at Ford.

Let me now turn it over to Bob to review our fiscal third-quarter financials in more detail.

Thank you, John, and good afternoon, everyone.

During the course of my comments, as well as those made by John, all income-statement amounts and percentages will be discussed on a non-GAAP basis and are provided to enhance the understanding of our core operating performance. A reconciliation of each figure to the most comparable GAAP measure is included in today's earnings press release.

Revenue was $112.4 million, representing a sequential increase of 4.6%, compared to $107.5 million in the prior quarter and an increase of 36.7% compared to $82.2 million in the fiscal third quarter of 2013. As previously mentioned, third-quarter revenues were above the high end of expectations.

Revenue by end markets were -- carrier and enterprise networks, $53.7 million and 48%; A&D, $22.2 million and 20%; automotive, $18.9 million and 17%; and multi-market $17.5 million and 15% of total revenues.

As you can see, we have combined carrier and enterprise networks because we found it difficult, if not impossible, to trace carrier versus enterprise demand within our network customers, which are similar.

Gross profit in the third quarter was $58.1 million, or 51.7% of revenues, compared to $53 million, or 49.3% of revenues in the prior quarter, and $37 million, or 45% in the fiscal third quarter of 2013.

As John mentioned, gross margins hit a milestone in the quarter, breaking the 50% level, even when including one month of lower-margin CPE business. Gross-margin expansion benefitted from favorable mix of higher gross-margin products. M/A-COM believes strongly that its focus on improving gross margins will continue to deliver margin expansion going forward.

In terms of operating expenses for the fiscal third quarter, total operating expenses were $34.2 million, compared to $31.6 million in the prior quarter, and $20.8 million in the prior year's quarter.

Research-and-development expense for the fiscal third quarter was $18.8 million. This compares to R&D expense of $17 million in the prior quarter and $9.7 million in the fiscal third quarter of 2013.

R&D as a percentage of revenue represented 16.7% in the fiscal third quarter, compared to 15.8% in the previous quarter and 11.8% in the prior year's quarter. The sequential and year-over-year increase in R&D was largely a result of continued investment in new-product development.

Selling, general, and administrative expenses were $15.4 million, compared to $14.6 million in the previous quarter, and $11.1 million in the prior year's quarter. SG&A as a percentage of revenue represented 13.7% in the fiscal third quarter, compared to 13.6% in the previous quarter, and 13.5% in the prior year's quarter. M/A-COM continues to leverage our global infrastructure as revenues grow.

Income from operations was $23.9 million, or 21.3% of revenue. This compares to $21.4 million, or 19.9% of revenues in the prior quarter, and $16.2 million, or 19.8% of revenue in the prior year's quarter.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, was $27.2 million, up from $24.8 million in the prior fiscal quarter, and $18.9 million in the prior year's quarter.

Interest expense was $3.2 million for the fiscal third quarter, increased from $1.5 million in the fiscal second quarter.

The increase in interest expense was due to the higher debt level and interest rates following the completion of our refinancing of our bank facility with an institutional term B loan in May.

We expect interest expense to be higher in our fiscal fourth quarter as a term-B facility will be outstanding for the fall quarter.

Turning to income taxes, our effective rate remains unchanged at 23.5%.

Our fiscal third-quarter net income was $15.8 million, or $0.33 per diluted share, at the high end of the range, compared to fiscal second-quarter net income of $15.2 million, or $0.32 per diluted share, and net income of $11.5 million, or $0.24 per diluted share in the prior year's quarter.

The share count used to compute EPS was 48.5 million shares for the fiscal third quarter, and 48.2 million shares for the previous quarter, as well as in the fiscal third quarter of 2013.

Cash flow from operations for the fiscal third quarter was $14 million, compared to $13.4 million in the fiscal quarter of 2013.

Turning to the balance sheet. At July 4, 2014, our cash and cash equivalents were approximately $173.5 million. Our debt was $350 million, and we had $100 million in credit availability. We added almost $100 million with our term-B refinancing.

Accounts receivable of $75.8 million compares to $67.9 million at the end of the prior quarter. Day sales outstanding were 61 as compared to 57 in the prior fiscal quarter.

Inventory was $69.9 million, compared to $71.9 million in the prior quarter. Inventory turns were 3.1 times versus 3 in the prior quarter.

Capital expenditures in the fiscal third quarter was $4.3 million, or 3.8% of revenue, compared to $3.8 million and 3.6% of revenues in the fiscal second quarter. Depreciation expense on property and equipment for the fiscal third quarter was approximately $3.3 million.

Now I'll turn the call back over to John, who will provide more color on the quarter and our business outlook for the fourth quarter of fiscal 2014.

Thank you, Bob. Complementing our solid financial execution, there were a number of positive developments for M/A-COM during the quarter.

In May, we held our inaugural analyst day in New York. The event was a major success, hoping to educate a broader set of investors on M/A-COM's story. I'd like to thank all those who attended and those who listened in to the webcast.

For those of you who were unable to attend, the entire event and presentation can be viewed on our website. We currently expect to hold this event every other year, but we will reassess the frequency as we continue to execute on our organic and M&A growth strategies.

As outlined during the analyst-day event, we believe M/A-COM is ideally positioned to take advantage of several secular trends that will be key drivers of our future growth.

First, 100-G optical represents a hyper-growth opportunity for M/A-COM, as operators worldwide have been rapidly deploying 100-G platforms in long-haul and now metro networks.

With the broadest portfolio of analog semiconductor solutions for long-call, metro, and for client-side networks, M/A-COM is well positioned to drive 100-G from the core to the data center and benefit from this expected decade-long build-out.

Second, active antenna arrays are playing a key part in next-generation radar systems for civil and defense applications.

M/A-COM is at the forefront of this revolution, providing the RF content and playing a key role in defining the next generation of radar technology.

Third, high-data-density networks. As all of you know, content-rich applications, as well as the need for improved situational awareness on the modern battlefield, are fuelling an explosion in data traffic in [field] networks.

M/A-COM's millimeter-wave portfolio provides state-of-the-art single- and multiple-channel offerings that are capitalizing on this explosive growth in next-generation systems.

And last but not least, GaN technology. GaN is at the very beginning of its adoption cycle. We believe that this breakthrough technology will disrupt more than 80% of our high-performance RF market over the next decade.

Both organically and through acquisition, we've established what we believe to be the broadest GaN product portfolio in the industry. M/A-COM is driving a profound change in economics for mainstream GaN adoption, while enabling breakthrough RF performance. Our innovative leadership approach to this technology transition represents significant share-gain opportunities for M/A-COM.

One accomplishment during the quarter that underscores our technology and product leadership was that two of our products were recognized as best in class by the industry's leading optical publication, Lightwave. One of those products received their review's only 5 out of 5-star rating.

This serves as independent validation of our pre-eminent product position that has now been driving sequential growth for multiple quarters.

Shifting gears, as you're all aware, our corner of the semiconductor industry is undergoing major consolidation. Our top four competitors are today undergoing merger or acquisition, leaving M/A-COM as the only remaining pure-play high-performance RF and microwave company.

We expect to be a major beneficiary of the potential disruption and distractions that our competitors may experience. In fact, we've already secured numerous purchase orders and design wins as a direct result of these disruptions.

To capitalize further on the secular growth drivers and competitive disruptions, this week we're realigning our business-unit structure within M/A-COM to maximize focus and execution to realize our growth aspirations.

We're assigning our top talent to the leadership positions, where they're now empowered to realize the vision and opportunities as they highlighted in our analyst day.

To conclude my comments, this is an extraordinary time in the history of M/A-COM. We're today realizing the benefits of our strategic initiatives and past investments in growth and gross-margin improvement.

We're reaching full stride across our businesses and believe that we have strong tailwinds fuelling future growth. At the same time, we're seeing disruptions at many of our competitors that are impairing their ability to capitalize on these same opportunities.

We remain laser focused on servicing our target customers and applications, as we further extend our leadership position and capture a greater share of the high-performance analog, RF, microwave, and millimeter-wave market.

With that, let me provide our guidance for the fourth fiscal quarter ending October 3, 2014.

We expect another quarter of solid growth, with revenue expected be in the range of $112 million to $116 million, which would be roughly 5% to 9% sequential growth, after adjusting for the sale of CPE.

We expect non-GAAP gross margin between 50% and 53% and non-GAAP earnings per diluted share between $0.31 and $0.34 on an anticipated 49 million shares outstanding.

Operator, you may now open the call to questions.

(operator instructions) Blayne Curtis from Barclays.

Hey, guys. Nice results. Maybe as a first question you can talk about by segment, as you look at the outlook, whether there's any outliers, as far as up or down. You obviously have to absorb the CPE fallout, but if you could quantity that, too, a little bit. I know you said it was 5% to 9%, but I'm assuming you're backing out of June, as well. If you could just clarify, thanks.

So let me start with the last question, Blayne.

So the CPE revenue in the third fiscal quarter was $5 million. So we have to account for that, plus the additional growth on top. In looking at the projections and the outlook by our end markets, it's pretty much up and to the right across the board.

We've got parts of our business, like A&D and the automotive business, which are kind of mid-single-digit growth. And then in multi-market and networks, it looks like low double digits. So it's pretty much strength across the board.

Thanks for that. And maybe just following up, carrier networks, we've seen mixed results. I know you're not completely focused on China [wireless], but just your perspective on just how these roll-outs are happening and how -- is it affecting you? Are you seeing any pause in demand? Just any perspective you have would be great. Thanks.

Sure. As I've said in previous quarters, we've had very little exposure to the -- both the good times and perhaps forthcoming down times in terms of the LTE build-out in China. We do have some switch business, but that's very modest compared to what kind of exposure others have.

We do see signs of life. We've had another strong quarter of sequential growth in our wireless backhaul business, and that projects forward also with a nice quarterly sequential growth, forward looking the next quarter. And, indeed, it looks like Europe is showing signs of life, which is where we have our primary exposure.

Thanks. And then just a quick one for Bob. If you could just -- the interest expense, is that the new run rate that you're seeing in June? And then just on taxes into September, as well.

So taxes -- we'll answer last first -- the taxes will continue for the fourth quarter at 23.5%.

The term B was outstanding for only a partial amount of the quarter, not the complete quarter, so it will rise slightly to about a little over $4 million per quarter as sort of the run rate.

Okay. Thanks.

Harlan Sur from J.P. Morgan.

Good afternoon. Thanks for taking my question, and solid job on the June-quarter results.

A&D was up 12% sequentially in the June quarter. I think you just said that it's going to be up mid-single digits in the September quarter. Can you guys just talk about the sequential growth drivers that drove strength in the business, both in June and your expectations about the applications that are driving the growth in the September quarter?

Well, I can tell you backward-looking with a little more detail. Forward-looking, I actually don't have that in front of me.

But for the third-quarter growth, it was pretty much across both the, really civil radar and satellite communications, so it was across the board. There wasn't a single end-market application that stood out. So it was pretty much widespread.

And then forward-looking, we see continued lift -- actually, let me take a look at my notes, here -- it looks like communications again a slight lift, and then in some radar programs -- yes, actually radar is also showing growth.

So it looks like it's pretty much across the board again next quarter.

Got it. Is that more commercial radar that you're talking about?

Yes, a lot of our exposure of radar programs now at this point. Forward-looking, we've got a lot more defense, but right now, present tense, a lot of its air-traffic control.

Okay, got it. And then, I know it's kind of early days, but typically there's not much in the way of seasonality in your business, but looking at your design win and customer and program pipeline, how should we think about the revenue trends looking at the December quarter?

Harlan, there's two things that come up this year that have the effect of seasonality in our fiscal Q1.

We see strength at Ford on the new model years, but there's some tooling to be done there. So we see some pull-back against normal production run rates on the auto business. But that's (technical difficulty) tool up a bit.

And then in the HPA business, high-performance-analog product business, there's some seasonality with respect to some of the fiber-to-the-home products. And so that's different from past years with M/A-COM.

Would you kind of generally expect the fourth-quarter revenue trajectory to be down slightly sequentially, then?

No, no. Fourth quarter? No. Fourth quarter, we're guiding up. But that's more of a seasonality for the first quarter of fiscal [2015].

Right. So that's (multiple speakers) fourth-quarter calendar is our first fiscal. So (multiple speakers) --.

That's what I'm trying to figure out. So should we -- given some of the seasonality trends -- and I know you just highlighted a couple of them -- but directionally speaking, would we anticipate your fiscal Q1 to be down slightly, or too early to tell?

No, I think it is down slightly.

Okay, got it. Thank you for that. And then, Bob, you're guiding gross margins relatively flattish in September, but you don't have the low-margin CPE business; and I'm assuming that your incremental revenues are coming on at 60% to 70% incremental gross margin. I'm just trying to reconcile that with your flattish guidance here. How do you set the midpoint of the range?

Well, I would say the midpoint of the range looks -- it's up slightly, but basis points, obviously. We do have 3,000 products, and we ship anywhere from 1600 to 1800 different products.

And some of the strength in some of the older products that come back have slightly lower margin than the new products. So we're projecting a mix that is in the range that we gave the (multiple speakers) --.

Maybe I can add some color. So it's coming off a very favorable [next] quarter. So if you look at our gross margin this past quarter and our third quarter, our relative guidance, we're at the top end of gross-margin mix.

So we had a favorable mix. And then, your observation is not inaccurate. So I would say our gross-margin improvement will be not as strong, possibly. But to be honest, as Bob said, it's one of toughest things to predict, because there can be so many puts and takes during the quarter. But again, third quarter was very favorable.

That makes sense. (inaudible) captured a lot of the incremental gross-margin opportunity in the June quarter. So I can understand the tough comparison. Okay, thank you very much.

You're welcome. Thank you.

Quinn Bolton from Needham & Company.

Hey, guys (inaudible). Congratulations. I just wanted to come back to the radar. You discussed a number of radar programs at analyst day [EMPAR] for civil or air-traffic control and some of the active, electronically scanned defense programs.

It sounds like the radar strength you're seeing now -- is that more the EMPAR civil, or is EMPAR still ahead of us? And then for the military radar programs you talked about at analyst day, when do you see those really starting to kick in? And then I've got a follow-up question.

So let me walk through the number of facets to your questions.

So the present-tense revenue is largely legacy air-traffic-control business with our pulsed-power transistors, where we're number one in the market for, I would say, conventional radar systems.

EMPAR is still ahead of us, although, interestingly over lunch today, there are very strong signs of life that things could be coming in in the relatively near term, some very sweet orders.

And then to answer your question about defense radar, we've won some programs that should be turning into material production in our fiscal 2015.

So all of this kind of layers on top of the legacy stuff. Again, those will be some of the growth drivers for next year.

Great. And then the follow-up question is just on the optical business. I think you said that was one of the drivers for the June quarter. Could you go into a little bit more detail? Was that mostly 100-gig? Did you also see growth in the fiber-to-the-home part of that business? Any more color you could provide in optical would be helpful.

So the optical I referred to in driving the growth was actually the 100-gig optical. So this is the long-haul, metro stuff, and it more than doubled in the quarter.

And you expect optical to continue to grow in September?

It will continue to grow. I'm not saying we're going to be putting back-to-back doubling quarters, but it's -- as we described at the analyst day, it's one of the key growth drivers for the Company.

Great. Thank you.

Steve Smigie from Raymond James.

Thanks a lot, guys, and congratulations on the numbers.

Thanks (multiple speakers).

Hey, guys, can you hear me?

Yes.

Sorry about that. I was just saying congratulations on the numbers and I was just going to ask about the high-performance analog business and how that looks going into September. I think you talked about the group overall, but just specifically for HPA.

So that's continuing to grow, putting together sequential quarters of very, very nice growth, I would say consistent with the kind of growth numbers that we talked about across our end segments, which -- I mean, between A&D, multi-market, and networks, they were all above 10% sequential growth. That's the kind of numbers I would be referring to.

And on a go-forward basis, I would say next quarter it's similar kind of growth rates. And the one thing I would caution -- Bob referred to -- is their [pawn] business tends to see some seasonality that the previous M/A-COM portfolio has never experienced, so some exposure to more seasonal aspects of build-outs. But the vision as anticipated coming into the Company is being realized fully.

Thanks. And then on the auto business, can you talk about over the next couple of years how you see this trajectory of that business? I think you're still doing some investment there. Is that kind of steady (inaudible) cash-flow-producing business?

Yes. I mean, our relationship with Ford has never been stronger. We continue with -- we don't consider that to be a growth business because we believe Ford's fully saturated in terms of their portfolio with the SYNC feature in their systems and their cars.

But we certainly have a portfolio extending beyond the current GPS functionality to advanced driver systems. And we have other customers and other engagements.

We tend not to talk about it because -- you know, at this point, automotive companies are working on model-year 2018; so we don't want to confuse people with short-term versus long-term growth.

But, as you said, it's a very, very nice business, still accretive to our operating margins. So it's a great cash generator for us.

Great, thanks. And the last question -- just in consolidation. As you mentioned, there's a lot of activity in the space right now. You guys just beefed up your balance sheet, and you already (inaudible) some acquisitions here recently. But how do you see your activity going forward? Is it imperative that you do stuff quickly here?

No. I don't feel undue pressure to do things quickly. We certainly have cash in the balance sheet. We have the ability to do things. But we pride ourselves in being very disciplined in the transactions that we choose to trigger. And those don't come along on short order. You have to be waiting for the right deal at the right time.

And the other thing that we care very much about is remaining focused on the markets, the customers, and the technologies that are close and adjacent.

We don't want to get ourselves spread out and going in five directions simultaneously. So it's an issue of beefing up, either in the markets or technologies; but it's all about sticking to the knitting and getting stronger in our areas of focus.

Okay, great. Thanks, and congratulations on the numbers.

Mark Lipacis from Jefferies.

Hi. Thanks for taking my question -- two questions. First, on the growth. The growth rates are impressive. We've also heard from several other broader-based companies some pretty good growth rates, John, and I was wondering if you would be able to share your perspective of where you think we are cyclically, or where we are in the cycle. Could you guys talk about your lead times? Are they stretching or shrinking? And what kind of visibility do you have into inventories of your products or your customer products downstream, to the extent that you have any concerns about inventory [builds]?

Relative to other companies [I worked for] we are really not exposed to the industry inventory cycles, anywhere near other people in the industry.

I can tell you we do have very good insight into our distribution, as well as customer inventories. We see no evidence of any kind of inventory -- excess inventory build. I think it's a very healthy state right now. In fact, we've gone through a very deliberate process of draining our channel inventories.

So it's a very high-quality revenue quarter, and the backlog looks very consistent with the growth aspirations we have. So it's -- I think we're playing (inaudible) still, realizing genuine growth.

How about the lead times?

There's certain foundry partners of ours that have stretched some lead times in one particular part of our business. But I would say that's very, very limited exposure. For the most part, we don't have any lead-time issues.

Okay. Thank you. And a follow-up if I may, a follow-up on the previous question. So as we think about your M&A strategy, it sounds like you prefer to go deeper within your existing product set, as opposed to broader and doing a bolt-on. Is that fair?

No, not necessarily. To me, it's an issue of adjacency, and the Mindspeed transaction is a perfect example. It was very highly complementary in expansion of our product portfolio, but it was the same customers and the same applications.

So what I would shy away from is something that is different technology in a different market with different customers that just gets us spread thinner rather than getting leverage from our existing either product market or technology position.

That's fair. And is there -- can you -- is there a sweet spot in terms of size that you're looking at? Or is there a range, or is there a size above which you would just say, you know, this might be too big for us? Thank you, and that's my last question.

No, I'd say we're open-minded about all options. But the way we think about it is, we have a very, very rich pipeline of small transactions, [pre-revenue] companies, small little tuck-ins that are really not material. We don't necessarily even talk about them.

And then we have transactions like the Nitronex transaction that was a $26 million transaction, which is very nice in terms of [inside straight].

And then we go to the Mindspeed-type transaction, which was $277 million, I believe, [enterprise] value. And the only thing that we're religious about is making sure that it's neutral to accretive as quickly as possible.

With Mindspeed, we managed it in the first quarter of combined operations; but certainly within the first year would be an imperative. And for anything that would be material to the Company, we would make sure that it's neutral to accretive.

Thanks, John. That's very helpful.

(operator instructions) Tore Svanberg from Stifel.

Hi, this is [Eric] calling in for Tore. I'll also echo the nice results for the quarter. Getting back to some of the accretion targets that you talked about in the past -- and I know last quarter you said you already achieved $0.07 accretion with respect to that deal -- and we're in line to hit at least $0.21.

Based on the June-quarter results and September-quarter outlook, it looks like you're tracking more towards $0.23. What's changed, and is there an update that you have for the accretion expectations?

Eric, I wouldn't change the -- so almost a year has gone by since the acquisition was announced. And the way it's integrated, I think that there is -- definitely within the range of the original $0.15 to $0.20 accretion. We are running slightly ahead of that. But we're achieving efficiencies, as well as the margin on the new products kicking in, is making a difference on the gross-margin line that slightly -- not slightly, is making the difference dropping to the EPS line. So I would chalk up that [delta] to the improving gross-margin product mix.

I didn't quite follow the math -- the logic, but let me just add some color to Bob's comments.

So the Mindspeed transaction has continued to only exceed our expectations throughout. I would say the only thing that has gone the other way in that September (inaudible) thing is with the term loan that was dilutive to our earnings, with the interest expense. So that might look to be dampening the benefit of the Mindspeed transaction. But once we put the money to work, we'll hopefully pull another Mindspeed.

No, I got that. I mean -- I was considering the $0.03 in the June quarter in relation to that. But that's helpful, thanks.

In relation to your target model, I think you mentioned a 60%, 30% gross operating margin. What revenue run rate would you need to achieve to hit those numbers or come close?

Well, it's our long-term model, and we strive to work everything to the most -- it drives the way we invest in products and what product areas, potential new development based upon incremental gross margin, obviously.

We don't have a time horizon, but I think over time you'll continue to see the progression of gross margin and operating margin increase as revenues increase across the board.

So we don't have a time frame, nor do we have a revenue target. But I think we'll continue to make progress over the next few years.

Okay. Thanks. And maybe just one more if I could squeeze in. I think in the past you talked about how much you had booked in the quarter that gives you the confidence in your guidance. Can you provide that for us?

I would tell you that our book to bill was over 1.

I would only add that the backlog is very consistent with previous percentages at this point in the quarter. There's nothing to stand out. If anything, it's stronger. But we've decided that's not necessarily material, especially with the introduction of the Mindspeed portfolio. It kind of behaves differently than our traditional, with more [terms] business over in China. But it's all, if anything, favourable to prior quarters.

Thanks so much.

Harsh Kumar from Stephens.

Hey, guys. A couple of questions, and my congratulations, as well, on the good numbers.

This was just asked a second ago on the long-term model. I'm curious if you have a midterm model or you've given some thought about what -- given the tremendous amount of improvements that you had, is there something we should be looking for in the next, call it a year or two-year time frame, Bob, are you still going to hold to the long-term model?

I will tell you this. I think we can continue the progression that you've seen. As revenues go up, I think the dynamics are at play that we will continue to eke out increment gross-margin increases over the next few quarters. So that -- obviously, you get to something below 60% to get to 60%, so you'll see that March to 60% over time.

We're ahead of where we had originally projected, even with the Mindspeed transaction. So with things going well, I can tell you that my mindset is reaching 55% next. That will be to next celebration point, and then with an eye towards 60%.

To be honest -- like I said at the analyst day, 60% is only [a way point in addition]. And who's to say two years is long term? (laughter)

Got it. Understood. And I was wondering -- I know this was asked, as well, earlier -- but I was wondering if you could give us some clarity on what impact maybe the month of CPE had on your margins. I know you talked a lot about maybe the nice mix and why the margins won't go up this quarter, but maybe help us understand how much it costs you in terms of gross profit from that one month.

I would say this, that -- if we had it for the full quarter, all the CPE business -- so quarter over quarter, we would have been closer to the low end of the guidance than where we are today.

That's really helpful, Bob. And then last question I had was on the CapEx. Very good control on CapEx. I think you were talking about $4.3 million, or so. Is that a number we should think about from here on for the foreseeable future? Or is that number just a low number, likely to go up?

No, we're -- again, from what we foresee today, as our capital needs and how we're spending and how we're budgeting for things, 4% is the annual target for capital expenditures. If it goes up a little per quarter, it's sort of smoothing that; but that's really the target that we think this business needs.

I would reiterate the fact that we're very -- even though we have a manufacturing fab here, we're very capital-light from an investment perspective. So we don't need a lot of capital to continue to grow in CapEx.

Got it. Thanks, guys. That's it from me. Congratulations again.

And we have a follow-up from Quinn Bolton from Needham & Company.

Just, Bob, quick thoughts on OpEx into the September quarter. Looks -- you're up a couple plus million in the June quarter. Do you think that's kind of flattish into September, or any thoughts you can provide on OpEx in September?

OpEx will continue to go up. I don't think the change is as large from Q2 to Q3, but it will increase in fiscal Q4.

Okay, thank you.

I'm showing no further questions at this time. I would like to hand the conference back over to Mr. John Croteau. Sir, you may (technical difficulty) concluding remarks.

Very good. A couple of final notes before we close today's call. Bob and I will be participating in multiple IR events this quarter, which will provide several opportunities to meet with our shareholders and investors.

First, Bob will be attending the Oppenheimer conference in Boston on August 12, as well as the Jefferies conference in Chicago on August 27.

We'll also be on the road in New York, Baltimore, Philadelphia, Minnesota, Milwaukee, as well as Los Angeles and San Diego. If you're interested in meeting with us there, please send us an email at ir@macom.com.

We look forward to meeting with you in the near future and reporting our continued progress next quarter. Operator, you may now disconnect the call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.