MACOM Technology Solutions Holdings Inc (MTSI) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to the M/A-Com Technology Solutions first-quarter FY15 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Monday, February 2, 2015.

I would now like to turn the call over to Leanne Sievers of Shelton Group, the investor relations agency for MACOM. Leanne, please go ahead.

Good afternoon, and welcome to M/A-Com Technology Solutions' first-quarter 2015 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, MACOM investor relations firm. With us today are MACOM's President and Chief Executive Officer, John Croteau; and Senior Vice President and Chief Financial Officer, Bob McMullan. If you've not received a copy of the press release, you can obtain a copy on MACOM's website at www.MACOM.com under 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, and answers to your questions, contain forward-looking statements, which are subject to risks and uncertainties. Because actual results may differ materially from those discussed today, MACOM claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and refers you to a more detailed discussion of risks and uncertainties that could result in those differences in MACOM's filings with the Securities and Exchange Commission, including its Form 8-K and quarterly report on Form 10-Q filed today. Any projections as to the Company's future performance represent management's estimates as of today, February 2, 2015; and MACOM assumes no obligation to update these projections in the future.

The Company's press release and management 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 SEC today and can be found at the Investor Relations section of MACOM'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 of MACOM's website.

And now, I'd like to turn the call over to MACOM's President and CEO, John Croteau. John, please go ahead.

Thank you, Leanne. Welcome, everyone, and thanks for joining us today. I'll begin today's call with an overview of our first-quarter results for FY15, 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 execution during the quarter, followed by guidance for the fiscal second quarter of 2015.

Straight to the results: Revenue for the first quarter was $114.9 million, which included $2.1 million of contribution from BinOptics during the two-week stub quarter. Revenue excluding BinOptics would have been near the midpoint of our guidance. Non-GAAP gross margin was 53.7%, with non-GAAP net income of $18.7 million, or $0.38 earnings per diluted share. Similar to last quarter, non-GAAP gross margin and non-GAAP EPS benefited from a favorable mix in sales, weighted towards higher-margin products.

During the quarter, similar to our peers, we saw broad-based seasonal softness across many of our end markets. One notable exception was our 100G Optical business, which grew 35% sequentially, excluding the contribution of BinOptics' stub quarter. Demand in aerospace and defense was also up slightly.

Multi-market and networks saw soft demand for our broad base of catalog products. Certain networks businesses, notably wireless infrastructure, were down due to what we believe was our customers' year-end inventory management, specifically in Asia. Automotive was also down due to anticipated seasonality with Ford.

Let me now turn it over to Bob to review our fiscal first-quarter financials in further 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 $114.9 million, representing a sequential increase of 0.5%, compared to the reported revenues of $114.3 million in the prior quarter, and an increase of 37.6% compared to $83.5 million in the first quarter of FY14. The last action of integrating our recent acquisitions was to harmonize the revenue recognition practices to be consistent across the Company. As is standard practice, this change in estimate is being implemented in our first fiscal quarter.

Certain agreements with distribution customers provided for rights of return and price protection until such time as the Company's products are sold by distributors to their customers. And until the quarter ended, January 2, 2015, for some distributors we recognized revenues from sales under such agreements when the distributor resold the product to its end customer; the sell-through basis of revenue recognition.

Over a period of eight months, and during the first quarter ended 2015, we completed an evaluation of our revenue recognition methodologies relating to all distributors, and concluded that it was more appropriate to recognize revenue on sales to distributors at the time of shipment to the distributor; the sell-in basis of revenue recognition. Prior to the recent acquisitions, we had concluded that we had insufficient information, as well as limited experience, in estimating the effect of the right of distributors to return product and price protection; and accordingly, used the sell-through method of revenue recognition.

We have recently concluded a study of three years of distributor-related transactions, in addition to our ongoing efforts to standardize our revenue recognition policies, and believe that the Company now has the sufficient data to reach the conclusion that sales and revenues relating to distributor transactions are capable of reasonable estimation. Accordingly, we implemented the sell-in method of accounting for sales to distributors.

We recorded a one-time adjustment during the first quarter ended January 2, 2015, related to this change, to recognize $17 million in previously deferred revenues; to recognize the related inventory costs of $4.4 million; and to establish a reserve of $4.5 million against distributor sales. And in determining the new reserve amount, we noted that distributor payments are due under agreed terms, and are not contingent upon a resale or any other matter, other than the passage of time.

We have agreements with some distributors and customers from various programs, including price protection, obsolete inventory, new products, and stock rotation. Sales to these distributors and customers, as well as the existence of sales and set-up programs, are in accordance with the terms set forth in written agreements with these distributors and customers.

In general, credits allowed under these programs are capped, based upon individual distributor agreements. We recorded charges associated with these programs as a reduction of revenue at the time of sale, based upon historical activity. Our policy is to use a 12-month rolling historical experience rate, as well as an estimated general reserve percentage, in order to estimate the necessary allowance to be recorded. As noted in our press release, we refer you to our 10-Q filed today.

Inclusive of the aforementioned change in estimate, network revenue was $53.5 million, aerospace and defense was $24.9 million, automotive was $18.3 million, and multi-market came in at $18.2 million. Gross profit in the fiscal first quarter was $61.7 million or 53.7% of revenues, compared to $61.9 million or 54.1% of revenue in the prior quarter, and $38.9 million or 46.6% in the first quarter of FY14. Gross margin still benefited from selling higher gross-margin products, but down 40 basis points due to slightly different product mix than the fiscal fourth quarter.

In terms of operating expenses for the fiscal first quarter, total operating expenses were $34.6 million, compared to $35.2 million in the prior quarter, and $22.7 million in the prior-year quarter.

Research and development expense for the first fiscal quarter was $18.5 million. This compares to R&D expense of $18.7 million in the prior quarter, and $10.9 million in the fiscal first quarter of 2014. R&D as a percentage of revenue represented 16.1% in the fiscal first quarter, compared to 16.3% in the previous quarter, and 13% in the prior-year quarter. The slight expense reduction was due to lower compensation expense, offset by the inclusion of BinOptics expenses.

Selling, general and administrative expenses for the fiscal first quarter were $16.1 million. This compared to SG&A expense of $16.5 million in the prior quarter, and $11.8 million in the prior year's quarter. SG&A as a percentage of revenue represented 14.1% in the fiscal first quarter, compared to 14.4% in the previous quarter, and 14.2% in the prior year's quarter. The slight expense reduction was due to lower compensation expense, partially offset by the inclusion of BinOptics expenses.

Income from operation was $27.1 million or 23.6% of revenue, which compares to $26.7 million or 23.3% of revenue for the prior quarter, and $16.2 million or 19.4% of revenue in the prior year's quarter. Higher gross profits and margins drove continued improvement in operating income and margin in the fiscal first quarter.

EBITDA, or earnings before interest, taxes, depreciation and amortization, was $30.6 million, up from $30 million in the prior fiscal quarter. Interest expense of $4.3 million in the fiscal first quarter increased slightly from $4.1 million in the fiscal fourth quarter, for additional borrowings to finance the BinOptics acquisition.

Turning to income taxes, our effective income tax rate for the fiscal first quarter was 18%. This tax rate compares to 23.5% in the prior fiscal quarter and in the year-ago quarter.

Our fiscal net income was $18.7 million or $0.38 per diluted share, above our high range of our previous guidance, compared to fiscal fourth-quarter net income of $17.2 million or $0.35 per diluted share, and net income of $12.1 million or $0.25 per diluted share in the prior year's quarter. The share count to compute EPS was 49.2 million shares for the fiscal first quarter, 48.9 million shares for the fiscal fourth quarter, and 48.6 million shares in the fiscal first quarter of 2014. Fiscal first-quarter cash flow from operations was $2.1 million, compared to $15.6 million in the fiscal fourth quarter, and $2.3 million in the fiscal first quarter of 2014.

Turning to the balance sheet: At fiscal quarter end, our cash and cash equivalents were approximately $48.3 million. Outstanding long-term debt was $445.9 million, reflecting an additional $100 million of debt during the quarter relating to the acquisition of BinOptics for approximately $224.1 million net. Accounts receivable of $79.5 million compares to $75.2 million at the end of the prior quarter. Days sales outstanding was 62.9 days, compared to 59.8 days at the end of the prior fiscal quarter. BinOptics receivables added $10.3 million to the fiscal quarter balance.

Inventory was $89.2 million, compared to $73.6 million in the prior quarter. Inventory turns were 2.4 times, compared to 2.9 times in the prior fiscal quarter. BinOptics inventory added $17.5 million to the first-quarter balance.

Capital expenditures in the fiscal first quarter were $3 million, or 2.6% of revenue, compared to 5.9% of revenue in the fiscal fourth quarter. Depreciation expense on property and equipment for the fiscal first quarter was approximately $3.5 million, and $3.3 million for the fiscal fourth quarter.

I'll now turn the call back over to John, who will provide our business outlook for the fiscal second quarter of FY15.

Thanks, Bob. I'd like to begin by providing an update on our recent acquisition of BinOptics. On December 15, 2014, we successfully completed the acquisition of BinOptics Corporation, and kicked off integration. We remain laser-focused on integrating the two teams and businesses -- so far, with no major surprises. This will be a transitional quarter for MACOM, as we continue to rationalize the sales channel, scale manufacturing, and consolidate management teams, operations and forecast systems.

After the announcement of our definitive agreement to acquire BinOptics, it became clear, literally overnight, that the strategic upside of the transaction would exceed our expectations. Having the right products at the right time to address a serious bottleneck and pain-point in our customers' supply chains in 2015, BinOptics has emerged as a potential catalyst for our networks business overall, vaulting MACOM to strategic vendor status in some of the largest telecommunications OEMs worldwide.

Since closing the deal on December 15, we've been in discussions with strategic customers regarding expanded relationships and cross-selling opportunities across all networks' product lines. We expect to see meaningful benefits from those negotiations as early as our third fiscal quarter this year.

At the same time, we remain cautious for the first quarter or so of combined operations with BinOptics, as they transition from a privately owned, less-mature, hyper-growth company to a more large-scale operation within MACOM. We need to jump horses mid-gallop in the midst of ramping capacity to harmonize MRP production systems, forecasting, and general operations on SAP. We expect revenue growth for this new laser business to remain supply-limited through the remainder of FY15.

Moving on, behind the scenes we've made great strides in realizing the vision of our GaN strategy. As we described at our Analyst Day last May, we believe that GaN will ultimately disrupt as much as 80% of our target markets. We've assumed a leadership position in driving the GaN technology transition, with the goal of enabling step-function increases in market share.

We're in the process of finalizing supply agreements with manufacturing partners that we believe will meet the demanding supply chain requirements for our various target markets. We believe these agreements will unlock the requisite cost structure, capacity and scalability to displace incumbent silicon and gallium arsenide technologies with material impact beginning in 2016.

As you may have seen earlier this evening, we announced that we have commenced an underwritten public offering of common stock issued by the Company, as well as selling shareholders. We intend to use part of the net proceeds from this offering to repay $100 million of our outstanding borrowings under our revolving credit facility, and for general corporate purposes.

To conclude my comments, I'd like to thank the team for another quarter of solid execution. We believe the BinOptics opportunity has proven to be larger than expected, and as we move into our second fiscal quarter, we'll begin realizing the benefits of the operational and financial synergies, as well as cross-selling opportunities, from that transaction, positioning us as the pre-eminent supplier for optical components in our corner of the industry.

For the fiscal quarter ending April 3, 2015, MACOM expects another quarter of solid execution, with revenue expected to be in the range of $120 million to $124 million. Non-GAAP gross margin is expected to be between 51% and 54%, and non-GAAP earnings per diluted share between $0.39 and $0.42, based on 50 million shares outstanding.

Operator, you may now open the call to questions.

(Operator Instructions)

Our first question comes from the line of Blayne Curtis with Barclays.

Hi, guys, thanks for taking my question. First, John, you saw a big uptick in Aerospace and Defense in December. Was that what you were expecting? And what drove that?

And then when you look at going forward in your guidance for growth, obviously, BinOptics layers in. But what other segments are you seeing a rebound after the seasonal adjustment?

Sure. Well on the A&D side, if you remember, that's a business that tends to bounce around quarter to quarter, and in many cases, surprises us on the downside, as well as upside. It tends to be lumpy because we have these radar programs, and you'll get -- depending on the timing of an order that comes in for a particular radar deployment, they can exceed our fullest expectations. So I think that bounce is within those normal conditions. The other part of your question was, other than (multiple speakers).

As you look at the March, obviously you get a full contribution from BinOptics. What other segments are you seeing up or down?

The Ford business is going to come back very strong. It was something that we had been anticipating seasonal weakness, with the F-150 platform transition last quarter, and that's coming back next quarter. The other area is Multi-Market, and then modest recovery on the Network side, although continued growth on the 100 gigabyte Optical part of that.

Great. And then just one following for Bob. Just on the change in sales recognition, I think the Q said $15.1 million over several periods. How much of an impact did that have for you in December?

The December impact is $15.1 million, and it's a change of an estimate because of the way we had to rework an estimate and get some historical trend information to be able to estimate potential returns and price adjustments. So that is a one-time change of estimate that goes through the P&L.

The net $15 million disclosed is an amount that includes a portion less the reserve that was on the books -- the $17 million that is on the books at the end of the FY14 period. And the additional amount to make $15 million is a current-period addition.

This is a one-time event that is no longer applicable. It's a GAAP transition, so all the disclosure around individual effect revolves around the necessary change and the required disclosure.

Okay, thanks for that, guys.

You're welcome.

Our next question comes from the line of Harlan Sur with JPMorgan.

Good afternoon, guys. Nice job on the quarterly execution. Just plainly, what are you guys baking into your revenue assumptions for the March quarter for BinOptics?

I'm just trying to get a sense on how the underlying business is trending. If you could just give us some sense on the current gross margin profile for BinOptics as well.

Yes, so we don't -- as you know, Harlan, we don't disclose revenue by product line or business unit. Starting in the second fiscal quarter, they're fully integrated. If you look at the disclosures, you can see the pro forma trailing 12 months, which was about $50 million in revenue. So to the first approximation, you can extrapolate that.

The other thing I would say, as I said in the prepared comments, we're being a little cautious in these first quarters. We are ramping capacity for growth, although they've only been integrated from an operational standpoint for about the past 30 days and we're still within the production cycle -- about one complete turn of production.

And the caution really comes from the fact that we have to transform a lot of their manufacturing systems, frankly, from things like using Excel for manufacturing controls, over to professional MRP systems. Have to get them on SAP, and so on. So we want to be cautious, especially what's ahead of us this quarter, so that we don't get ahead of ourselves and disappoint.

Okay, thanks for that. And then Bob, we can probably back out of the guidance. But given the three acquisitions and also the usage of the $100 million revolver, could you just give us a range for the OpEx that we should be expecting in the March quarter? And the net interest expense you're baking into the guidance for March as well?

Sure can. As you know, interest expense will be reduced from the current level because of the short repayment of debt in the period, but the interest drawn for the revolver was only three weeks in period of time. So if you were to look back to the previous quarter when just the Term B was outstanding, that would be representative of a range to expect going forward.

When you look at the overall expense levels quarter over quarter, we'll see an increase in R&D and SG&A, but almost in line with what you saw last year. We'll have the full quarter, from an R&D perspective, and some SG&A for BinOptics that is not fully reflected. So that's showing an uptick in the R&D and operating expenses. From a range of where we were in Q1 to where we were in Q2, it's in the $1 million range, plus or minus.

Okay, so up about $1 million, plus or minus?

Yes.

Okay, great. And then just last question. Pre the closure of BinOptics, John, I think you said that this business was growing at 100% per year and that it could sustain 50% growth rates over the next few years. Post the closure, and obviously after a more detailed scrubbing of their pipeline, what's the confidence level around that 50% number?

Extremely high. What we had -- and again, in our prepared comments, like I said, that we would end up supply-limited through the rest of this year, and frankly, into next year. By that, I mean demand is such that our biggest problem, frankly, right now, is harmonizing customer priorities. People are coming in looking for demand and looking to negotiate long-term supply agreements that are in excess -- and in some cases far in excess -- of our ability to deliver, even with the aggressive capacity ramp.

So certainly through the rest of this year, I would say every laser that we can produce, we'll ship. And doubling in six months, and quadrupling in 12 months is -- you can get a sense of what that would produce. The one caution I would say -- it's six months from closing.

So it's closing six months from December, and that's when we would have that doubling in capacity, and not the prior quarter. Where I would see the material jump, in terms of the capacity expansion, would actually be our fourth fiscal quarter. To some extent third, but especially the fourth. And then 2016 -- off to the races.

Thanks, guys.

You're welcome.

Our next question comes from the line of Quinn Bolton with Needham & Company.

Hi, John. It sounds like if you've got customers on the BinOptics side looking to negotiate long-term supply agreements, you're probably not too worried about double-ordering. But can you give us any sense about whether or not you think any of these forecasts you're seeing from customers, given the supply constraints, might be leading to any type of double-ordering here for BinOptics over the next several quarters?

There's no question that there's posturing for unfair allocation for increased market share gains by the customer. So that is a concern. It's not a concern for the next two or three quarters, because there's such a gap between aspiration for allocation versus reality.

Secondly, I would suggest it's pretty clear to the customers and to ourselves that on a go-forward basis, from a laser supplier standpoint, you've got a couple of guys that are effectively de-committed to the area, where we're strategically committing and entering. So I'm confident that as we ramp capacity -- and ramping capacity also has a secondary benefit of COGS reduction -- that we'll be able to be able to continue taking share, to be able to keep up with our available capacity.

So it's definitely a latent concern. It's something we're having explicit discussions with our customers about. We have a two-tier customer model. You have the system OEMs, and then the optical modules guys sitting in between. And we discuss explicitly with both, how much of which product is going to which OEM. So it's definitely a complex and an interesting challenge.

Appreciate the detail. And then just a couple of follow-up questions. In the prepared comments, you mentioned seeing some broad-based weakness in the December quarter. It sounds like a lot of that might have been inventory -- certainly your Automotive business, and I think you said Networks might have seen some inventory. As we pass the New Year, can you talk about whether you're seeing better order trends, post-December 31?

And then just lastly, on the radar business. At Analyst Day, you talked about a lot of the active radar programs that are off in the future. Can you give us some sense, are those -- do you think you'll see revenue kicking in this fiscal year? Or is the MPAR and ASA radar really more a FY16 revenue driver? Thank you.

Sure. Let me address the second part of the question first, while it's on the top of my mind. The Empire program and derivatives thereof is moving from the advanced development phases that we did in conjunction with MIT Lincoln Labs into commercial deployments, for both defense as well as civil use. These are real programs that customers are actively bidding and the government is awarding. So we are going to see material revenue from those in the form of early production orders and additional field trials in our third and fourth fiscal quarter this year.

That's already cooked into our growth plan. And perhaps as early as the fourth fiscal quarter, but absolutely 2016. That will turn an additional inflection point in our growth trajectory, as those programs turn on. Again, for both defense, as well as civil use -- civil programs. So that's going to turn into a very exciting thing as we get into the latter part of this calendar year.

On the former part of your question about where we're seeing order patterns and so on, there's no question that there was true seasonality in the fourth calendar quarter -- our first fiscal quarter. One of the things we didn't fully appreciate was, we saw something that I had seen in my previous lifetimes, which is end-of-the-calendar-year inventory stick handling among Asian OEMs in the Network segment. And also seasonal weakness that others have reported in the broad-based RF microwave segment as well.

We're told by a number one distributor in that space, we're the number one line, that our POS actually held up better than their corporate average. Which was encouraging, because it's all relative, right? But nonetheless, the order patterns have picked up and are fully supporting the outlook that we communicated in the guidance. So I think I would consider second quarter a very nice progression, and then third and fourth, it's shaping up to be very solid quarters.

Great, thank you.

You're welcome.

Our next question comes from the line of Mark Lipacis with Jefferies.

Thanks for taking my question. First one on BinOptics. Can you give us a sense of how high is the intellectual property or patent barrier you have on the Etch Facet laser technology? Is this something that somebody else could come in and duplicate? Or do you think the moat is high here? And on the same topic of BinOptics, could you help us understand, what is the opportunity for bundling the lasers with the amps or the CDRs in order to get more -- to try to get leverage on the opportunity?

Yes, so I should point out, Alex Lafarge, CEO of BinOptics, who is staying on, hopefully, in perpetuity -- I think Alex would say that he is -- actually has a background in IP management at IBM, so he's extremely adept. He built a very professional minefield of 35 patents, and more importantly, a whole bunch of intellectual property in the form of trade secrets. So the moat, as you described it, is extremely deep and extremely wide.

Not that others couldn't attempt to do it, but it took BinOptics, I think, 14 years to get to the point where they are. Others might be able to do it in a fraction of the time if they're better resourced. But even then, you're talking about years away. So we feel it's a very unique position, and for the foreseeable future, they've got an unequivocal lead.

And I should also point out, they ran lean as a privately held company, venture capital-funded. We are increasing the commitment to R&D, to be able to distance their IP position, be able to drive the cost structure, to be able to support the economics, as they move into data centers. I can't remember if the last time we spoke, I had gotten a comment, but we had a major, mega-Chinese OEM that the VP of Global Procurement mentioned. Unit demand in data centers, they expect will be 100 times -- two orders of magnitude bigger than current demand in access.

So I wouldn't pretend that the economics remain the same. We want to make sure we get out in front with a lot of aggressive innovation in the form of cost reduction, to be able to support that, as well as to be able to support a very nice gross margin model on our business in perpetuity.

In terms of your question about the bundling, I made the comment in the prepared remarks about -- literally overnight. What happened was, after we announced the definitive agreement, while we were sleeping here, and while in the middle of business over in China, we had all of the major OEMs and ODMs calling, looking for executive meetings to open the dialogue, and them proposing bundling. That's bundling, indeed, the CDRs and laser drivers and TIAs in that application.

But in the case of the system OEMs, they're talking about broader agreements, where negotiating greater share in things like wireless backhaul -- for that matter, GaN replacement feral D mods and 4G LTE base stations. And that's the reason why I said a catalyst for our networks business overall. I mean, BinOptics is shaping up to be a gold mine.

That's very helpful, thanks. And a follow-up, if I may. On the 100-gigabyte optical, components were up 35% sequentially. Is it fair to assume that, that has nothing to do with BinOptics? And can you give us a sense of the size of that business? Thank you.

Yes, I've got to be careful. Again, our policy is not to break down our business quantitatively by product line. But it is absolutely getting to be material. It may be our largest in our networks business, relative to what was previously cable and wireless infrastructure, so it's not immaterial. And as you can imagine, 35% growth is substantial.

That had absolutely zero impact from BinOptics, and that only came in, in the mid-quarter, or towards the end of the quarter, and certainly no ability to negotiate bundles, whatsoever. So the way I would put it is, the business we had in 100-gigabyte optical that even preceded Mindspeed, is flying off to the races.

Mindspeed accelerated that. They're succeeding; they met all of their growth targets coming into the Company from a year ago. And now the BinOptics just puts it into overdrive. So everything standalone is pulling its own weight; everything together looks even better.

Great, thank you very much.

You're welcome.

Our next question comes from the line of Steve Smigie with Raymond James.

Great, thanks a lot. I was hoping you guys could comment a little bit more on the Mindspeed business standalone. I think data center has been pretty strong. I was hoping you could provide more detail if CDR is keeping up with that general trend?

Sure. So the high-performance analog, the HPA team, that business unit which was previously known as Mindspeed -- the artist previously known as Mindspeed -- delivered on their plan coming in. I think it was 13% growth year on year.

The difference was, the mix was more favorable. They had come in with a plan for some relatively consumer-ish type products. That demand did not materialize, but was instead replaced with upside on the enterprise side.

They've gotten a lot more traction quicker than what they anticipated across both data centers, as well as the broadcast video. They've got a great product position, a lead position in that segment. So it's looking all good. Did that answer the question?

Yes. And a question on legacy components business. Is that primarily just used as a cash cow at this point, or what's the thought on that business?

Yes, our base business -- we have got a great slide in our investor deck I'd refer you to, which is a stacked bar chart that shows the break-out of our business over the past two years -- revenue by gross margin. We went from about 50% to about a third of our business now, as the sub-50% business grew slightly. That's really the old legacy stuff. It's a great cash cow business. It's something we don't want to see deteriorate. In fact, taking incremental share is a great drop-through. So that is absolutely a cash cow.

At the same time, a lot of our investments over the recent years and going forward are going to be refreshing our catalog. They are refreshing our catalog. And we're building a new business built on top of that at the 70% gross margin level. That tends to take long time for instance. So it's really a time-dimensional answer, is the easiest way to put it.

If I could just slip one more quick one in. As you bring GaN on silicon into the base station, can you talk about your dollar content opportunity there?

Yes, well it's difficult. Depends upon the architecture of the PA on the system. So the best way I'd try to answer the question in spirit is, it's an $800 million market. The two primary players are NXP and Freescale. Infinion is a distant third. I think it's probably 40 -- 45, 45, 10, in terms of market share.

And you can argue about whether the macrocell base station is growing or declining in the future -- depends upon what crystal ball you want to look at. But 100% of that is actually a target for displacement with the GaN on silicon. So for us it's a big, fat juicy target.

Okay, thank you.

You're welcome.

Our next question comes from the line of Tore Svanberg with Stifel.

Yes, thank you. The first question is on gross margin. Gross margin was up about 700 basis points year over year. It looks like it's going to take a little bit of a breather here because of the mix, maybe the Automotive contribution taking it down a little bit. But as we look beyond the March quarter, should we continue to expect pretty steady gross margin expansion every quarter?

Yes, absolutely. What you're going to see is a lot of growth kicking in, in the second half of the year, realizing our growth plan for the year. And these are relatively soft quarters, the first and second quarter. That growth that will be kicking in is very heavily skewed towards the high-margin part of the portfolio, the new products. So our usual mix story is there.

The other thing that I'll be interested to see how it materializes is, as we increase capacity on the BinOptics portfolio, there's a lot of juice in there for gross margin improvement. Because if you double your capacity off the existing, in terms of improving yields, it's a direct cards reduction or margin improvement.

So I think we've got a pretty healthy road map, especially depending on what the trajectory you assume to be for the BinOptics business. That could be a real lift, in terms of the gross margin, through the second half of the year and into 2016.

Very good. And John, I look at the optical revenue -- its obviously becoming a bigger percentage of your revenue -- and I suspect the momentum there last year was primarily 100-gigabyte in long haul. But as we look at calendar 2015, should we start to think about some other applications and markets contributing to the momentum there? I'm thinking maybe 100-gigabyte penetrating the metro, obviously coherent continuing its momentum. Anything we can point there to model the continuous momentum in optical?

I would say, first of all, data center is going to be a key driver, in terms of growth. If you look at the BinOptics revenue, a lot of the growth last year and a lot of growth this year will actually be fiber backhaul from mobile infrastructure, all layering on top of the business in the day, and the HPA guys have in-access, so fiber-to-the-home. That was a growth driver, but then it starts transitioning over to data center, and that's where the upside really gets interesting. Not that the growth isn't nice even before that.

But the other number that I'd share is, our optical business, of all forms, all frequencies, all segments, is approaching 30% of revenues. I think last quarter it was 28%, by calculation. So it's a material part of our business now, and you can see you'll be able to see that growth really materialize. The growth on 30% is going to be a real kicker.

Very good. Just one last question. I know you haven't talked too much about your cable business the last few years, for obvious reasons, but there is an upgrade cycle coming here pretty soon, which is DOCSYS 3.1. I'm just wondering if we should start to think about that infrastructure build-up being a good growth opportunity for the cable business some time soon?

In terms of top line, it won't appear as a growth business, because it's offsetting decline in set-top box. Consistent with the de-emphasis on low-margin parts of our business, we did not follow the DOCSYS 3.1 set-top box requirements. That tends to be one of the drags on our gross margin, historically. And all of the investment emphasis went over to infrastructure -- so DOCSYS 3.1, power amps, and so on -- and line amps.

So yes, there is growth in that part, but it's offset at the top level. Our plan for cable is actually relatively flat. The material benefit will be a mix shift from low-margin to high-margin. So it will be still a driver in EPS and operating margins.

Very helpful. Thank you, John.

You're welcome.

Our next question comes from the line of Mark Delaney with Goldman Sachs.

Yes, good afternoon, and thanks very much for taking the questions. To start, I have two clarification questions around BinOptics. First, when you talk about the production of BinOptics doubling in roughly six months, maybe you could just help us beyond that -- how long it takes from production until you can start to generate revenue off of that increased capacity?

It's instant. We can ship every product that we produce, at least through this fiscal year. So when we say doubling in six months, that is through yield improvements and debottlenecking the factory in Ithaca, New York, and some minor capital investment. So that will, starting in six months, be that step function. It's difficult within the first three months.

And then the second thing that is operating in parallel is, we're replicating the production line in Lowell, in our factory in Massachusetts. And that opens up a much broader capability for capacity. We say doubling that again -- reality is, we could probably increase it ten-fold and not run into any equipment issues.

Okay, that's helpful. And then for a second follow-up around BinOptics, you mentioned about 30% of sales now are coming from optical. Is that including the contribution from lasers, or is that just the analog part?

Yes, that would be including lasers, including the Mindspeed contribution, and the stuff that pre-existed Mindspeed, the 100-gigabyte long haul rural-to-metro growth, which is now a very substantial piece of that as well.

Okay, that's helpful. And then, I just wanted to ask around the OpEx profile of the Company and capital requirements. I know you guys touched on this a little bit, but as capacity doubles or quadruples at BinOptics, should we be thinking about some sort of step function increase in either OpEx? And are there any kinks we need to have in mind as we go forward?

Or around the capital investment line, is there any large or discrete capital investments you might need to make? For example, if you wanted to ramp up capacity at the Lowell fab?

Not that would be noticeable, because the additional depreciation cost for the new equipment, when it comes on line, goes through cost of sales. So that is part of the cost of the incremental revenue. That's all -- you'll see increasing costs, but you'll also see our margin in the range it is today. It's not going to be a dilution effect of the increased expense.

The other side of the coin is that we have some compatible equipment that is in place in Lowell already. So we can further utilize the equipment that we have. That generally will do the opposite. In fact, while it's not material overall to our overall P&L, it will improve the utilization we have of our fixed cost inside the fab.

That's helpful. And just a last question around the tax rate. I know it's coming down this fiscal year. Is that already baking into the full benefits from BinOptics? Or can we think about other ways for the tax rate to come down maybe even beyond FY15 into FY16?

It's possible to go down, and that is dependent upon the shift of the revenue. So more of the pure revenue that can be sourced externally, actually outside the USA, can fall into our international tax scheme that is focused on generating revenues in low tax or no tax environments.

I think there is room, but this drop this year from 23% to 18% is the result of our execution utilization of the Mindspeed NOLs to take what was formerly domestic subsidiary or domestic revenue and transfer it to our international tax organization. And that's stepping down the overall tax rate, because it's at a lower rate.

Understood. Thank you very much.

You're welcome.

Thank you. With no further questions in the queue, I would like to turn the call over to John Croteau for any closing remarks.

Very good. Thank you, Operator. Before closing out today's call, please note that Bob and I will be on the road for the next three days in a number of the major financial centers, in support of the primary offering that we announced today. Kindly direct any meeting and schedule inquiries to your Goldman Sachs sales representatives. Additionally, on February 10, Bob and I will be attending the Stifel conference in San Francisco.

Thank you all for joining today's call, and I look forward to reporting our second-quarter fiscal results and progress in the coming months. Operator, you may now disconnect the call.

Thank you. Ladies and gentlemen, this does conclude the program, and you may now disconnect. Have a good day, everyone.