MACOM Technology Solutions Holdings Inc (MTSI) 2015 Q2 法說會逐字稿

Good afternoon, and welcome to M/A-COM Technology Solutions fiscal second quarter 2015 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Tuesday, April 28, 2015. 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' second-quarter 2015 earnings conference call. I am 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. If you've not yet received a copy of the press release, you can obtain a copy on M/A-COM'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, M/A-COM 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 M/A-COM's filings with the Securities and Exchange Commission, including its current report on Form 8-K filed today, and quarterly report on Form 10-Q filed on February 2, 2015. Any projections as to the Company's future performance represent Management's estimates as of today, April 28, 2015, and M/A-COM 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 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 30 days in the Investor Relations section of M/A-COM's website.

And now, I'd like to turn the call over to M/A-Com's President and CEO, John Croteau. 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 second-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, and an update on some of our key growth drivers, followed by guidance for the fiscal third quarter of 2015.

Straight to the results. In our first full quarter including BinOptics, revenue for the second quarter was $124.9 million, and came in above the top end of our guidance. Gross margin was 53.1%, coming in just above the midpoint of our guidance, due to strength in our high-margin optical business, partly offset by strong demand in our lower-margin automotive business.

Net income came in at $21.3 million, or $0.41 earnings per diluted share, based on our new share count after the February offering. Looking at our end markets, networks was up strong quarter on quarter, on the back of our optical business, as we begin to see 100G metro deployments ramp. Automotive was similarly up strong quarter on quarter, due to the increasing global demand at Ford.

As expected, multi market demand snapped back from the broad-based seasonal softness we saw in Q1, returning close to our fiscal fourth quarter run rate. Similarly, A&D performed as expected, with demand slightly down quarter on quarter, within the range of usual lumpiness we see in radar program timings. We anticipate that this will improve as early as our fiscal fourth quarter, as active electronically scanned array radar programs begin to ramp.

In summary, we are very pleased with another solid quarter of execution by the team. Let me now turn it over to Bob to review our fiscal second 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 $124.9 million, representing a sequential increase of 8.7%, compared to reported revenues of $114.9 million in the prior quarter, and an increase of 16.2%, compared to the $107.5 million in the fiscal second quarter of 2014. The 2014 fiscal quarter included revenues from the CPE business sold in May of 2014 of $9.7 million. Adjusting for the CPE business, revenue grew 27.8% over the prior year's fiscal quarter. Networks was $67.1 million, aerospace and defense was $19.5 million, automotive was $22.5 million, and multi-market was $15.8 million.

Gross profit in the fiscal second quarter was $66.3 million, or 53.1% of revenue, compared to $61.7 million or 53.7% of revenues in the prior quarter, and $53 million or 49.3% in the fiscal second quarter of 2014. Gross margin benefited from selling higher gross margin products, but down 50 basis points, due to a different product mix than the fiscal first quarter, including higher automotive revenue.

Operating expenses for the second quarter. Total operating expenses were $36 million compared to $34.6 million in the prior quarter, and $31.6 million in the prior year's quarter. The overall increase in operating expense was the full quarter's inclusion of BinOptics expenses.

Research and development expense for the second fiscal quarter was $18.7 million. This compared to R&D expense of $18.5 million in the prior quarter, and $17 million in the fiscal second quarter of 2014. R&D as a percentage of revenue represented 15% in the fiscal second quarter, compared to 16.1% in the previous quarter, and 15.8% in the prior year's quarter. The expense increase was due to the inclusion of BinOptics expenses, offset by lower variable compensation expense.

Selling, general and administrative expenses for the fiscal second quarter were $17.3 million. This compared to SG&A expense of $16.1 million in the prior quarter, and $14.6 million in the prior year's quarter. SG&A as a percentage of revenue represented 13.9% in the fiscal second quarter, compared to 14.1% in the previous quarter, and 13.6% in the prior year's quarter. The expense increase was due to the inclusion of BinOptics expenses, and higher commission expenses, offset by lower variable compensation expense.

Income from operations was $30.3 million, or 24.3% of revenue. This compares to $27.1 million or 23.6% of revenues in the prior quarter, and $21.4 million or 19.9% of revenues in the prior year's quarter. Solid gross margins and leveraging of our global infrastructure drove the continued improvement in operating income and margin in the fiscal second quarter further towards our goal of 30% operating margin.

EBITDA, or earnings before interest, taxes, depreciation and amortization was $34.1 million, up from $30.6 million in the prior fiscal quarter, and $24.8 million in the prior year's fiscal second quarter. This represents growth of 11.4% sequentially, and 37.4% year-over-year. Interest expense was $4.3 million in the fiscal second quarter, even with $4.3 million in the fiscal first quarter. $100 million of proceeds of the primary shares sold in February were used to pay down our revolving credit agreement.

Turning to income taxes. Our effective income tax rate for the fiscal second quarter was 18%, the same as the prior fiscal quarter, and 23.6% in the year-ago quarter. Our cash taxes paid in the fiscal second quarter were just 3%.

Our fiscal quarter net income was $21.3 million or $0.41 per diluted share, near the top of our range of our previous guidance, even after the effect of the additional shares outstanding from the $4.5 million primary offering we completed in February, compared to the fiscal first quarter net income of $18.7 million or $0.38 per diluted share, and net income of $15.2 million or $0.32 per diluted share in the prior year's quarter. This represented EPS growth of 7.9% sequentially and 28.1% year-over-year.

The share count used to compute EPS was 52.5 million shares in the fiscal second quarter, 49.2 million shares in the fiscal first quarter, and 48.2 million shares in the fiscal second quarter of 2014. Fiscal second quarter cash from operations was $13.9 million compared to $2.1 million in the fiscal first quarter, and used cash of $6.6 million in the fiscal second quarter of 2014. Working capital increased with the acquisition of BinOptics.

Turning to the balance sheet. At fiscal quarter end, our cash and cash equivalents were approximately $74 million. Outstanding long-term debt was $341 million, after the paydown of $100 million of the revolving credit agreement. We have available $130 million under the existing revolving credit agreement for future use.

Accounts receivable of $89.4 million compares to $79.5 million at the end of the prior quarter. Days sales outstanding was 65 days compared to 63 days at the end of the prior fiscal quarter. Inventory was $84.1 million, compared to $89.2 million in the prior quarter. Inventory turns were 2.8 times, compared to 2.4 times in the prior fiscal quarter.

Capital expenditures in the fiscal second quarter was $11.1 million, or 8.9% of revenue, compared to 2.6% of revenues in the fiscal first quarter. The majority of the CapEx was for the planned expansion of laser capacity in the Ithaca and Lowell fabs. Depreciation expense on property and equipment for the fiscal second quarter was approximately $3.8 million, as compared to $3.5 million in the fiscal first quarter.

Now, I'll turn it back over to John.

Thanks, Bob. I'd like to begin by providing an update on our recent acquisition of BinOptics. As many of you know, on December 15, 2014, we successfully completed the acquisition of BinOptics Corporation, and kicked off our 100-day integration exercise.

It's now clear that BinOptics provides strategic upside potential, beyond that originally anticipated. The deal has emerged as a catalyst for our networks business overall, raising M/A-COM to strategic vendor status in some of the largest telecommunications OEMs worldwide. For example, in the last quarter, this transaction enabled us to negotiate strategic supply agreements for much sought-after BinOptics lasers, and other products spanning the breadth of our networks portfolio.

We expect our new strategic supplier status to help drive our optical and photonic products current position, as well as share wallet at major customers worldwide. We are right on track to meet our two-step goal of doubling unit capacity by the end of June, while quadrupling unit capacity by the beginning of calendar year 2016.

Step one, in Ithaca, we have successfully identified and addressed key yield and throughput bottlenecks, which we believe will enable doubling of capacity by the end of June. One byproduct of doubling capacity would be material COGS reductions that, in turn, should allow us to expand gross margins.

On the second step of capacity expansion, I'm proud to report that we've already produced high-yielding, Indium phosphide laser wafers at our four-inch facility in Lowell, which builds confidence in our ability to achieve that capacity expansion by the beginning of 2016. This warrants some clarification. Doubling unit capacity does not linearly equate to doubling revenue, as some have inferred. Part of the incremental demand to be serviced is naturally at lower ASPs.

That said, capacity expansion will result in material COGS reductions that should allow us to aggressively expand our addressable market. We are now confident that our COGS reductions will outpace ASP declines, allowing us to expand markets, grow share, and still meet our target gross margin model of 60% for this new high-growth business for M/A-COM.

In summary, on BinOptics, I am extremely proud of our team and their ability to execute yet another strategic acquisition, with rapid integration. With the main integration actions behind us, you'll see BinOptics fully rolled up into M/A-COM's financial projections and performance, as we report going forward.

All right. Moving on. As we mentioned last quarter, we've been working to realize the full potential of our GaN strategy. We are a year into transferring process modules with two high volume manufacturing partners, and are currently running qualification wafers in parallel, in two target production lines.

During the remainder of 2015, we expect to qualify the process and the initial products, with the goal of volume production in 2016. Our manufacturing partners were chosen based upon their manufacturing scale and cost structure, and ability to service the most challenging customers and applications, notably 4G LTE base stations. We believe these partnerships will deliver manufacturing scale and cost structure that to date was previously unavailable to the compound semiconductor industry.

This, in turn, will unlock a whole new set of RF energy applications, with the ability to drive hundreds of millions of units of demand, and the potential for transformational revenue impact in the years to come. Reducing this vision to practice, I'm proud to say that M/A-COM will be showcasing its Gen4 GaN technology and initial products at the upcoming IMS tradeshow in Phoenix, Arizona, May 19 through 21. Delivering performance that matches expensive GaN on silicon carbide, at a cost structure below that of incumbent LDMOS technology, M/A-COM's Gen4 GaN is positioned to realize the potential of our technology and supply chain partnerships.

Now, moving over to the optical space. With the recent news of deployment such as Verizon's selection of Cisco and Ciena to deploy next-generation 100G Metro networks, we believe that the Metro market will drive the next phase of 100 gig optical growth.

We have seen an inflection point in our demand in the last quarter for optical components across the board, feeding into these deployments. We have established a preeminent position in design, servicing the 100 G Metro market, due to our breadth of semiconductor technology, coupled with our expertise in packaging optoelectronic and photonic products, and high-performance packages. Moving forward, we see this as a key growth driver for M/A-COM for years to come.

Stepping back, and looking at our full portfolio in balance, demand in our broad-based business across many of our end markets recovered from seasonal softness in Q1, close to the previous quarter run rates. Looking forward, we share the reports of currency effects beginning to impact semiconductor industry results.

First off, we transact the majority of our business in US dollars. That said, a stronger dollar does make our products more expensive to certain customers, and may delay orders or impair short-term business entirely. Currency effects are very hard to quantify, so we remain cautious.

Our strategic investments have resulted in a balanced and diversified portfolio that should enable us to outgrow our peers by a factor of 2 to 3X. We remain bullish with the future of our optical deployments in GaN more than compensating for the slower-growing parts of our portfolio. As I have mentioned in the past, disruption resulting from consolidation in our corner of the industry continues to benefit M/A-COM, whether it be customer design wins or access to talent that was previously unavailable.

We're seizing the opportunity to diversify our leadership team, and deepen our bench for continued execution and competitive share gains. A great example of this, effective this quarter, Thomas Wong is firmly in the saddle as our Senior VP of Worldwide Sales. His selling strategy and structure, new to M/A-COM, is in my experience, best practice in the industry, bar none. Thomas' model covers multiple selling methodologies, from securing orders and share of wallet for catalog products, through designing in complex RF and microwave and high-speed networking solutions.

With the addition of BinOptics and our breakout networks, the timing of Thomas joining M/A-COM could not have been better. He's already proven instrumental in realizing many of our recent customer wins.

On a similar note, I'm proud to say we have successfully retained all key players from the BinOptics team. Most notably, Alex Behfar, Founder and CEO, whose vision spans entirely new applications for photonic technology. Everything from mass storage, to hyperscale data centers, and basic connectivity, all new fields of long-term secular growth that will benefit from etched facet technology.

I'd like to close today's scripted remarks by thanking the team for yet another quarter of solid execution. It's clear that we have the right strategy, addressing the right secular growth drivers, with the correct technology, intellectual property, and leadership team to assure long-term success for M/A-COM and our shareholders.

Moving over to the guidance. For the fiscal third quarter, M/A-COM expects another quarter of solid execution, with revenue expected to be in the range of $126 million to $130 million, non-GAAP gross margin is expected to be between 51% and 54%, and non-GAAP earnings per diluted share between $0.38 and $0.41, based on 55 million shares outstanding.

Operator, you may now open the call to questions.

(Operator Instructions)

Blayne Curtis, Barclays.

Maybe to start off, if you could just talk about into June by segment, if there's any variances between the different segments, that would be helpful.

Blayne, could you repeat that? We didn't catch it all, the first part of it.

I was just asking about, in your outlook for June, if you could provide any color in terms of directional by segment, that would be helpful.

Yes. I would say the strongest growth that we're anticipating is actually on the network side, continued growth in the optical business. Modest growth in the multi-market and A&D business, and effectively flat in automotive.

Perfect. Thanks. John, I just wanted to follow-up with your question. You are obviously adding capacity for BinOptics. I just was curious, your comments about the revenue wouldn't necessarily equate, timing wise, to when you add the capacity, but when do you think you can actually increase the revenue in that business? Is it a next year story, or is it still back half of this year, you could see some uptick?

Actually, with the fourth fiscal quarter, which is the third calendar quarter, actually, we'll see a slight lift this quarter in that business. But that's really where we see the full impact of the capacity expansion. Let me clarify my comments about the doubling in revenue, versus doubling in unit capacity.

There were a few reports published that inferred that our revenue in that business would double, and it's not quite a doubling affect, and the rationale is quite logical. When, any time you are in a capacity constraint, you always service the higher-quality, the higher ASP revenue. The logical extension of that is when you expand your capacity, than the incremental demand you service is going to be at equivalent or lower ASPs. So it's not a one-for-one linear doubling of revenue. So we just wanted to make sure people are modeling the right assumptions into the plan.

Great. Finally, Bob, if you could talk about the gross margin, the midpoint of that guidance is about 100 basis points down. Can you talk about what the moving factors are within that? Thanks.

Blayne, I think that's pretty consistent to where we've been in the last three quarters, with respect to the margin, gross margin range, 51% to 54%. So again, it's a guidance number. I think, overall, there are, just on the edges, there's some -- at the last thing that could influence things. Again, we are very comfortable that this is a stepping stone to the 60% overall target.

Blayne, actually let me add a comment. The previous two quarters, we were careful to emphasize that we had a perfect storm in terms of very favorable mix, so the slight decrease this time is really due to the fact that we get some strength in automotive, which was at the lower end of our margin business. And as Bob said, our guidance is the same as previous quarters, and depending on how the mix comes, we could end up at the upper end versus middle end and theoretically at the lower end.

Okay. Thanks.

Vivek Arya, BofA Merrill Lynch.

One more on the June guidance. When you look at the growth that you are targeting, are you already including some FX -- I think John, you mentioned some headwinds some headwinds from FX. Does it already include that? And if yes, how much is that? And are you seeing any additional headwinds from the slowdown in base station deployments, for example, or consolidation between networking OEMs? I'm just trying to get a sense for if there are any headwinds that you see in the June quarter guidance, that you've already baked in.

I would say there is some stuff, like we have limited exposure to base stations. We did have some high-power switch business that was nice business, but not really material compared to the exposure that other folks have. So, that's softening a little bit. Frankly, it's within the noise of the overall puts and takes for our business. So, I would say less so on that.

It's hard to describe the other, on the multi-market, in broad-based catalog business. It isn't things that we see, it's the things that we don't see that concern us. With the currency effects, we transact business primarily in dollars, so there isn't a direct impact. Our concern is the behavior of customers may change, in terms of delaying orders, or having some business impaired entirely. So, I would just describe it more that we are cautious in our guidance, rather than guiding down, because of some known problem.

Got it. For my follow-up, Bob, if you could give us as a sense of how we should think about OpEx, now that you have the full quarter of BinOptics OpEx already in the numbers. As we look out the next several quarters, do you anticipate any big need for any specific R&D, or other programs?

Vivek, we are forecasting expense increases. $1.5 million to $2 million over the next two quarters. There are some specific areas where we are investing, and we'll continue to see the OpEx grow here, along with the increasing margins and revenues.

Got it. One last one, if I may. We know that NXP is trying to sell their RF amplifier business. I'm wondering if that, depending on who they sell it to, does it have any implication on your GaN strategy over the next few years at all?

No. I wouldn't consider -- NXP, we always consider them to be not a natural competitor. LDMOS technology is pretty clearly the incumbent for 4G LTE, 3G base stations, but the whole next generation of GaN is really a different set of players. So, I guess, it could go to someone with a GaN portfolio, that could end up implicitly being a threat.

We are actually quite confident that our GaN on silicon position is very powerful, regardless of what other flavor of GaN is brought against us. I would say, if anything, that disruption that would occur could only play in our favor. I don't see it really playing against us in any material way.

Thank you.

Steve Smigie, Raymond James.

I just wanted to follow-up on the BinOptics a little bit, in terms of the doubling and I think it was like quadrupling capacity there. In terms of new parts, is it roughly a trade-off, in terms of size, so if you bring in one chip that's for PON or something, versus a chip for 100G optical, is it the same size and fills up the wafers that way, so we should think about it as a one-for-one exchange, or is it much more complex than that?

I'd say there's a lot of levers, but that is one of them. But, I think on an apples to apples basis, it's generally a doubling in capacity. But, of course, a large part of the market, the existing TAM for those lasers is in PON, is in access, so logically speaking, a lot of the incremental demand that we would be servicing is, indeed, in access, and that is, hence, a more ASP-constrained environment. That's exactly consistent with my comments.

Okay. Can you talk a little bit about what kind of mix you might be thinking over the course of the next 18 months roughly, between the lasers versus PONs - like the 100G lasers versus PON?

Well, it's an interesting equation because time, dimensionally, the access market is where the action is today. Very healthy business in fiber backhaul, and mobile infrastructure. The future is, by orders of magnitude, greater in data centers. So, time, dimensionally, 100G is the fastest growing, but it's growing from a relatively smaller number.

So in the short-term, when we talk about doubling or quadrupling in capacity, implicitly, it applies to a greater position of access. It's really a leading path toward getting a cost structure that's very attractive for data centers, because they are different products, but the cost structure of the lasers is based upon the same factory utilization yields, overhead structure, and so on.

Okay. Great. Just a quick question about your GaN solutions. I think you said at an upcoming conference, you were going to be talking actually about your GaN on silicon carbide solutions, I think it's your fourth generation.

Can you talk a little bit about your GaN strategy going forward? Obviously you have certain markets where you play GaN on silicon carbide, and then certain markets you will have GaN on silicon. Can you talk a little bit about how those two pieces should develop and grow, over the next 18 months?

Yes. Actually, one correction. Our Gen4 for GaN is actually GaN on silicon.

Okay.

It's a real breakthrough because we have now demonstrated in volume production, an ability for the performance, in terms of efficiency and power gain, which are the two critical specifications for GaN performance, to exactly match the performance of GaN on silicon carbide. But, the cost structure, as you know, for GaN on silicon, Is much closer to LDMOS.

In fact, we have a 4X benefit of power density versus LDMOS. The cost structure of GaN on silicon is actually less than LDMOS, when you normalize for die cost. So, it's really a breakthrough, in terms of next generation of RF power systems, because you don't have to go to the expense of GaN on carbide, GaN on silicon carbide, to get the performance. So for commercial applications, normally 4G LTE base stations, this is the last step in terms of product and technology delivery to actually make it viable to basically take out LDMOS.

Okay. Great. Then, if I could just ask a little bit about aerospace and defense, again, over the next year. You've obviously got a bunch of radar applications ramping, but at the same time, you've got some defense wins ramping. Can you talk a little bit about how you see those pieces of that business ramping over the next year?

We get some program wins that are in the airborne defense space, for AESA radar. Those will begin material revenue contribution, as early as our fourth fiscal quarter. Even more wonderfully, we've got a lot of traction, and what we had talked about last year at our Analyst Day in MPAR, which was kind of an advanced development with MIT Lincoln Labs, and the next quarter or so, I expect to be able to talk much more publicly about some commercial breakthroughs where that's going to be brought into mainstream defense, as well as civil radar applications.

I can tell you, the people -- both from a defense industry standpoint, as well as civil, talking about this, is disruptive in terms of cost structure of radar systems. As that comes to full -- as we can become fully transparent in terms of who we are working with and how, it's going to be pretty compelling. That will ramp over the course of 2016, especially 2017. There are some programs that have already been bid, and will be awarded in the summer or fall timeframe. Believe it or not, when you start adding up that capability, it starts rivaling our optical and GaN potential, in terms of end market growth potential.

That's great. Thank you very much. Harsh Kumar, Stephens.

Thanks for letting me ask a question. I had all a couple of quick questions. We've heard from a couple of companies that China is actually seeing a lot of strength in wireline. I'm wondering, since you play in that area, and you play in the territory, if you could maybe clarify or just have some commentary on this statement?

When you say wireline, you mean?

Optical.

Optical, yes. Absolutely. There's some government programs, we've heard both two and three-year programs from different customers, the guys who know, and I believe it was 20% growth in the PON market, and they expect that to remain stable for the next two to three years. That, in fact, was what triggered the shortage of laser supply that I had been referring to, with BinOptics acquisition, and what we have in the scripted remarks.

Thanks for that clarification. Then, John, I couldn't help but notice in the R&D numbers that you put up, despite the fact that BinOptics was supposed to be research intensive, your R&D actually didn't go up very much at all. Was there any specific reason, John or Bob? Or, was it just the way the numbers fell down this quarter?

That's an interesting question. Believe it or not, if we could spend more in the laser and photonics solutions, we would. It's just a limited talent pool that one can draw upon. So, we do our best to spend more, but it's on track.

Okay. My last question was, you're starting to generate -- hopefully, quarters out -- you will start to generate some cash. What would be the primary use of cash at this point? Would it just be to build up the balance sheet, or would it be to look at the debt, and start to pay that off?

That's a great question, and I appreciate the question, actually. We do have some expenses related to transactions, and some of the restructurings that have consumed cash. We have invested in the working capital of the business, to be in a position to be very responsive to our customers as opportunities present themselves. The long-term debt is fixed at a rate -- a small rate of principal repayment. So, short-term, here, we would look to add to the balance sheet and to continue to invest, from our strategic plan perspective in potential acquisitions. We do, though, reiterate our conservative and shareholder-friendly approach to delivering neutral to accretive acquisitions in the first year of a transaction.

Thanks, guys. And if I can ask this one last one. On the GaN on silicon manufacturing agreements that you're working on, and you've got wafer quals going on there, what would trigger you to announce those? Would it be a successful set of wafers? Or, what you wait for revenues to come in? When can we expect these announcements as they get done?

That's a great question. In fact, I think I was alluding to possibly even announcing sooner rather than later. I think the simple answer is, there's been some competitive developments with businesses that have come on the market, where we have decided to hold our cards closer to our vest for another quarter.

There's really no need -- until we can sample broad-based, and fulfill demand from those production foundries, with the material that we are confident will be qualified, and ultimately production material, there's really no urgent need to announce those. So, again, we had a lot of turbulence in our competitive landscape. We figured it's better safe, keeping things confidential a bit longer.

That's great. Thanks.

Tore Svanberg, Stifel.

Nice quarter. A few questions. First of all, coming back to BinOptics, and not a question on revenue, but on gross margin. So, it sounds like you feel a little bit better about contribution to gross margin from the additional capacity.

I was just wondering, as we get to the June quarter, and into the second half of the calendar year, what types of gross margin expansion should we expect? Are we talking about 50 basis points per quarter, very gradual improvements? Or, could you get potentially into the 100 to 200 basis points per quarter?

There are scenarios where it could be very rapid, as we bring on that capacity, the utilization goes way up, and it would be very attractive. Now, the other flip side of the equation is, we now have capacity to sell, to find homes for, and getting more, we would be addressing more cost sensitive parts of the market, not the least of which is the PON, fiber to the home stuff.

So, there's moving ASPs, there's moving COGS, and until we have that capacity landed with agreements at the higher volumes, it's really hard to predict which way the gross margin is going to end up. I can tell you that things looked so attractive on the COGS reductions, that we are pretty darn confident that meeting our target of 60% when things settle down will be in the cards.

That's very helpful. On the optical business, as it relates to the Metro markets, you said you're already starting to see some revenue there. But, should we expect that business to see more meaningful ramps in the second half of the year? Or, what you expect it to be more gradual increases?

That's a very good question. I think it's going to be some pretty interesting growth. If you read all the reports about forecasts for the Metro market, it's going to be unequivocally the growth driver. To date, a lot of our 100 gig revenue has come from long-haul.

But we have a fabulous design win position in terms of clear, clear, clear market share leadership in the initial Metro deployments. In the next wave of CFP2 form factors which are really optimized for Metro applications. So we would expect that with the Metro ramp, and you are starting to see the announcements now, that would be really fueling growth, I would say, through 2016. How quickly it is in the next quarter or two, remains to be seen. Unequivocally, with Verizon set to go live in 2016, there's some real end market demand that will be fueling that growth.

Very good. On the GaN and silicon PA products that will eventually be in production, as they penetrate, let's say, a base station, would you expect your customers to maybe design it into -- maybe a product here or there, or would they right away, just given the performance and the cost advantages, would they right away design it into several platforms, do you think?

I do have some experience with this. What I would expect is, it's less to do about the technology and more to do with the supply chain. So, they would start cautious with some initial programs to test, to make sure that we can, in fact, supply their volumes with commensurate quality that they need in those applications, and then the proliferation within those customers tends to go geometrically. You go from a couple of designs to 4, 8, 16 and so on. Then, before you know it, within a couple of years, you are at full adoption.

Very good. Last question for Bob, on CapEx. It's obviously a little bit higher right now, because of the capacity additions. It's 9% of revenue. When do you think it would come back down to the 4% or 5% range? With that happened this year at all? Or is that more in 2016?

It will get back to that range this quarter.

Okay. Perfect. Very good. Thank you very much.

Mark Lipacis, Jefferies.

I had a question on the pricing strategy of the new products, and then a second one on the competitive environment. John, I think you mentioned that you'd be demoing in May again on silicon products, or showing them. And, the cost, you expected it to be below LDMOS, which for me, that's new, and I think that's interesting, because my understanding is the products have much higher efficiency than LDMOS products. So, I was wondering if you could help us understand on both that product and on the BinOptics products, how much better is the pricing than what you would expect in the marketplace? Are we caught talking 5% to 10% better, or are we talking orders of magnitude better, of the cost structure? That's the first question.

Let me separate the cost question from the price question. Two independent variables, right?

Absolutely.

On the cost side of things, the reason why we said it's a lower inherent cost structure than LDMOS, is we have demonstrated four times the power density. So to get equivalent power output, you would need an LDMOS die that is four times the size of our GaN on silicon die. In theory, our wafer cost could be four times the cost of the LDMOS wafer, and you would still be at parity.

The reality is, a GaN on silicon wafer is a fractional increase in cost structure, primarily materials cost, compared to LDMOS. So pretty much under any conditions that maturity, the structure, the cost structure will be below that of LDMOS, at maturity. Quite separate from that is the value proposition, and the pricing strategy with customers. And I would describe it this way.

Customers initially view these products through the lens of their existing experience with GaN on silicon carbide, which is a substantially higher price than LDMOS. At the same time, they understand that our ability to get it to address their mainstream programs is there. So it's really, the pricing question becomes a time dimensional one.

They understand that in the early phases of production, you are not at that mature cost structure, so it ends up not a price driven equation. The real transition comes as we bring on these scale manufacturing sources. Then, we will have the cost structure, and we can take a much more aggressive stance in the subsequent year, of proliferating across their programs and really taking out the bulk of the market. Did that answer your question?

That's very helpful, and I had a follow-up or two. And how about on the cost structure of the etched facet, versus the cleaved facet lasers that are in the market. Are we talking -- is this like measured -- is the benefit measured in the tens of percentages, or is this an order of magnitude cheaper, lower-cost product?

I would infer from the public information that we know, acquisition of one of the BinOptics competitors by another company in the industry, based upon their reported gross margins, that you can infer integer multiples difference in cost structure, based upon their reported gross margins, compared to BinOptics. I would say the improvements we are talking about in moving -- not just to the doubling of capacity in Ithaca, but into our four-inch line in Lowell is integer multiples yet again lower-cost.

So, we have a profound cost advantage that's really all rooted in the fact that the etched facet technology is a wafer scale technology. It's a classic semiconductor wafer manufacturing model that to us, in M/A-COM, we've been doing these compound semiconductor fairly sophisticated devices for decades. So, it's right in our wheelhouse.

It's really sweet, and it's not just for the access market that's cost sensitive, but the implication about when you get into data centers, with orders of magnitude higher demand rates, the ability to scale manufacturing, simply from a capacity standpoint is a huge deal, nevermind from a cost standpoint. There's a lot of juice there, on both the gross margin side and the market expansion.

Thank you. That just leads me to my final question on the competitive environment. Can you discuss where -- to the extent that you have a moat or a wall around the etched facet technology on BinOptics, or the GaN on silicon, what do think your lead is on your closest competitors there? Thank you.

We've really, given the strong patent position, and it's not just patents. I mean, Alex Behfar was an IP expert coming out of IBM Microelectronics. He put together a multi-layered, multi-dimensional IP strategy that included trade secrets, not just patents and intellectual property.

So, it's very well protected. I don't believe they see anybody, really, I think, even on the horizon with something equivalent. You always have to be healthy skepticism -- paranoia, I should say, healthy paranoia about someone coming out of the blue. But, there's nothing that I think we've seen that causes us any concern at this juncture.

How about on the GaN on silicon side?

It's interesting. There are people who are out there talking publicly about GaN on silicon, for RF applications, and it's going to be an interesting period as we begin to defend our intellectual property position. The Nitronex team, I think they invested $60 million in building the patent base, and the IP base that is shared between Infineon, now, originally International Rectifier and M/A-COM, originally Nitronex. So you can see what kind of valuation Infineon put on that for the power conversion field of use. We consider this a very high-value asset, and we are going to defend it.

Thank you very much.

Quinn Bolton, Needham & Company.

I just wanted to come back, and I apologize because I missed part of the prepared script. Just looking at the laser business, obviously, I understand that a lot of the growth today is coming from the access segments. As you look out over the next couple of years, the data center opportunity seems pretty significant. At OFC this year there were a significant number of 25 gig QSFP modules, 4 by 25 configuration. Wondering if you can comment on your design position in some of those QSFP 28 lasers, and if you are not in them today, when do you think you could intersect that market, and then I have a couple of follow-up questions. Thanks.

As I understand, the BinOptics team had established a very respectable design in position into a lot of those first-generation designs. I can say that the way they were perceived at the time is profoundly different, the way we are perceived now. You can imagine, when people are talking about orders of magnitude of incremental demand, a venture capital backed $50 million start-up was not exactly at the top of the list of priorities for strategic vendor status. That's profoundly changed, now.

So, in terms of our ability to penetrate the 100 gig, the 25 gig, the 100 gig data center opportunities, I think, especially as we bring our cost structure to bear, it bodes extremely well. That is, from a future growth standpoint, and volume standpoint five years out, the real prize. Right now, access is where the action is. It's where the volume is. It's where the share gains -- the availability for share gains are, and 20% top line growth this year with the China programs building out rural access to fiber, fiber to the home, it's quite substantial.

Great. And then just wanted to move over to the GaN on silicon. You mentioned working with two production lines to ramp the process and, hopefully start to date a position to sample next -- I think early 2016. If that's the timing, can you just, given your experience in the base station power amp business, do think you start sampling products to the base station vendors?

How long does it take them to first design in the product and then once they designed it in, to take those productions to a volume ramp? I know some other semiconductor companies can say it may take a year plus, maybe as long as two years from when they actually receive a design win in base station to when it actually ramps. Just trying to get a handle of when you think you could be in production, volume production and shipping in base stations with the GaN on silicon, given its advantages.

Let me answer the question in two parts. One is where we stand, and get to the part of your question which is the behavior of the base station market. Where we stand, we've actually been sampling customers. We are announcing our Gen4 GaN products.

Those have been sampling, we've been demonstrating capability and customers have given us the feedback. They gave us the target specs. They now give us the production spec requirements, and basically everyone who matters in that market, it's a heavily concentrated market. We have our sights set clearly on what we need to do to execute on the product side.

So, it's not a theory, it's actually being reduced to practice. The real task now is, we have to deliver those products with that same performance from the production lines that I referred to, who are capable of supplying the volume and quality that is required by the base station industry. That will be happening through the rest of this year. We actually have customers who would, ideally, like to begin production in the beginning of calendar 2016.

Now, whether we can get there and get the process qualified and get those productions ramped and the capacity in place is the real challenge. Until we've got it, we don't have it, so, we are not going to forecast it. We need to be cautious. I would describe it that sometime in 2016 is when things start turning on.

Now, to the second part of your question, the behavior of the base station guys, it really depends on which one. Some tend to have power amplifier platforms that are long-term technology roadmaps. They take as much as two years to really sync up and turn on production programs. There others that move much more rapidly, and are much more aggressive in terms of deploying new technology, and taking share. We're working with all of the above.

Okay. Great. Just wanted to -- this is for Bob, to follow up on Blayne's question on gross margin. If I look at the fact that you have revenues increasing in the June quarter, and you tend to have pretty good fall through on incremental revenue, I think you commented that the network, specifically optics, would probably be the strongest part of the business, and lastly the auto business, probably flattish in June. All of three of those factors to me sound like they're positive for gross margin. Just wondering if there's anything that offsets that in the June quarter.

Quinn, there's nothing that offsets it. It's just a mix. There is some variability to the mix that comes on. As you've seen, it can go up and down a little bit, so we're managing -- in terms of the guidance, to the range today.

Bob, mix perhaps within segments, not necessarily among segments?

Yes. It's product lines versus end markets.

Got it. Okay. Thank you for the clarification.

That does conclude our question-and-answer period. I would like to turn the conference back over to Mr. John Croteau for any closing remarks.

Thank you, operator. Before closing out today's call, please note that Bob will be attending the Cowen TMT conference in New York on May 27. We welcome the opportunity to meet with any investors in attendance.

To request a meeting with management at a future event, or be notified of the next time that we plan to be in your area, please email us at IR@MACOM.com. Thank you all for joining us on today's call, and I look forward to reporting our fiscal third-quarter results and progress in late July. Operator, you may now disconnect the call.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.