MACOM Technology Solutions Holdings Inc (MTSI) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the M/A-COM Technology Solutions' FY15 fourth-quarter financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Tuesday, November 17, 2015.

I will now turn the call 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' FY15 fourth-quarter 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. If you've not received a copy of the press release, you can obtain a copy at 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 and 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 August 12, 2015. Any forward-looking statements represent Management's views only as of today, November 17, 2015, and M/A-COM assumes no obligation to update these statements in the future.

The Company's press release and Management's statements during this conference call will include discussion 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'll 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 fourth 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 a summary of our execution during the quarter followed by guidance for the fiscal first quarter of 2016.

Straight to the results, I'm pleased to report that for our fiscal fourth quarter, after closing the divestiture of the Automotive business to Autoliv, revenue was $112.6 million, gross margin was 57.4% and net income $18.8 million, or $0.34 earnings per diluted share. Looking at our end markets, Networks grew 7% sequentially on the back of strong demand for our optical products, mainly 100G for long haul and metro networks and lasers in the access market. Multi-Market was flat quarter on quarter with POS and OEM demand for our catalog products effectively flat sequentially.

Moving over to aerospace and defense, during the quarter, we realized growth from our previously mentioned airborne defense radar program. However, this was more than offset by pushouts in legacy ground-based radar and satellite communication programs. All in all, we had another solid quarter of growth with particular strength in our break-out optical business, which more than offset unanticipated weakness in aerospace and defense.

Let me now turn it over to Bob to review our fiscal fourth-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. Also, with the sale of our Automotive business to Autoliv in August, all historical numbers I discuss today exclude the Automotive business now treated as a discontinued operations. As this is our fiscal fourth quarter and fiscal year-end, my comments will be on the quarterly results followed by the fiscal year.

Revenue was $112.6 million representing a sequential increase of 3.2% compared to reported revenues of $109.1 million in the prior quarter and an increase of 19.9% compared to $93.9 million in the fiscal fourth quarter of 2014. Revenue by end markets were Networks, $79.3 million, or 70.4%, A&D $18.7 million, 16.6%, and Multi-Market $14.6 million and 13% of total revenues. Gross profit in the fiscal fourth quarter was $64.6 million, or 57.4% of revenues, compared to $63.3 million, or 58% of revenues in the prior quarter, and $54.5 million, or 58% in the fiscal fourth quarter of 2014. The gross margin decline sequentially of 600 basis points was the result of slightly different product mix.

Operating expenses in the fiscal fourth quarter, total were $38.4 million, up 2.4% compared to $37.5 million in the prior quarter, and up 11.6% compared to $34.4 million in the prior year's quarter. Research and Development expense for the fiscal fourth quarter was $19.3 million. This compares to R&D expense of $19.3 million in the prior quarter and $18.1 million in the fiscal fourth quarter of 2014. R&D as a percentage of revenue represented 17.1% in the fiscal fourth quarter compared to 17.7% in the previous quarter and 19.3% in the prior year's quarter.

Selling and general and administrative expenses for the fiscal fourth quarter were $19.1 million. This compared to SG&A expense of $18.2 million in the prior quarter and $16.3 million in the prior year's quarter. SG&A as a percentage of revenue represented 17% in the fiscal fourth quarter compared to 16.7% in the previous quarter and 17.4% in the prior year's quarter. The increase sequentially was due to higher variable compensation.

Income from operations was $26.2 million, or 23.3% of revenue. This compares to $25.8 million, or 23.6% of revenues in the prior quarter, and $20 million, or 21.3% of revenues in the prior year's quarter. Operating margin in the fiscal fourth quarter was down 300 basis points from the fiscal third quarter due to higher variable compensation expense in the fiscal fourth quarter.

Adjusted EBITDA was $29.9 million, up from $29 million in the prior fiscal quarter, and up from $23.2 million in the year's prior quarter. Interest expense was $4 million in the fiscal fourth quarter, compared to $4.1 million in the fiscal third quarter, and down slightly from $4.1 million in the prior year's quarter.

Turning to income taxes, our effective income tax rate for the fiscal fourth quarter was 15%. The sale of the Automotive business did generate a taxable gain for federal income tax purposes and combined with our taxable earnings anticipated for FY15, reduced by our net operating losses and carry-forwards, resulted in a $21 million tax payment in our fiscal fourth quarter. Based on our current view of international versus domestic revenue, we see 15% as our normalized rate through FY16.

Our fiscal fourth quarter net income was $18.8 million and $0.34 per diluted share, compared to fiscal third quarter net income of $18.4 million and $0.33 per diluted share, and net income of $13 million and $0.27 per diluted share in the prior year's quarter. This represents EPS growth of 3% sequentially and 21.4% year-over-year. The share count used to compute EPS was 55 million shares in the fiscal fourth quarter, 55.2 million shares for the fiscal third quarter, and 48.9 million shares in the fiscal fourth quarter of 2014.

For the fiscal year ended 2015, revenue was $420.6 million, growing 24.4% over FY14 revenue of $338.1 million. Gross margin expanded 320 basis points to 57.5% from 54.3% in FY14. EPS grew to $1.28, a 40.7% from $0.91 in FY14.

We generated $111 million of adjusted EBITDA in the FY15, up from $75.7 million, or 46%. In summary, revenue grew 24.4%, gross margins expanded 320 basis points to 57.5%, closing in on our target of 60%, and we delivered 40.9% EPS growth.

On a GAAP basis, cash flow from operations for FY15 was $33.7 million. This includes the cash use of $14.6 million noted on the statement as prepaid retention, an increase in the current asset account related to the BinOptics employee retention plan funded as part of the original acquisition payment of $230 million.

Adding this acquisition-related amount and $5.6 million for associated transaction fees, adjusted cash flow from operations would be $48.3 million. The difference between net earnings of $68.1 million and the adjusted cash flow from operations of $48.3 million was the use of cash to an increase in working capital in line with our growing revenues and business.

Turning to the balance sheet, at the fiscal quarter end, our cash and short-term investments were approximately $161.9 million, outstanding long-term debt was $343.5 million, and we had $130 million in credit availability. Accounts receivable of $84 million compares to $77.1 million at the end of the prior quarter and $62.3 million at the end of the year-ago quarter.

Day sales outstanding were 67.9 days compared to 64.3 days at the end of the prior fiscal quarter and 59.8 days at the end of the year-ago quarter. Inventory was $79.9 million, compared to $82.2 million in the prior quarter, and $71.5 million in the year-ago quarter. Inventory turns were 2.4 times compared to 2.2 times in the prior fiscal quarter, and 2.9 times in the year-ago quarter.

Capital expenditures in the fiscal fourth quarter were $5.8 million, or 5.1% of revenue, compared to 18% of revenues in the fiscal third quarter, and 6.1% of revenues in the FY14 fourth quarter. Total capital expenditures for FY15 were $38.3 million, compared to $17 million for FY14. The increase was due to the purchase of our Lowell facility for approximately $8.3 million and approximately $12 million for the expansion of laser capacity in Ithaca and Lowell.

Depreciation expense on property and equipment for the fiscal fourth quarter was approximately $3.8 million, $3.3 million in the prior quarter and $3.2 million in the prior year's quarter. Depreciation expense was $14.1 million for FY15, compared to $12.6 million for FY14.

I'll now turn the call back over to John who will provide additional color on our fiscal fourth quarter and our business outlook for the FY16 first quarter.

Thanks, Bob.

This quarter we began to unveil progress that we made in realizing the potential of our third major secular growth driver, active antenna arrays. Moving forward, we believe that active antennas can deliver M/A-COM substantial short, medium, as well as long-term growth potential, consistent in magnitude with our other two secular growth drivers, optical and GaN. In addition, earlier today, we announced the tuck-in acquisition that we believe will complement and accelerate our success in 100G optical, an already proven area of growth and profitability.

First, let me address our progress with active antenna arrays. Working collaboratively with MIT Lincoln Labs, we've moved the Empire platform from successful field trials to commercial reality, including the receipt of our first production order for a full-scale civil radar implementation. We recently announced relationships and endorsements with the likes of the FAA, NOAA and DARPA, which we believe will lead to both civil and defense radar deployments through the latter part of the decade.

Further, as many of you know, we've been working with MIT Lincoln Labs for over seven years on tile-based radar systems. This approach enables rapid design and deployment of active antennas with as much as a five times cost reduction to the radar sensor arrays. That's more than 80% cost down, as estimated by MIT Lincoln Labs versus traditional radar and antenna technology. We believe this tile-based approach has the potential to drive a dislocation in the way radar systems will be designed and constructed moving forward, propelling empire technology towards mainstream adoption and deployment.

To frame the business opportunity, single program awards could be up to $100 million wins for M/A-COM. Our tile products are already part of active competing bids in such programs today. First applications beginning ground based civil and defense radar systems and will expand to airborne and seaborne radar platforms. Once awarded, these programs tend to be highly predictable, long-term and stable revenue drivers.

To put this in context, our current catalog A&D business is on the order of $80 million annually. Single program awards of tile-based radar systems can be up to $100 million and M/A-COM is positioned to compete in dozens of domestic and international defense and civil programs through the latter part of this decade. Moving forward, you'll hear us refer to this new tile-based antenna business using the acronym and trademark SPAR, which stands for scalable planar arrays.

SPAR tiles are RF sub assemblies containing antenna elements, gas and GaN semiconductors, transmit and receive modules, and analog beam forming functions, which together form the basic building block for active electronically scanned antenna or AESA radar systems. SPAR tiles enable the transition from cumbersome brick architectures to a more efficient planar approach. Leveraging M/A-COM's commercial manufacturing and antenna expertise, we anticipate that SPAR tiles will help drive cost efficiencies that will propel planar arrays to mainstream adoption and deployment.

Given this context, you can understand why we believe that active antennas will be a fundamental and profound growth driver for M/A-COM for many years to come. We've established yet another leadership position, addressing a major industry trend that plays directly to our long-term competitive strengths and core competencies.

Now let me touch briefly on our GaN status. We remain on track with our process qualification and customer adoption timeline leading to mainstream GaN adoption in 4G/LTE base stations in 2016. Last quarter, our team delivered our top target customers power amplifier designs that fully meet performance targets, that will lead to mainstream displacement of incumbent LDMOS technology. This quarter, we began sampling and qualifying material produced using our high-volume supply chain. We expect this will ultimately deliver the highest performing as well as the lowest cost solutions available.

Turning to optical, our business in long-haul and metro was up very strong sequentially as we begin to see the effect of metro deployment's ramp. Our laser business was also up strong sequentially and remains supply constrained for the foreseeable future. However, we remain cautious on growth for the next quarter due to traditional seasonality and continued supply constraints as Lowell comes online after the first of the new year.

Now, onto our acquisition, this afternoon, we announced the acquisition of FiBest, a leading supplier of 100 gig optical sub assemblies. This is a tuck-in acquisition valued at approximately $60 million and delivering $25 million trailing 12-month revenues. This move is consistent with our philosophy of pouring it on in areas of already proven breakout growth, in this case optical.

Starting at 100G, but especially at 200G and beyond, optical packaging technology becomes a significant factor in determining the performance, power efficiency, and cost structure of an optical transceiver. We believe that acquiring FiBest will allow M/A-COM to assume a commanding position targeting mainstream 100G optical adoption and data centers.

A secondary benefit, with a strong organizational foundation and presence in Japan, we believe that FiBest will help unlock what was previously a largely untapped $500 million market for our RF and microwave components. Similar to how BinOptics and Mindspeed opened up the Chinese market for M/A-COM's growth and global expansion, we expect FiBest will do the same for us in Japan.

In total, acquiring FiBest makes M/A-COM unique and enhances our strategic value in the eyes of our customers worldwide. In everything from indium phosphide to silicon germanium, lasers to sub assemblies, access and fibers of a home to long haul and metro networks, and explosive growth potential in data centers, we now have all of the requisite technology, products and packaging that can enable our customers to achieve their most ambitious goals. For these reasons, you'll understand why we're bullish on our optical growth potential for many years to come.

In summary, I'm proud of our execution by our team as a whole. Delivering strong organic growth despite tough market headwinds, complemented by our ability to put the proceeds of the sale of the Automotive business to good work, we hope to further accelerate growth in M/A-COM's shareholder value.

Now, moving over to guidance, we'll guide this quarter without the contribution of FiBest, although we do expect it to close this quarter. For the fiscal first quarter ending January 1, 2016, M/A-COM expects revenue to be in the range of $110 million to $114 million, adjusted gross margin is expected to be between 58% and 60%, and adjusted earnings per share between $0.37 and $0.40 on an anticipated 56 million diluted shares outstanding.

I'd like to close today's scripted remarks by thanking the team for another quarter of solid execution. Operator, you can now open the call to questions.

Thank you.

(Operator Instructions)

Our first question is from Blayne Curtis of Barclays. Your line is open.

Hey, guys, thanks for taking my question. Just a couple. John, in the outlook you mentioned that Networks may have some seasonality. Just curious by segment, are they all expected to be down and if any are down more than others?

Hi, Blayne. Good question. So in the December quarter, what we've seen given the fact that a lot of our Networks business is over in Asia, there tends to be a fair bit of stick handling of customer inventories at the end of the year, end of the calendar year. We've seen that for the past few years and that kind of contributes to our caution over there. We've also seen an element of seasonality last year with the PON business and now we have both lasers as well as drivers, laser drivers and TIAs in PON. So that's really the source of our caution. There isn't anything beyond that to the first approximation.

And then you talked about the SPAR opportunity, obviously quite huge in terms of dollar amounts. Is there a way to think about how that revenue -- how many years that revenue would unfold over? And then, if you can talk about you said you're in the bidding process, how competitive -- how many parties are you bidding against and what's the right timeline to think about any early contributions there?

Another great question. The way to think about it is there is a small number of primes, defense primes bidding on programs. One of those is very deep into adoption of the SPAR tiles. They are actively bidding programs. Some of these programs are actually being awarded for production beginning this year.

So none of those are landed yet, so we can't say that we have revenue contribution this year, but given the magnitude of single wins, if one of those gets landed then it can obviously, have substantial impact sooner rather than later. But I would say that it's really -- the near-term contribution is before SPAR tiles, it's in the airborne defense program, which is actually beginning to ramp starting last quarter. When the SPAR stuff picks up, it's going to pick up in a big way.

Just finally, for Bob, you mentioned a negative mix in the September quarter on gross margin but then December it seems you have a nice tailwind. So what are the moving pieces there driving the uplift in gross margin?

It's very hard to pinpoint exactly, Blayne. We ship about 2,000 products in a quarter and a little mix here, a little mix there on the final outcome can -- is not a big -- I said 300 basis points but it was really 30 basis points difference, so -- or I said 600 versus 60 basis points, my error. It really isn't that great a difference. It's just a slight mix change.

Thanks, guys.

Thank you. Our next question is from Gabriela Borges of Goldman Sachs. Your line is open.

Great. Thanks so much for taking my question. I was hoping you could help us understand with all of the growth drivers of the business for FY16, how should we think about the medium-term top line growth rate for the Company either in absolute terms and maybe as a function of the industry, whatever you're willing to share?

Excellent question. So let me share with you the way we're thinking about growth on a forward-looking basis. We've got a core RF microwave business which continues to grow. It grew year on year. In fact, it grew actually quarter on quarter sequentially last quarter. So it's a very healthy foundation, which I would describe it as the traditional growth approach, as measured in percent which would be market growth on the order of 5%, plus incremental share gains. And then, layered on top of that is the optical growth and that is -- I think last year, optical grew 50% year on year. So that's really a hyper growth contributor.

So when we talk about the GaN stuff kicking in sometime in 2016, likewise active antenna arrays, you'd similar have hyper growth haired on top of that base. You back in, if you look at each one of these growth drivers literally, and we modeled this out very carefully, each of those could arguably double the size of our Company within three years, on the outside five years. So we could double, triple, or quadruple if we bat 1,000 on those three secular growth drivers. It's more time dimensionally three to five years integer multiples rather than percentage for the hyper scale stuff.

That's helpful. Thank you. And maybe as a follow-up on the planned acquisition of FiBest, I think one of the points in the press release was a potential inflection in demand in 2017 time frame. Maybe help us understand given that 2017 is still a little ways out, what are the risks to hitting those milestones? And what are the key milestones that have to be hit in order to achieve that inflection in demand and how you feel the Company's positioned competitively speaking? Thank you.

Another great question. So FiBest comes at 100 gig, 100G as well as 200 and 400 primarily from the telecom background with customers like Fujitsu and Huawei and Alcatel-Lucent. The reason why we acquired that, it's a very healthy business, they're growing, growing on the same kind of scale as we are top line.

The real play is in data centers. One of the things we saw is we now have 100% semiconductor content in the 100 gig optical subsystem, all the analog, laser, Photonics content. But we saw the packaging as the last piece to complete that puzzle and it really has a significant impact on the cost performance and power consumption of the overall solution. So as that comes together, in fact those designs are I believe completing this quarter, so it's not a forward-looking bet but I should say FiBest was a customer of ours as a Tosa Rosa supplier. It's really that inflection point depends upon when and how big 100 gig takes off and obviously, how well we do.

I think we've established a preeminent position given the cost structure and performance of all that semiconductor content. We believe we're second to none for each of that but then wrapping that up and being able to put that in the optical subassembly and further refinement of that component set solution really positions us well to ride that data center wave. Which frankly, is integer multiples if not orders of magnitude bigger than what we've addressed so far which is long-haul and now, the early stages of metro adoption. So that's very explosive, the real dependency is on how big and how quickly that market develops. For that reason, we say 2017.

That's very helpful color. Thanks very much.

You're welcome.

Thank you. Our next question is from Vivek Arya of Bank of America. Your line is open.

Thank you. First question, John, maybe just overall demand environment. If you could give us some color as to how much is your exposure to the China market, whether it's in the networking or the multi-market segment? And are you seeing trends there still a little bit on the weaker side? Are they stabilizing or how should we think about what your exposure is to that market where there are a lot of concerns about growth?

Great question. So a large part of our transactional revenue is now in China. I would point out, though, the bulk of that demand is actually in other parts of the world. China now supplies a very large majority of equipment and component manufacturing, feeding into those networks markets.

So the exposure, we do have some exposure on the fiber to the home PON deployments that are in China right now. That's a healthy piece of our PON business. That is rock solid stable and if anything, growing for at least another two years. So there's no indication whatsoever of any impairment on that market.

The other slight exposure that we had was on wireless back-haul and then fiber back-haul and that is markedly improving. There are clearer signs of orders are coming in, recoveries happening. How much of that we capture in December versus the March quarter, is the only remaining question. But there's no question that's coming back.

And then second question is, if you could also give us a sense for how large is the optics business today and what importantly, is the mix between 40 gig and 100 gig? Where does that go and what are the ASP implications of that shift?

Sure. So I would say optical overall, if you include everything from access, fiber to the home, the lasers and the back-haul as well as long-haul and metro line drivers and everything we do, cross point switches that we sell into optical, it's about 45% of our revenues; so it's substantial. And the reason why it's that big, frankly, is it is growing.

There's chunks of that business that are growing multiple double digits quarter on quarter. So it's truly a breakout for us. I would genuinely say there isn't a single piece of what I just described that we would describe as below our corporate operating model in terms of gross margin and operating margins. So it's not only a high growth but it's a very favorable margin business for us.

Got it. And then lastly, maybe Bob, how should we think about the milestones to generating free cash flow on a more consistent basis? Is it a certain revenue level where we should start modeling free cash flow right at a certain level? Do you have any specific targets around that? Any color would be helpful. Thank you.

Right. So going through our cash flow from operations on a GAAP basis as I mentioned in my scripted remarks, the $15 million approximately of the prepaid retention program we put in place for the management team and employees of BinOptics, that actually came out of the $230 million of proceeds. If they leave and don't realize the benefit of staying with M/A-COM for example, that actually defaults to the previous shareholders.

It's a nuance in accounting, GAAP accounting, that it's a current asset that makes it go through cash flow from operations. As we have transactional expenses, we do have some use of cash that isn't aligned to the cash flow of the business per se and as we do have some synergies and some other integration costs, that as well, reduces cash flow from operations on a GAAP perspective.

But as we move forward here, big change with respect to the accounting that washed that deferred revenue through the balance sheet and that's behind us, we should come closer to non-GAAP earnings as we go through FY16 as we sit here today based upon what we see today. If we do another large transaction or other tuck-in transactions, there may be some synergies or integration costs or transaction costs that basically are outside of operations that reduce cash flow from operations.

Is there a certain level, Bob, at which we should think that free cash flow will X percent of sales? I understand the business is going through a transformation, but is there a target that you have in mind?

Well, Vivek, it's really from the other perspective. We are projecting growth in revenues and so we have as we've said before, we have deferred to carrying inventory to be in a position to meet turns business and opportunistic business that exists because we have products. When you also look at some of the market in the past, some of that inventory levels are also driven by supply constraints where our partners have longer lead times because of their load from many other customers. That really hasn't had a material effect other than us increasing our inventories.

So as we -- these growing markets as we anticipate demand, as inventory grows, it's really a function of the difference in many ways between the cash generated by the balance sheet, EBITDA for example, and our decision to make investments in working capital. We can scale that back as visibility of business is clearer to us overall for the longer term. So it's not so much a level of business. It's more of where we want to make the investment from a working capital perspective. That is the majority of the change here.

As you know also, we tax effect at 15% to get a normalized run rate. Sometimes in cash flow from operations on the GAAP basis, that also penalizes cash flow from operations because we're basically not doing anything and it's balance sheet changes and current assets that affect use of capital, use of cash. So some of it's accounting, but more of it is transactional expenses and our decision to invest in working capital.

Thank you.

Thank you.

(Operator Instructions)

Our next question is from Harsh Kumar of Stephens. Your line is open.

Hi, guys. Couple of questions. My first one is it seems like Bob, there are two moving parts. There is the legacy ground-based business which I think in the press release you said is off a little bit. And then I think I also heard you talk about the Networks piece, particularly maybe some seasonality in the optical side. I'm curious what is the magnitude of each of those if one's larger than the other, equal size, any color?

I'm sorry, I didn't quite follow the -- are you talking about the effects last quarter or the forward-looking?

No, the effects going forward.

I would say the lumpiness in our traditional catalog transistor business, the radar, is really a quarter to quarter effect. We can't affect our Asian or European customers who are deploying or doing retrofits of old radar systems. It's just lumpy and that's the way it kind of is. It's on the order of a few million a quarter. And we've had up quarters, surprisingly. I think last quarter, previous quarter was an up quarter. So it's kind of hard to predict, bouncing around. On the seasonality, I'm sorry, the other aspect of the question was the seasonality in optical?

Correct, that's right, yes.

It's really, what we've seen in previous years and it looks like the behavior is similar, is our customers especially over in China where a lot of our business is transacted right now, manage inventories down at the end of the year. As I understand it, personal incentive rewards are given for year-end inventories. From a demand standpoint, it's seasonal.

Not end market demand necessarily, although we have seen an element of that previous last year in PON. That was our first year with Mindspeed in the portfolio for instance. Now we doubled that down. Now we have a big position in lasers as well. So you could have that effect. And traditionally, we could offset that or previous quarters, we could offset that with strong growth in other parts of our optical business.

But this quarter right now, we're tapped out from a supply standpoint. If you remember double capacity in the first half of the year and then by January next year have Lowell online which at least doubles capacity yet again. It's just the December quarter, that capacity hasn't come on so we're kind of tapped out from a supply standpoint.

John, very helpful. That was very helpful. So it doesn't sound like you've seen anything specific in the marketplace. Sounds like it's just your expectation of managing inventory down. Is that fair for me to think from that angle and you guys maybe not having the supply? Is that the larger issue?

I would say they're equal.

Okay.

We just can't supply more units in this particular quarter. The March quarter, it's basically unbounded. And then the other thing is just caution from a demand standpoint that kind of pushing customers to sustain inventory levels at the end of the year is something that we don't really choose to do. Other people do it. We don't.

I'm hearing you talk about long-haul optical after a long time. In the past, you always said the big driver, at least in front of your eyes, was the access site. But this press release, also your commentary is talking a little bit more about long-haul optical. Is there something you're starting to see along with maybe the return of the base station market that's making you more optimistic, John?

As I mentioned previously, we have seen some unanticipated orders come in for back-haul related business. Unquestionably there's signs of life there. And again, the real issue is race against time because here we are mid-November. So to capture additional orders and turn them this quarter, there's limited ability. That's really the only issue there.

On the other side of things, to be clear, and I had it in the scripted remarks, the strongest sequential growth we saw last quarter was in our long-haul and metro drivers. The lasers were up and up strong sequentially, but the real blow-about and we believe we're beginning to see the impact of metro deployments driving demand. If that's the case, that can continue through the next year very nicely because the reports we've seen is up through the middle part of the year only about 3%, certainly less than 5% of metro deployments were at 100 gig.

So the transition to 100 gig in the metro space is just in the early stages. As that ramps to 50%, for instance in long-haul over 50% of the cords are 100 gig, there's a lot of runway there. And we think metro's probably 2X minimum if not 4X the size of long-haul.

Understood. Very helpful again. Then, I think you talked a little bit about loosely on GaN on silicon timing. I think you mentioned 2016. Maybe if you were more specific I missed it. John, could you maybe try to pin this down a little bit more? You're getting close to the finish line there with production orders. Should we be thinking first half or second half or any kind of granularity would be great?

In terms of a material inflection point in our revenue, the contribution would be in the second half. Simply because until you reach qualification, customers aren't going to award programs and those don't magically start instantaneously. The reason why we remain cautious on making any sort of investor commitments in the second half, is until those customer decisions are made, they're not made.

That said, our entire qualification timeline, we are definitely absolutely on track. There were giant milestones that we accomplished this quarter, where now customers have been delivered fully operational power amplifier designs that meet every target specification they've given to us and they have nodded their heads in approval and basically opened up programs across multiple platforms. So, we have the full target right before us to execute to. And I've said it before and I'll say it again, until we pass qual, we have not passed qual. That's the reason why we maintain the caution.

That's fair, guys. Great. Thank you.

You're welcome.

Thank you. Our next question is from Tore Svanberg of Stifel. Your line is open.

Thank you. A few questions. First of all on the BinOptics business, I just want to understand the moving parts there. You were ramping capacity. Did you get -- did you have some contribution from that capacity already or is the main contribution coming in the first half of next year?

No, I mean, the sequential growth on our laser business was close to 10% sequential. It was a very nice, strong sequential growth. That's after what we had originally done. I think you can go on our investor site. We've got a slide, if I remember, slide 6 or 8 in our slide deck, that showed the actual doubling of capacity through the first half of the year. So that's another 9% on top of what that original doubling occurred.

On a forward-looking basis, right now that 9% is pretty much tapped out for the factory in Ithaca, New York. That was the original BinOptics factory. The next inflection point in terms of supply, which we remain supply constrained, not demand constrained, that comes on after the first of the year in January in our Lowell factory. And at that point, it's basically unconstrained from a supply standpoint. But we just got to pause here because we've pretty much tapped out Ithaca.

Very good. And then on the FiBest business, just looking at the website, they're only talking about 10 gig products. I assume obviously, they have some new products in the pipeline. But how should we think about their ramp into 100 gig and especially if you think about the $25 million they have in revenue today, I assume that's all 10 gig?

I wouldn't say it's all, but I'd say the majority of the revenue on a backward looking basis probably 90% is in the past would have been 10 gig. I believe this quarter is a transition. I should point out I don't think they've updated their website in at least nine months, I'm not sure they're really a commercial supplier in that respect. But anyway, I believe about 90% this quarter coming in, is in 100 gig.

Okay.

They've made that transition to their telecom business.

Got it. And then last question for Bob. CapEx, it kind of doubled year over year FY15 over FY14. How should we think about CapEx in 2016, especially in light of capacity uptakes and also the progress for acquisitions?

The spending, the capital investment for BinOptics and the laser business has been made. So there's a small parts in fill-in. As we sit here today, we would say looking forward, our traditional model of 4% of revenues maybe increases slightly to 5% outside of an occasional special thing when an acquisition may drive or something else like that's not really visible today.

I'd point out that we had an opportunity to purchase our building at very favorable terms and that's critical to our ability to control our destiny longer term. So that was sort of an exception on top of the BinOptics investments last year. So about 5% is our normalized model for CapEx.

Very helpful. Thank you very much.

Thank you. Our next question is from Steve Smigie of Raymond James. Your line is open.

Great. Thanks a lot, guys. So was hoping you could talk a little about how fast your laser business could grow in calendar 2016, if you were able to fill all the past capacity you planned to build out this year? So assuming demand was there, how fast could the laser business grow?

I don't want to sound smug but if we were to sell every element of capacity we have, it would probably grow 1,000%. The factory in Lowell is in order of magnitude larger in equipment capacity than Ithaca. So, it's the reason why I say -- we said doubling in capacity by the first of the year.

Once we're in Lowell, it's basically unlimited, which is key because from unit volume standpoint, data centers could absolutely consume a sizable chunk of that. Whether it's 10-fold or more or less, remains to be seen. But I think the first approximation was the way to think about it is infinite supply for the foreseeable two or three years.

On the $100 million wins potentially on an active antenna side, how would that revenue play out? You win the contract? Is it rolled out over 10 years? You have a certain number of radars you're building out? How does that work out?

So a particular radar system from what we've seen on the defense side, the programs that we've been exposed to are typically three-year buildouts, sometimes five-year buildouts. The civil programs, they're talking about a whole wholesale upgrade of the weather and air traffic control radar system in the US. That would be hundreds of millions of dollars of opportunity to us over decades, literally.

That's not imminent in the next year or so, but when that happens, we're very well-positioned and it's transformative from a Company standpoint. But I would say there are some programs in the $20 million, $30 million range on the defense side, some that are $100 million and I know of at least one that's over $200 million. Again, the buildouts, I would say would average three to five years.

Revenue recognition, Steve, is on a shipment basis and title transfer, just as any other component we ship today.

Okay. And then on the FiBest stuff, can you talk about the product a little bit more? Is it -- again, just look at the website, it's not clear. Is it they're just doing the package or are they doing a complete transceiver? So they're buying components from everybody else and then packaging and then selling that? Or is the revenue more on packages alone?

The simplest way to think about it is the packaging option. We've got all the semiconductor content that goes in those transmit and receive optical subassemblies. To us, it's packaging. It's high-value add packaging because when you talk about the lens assembly for these complex optical devices at 100 gig and beyond, that has a big impact on the performance and power consumption and the overall solution. It has a lot to do with IP around alignment of the light sources and so on.

But let me emphasize something. We are not making an integration play to transceivers. That is the opposite direction of the way other people are going. That is in our opinion, a low-value add, Asian commodity play. We're remaining a component supplier and whether people want to use our subassemblies or just our components, frankly, we don't care. It's all good business to us. I would say that having the packaging capability allows us to improve and refine the quality of our solutions at a component level. So when this is not an integration play, it's really a packaging option.

Okay. Great. Last question is just on the aerospace and defense side. What would be the breakout at this point between aerospace versus defense and how do you think about that as we think about the next few years as you've got a bunch of these pretty sizable programs ramping up?

The A&D business today and looking backwards, is profoundly different than what we talked about on a go-forward basis. Looking backward, we have a catalog of diodes and transistors and we sell them by frequency bands and there are bands that are used both for civil and defense purposes. So it's literally -- by the way, they go into customers who have both civil and defense divisions. So it's effectively impossible to really quantify civil versus defense usage other than a rough cut of how much of our customer's business is that way. And the last time we looked it was about 50/50. So I think that's probably a fair assessment going back.

Going forward, these large programs are things like our peers have had and captured during the days when M/A-COM was owned by Tyco and they didn't really care to invest in aerospace and defense programs. Now as we capture these, they're large chunks, very predictable, very reliable, long-term programs, all the nice characteristics that we talk about in traditional M/A-COM business. It's just literally, in order of magnitude bigger than our A&D business looking back.

Going forward, Steve, it's easier. The MPAR program is obviously, a civil aeronautic deployment. As we get certain programs, if they allow us to, we can identify whether they're defense, military, versus civil applications.

Okay. Great. Thanks a lot, guys.

Thank you. Our next question is from Harsh Kumar of Stephens. Your line is open.

Hi, guys. Thanks for the opportunity for a follow-up. John, I was wondering if you could talk about who do you see in the optical space as your primary competitors? Who do you run into for the most part? And also, I've heard a few tidbits about the cost advantage that BinOptics products or your product has over the competition. Wondering if you could elaborate that a little bit?

Sure. So depending on the product category, we have a totally different set of competitors. For instance, our high performance analog stuff, which came over from Mindspeed tends to compete more with SemTech. The traditional competitors for our long-haul business, compound semi stuff, Qorvo at one time had a substantial business. I'm not sure what they have left at this point.

We have Inphi that tends to try to compete. They tend to do a very good job with transimpedance amplifiers whereas we tend to do a great job with line drivers, our modulator drivers. And from an overall TAM standpoint, the drivers are more like 80%, 10% on the receive side on transimpedance amplifiers.

And then, when we talk about lasers, if you remember, was Mitsubishi and CyOptics, the CyOptics division of Avago. So it's really -- there's no one who really transcends all of those things. I would say, Avago, when we talk about data centers, I would say would have the strongest position and is a great Company I like to compete with.

From the cost benefit I was referring more to the laser side.

Oh, yes, sorry I missed the question. The etched facet technology, if you remember when we picked up BinOptics last year, it's transformative. A lot of the lasers supplied into the market are using decades old cleaved facet technology and what BinOptics did was a venture capital funded startup that developed etched facet technology which is a wafer scale process. Very familiar to what semiconductor guys do, like us, in the compound semiconductor world.

I think I calculated at the time of the acquisition, it was minimally a factor of two better cost advantage of BinOptics versus their competition. Competition being CyOptics and the publicly stated financials at that time. Since that time by doubling capacity, you get a proportional reduction in cost structure and as we go into Lowell, it's again, from 3-inch to 4-inch, higher yields.

We have several integer multiples of cost advantage where it's the reason frankly, and the most price sensitive part of the laser world in PON, fiber to the home access, it's very much a consumer market, we are above arguably, ending up well above our target financial model. So you can imagine whether you're talking about wireless back-haul, fiber back-haul or even data centers, the cost advantage can really be brought to bear.

Got it. Understood, guys. Thank you very much.

You're welcome.

Thank you. And our next question is a follow-up from Tore Svanberg of Stifel. Your line is open.

Thanks. Just two quick follow-ups. First of all, how should I think about the profitability profile of the SPAR antenna business?

It's consistent with our financial model on a go-forward basis out of the gate.

Okay. Very good. And then how should we think about OpEx in the December quarter? I think maybe, we talked about somewhere around $35 million, $36 million when we exclude the Automotive business. So is that the good starting point?

So we did in total $38.5 million in operating expenses. As we've talked about in the past, our fourth quarter is the settlement of a lot of variable compensation, so that can trend down as much as $2 million. So it's in between $36.5 million and $38.5 million overall.

Okay. Perfect. Thank you very much.

You're welcome.

Thank you. At this time, I see no other questions in queue. I'd like to turn it back to Mr. Croteau for any closing remarks.

Thank you, Operator. Before closing out today's call, please note that we'll be attending the Goldman Sachs conference this Thursday in New York, the Barclays conference December 9, in San Francisco, and the Needham conference January 12 to 14, in New York. To request a meeting with Management, please e-mail us at IR@MACOM.com. With that, I'd like to wish everyone a happy holiday season and a healthy and prosperous new year. Operator, you may now disconnect the call.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone have a great day.