MACOM Technology Solutions Holdings, Inc. (MTSI) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the M/A-COM Technology Solutions Third Fiscal Quarter 2013 Financial Results. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host today, Leanne Sievers, with the Shelton Group. Please proceed.

Good afternoon, and welcome to M/A-COM Technology Solutions Holdings, Inc. Third Quarter of Fiscal 2013 Earnings Conference Call. I’m Leanne Sievers, Executive Vice President of Shelton Group, M/A-COM's Investors Relations firm. With us today are M/A-COM’s President and CEO, John Croteau; and Chief Financial Officer, Conrad Gagnon. Before I turn the call over to Mr. Croteau, I’d like to remind our listeners that management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties that could result in those differences in the company's filings with the Securities and Exchange Commission, including its Form 8-K filed today and its quarterly report on Form 10-Q filed on May 3, 2013. In addition, any projections as to the company’s future performance represent management’s estimates as of today, July 30, 2013. M/A-COM assumes no obligation to update these projections in the future as market conditions may or may not change. Additionally, the company's press release and management's statements during this conference call will include discussions of certain non-GAAP measures and financial information. These financial measures and 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 Securities and Exchange Commission today and be -- can be found at the Investor Relations section of M/A-COM's website at www.macomtech.com. 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 Investors 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. Mr. Croteau, please go ahead.

Thank you, Leanne. Welcome, everyone, and thank you for joining us today. I'd like to begin today's call with an overview of our third quarter results and then review our end markets and the progress we continue to make towards executing on our growth strategy. Once completed, I'll turn the call over to Conrad, who will review our financial performance in further detail. I'll then conclude today's prepared comments by providing our guidance for the fourth fiscal quarter before opening the call for questions. Revenue for the third quarter was $82.2 million, slightly above the high end of our guidance and represents a 5.7% sequential increase. Non-GAAP gross margin of 45% was at the midpoint of our guidance, and the non-GAAP net income of $11.5 million or $0.24 per diluted share was at the high end of our guidance. We finished the quarter with $115.6 million in cash and cash equivalents, an increase of $12.3 million, and no debt. Taking a closer look at our revenue by market. 27% of our third quarter revenue was from networks, 27% from aerospace and defense, 27% from automotive and 19% from multi-market. During the quarter, we saw a surge in demand for our catalog products, driven mainly by strong sales across aerospace and defense, networks, as well as automotive markets. Automotive sales outpaced our expectations quarter-on-quarter, which we believe was driven by pull-ins at Ford's European factories to avoid any supply delays stemming from the 4th of July holiday in the U.S. Going forward, we continue to believe that any near-term growth in this market will be contingent on market share gains by Ford and end market growth. Sales into the networks market grew a modest 3% quarter-on-quarter. We have yet to see any meaningful recovery in the wireless infrastructure space and continue…

Thank you, John, and good afternoon, everyone. During the course of my comments, as well as those made by John, with the exception of revenue, our income statement amounts and percentages will be discussed on a non-GAAP basis. These non-GAAP measures are provided to enhance understanding of our core operating performance, and a reconciliation of each to the most comparable GAAP measure is included in our earnings press release circulated earlier today for your reference. With that in mind, let me now begin with a review of our financials for the third quarter of fiscal 2013. Revenue for the third quarter was $82.2 million, an increase of 5.7% compared to $77.8 million in the second quarter and an increase of 6.6% compared to the $77.1 million in the third quarter of 2012. The sequential increase in revenue was driven by growth across our A&D, networks and automotive end markets with multi-market relatively flat sequentially. Gross profit in the third quarter was $37 million or 45% of revenue compared to $34.6 million or 44.5% of revenue in the prior quarter, representing a 50 basis point sequential improvement. Gross profit in the prior year quarter was $36.1 million or 46.8%. Our focus continues to be on improving gross margin through increased sales of higher-margin products, market growth and channel efficiencies, as well as the ongoing benefits of operational efficiencies. In terms of our operating expenses for the third quarter, total operating expenses were $20.8 million compared to $19.7 million in the prior quarter, both of which represent 25.3% of revenue and compared to operating expenses in the prior year quarter of $18.8 million or 24.3% of revenue. Looking specifically at investments in new products. Our research and development expense for the third quarter was $9.7 million, flat with the prior quarter and…

Thanks, Conrad. For the fourth quarter ending September 27, 2013, we're currently expecting revenue to be in the range of $82 million to $86 million, non-GAAP gross margin between 45% and 47% and non-GAAP earnings per diluted share between $0.24 and $0.26 on an expected 48.3 million shares outstanding. As of today, we have already shipped or are presently firm booked for 84% of the midpoint of that revenue range. Operator, you may now open the call for questions.

[Operator Instructions] Our first question comes from Frank Keller with Barclays.

Just a quick question for you on gross margins in the quarter, and then looking forward. Just kind of wanted to get your thoughts on the moving pieces there. Obviously, I know that you're seeing some strength in automotive. That had been somewhat of an overhang in gross margin in the past, and it doesn't appear to be anymore. So just kind of want to get your thoughts around your solid gross margin guidance for September, if you could, please.

Sure, Frank, no problem. Yes, actually, in terms of the gross margin, as you know, our model is 60% drop through the gross profit on incremental revenue. We're slightly below that in the third fiscal quarter because we had unexpected strength due to seasonality at Ford. So it's slightly above -- below the model. On the outlook for the fourth quarter growth, we're actually above the 60% model because of that seasonality swinging back in favor of the higher-margin part of the portfolio growing.

Perfect. That's great. And then I wanted to get your thoughts on -- I guess you started to answer it, because you talked about the seasonality and how to move business but just wanted to kind of get your thoughts on the trajectory for growth for some of these other end markets like networks and aerospace and defense. What are going to be the real drivers into September?

When we looked at the growth in the third quarter, about 1/2 of the upside above our midpoint guidance came out of automotives. Not just Ford, for the most part Ford, and that was related to, as I mentioned in the scripted part of the call, the seasonality effect as it related to European factories and the 4th of July that was unanticipated behavior from Ford. I would say on a go-forward basis, I think we're going to see a little bit of a correction in the other direction on automotive. Network, we're very, very cautious. As I mentioned, we don't see any kind of meaningful recovery in the wireless infrastructure space. Cable, the CATV business, is still awaiting the DOCSIS 3.1 upgrade. Optical is performing well for us. We're kind of in the preproduction volume levels and stepping up in coming quarters to production levels, and that would be beyond the fourth quarter, I should say. So networks is -- it was up a modest 3%, which isn't bad. The real surprise was the strength we had across our catalog portfolio nearly spending all of these end markets. And notably, aerospace and defense were up 9% in that particular end market, which, in light of sequestration, was a surprise even to us. We felt we were relatively immune, relative is the operative word there. But sure enough, delivering 9% growth and a surge in catalog demands was wonderful and that was really due to turns business. We had very strong turns within the quarter and our short-term demand remains, into the fourth quarter, very strong.

The next question comes from Harlan Sur of JPMorgan. Harlan Sur - JP Morgan Chase & Co, Research Division: A question on the catalog products. Obviously, very important part of the portfolio, core part of the business. Is the team actively trying to improve the attach rates of your catalog products to certain of the more program-specific products and applications that you're going after? Are you gaining more dollar content with higher catalog attach rates? And if you are, maybe if you can quantify the improvements that you've seen in attach rates, let's say, over the past 3 to 4 quarters.

Actually, Harlan, I would actually suggest, given our history, which you are very well aware of, I would describe our business as actually quite the opposite. We have a tremendous footprint with our catalog products throughout thousands of customers. And our game is all about increasing our share of more of the system-level integrated MMICs, and that is a central part of our growth strategy. I think one of the refinements to our strategy over the past quarters is, we've really identified the end market growth areas, things like the microwave X-Band radar space and millimeter wave satellite communications space, which are growing much faster than the end markets. And those are the areas where we really fixate on trying to increase our share of wallet, and as you described, attach rate for the more integrated MMICs. And by the way, Northrup Grumman is a poster child to that success and that was exactly the way I'd describe our historical business, and the ability to step up and be a mainstream MMICs supplier is a very big deal for us. Harlan Sur - JP Morgan Chase & Co, Research Division: Great. Great to hear that. And then also, good to see the dual sourcing arrangement with GCS that you announced last week and again, manufacturing. Obviously, as you said, important for operational continuity, and then I know it's also important to some of your customers that may require domestic manufacturing. My question here is that, with the GaN technology in-house, can M/A-COM now develop their own processes and sort of custom-tailor certain aspects of the GaN technology to better serve your customers' performance requirements? And then maybe if you can just help us quantify roughly how big your GaN-based products are as a percent of your total revenues today and how big do you expect that to be, maybe looking out over the next 12 months or so?

I don't have the numbers in front of me about what our GaN business will be in 12 months. But I would say, describe it, that the revenues today are minimal. We have over 25 customers, probably over 30 active customers now for the GaN portfolio, but those are still in the early stages of design wins -- not design wins but preproduction. So certainly, on a go-forward basis, it's going to be very substantial driver for our growth. It's just, we're still in the relatively early stages. To get to the first part of your question, you had asked about, do we have the ability to differentiate at the process technology level? The answer is yes, absolutely, definitively. That said, I personally do not believe that, that is a primary consideration in the short to medium term. We have done extensive benchmarking of GaN technology available throughout the industry from various foundries and proprietary suppliers among competitors. And to the first approximation, the level and degree of differentiation at this juncture is minimal. This deal with GCS was all about getting a supply chain that can actually enable volume production. Now I'll point out, Northrop Grumman has a very good example of where the issue lies. They require domestic supply and control over the domestic supply chain for decades. The types of programs they service last for decades. And regardless of whether it's an earthquake in California, tornadoes in Texas or tornadoes or thunderstorms and hurricanes in Massachusetts or typhoons, supply -- continuity of supply is front and center, not just for aerospace and defense, but I can tell you vendor qualification for the major networks guys. Globally, multiple sources of supply is a requirement for things to go mainstream. And moving from the first generation of what you might call beaker fabs, the real mainstream volume production capability with dual sources is -- was to me, in my experience, one of the remaining barriers to mainstream adoption. Harlan Sur - JP Morgan Chase & Co, Research Division: Great. And then my last question for Conrad. Obviously, as John mentioned, your incremental fall-through in the gross margins is going to come in better than 60% in your September quarter guidance. How much of that is mix related versus continued improvements in manufacturing costs and operations?

Okay. Harlan, the restructure initiative that we put in place this past quarter has an additional approximate 10 basis points in the September quarter. So the balance of the contribution will be relative to mix and higher-margin products that start to come in.

Your next question comes from Mark Lipacis of Jefferies.

On the surge in the catalog orders, we've heard that from a number of other broad-based companies and I was hoping that you'd share your view on to what extent is this end market demand just getting better versus a seasonal impact versus the supply chain tightening up for some people and that motivating kind of a restocking of inventories?

Yes. When you look at both book-to-bill ratios within our distribution partners, my interpretation is we're really bouncing along the bottom. If there's a recovery, it's a very soft recovery. It's certainly not snapping back. And in terms of inventory levels, similar comment. It doesn't feel that it's an end market demand-driven artifacts. Our sense, if you look it -- and we track very closely, as you would expect, our peers' announcements -- we see the end market's very consistent with our peer guidance and our peer results. I really attribute our ability to grow sequentially here at getting back in the game of keeping our eye on the ball in our catalog business. Previously, and appropriately, we have a lot of exciting growth opportunities for our more application-specific investments, which are thoroughly appropriate and do pay off and will pay off big time, but certainly not to the exclusion that we can grow share for our core business. And a lot of the pieces of business that we've been landing are things which, I would say, are things that we just wouldn't have paid as close attention landed in the past. And it's through the accumulation of a lot of singles and infield hits that we've been able to evolve the business forward in the past few quarters. It doesn't feel like it's in some kind of macro recovery within our target customers.

Fair enough. Second question, John, on the optical, 100-gig build-out, could you give us your view on how this plays out over the next 5 years or so? What are the kind of boxes that you expect to be deployed into -- where in the network are you going?

Well, we tend to be on the long haul side, not in the data centers as much. And I would say that's within our existing product portfolio. One of the things we're really looking to do is broaden our footprint. That is the one bright spot in my opinion within, certainly, within the network space of the end market, healthy end market condition. So I would say, it's really that part of the market where we're currently focused, but I'm reluctant to comment further about where we aspire to be in the future.

Fair enough. Last question, on the wireless infrastructure side. And you're not alone on this, it seems like we've just been waiting for Godot for such a long time here. What do you think is going on here? Why are they taking so long to get these orders in what most view to be a secular growth market?

Okay, no problem. So the -- my take is, certainly, there are indications that in the U.S. and in China, China Mobile specifically, there are capital investments and build-outs. So there's -- the people who service that base station part of the market benefit from those. I would say -- I've described in the past, our business is really in the point-to-point radios, wireless, tend to be at the higher frequency bands which are shorter haul, high-margin, high-value opportunities. And sad to say, Europe shows no signs of recovery. If anything, it's looking to be getting worse. We heard that in Europe, the European Commission just put in price caps for mobile roaming growing within the EU nations, as much as 36% reduction in maximum charge for daily usage. My fear, my concern is that, that is further going to compress and push out any investments in infrastructure spending Europe. So that's the reason -- one of the reasons why we say in general, wireless infrastructure and, specifically, European point-to-point business, we remain cautious.

[Operator Instructions] Your next question comes from Harsh Kumar with Stephens Inc.

This is Richard in for Harsh. Kind of going back to the optical. Are you seeing that predominantly in Asia? Or are there other regions that are benefiting from that?

So our -- we have 9 active customers across all regions. I'd say some of the first guys that turned on to the preproduction volumes tend to be based in Asia, but they service demands globally so -- and notably in the U.S. So the end market demand, I would describe as global. I would say our sales initially were more skewed towards Asia. But I think as all 9 ramp to full production, it will be very much a balanced market for us.

And then my second question was kind of going for your gross and op margin targets. What are the puts and takes to get there? And are you still confident that those are achievable?

There's no question. In fact, one of the interesting things, we went -- just went through an analysis and rather than focusing on the low-end margin portfolio in the automotive business, when we did the analysis, we found that close to 1/4 of our revenue today is over 70% gross margins. Now 23.5%, 24% of our business, it's over 70%. Empirical evidence is all of the new products that I saw released this quarter had gross margins in excess of 70%. So the reality is, we're investing heavily -- I won't say exclusively, because I want to reserve flexibility, but we're really investing in growing that 70% part of the portfolio. We used the 60% drop-through because it's not only that's growing. Also, our base business at the lower margins is also growing. And it's really a blend of those 2 that we come out, at least in the short term, with 60% drop-through.

Our next question comes from Tore Svanberg with Stifel. Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division: This is Erik Rasmussen in for Tore. I wanted to get back to the comms infrastructure. I know that we kind of addressed that a few times, but you remain cautious on it and not seeing any sort of recovery. But for us, when it comes to M/A-COM, what sort of milestones should we be looking for as it pertains to you and your opportunity in this segment?

Well, our strongest position in wireless infrastructure is in point-to-point radios at the 38 and 42 kilohertz bands -- 5 gigahertz bands, I should say, which are relatively short-haul, high data rate, which ends up highly correlated to the European market. There are some build-outs that we understand in Southeast Asia that will be using the same bands. So it's really, our business is not exclusively by any means, but heavily tied to the European -- whole of the European market. And then in general, the concerns I would have beyond that is, as what was received by -- certainly, by me, as well as many others as a temporary downturn as it goes on to a second year, especially with news of some of the major OEMs suffering from gross margin compression, I start worrying about the overall health of the recovery even in the long run. That doesn't mean that we don't take that business very seriously and we don't maximize our share, but it just gives you more reason for caution. Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division: Got it. Maybe just then -- just staying in the networks. Obviously, you benefited lately from your success in the 100G Opto market. How big is this business today? Can you comment on that? Or how do you see this business ramping in the coming quarters or years?

Well, I don't mean to be dodgy about it, but we don't report with the granularity down to the product line level. But I would say that we are in the early stages of ramp. We're very much in the preproduction phase. The analyst reports that we see are very consistent with the forecast that we see from our customers. Analysts like Dell'Oro predict a compound growth of 75% for the coming years, coming 2 or 3 years. So it's the high-growth segment, or I should say end market, which is experiencing unquestionably strong capital investment. So it's -- there's a lot of juice in it and we're just at the very early stages of what we believe could be a decade-long build-out. Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division: Great. And then you mentioned on your defense business, you've not really seen any sort of impact from sequestration and you haven't just because of the markets that you serve there and your exposure. Do you think, though, in terms of that dynamic, if things bottomed, are you seeing recovery? I know you announced earlier today your win with Northrop Grumman, which was a nice win, but can you just comment just on what you're seeing?

Yes. I have to be careful in using the correct words. We see no impact from sequestration. That said, I mean, given what we've seen our peers indicate in terms of the effect of sequestration, I suspect there has been some effect of sequestration on our business, we just can't see it. So maybe without sequestration, we would have grown north of 9%, whereas in the presence of sequestration, we grew only 9%. It's difficult for us to see it because we have a very diffuse business through many, many customers in that space. We do not have highly concentrated business and specific MMIC platforms like we will have in the future with Northrop Grumman. So that's good news and bad news. The bad news is we don't have that large revenue today. The good news is we're not exposed as others might be to sequestration. Really, what we saw was a very high degree of turns business and very healthy demand for us selling through direct and through distribution. And it's hard -- beyond that, it's hard to really judge the end market health, to be honest. Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And maybe if I can squeeze one more in for Conrad. The OpEx went up considerably, specifically SG&A. What can you just -- what drove this? And then what are your expectations for OpEx in future periods?

Sure. Certainly. The OpEx, the increase were driven -- some of them were sales-related. Sales were up. Selling costs were up. Increased costs for outside professional services as we prepare for SOX compliancy, some tax work and some seasonality in marketing communications with regard to trade shows that we -- a major trade show we've made in this quarter. So SG&A ran at 13.5% compared to 12.9% in the prior quarter. And in total, the OpEx of 25.3% of revenue was the same this quarter as in the prior, which is well within our OpEx model. So our target is 25% and it could vary from 25% to 26% in any given quarter. So that's the color I'd like to offer.

Your next question comes from Quinn Bolton with Needham & Company. Quinn Bolton - Needham & Company, LLC, Research Division: I apologize, I missed the part of the prepared comments. But just first, wanted to ask, last quarter or 2, I think you could see, sort of, the turn in the catalog business and it certainly seems like that is playing out in the revenue line. Was just wondering if you still have similar visibility in that broader catalog business heading into the September quarter that you did see a quarter ago?

Yes. So the turns business was, in the prepared remarks, we indicated that's where the strength came and that's what really drove us towards the upper end of our guidance. And that has continued into this quarter. It's the reason why we're guiding for growth in the fourth quarter. The one caution I would give is, the shape of the demand is high turns business, short lead times. So it's hard to kind of extrapolate that into the first quarter and make any general comments about overall market recovery. The visibility is low, so we remain cautious on a go-forward basis. But certainly, the level of firm book, the order book we have is consistent with the growth that we've put into the guidance. Quinn Bolton - Needham & Company, LLC, Research Division: Okay, great. And then just on the Northrop Grumman and some of the other relationships you've announced recently, are you seeing just a greater use in partnerships or perhaps a trend towards outsourcing for potentially as an effect of sequestration? Or do you think that these types of transactions would have happened regardless of what's going on with the defense spend?

Yes. I would obviously say ELTA is relatively immune to the sequestration issue. And certainly, Northrop Grumman would be exposed to it. And actually, sequestration has had, or any overall market trends, I don't think had any impact, good or bad, on this particular breakthrough for us. The background there is Northrop was looking to move to a much more balanced supply chain. They were overexposed in terms of their previous vendor base. And they looked around, and I think if you spoke to them, they would say M/A-COM was the obvious choice. We have domestic control over our production. We have decade-long history and decade-long legs to our production, which is exactly the kind of supply model they need. We have the technology base that they needed, and we had the design capability and that we have the, finally, the ability to invest in MMICs where, during the Tyco years, M/A-COM just took it -- Tyco took M/A-COM out of the game, and we're back in the game. This is, arguably, just a rebalancing to share that we otherwise could have and should have had. A lot of great execution on our engineering side. I don't want to take anything away from all the hard work and success. In fact, all the commitment on the Northrop Grumman side to help make it a success as well. But I think it had a lot more to do with supply chain dynamics than anything else. Quinn Bolton - Needham & Company, LLC, Research Division: Great. And then just lastly, on the optical business, I know your existing products and design wins mostly target the long haul or submarine markets, but your data center is probably going to be a pretty big area over the next few years. I was just wondering, are you looking at technologies, whether it's parallel, receivers or laser drivers, that could target some of the data center applications as data center moves to 100 gig?

Well, yes, I mean, I don't want to sound factitious here, but we're looking at everything in 100G and moving not just with organic growth and broadening our footprint in organic, in all approaches as well. As I said, I mean, if you would ask me what my pareto is of priorities for M&A activity, I would say, Gallium Nitride, technology leadership and 100G leadership would lead to that stand-out, bar none. And I think the market's going to happen quicker than we can really stay on top of organically, so it's a logical thing for us to be looking around at acquisition opportunities.

Your next question comes from Steve Smi (sic) [Smigie] of Raymond James. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Just following up on the Northrop win. As you said, you had, in addition to good engineering, some supply chain strength there and Northrop was looking to diversify. So can you talk about who it was that you were able to beat there, to get some sense of the competitive environment? And could you talk about maybe how many people you had to beat out there to secure that win? Just some more competitive color.

Well, I think I'll refrain from mentioning the competitor by name, but the one thing I'd point out is it was a relatively monopolistic supply condition. And so I'll leave it to you to discover who it is. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, fair enough. I was just trying to see if it was multiple people that you're thinking of. It sounds like one major player. And then on the dynamic between investing at the high end but also trying to get the legacy products going again, can you talk a little bit about how you make the decisions to allocate resources to there? And I guess a little bit on the low end, what's different that you're able to drive more singles and doubles than you're used to? Is it more showing up at conferences, committing more R&D resources to your clients, many more capacity? What's driving the low end, and how do you balance those resources?

Well, when I talk about our core catalog business, like a lot of companies with strengths in broad-based portfolios, it's actually some -- in many cases, the older vintages are of the highest margin and the highest opportunities, and it's not about new products. Yes, there's some mix of new products but it's largely how you engage customers, both commercially and technically, how you service those customers commercially and technically. And when the call comes in for the order or the call comes in for pricing or technical support, you have to be on top of it with a very high capture rate. And so I would say in terms of growing that base business, every incremental dollar is a nice contribution. And whether it's 70% margin or 50% margin or 60%, it doesn't matter, it's nice and it contributes to EPS growth. It's an entirely different thing to invest heavily in low-margin products, and that we avoid. This is where we focus our energy on 70%-plus margin, not exclusively because there are certainly situations where, for -- in a particular networks market, for instance, there may be customers who, from a supply chain standpoint, wants you to take a share of modest margin business in return for a good healthy share of the high-margin business. So the way I look at it is, we don't invest one product at the time, we invest one business at a time. But in general, we really reserve our heavy R&D dollars for 70%-plus margin business. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, that's very helpful, appreciate it. So the last question was on military-related businesses. Obviously, there's been sequestration and yet it seems like electronics firms have done reasonably well considering -- and I was hoping you could talk a little bit about your aspirations there. If electronic content's increasing, how do you get increasingly involved with that? And does it -- how does it make sense that electronics firms are doing so well here despite the sequestration cuts?

Well, I mean, in general, if you're talking about companies that are fully penetrated in a maximum share in a very mature state, the overall impact of sequestration has a very real impact, which is unavoidable. There's no place to run and hide. We are not in that situation. I mean, during the Tyco years back 5 years ago to 15 years ago, the company did not invest in sustaining what is our natural share in that military aerospace defense market. Consequently, only 10% of our sales today are in defense-related business. And I would say, a more natural condition would probably be more like 1/3 of our business. So that is -- and Northrop is a good example. I mean, the amount of business we do relative to their purchase level is recently anemic compared to what we can really establish as we establish that MMIC business and become appropriately a good strategic supplier with our fair share of business. The other thing I'd point out is sequestration is very real. In many cases, more conventional parts of the military are impacted. But I can tell you, whether it's secure broadband communication with frequency hopping, battlefield communications is front and center. That's going to happen under any condition. UAVs, very healthy market. Those who need to communicate, they need radar systems. And so there's programs which are new, which, coming from a relatively small share, that we can ride the wave of these new programs and end up with a more appropriate share for M/A-COM supplying the defense industry, the U.S. defense industry. We can drive a lot of growth for this company in the presence of a fairly owner sequestration.

Your next question comes from Harlan Sur with JPMorgan. Harlan Sur - JP Morgan Chase & Co, Research Division: Just a follow-on to A&D segment. Obviously, I think you've got pretty good visibility as it relates to sort of these -- some of these big program wins, maybe not as good visibility on the timing of those ramps. And as you mentioned, you've got some key new relationships on the defense side. But kind of looking out over the next 18 to 24 months as some of these programs start to fire, are they more aerospace-related? You've done well with commercial radar and satellites. Are they going to be more defense-related? Do you still see that sort of 2/3 aerospace, 1/3 defense mix holding or changing over the next couple of years? It seems like from your prior comments, you think that maybe your defense business might become a bigger part of the mix.

I would say both are very healthy growth areas, the commercial aerospace piece, whether it's the satellite communications or air traffic control and weather radar. I mean, you're talking about entirely new deployments of air traffic control radar systems. We're using technologies. I mean, we're extraordinarily well-positioned with our new Gallium Nitride power transistors. So we can really benefit from that and drive very, very nice growth on top of our historical run rates. That said, on the defense side, as I was just describing, relative to our natural share of that market, we are dramatically underpenetrated. I can't speak to the details of the program wins and so on, but I mean, you're talking about transformative levels of revenue and gross margin contribution relative to our current size.

I'm not showing any other questions in the queue at this time. I'd like to turn it back over to Mr. John Croteau for closing comments.

Great. In summary, you're beginning to see our growth strategy take shape near term. Our focus remains on taking market share, which has, so far, yielded 3 quarters of sequential growth despite a challenging macroeconomic environment. Medium term, we believe our growth will be fueled by new strategic customers in networks and aerospace and defense, such as Northrop Grumman and ELTA, as they ramp into production. Long term, we believe M/A-COM is positioned to reshape and outperform the industry with the first sustainable supply chain for Gallium Nitride technology. Conrad and I plan to be at the Morgan Stanley conference on August 21 in Boston. If you plan to attend this conference, we welcome the opportunity to meet with you. But I want to thank everyone again today for joining us on today's call, and I look forward to reporting our continued progress next quarter. Operator, you may now disconnect the call.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your conference. You may now disconnect. Good day.