Good afternoon, and welcome to MACOM's First Fiscal Quarter 2020 Conference Call. This conference call is being recorded today Tuesday, January 28, 2020. At this time, all participants are in a listen-only mode.I will now turn the call over to Mr. Steve Ferranti, MACOM's Vice President of Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Catherine. Good afternoon, and welcome to MACOM's first fiscal quarter 2020 earnings conference call.I would like to remind everyone that our discussion today will contain forward-looking statements, which are subject to certain risks and uncertainties as defined in the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. For more detailed discussions of the risks and uncertainties that could result in those differences, we refer you to MACOM's filings with the SEC.Management's statements during this call will include discussions of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related Form 8-K, which was filed with the SEC today.With that, I'll turn over the call to Steve Daly, President and CEO of MACOM.

Thank you, and good afternoon. I will begin today's call with a general company update. After that, Jack Kober, our Chief Financial Officer, will provide a more in depth review of our fiscal 2020 Q1 financial results. When Jack is finished, I will provide revenue and earnings guidance for our Q2 and then we would be happy to take some questions.Revenue for Q1 was $119.1 million and adjusted EPS was $0.07 per diluted share. It was a good start to our fiscal 2020 and the MACOM team did an outstanding job during the quarter to achieve these results. MACOM's management and employees continue to drive improvements across all aspects of the business. The management team is doing a great job establishing a culture of engineering excellence and fiscal discipline.Our Q1 revenue by end markets was as follows: Telecom was $45.6 million, Industrial & Defense was $50.5 million and Data Center was $23 million. All markets performed well with sequential growth of 15%, 1% and 2%, respectively. On a geographic basis 45% of our first quarter revenue was from domestic customers and 55% from international customers similar to prior quarters.Our book-to-bill ratio was 1.1:1 and our churns business or business booked and shipped within the quarter was approximately 25% of our total revenue. We experienced solid bookings across all three end markets. And generally speaking, demand for our products was strong in the first fiscal quarter.The sequential growth in our Telecom end market was primarily driven by demand for our 5G products and to a lesser degree by an increase in 2.5 GPON following multiple quarters of decline. As a reminder, our 5G portfolio today consists of receive side RF Front-End Modules, control products for base stations, high-performance analog ICs for 5G front-haul and high-performance coherent driver and TIA products for…

Thanks, Steve and good afternoon, everyone. Our fiscal Q1 results were another tangible step toward improving MACOM's overall profitability and cash flow. Most notably, we posted sequential improvements in revenue, adjusted earnings per share, and free cash flow. This has been a company-wide effort, and I would also like to thank all of the MACOM employees who have been working hard to help achieve this.Revenue in the first fiscal quarter of 2020 was $119.1 million, up 6% sequentially. The sequential improvement was driven by positive trends across our end markets, including growth from early 5G deployments in Telecom, healthy demand in industrial and defense as well as increases in Data Center.On a year-over-year basis revenue was down 21% from $150.7 million in fiscal first quarter of 2019. Adjusted gross profit in fiscal Q1 was $63.7 million or 53.5% of revenue. Adjusted gross margin was up 50 basis points sequentially. Gross margin improvement remains a key focal point for us.As Steve noted, we have a number of ongoing internal initiatives aimed at cycle time improvement, scrap reduction and operational efficiencies that we believe will result in incremental gains in gross margin for the course of fiscal 2020 and beyond. Total adjusted operating expense was $50.7 million, consisting of R&D expense of $31.6 million and SG&A expense of $19.1 million.Operating expenses were down more than $300,000 sequentially. We incurred $1.2 million of restructuring charges in the first fiscal quarter associated with the restructuring plan we announced back in June 2019. We anticipate approximately $2 million of additional restructuring expense remaining over the course of fiscal 2020 as we complete these actions.As I have previously noted, there are a few remaining items related to our June 2019 restructuring plan that we expect will provide additional OpEx reductions later in fiscal 2020.I would also…

Thank you, Jack. MACOM expects net revenue in Q2 fiscal 2020 ending March 27, 2020 to be in the range of $122 million to $126 million. Adjusted gross margin is expected to be in the range of 53% to 55% and adjusted earnings per share is expected to be between $0.09 and $0.13 per share based on 68 million fully diluted shares.Our Q2 revenue projections include expectations that Telecom and Data Center end market revenues will be up and Industrial & Defense end market revenues will be flat to slightly down. We are excited about the multiple opportunities in front of us and we are focused on execution and planning.I would now like to ask our operator to invite our listeners to ask any questions.

Thank you. [Operator Instructions] And our first question comes from Harsh Kumar with Piper Sandler. Your line is open.

Yeah. Hey, guys. First of all congratulations, solid execution. Good to see that positive free cash flow. A couple of the other companies are talking about Data Center getting better. We didn't see that in the December quarter in a meaningful way, but I think your guidance implies that it will be up in March. I was curious, if you can give some color maybe why it didn't move the December quarter? And then perhaps what you're thinking specifically for that end market? And then I have a follow-up.

Yeah. I think that our – what we're seeing in the Data Center market is in line with industry. We are seeing a positive momentum in terms of booking activity and demand. Most of our exposure in the Data Center is on our 100G analog solutions that are generally for short-reach type applications. As we look into Q2, we see continued strength. We think our sequential growth in the Data Center will be low, well, I'll say like above 10% sort of a low-teens type of sequential growth. But generally that end market behaved well to us. We're seeing the demand for our 100G products and we think there's some significant growth in front of us to come.

Our next question comes from Quinn Bolton with Needham & Company. Your line is open.

Hey. Let me echo my congratulations on the nice results and especially on the nice cash generation in the quarter. Steve, I wanted to come back. You had mentioned some new products I think it was GaN on Silicon the 68 to 10 watt. And I'm just trying to get a sense of the applications for that and how those products may differ from what you're doing with STMicro for GaN on Silicon?

Right. So just to remind everybody, we have a fairly robust power business. Most of it revolves around legacy bipolar transistor business, where you're talking about 50-watt and above type power levels. And we see that that's a stable market. It's typically in avionics defense type end applications test and measurement even. And so part of our strategy in terms of product development is to make sure that as the new technologies come forward, such as GaN on Silicon or even GaN on Silicon Carbide that we address those same markets with a more relevant technology or a newer technology.So our strategy over the next year or two will be to build out our general power transistor as well as power amplifier business for this multi-market category.What we like about this market is the ASPs are high; the margins are generally very strong typically above our corporate average. It's a low medium volume, high mix type of a product area. And its additive to the strategy that revolves around 5G and ST.But it's very, very different. So, as you know the ST strategy is really taking our existing GaN-on-Silicon process and transitioning it to a 6-inch low-cost high-volume fab, specifically to address markets like massive MIMO and 5G.

Got it so, it's a different application. Thank you. The other question I had is you guys seem to be reporting strength on the Telecom side of the business driven by 5G. I think front mid-haul.Yet when we listen to Texas instruments and Xilinx reported here after the close. Both companies have talked about seeing slower activity on 5G. Just wondering, if you might be able to help us reconcile, the strength you're seeing versus perhaps some of the weakness some of the larger players, in the space are seeing?

Well, I think, a few things. Number one, we're very small relative to the size of the market. Remember, we're in front of a multibillion-dollar SAM. So our incremental growth in any period isn't necessarily representative of the market. That's the first point I'd make.The second is, our Telecom end market is actually a large catch all for a variety of different submarkets. So 5G is one of them. But we have other submarkets that drive growth. For example GPON, and I think I mentioned in the script that that was an area that was showing strength.But with that said, we are seeing new revenue, from new products in the 5G front haul market. And we believe we're in a strong position with some of our products, some of our analog products to support that market.So, I guess I'll leave my comments at that, other than we are seeing the strength. We think that that strength will continue. We have a lot of different products that go into Telecom. We talked about the high-power switches in the past, front-end modules of course for 5G radios. And then, the access market which is the GPON market.So, Telecom for MACOM is a very broad market. As we look into Q2, we think we'll see high single-digit sequential growth, coming from all these things I just talked about.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Tore Svanberg with Stifel. Your line is open.

Yes. Thank you and congratulations on the strong results. Steve, I apologize for making this comparison, but the previous management team at MACOM seemed to be really aggressive on GaN-on-Silicon.You just mentioned that perhaps with GaN-on-Silicon carbide, at least to me it appears that you're going to have a -- the more of a balanced approach when it comes to the different flavors of GaN.Is that the right way to think of it, or is there any other reason why you are starting to make more investments in GaN-on-Silicon Carbide?

Rights, so I look at our business from a portfolio point of view. And we will have products that will run through our internal fab. And we'll have products that we will go to the market and we'll use external fabs.And so, when we think about GaN-on-Silicon or GaN-on-Silicon Carbide or any other process whether it's high-power pHEMT or HBT or even bipolar, our strategy is simple. We want to make sure our chip designers have access to the best technology, for the applications that they're focused on.About $50 million of revenue today is in Industrial & Defense. This is an end market that we sit in or contribute to that wants the best technologies. And so, when we compare certain applications to the different GaN process technologies, there are many instances where GaN-on-Silicon Carbide will provide a superior solution.And so we want to provide our designers access to that process. So, I look at the opening up of the aperture of our GaN strategy as additive. We're certainly not backing away from our goals regarding GaN-on-Silicon and developing a high-volume solution for a variety of markets including massive MIMO.There are some compelling attributes of GaN-on-Silicon in terms of ease of use for example in certain applications. So we're continuing to develop that. We see it as a long-term activity as I pointed out. But I don't think you should interpret these actions as a strategy change, where we're replacing GaN-on-Silicon with GaN-on-Silicon Carbide.

That's really helpful. And my follow-up question is perhaps for both of you, as it relates to gross margin. So you said you're taking some actions internally operationally to try and improve yields scrap and so on and so forth.Should we think about those initiatives kind of getting the company beyond the immediate goal of 60% gross margin, or is that kind of part of the march towards that long-term target?

Tore, it's Jack. Those initiatives are getting us in line with that march towards improving margins. We know we had margins in the high 50s going back the past couple of years or so. So we're taking many of these initiatives to try and get us back in line there.We have posted sequential increases in our gross margins over the past couple of quarters. And the expectation is that will continue. It's going to take some time as we work our way through it. And once again as revenue recovers we think we've got more of an opportunity to expand from a gross margin perspective as well.I think the other area just to note is in addition to gross margin expansion from an operating margin point of view, we feel we've got sufficient leverage just based on our current OpEx structure and where we're going to have that really contribute to the bottom line.

Thank you. And our next question comes from Tom Diffely with D.A. Davidson. Your line is open.

Yes, good afternoon. When you look at the fairly impressive outlook for high single low double-digit growth, is most of that coming from how you would describe as a market recovery versus the new products, or are the new products starting to have a meaningful impact on that?

Yes. I think it's a little bit of both. And just to be clear on our guidance I think at the midpoint it's around 4% aggregate sequential growth. Some of the submarkets, so our smaller markets are growing faster right now such as Data Center and Telecom. But I think it's – it really is a combination of both.There are pockets where there's market recovery such as in the Data Center. But there's other areas where we're winning market share. And some of that's due to the great work the company has been doing over the past few years including developing products for long haul, adding to that product set for example, linear TIAs, modulator drivers that are running at higher data rates.So our goal as a business is to more rapidly introduce products to capture the market opportunity. And so what Jack and I and the team are doing are really focusing on, how do we move products out the door at a faster rate, whether it be a gallium arsenide MIMIC that we run in our foundry, whether it's a laser diode that we want to sell into the Data Center or whether it's a massive MIMO amplifier for 5G.So I think the theme around MACOM's growth will at least in the next year or two will be centered around our ability to launch products for these very large markets that are demanding the products now.

Okay great. And then when you look at the ramping level of new product release, are there certain – is there a certain end market where you're initially focused higher margin markets, or is this truly across the board?

So we – back in September we actually reorganized our engineering organization into six different groups which were primarily aligned by technology. Those technologies in some instances are very focused on one market. In some instances they serve many markets. And so each one of these engineering organizations has a product development plan.And I would say generally speaking there's a continuum of products that have lower margins and products that have higher margins depending on the performance of the product and the end application. And so over the long term as a part of our strategic planning, we do want to increase the gross margins of the company.And while we can work on making improvements with the operation of the business and whether it be yields and production or better designs that have more margin during production that will get us so far. Then the next step is really launching products that command higher gross margins because the customer's willing to pay a higher price. And so we are going back to our strategy and we are reviewing the end markets that we're in, we're reviewing the markets that we're not in and we're asking ourselves the question, how do we get our margins above 60%? And the answer will really be coming from what products we choose to design.Now with that said, as Jack highlighted here just a moment ago, one thing that's tremendous strength for MACOM is we have incredible manufacturing power and leverage. And you saw a glimpse of that really looking from the fourth quarter to the first quarter, where we just had maybe 6% revenue growth but we had a 50% increase in EPS, 56% in that range.And so part of what we want to do as a management team is to make sure that we capture the opportunities that drive shareholder value, which ultimately means driving earnings up. And so there's lots of different ways to do that. It can be by launching more high-margin parts but it can also be a result of launching say lower or – lower than let's say corporate average margin parts but the revenue stream associated with that is tremendous. And so we will certainly look at all of these strategies and you can be sure that our underlying theme will be to drive shareholder value which means driving earnings up.

Thank you. Your next question comes from Tim Savageaux with Northland Capital. Your line is open.

Hi, good afternoon and congrats on the results. Wanted to focus in on your Telecom growth in the quarter. And to the extent that's somewhat on driven sounds like mostly 5G driven and within that probably mostly front-haul, mid-haul. But if you have a kind of comment on that I'd like to hear it. To what extent, are you able to ascertain kind of what sort of end markets are driving that growth? I assume China is a significant one there. And I wonder if you can give us an update on kind of where you're standing with Huawei these days in that regard? And then I'd like to follow-up.

Yes. Well, your initial comments are accurate and correct regarding what you believe the growth is coming from. It is primarily coming from basically 5G front-haul in the chips associated with that end application. It's primarily a China end market. Although there is a small contribution coming from other overseas markets that are outside of China.Regarding Huawei. You know Huawei as everybody knows went on the entity list back in May. Prior to that, our revenue at Huawei had been ramping up. They had not in recent years achieved a 10% revenue level, but they were climbing up to that point. And then in the middle of May that changed. And since then we've seen well number one a vast majority of the products that we we're selling to Huawei we're no longer selling to Huawei because of the export restrictions. But there is a small subset that we are allowed to sell to them and we've been doing that. And I would say, over the past seven months, the revenues to Huawei have effectively been declining or flat.And so when we do our AOP planning and we look at our future activities, we sort of take the associated revenues out of our modeling and consider that upside. But the general trend has been flat really over the last two quarters, but declining. And so again, when I look at that and think about our business at large, I would say clearly Huawei is a key player in the Telecom space, but our strategy has to be -- to grow beyond Huawei and make sure that if we lose a key customer that we're still strong enough to be profitable and to grow. And that's where the diversity of our business comes into play.We have thousands of customers. We have hundreds of product lines. We don't have a lot of customer concentration relative to our peers and so, we think this is a strength. But we are certainly keeping an eye on Huawei. We're not really engaged with them at this stage other than selling a very small subset of what we were previously selling them. And all of our forward-looking planning is sort of ex-Huawei until things change.

Got it. And a follow-up on the front-haul side. You made some comments around 25-gig lasers into that application though. I'm not sure, I caught the timing. Assuming your kind of front-haul revenues today are more HPA driven, what could the laser part add to that? And when might you expect that to ramp?

So you're right. It could be very additive. We didn't specifically talk about the timing of that other than to say that we've just gone through a process update and now we're going through a qualification phase. So, the best thing to do at this stage is to wait for updates on this -- on the timeline. I can say that it's going to take at least a quarter or two to get to the point where we're comfortable talking about ramps or product introductions or things like that. We still have a fair amount of work to do internally, so no 25G laser revenue for front-haul in the near term.

Thank you. And our next question comes from Harsh Kumar with Piper Sandler. Your line is open.

Thanks for follow-up question. Jack, I was curious if you could talk about how we should think about OpEx. Your OpEx was actually kind of held and then actually went down a little bit, while you grew your revenues. And I think you made some comments that you're going to be reigning it in or sort of holding it pretty tight. Is that in context to absolute dollar terms, or is that in as a percentage of sales for the rest of the year?

Yes, we're focused on managing all the operating expenses, Harsh. There can be some ups and downs depending on some R&D expenditures as I had noted earlier. We're focused on the dollars as we work our way through. And we'll continue to do that and aggressively manage it.

Thanks.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Steve Daly for any closing remarks.

Thank you. In closing, Jack and I would like to thank our employees for their efforts throughout the past quarter. Have a good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.