Welcome to MACOM’s First Fiscal Quarter 2022 Conference Call. This call is being recorded today, Thursday, January 27, 2022. At this time, all participants are in a listen-only mode. I will now turn the call to Mr. Steve Ferranti, MACOM’s Vice President of Strategic Initiatives and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Olivia. Good morning. And welcome to our call to discuss MACOM’s financial results for the first fiscal quarter of 2022. 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 a more detailed discussion 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 also include discussion 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 morning. I will begin today’s call with a general company update. After that, Jack Kober, our Chief Financial Officer will review our Q1 results. When Jack has finished, I will provide revenue and earnings guidance for fiscal Q2 and then we will be happy to take some questions. Q1 was a good start to our fiscal year. Revenue for the quarter was $159.6 million and adjusted EPS was $0.64 per diluted share. We made incremental progress and profitability, achieving gross margins above 61% and operating margins above 30%. Our financial performance reflects the numerous improvements that we're making across all aspects of the business. Over the last couple of years, our management team and employees have worked hard on numerous continuous improvement projects that have spanned the company. We are focused on execution whether it involves developing and launching new products, meeting customer delivery requests, improving our operational efficiency, or improving internal business development processes to name a few. I would like to thank all MACOM employees for their continued dedication and hard work. Overall demand for our products has been increasing. Our book-to-bill ratio for the quarter was 1.1:1 representing the fifth consecutive quarter of a book-to-bill ratio being greater than 1. Today's near record backlog is helpful as we plan Q2 and beyond. Similar to prior quarters, we believe that our Q1 bookings activity reflects a combination of market share gain and/or long lead orders which are being placed well ahead of required ship dates due to extended industry cycle times. Our turns business was approximately 14% of our total revenue during the quarter, which was in line with expectations. Our operations, planning and logistics teams continue to do an excellent job managing the variety of day to day challenges whether supply chain shortages…

Thank you, Steve. And good morning everyone. Our fiscal year 2022 began with further improvements in revenue, gross margin, operating margin and earnings per share. Revenue for the first quarter was $159.6 million up 2.8% quarter-over-quarter. The sequential improvement was driven by strength in our telecom end market. On a geographic basis consistent with prior periods, domestic customers represented approximately 47% of our fiscal Q1 results. Adjusted gross profit was $98 million, or 61.4% of revenue, up 30 basis points sequentially. During fiscal 2022 and beyond, largely as a result of the numerous operational improvements that Steve noted in his prepared remarks, we expect further gross margin improvement, albeit at a slower rate compared to prior periods. Total adjusted operating expense was $49 million, consisting of R&D expense of $31.2 million and SG&A expense of $17.8 million. Total operating expenses were sequentially up by $900,000 from fiscal Q4 2021 driven by anticipated increases in R&D staffing. Over the past few years, we have implemented new processes to assess our R&D investment opportunities and new product initiatives. We feel these investments and the rigor associated with our processes will continue to help ensure we are maximizing returns for our stockholders going forward. I would also like to note that we will continue to be disciplined with overall discretionary spending for fiscal year 2022 carefully balancing growth related operating expenses with appropriate returns. Adjusted operating income in fiscal Q1 was $49.1 million, up from $46.8 million in fiscal Q4. Adjusted operating margin was 30.7% for fiscal Q1 sequentially up from 30.2% in Q4. We expect a combination of top line growth, incremental gross margin improvements and disciplined spending will enable opportunities for modest operating leverage improvements in fiscal 2022. Depreciation expense for fiscal Q1 was $5.9 million and adjusted EBITDA was $55…

Thank you Jack. MACOM expects revenue in Q2 to be in the range of $161 n million to $165 million. Adjusted gross margin is expected to be in the range of 60% to 62% and adjusted earnings per share is expected to be between $0.64 and $0.68 based on $71.4 million fully diluted shares. In Q2 when compared to Q1, we expect revenue for industrial and defense and data center to be flat to slightly up and telecom to grow by approximately 5%. In summary, we stand in front of a multibillion dollar SAM with a unique technology portfolio. Our strategy is to further establish a diverse portfolio of products, customers and end markets. We maintain a long term perspective on executing our strategy and we will work to manage our business to be profitable throughout all business cycles. We are confident we can continue to improve our financials and take market share in the months and years ahead. I would now like to ask the operator to take any questions.

Thank you sir. Now, first question coming from the line of Tom O’Malley from Barclays. Your line is open. Tom O’Malley: Hey, good morning, guys. And thanks for taking my question and appreciate the color into March as well. I guess the major question here is when you guys laid out kind of the shape of the year heading into this year, you’ve talked about a data center business that would grow high single digits to low double digits. You're guiding the datacenter business up slightly, flat to up slightly. What's going to drive this acceleration in the back half in June and September? Is that the addition of the laser portfolio? Are you seeing increased analog shipments there? Just any color on that acceleration, which is kind of implied for the back half.

Sure Tom. Good morning. So thank you for the question. Maybe what I'll do is I'll sort of take a step back first and talk about the expectations for the full year in total and then we can talk a little bit about the data center. So for today, certainly we could up date everybody to say that we are still on plan to hit at least 10% year-over-year growth for the company. So we're very excited about that. Second, I would just highlight that there's really no changes to our outlook in Industrial and Defense that end market which is our largest market. On our last call we had signaled sort of an 8% to 10% year-over-year growth rate. We're comfortable with that range. And third, our outlook for telecom has increased slightly since our last call. And our outlook for data center has decreased slightly. And so, as we look into the rest of the year, we think telecom's going to be in the mid-teens or slightly better and we think the data center will more likely be in the low-to-mid single digits per growth year-over-year. And what's driving that is a few different factors and we highlighted some of these on our call last quarter and that some of these trends continue. We are seeing a softness in a 100G CWDM4 pluggables. Some of our short reach volumes we're also expecting to continue to either remain at the current levels or decrease slightly in the back half of the year. And so those are areas within the data center that I would say are soft and that's our expectation for the balance of the year. And that will be offset by some different areas of growth and most of which are PAM-4 related, including 200G, our short…

Sure. So our approach to providing guidance for the quarter or even sort of our general outlook for the year has not changed. We tried to factor in all the things that you've talked about including supply chain risk, potential shortages of components, an area that is a little bit of wildcard of course. It's some of our customers are having problems supplying components for their builds, often times what they will do is delay, the production which of course has an impact in companies like MACOM. So we try to factor all of those things in. I would say generally speaking, the environment has not really changed for MACOM in the last three months. We have areas where we are running very a high utilization rates or at or near capacity. We have a few product lines mostly network and data center related product lines that are being directly impacted by capacity constraints or high density let's say package technology. And so, there is a significant amount of work we're doing right now to bring up second sources. And that's one of the reasons why you're really seeing a plateauing of the data center run rates sort of mid-year and we think that will open up in Q4. But generally speaking, Tom, the environment has not changed in the last three months. The impact to COVID, I would say is abating. Of course on the logistic side, it is there is lots of issues moving product around the world right now and our team I think it does a nice job of managing those challenges.

The next question coming from the lineup, Tore Svanberg with Stifel. Your line is now open.

Yes, thank you. And congratulations on the continuous execution here. Steve, maybe it's just my perception but I thought the laser business would probably start to ramp a little bit quicker or I was thinking maybe will ramp this year. Any changes there, are there some qualification delays, if you could update us specifically on the laser business that'd be great.

Yes. So our expectation for laser growth and in revenue growth in the second half is significant. And we think our laser revenues for both telecom and data center will grow by at least a factor of five in the second half compared to the first half. So from a design qualification, winning market share, nothing has changed there. It's really a timing around individual customer's ramp. We are starting from -- in the case of 25G technology, we're starting from a very small base, effectively zero. As you remember, we launched our Clear Diamond product line in June of 2021. But we are getting positive signals from the market. We believe we will be winning market share this year. And so, I don’t see any yellow or red issues associated with the laser business in general.

Great. Thank you, for that. And I know analog transformers has been an opportunity for a while but you spent a little bit more time on it on this call. Does that mean we are potentially at an inflection point of seeing analog and for penetrating the market more materially this year?

I think I can talk from our perspective and the make-up of our revenue. Three maybe four years ago, all of our business was NRZ business and today we're approaching about 50% of our data center revenue being PAM4 related. So it's absolutely there we see a movement of the movement towards PAM4. And our contribution is primarily 200G, 400G, 800G applications where we support short reach analog platforms.

Our next question coming from the line of Harsh Kumar with Piper Sandler. Your line is now open.

Yes, hey guys. First of all, congratulations, solid grand solid guide, I appreciate that very much. So Steve, MACOM had historically been a growth story. And you were showing leverage on the gross margin. I think you're indicating on this call that the leverage in the gross margin piece and the off margin leverage is intact. But I wanted to understand the growth piece a little bit more. Can you point us to things that are working in telecom as you look out the next 12 months, which parts might move faster than the others? And my other question was did you leave any revenues behind on the table because of supply constraint in either December or the implying guidance for March. And I have a follow up.

Sure, thanks. Thank you, for the question. Maybe a couple of words about the recent history or execution. And as we've talked about in the past on prior calls, from taking a big step back from 2010 to 2020, there was fiscal years MACOM had a CAGR of about a 7.5%. And our goal from 2020 to 2025 is to at least double that that is our goal. And when we do that, we end up at approximately a $1 billion of revenue in our fiscal year 2025. So that is our goal. Now, we had of course as everybody knows a very strong fiscal year '20 and '21. In fact, in fiscal year '21, we had 14.5% year-over-year growth, which meant that we exited fiscal year '20 at a very high run rate because the sequential growth during fiscal year '21 was between 1% and 2%. And if you look at our sequential growth today and what we're forecasting for the back half of the year, Q1 and Q2 it’s around north of 2% and then in the back half of the year we expect sequential growth greater than 4%. So we believe there will be some slight acceleration of growth in the back half of our year due to some of the reasons we talked about. And when you ask well where is the growth coming from, it really speaks to our strategy. Our strategy is to expand our SAM to launch new product lines to get into new markets. And as we've talked about some of the accomplishments and we look at our business today, you -- I can tell you that this past quarter we had record bookings within on our pure carbide line which certainly supports our growth strategy for RF power. We won a…

Hey Steve, very helpful. And then, maybe one for you or Jack, I want to go back to gross margin. So you came on and it was very quick gross margin turn outs were really quick because of tweaks in the business and some initial cost cuttings. Can you maybe help me understand as I'll look to the next three years let's say. My gross margin growth, is that likely to come from tweaks in the business or to a greater degree from the new products that you're getting into. Is there a threshold that you have for gross margin for the new products that is perhaps driving gross margin up?

Tore, thanks for the question. And maybe, I'll make a few comments and then Jack can also add to it. So, the -- you're correct, we've done the teams done a lot of work to improve the gross margins of the portfolio and that work continues. As we think about the future, we'll now start turning towards more of a dependency on the new products and their contribution to the gross margin improvement. And so, let's say over the next two to three years, the majority of the improvements will come from product and technology and making sure that we're more differentiated and our price points have more value where we can achieve higher gross margins. And just to build on that, Harsh, as I had mentioned in my prepared remarks, there is a fairly robust process that we have from an R&D perspective in terms of analyzing those projects to make sure they're coming out with higher margins. Not every new projects going to have higher margins but we're definitely focused on driving that higher. And then to your other point, there are things that we can continue to do within the business to improve the gross margins over time. There's a number of internal initiatives that we have working that will improve that over time. And as we continue to expand our product launches as well as the SAM that Steve had mentioned, that additional revenue will also provide additional margin expansion as we go forward. Just speaking, Harsh, on calling you Tore.

Our next questions coming from the line of Chris Caso with Raymond James. Your line is now open.

Yes, thank you. Good morning. And the first question, I just wanted to go through a bit of the expectations for the second half of the fiscal year based on the color you've provided both of the overall revenue up 10% and the different segment commentary. Based on what you said, it would seem that the I&D would be kind of up slightly on a quarterly basis in the second half of the fiscal year. But then, telecom to get to that kind of a mid-teens growth it would see rest of it down on a quarterly basis and then data center as you said would be up pretty strongly in the second half of the fiscal year. Is that consistent with your expectations and maybe some kind of color on what would be driving those trends as you go into the second half of the fiscal year?

Yes Chris, this is Jack. Yes, based on the math that you're describing, that would get us to the things that we had described. But also as Steve had mentioned, you're not -- it isn’t good to be a perfect answer, the markets do continue to change and evolve but that will be our view point. We also look to our strong book-to-bill in our on our backlog is we form formulate some of these projections going out over time. So that backlog gives us some of the strength to hit those numbers as we work our way through the year.

Okay, great. As a follow-up, just about that that backlog as you go to the second half of the year. And maybe you could talk about what's in that backlog and I presume based on we talked about the growth projections, a strong part of that backlog is in data center and is that really depended on supply constraints right now? And getting some of that backend capacity you've talked about there, is that the main constraint or kind of risk factor on getting to those numbers as you go to the second half of the year.

And maybe I'll help with the answer on that question. So you're correct that we have been building backlog. I think as I highlighted, we've had five consecutive quarters of greater the one book-to-bill a data center backlog has been growing and we are constrained in some product areas I talked about related to different package technologies. And so we do see that Q4 is an important quarter for us on the data center to make sure a lot of things fall into place to support the demand that we have for our products. But generally speaking, as we again as we talked about making two or three quarter forecast is not as scientific as we would want. Certainly we have a strong backlog but there's also dynamics at play from each of these different markets. Our small market in Q1, data center, which is about 18% of our revenue is the most volatile market. So, that can move around quickly on us both on the ramp up and as well as on the ramp down side of the cycle. So, we have to plan for that and hedge those extreme cases and make sure that we can hit the targets that we put out there publicly. But generally speaking, if we look at the growth, I&D is going to have a very good year this year, telecom is going to be as I highlighted in the mid-teens for the full year. And then the data center if we can hit mid-single digit, we'll be very pleased with the way we set ourselves up for our fiscal year '23.

And next question coming from the line of David Williams with Benchmark. You're line is open.

Hey, good morning and thanks for letting me ask a few questions here. I just want to come touch base maybe in terms of the order trends you're seeing and how those are maybe track, obviously the book-to-bills have been good. But just are there areas that you're seeing particular I guess changes in customer behavior in terms of order trends?

Generally, no. I think our main customers that run in high volume platforms are well aware of the extended cycle times in the industry. They run they understand the risks associated with supply and potential constraints. And so, our customers and our sales force has been working very closely to make sure that we understand their demands and we tell our customers the best way to secure supply is to place orders so that we can instigate the planning. The other thing that I'll just highlight and Jack mentioned this in his script is that we have been building a bit of inventory. Our inventory went up this quarter and that also will allow us to hit some of the revenue projections that we have for Q3 and Q4. We have seen, I will say we have been messaged by some customers and they're not getting all the components they need to run production and that has an attenuating effect on our plans. And so, we -- I would say that’s probably the only sort of new dynamics that's at play right now. We are hearing that from customers and I think now their level setting what they can execute in resetting production schedules based on good information about supply. And so, that has a trickledown effect to us. But again I think these are short-term issues, they're manageable and over the long-term, I think we're setting ourselves up for success. I'll highlight that engineering team this year has been doing a great job with product development. We are still on track to launch at least 35% more products this year than we did last year. We are coming up to OFC in March and also IMS in June. And these are major conferences where we like to introduce our best in latest products. So we're getting pretty excited about some announcements at OFC and also IMS.

Great, that's very helpful. Thank you. And then, maybe just some kind of thinking about when the supply team begins to normalize. Do you think that there is a period of replenishment of the supply team that will need to happen that maybe helped just kind of isolate the oversupply that we typically see. I’m just trying to get a feel of how you think the customer behaviors will act as we get closer to normalization. How do you think in terms of your business and your visibility into that supply team and you feel will like you're fairly well-positioned to can maybe avert some of the problems as we begin normalized.

So it depends on the end market. We have some end markets where the channel inventory is empty or very, very low and then we have other markets where the customers are in low and or medium volume production and they do a very good job of planning. And so, we wouldn’t expect that expect any sort of unforeseen falloff on their run rates. I'll highlight that most of our major customers deal directly with MACOM and we have good visibility into their plans. And so, that allow -- like gives us comfort that if there's going to be changes in the future, we can plan for that because as you know our manufacturing cycle times in some instances are longer than six months. And so, we have to stay very close to our high volume customers.

Our next question coming from the line of Karl Ackerman with Cowen. Your line is now open.

Yes, thank you. Two questions, if I may. Good morning. I guess for us, just on capacity growth. You would be expanding capacity in New Hampshire, which there wasn’t much commentary on this call 90 days ago. But you would really be expanding capacity in New Hampshire unless your customers are telling you they need more capacity. Clearly in markets you serve overall growing which you indicated there's several areas where your team is expanding now. Are these customers giving you order visibility beyond 2022 and maybe even into the back half of 2022? And so you discussed the manufacturing loading and when that facility should be up and running.

Thank you for the questions. So in some areas we have very good visibility in backlog through the back half of 2022, so yes. And as we highlighted in the script we have a record backlog. And if we roll the map even on our last five quarters where we had greater than one book-to-bill, we -- it shows and you compare that to what we actually ship, we've actually generated over a $120 million of backlog over the past five quarters. And so, the demand is there. You mentioned New Hampshire and the manufacturing site we have there in the doubling of the space, so I would just highlight that that's one example of an area that we're expanding. We're expanding in all different parts of our business including the business units, operations, planning, logistics, design engineering, and of course production. And so, we have very aggressive growth plans. Obviously we talked about 35% more products coming out this year than last year and that requires more people and more facility to support the growth. Now with that said, we like the fab-less model and we have a significant portion of our business that we run through other people's fabs. And that provides our business a tremendous leverage where we can ramp production quickly with adding little or no cost to our operation. So we still have leverage in the model. We're expanding based on expectations of growth in areas where we think it makes sense to do that. The New Hampshire facility runs a wide range of products for a wide range of markets. And so, I wouldn’t read into that expansion as sort of an indicator of any one particular customer program or activity. It's broad it's to support broad based growth.

I appreciate that. Two quick clarifications if I may, I'll tie them into one. The higher growth projection you have in telecom, is this mainly Fronthaul lasers or is this also coming from PON. Second, Jack, I guess, when might you finalize plans and deploy the proceeds from the inflow of cash when they appear? Thank you.

Thank you, for the question. I'll take the first one and maybe Jack can take the second. So I would want to or investors to think that our telecom growth is exclusively coming from 5G Fronthaul or PON. It is a diversified growth. Certainly PON is an important market for us but we also service various wireline and broadband applications as well as of course 5G not only on the optical side but on the RF side. So the good news is our growth in telecom is broad based, not just based on the two items that you talked about. Jack, do you want to take the second?

Yes. And then with regards to the Ampere transaction we're pleased with the outcome there. And as we sit here today, we don’t view ourselves as having any kind of excess cash, we're still in a net debt position call. So we think we're appropriate in terms of where we sit today. Don’t feel like there's any needs to deploy that cash immediately. As we've mentioned, we've been making investments internally in the business over the past year and plan to continue doing that. I know in my prepared remarks I had also mentioned some CapEx investment. So that will be some of the utilization for our cash to make sure we're generating appropriate returns for the business as we go forward.

Our next question coming from the line of Quinn Bolton with Needham. Your line is now open.

Hey guys, just a couple of quick questions from me. Just one on the gross margin guide, midpoint of 61 down 40 basis points sequentially. Any particular headwinds you're seeing in the current quarter either from a product mix shift or COVID cost related issues, higher input costs that we should be aware of?

Short answer to that point is no. but as we work through gross margins, as we look to go out into the future, our goal is to continually improve. It does get a bit more challenging as time goes on and things don’t always happen in a straight line. Our plans are to as I said continually make those improvements and effectively we grab the guide that we put out there last quarter was within the range over the 60% number. So I think the guide that we had was 60% to 62%. So nothing really notable to point out with that guide there.

Perfect. Thanks for that clarification, Jack. And then Steve, I guess like a couple of questions on the data center. You mentioned the 25 gig AOCs and CWDM4 business was going to be soft in the second half of the year. Should we sort of think of those now as past their peak in those businesses sort of move into a legacy in a declining mode as the business shifts towards PAM or do you think at some point you could see a resurgence in those lower speed applications?

That's a very good question and that's a question we're also asking ourselves and as we look to work with our customers. Our general sense is these programs especially 100G CWDM4 have steady demand and they'll continue to be relevant let's say in the future. But we're still looking at that. It's possible they'll continue to trend down but that's really not our expectation. And then, certainly things are migrating towards PAM4 in the higher data rates. And certainly areas that we see that are very exciting and maybe I'll spend a moment on this is the new product line that I talked about in my prepared remarks the linear equalizers. And I think it's important to highlight that this technology really addresses two very different applications in the data center. The first is short reach electrical connections where you're on let's say a backplane of copper cable and you're moving an electrical signal as opposed to an optical signal. And then the second application is inside the data center where we're working with companies that have all of the components necessary to stand up very high end computers. And they want to use the infrastructure of their computers and the to drive and make adjustments to the optical signal. And so we're working with some key customers to develop solutions to effectively remove the DSP function, let's say from the pluggable module and have that functionality brought into the . And so that's exciting for us. And we're doing -- we're entering programs at 400G. And if we're successful here that will break the dam on moving that as a more adopted technology for broader applications inside the data center. So we're very focused on that as a company where we have very unique technology. We have close relationships with some major companies that are looking at effectively there's different words for it, you can call it direct detector, direct drive, but the goal would be to eliminate the DSP in certain applications. And so the reason why I mentioned this when we talked about some of those legacy platforms like 100G SR4 or 25G, that's our AOCs, things will migrate to newer technologies and we are involved in those. So it's about portfolio management, making sure that we're engaged with next generation platforms.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Daly for any closing remarks.

Thank you. In closing, we'd like to thank our customers, suppliers, business partners and employees for their continued support. Thank you and have a nice day.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may now disconnect.