MTSI
Earnings call · Jan 2025 (Q1 FY25)

MACOM Technology Solutions Holdings Q1 FY25 earnings call MTSI

Feb 6, 2025 Source

Executive summary

MACOM Q1 FY25 — Record Revenue and Strong Cash Flow

MACOM delivered record Q1 FY25 revenue and strong cash generation, driven by sequential growth across all end markets, particularly record performance in Industrial & Defense and Data Center. The company is strategically investing in fab modernization and capacity expansion, supported by potential CHIPS Act funding, to enhance long-term competitiveness and address growing demand in high-speed data and defense applications. While gross margins faced pressure from underutilized fab capacity due to softness in some industrial and telecom areas, management remains focused on operational efficiencies and market share gains to achieve its $1 billion annual revenue goal.

Highlights

5

  • Q1 revenue reached a new quarterly record high of $218.1 million, up 8.7% sequentially.

  • Adjusted EPS was $0.79 per diluted share, up from $0.73 sequentially.

  • Free cash flow for Q1 was approximately $63 million, contributing to $657 million in cash and short-term investments.

  • Q1 book-to-bill ratio was 1.1:1, marking the fourth consecutive quarter at or above 1.0.

  • Industrial & Defense and Data Center segments achieved record quarterly revenues of $97.4 million and $65.3 million, respectively.

Concerns

3

  • Adjusted gross profit margin for Q1 was 57.5%, 60 basis points lower than the preceding quarter and below target, due to lower wafer volumes in the Lowell fab.

  • Ongoing softness within certain industrial and telecom end markets led to underabsorbed costs in the Lowell fab.

  • Gross margins are expected to remain in the range of 57% to 58% for the remainder of FY25, partly due to increased revenue contribution from the RF Power business (which has slightly lower margins).

Guidance & targets

CategoryTargetConfidence
Revenue
$227 million to $233 million
high materiality
High
Adjusted Gross Margin
57% to 58%
high materiality
High
Adjusted EPS
$0.82 and $0.86
high materiality
High
Adjusted Income Tax Rate
3%
medium materiality
High
Capital Expenditures (excluding CHIPS program spending)
approximately $30 million
medium materiality
High
Annualized Revenue Run Rate
$1 billion or more
high materiality
High

Segment performance

SegmentRevenueYoYQoQMargin
Industrial & Defense
Driven largely by growth in Defense business, with an uptick in radar and EW systems.
Record quarterly revenue
$97.4 million—up 5% sequentially—
Data Center
Strong growth driven by optical side of portfolio, particularly 800G products.
Record quarterly revenue
$65.3 million—up 16% sequentially—
Telecom
Weakness in certain areas, but overall sequential growth.
$55.4 million—up 7% sequentially—
U.S. Domestic Customers
Levels consistent with fiscal Q4 2024.
Revenue from U.S. domestic customers: approximately 45% of fiscal Q1 results
————

Operational metrics

Non-GAAP gross margin
57.5% 60 basis points lower than the preceding quarter
Q1 FY25

Below target due to underutilization in Lowell fab and mix shift.

Non-GAAP operating expense
$69.9 million up $4 million sequentially
Q1 FY25

Primarily driven by higher compensation-related expenses (merit increases) and higher R&D costs.

Non-GAAP operating income
$55.4 million up 9% sequentially from $50.7 million
Q1 FY25

Sequential increase over the past 3 quarters.

Net interest income
$5.9 million compared to approximately $5.3 million in Q4
Q1 FY25

Expected to increase at a similar rate through FY25 due to increased investment balances from operational cash generation.

Adjusted income tax expense
$1.8 million
Q1 FY25

Based on a 3% adjusted income tax rate.

Net cash tax payments
$1.1 million
Q1 FY25

Expected to remain relatively low through FY25 and FY26 due to deferred tax asset utilization.

Deferred tax asset balance
$217 million increased from $212 million at the end of fiscal Q4 2024
Q1 FY25

Includes R&D tax credits.

Non-GAAP net income
$59.5 million compared to $54.2 million in the fiscal Q4
Q1 FY25
Adjusted EPS
$0.79 up from $0.73 in fiscal Q4 2024
Q1 FY25
Diluted share count
75.6 million
Q1 FY25

Used for adjusted EPS calculation.

Accounts receivable balance
$91.8 million down from $105.7 million in fiscal Q4 2024
Q1 FY25

Due to improved shipment linearity and strong collection activity.

Days sales outstanding
41 days compared to 48 days in the prior quarter
Q1 FY25
Inventory balance
$198.4 million up sequentially from $194.5 million
Q1 FY25

To support growing customer order backlog and strategic growth plans for FY25.

Inventory turns
1.7x flat sequentially
Q1 FY25
Capital expenditures
$5.3 million slightly above the preceding quarter
Q1 FY25

Excludes CHIPS program spending.

Cash and investments balance
$656.5 million up $74.6 million from Q4
Q1 FY25
Net cash position
more than $157 million
Q1 FY25

Compared to the book value of convertible notes.

Depreciation expense
$6.7 million compared to $6.3 million in Q1 2024
Q1 FY25
Loss on extinguishment of debt
$193.1 million
Q1 FY25

Related to refinancing of convertible notes.

Shares issued for convertible note refinancing
1.6 million
December 2024

Issued to certain noteholders in connection with refinancing. Majority already included in diluted shares.

Turns business
approximately 23%
Q1 FY25

Of total revenue.

Serviceable Addressable Market (SAM)
$7 billion to $8 billion
current

Across 3 large and diverse end markets.

Data Center revenue growth
35% YoY
FY24

Strong growth in the prior fiscal year.

Data Center revenue growth
close to 50% YoY
FY25

Estimated based on current trends and guidance.

Telecom revenue growth
strong double-digit growth YoY
FY25

Estimated based on current trends and guidance.

Industrial & Defense revenue growth
strong double-digit growth YoY
FY25

Estimated based on current trends and guidance.

Industry KPIs

MetricValueDetails
Lead timestypically anywhere between 4 and 6 months months
Backlog order bookrecord levels
Book to bill ratio1.1:1
Ai data center revenue$65.3 million USD
Fab capacity utilizationlower wafer volumes
Inventory channel inventory$198.4 million USD
End market segment revenue mixIndustrial & Defense $97.4 million; Data Center $65.3 million; Telecom $55.4 million USD

Orderbook & backlog

Backlog record levels Q1 FY25

The increase in our inventory balance is to support our growing customer order backlog and our strategic growth plans for fiscal 2025.

Product announcements

ProductTypeDetails
Two new product lineslaunch

Deals & partnerships

CHIPS program office Nonbinding preliminary memorandum of terms (PMT) for grants and tax benefits.

Partnership for wafer fab capital investment plan, including Lowell and North Carolina fabs.

French government MMIC development project funded within the framework of the France 2030 program.

Awarded to MACOM's European semiconductor Center (MESC).

Convertible noteholders Refinancing of convertible notes due March 2026. refinanced approximately $289 million; issued new convertible notes of approximately $340 million due in December 2029

Issued new 0% coupon convertible notes due December 2029. Issued approximately 1.6 million shares of common stock.

Capital programs

Modernize Lowell Massachusetts fab underway
Funding: CHIPS Act and state funding

Benefit:expand its technology base with advanced node GaN on silicon carbide, improving some of the infrastructure, replacing some antiquated equipment, improve yields, increase throughput, small, very focused advanced GaN capability

Part of a long-term wafer fab capital investment plan. Will augment existing 4-inch line with a 6-inch GaN on SiC line.

Expand North Carolina fab underway
Funding: CHIPS Act and state funding

Benefit:expand the manufacturing capacity and capabilities, installing a 6-inch line right next to the 4-inch line in the existing building, buy an MOCVD reactor so that we can work on advanced epi for GaN

Part of a long-term wafer fab capital investment plan. Anticipates capacity issues in 1-2 years.

Risks & headwinds

Gross margin pressure from Lowell fab underutilization Q1 FY25 and remainder of FY25

57.5% in Q1, 60 basis points lower than preceding quarter; expected to be in the range of 57% to 58% for the remainder of fiscal year 2025

Mitigation:making good progress on numerous initiatives where our team continues to refine and optimize our cost structure and execute on incremental operational efficiencies and yield enhancements. Expects recovery when core telecom business returns to strength.

Architectural changes impacting ACC demand from one customer Current (Q1 FY25)

reduce the overall demand for that particular product

Mitigation:We've built that into our guidance. We don't see this as a major challenge for the company given we have lots of variety within the data center. Tremendous interest from broad customer base for ACC technology.

Temporary volume reduction in a large RADAR program Temporary, awaiting reload of another long-term contract.

volumes on that one particular program have come down

Mitigation:Expects volumes to return with new long-term contract.

Weak demand in certain industrial and telecom end markets Ongoing (past 3 quarters)

ongoing softness within certain of our industrial and telecom end markets

Mitigation:Expects demand to come back at some point.

CHIPS Act funding subject to political dynamics Ongoing

null

Mitigation:if it does [get canceled], we will adjust our strategy accordingly

What to watch in Q2 FY25

Data Center Revenue Growth

next quarter (Q2 FY25)
Current up 16% sequentially
Target approximately 10% growth

Why it matters

Data Center is the primary growth engine; sequential growth is key for overall revenue targets.

We expect sequential revenue growth in all our end markets. We expect that data center will lead with approximately 10% growth followed by telecom and industrial and defense, both with low to mid-single-digit sequential growth.

Q&A highlights

Update on ACC inflection point timing and demand trajectory given architectural changes; compare LPO opportunity to ACC, especially at higher data rates.

Data Center growth is strong, driven by optical products (800G), with a transition to 1.6T expected to slow 800G demand. ACC demand is impacted by architectural changes at one customer, but overall interest is strong across a broad customer base. LPO is a significant opportunity for late calendar '25 and '26, primarily at 800G and 1.6T, offering DSP elimination, power savings, and lower latency.

“A lot of that growth is being driven by the optical side of our portfolio. So I want to make that very clear. A lot of that growth has been driven by strength in our 800 gig portfolio. And what we see happening, during the course of our fiscal '25 is actually probably a bit of a slowdown in 800 gig as some of our lead customers transition over to 1.6T.”

asked by Thomas O'Malley · answered by Stephen Daly

2 min read 6 chapters

Detailed narrative

Defense Market Evolution

The defense market is rapidly evolving due to new threats and technology advancements, driving an uptick in novel radar and EW systems with increased RF and microwave semiconductor content. MACOM is an enabling partner for Tier 1 primes, subsystem suppliers, and startups, focusing on higher frequencies, power levels, and integration. The increased use of UAVs and drones necessitates upgrades to legacy platforms and new EW systems, while DoD satellite programs drive investments in high-speed broadband connectivity.

MACOM's Defense Differentiators

MACOM leverages its industry-leading gallium arsenide and gallium nitride capabilities, broad expertise in hardened optical solutions (including RF over fiber), and leading RF diode technologies. The company has also built strong microwave system engineering capabilities, allowing earlier engagement in customer design cycles and positioning it as a partner of choice for defense and space customers. Two new product lines are planned for announcement in March and June 2025 to extend market reach.

Telecom Market Focus

MACOM's technology supports 5G applications with GaN on silicon carbide solutions for base stations, where it believes it is gaining market share due to unique advantages in high-power multi-band radios. The company also has a broad portfolio for LEO satellite-based broadband and direct-to-cell applications, providing semiconductor and module solutions for satellite-to-satellite and satellite-to-ground links. Other focus areas include front haul, 132-gigabaud coherent systems, metro/long-haul deployments, PON, and cable infrastructure.

Data Center Growth and Innovation

The data center market is experiencing strong growth driven by cloud service providers' accelerating capex for next-generation architectures. MACOM supports 100G to 1.6T applications with existing products and aligned roadmaps, differentiating through IC and system design expertise, and unique photonic materials. The company is focused on designing 400G per lane products for future 3.2T connectivity and supports various architectures including retimed/linear PAM4 and non-DSP LPO solutions, as well as silicon photonics and co-packaged optics.

Strategic Fab Investments

MACOM announced a long-term wafer fab capital investment plan, seeking CHIPS Act and state funding. This plan includes modernizing the Lowell, MA fab to expand its technology base with advanced node GaN on silicon carbide, and expanding manufacturing capacity and capabilities at the North Carolina fab. While a nonbinding PMT has been signed with the CHIPS program office, a definitive agreement is pending, with minimal near-term P&L impact. The European semiconductor center also secured a MMIC development project funded by the French government.

Refinancing and Balance Sheet Strength

In December 2024, MACOM refinanced approximately $289 million of convertible notes due in March 2026 by issuing $340 million in new 0% coupon notes due December 2029. This transaction, which included issuing 1.6 million shares, resulted in a one-time non-cash loss of $193.1 million but had a neutral impact on pro forma net leverage, strengthening the balance sheet and future financial performance. The company ended Q1 FY25 with over $656 million in cash and short-term investments, and a net cash position exceeding $157 million.

AI-generated summary of the company's earnings call. Not investment advice.