MACOM Technology Solutions Holdings, Inc. Q4 FY2022 Earnings Call

Welcome to MACOM's Fourth Fiscal Quarter 2022 Conference Call. This call is being recorded today, Thursday, November 3, 2022. I will now turn the call to Mr. Steve Ferranti, MACOM's Vice President of 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 fourth 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 provide a more in-depth review of our fourth quarter and full year results for fiscal 2022. When Jack is finished, I will provide revenue and earnings guidance for the first fiscal quarter of 2023, and then we will be happy to take some questions. We finished our fiscal year with a solid financial performance. Revenue for Q4 was $178.1 million and adjusted EPS was $0.77 per diluted share. For the full fiscal year ending September 30, 2022, revenue was $675 million and adjusted EPS was $2.82 per diluted share. This represents 11% year-over-year revenue growth and over 30% year-over-year growth in adjusted earnings per share. These results demonstrate the strength and leverage in our business model. Over the past 4 quarters, we have incrementally improved our gross margins and operating profits, resulting in improved cash flow. We finished the fiscal year with $587 million in cash and short-term investments on our balance sheet. FY '22 was also a strong year for new product development, with our R&D teams launching nearly 150 new products, an increase of approximately 15% year-over-year. We believe many of these products will enable market share gains and support our near- and long-term growth targets. There is a high level of excitement at MACOM because we have many new projects underway, a growing team of world-class IC designers, and unique manufacturing and packaging capabilities. We will continue to expand and build upon these competitive advantages in fiscal year 2023. In Q4, our book-to-bill ratio was 1.0:1 and our turns business was approximately 10% of total revenue. For the full fiscal year, our book-to-bill was 1.1:1. Our backlog remains at near-record levels entering fiscal 2023, providing us with a strong position to achieve our growth goals for the upcoming year. To provide some additional context, over the last 3 years, our backlog is up 2.5x, translating to a 36% CAGR. We believe our backlog growth over this timeframe is reflective of the market strength as well as MACOM's market share gains due to new product adoption. However, to be clear, we do not believe our business will be immune from a global recession or market slowdown. In fact, recently, we have seen softness in order flow. And as a result, we are being cautious and believe our book-to-bill ratio could be at or below 1 this quarter. Despite this, we are optimistic about our prospects for fiscal year 2023 and beyond. More and more customers are viewing MACOM as a strategic supplier of high-performance analog, RF, microwave, and Lightwave semiconductor solutions, and we believe this is directly attributable to our strengthening product portfolio. Additionally, we see a tremendous opportunity to better address our $5 billion to $6 billion serviceable addressable market, or SAM, by continuing to expand our product lines and portfolio. As a reminder, we maintain a diverse revenue base with little to no consumer exposure, which we believe is a strength and a business advantage for the company. Our diversification spans product lines, customers, and end markets. In FY '22, our top 10 end customers represented 31% of our total revenue. We had no direct customers greater than 10% of revenue. And for the full year, no single product generated more than 2% of our total revenue. Turning to our end markets, fiscal Q4 revenue was generally as expected, with Industrial and Defense at $78.5 million, Telecom at $62 million, and Data Center at $37.6 million. For the full fiscal year 2022, Data Center was flat, I&D was up 5%, and Telecom was up 29%. Looking at the details for each end market, our Industrial and Defense end market performed well during Q4 and for the full fiscal year. Our goal is to sell all of our technologies into the I&D markets. And our business development and sales teams continue to find large opportunities to leverage our optical capabilities, RF subsystems and modules, GaN power transistors, and filter technologies across a wide variety of ground, airborne, and ship-based programs. As an example, one of our U.S. Defense customers has recently been awarded a large multiyear contract to manufacture and deliver tactical radios to the U.S. government. In fiscal 2023, our low fab will support this production program with our unique technologies and custom ICs. Defense customer requirements often push the limits of semiconductor performance because they're building systems at extreme frequencies, high data rates, and high RF or microwave transmit power levels. These challenging requirements align perfectly with MACOM's core competencies. Our strategy is to further leverage these same technologies into the industrial markets to support test and measurement, medical, automation, commercial radars, and new automotive opportunities. Our Telecom end market revenue was flat in Q4. During the quarter, softness in 5G was largely offset by strength in the broadband access segment. For the year, Telecom had a very strong growth performance, growing 29% in FY '22. The drive for higher data rates and faster connections across subsegments like 5G wireless, metro/long haul, PON, hybrid fiber coax, Satcom, and microwave networks plays directly into MACOM's strengths. Our exceptional growth in telecom in FY '22 was broad-based and driven by these strong end market dynamics, coupled with new product introductions and market share gains. Our Data Center end market revenue was up in Q4, but flat overall for FY '22. As a reminder, our Data Center product portfolio includes our high-performance analog drivers and transimpedance amplifiers for NRZ and PAM4, coherent drivers and TIAs for RZ, Crosspoint switch products, and legacy OTN mappers and framers in addition to new product offerings, including our linear equalizers and 25G DFB and 50G CW lasers. Today, we have a strong backlog for our Crosspoint switch solutions and OTN products, noting that these orders were impacted by supply constraints for most of FY '22. In many cases, we are the sole source supplier for these products. Over the course of FY '23, we expect new products to be the primary drivers for Data Center growth. For example, our sales and marketing efforts for our new 25G DFB lasers and 50G CW lasers are just beginning. Our linear equalizer products have started ramping during FY '22 and will continue this year in support of high data rate applications, including backplane and active copper cable. We are also beginning to see the proliferation of coherent optics in the access market with low-cost tunable 100G solutions. All of these products represent incremental growth drivers of MACOM's business. As we have discussed in prior calls, today, we engage selectively within the Data Center market, focusing on areas where we can leverage MACOM's competitive advantage and technology portfolio including high-performance analog ICs in optical semiconductors such as lasers and photodetectors. We are a small but broad-based supplier into the Data Center market. We will continue to pursue this targeted engagement strategy and increasingly, we will focus on finding attractive new opportunities outside the Data Center, leveraging these same design resources and technologies. We had many engineering accomplishments in fiscal 2022, and I would like to recap a few of these today. We opened 2 new design centers located in Seoul, Korea and Western Massachusetts and staffed them with industry-leading talent. Our 0.14 GaN on silicon carbide mimic process is on schedule to be qualified and released to production at the beginning of next quarter. Our fab and device engineering teams have done remarkable work to meet schedule and to achieve these results, and we know our customers are waiting for the first wave of product introductions. Our HPA team launched MACOM's PURE DRIVE product line comprising linear drivers and transimpedance amplifiers that target single mode and multimode 400G PAM4 architectures. This innovative chipset has been designed to support broad dynamic ranges, linear equalization, and low noise amplification to enable direct connection to switch and server ASICs. Working together, these linear links can support leading-edge throughput while at the same time, enable specialized functionality for each component in the data path such that power, cost, and latency can be minimized. We believe this is disruptive technology as it can eliminate the need for a DSP in certain applications. Our Diodes teams completed an important product qualification for a key automotive customer. We expect more design wins from this and other automotive customers in 2023 now that our fab is automotive TS 16949 certified. We continue to push the boundaries of compound semiconductor performance in high-power RF applications. We expanded our MACOM pure carbide power amplifier product portfolio to include a 7-kilowatt power amplifier, which we believe is the highest power part in the industry. The 7-kilowatt product is ideal for high power and high-voltage aerospace and defense applications, including radar and electronic warfare systems. This extremely high power level was achieved by combining novel high-voltage circuits with advanced packaging materials for improved thermal management. Our Lightwave team transitioned several customers from qualification status to production status on both photodetectors and 25G lasers. We have slow but steady market penetration. Notably, our Lightwave engineering teams first measured results on our 100G EML products, and the results look compelling. Lastly, we expanded our RF subsystems and module design capabilities for IND applications. Here, we will leverage our engineering expertise to provide customers with unique subsystem solutions based on MACOM's proprietary semiconductors. As we focus on fiscal year 2023, our priorities include taking market share in gallium arsenide and GaN on silicon carbide mimics, diversifying our high-performance analog IC business, maintaining our leadership position in coherent IT solutions for Telecom and Data Center markets, continuing to gain content and market share in 10G, XGS PON, and other broadband access solutions for North American and European fiber-to-the-home markets and upgrade cycles. We aim to continue expanding our RF and microwave module and subsystem capabilities and win more amplifier and microwave assembly business while executing on recently awarded radar development programs. We will strengthen our competitive advantage by introducing new products based on MACOM's proprietary semiconductor processes, working with federal, state, and local authorities on securing CHIPS Act funding to grow capabilities in our business; further optimizing the efficiency of our operations to improve profitability and cash flow; and continuing to develop our employees' careers so that they can grow with the company, as well as enhance our entire organization by attracting industry-leading talent. A central theme for fiscal year '23 is to move quickly and capture market share. In summary, MACOM has a wide range of products in production today, spanning dozens of different product lines, servicing thousands of customers. Many of these products have long life cycles and produce revenues for years after they've been introduced. We view this diversity of technology, products, and end market applications as an inherent strength of the company, helping to provide a broad and stable revenue base. Jack will now provide a more detailed review of our financial results.

Thank you, Steve, and good morning, everyone. Before getting into the details of our quarterly results, I would like to summarize a few items associated with our fiscal year 2022 financials. First, our order backlog grew by more than 20% during fiscal 2022, and our full year 2022 revenue grew by more than 11% over the prior fiscal year. Second, we continue to expand our margins with our adjusted gross margin for the full fiscal year 2022 at 62%, up 240 basis points from 59.6% in fiscal 2021. This is the first full fiscal year that our gross margin has exceeded 60% since MACOM went public in 2012. Additionally, our adjusted operating margins for fiscal year 2022 were in excess of 31%. Third, our fiscal year 2022 adjusted net income was $201 million compared to $152 million in fiscal year 2021. Fiscal year 2022 adjusted EPS was $2.82 compared to $2.15 in 2021, a more than 30% improvement. Finally, from an operational perspective, MACOM's team of outstanding employees continues to remain focused on improving the performance of the business and executing our strategy as we move into fiscal 2023. Now on to the quarterly results. Revenue for the fiscal quarter was $178.1 million, up 3.4% sequentially based on modest growth from our data center and I&D markets. Our Q4 completed another year of double-digit growth for MACOM with fiscal year 2022 revenue at $675 million, up from $607 million in fiscal 2021. On a geographic basis, revenue from U.S. domestic customers represented approximately 50% of our fiscal Q4 results and 47% for fiscal year 2022, up from 46% in both fiscal Q4 2021 and fiscal year 2021. Adjusted gross profit for fiscal Q4 was $111.5 million, or 62.6% of revenue, up 40 basis points sequentially. Over the past fiscal year, we executed on many annual initiatives to improve yields, reduce cycle times, and optimize pricing, resulting in these improvements to our gross margin. Going forward, we expect gross margin to continue to trend higher as we commence additional improvement initiatives and as new products contribute to our overall revenue mix. Total adjusted operating expense was $54.5 million, consisting of research and development expense of $35.3 million and selling, general, and administrative expenses of $19.2 million. The $1.4 million sequential increase in adjusted operating expense was primarily driven by the continued expansion of our R&D staff and higher employee-related costs. We plan to continue to invest in our R&D capabilities over the course of fiscal year 2023, which will modestly grow our OpEx over the course of the year. We believe the investments we are making in R&D resources and technology will help us to continue to deliver new technologies and leading-edge semiconductor solutions to our customers in the years ahead. Adjusted operating income in fiscal Q4 was $56.9 million, up from $54.1 million in fiscal Q3. Adjusted operating margin increased 60 basis points sequentially, reaching 32% in fiscal Q4. Fiscal year 2022 adjusted operating income was $211 million compared to $170.3 million for fiscal 2021, representing a 24% year-over-year increase, highlighting the operating leverage in our business. Depreciation expense for fiscal Q4 was $6.1 million and $23.8 million for fiscal year 2022. Adjusted EBITDA for fiscal Q4 was $63.1 million. Trailing 12 months adjusted EBITDA was approximately $235 million as compared to $194 million last year, representing a 21% year-over-year increase. For fiscal Q4, we had adjusted net interest income of less than $100,000 compared to net interest expense of approximately $400,000 for fiscal Q3. Fiscal year 2022 adjusted net interest expense was $2.6 million, down from $11 million in 2021. The decrease in fiscal year 2022 net interest expense was driven primarily by partial repayment and associated refinancing on our term loan in our prior fiscal year 2021, as well as higher interest income from our increase in cash and short-term investment balances. Our adjusted income tax rate in fiscal Q4 was 3% and resulted in an expense of approximately $1.7 million. Our net cash tax payments were approximately $400,000 for the fourth quarter and $2.2 million for fiscal year 2022. We expect our adjusted income tax rate to remain at 3% for fiscal year 2023. Next, I would like to discuss a $200 million noncash tax benefit recorded on our GAAP financial statements during our fiscal fourth quarter. Historically, MACOM had recorded GAAP losses in our financial statements and had accumulated net operating loss and R&D tax credit carryforwards that could potentially be used to offset future income. Due to our history of recording GAAP income statement losses and limited potential to utilize these historical loss carryforwards to offset future income, the GAAP accounting rules historically did not permit us to reflect these loss carryforwards as an asset on our financials. Primarily as a result of our improving GAAP profitability, we have updated our financials here in the fourth quarter of 2022 to now have substantially all of these tax benefits recorded on the face of our balance sheet as a deferred tax asset. This adjustment resulted in a Q4 noncash tax benefit of approximately $200 million recorded on our GAAP income statement. This $200 million tax benefit was not included in our adjusted non-GAAP earnings for the quarter. As of September 30, 2022, our net operating loss carryforwards are approximately $645 million, and our deferred tax asset balance is $237 million. As I noted earlier, one of the primary considerations for this accounting adjustment was that more recently we have consistently generated positive income on a GAAP basis and expect to continue to generate GAAP income going forward. For reference, our GAAP net income was $38 million in our prior fiscal year 2021 and $440 million for our fiscal year ended September 2022, inclusive of the $200 million benefit from the tax adjustment I just noted and a $118 million gain associated with the Q1 sale of an equity interest. For fiscal Q4 adjusted net income was $55.1 million compared to $52.1 million in fiscal Q3. Adjusted earnings per fully diluted share was $0.77, utilizing a share count of 71.3 million shares compared to $0.73 of adjusted earnings per share in fiscal Q3. Now moving on to operational balance sheet and cash flow items. Our Q4 accounts receivable balance was $101.6 million, down slightly from $106.6 million in fiscal Q3, mostly due to improved linearity during the quarter. As a result, days sales outstanding were 52 days compared to 56 days in the prior quarter. Inventories were $115 million at quarter end, up sequentially from $110.2 million. During fiscal year 2022, we have continued to make strategic investments in various inventory items, including manufacturing consumables, substrates, precious metals, as well as critical wafer stocks and finished goods to support our customer orders. Inventory turns were 2.3x, down sequentially in Q3 from 2.4x in the prior quarter. Fiscal Q4 cash flow from operations was approximately $60 million, up $19.6 million sequentially. This quarterly increase is primarily due to the timing of working capital payments. As a result, for our upcoming first fiscal quarter of 2023, we expect our cash flow from operations to moderate and be below this high Q4 level. Capital expenditures totaled $7.7 million in fiscal Q4. Fiscal 2022 CapEx of $26.5 million was up from $18 million in fiscal 2021, attributable to fab and R&D spending. We expect our fiscal 2023 CapEx to be approximately $40 million as we continue to expand capacity and process capabilities at our domestic manufacturing locations and R&D facilities. Next, moving on to other balance sheet items. Cash, cash equivalents, and short-term investments for the fourth fiscal quarter were $586.5 million, up $50.2 million sequentially and up $242 million or 70% from the same quarter in the prior year. With our continued cash generation and the increase in trailing 12-month EBITDA, our fourth quarter gross leverage is 2.6x, down from 2.7 in Q3. Our net leverage remains below 1, and our net debt is now less than $20 million. In summary, our business continues to perform well. The quality of our earnings continues to improve, and our cash flow remains healthy. We are aware of the macroeconomic uncertainty currently impacting the semiconductor industry. However, we maintain a strong balance sheet with ample cash to help fund our strategic goals. We carefully manage our discretionary spending and expect to support healthy margins and remain cash flow positive over the course of these business cycles. I will now turn the conversation back over to Steve.

Thank you, Jack. MACOM expects revenue in fiscal Q1 ending December 30, 2022, to be in the range of $177 million to $182 million. Adjusted gross margin is expected to be in the range of 61.5% to 63.5%. And adjusted earnings per share is expected to be between $0.78 and $0.82 based on 71.4 million fully diluted shares. In fiscal Q1, we estimate flat or modest growth across the 3 end markets. As I've noted, we maintain a long-term perspective on executing our strategy. We are confident that we can continue to improve our financials and take market share in the months and years ahead. Our product portfolio is stronger than it was a year ago, and for this reason, we are confident that we can meet or exceed our targets. Over the long term, we believe trends, including the drive towards more bandwidth, faster data speeds, higher frequencies, and higher power levels, will support MACOM's growth. These trends will require higher performance levels from semiconductor suppliers, which means better analog designs, specialized compound semiconductor materials in manufacturing processing, innovative packaging solutions, and strong system-level know-how. MACOM is unique in our potential to bring all of these requirements together to provide our customers with the highest power, highest frequency, and highest data rate analog semiconductor and subsystem solutions in the market. I would now like to ask the operator to take any questions.

Our first question comes from Harsh Kumar with Piper Sandler.

Yes, first of all, guys, solid execution. We're seeing semiconductor companies just fall apart in this earning season. So we appreciate a very steady guide. So with that, Steve, you did say that you're seeing some softness in orders. I wanted to understand, a, first of all, where are you seeing the softness in orders? And then b, we are cognizant now very, very aware that there's recessionary activity or stock economic activity, how do you perceive your long-term goal of, call it, the low teens growth? Is that still even a valid mark for us to think about?

Thank you, Harsh, for the questions. So the softness that we talked about on the script in terms of bookings is fairly broad-based. I wouldn't necessarily call out any one particular segment as being weaker than the other. I'll highlight that our defense business is still holding in quite strong as well as some of the new design wins in the automotive market are also supporting overall bookings. I just have to highlight that this was, as Jack said, the eighth consecutive quarter where we had a book-to-bill of greater than 1 which really allows us to position ourselves for a strong fiscal '23, which leads to the second part of your question, which is our overall long-term growth and goals. As you know, we don't give annual guidance. We generally give 1 quarter at a time. As I mentioned in my script, we feel like we're in a stronger position at the start of this year than we were last year, primarily due to the work we're doing to expand our SAM in the addressable markets, primarily driven by new product lines that we've been launching, many of which we've talked about during the course of the year. At the beginning of fiscal '21, we set a target of greater than 10% year-over-year growth, we delivered 14%. At the beginning of fiscal '22, we also set the threshold at 10%, and we delivered 11%, so we were happy about that. As we think about fiscal '23, we're really taking the same philosophy forward that we want to have at least 10% growth. However, you have to understand that given the macroeconomic conditions, the geopolitical risks, and certainly some of the softness we're seeing in Asia, specifically China, all of those items do provide, I would say, more uncertainty in terms of our targets in fiscal '23. But if you take a big step back and look at our long-term goals, which I think is more important, we still do believe we can achieve $1 billion in revenue in our fiscal '25. The math is quite simple. If you just take our guide for Q1 and annualize that and apply an average growth rate of low double digits, you get to $1 billion quite quickly. So we think we're doing all the right things. It starts by increasing the number of new products. I can tell you from 2019 to 2022, we have doubled the amount of products we're launching annually. This will be the ultimate driver of our growth.

Steve, thank you. I have a follow-up question before I step away. Are you experiencing any pressure on average selling prices in any of your markets? Additionally, with your strong activity in launching new products, can you share which areas of the three end markets you are particularly optimistic about for growth?

The semiconductor industry, as you know, is very competitive, and we're constantly seeing price pressures. So that is something that I think the team is quite capable of handling. We try to optimize the value of our solutions to customers. We are not a price leader in terms of chasing business at lower prices. We try to differentiate ourselves. As you've seen over the last really 2 to 3 years, as we've introduced more and more products, our gross margins are going up. Yes, some of that is due to operational improvements in supply chain management and yield enhancement programs, but it also speaks to the fact that the portfolio is getting stronger and more differentiated, which allows us to command stronger pricing. We expect those trends to continue, as Jack highlighted in his script. In terms of the new products or the new product introduction products that you referred to and which markets or segments are we most excited about for growth? It's hard for me to sort of call out any one particular area, market, or technology because we have so many different things going on. But I will say we are really turning a corner with our GaN on silicon carbide process, which we'll be introducing right after New Year's. That is a major event for our company, and we're very pleased about the performance of the process. We know the market's there, and over the next 2 to 3 years, it will be a lot of fun to go out into the market and take market share. So I think the whole team is really excited about that.

Our next question coming from the line of Vivek Arya with Bank of America.

Steve, I just wanted to go back to the comment you made about the potential and the opportunity to grow perhaps double digits this year. I was hoping you could give us some color by segment? Which segments do you think would help you grow faster or below that rate? Or do you think all 3 segments can grow in line with that growth and opportunity?

I think it's very difficult for us to sort of communicate with fidelity where we think the year will end in terms of ultimately which markets will drive our growth. If we can achieve high single-digit and low double-digit growth across the mix of markets, I think we'll be able to achieve our goal. I don't want to necessarily call out any one particular item or end market. Certainly, everybody knows that 5G is fairly soft right now. However, we know that defense is strong and getting stronger. Our telecom business is doing quite well, primarily driven by product introductions. As we mentioned during the course of the year, we expanded our SOI product line. We're getting involved more and more in cable infrastructure and broadband access with a variety of control products, amplifiers, and filters. I mentioned also on the optical side, we have some very interesting projects that we're working on, including EML lasers, which is very additive to our laser portfolio. When we think about lasers, we think about establishing a portfolio of functions that addresses not only Data Center and Telecom, but also sensors. We have a lot of interesting projects underway in and around lasing. So we're excited about that for this coming year. So a lot of interesting projects, but I wouldn't necessarily highlight any one that will drive our growth. I guess I'll leave it at that.

All right. The reason I asked that question is there was a big disparity in the relative growth rates of the 3 different segments in fiscal '22. And the one I wanted to really get your perspective on is Industrial and Defense. The 5% growth. Obviously, last year, you grew 44%, so compares are tougher. But how do we put this 5% growth in the context of 15%, 20% growth in Industrial and Defense sales that we saw across a number of your other analog and industrial peers. Like where I'm struggling is how to model growth in Industrial and Defense and what to correlate this to?

It's important to put things in context that our Industrial and Defense business was range-bound for many years in the sort of $40 million to $50 million a quarter range. That was due to lack of investment, lack of focus, and really the strategy of the business. When we went through our strategy update back in 2019, we made a decision then to make Industrial and Defense a priority. Fast forward to Q4, Q4 was actually the record level of I&D revenue for the company at $78.5 million. So that was a record quarter. Going into this Q1, we're also expecting either flat or modest growth in that segment. We're quite pleased about I&D, and we believe we are doing the right things to continue to see reasonable growth. In terms of long term, we believe we can still achieve the $1 billion by continuing to have solid performance with our Telecom business as well as our I&D business. So I would leave it at that.

And our next question coming from the line of Thomas O'Malley with Barclays.

I just wanted to go back to a prior comment you made, I think, to an earlier question about the well-known weakness in China. Is there any way you could contextualize the weakness that you're seeing, the company-specific weakness from 2 quarters ago until now? And then also, we recently saw the unverified list come out, and there was a large amount of Chinese optical companies that were actually on that list. Could you just give any color on, one, if you've taken a look at that list and two, what you think the impact might be if some of those customers were unable to ship in the future?

A few things about China. First of all, as everybody knows, China is a very important market for the semiconductor industry. I think in 2021, China imported $400 billion of semiconductor products. Today, MACOM ships about 25% of our business into China. If you go back and look at the last 3-year trend, that's actually been trending down. In 2020, we were just below $200 million, and now that's trending towards about $175 million. It's an important and diverse market for us. This past year, what MACOM did is we actually did a bit of restructuring, rebuilding, and expansion of our team inside China. As we think about our growth going forward, we recognize that there are some very interesting markets in China, including electric vehicles and new energy markets that will require a wide range of semiconductors. Therefore, part of our go-forward strategy is to address some of those large markets that we're not currently addressing today. In terms of export control, we take that very seriously. Whenever there are updates to denied parties or entity lists, we react immediately and address all of those changes. There have been instances in the past where companies have gone on the entity list. As a result, we do have to take an impact and we see that our revenues dip down. For instance, Huawei in 2019, we were trending to about $20 million a year, and now that's at 0. So what I would say is as the regulations are updated, we follow the regulations, and it's hard for us to predict how any particular change would impact our business aside from the fact that we adjust and follow the regulations.

Got it. Really helpful. And then just a follow-up on the I&D business. Historically, I think you guys have given the breakout of 60% Defense, 40% Industrial. With the moving pieces, you would expect that Defense would be a bit stronger as we go forward. Is the breakdown still 60-40? Or have you seen those relative sizes of those 2 pieces change over the last couple of quarters?

I think that ratio is about correct. I think it's reasonable to use that ratio. I expect that Defense might actually grow beyond that 60-40 ratio over the long term with some of the big programs we're getting involved in.

The next question coming from the line of Tore Svanberg with Stifel.

Congratulations on the 62% gross margin for the full year. That's a good milestone. First question, maybe I didn't quite catch this, Steve, but when you were doing your prepared remarks, I think you said a SAM of $5 billion to $6 billion. I know in the past, you've talked about $5 billion. So I was just wondering why you said 5 to 6? And is that additional $1 billion, is it coming from your 3 segments, but obviously, auto is now also becoming a segment? So I was just wondering if you're going to start separating that out as it's on SAM.

You are correct that we are working hard to expand our SAM. SAM numbers can be variable depending on what you include in the SAM and what you don't. We generally try to be a little conservative on our estimating of SAMs. What I will say is the growth is coming from new product lines and new technologies. Over the last few years, we've launched a number of new product lines. So that SAM expansion and that $6 billion is a real target number. Part of our strategic plan is to ensure that every year, we're adding new functionality to our portfolio. You should expect that number to continue to grow.

Very good. And as my follow-up, for your Data Center business, I think MACOM has been a bit contrite, right? I mean, this year, you didn't see any growth there, while a lot of others did. It does sound like you have a lot of new products coming next year, especially the DFB lasers, the FP lasers, and so on. I'm just wondering based on what you see today, even if that market were to be weak next year, could you still grow the Data Center segment based on your new products?

We think yes, and we believe that growth could achieve double digits. Just to remind everybody, we had forecasted at the beginning of fiscal '22 that there would be about a $15 million drop in legacy business within the Data Center market. If you add that back into our $138 million of revenue, you would have about 10% growth. When we think about this coming year, we look at ramping many of our 400G products. Some of the NRZ platforms we are involved with today are being replaced with the 400G platform. We have launched our active copper cable products that will ramp in '23, providing us some incremental growth. As the world continues to move towards PAM4 at higher data rates, this is where our product line really excels in terms of our drivers, TIAs, and now even our lasers.

And our next question coming from the line of Matt Ramsay with Cowen.

Steve, I wanted to ask about the order patterns you’re seeing. You have maintained a book-to-bill ratio above 1 for quite some time, but you mentioned it might fall below 1 in the upcoming quarter. Can you clarify the current length of the backlog in relation to the run rate? Are there actual delays or pushouts in the orders within the backlog, or is it solely the new orders that are causing the book-to-bill ratio to drop below 1?

We have a very high-quality backlog, and we're constantly ensuring that orders placed are within a reasonable lead time. We don't typically put things on our backlog that extend beyond a year for some of our larger programs. I will say that recently, we have seen a little bit of everything. We've seen some cancellations on the margins, we've seen pushouts, and we've seen pull-ins. But generally, it becomes customer-specific. For example, we've seen major customers that were in high-volume production cancel programs in certain segments. Yes, we're seeing a little bit of that. However, even when we take all those numbers into account this quarter, we still had a greater than 1 book-to-bill. Thus, we are happy about that. So we are seeing pressure on the bookings side, and maybe Jack can add to the comments in terms of trends and also channel inventory.

Thanks, Steve. Yes, Matt, we have a fairly rigorous process here when we look at our order inflow and our backlog over the course of each period. It's time that we spend with our sales and operations teams to ensure we're aware of what's happening across all 3 of the different end markets we serve. It has been fairly well diversified in terms of the strength we have seen across those end markets. When we look at our backlog, it's generally going out no more than 1 year. I would say substantially all of our existing backlog is under 1 year at this stage.

That’s all the detail there. That's really helpful. Jack, I just wanted to ask you and Steve about the last semiconductor downturn since they all have similarities. You have added around 13 points of gross margin since then, finishing the year with a 31% operating margin compared to nearly zero in 2019. Additionally, you have just turned net cash positive. I'm curious if you can compare the current position of the company with past downturns and share your thoughts on capital allocation now that the balance sheet is much improved compared to before.

You're right, no 2 downturns are the same. What we can talk about is why we feel like we're going to do better than most going forward. It really comes down to the diversity of our business. We have a balance that is almost evenly split between domestic and international clients, no greater than 10% of any particular customer, and we generate only 2% of revenue from any single product. Over the past 3 years, we've launched over 400 new products across a wide range of product lines. These factors provide the best defense we can have against recessions and revenue declines going forward. I will also add that we run a very lean organization. We keep a close eye on discretionary spending and waste. This collaborative effort across our operations, sales, finance, planning, and logistics teams allows us to save money and invest in our desired areas. We think the best place for our cash right now is within the business itself. We will be allocating more capital spend in the coming year, mainly towards our fabs in Lowell and Ann Arbor. By the way, if our customers start producing less or canceling programs, we'll have to adjust our strategy accordingly. Looking at where we are now compared to 3 or 4 years ago, as Jack highlighted earlier in his script, even if we enter a downturn, MACOM will remain profitable and cash flow positive. That is a major difference from where we were 3 to 4 years ago.

And our next question coming from the line of Quinn Bolton with Needham.

Congratulations on the nice results and outlook. I guess, Steve, you've been through a number of cycles. I wonder, you've had 8 quarters of better-than-1 book-to-bill. You mentioned some adjustments in backlog and order softness, but I wonder if 8 quarters of positive book-to-bill would suggest that you can continue to put up flat to sequential growth through next year. How long might this period of order weakness last before you see quarterly revenue start to trend down? Can you absorb a quarter or two of order weakness, or could you absorb more than that?

Yes, probably 1 or 2 quarters is the short answer. When you're trending with book-to-bills below 1 for too long, it impacts your top line. I would say it's probably in the range of 1 to 2 quarters. However, as Jack also mentioned, we do have a very, very strong backlog, and we're in a good position.

Great. And then obviously, a big focus on new products, and you mentioned about 150 new products in 2022. Do you have a target for '23? Will it be about that same level? Do you expect to grow it potentially in fiscal '23?

So we do have targets. We have internal expectations that should be for more new products next year. We're not ready to put that number out there just yet. The entire organization revolves around new product introductions. For instance, here in Lowell, Massachusetts, there are monitors in all different conference rooms and cafeteria displaying our product launch schedules, release dates, and performance metrics against quarterly goals. Suffice to say, we expect to increase those numbers while keeping a close eye on quality. We aren't just launching products for the sake of increasing quantity; they need to be better than our competitors. About 20% of our revenue today comes from products launched within the last 3 years. This speaks to the efforts our team is making to launch compelling products and take market share.

Our next question coming from the line of Harlan Sur with JPMorgan.

Innovation and new products, obviously, have been a big driver for the team. Your standard product offerings are complemented, I believe, by some key custom programs. How does the custom pipeline look heading into fiscal '23? Can you provide us with a few examples of key programs and maybe if you can give us a rough sense of the mix of customer as a percent of your total revenues?

We encourage all of our engineering organizations to engage in custom chip developments. We're doing this at the diode level, the mimic level, and across all areas with our analog mixed signal devices. We highly value these engagements as customers are willing to finance the development of customized solutions for their programs. We haven’t broken down the amount of development dollars we're acquiring or sized that part of our business for you, but we are indeed busy. All of our engineering organizations likely have between 1 and 5 custom developments at any time, with most customer-funded. Some are strategically important accounts.

Great. And then in Data Center, we keep hearing about active copper cable or active electrical cable, 400-gig, early 800 gig within RAC connectivity, especially as the switching architecture moves to 26 and at some point, 52 terabits per second. Feels like the direct attach kind of just runs out of steam, right? You talked about this contributing to growth here in fiscal '23. Are you also supplying the CDR chip? How many cable vendors have you qualified with? And roughly how big is this market opportunity?

There is a lot of hype surrounding active copper cable. We don’t want to add fuel to that fire. We look at the opportunity with our ACC or linear equalizers just like any other product in our portfolio. Customers for short reach do not want to use optics; they want to maintain the signal as electrical and run that at higher data rates over copper. We have effective linear equalizers that work up to 10 meters. These chips do not have CDRs; they aren't retimed. These chips can support PAM4 100G per lane, and we're now developing 200G per lane as well. We have a strong position in the market. However, we cannot disclose how many cable manufacturers we are currently working with. We believe we are becoming a go-to supplier for these solutions given our expertise in equalization and signal integrity. Our solutions are low current, low latency, and low-cost chips that are effective for short-range applications.

And our next question coming from the line of C.J. Muse with Evercore.

I guess another question on your revenue outlook for fiscal '23. You've clearly talked about aspirational goals of high single digits, low double digits. But at the same time, you highlighted that you're not immune to the macro weakness we're seeing. Is there a way to sort of parse your portfolio that is cyclical versus secular? If I threw out a semi revenue world of down 5% to 10% in calendar '23, what would you guys think you could do given that type of environment?

That's a very difficult question for us to answer. So all I can say is that we're launching more and more products. We believe that taking market share is a great way to buck any downturn trend, and we're focused on that. MACOM is not a bellwether of the semiconductor industry. We’re fairly small, so if the semiconductor industry goes in one direction, we may not go in the same direction due to our customer base, portfolio, and priorities. It's challenging to provide a meaningful answer to your question; we might just risk getting it wrong.

That's helpful. I appreciate it. I guess maybe as my follow-up regarding the CHIPS Act, and it sounds like there will be greater clarity in February. Curious about your focus on CapEx or R&D related and how that would help your business over time?

We're actively pursuing CHIP Act funding and have had multiple engagements with government agencies over the last 4 to 5 months. You can break down our requests into four different categories. Firstly, overall modernization and capacity expansion of our wafer fabs as a priority. Secondly, funding for advanced process development focused on next-generation processes, whether for higher power or higher frequency applications. Thirdly, we aim to develop packaged technologies that are currently being purchased offshore while establishing an onshore capability for some assembly and test. Last, we seek funding for workforce enhancement by partnering with universities and attracting talent to our company. These pillars provide a foundation for our requests, which we believe aligns with the intent of the CHIPS Act. The timing, methodology, and scale of the funding distribution remain somewhat unclear and are being worked on. We don't expect funding in the first half of '23; we suspect it will be beyond that timeframe.

And our last question coming from the line of Melissa Fairbanks with Raymond James.

I will trim my list accordingly. Following up on the CHIPS Act, I'm curious how many of your customers are approaching you regarding near-shoring or on-shoring activities with your future CapEx investments? I know, traditionally, your defense business already operates within that area. You have a strong domestic supply chain. Are you sensing a shift in your customers' requirements for that supply chain?

Yes. There are multiple markets we cater to. Some customers care deeply while others do not. It’s challenging to quantify that for you. There are some U.S. defense customers who are particularly concerned about supply chain aspects, and we're eager to meet their needs through CHIP Act funding. More generally, we view the opportunity to accelerate these investments as a long-term strategy to remain profitable and grow. This focus on expanding or investing in our business remains a priority because once CHIP Act funds come in, it's vital to ensure we have a solid business plan around those investments. There are no guarantees we will receive funding, but we believe we are strong candidates.

And our last question coming from the line of Richard Shannon with Craig-Hallum.

I'll just ask one here. Steve, you talked about having the GaN on silicon 0.14 micron ready here, I think, introducing it early next year. Maybe you could talk about the early customer engagement or if it's appropriate to mention a pipeline here. What should we expect, if any, in revenues in fiscal '23? And how does this compare broadly with the ramp and opportunity with your silicon carbide products?

We've been careful not to promote the technology before it's fully qualified. We're just completing our high-temperature life testing, and the results are looking good. We're starting to release PDKs and design kits to strategic customers who want to use our process as a foundry. Our design team has been gaining experience with the process throughout fiscal '22. Everything will converge at the start of calendar '23. We expect to have a reasonable launch with compelling products that will hit the major defense frequency bands and the SATCOM bands with high-power devices. Regarding revenue expectations for '23, I don’t want to overly break it down, but expect modest incremental gains as we enter the market and ramp programs with customers. The opportunities with the 0.14 process and our lower frequency pure carbide products are equally exciting, targeting high power and lower frequency versus higher power and higher frequency.

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

Thank you. In closing, I'd like to acknowledge the hard work and dedication of all of our employees that make these results possible. Thank you very much. Have a nice day.

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