Welcome to MACOM's First Fiscal Quarter 2024 Conference Call. This call is being recorded today, Thursday, February 1, 2024. 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 Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

Thank you, Olivia. Good morning, welcome to our call to discuss MACOM's financial results for the first fiscal quarter of 2024. 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 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. Before I review the quarter's results, I would like to acknowledge the passing of John Ocampo, our Chairman, this past November. His contributions to the semiconductor industry, educational institutions and charitable organizations helped make the world a better place. His vision to make MACOM a world-class company lives on. Now I will provide a general company update. After that, Jack Kober, our Chief Financial Officer will provide a more in-depth review of our first-quarter results for fiscal 2024. When Jack is finished, I will provide revenue and earnings guidance for the second fiscal quarter of 2024 and then we will be happy to take some questions. Revenue for Q1 was $157 million, adjusted EPS was $0.58 per diluted share and operating cash flow was approximately $33 million. MACOM's core business was essentially flat quarter-over-quarter. But in total, our revenue grew by 4.5% sequentially, including approximately $6 million from the Wolfspeed RF business acquisition, which closed on December 2, 2023. We ended the quarter with approximately $463 million in cash and short-term investments on our balance sheet. Our business remains healthy and profitable and we continue to generate strong cash flow, while improving in future growth opportunities. In Q1, our book-to-bill ratio was 0.9 to 1. In our turns business, or orders booked and shipped within the quarter, was approximately 26% of total revenue. Separately, our acquired RF business included a significant amount of backlog, which provides us increased visibility over the next few quarters. Fiscal Q1 revenue by end-market was as expected with Industrial and Defense at $77 million, Data Center at $49.5 million and Telecom at $30.6 million. For the quarter, I&D was down 3% sequentially, Data Center was up 22% sequentially and Telecom was flat sequentially. We maintain a highly diversified customer base, consisting of thousands of customers across a broad range of end markets and our strategy is to further diversify and expand our geographic and industry exposure. We continue to see new growth opportunities in all our end markets. Industrial and Defense is our largest market and has been steadily growing over the past few years. Defense orders remained robust, while industrial orders remained weak. Overall, I&D revenue was down sequentially in Q1, primarily due to weakness in the industrial markets. We believe the long-term trends for our I&D business are favorable and our growth strategies are working. Our focus over the last few years has been on building out and improving the competitiveness of our established mixer and diode product lines to cover more functions, power levels and higher frequency ranges. Expanding our addressable market opportunity through organic and new technology developments like KV caps, BAW filters and high-frequency GaN. Adding new product categories such as RF over fiber and cross-selling our optical and high-speed analog product lines. In total, we address a wide range of applications within the I&D market. Our opportunity pipeline with major defense customers is robust and our capture rate for future business looks strong. Our Data Center end-market revenues grew sequentially in Q1. Demand continues to be very strong within 100G per lane, 400G and 800G short-reach optical connectivity solutions. Customer demand for shipments exceeded our expectations during our Q1 and Q4, as certain customers ramped up production. Given the fast growth rates in shipments in the past two quarters, we are anticipating reduced shipments in Q2. However, our current expectation is that demand for high-speed products will remain steady over the next couple of quarters. MACOM's linear product portfolio continues to grow. We recently announced the addition of a new dual-channel laser driver and transimpedance amplifier or TIA products supplementing our existing portfolio of four and eight-channel products. These products feature high bandwidth, broad dynamic range and low noise to enable linear pluggable or LPO solutions and targeted applications and form factors. These new solutions can provide a cost and power-optimized solution for SFP-DD and SFP112 optical form factors targeting Ethernet, Fibre Channel and InfiniBand applications. We are also seeing the opportunity to further expand in other high-volume applications by implementing linear drive connectivity and network interface cards or NICs to support 100G per lane optical switch-to-server connections. Finally, our R&D teams are actively engaged in developing the next-generation solutions at 200G per lane to further enable 1.6 terabit per second applications. We support a broad spectrum of applications including DSP-based solutions, linear pluggable optics and coherent. The full breadth of MACOM's high-performance analog and photonics capabilities will be on display at this year's Optical Fiber Conference or OFC in San Diego in March. Our team is planning a variety of live demonstrations, including multiple hardware examples of 100G per lane, linear pluggable optical or LPO module solutions showing interoperability, 200G per lane single mode fiber LPOs and 200G active copper cable solutions. These products will support high-speed opportunities, including the latest disaggregated data center architectures. Overall demand in our Telecom end-market continues to be weak with revenues down approximately 50% compared to just four quarters ago. Demand weakness is broad-based spanning most of our larger market sub-segments, including 5G, metro long-haul, cable infrastructure and passive optical networks and in many of these markets, customers continue to reduce inventory or suffer from weak demand. While we remain cautious on certain portions of the telecom market, we are excited about the expansion of our technology portfolio and customer engagements within telecom. We believe telecom remains an attractive and diverse market for MACOM; it provides opportunities to differentiate based on product quality and performance. As data speeds continue to increase across wireless, wireline, cable and satellite networks globally, we see numerous opportunities for MACOM. And of course, we believe our RF power product line is well-positioned to capture market share and over time we expect to be a much larger player in this market. We also believe the SATCOM portion of the telecom market will continue to provide exciting opportunities for MACOM in FY 2024 and beyond. And we see an expanding SAM for ground terminals, gateways and space-based hardware. We can provide these customers unique high-performance IC and module solutions based on proprietary semiconductor process technologies and capabilities. In addition, we added to our already growing space and SATCOM portfolio with the acquisition of Linear Communication Group. This acquisition added design capabilities in solid-state power amplifiers or SSPAs and standalone linearizers for ground station and satellite applications. We expanded our capabilities last year in millimeter-wave frequencies, with the opening of our MACOM European Semiconductor Center, MESC, which recently received European Space Agency qualification on certain of its key semiconductor processes and products. And finally, we continue to expand our RF microwave and millimeter wave assembly and test capabilities for special microwave components and sub-assemblies for satellite, military, test equipment and other high-performance applications. We leverage our custom mixer and analog IC with specialized PCB materials and unique interconnect technology and assembly techniques to create smaller-size solutions compared to our competition. On a related note, we look forward to participating in the upcoming Satellite Conference in Washington DC in March. The conference provides our team an opportunity to engage with various satellite manufacturers and industry groups to discuss requirements for traditional defense and commercial satellite constellations. We see a great opportunity to support new commercial constellations targeting high-speed broadband Internet connectivity and direct-to-device applications. We believe our comprehensive product portfolio is ideal for this market segment, which requires optical, RF, millimeter and microwave technologies from the IC component level up to the sub-system level. I would like to update investors on our recently closed acquisition of Wolfspeed's RF business. We are excited to take ownership of this compelling technology and product portfolio and advance its ongoing business activities. The acquired process technologies and products are highly complementary to our existing portfolio and support our goal of SAM expansion within our target markets. Our GaN on silicon carbide RF product portfolio is now one of the most advanced and complete portfolios in the industry. We estimate the RF GaN market to be a $2 billion SAM and forecasts predict the market will grow to approximately $3 billion by 2027 primarily driven by the increased adoption of GaN in defense and commercial wireless applications. Our RF GaN portfolio now supports a wide range of low-frequency applications, including ground-based radar systems, electronic warfare and terrestrial communication systems, as well as very high-frequency applications, including various DoD systems and terrestrial and satellite communication systems. We believe our GaN team has industry-leading depth and experience. And I'm confident we can disrupt the industry with further GaN epi, semiconductor process and IC design innovation, which will ultimately lead to market share gains in the years ahead. A few other comments regarding the transaction. First, prior to closing, we identified significant synergies and took actions to enable the business to meet an important objective to improve profitability and to be accretive to our bottom-line. And based on our current projections, we believe the acquisition will modestly contribute to our earnings in Q2. Of course, we still have a great deal of work ahead of us to improve the overall profitability of the product line. Second, our respective integration teams established a plan to enable the acquired business to be fully operational within MACOM immediately after closing. We met our goal and a few days after the closing the RF business was operating within MACOM's systems environment including IT, HR, ERP and financial reporting systems. And most important over the next 12 months to 18 months, we expect to make meaningful progress on improving operational efficiencies, profitability and expanding revenue within the RF business. In summary, MACOM now has a wider range of products than ever before. Many of these products have long life cycles and will produce revenue for years after they've been introduced. We view these business attributes as an inherent strength of our business model. Before I turn the discussion over to Jack, I would like to welcome Raj Shanmugaraj, an independent director to our Board. Raj brings extensive telecommunications hardware expertise and decades of industry experience to MACOM. He was previously the President and CEO of Acacia, a leader in coherent products and components, which was acquired by Cisco in 2021. The management team and the Board of Directors look forward to working with Raj. Jack will now provide a more detailed review of our financial results.

Thank you, Steve, and good morning to everyone. Revenue for the fiscal first quarter was $157.1 million, up 4.5% sequentially based on growth in our Data Center end-market. Revenue in Q1 included approximately $6 million, which was a partial month contribution from the RF business, which closed on December 2, 2023. On a geographic basis, revenue from US customers represented approximately 44% of our fiscal Q1 results. Adjusted gross profit for fiscal Q1 was $93.1 million or 59.2% of revenue compared to 60.1% in fiscal Q4. The decrease was due to the RF business acquisition, which had gross margins lower than MACOM's corporate average. The adjusted operating expense for our first fiscal quarter was $54.5 million, consisting of research and development expense of $35.7 million and selling, general and administrative expense of $18.8 million. Total operating expenses were sequentially up by $1.4 million mostly due to added R&D expense from the acquired RF business, partially offset by lower discretionary spending. Adjusted operating income in fiscal Q1 was $38.6 million, up from $37.2 million in fiscal Q4 2023. Adjusted operating margin was 24.5%, down 20 basis points from fiscal Q4. We see opportunities for improving our operating leverage over the course of fiscal year 2024 as we continue to focus on operational excellence and exercise discretionary spending discipline across the entire business. Depreciation expense for fiscal Q1 was $6.2 million and adjusted EBITDA was $44.7 million. Trailing 12 months adjusted EBITDA was $193.2 million. Adjusted net interest income for fiscal Q1 was $4.6 million, roughly $400,000 higher than the prior quarter due to favorable yields on our short-term investment portfolio. We expect interest income to decline slightly next quarter based on the lower cash balance following the RF business acquisition. Our adjusted income tax rate in fiscal Q1 was 3% and resulted in an expense of approximately $1.3 million. Our net cash tax payments were approximately $900,000 for the first fiscal quarter. We expect our adjusted income tax rate to remain at 3% for fiscal year 2024 and into fiscal year 2025. Fiscal Q1 adjusted net income was $41.8 million compared to $40.1 million in fiscal Q4 2023. Adjusted earnings per fully diluted share was $0.58, utilizing a share count of 72.3 million shares compared to $0.56 of adjusted earnings per share in fiscal Q4. Based on the applicable accounting rules, our diluted share count was 72.3 million for Q1, including approximately one-third of the 712,000 shares issued to the seller in connection with the RF business acquisition. And our Q2 diluted share forecast of $73 million will include all of these shares. Now moving on to operational balance sheet and cash flow items. Our Q1 accounts receivable balance was $101.1 million, up from $91.3 million in fiscal Q4 2023, primarily due to incremental December revenue from the acquired RF business. As a result, day sales outstanding were 59 days compared to 55 days in the prior quarter. Inventories were $159.5 million at quarter-end, up sequentially from $106.3 million. Inventory turns were 1.6 times, down sequentially in Q1 from 1.8 times in the prior quarter. The sequential increase in our inventory balance and associated decrease in turns were a result of the acquired RF business. This incremental inventory will support the business's strategic defense, industrial and communications infrastructure customers. We expect to improve inventory turns within the RF business in the coming quarters as we will now manage wafer starts and other material purchases for the RF business. Fiscal Q1 cash flow from operations was approximately $33.1 million, down from $50.4 million sequentially due to increases in working capital items and one-time acquisition-related costs paid during the quarter. As we look forward in fiscal year 2024, we will remain focused on cash generation and we expect our cash flow from operations to exceed our Q1 level. Capital expenditures totaled $4.7 million for fiscal Q1. During fiscal year 2024, we expect our capital expenditures to be in the range of $30 million to $35 million for the full fiscal year. Even with our expansion of our operations, we continue to effectively manage our CapEx budgets. Next, moving on to other balance sheet items. Cash, cash equivalents and short-term investments for the first fiscal quarter were $463.3 million, down $51.2 million sequentially, driven by $75 million of cash consideration paid for the acquisition of the RF business, partially offset by cash generated from the base MACOM business. Prior to handing the call back to Steve, I would like to provide some additional commentary on the recently acquired RF business. We see many opportunities for our combined teams to drive revenue growth and achieve operating excellence as we go forward. In addition, as previously noted, the RF business will dilute our gross margins in near-term. However, we do expect the acquired business to be accretive to our Q2 non-GAAP earnings. As we improve operational execution, realize additional post-closing synergies, refine business strategies and accelerate the introduction of new products, we expect our consolidated corporate adjusted gross margins to return to historical levels in excess of 60%. I will now turn the call-back over to Steve.

Thank you, Jack. MACOM expects revenue in fiscal Q2 ending March 29, 2024, to be in the range of $178 million to $184 million, adjusted gross margin is expected to be in the range of 56% to 58%, and adjusted earnings per share is expected to be between $0.56 and $0.62 based on 73 million fully-diluted shares. In fiscal Q2, we expect I&D and Telecom revenues to increase sequentially by approximately 20% and 50%, respectively, compared to the prior quarter. Data Center revenues are expected to be down 15%. Two final comments on MACOM's base business. First, we see ongoing weakness in the telecom and industrial markets throughout 2024 and we expect our base business to be flat in Q2. That said, even with the weak markets, we believe we can modestly grow our base revenues and profits in the second-half of FY 2024. Second, I'll note at current revenue levels MACOM's base business gross and operating margins are under pressure relative to prior periods. As revenues recover in our base business, we expect to return to prior profit levels. I would now like to ask the operator to take any questions.

And our first question coming from the line of Thomas O'Malley with Barclays. Your line is open.

Good morning, guys, and thanks for taking my question. I guess the first one is on Data Center. So, in your prepared remarks you kind of talked about very strong growth in the September and December quarter and kind of taking, maybe a little bit of a breather from that in the March. Could you just describe the dynamic there? Is that inventory position being worked down, is that demand slowing? And then could you talk about, is this a temporary pause in March or do you think that things remain weak for longer than just one quarter?

Sure. Good morning, Tom. Maybe I'll make a few comments about the overall data center market and then we can talk about the revenue trends. So we are definitely seeing a lot of activity across our customer base as it relates to moving to the higher data rates. So that is a general trend, where there is an incredible amount of work at both 400 and 800 gig solutions. We are providing products for those solutions in production today that has been driving our growth over the past couple of quarters. Included in that is contributing products that we call linear drive products. And while it's still very early, we do see increased interest in this product set, in this architecture for these systems. And so, we're continuing to work with industry and customers to better understand how to use those types of solutions. And so ultimately, we think that will add further growth as we move into the year and even into next year. The other trend I would highlight is, with the 100G per lane becoming more omni-present across the market, we think that will stimulate more demand for the more traditional architectures. So our goal as a company is to focus on analog solutions. We want to have the best drivers, TIAs, equalizers and linear drive products, cross point switches servicing the highest data rates. We believe we have one of the best signal integrity teams in the industry. And we're very focused on NPI as it relates to our new product development. Now most of our revenue and backlog, like I mentioned, is at the higher data rates. We have a very strong backlog at 800 gig today. We have very good visibility into our lead customers' ramp schedules. And as they are bringing hardware and they're beginning to modulate some of the shipments, that's why we're dipping down in Q2. But I would highlight that we actually, as a company, this past Q1, it was actually a record level of shipments into the data center at just about $50 million, just under $50 million. So we're not really surprised or concerned that there'll be a dip down. We think the long-term trends are favorable, we expect to see moderation in Q3 and Q4, as other programs come online. So while we're not giving guidance for Q3 and Q4, we have an expectation that will remain or build upon the levels that we're seeing in Q2.

Very helpful. Thank you. And just as a follow-up, when you guys closed the Wolf acquisition or when you first talked about guidance, you had talked about $150 million a year in revenue contribution. Obviously, things get a little messy with the stuff. But if I'm doing my math right, here it looks like in March, if you're talking about that core business the way you are, Wolf is around $24 million, which is just a little bit below that $150 million run rate. Could you talk about, one, is that $150 million kind of like more of a run rate where that business is growing into that? Or what's going on with that acquired asset where it's a little bit below that run rate right now? Thank you.

Yeah, so from the point of announcement of the transaction in August until December when we closed, the run rate for that business has declined. It was over $40 million, and it's come down to about a $30 million run rate. When we look at our Q2 guide, we are including in that $30 million contribution from the Wolfspeed business, plus or minus a little bit. So you're correct in your sort of comment that things have come down a bit. That is primarily due to the Telecom portion of the business being weaker than, let's say, it was six months ago. But then when we look at the returns and the contribution and the cash generated by the business, I have to just highlight, number one, we acquired a business that was fundamentally losing a lot of money. It had very high expenses, very high material costs. And so we fundamentally changed the way that business is running through the acquisition process that I talked about. So when it actually came into MACOM in the first full quarter, it will add about a penny in Q2 is our thinking. And that is really the beginning. And as we look at the cash that will be generated over the next 12 months and then the following 12 months, we see that this business in the next 12 months can easily generate $20 million in that ballpark. And then year two, certainly in the mid-30s and year three in the mid-40s. So when we add those numbers up, we get pretty close to our purchase price. What we need to do is the business is, number one, we need to grow the top line. We certainly need to address the margins as the business has come into MACOM, as Jack pointed out, with gross margins that are significantly below MACOM's corporate average. We don't see that we have to spend a lot of capital to do the work on this business. So we're actually quite excited. And I'll also highlight that when this management team took over running MACOM back in 2019, that first quarter where we provided results, our gross margins were below 40%. And it took us eight quarters to get the business to 60% and another five quarters to get the business to almost 63%. And so we plan on running that same program on this business, which is today at a run rate of somewhere in $120 million and growing. And from a business point of view, we have an incredible team, incredible technologists, arguably number two in the U.S. as a merchant supplier of RF Power GaN. It's an amazing fit to MACOM. And our team feels like we were just handed a bazooka and we're ready to go into the market and do some serious damage.

Thank you. And our next question coming from the line of Quinn Bolton with Needham. Your line is open.

Hey guys, thanks for taking my question. I just want to follow up on the Wolf business. Just to try to size the opportunity there. Obviously, it's coming below core MACOM. Steve, you mentioned that core MACOM margins are under pressure relative to the recent past, just given industry conditions, should we be thinking the core business probably in the kind of 59-ish percent range, and then Wolf takes you down to the to the guidance of 56% to 58% for the quarter. Is that kind of the right ballpark just to be thinking about where that base business may be settling in the near term?

Right. So our modeling and our data right now in recent looking at the business as well as the trends, my comments revolved around coming off that peak of just under 63% and when we were at $180 million run rate for the core business, we're now at $151 million run rate for the business, and it's come down to 60%. We don't expect it to go below 60% for the core business. So I think you can then sort of back into the gross margins on the Wolfspeed side, which would get you to gross margins in sort of the low 40% and Jack, I'll turn to you if you want to add to that.

I think that was a good summary. I guess, just to follow up, Quinn, the there's many things that we've done to structurally improve the base MACOM business from an overall cost perspective that have helped to preserve that 60% gross margin number that Steve was referring to. So expectation is, as we go forward, we'll be able to apply some of those same things that we've done with the base business to the Wolfspeed acquired business, and that will help support us. And then with some lift from a revenue perspective on the base business as well as with the acquired business, that will help improve margins as we go forward.

Got it. A follow-up: I understand Wolf will continue to operate that fab for the first two years. Is there anything that prevents you from accessing the fab to run your processes or try to drive higher yields? Are you constrained in what you can do while Wolf operates the fab, or will you have free access to start applying your know-how and basic improvements to raise yields immediately after close?

I'll give some background to answer that. We currently have a foundry relationship with Wolfspeed where we buy wafers at an effectively fixed price, and that arrangement remains in place until the fab conveys in about two years. As part of the transaction we gave Wolfspeed $50 million of stock, so they are now an equity holder in MACOM and our strategic goals are aligned. We also established a Fab Operating Committee made up of Wolfspeed and MACOM staff to work together on implementing changes in the fab with Wolfspeed’s support. It’s in their interest to improve execution and yield because that lowers the cost of the wafers they sell to us, so everyone’s objectives are aligned. It’s only been about two months, but we already have an excellent working relationship with the staff in North Carolina, both inside the fab and with the technologists, and we will be able to drive improvements. There are boundary conditions and a structured process to ensure we can do that, and that structure is an important part of the deal. Outside the fab, on back-end assembly and test and other inbound material costs, we have full control. We can change OSAT contracts, pursue yield improvements in assembly and test, and apply MACOM’s resources to the back end, which is a significant component of COGS, and we are acting on that immediately. Wolfspeed’s teams in Malaysia and Morgan Hill are rolling up their sleeves and working with MACOM staff, so there are many areas we will focus on. We will also change business practices to align with how MACOM runs its business. For example, we prefer to deal directly with major customers rather than rely on distribution and would rather sell the full product line. We will optimize distribution usage and review all contracts, including long-term purchase and foundry agreements, to bring them to MACOM standards. There is a lot of work to do, and improvements won’t be instantaneous. We expect incremental progress over time; if we achieve that, it will meet our financial targets and help us begin to dominate the market.

Thank you. And our next question coming from the line of Vivek Arya with Bank of America Securities. Your line is now open.

Thanks for taking my questions and thank you, Steve, for giving the color around the steps required to drive all the cost synergies. I was wondering if there is a way to quantify when you think the combined entity can get to that 60% or so gross margin level. Is that an eight-quarter type time line as you described in your historical activities? Or should we think about something different and something you can achieve faster?

So we don't have a sharp answer for you on that. We're starting in the low 40s. We'd like to exit our fiscal year close to 50%; if we can get to 49% or 50% for this business segment going into fiscal 2025, I think that would be a win. We're head down, focused on pulling all the levers we can to make that happen. I can't necessarily put a timeline on our end target, but in the near term we plan on making significant changes. Part of that will have to do with the mix and with the amount of growth that comes through the business, so there are a lot of factors that make it difficult to give a firm answer. I can say this: we fundamentally understand the business. When we look at the industry, the competition, and their gross margins, we know there is a lot of room to go with this technology.

Got it. And then can you give us a sense for what is the core MACOM industrial and defense revenue that you're guiding to in the March quarter? And where do you see the trough on the industrial side? I realize it's tough given all the cyclical headwinds. But what is sort of the core MACOM industrial you're guiding to? And where do you see the trough for that business? I think you mentioned something about a back-half recovery. So I was just hoping you could give us some color so we can model that business in the right way.

Sure. I'll start with that and then Jack can add. So going into Q2, our base business, the Industrial and Defense, we think, will be up about 5% or 6%. We think Telecom will be up about 8% or 9%, and we know that the Data Center will be down about 15%. So that is for the core business. Now when you compare that to my commentary for the full business, Industrial and Defense going in Q2 will be up about 20%, Telecom, 50% and Data Center, the same at that 15% drop. Obviously, the big step-up in the aggregate numbers are due to the Wolfspeed contribution of that $30 million, and it's essentially evenly split between the two market segments. Jack, do you want to add to that?

I think the only other item to add was with regard to the industrial piece of that I&D business. So I think we've been discussing how the industrial piece has been down for us over the past couple of quarters. That's something that we continue to manage. But I think we've been pleased with the performance on the defense side of the business, which has really supported things within that end market, and we continue to see opportunities on the defense side to ultimately drive improvements in that end market as we go forward.

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

Yeah, hey, guys. Congratulations on closing the deal and looking forward to you guys doing an excellent job on integration. Steve, I did have a question, a follow-up on kind of what Vivek was just asking about. You said your book-to-bill for the business was 0.9 in the December quarter. Sounds like if I take your guidance of the core business being roughly flattish, is it fair for me to assume that the book-to-bill is now very close to 1? And if you're talking about a recovery in your business in the back half and the book-to-bill starts to climb. The reason why I asked that, historically, when the book-to-bill start to climb like that, it signals the bottom. Is it fair for me to assume that your industrial business is bottoming out right about now to plus or minus a quarter?

So a couple of things. You're right, if we just go back a quarter or two, in Q3 of our fiscal 2023 the book-to-bill was 0.9 and then we ended fiscal 2023 with a book-to-bill of 1.1. This past quarter it was 0.9. The weakness in bookings was really Telecom and, to a certain degree, Data Center related. The strongest segment was I&D, primarily driven by the D, and we had some very good bookings there. As Jack said, our industrial business still remains weak. I'm not sure we can call a bottom per se, but we feel that we can move the base business during Q3 and Q4. We've been at $151 million now for a few quarters, so whether we're at the bottom or not is hard to tell. I really can't say anything more than that.

Yeah.

Fair enough. Thanks, Stephen. And then I did have a follow-up, another question that was asked earlier on your Data Center strength, wherever we look, we see this generative AI driving compute memory and it would imply that connectivity is rising, which is really good for you guys. It seems like you've got the products you talked about strong demand, but you are talking about slippage, I think is that this quarter in March. And I think you said maybe potentially slipping into the June quarter as well. A, is that correct about March and June quarters? And then, B, is that simply you aligning your shipments to customer needs, which would imply that the customers are weak? Or is there something else going on?

There are a lot of moving parts in the Data Center for the back half of fiscal 2024. When we look at the Data Center business, we think there are opportunities for growth, but we can't say exactly what they will be today. Second, there is currently an overhang from lower data rates, 25 gig, and many of the traditional NRZ products we sold, which are very weak. We do not expect those to come back in earnest in the back half. We think growth in the back half will be at higher data rates. Third, you are seeing movement around major customers and their ordering patterns as they ramp up and hit steady state. As we have seen many times in the data center, there is a prime the pump drive up and then pump the brakes slowdown. We are in that slowdown in Q2, where many of our lead customers are digesting inventory before another step up. These parts also have long lead times, so customers know that. As we move into this quarter and the beginning of Q3, we will have very good visibility into the back half. The trends support our core strategy of focusing on higher data rates, and we have a compelling product line. We believe we have some of the best drivers and TIAs in the industry. We have seen pull not only from major customers but also from cloud providers, who are beginning to accept that linear drive can have a place in their networks. Finally, with new system architectures there is an incredible amount of short-reach optical and electrical connectivity and cables. The serviceable available market in this area is growing rapidly, and many publications predict large increases in port counts. There is tremendous predicted growth, and we feel we are in a good position.

Thank you. And our next question coming from the line of Harlan Sur with JPMorgan. Your line is now open.

Hi, Good morning, thanks for taking my question and congrats on getting the RF business acquisition closed. Steve, the newly acquired RF business in Telecom, you guys had expected a slight decline in the December quarter, marking sort of five quarters of consecutive declines. It looks like Telco was actually down more than that in the December quarter, obviously, we know wired and wireless infrastructure trends continue to be weak. But from March, you're actually thinking 8% to 9% sequential growth. So do you guys believe that the business has bottomed and maybe Telco sort of bounces along the bottom beyond the March quarter?

So possibly. The telecom market for us has, well, three areas that are positive right now. Number one is metro long haul, where we see early ramp-ups of 130 gigabaud systems and strong spending and pull for our products in this market. Second is SATCOM, satellite communications, where we are seeing growth and many opportunities to expand our business, which is supporting our near-term revenues. We are starting to see some growth in China for small cell deployments and fronthaul demand; it's modest, but an improvement over a quarter or two ago. But to your point, you're right: we've come down significantly from over $60 million to $27 million this past quarter. Much of the growth we had in 2022 and 2023 was cable infrastructure, and that has essentially gone away. We had a lot of revenue with PON, passive optical networks, and today we are shipping into PON at a very muted level — not zero, but quite low. Finally, 5G is still a very important market for MACOM, and while many are quite negative about telecom, we are reinvigorated and excited about bringing the RF power business from Wolfspeed to a wider range of customers where they were not engaged or where we want to grow positions they were engaged in. We believe that together we can gain more market share in the 5G market, and that is part of our core strategy.

I appreciate that. And then maybe just a quick update on the linear driver, right? Because it seems like there would be more demand for these types of solutions as the industry moves to 1.60 speeds later this year because the DSP-based 1.60 modules consume so much power. So maybe give us an update on the traction of Linear Drive on the current 100 gig per lane, upcoming 200 gig per lane. And is the team actually shipping solutions in high-volume production today?

Right. A few things. There is a lot of work going on in the industry for interoperability at 100G per lane for linear drive, and that is really the state of the industry. You are starting to see various publications. In fact, there was an industry get-together, I think in October, where some of the major cloud companies presented data showing bit error rate and functionality of linear drive systems, actually showing system-level data, and the data is compelling. What needs to happen to support this is more switches being available, not just Tomahawk 5 but other platforms, whether it’s Cisco Silicon One or others. There needs to be more switches that can handle linear drive because the ASIC needs to support the linear drive chip that we make. That is the state of that business. We feel like we’re right on the edge of that discussion and our high-performance connectivity team is doing a phenomenal job. When you talk about 200 gig per lane, as I mentioned in my prepared remarks, we will be demonstrating some products in that regard, and we are of course very active. I think there is less activity right now in that area. A lot of the first-generation 200 gig per lane will be single-mode fiber using silicon photonics and EMLs, and we think before the volumes kick in it has to switch over to a VCSEL laser. We don’t make VCSEL lasers at 200 gig today. It’s still very early days for that, and there are things that need to come together in the ecosystem to support super high-volume 200 gig. It’s something we are focused on, and we think we’ll be positioned well when our customers want to ramp up those technologies.

Thank you. And our next question coming from the line of David Williams with the Benchmark Company. Your line is open.

Hey, good morning. And let me add my congratulations on the closing of Wolfspeed acquisition there. I guess my first question has just been around that acquisition, has there been anything, any surprises, either positive or negative that you've come across? And maybe just kind of touch on what you've done in terms of integrating that into the business? Thanks.

Sure. I would say that no, there were really no surprises. We spent, well, a fair amount of time in due diligence to get to know the people, the staff, the organization, the infrastructure and had just a great engagement with the Wolfspeed team. So post-close, there were no real surprises. As I highlighted in the prepared remarks, most companies will acquire a company and then integrate after closing; we had set up a planning process to allow us to execute that integration the day after we closed, essentially. And I have to really thank the Wolfspeed team as well as our team for working so well together. I will say that the customers and the industry seem to be very receptive to this change. They now recognize that given MACOM is very focused on RF and microwave, it's a perfect fit. And a lot of the things that were on the drawing board for next-generation processes or products we can now implement together as a priority. So I think the customers will benefit from that. But I would say, generally speaking, no surprises. There's certainly a lot of heavy lifting that we need to do, as Jack and I have talked about. The team, the management, the production workers and application staff are amazing. They have a very strong footprint across Europe with their sales and applications team. They are stronger than what we had, so we're really excited about that. There is a very strong team in China and some great manufacturing capabilities, not only in North Carolina, but also in California where their Morgan Hill facility is essentially a state-of-the-art assembly factory.

Great color there. Thank you. Jack, you mentioned the flexibility in the model on the expense side. Can you discuss your expectations as you fully ramp and realize the synergies you expect? How should we think about the expense side? Thank you.

Thanks, David, and I'm assuming you're referring to the operating expense side. So as we closed out the December quarter, that was only a partial quarter from an operating expense point of view. So as we look forward, we'll obviously have a full quarter's worth of operating expense with the acquired business. But I think one of the things to look to in terms of how we manage the business, right? We want to make sure we're also leveraging many of the costs that we are currently incurring from a MACOM point of view. So certain of that was already factored into the acquisition model as we played this out. So a lot of that work was done upfront and prior to closing. So from an overall expense perspective, we think we've got a pretty good handle in terms of where we're at today. Similar to what we've worked through with MACOM from an operating expense perspective, we want to make sure we're going to continue to refine things and better leverage our overall operating expenses as we go forward. So I think if you look at the guide that we've put out there and some of the other directional information, you can see that we'll probably be making some pretty good progress from where that business was historically from an overall operating expense perspective. But I think we're feeling pretty good in terms of where we're at now and look to obviously build upon that as we go forward.

Thank you. And our next question coming from the line of Srini Pajjuri with Raymond James. Your line is open.

Thank you. Good morning, guys. Thanks for squeezing me in. My question is on the Data Center first question. Steve, you talked about some lumpiness in the near term. I'm just trying to understand the mix of your business in terms of lower speed versus higher speed. Obviously, the higher speed the market itself is growing nicely. But at the same time, to what extent the lower speed weakness, I'm trying to understand to what extent this is cyclical versus something structural? And where do you see that lower speed and a business bottoming per year?

So I think when we talked about the lower speeds, we do think there will be a couple more years of 100 gig per lane demand for what I would call our traditional 100G SR4 AOCs and some of the 100G DR1 and similar products. We think there is still a good amount of legacy business and demand there. But we are definitely starting to see that as next-generation switches come out, people want to run at higher data rates, 400 and 800 gig, and some are jumping straight to 800. Today the vast majority of our revenue is in 400- or 800-gig PAM4 applications. These are typically short reach, generally less than 100 meters and sometimes up to 500 meters. Related to that, we see similar trends in metro and long-haul; we lump metro long-haul into telecom, but we expect 32 gigabaud products to ramp down in the next year or two as customers move to 64 gigabaud, which corresponds roughly to 400 gig for the majority of cases. Some are even starting at 130 gigabaud. So you see a migration to higher data rates. I think it's slow and gradual. Given that run rates for lower data rate revenue are so low and higher data rate revenue is growing rapidly, I think the worst is behind us in terms of a step down from a 25-gig platform reaching end of life.

Got it, thanks for that. And then my next question is about your I&D business, Steve. I mean, obviously on the investment community side, I think we understand how to kind of think about the industrial business fairly well. The difference is more program-based and company-specific. So as you look out to the next 12 to 18 months, can you talk about how you're thinking about your defense business growth? Are there any new programs that are kicking in? I mean, just from a modeling standpoint, what is the organic growth rate for this business the way you guys think about it?

Yes. I would say that if we can achieve high single-digit growth rates on a CAGR basis, that would be great. I think the last three or four years, it's been about 18%. So we've been making a lot of great moves with capturing programs, being more aggressive cross-selling some of our capabilities into the defense market. Most of our defense business historically has been RF and microwave-related at the chip or package level. And part of our strategy has been to slightly go up the value chain and build multifunction assemblies for customers using all of our chips, and that strategy is working quite well. And then, of course, with Wolfspeed, a significant portion of the Wolfspeed business is for defense and primarily for transmitters and radar systems. So with Wolfspeed and MACOM, we believe we can do higher levels of integration, we can capture more market share and just better service to customers in this segment together. So we're in all sorts of different types of platforms with the core MACOM business with the RF power coming online, our SAM just increases further. From a GaN point of view, just to remind everybody, Wolfspeed's technology is ideal up through about 14 or 15 gigahertz; they're very high-voltage, high-power processes. So if you're building a radar that wants to knock or a transmitter that needs to drive high power, you would want to buy one of Wolfspeed or one of MACOM's products as an example of a new application that is very relevant today. And then, of course, the necessity to upgrade electronic warfare and jamming systems. They all require high-power transmitters and this is right in our wheelhouse. So great technology. We're very active, we'll conservatively say high single-digit growth, but we've been beating that and if things go well, then we hope to stay on that CAGR run rate.

Thank you. And our next question coming from the line of Tore Svanberg with Stifel. Your line is open.

Yes, thank you. And let me first offer my sincere condolences on the passing of Chairman Ocampo. First question, Stephen, it's really related to what you just talked about. So if we think about the Wolf RF business, it sounds like it's going to sort of contribute 50-50 between I&D and Telecom. But as you think about the growth of that business, will that also be very similar? Do you expect sort of the contribution to be similar to both of those segments?

So I think they're going to be different. And I think when we look at the Wolfspeed portfolio as it exists today, they have a very strong telecom business, which is down right now because of weak 5G, and we have great potential there to capture more market share together and turn that around. They have a great foundry business, which is a combination of commercial and defense, and we believe we can continue to grow that business. And then they have a product line of FET discrete devices and mixers. We believe their mixer product line is way too small. We want to throw the full force of our mixer designers at their processes and take higher-value products to the customers. So we would expect, and our strategy will be to grow the mixer portion of their portfolio in terms of assigning resources to develop products to go after customers aggressively. That will be a corporate priority for us. And we think that is one of the best ways to: A, capture market share; B, improve profitability; and C, grow the revenue of what is a product line that today is just too small. So when we roll all that up, we'll just have to sort of wait and see. There's a lot of factors here beyond our control regarding some of the run rates of their big programs. And of course, we're still getting to know the programs and understand them. And as the Wolfspeed management team works with our team and we go together to customers and learn about the programs, we'll be able to sort of refine our thinking. But yes, this business has tremendous potential to grow. If you look at the $2 billion SAM for GaN, about half of that, we believe, is defense-related. And so we want a big piece of that.

That's very helpful. As a follow-up, and I know many people are asking about the step down in Data Center: could you give us a little more color on the mix? If it's a $200 million business now, how much of that is lower data rate versus higher data rate? Are you starting to see any seasonality in that business, or is it still too early to tell?

I'll say one thing about concerns regarding our data center business. In 2019 it was about $115 million, and on our current trajectory it will likely be above $175 million to $200 million. We're pleased to have grown the business every year. That said, this is the most volatile part of our business — ramps go up and down, and that's what you're signing up for. You've seen some of that over the past three to four quarters, with a big ramp-up followed by a pause. We don't read too much into it. At higher data rates we're gaining exposure across the industry as LPO technology is adopted, which plays to our favor, and the sheer volume of short-reach connections is increasing. Those are the key themes. I wouldn't call this business seasonal; it's driven by deployments and by customers building data center infrastructure, winning business, and rolling out large clusters. It's more program-related than seasonal.

Thank you. And our next question coming from the line of Karl Ackerman with BNP Paribas. Your line is open.

Yes, thank you, gentlemen, for squeezing me in. I have two questions, if I may. First, Jack, or Steve, could you address whether you have enough capacity today to support 50-gig per lane or 100-gig per lane, and whether you could support 200-gig per lane for short-reach applications? And are you actually seeing end customers begin to co-invest in the supply chain to support continuity of supply?

Just to remind everybody, our high-performance analog products are produced in third-party foundries, not MACOM’s own fabs. We work with global leaders that make high-performance CMOS or silicon germanium, and our volumes generally don’t move the needle inside those very large fabs. We’re a relatively small customer and our volumes are immaterial to their overall business, so we’re not particularly concerned about capacity. What we do worry about is lead time and planning, because this business is volatile. When the music stops, we don’t want to be left holding a lot of parts. We must carefully plan how we ramp up to steady state, diversify parts across many customers, and then ramp down. To manage that risk with customers, we provide long lead times so we can buffer and reduce inventory exposure. Generally speaking, we do not have a capacity problem. On the back end with OSATs and testing, many of these products are bare die, flip chip, or bumped and packaged in some cases, so capacity is not an issue there either. Finally, we have strong relationships with our third-party foundries, and when demand spikes we communicate with them to ensure they can clear the road for us if necessary. It really comes down to priority and planning.

Yeah, thanks for that, Steve. For my follow-up, thank you for providing the core growth of telecom in March. But how do you see that market this fiscal year? And within telecom, the Wolf acquisition gives you both GaN as well as LDMOS product and it gives you the full suite of antenna components where telco operators can implement really 5G NR and 4G LTE for carrier infrastructure. And so the Telco to that is, will you also prioritize LDMOS? And if so, how are you thinking about that particular end market, the carrier infrastructure of the market this year as well? Thanks.

Thank you. Yes, you're correct to say that LDMOS is part of the portfolio, and we will continue to provide those products to customers. We basically, when we visit customers and we look at requirements, it becomes clear through conversation what the best process technology is. And so we definitely have those conversations. And if LDMOS is more appropriate, then we'll certainly offer that. We are not wedded to one over the other. And the 5G infrastructure, what you're typically seeing is higher frequencies, you're seeing requests for higher efficiency. And typically, GaN has the edge there. So that has been the trend over the past few years in this market. Now with that said, MACOM our base makes MOSFETs and high-power devices in our fab here, silicon MOSFETs. And so we sell these products into avionics and a lot of defense systems, and we've been selling them for decades. So we look at LDMOS as a great technology for avionics and some defense systems, some communication systems where they prefer that technology. And so we'll actually be moving and focusing our sales force to sell LDMOS across all things wireless.

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

Thank you. In closing, I would like to thank our employees, suppliers and customers for making these results possible. As we move into 2024, we're excited to service the RF and microwave markets with our bigger and stronger RF power team. We're excited to be involved with cutting-edge data center applications for next-generation high-speed infrastructure and to service our growing SATCOM market. We will continue to work as a team to meet our customers' needs and to execute our strategy. Thank you very much.

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