M/A-COM Technology Solutions Holdings' CEO Discusses F2Q 2013 Results - Earnings Call Transcript

May. 1.13 | About: M/A-COM Technology (MTSI)

M/A-COM Technology Solutions Holdings (NASDAQ:MTSI)

F2Q 2013 Earnings Call

April 30, 2013 5:00 pm ET

Executives

Leanne K. Sievers - Executive Vice President of Investor Relations

John R. Croteau - Chief Executive Officer

Conrad Gagnon - Chief Financial Officer

Analysts

Mark Lennihan – Goldman Sachs

Harlan Sur – J.P. Morgan

Harsh V. Kumar – Stephens, Inc.

Tore Svanberg – Stifel Nicolaus

Operator

Good afternoon and welcome to M/A-COM Technology Solutions Holdings Second Quarter and Fiscal 2013 Financial Results Conference Call. At this time all participants are in a listen-only mode. At the conclusion of today’s conference call, instructions will be given for a question-and-answer session. As a reminder, this call is being recorded today, Tuesday, April 30, 2013.

I would now like to turn the call over to Leanne Sievers of Shelton Group, the Investor Relations Agency for M/A-COM Tech. Leanne, please go ahead.

Leanne Sievers

Good afternoon and welcome to M/A-COM Technology Solutions Holdings, Inc. second quarter and fiscal 2013 earnings conference call. I’m Leanne Sievers, Executive Vice President of Shelton Group, M/A-COM Investors Relations Firm. With us today are M/A-COM’s President and CEO, John Croteau; and Chief Financial Officer, Conrad Gagnon. Before I turn the call over to Mr. Croteau, I’d like to remind our listeners that management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements and response to your questions.

Therefore the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties that could results in those differences in the company’s filings with the Securities and Exchange Commission including its Form 8-K filed today and its Annual Report on Form 10-K filed on November 28, 2012.

In addition, any projections are for the company’s future performance represents management’s estimates as of today April 30, 2013. M/A-COM assumes no obligation to update these projections in the future as market conditions may or may not change.

Additionally the company’s press release and management’s statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP charge. These financial measures and a reconciliation of GAAP to non-GAAP results are provided in the company’s press release and related current report on Form 8-K, which was filed with the Securities And Exchange Commission today and can be found at the Investor Relations section of M/A-COM’s website at www.macomtech.com.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 30 days in the Investors Relations Section of M/A-COM’s website.

And now, I like to turn the call over to M/A-COM’s President and CEO, John Croteau. Mr. Croteau, please go ahead.

John R. Croteau

Thank you, [Lian]. Welcome everyone and thank you for joining us today. I’d like to begin today’s call with an overview of our second quarter results and then review our end markets and the progress we continue to make towards executing our growth strategy. Once completed, I’ll turn the call over to Conrad Gagnon, our CFO, to review our financial performance in further detail. I’ll then conclude today’s prepared comments by providing our guidance for the third fiscal quarter before opening the call to questions.

Revenue for the second quarter was $77.8 million, which was slightly above midpoint of our guidance and represents a 3.7% sequential increase. Our four end markets performed as expected, with our new 100G optoelectronics products driving the growth in the quarter as we successfully delivered on our backlog. Non-GAAP gross margin was 44.5% was at the midpoint of our guidance. Non-GAAP net income was $11.7 million or $0.24 per diluted share and we finished the quarter with $103.3 million in cash and cash equivalents, no debt and an untapped credit line of $150 million. Taking a closer look at our revenue by market, 28% of our second quarter revenue was from networks, 26% from aerospace and defense, 26% from automotive and 20% multi market. Networks as expected was up for last quarter, driven largely by sales of our optoelectronics products, specifically our new portfolio of modulated drivers and TIAs for 100G applications gained significant momentum as we executed on our orders from last quarter.

We believe that with our broad portfolio of targeted products, M/A-COM is well positioned to benefit from a decade long build-out of the 100G fiber optics market. Sales into the aerospace and defense market were flat and we have not seen any impact of sequestration on our business. Likewise, the automative business performed as we expected and we continue to believe that any future growth opportunities in this market will be contingent on market share gains [by core].

Our core standard catalog products continue to demonstrate firm demand. These products are usually sold through distribution. Book-to-bill on our key distribution partner was positive for the second fiscal and through April. So we remain cautiously optimistic moving forward. Building upon the past three years of improvements to gross margin and operating income, we have identified further areas for operational refinement. As a result, this quarter, we are implementing a minor restructuring that will help improve COGS as well as redirect future investment from the lower margin to higher margin opportunities.

In summary, the overall business environment remains challenging. However, we believe our strong execution matched by our commitment for operational improvements will deliver broad based growth next quarter and for quarters to come, which is consistent with our strategic plans.

With that, I’ll now turn the call over to Conrad to discuss our financial results for the second quarter of 2013.

Conrad Gagnon

Thank you, John and good afternoon, everyone. During the course of my comments as well as those made by John with the exception of revenue, our income statement amounts and percentages as well as cash flow from operations will be discussed on a non-GAAP basis. These non-GAAP measures are provided to enhance understanding of our core operating performance and a reconciliation of each for the most comparable GAAP measure is included in our earnings press release circulated earlier today for your reference.

With that in mind let me now begin the review of our financials for the second quarter of fiscal 2013. Revenue for the second quarter was $77.8 million an increase of 3.7% compared to $75 million in the first quarter and slightly up compared to the $77.5 million in the second quarter of 2012.

The sequential growth in revenue was primarily driven by increased demand for our new 100G optoelectronics product. Gross profit in the second quarter was $34.6 million or 44.5% of revenues compared to $33 million or 44% of revenue in the prior quarter. Representing a 50 basis point sequential improvement, gross profit in the prior year quarter was $37 million or 47.7% our long term focus continues to be on improving gross margin through increased sales of higher margin products, market growth, and channel efficiency as well as further cost reduction.

In terms of our operating expenses for the second quarter, total operating expenses were $19.7 million compared to $19.2 million in the prior quarter and $19.1 million in the prior year quarter. Looking specifically at investments in new products our research and development expense for the second quarter was $9.7 million compared to $9.5 million in the prior quarter and compared to $8.7 million in the second quarter of 2012.

R&D as a percentage of revenue represented 12.4% in the second quarter compared to 12.7% in the previous quarter and 11.2% in the prior year quarter. Selling, general and administrative expenses were $10.1 million compared to $9.7 million in the prior quarter and $10.5 million in the prior year quarter. As a percentage of revenue, SG&A represented 12.9% in both the first and second quarter and 13.5% in the prior year quarter.

Income from operation was $14.9 million or 19.1% of revenue. This compares to $13.8 million or 18.4% of revenue in the prior quarter and $17.8 million or 23% of revenue in the prior year quarter. We expect operating margins will expand over time as we reach our 25% OpEx model and gross margins expand through (inaudible) entire margin products and the benefit of operational efficiencies.

Turning to income taxes, our effective income tax for the second quarter was 21.5% compared to 30% in the first quarter. Our second quarter results benefited from a lower tax rate due to the reinstatement of the U.S. Federal R&D tax credit in January 2013 enabling us to recognize related tax credit horizon from calendar year 2012. The second quarter results included a benefit from this one-time tax credit and the amount of $0.02 per share.

The effective tax rate for the remainder of the fiscal year is expected to be 29%.

Our second quarter net income was $11.7 million or $0.24 per diluted share and compares to first quarter net income of $9.7 million or $0.20 per diluted share and the prior year quarter net income of $12.1 million or $0.28 per diluted share. The share count used to compute EPS was 48 million shares of the second quarter, 47.6 million shares for the prior quarter and 42.8 million shares in the prior year period.

Turning to the balance sheet. As of March 29, 2013 our cash and cash equivalents were $103.3 million, which represents an increase of $10.8 million for the quarter. Cash flow from operations for the quarter was $13 million compared to $14.4 million in the previous quarter and $9.9 million in the prior year quarter. We have zero debt and revolving credit facility of $150 million or additional liquidity.

Our tax receivable of $49.6 million represents 58 days sales outstanding, which compares favorably to $52.1 million and 63 days sales outstanding at the end of the prior quarter.

Inventory was $57.2 million a $1.4 million decrease from $58.6 million in the prior quarter. Inventory turns were three in the second quarter compared to 2.9 in the prior quarter. Capital expenditures in the quarter were $3.1 million or 4% of revenues compared to 2.1% of revenue in the prior quarter. Depreciation on property and equipment for the quarter was $2.6 million.

As John noted, we are implementing a restructure in the June quarter to further improve operational efficiencies and costs of good sold as well as to redirect OpEx towards higher margin products. In cash charge for the restructure to be recorded in our June quarter is estimated to be between $1.1 million and $1.3 million. In Q3 benefit to gross margin is estimated at 25 basis points and is included in our guidance.

I’ll now turn call back over to John, who will provide our business outlook for the third quarter of fiscal 2013.

John R. Croteau

Thanks, Conrad. In the third quarter ending June 28, 2013, we’re currently expecting revenues to be in the range of $78 million to $82 million. Non-GAAP gross margin between 44% and 46% and non-GAAP earnings per diluted share between $0.22 and $0.24 on an expected 48.1 million shares outstanding. As of today, we have already shipped [were presently] for 86% of the midpoint of our revenue range.

Operator, you may now open the call for questions

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) And it looks like our first question comes from the line of Mark Lennihan with Goldman Sachs. Please go ahead, your line is now open.

Mark Lennihan – Goldman Sachs

Yes, thanks very much for taking the question. Jonathan, I wondering if you could elaborate a little bit more on your comments about the order trajectory, and I understand the book-to-bill from your distributors was positive and remained so in April. Could you talk a little bit more about the bookings transferred in the entire business and reconcile that with the commentary of how from books you are relative to your June-quarter guidance?

Unidentified Company Representative

Sure, Mark. So our book-to-bill actually across all the business was greater than one. We tend to use the distribution number as more of an indicator of the broad-base demand rather than just a vertical customers. And consistent with that we consider the next quarter to be a growth quarter, modest growth. We are cautiously optimistic. And with 86 – a little over 86% from books, we’re very much on track. We’re getting that mid point of 80%.

Mark Lennihan – Goldman Sachs

Thank you for that. For my follow-up, I do understand you’re taking some incremental steps that are going to help your gross margin in the third quarter and there are some prior things that I think were underway, such as targeting their yield, and some new product introductions. So if you put the new actions together with some of the prior initiative that you had on the gross margins, can you just help us understand what sort of drop do you wish to expect going forward?

Unidentified Company Representative

Yeah. Our model still remains intact with incremental – drops are on incremental revenue to the gross profit line of 60%. This minor restructuring we refer to in operational efficiencies are really just continuing activity that we’ve had over the past three years. I think in previous calls we talked about, you know, as much as 200 basis we thought we could improve operating efficiencies over the coming year and year half. And this is part of that exercise.

Mark Lennihan – Goldman Sachs

Okay. Thank you. Good luck.

John R. Croteau

Thanks.

Operator

Thank you, sir. Our next question comes from the line of Harlan Sur with J.P. Morgan. Please go ahead. Your line is now open.

Harlan Sur – J.P. Morgan

Hey, guys. This is (inaudible) for Harlan Sur, great execution on the quarter. Within the growth guidance I was wondering if you can talk about the particular segments, perhaps what segments are improving and what you expect to be fairly flat across the board for the quarter.

John R. Croteau

I’m sorry. Is your question about forward looking or for the next quarter or…

Harlan Sur – J.P. Morgan

Yes, for the next quarter. Yes.

John R. Croteau

Yeah, well, ultimately growth that we’re predicting is pretty much across all end markets and all product categories with the exception of automotive. Our [forward] business continues to be flat. We actually were flat within 1 percentage point. So there is good planning for you. In any case on a forward looking basis, nothing really stands out in terms of our primary growth driver. It’s really broad based, like I said across the aerospace defense networks, the various networks, sub-segments as multimarket and it’s between standard products as well as the application specific products. So it’s a little bit encouraging that we’re not being driven by one particular segment.

Harlan Sur – J.P. Morgan

Okay. Thank you. And then, just wondering about the second half of 2013. I was wondering if the team can talk just qualitatively about the growth in your four segments for the second half of this year.

John R. Croteau

Yeah, we don’t have too many leading indicators on a forward-looking demand. We hear the rumors that everybody hears about second half calendar 2013 recovery and end markets like the wireless infrastructure segment. I would say everything we see is not inconsistent with that, but it’s too early to really see the orders builds in support of that.

Harlan Sur – J.P. Morgan

Okay. Thank you.

Operator

Thank you, sir. Our next question comes from the line of Harsh Kumar with Stephens. Please go ahead. Your line is open.

Harsh V. Kumar – Stephens, Inc.

a couple of question, John, something similar to the line that was just asked, I guess, let me ask the same question in another way. What are you most excited about as you look to the back half, I’ve got a thing that (inaudible) somewhere in there, but what else are you excited about for the rest of the year?

John Croteau

I would say the networks and the multi-markets are two areas that really standout as the real growth drivers, networks, we’ve talked a lot about the success we’ve had in the 100G optoelectronics segment. We’ve had our first customers ramp into production and that’s really kind of breaking the ice for more customers turning on. So I think not just through the second half of this year, but through the coming years, arguably for the next decade, I think that’s going to be a wonderful growth driver. At some point, the point market will recover. We have no indication of that as in the coming quarter, but again we hear the same rumors that everybody does that the second half of the calendar year will lift.

And then the other thing that’s very much encouraging for me is our standard catalog products, the demand through not just distribution, but across all of our end markets, both OEMs as well as distribution, that is steadily growing and picking up pace and like I said, I mean, that’s when I really get encouraged. So it’s not any particular one segment as it was for the past quarters, but broad based lift is – it would be nice if somebody headwinds turn into tailwinds.

Harsh V. Kumar – Stephens, Inc.

No, definitely and kind of getting a little deeper into your answer, John, outside of networks, are there any tremendously bright spots, I apologize, outside of opto and the network side, clearly you’re taking share there with some new lines but outside of opto, is there anything else in that that excites you?

Unidentified Company Representative

There is no question, I think, we’ve made some major progress behind the scenes not yet realized in revenue but breakthroughs at one of our top point-to-point customers in terms of driving share of wallet as one of the major point-to-point customers but again, that’s going to take a few quarters to be realized. CATV, we are well positioned but the [DAC’s] 3.1 deployment is, while key decisions will be made this year, the revenue won’t be realized until latter part of 2014 it looks like. So that’s why it’s a bright spot, it’s not a short-term bright spot and then there is a lot of absolutely wonderful things happening in our aerospace and defense business, which we hope in the coming quarters we can talk about more publically and that just – that’s revenues that will be realized a little further up in time. So it’s – the answer is really time dimension.

Harsh V. Kumar – Stephens, Inc.

And, I want to ask you an interesting question, we cover a couple of other companies in the defense space, John, that have all said the same thing they haven’t seen an impact from the sequestration. I was kind of trying to pick your brains and see why that maybe – is it simply too early or simply that the electronics part is immune from that? And then I’ll get back in line.

Unidentified Company Representative

I would, I mean this is pure speculation. So my sense is we simply are not that exposed. M/A-COM once upon a time would have been heavily exposed to the defense sector. We’re not so much today. It’s 10% of our total revenue and EBITDA at 10% has spread so wide. What I would worry about is for instance if we had big radar programs. Our radar business today is largely air-traffic control and weather radar if it was defense radar in the present sequestration with big lumpy business I mean you can have big material impact we just that’s not the nature of our defense business today. And we’ve been keeping a very close eye on the products that we sell into the defense applications and as I said there is absolutely zero indication of every any impact so far.

Harsh V. Kumar – Stephens, Inc.

Hey, good to hear, best of luck guys I’ll get back in the line.

Unidentified Company Representative

Great, thanks.

Operator

Thank you, sir. Our next question comes from Tore Svanberg with Stifel. Please go ahead your line is now open.

Tore Svanberg – Stifel Nicolaus

Yes, thank you. A few questions just to clarify on the restructuring that you are implementing you’ll get an immediate 25 basis point improvement to gross margin this quarter but that is there a specific number that we can also add for subsequent quarters?

Unidentified Company Representative

Sure, we project that it’s about 300 K per quarter in savings and cost of goods sold.

Tore Svanberg – Stifel Nicolaus

Excellent, very good. And on the question on aerospace and defense I guess another way of asking the question there is could you actually potentially see some benefits from sequestration, I’m thinking in a more outsourcing from your customers have you had more dialog with them or is it that still too early?

Unidentified Company Representative

Yeah, I think it’s just too early to say, I certainly wouldn’t be declaring upside on the back of sequestration at this point.

Tore Svanberg – Stifel Nicolaus

Very good then looking at your (Inaudible) business obviously it’s now ramping with one customer as we look at the second half I mean to the next fiscal year. I mean what inning are we in here. I’m just trying to understand the magnitude of this ramp that we’re going to see for the next six quarters.

Unidentified Company Representative

I don’t think we’re just in the first inning. I think we’re in the first of that. I had a chance to get our and meet with some of our lead customers in this space over in Asia this quarter and they were talking about, this is a decade-long build-out. This is not a flash in the pan with 100 (inaudible). I said it’s going to be like 10G. It’s going to be literally measured in a decade or more. So, I think – the way to think about our progress this quarter is the way these things work is and the infrastructure space, field reliability and product qualification is a very, very big deal.

As you could imagine, no OEM wants to put product in the field that is ultimately determined to be unreliable. So they go through a very, very rigorous qualification and what happened this quarter was we get through that qualification with one of the most respected market share leaders in that space and that is a trigger, we believe for the rest of our customers, we’re stepping in with those feet and ramping over the coming quarters. And like I said, I mean this is going to adjourn into a very long life cycle. But what we think it will be a very nice business for us.

Tore Svanberg – Stifel Nicolaus

Very good. Just last question on point-to-point in that business, Professional Recovering, like you said, there seems to be a lot chatter than maybe could second half; could see a recovery there. But when you talk to your customers, I mean, are they talking about any specific regional deployments? I mean thinking 4G in China, or 3G in India? I mean is there any of those discussions going on?

Unidentified Company Representative

Yeah, I mean there is constant discussions going on and my personal experience in this space, in this life and my previous life is our customers even at the most market share leaders frankly are very – themselves, the lead times they operate are incredibly short and when the delivery is very rapid. And so I made the comment last quarter and I standby as I’m out of the business of declaring a recovery in the segment, so in fact we see it.

Tore Svanberg – Stifel Nicolaus

That’s very fair and helpful. Thank you so much.

Unidentified Company Representative

You’re welcome.

Operator

Thank you sir. (Operator Instructions) Our next question comes from Steve Smigie with Raymond James. Please go ahead, your line is now open.

Steven Smigie – Raymond James

Thanks a lot for asking my questions here. And then just in regard to the point, the point discussion we’ve been having here, I think that’s some of your highest margin business, so if you do get that to back seems like it significantly changes trajectory of your margins. If you saw a pick up in the back half, could you continue to invest in some of the higher end 70 giga hertz solutions in addition to I think some of the more intermediate side that you’ve been talking about just give seem like that could also pretty meaningful margin addition, what you have out there?

Unidentified Company Representative

Sure, I mean we launched, I think this quarter we announced our band power amplifier products, so in this very strong leadership position in that space, so we absolutely invest and intend to maintain the technology high ground in that space. Now the issue we deal with that is from a overall standpoint, is a modest market, modest opportunities space and the way I look at the network's market is I invest in customers not necessarily just products, so we have customers when they commit to use the large share of wallet, we commit to them not just cherry picking the high ends but being a strategic supplier and a mainstream supplier in fact ultimately number one supplier in the space. So we will maintain the technology high ground but we will also end up with a blended business that's lucrative both from a top line and as well as the gross margin stand point.

Tore Svanberg – Stifel Nicolaus

Great, with regard to (inaudible) it seems like there's a lot of opportunity there for you guys and we have a new Chinese administration in place that seems to depend, holding up some of the deployment as we waited for new administration to come in over there, have we started hear any rumblings that some of those projects you've been looking at or maybe you're starting to accelerate a little bit?

Unidentified Company Representative

I would say on the radar side or you talking about the . . .

Tore Svanberg – Stifel Nicolaus

Any projects but I thought you're doing some work for example at radar air force but other applications as well?

Unidentified Company Representative

Yes there's no question we see some very nice orders coming in for this quarter and future quarters, things seems pretty cold last year into the early part of this year and they certainly have us feel of warming up a bit, I did get a chance to meet with our top Chinese customers as for the travel over range and there is no question that the general environment is improving.

Tore Svanberg – Stifel Nicolaus

Okay. Just some standard catalogue products, I know you gotten very strong reception for these products are multiple decades from your customers. Can you take those relationships in at additional products to that or is that not really – how you’re going to try to leverage your portfolio there?

John R. Croteau

(inaudible) we have the beauty of M/A-COM here is that we decades of customer relationships and a very broad portfolio of customer reach that I think frankly other companies in the industry can only dream of. And to be able to build out our portfolio of the products that were kind of over loops, over decade during the cycle years as we build those out it’s a low risk business. We get customer access. It’s technology that’s in our warehouse. I mean, to be frank I just have to deliver the products that customers want. So I think one of the brightest spots, take nothing away from some of these vertical markets, one of the brightest spots that may come in the future is building up that standard product business.

Tore Svanberg – Stifel Nicolaus

Okay. And just sort of a similar type question, seems like you’re getting some nice traction with the 100G. I believe that was the trend and seen thus far other adjacent product categories you can address given again another pretty high margin category assume you get some nice attraction there?

John R. Croteau

Actually our biggest strength on the margin-related driver side. They also have [DIAs] and we do well those, but we’re really driving is on the modulate driver side and indeed we are looking at broadening our product footprint as much as possible now that we’ve established ourselves in the segment, we’re frankly – M/A-COM previously had no presence. So that’s – when we talk about fraying up investments or higher margin opportunities that’s part of the equation.

Tore Svanberg – Stifel Nicolaus

Okay. Thank you.

John R. Croteau

You’re welcome.

Operator

Thank you, sir. And at this time I’m showing no additional questioners in the queue. I’d like to turn the floor back over to John Croteau for any additional or closing remarks.

John Croteau

Very good. I want to thank everyone again for joining us on today's call. And I look forward to reporting our continued progress next quarter. One last comment, Conrad and I would be attending several upcoming events including the Jefferies Conference on May 7 in New York, the JPMorgan Conference in Boston on May 14, and the Barclays Conference, May 22 in New York. Will be plan to attend any of these events we love to welcome the opportunity to meet with you. Operator you may now disconnect the call.

Operator

Thank you, sir. Thank you ladies and gentlemen for participating; it does conclude today's conference. You now disconnect and have wonderful day.

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