Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

F1Q 2014 Earnings Call

February 10, 2014 5:00 PM ET

Executives

Leanne Sievers – EVP, IR, Shelton Group

John Croteau - CEO, President

Robert McMullan – SVP and CFO

Analysts

Chris Hemmelgarn - Barclays

Mark Delaney - Goldman Sachs

Harlan Sur - JP Morgan

Mark Lipacis - Jefferies

Steven Smigie – Raymond James

Harsh Kumar - Stephens

Quinn Bolton - Needham

Operator

Good afternoon, and welcome to the M/A-COM Technology Solutions First Quarter 2014 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded today, Monday, February 10, 2014.

I would now like to turn the call over to Leanne Sievers of the Shelton Group, the Investor Relations agency for MACOM. Leanne, please go ahead.

Leanne Sievers

Good afternoon, and welcome to MACOM Technology Solutions’ first quarter fiscal 2014 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, MACOM's Investor Relations firm.

With us today are MACOM's President and Chief Executive Officer, John Croteau; and Chief Financial Officer, Robert McMullan.

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 in 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 result 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 December 5, 2013.

In addition, any projections as to the company’s future performance represents management’s estimates as of today, February 10, 2014. MACOM 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 non-GAAP measures and financial information. 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 SEC today and can be found at the Investor Relations section of MACOM's website.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 60 days in the Investors Relations section of MACOM's website at www.macomtech.com.

And now, I'd like to turn the call over to MACOM's President and CEO, John Croteau. Mr. Croteau, please go ahead.

John Croteau

Thank you, Leanne. Welcome everyone and thank you for joining us today. I’ll begin today’s call with an overview of our first quarter results, then turn the call over to our new CFO, Bob McMullan. Bob will review our financial performance in further detail. I’ll then conclude today’s prepared comments by providing an update on the progress we’ve made integrating Mindspeed Technologies and our guidance for the second fiscal quarter before opening the call to questions.

For those of you who don’t know Bob, he is a seasoned business executive who joins us with over 25 years of C level experience. Bob has a strong record of success in mergers and acquisitions, financial management, corporate financing and restructuring. We believe his deep industry experience combined with his extensive financial background make him a strong addition to the MACOM team. I am pleased Bob is on board and contributing to our business as CFO.

Now for the results. Revenue for the first quarter was $83.5 million. Non-GAAP gross margin was 46.6% with non-GAAP net income of $12.1 million or $0.25 earnings per diluted share. As indicated in our earnings press release, Mindspeed contributed $1.3 million in revenue and $0.7 million in operating loss for its inclusion of three weeks in the quarter.

During fiscal Q1, revenue and earnings per share for the core MACOM businesses performed in line with our expectations with non-GAAP gross margin improving 120 basis points from the prior quarter and 160 basis points from midpoint guidance. Net income came in at the midpoint, rounding out another quarter of solid execution by our team.

Looking at our end market breakout. Networks and aerospace and defense showed improvements both up 2% sequentially. Networks benefited from the sale of switches into China LTE rollouts, which were up strong sequentially, as well as continued ramp of new products and greater market share in low-frequency bands of wireless backhaul.

Growth in aerospace and defense was due to continued market share increases in our catalog portfolio. This growth was offset by softness in multi-market due to weakness in test and instrumentation. As expected, sales into automotive remained flat quarter on quarter.

Now let me turn it over to Bob to review our fiscal first-quarter financials in more detail.

Robert McMullan

Thanks, John. I would like to thank John for his introduction and add that I'm very pleased to join an exceptional executive team and look to complement the team in my areas of expertise.

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

Also, during the first fiscal quarter, Mindspeed’s operating results were included in MACOM’s operating results since the transaction closing on December 18. During this three-week period, Mindspeed had two weeks of holiday shutdown in which we incurred expenses with minimal revenues, which would not represent our forward expectation.

Also, we classified the Mindspeed wireless business as discontinued operations. In terms of comparability to prior Mindspeed results, I would point out that sales of intellectual property, which were contributors to revenues and gross profits at Mindspeed over the last preceding four quarters did not impact Mindspeed’s results during the three-week period. Going forward we expect that product revenues will generate the majority of Mindspeed’s revenue contribution and that these revenues will be reported in our carrier networks, enterprise networks and multi-market end markets.

On a pro forma basis as if Mindspeed acquisition was closed at the beginning of first fiscal quarter, total revenues would have been $104.5 million, consisting of carrier networks at $34.7 million, A&D at $23.5 million, automotive at $21.3 million, multi-market at $16.6 million and enterprise networks at $8.4 million. Going forward, we will report revenues consistent with this end market presentation.

Revenues were $83.5 million, essentially flat to $83.7 million in the fiscal fourth quarter of 2013 and an increase of 11% compared to $75 million in the first quarter of 2013. As John mentioned, the first quarter revenues were within our range of expectations and included an approximately $1.3 million contribution from our acquisition of Mindspeed.

Gross profit in the first quarter was $38.9 million, or 46.6% of revenue, compared to $38 million and 45.4% of revenue in the prior quarter, and $33 million and 44% in the first fiscal quarter of 2013. Gross margin continues to improve quarter over quarter due to a more favorable mix of higher margin products.

In terms of operating expenses for the first quarter, total operating expenses were $22.7 million compared to $21 million in the prior quarter and $19.2 million in the prior year quarter.

Looking at our investments in new products. Research and development expense for the first quarter was $10.9 million which compares to R&D expense of $10.1 million in the prior quarter and $9.5 million in the fiscal first quarter of 2013. R&D as a percentage of revenues represented 13% in the first quarter compared to 12.1% in the previous quarter and 12.7% in the prior year quarter.

Selling, general and administrative expenses were $11.8 million compared to $10.9 million in the previous quarter and $9.7 million in the prior year's quarter. SG&A as a percentage of revenue represented 14.2% in the first quarter compared to 13% in the previous quarter and 12.9% in the prior year's quarter. The sequential and year-over-year increase in SG&A was primarily due to the inclusion of Mindspeed SG&A expenses and the inclusion of an additional week in the quarter.

Income from operations was $16.2 million or 19.4% of revenue. This compares to $17 million or 20.3% of revenues in the prior quarter and $13.8 million or 18.4% of revenue in the prior year's quarter.

Turning to income taxes. Our effective income tax rate for the first quarter was 23.5% compared to 29% in the prior quarter and 30% in the year ago quarter. This change is indicative of the use of Mindspeed’s net operating loss subject to change of control limitation, anticipated repositioning of certain Mindspeed’s international business into the MACOM international structure and related tax savings and our estimate of our actual annual cash taxes over the next few years.

To this point we anticipate paying U.S. income taxes at a much lower rate than the 23.5% for fiscal 2014. We would not anticipate changing this non-GAAP effective tax rate unless we saw a significant shift in growth of international revenues over U.S. revenues.

Our first quarter net income of $12.1 million or $0.25 earnings per diluted share compared to fiscal fourth-quarter net income of $12 million or $0.25 earnings per diluted share and net income of $9.7 million or $0.20 earnings per diluted share in the prior year first quarter. The share count used to compute EPS was 48.6 million the first quarter, 48.5 million in the fourth quarter and 47.6 million shares in the fiscal first quarter of 2013.

Two of MACOM’s customers represented 23% and 24% respectively of revenues in the quarter. Cash flow from operations for the first quarter was $10.8 million compared to negative $9.5 million in the fiscal fourth quarter and a positive $14.9 million in the first quarter of 2013.

Turning to the balance sheet. On January 3, 2014, our cash and cash equivalents were $66.4 million. During the quarter we drew $220 million under our previously existing $300 million revolving credit facility to finance the acquisition of Mindspeed, including the retirement of approximately $33 million of debt of a total of $40 million of debt on Mindspeed’s balance sheet at the time of closing. The remaining short-term debt of $7 million is expected to be paid in the fiscal second quarter.

Accounts receivable of $66.5 million compares to $63 million at the end of the prior quarter and $52.1 million at the end of the year ago quarter. Days sales outstanding were 56 days compared to 68 days at the end of the prior quarter and 63 days at the end of the year ago quarter. DSOs are calculated on a pro forma fiscal first-quarter revenues. The decrease in DSOs largely reflects focused collection management.

Inventory was $88.7 million, including $20.1 million of purchase accounting step up to fair market value compared to $54 million in the prior quarter and $58.6 million in the year ago quarter. Inventory turns were 3.1 compared to 3.4 in the prior quarter and 2.9 in the year ago quarter. Inventory turns are calculated on a pro forma fiscal first-quarter cost of goods sold and excludes the purchase accounting fair value step-up.

Capital expenditures in the first quarter were $2.6 million or 2.6% of revenue compared to 6.1% of revenue in the fourth quarter and 2.1% of revenue in the fiscal first quarter of 2013.

Depreciation expense on property and equipment for the first quarter was approximately $2.9 million.

I'll now turn the call back to John to review our progress on the Mindspeed integration and also provide our business outlook for the second fiscal quarter of 2014.

John Croteau

Thank you, Bob. To reiterate, we expect that the Mindspeed acquisition will be accretive beginning this quarter fiscal Q2, the first full quarter of combined operations. This will be a transitional quarter for MACOM as we execute on our 100-day integration plan.

We continue to rationalize the sales channel and harmonize inventories, consolidate the management teams, operations and forecast systems while looking to reduce operating expenses across-the-board. Altogether we expect to achieve $0.02 of accretion over previous EPS consensus estimates of $0.25 for Q2. Execution of our 100-day integration plan will conclude this quarter fiscal Q2. Mindspeed’s headcount as of closing on December 17 was 478 people, we will exit this quarter at 230 people and ultimately conclude with a headcount of less than 200 after completing transitional services for Intel.

We've also begun to realize further synergies by eliminating redundancies in engineering tools and overhead, SG&A, public company costs, follow-on [ph] entertainment as well as other recurring expenses. We’re actively consolidating facilities and costs within the combined supply chain.

During our first full months of combined operations, we identified strategic upside beyond that originally anticipated. For example, as our optical teams began working together, we discovered that we have the highest performance and lowest power clock and data recovery as well as EML, DML driver solutions for 100G. We believe that the combination of these will enable the next generation of pluggable CFP4 as well as QSFP plus 28 optical modules. This is a breakthrough that can double, if not quadruple, port density from current 100G platforms.

Likewise in January, we brought together our respective sales teams in Asia and identified numerous short-term sales opportunities beyond our original expectations. For example, Mindspeed channel partners have close strategic relationships with set top box ODMs who supply into emerging markets. They are highly motivated to drive sales of MACOM’s RF portfolio which we had previously focused on tier 1 OEMs in Europe and North America. The timing of this is fortuitous as global demand in certain set top box applications seems to be shifting towards emerging markets.

Another example of strategic upside from the Mindspeed acquisition lies in bringing Silicon Germanium technology to bear in MACOM’s target applications. This quarter we secured our first major customer win for a millimeter wave communications program using Silicon Germanium technology. We believe the merger of Mindspeed can eliminate the learning curve and execution risk that’s normally associated with the organic [ph] technology investments.

Mindspeed immediately brings engineering competence, EDA and CAD tools, manufacturing skill and a world-class supply chain that other RF and microwave suppliers are left to develop organically. We believe this is a significant competitive advantage and accelerates time-to-market in areas where CD [ph] could serve as a disruptive force.

To conclude my comments today, I want to reiterate that I'm very pleased with the progress we've made to date integrating the Mindspeed acquisition. Fiscal Q2 serves as a key transitional quarter as we complete our 100 day integration plan. This sets the stage for realizing the full benefits of operational and financial synergies as well as cross-selling opportunities in the second half of our fiscal year. We remain confident in achieving our accretion targets for the full fiscal year of 2014.

Turning to our guidance. For the second quarter ending April 4, 2014, we currently expect revenues to be in the range of $103 million to $107 million line, non-GAAP gross margin between 48% and 52% and non-GAAP earnings per diluted share between $0.26 and $0.28 on an expectedly 49.3 million shares outstanding.

Operator, you may now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And it looks like our first phone question will come from the line of Blayne Curtis with Barclays.

Chris Hemmelgarn - Barclays

Thanks very much. This is Chris Hemmelgarn on for Blayne. First quick question, could you walk us through some of the puts and takes of your expectations for the March quarter in terms of the sector level performance?

John Croteau

Puts and takes. I would say that the growth quarter on quarter is going to come largely from the addition of the Mindspeed portfolio, both on carrier networks, so we’ll get a large improvement with their PON business as well as on the enterprise networks where the crosspoint switches had a very strong position. And looking deeper we see modest recovery in things like our CATV set top box business and continued strength in wireless backhaul.

Chris Hemmelgarn - Barclays

I guess beyond that, you talked about your plans for synergies with that business. Any chance you could help kind of quantify your expectation having taken a deeper look there and just talk about the timeline, have those changed?

John Croteau

The only area that we are prepared at this point to really quantify is the headcount and we feel it’s a fairly dramatic indicator of the OpEx synergies in bringing over the Mindspeed entity and reiterating what I said in the prepared remarks, as of closing on December 18, there was 478 heads – 478 people, we’re highly confident that we will exit below or right around 230, so from 478 to 230 and then when we’re finished with the transitional services for the divestiture of the wireless business to Intel, we’ll end up south of 200.

Operator

And it looks like our next question will come from Mark Delaney with Goldman Sachs.

Mark Delaney - Goldman Sachs

Hoping you can help me to better understand the impact of Mindspeed on your guidance and both for this upcoming quarter and then for the fiscal year – I think you said $0.02 of impact of accretion next quarter. Maybe I missed this but can you help us think about how much revenue that’s adding? And then I just want to make sure I fully understand for the full year you’re still expecting $0.15 to $0.20 of EPS accretion and so it would imply you’re going to get most of that in the back half of the year?

John Croteau

Absolutely. Yes, you’ve basically got it right. So our second quarter as I indicated is, best described as the transitional quarter. We’ve got a lot of OpEx coming out of the combined company. From a revenue standpoint there is a lot of harmonization of customer and channel inventories. The other thing that’s difficult to really bridge between the previous whole Mindspeed business is there is a large amount of revenue that is coming out in terms of the – being treated as discontinued operations on the wireless side as well as some nonrecurring revenue elements that we have been talking about before.

Mark Delaney - Goldman Sachs

Bob, I was hoping you can help us just understand what attracted you to MACOM and then some of the things you’re hoping to help the company implement going forward?

Robert McMullan

Great question, Mark. I appreciate it. I have been very impressed by John with his vision and the activity to join what I think is going to be a very successful company that’s focused on internal execution as well as acquisition. Execution -- the company does have a background of private equity owners that is also very complementary to my background and I am looking to contribute across the line from operations as well as to capital structure as well as traditional CFO responsibilities.

Operator

Our next question will come from the line of Harlan Sur with JP Morgan.

Harlan Sur - JP Morgan

I apologize if I misread this correctly, but if I remember the quarterly revenue runrate from Mindspeed ex-wireless was around $33 million per quarter. So I would have expected a revenue guide somewhere between 110 to 120 versus the 103 to 107 that you’re guiding here in March. That’s roughly about a $10 million delta here. Can you just kind of help us understand the differences?

John Croteau

That’s a very good point. So basically the way to think about it is after Mindspeed entered the process of selling the company last April, they entered a period of what might be called unnatural environment and proceeded with some fairly sizable nonrecurring revenue elements, things like a very large last-time buy on some WAN products as well as sales of intellectual property, neither of which would be recurring. Let’s just also say there is a fair degree of harmonization that we need to go through with customer and channel inventories, as the entity comes over. And what we want to do is make it through our second fiscal quarter for which this guidance is – we only limit ourselves to one quarter of guidance and basically complete all of that and then emerge into our third fiscal quarter fully intact. And we are very comfortable doing that because despite handling all of these difficult integration issues we are still delivering $0.02 of accretion, very consistent with our original – in fact, exactly right on our initial plan coming in and we’re still fully confident and committed to the $0.15 to $0.20 of accretion for the rest of our fiscal year.

Harlan Sur - JP Morgan

And then could you just give us an update on the sale of the wireless business to Intel? Is that still expected to close here in February? What are the potential net proceeds to the team and can you just give us an update on your plans to find a home for the comps processor product line?

John Croteau

The things with – great questions by the way – so things proceed fully in line with our expectations in terms of the divestiture to Intel. There was a very long list of closing conditions and lot of complexity that has taken time to work through and that’s right on in the latter stages. I can’t comment on the actual closing date but let’s just say entirely consistent with our original expectations. So that’s right on track.

And then regarding the CPE business, I’d put this way. We are absolutely open and listening to offers for people to acquire that business. It’s unlike the wireless business, it’s not a liability. And I will put this way – the accretion targets that we have mentioned, the $0.15 to $0.20 for the year, will be met regardless of whether we sell that business or not.

Harlan Sur - JP Morgan

And then my final question. Last quarter at the time of the earnings call you were about 84% booked for your revenue guidance. What’s your backlog coverage for the March quarter?

Robert McMullan

We are in a range of what it was – also John mentioned, harmonization and where you have two systems that’s coming together but it’s plus or minus in the same range as it was last quarter.

Operator

And our next question will come from Mark Lipacis with Jefferies.

Mark Lipacis - Jefferies

John, thanks for the concrete examples on the top line synergy potentials that you are discussing. When we think about those -- in those kinds of examples with the 100G products and the Asia set-top box opportunities, how long does it take – once you get together and you’re able to leverage the Mindspeed’s sales force over there, you put together a the product on the optical side. How long does it take to start to see those synergies hit the top line? Is it a six month kind of event, is it instantaneous, is it 18 months on lots of the line, how should we think about that?

John Croteau

Yes, very good question. So it really depends upon which elements of those soft synergies you’re talking about realizing. For instance, if you’re talking about Asian ODM supply in emerging markets, it’s much quicker than, if you’re talking about long-haul carrier network deployments. I would say minimally in six months it’s difficult to go from nothing to volume material revenue in a shorter than six months and I would call that 6 to 12 months for swap-outs for lack of better word. And then if you’re talking about entirely new design for a new optical module might be 18 to 24 months for carrier network deployment. So it’s really all over the board depending on which application and which geography and which Channel.

Mark Lipacis - Jefferies

And then on the A&D business you talked about some catalog share gains. Typically we think about it in terms of – you’re selling into products that are doing better or you’re taking pockets. Could you help us understand which category you think you fell into?

John Croteau

Well, our catalog portfolios typically that are not long lead time design wins, it’s more a multi source second and third tier customers, it’s on a very fragmented customer base. And I would say this is one of the areas that pleasantly surprises us quarter after quarter after quarter. I always knew that we had strength at our core transistor and diode businesses and that’s what MACOM through decades has been known for. Always knew that we could grow that with focus and it was another quarter of demonstrating it. For instance, I mentioned last quarter that we would have a low in our radar programs which we did and the strength in our catalog business more than made up for that and generated 2% growth. So it’s something you can’t really commit to in the future but we are fixated on maximizing the results.

Mark Lipacis - Jefferies

Last question if I may. On the 100G opportunities, you’ve discussed this before. Could you help us understand where are we in the development and deployment cycle, what are the class of boxes you expect to see the most exciting topline results?

John Croteau

So in the 100G space, we have had strength through our previous position with helium phosphite as well as gallium arsenide modulator drivers, largely on the modulator side. And where we see the real explosive opportunity is moving from long-haul where we’ve traditionally done much better and into metro and especially data centers. So I think one of the other strategic synergies – not an a synergy a surprise, that very pleasant surprise is the folks coming over with high-performance analog business from Mindspeed have the world’s lowest power as well as high-performance clock and data recovery circuits and which have a very valuable and unique opportunity that is only upside to our original expectations, specifically in 100G and data centers and with all of the intensity and all the upside forecast with data centers, that looks like it could be providing some real juice for growth through this year and beyond.

Operator

And it looks like our next phone question will come from Steve Smigie with Raymond James.

Steven Smigie – Raymond James

So could you maybe talk about -- a little bit about the revenue guidance in terms of the comps processors – [indiscernible] is there any comps processor assumed in that or is that also a discontinued business like the wireless?

John Croteau

No, we chose not to treat that as discontinued business. It’s a good business, profitable business. So there would be no need to discount that as discontinued operations.

Steven Smigie – Raymond James

Bu you had said some of that you want to spin off and some of that you wanted to continue. So have you had a chance to look at that any further and have some sense of product wise anyway, which one to keep or it’s also working through that?

John Croteau

Well, we are still working through it. But let me reiterate what I said when we announced the acquisition. The voice-over-IP business is superb. It’s a sure cash cow, very high margin, very profitable. Under no condition will we let go of that. The CPE business is different, it is profitable, it’s not a bad business to have. But I would describe it that it’s a potentially of higher value in a better place for the customers and employees to be in someone else’s hands who has a long-term commitment to give submicron processor roadmap message – roadmaps and they are playing important roles in these place of businesses, we would have no interest and frankly no capability to sustain those roadmaps. So therefore if we saw it, find someone who is willing to pay an appropriate price and it will bring that business over, we would absolutely entertain them. But there is no -- under no circumstances there is very incentive urgency to do so. Very different than the wireless situation.

Steven Smigie – Raymond James

And then so what should we think about the guidance – I am sure [indiscernible] do this, but I guess we’re in a transition quarter here. What would you say that the sequential guidance is for just the Q2 – core business that – should have dipped a little bit or –

John Croteau

Yes, I think well on a go forward basis, all of our plans now have fully integrated to Mindspeed. So one point of clarification for instance is as we brought enterprise and we realized this enterprise networks is also piece of the high-performance analog business which is actually in carrier networks. So we have renamed what we previously called networks to carrier networks and added enterprise networks as the new segment. And we expect growth in networks has been the challenge – challenged business whether it was originally wireless infrastructure and capital spending issues and in the set-top box issues and so on, that has been where we’ve seen challenges and we absolutely see growth quarter on quarter on a go forward basis.

Steven Smigie – Raymond James

And then on the gross margin again, I know you wouldn’t give a couple of quarters of guidance here. But how should we be thinking about the June quarter a little bit here in terms of essentially revenue and gross margin and I don’t know maybe I wouldn’t necessarily call guidance but just color on -- directionally should it up from here or because you’re rationalizing more heads, is it down and sounds like you have great accretion on it, so how should we think about gross margin in the June too?

John Croteau

Well, like I said we reiterate we are still highly confident in our original accretion numbers of $0.15 to $0.20 for the fiscal year. We are now through half of the year, between this guidance for the second quarter. So you do the math you realize there is substantial accretion in the second half. And the way that is realized is actually pretty straightforward. We’ve had our heads down to make sure we complete the integration during on transitional quarter. [Indiscernible] to be an extended process in terms of the OpEx reductions.

Regarding harmonized channel inventories, because we don’t want that to be a protracted exercise. So we are trying to -- as much if not everything behind us in this quarter as possible and that leaves us to be delivering much more pure business results starting in our fiscal third quarter. And that’s how you see the step-up in accretion.

Steven Smigie – Raymond James

I think you speak one last more in just on the core business, you talked in the past little bit about successful agreement with network deployment and just wondered if you could give an update on that and –

John Croteau

So I guess we have not yet achieved a point at which our customer and MACOM are comfortable with announcing any particular form of business arrangement. So when we accomplish that we’ll be more than happy to convey that news. But consistent with our original statements not material for fiscal ’14. We would anticipate seeing the impact in early on in ’15 and beyond.

Operator

Our next phone question will come from Harsh Kumar with Stephens.

Harsh Kumar - Stephens

Couple of questions. In your press release and your commentary you mentioned that you’re optimistic about what you’re seeing in the carrier market. You mentioned China LTE. Outside of China rollout are you seeing areas -- geographically other areas outside China, that also acted positively for you?

John Croteau

Yes, so in our wireless infrastructure, both the point-to-point and base-station the space we saw a very strong sequential growth, certainly double-digit, very strong double-digit sequential growth. As I mentioned there’s an elements of that which is switches that we have designed into China LTE deployments and that’s red hot as many of our peers have noted. But in addition to that we’ve got our new E-Band power amplifiers and the lower-frequency power amplifiers that are ramping and other tier 1 OEMs throughout the world, both Europe as well as Japan. And we actually saw an uptick in our 38 GHz, our core business for Europe as well as in China. So it’s modest – I wouldn’t describe it as setting the world on fire, certainly not like the base-station businesses in China right now but definitely showing signs of life and continuing to take share.

Harsh Kumar - Stephens

It seems like you guys have accomplished a lot in the short time that you have had the business and seems like you’ve got your work cut out. What do you think is the most important thing that you need to sort of accomplish in this March quarter or little bit beyond that to get this deal right?

John Croteau

Yes, so it’s all about execution and not just execution on the synergies, on hard synergies, operating expenses and so on. It’s realizing all the strategic value. I’ve been extremely pleased and just for the first 45 days of having Mindspeed team over, we got traction with the sale teams, brought them together for joint sales conferences and sales training. And I will tell you the degree of enthusiasm is thrilling. The genuine enthusiasm from the Mindspeed channel to be able to take our RF portfolio and things like set top boxes, big, big deal. We just completed sales training of Mindspeed team and our sales guys in the U.S. are thrilled to be able to bring the Mindspeed portfolio into the broader customer base.

So that sales synergy to be borne [ph] exceeded my expectations in both time and magnitude of opportunity. Like I said earlier the opportunity, the low-power CDRs, I guess I lost over the opportunity, a lot of them the high-performance analog business at Mindspeed, they’ve got something like 70% share in enterprise applications for crosspoint switches with very nice margin structure as well as I think two-thirds, 65%, 70% share for the PON business and carrier networks. So I kind of gloss over the opportunity that is new – relatively new with the low power CDRs which is a new requirement for the 100G networks in enterprise applications and data centers. So I think that opportunity exceeds my expectations and the other thing I mentioned in my prepared remarks about SiGe, the win that we got is a really big deal both quantitatively and also the quality of the customer and it’s a validation of exactly what we can do with the SiGe when brought to bear with our GaAs capability.

We took the programs from -- that we otherwise likelihood would have done as one of our prominent competitors and we wanted on the fact that we had both the world class SiGe capability as well as the GaAs capability. So with the Mindspeed team coming in and being able to nail – eliminate what I was concerned about which is the learning curve and the execution risk associated with organic developments, it’s a really big, big deal. I think it can really distance ourselves from the competition for a long time to come.

Harsh Kumar - Stephens

Quickly two questions for Bob. Bob, it seemed like the CapEx of 2 point something million, 6 million I believe seems like a little low. Is that a sustainable rate or do you – it’s just like an interim rate and we should expect it to go up again?

Robert McMullan

Timing of our, again, investments that we talked about in the past can fluctuate a little bit but basically I would guide to about 4% of revenue, that’s the top end of CapEx.

Harsh Kumar - Stephens

And then last question, I know you talked about a tax rate 23.5 odd percent, is that what we should model going forward, or should we expect it to decline significantly like you said in the commentary -- And if so, how much should we model for the year ?

Robert McMullan

At this point, based upon the facts that we have, I would model the 23.5%.

Operator

And our next question will come from Quinn Bolton with Needham and Company.

Quinn Bolton - Needham

Just wanted to follow on, John – two questions on the Mindspeed. You mentioned a significant design new win in the quarter, I think for millimter wave application, did you benefit from the Mindspeed knowledge to get that win or is your enthusiasm about Mindspeed to have, fact that they can help you further come up the learning curve in a very quick timeframe on that process?

John Croteau

Very, very interesting questions. So people tend to gloss over and think that designing a particular integrated circuit is everything, it’s 90% of the challenge and it’s not. The design element we already had nailed and the system specification which is right in our real house, we had nailed, typically where programs fall apart is in the execution and the execution of industrializing and productizing the solution as well as from a supply chain standpoint, frankly starting with 0 revenue customer for a major semiconductor foundry doesn’t really get you to support that you need to execute flawlessly. With the Mindspeed transaction coming over, we are instantly a $100 million – well 100 probably on the wafer side, I would probably quantify it at probably $20 million to $30 million is my guess for major SiGe foundry.

So from a CAD and tool support, from engineering competence, understanding how to tap out a silicon product as opposed to gallium arsenide compound semiconductor product, there is a lot of know-how that removes -- as I said learning curves and risks. And it’s one thing to commit to the designer product, it’s another thing to commit to volume production. So I’m very comfortable that we will be able to nail that program and not just that program, we’d be able to scale it in the millimeter wave communications space for satellite communications and so on. And this is one of the areas that we’ve identified as one of our hyper growth targets. So I think it has a lot more leverage beyond just the first the big customer in program.

Quinn Bolton - Needham

And just to make sure I understand it, it sounds like MACOM sort of was well on the way with the design and this is not product that may not ramp immediately, it may ramp over say some timeframe in bringing the Mindspeed folk in with their knowledge of high-volume SiGe manufacturing really helps you get it across the all line in terms of the manufacturing aspect of that design win?

John Croteau

Absolutely. And it doesn’t ramp immediately, have nothing we start designing ramps immediately. I mean there is always some runway. But for instance, we typically ship relatively low income modest to – I mean transistors, diodes, MIMEX, are you talking about handful of transistors, I mean you’re talking about I think this type of devices something like 800 transistors and large PIN code, so very different challenge to productize that class of product as opposed to the stuff within our warehouse. It’s right in Mindspeed warehouse.

Quinn Bolton - Needham

And then second question, you seem very excited about the CDR opportunity, especially as you get into higher volume data center applications. Can you give us some sense of -- how long does that design win cycle take place with Mindspeed well along in that design win pipeline, and so we could see revenue relatively quickly or do you think it’s sort of a typical one to two year kind of design cycle now that you have the team on board, and get them focused on that particular application?

John Croteau

There is no need for us to change their focus. I mean they were a high-performing team. They demonstrated something like 14% CAGR growth over the past four years within Mindspeed. They know their market, they know their customer, they’re engaged, they are executing, they have a roadmap, all good stuff, believe me they weren’t waiting around for MACOM to come along and show him the way. So they are well along in the execution and I think this will be one of the areas that will be underpinning growth, forward looking growth consistently with their proven track record.

Quinn Bolton - Needham

And then my last question, I apologize if I missed it. But could you give any outlook on the automotive business, is it flat still, or outlook for that business over the next few quarters?

John Croteau

Yes, it’s totally in line with expectations. It performed last quarter exactly as we predicted, I think within couple of K of flat quarter on quarter.

Operator

Next question in queue comes from the line of Steve Smigie with Raymond James.

Steven Smigie – Raymond James

Just looking at some of the Mindspeed business, I am not sure – correctly had a chance to look at this yet, on that PON business that you discussed, I think one of the big opportunities that was coming there, was that China was going to be – I think China Mobile was going to be deploying a pretty big rollout of that. And so it seemed like that had started to take place and I am just following up to see if that has gotten some more traction at this point – or if it’s still in the early phases?

John Croteau

Yes, I apologize, I don’t have -- perspective on the previous quarter and I do remember first [ph], who is our business unit manager for that indicating that China was in classic form off and then on again. I just can’t give you the context of the past to the present.

Steven Smigie – Raymond James

Fair enough. I mean either way I think that you have a pretty big mandate for units to be rolled out there, so should be pretty well positioned. But I guess a similar question on crosspoint, I am not sure how you look at the technology but it seemed like that crosspoint was poised to get some nice traction as we switch to 4K TV and obviously we’re still in the early phases of 4K TV rollout. So I was wondering if there was any color there if you’re getting up to speed on that side?

John Croteau

Absolutely. On the video enterprise applications, 4K TV is absolutely one of the secular drivers that will be driving continued growth in that business. Our design share is consistent with our revenue-share 70% plus, minus a little bit. So very strong position, frankly it’s one of the areas – reasons why that initially had very attractive but the 4K video was only one of the drivers. Some of the other stuff that we’ve seen is entirely new usage models and software defined networks that could come to fruition which could provide a lot of underlying growth as an integer multiples, not percentage.

So the number one clear true leadership position in crosspoint switches with good secular demand drivers is – was one of the most attractive points of that acquisition. .

Steven Smigie – Raymond James

And then on the catalog business – core MACOM catalog business you’d started initiative a couple of quarters ago to get that, ramp back up again on your investments [ph]. It seems like you’re getting some traction and you discussed that a little bit. Just a little bit of an update there in terms of how you’re seeing the growth opportunity for the next 18 months on that business?

John Croteau

So in our catalog business in general, in terms of the traditional portfolio, longer vintage products, one of the most attractive aspects in any catalog business, including our business in RF and microwave, there is the recurring demand nature of it. It’s not something that you have to go out and create new design wins and cycle for the next generation. It is almost an annuity where you have just ongoing, as I said the recurring demand. So it’s very nice. What isn’t explosive growth typically because with that comes cycle times that are – tend to be longer in terms of reaching our broader base of customers.

The way to drive growth is a couples of things. One is lot of the investments when I joined the company were focused very much on single customers and single applications. We are broadening that now to broader catalog portfolios of products. A great example is the radar applications that I have spoken about, AESA radar instead of just our lead customer, we now have a full portfolio of X-Band radar products that can be sold through our catalog to anybody who is designing X-Band radar. And by X-Band it’s airborne, seaborne, land-based, commercial as well as defense, actually is very highly fragmented market, believe it or not. So portfolio as we bring in new products, very high-margin new products, we replenish that portfolio.

Secondly, it’s all about channel. We brought our – the other big news I think we came out this week is we brought on DGT [ph] as a new distributor. We’re about to expand to very extraordinarily broad customer base both for small volume production but also initial sampling for new design wins. So being able to expand the design win footprint is a big deal with DGT. And last -- I should say – the other thing I failed to mention is we’ve now signed the Mindspeed portfolio up to be sold through the MACOM distributor network. So expanding our traditional distributors like Richardson are thrilled to have that rich portfolio to be able to bring to bear in their target customer base.

And then last but not the least is it’s all about web marketing nowadays, and we’ve got some very innovative, very aggressive use of web and social media that we will be rolling out over the next quarter, where I think you’ll see a very different face to make them. So that’s one of the realizations here is through thick and thin, where you can grow that catalog business and the recurring demand is all good.

Steven Smigie – Raymond James

And if I could sneak one more in for Bob. I was just curious – if you have any thoughts on cash use, pay down debt or share buyback or potential other acquisitions?

Robert McMullan

The latter I would eliminate at the moment in terms of share buybacks. Not for any other reason I think all the float we have, we could use some more. But that’s my opinion. Obviously as we generate cash here we will be repaying – the form of the debt is in a revolving credit agreement. So we have the ability to pay down as cash is generated.

Operator

Thank you. And presenters, with that, that does conclude our question-and-answer session. I am showing no additional lines. I would like to turn the program back over to Mr. Croteau for any additional or closing remarks.

John Croteau

Great. I’d like to thank everyone today for joining us. One final comment, Bob and I will be at have the Goldman Sachs Conference this Wednesday, February 12 in San Francisco, as well as at the Raymond James conference on March 5 in Orlando. If you plan to attend either of these events, please be sure to contact us. We welcome the opportunity to meet. Thank you again for joining us for today’s call and I look forward to reporting our continued progress next quarter. Operator, you may now disconnect the call.

Operator

Sure. Again, ladies and gentlemen, thank you for your participation. This does conclude your M/A-COM Technology Solutions first quarter fiscal 2014 financial results conference call. Thank you for your participation. Have a wonderful day. Attendees, you may now all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: M/A-COM Technology Solutions Holdings' CEO Discusses F1Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts