M/A-COM Technology Solutions Holdings (MTSI) John R. Croteau on Q1 2016 Results - Earnings Call Transcript

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

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

Q1 2016 Earnings Call

January 26, 2016 5:00 pm ET

Executives

Leanne K. Sievers - Executive Vice President-Investor Relations, Shelton Group

John R. Croteau - President, Chief Executive Officer & Director

Robert McMullan - Chief Financial Officer & Senior Vice President

Analysts

Blayne Curtis - Barclays Capital, Inc.

Vivek Arya - Bank of America Merrill Lynch

Mark Delaney - Goldman Sachs & Co.

Harlan Sur - JPMorgan Securities LLC

Harsh V. Kumar - Stephens, Inc.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Mark Lipacis - Jefferies LLC

J. Steven Smigie - Raymond James & Associates, Inc.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Quinn Bolton - Needham & Co. LLC

Operator

Good afternoon and welcome to M/A-COM Technology Solutions Fiscal First Quarter 2016 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 the question-and-answer session. As a reminder, this conference call is being recorded today, Tuesday, January 26, 2016.

I will now turn the call to Leanne Sievers of Shelton Group, the Investor Relations agency for M/A-COM. Leanne, please go ahead.

Leanne K. Sievers - Executive Vice President-Investor Relations, Shelton Group

Good afternoon and welcome to M/A-COM Technology Solutions' first quarter 2016 earnings conference call. I'm Leanne Sievers, Executive Vice President of Shelton Group, M/A-COM's Investor Relations firm.

With us today are M/A-COM's President and Chief Executive Officer, John Croteau; and Senior Vice President and Chief Financial Officer, Bob McMullan. If you've not yet received a copy of the press release, you can obtain a copy on M/A-COM's website at www.macom.com under the Investor Relations section.

Before I turn the call over to Mr. Croteau, I'd like to remind our listeners that management's prepared remarks and answers to your questions contain forward-looking statements, which are subject to risks and uncertainties. Because actual results may differ materially from those discussed today, M/A-COM claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and refers you to a more detailed discussion of risks and uncertainties that could result in those differences in M/A-COM's filings with the Securities and Exchange Commission, including its current report on Form 8-K filed today and Annual Report on Form 10-K filed on November 24, 2015. Any forward looking statements represent management's views only as of today, January 26, 2016, and M/A-COM assumes no obligation to update these statements in the future.

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 M/A-COM's website. 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 Investor Relations section of M/A-COM's website.

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

John R. Croteau - President, Chief Executive Officer & Director

Thank you, Leanne. Welcome, everyone, and thanks for joining us today. I'll begin today's call with an overview of our first quarter results for fiscal 2016 and then turn the call over to Bob McMullan our CFO, who will review our financial performance in further detail. I'll then conclude today's prepared comments by providing a summary of our execution during the quarter followed by guidance for the fiscal second quarter of 2016.

Straight to the results. I'm pleased to report that for our fiscal first quarter of 2016 revenue was $115.8 million, which includes $4.6 million of revenue contribution from the stub quarter of the recent FiBest and Aeroflex/Metelics acquisitions.

Gross margin came in at 58.7% with net income coming in at $21.8 million or $0.40 earnings per diluted share. All were in line with our previously announced range of expectations with earnings contribution essentially neutral for the stub period from the acquisitions. All in all, our business performed as expected as revenue across networks, multi-market, and aerospace and defense came in essentially flat quarter-on-quarter.

That said, we achieved a major milestone for the core M/A-COM business achieving 60% gross margin excluding the two recent acquisitions. Two years ago, we set 60% as our target operating model, and gross margins have steadily progressed as new high margin products have fueled our growth. Achieving 60% gross margin was no easy feat, so I'd like to congratulate our engineering, operations and business teams on achieving this defining milestone.

We believe that gross margins including the Aeroflex/Metelics and FiBest businesses will recede for a few quarters and then lift back to the 60% level as we realize clog synergies and factory consolidation through 2016. These acquisitions will end up solidly accretive and our target operating model remains 60% gross margin and 30% operating margin.

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

Robert McMullan - Chief Financial Officer & Senior Vice President

Thank you, John, and good afternoon, everyone. During the course of my comments as well as those made by John, all income statement amounts and percentages will be discussed on a non-GAAP basis and are provided to enhance the understanding of our core operating performance. A reconciliation of each figure to the most comparable GAAP measure is included in today's earnings press release.

Before I review our reported results for the fiscal first quarter, I will provide the results adjusted to exclude the stub period contributions of FiBest and Aeroflex/Metelics acquisitions. Revenue was $111.2 million. Gross margin was 60%. Fully diluted EPS was $0.39. This compares to revenue guidance of $110 million to $114 million, gross margin guidance of 58% to 60%, and fully diluted EPS of $0.37 to $0.40 per share.

Reported revenue including the contribution from acquisitions was $115.8 million, representing a sequential increase of 2.8% compared to revenues of $112.6 million in the prior quarter and an increase of 19.9% compared to $96.6 million in the fiscal first quarter of 2015.

Revenue by end markets were networks, $83 million and 71.7%; A&D, $18.3 million and 15.8%; and multi-market, $14.5 million and 12.5%. Gross profit in the fiscal first quarter was $68 million or 58.7% of revenue compared to $64.6 million or 57.4% of revenues in the prior quarter and $54.9 million or 56.8% in the fiscal first quarter of 2015. The gross margin quarter-to-quarter improvement of 130 basis points resulted from the contribution of higher-margin product mix partly offset by lower gross margins from the acquisitions.

In terms of operating expenses for the fiscal first quarter, total operating expenses were $40.3 million compared to $38.4 million in the prior quarter and $33.8 million in the prior year's quarter. Research and development expense for the fiscal first quarter was $21.5 million. This compares to R&D expense of $19.3 million in the prior quarter and $17.8 million in the fiscal first quarter of 2015. R&D as a percentage of revenue represented 18.6% in the fiscal first quarter compared to 17.1% in the previous quarter and 18.4% in the prior year's quarter.

Selling, general and administrative expenses for the fiscal first quarter was $18.8 million. This compared to SG&A expense of $19.1 million in the prior quarter and $15.9 million in the prior year's quarter. SG&A as a percentage of revenue represented 16.2% in the fiscal first quarter compared to 17% in the previous quarter and 16.5% in the prior year's quarter.

Income from operations was $27.7 million or 23.9% of revenue. This compares favorably to $26.2 million or 23.3% of revenues in the prior quarter $21.2 million or 21.9% of revenue in the prior year's quarter. Operating margin improved 60 basis points due to lower variable compensation expense in the fiscal first quarter compared to the prior quarter.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, was $33.5 million, up from $29.9 million in the prior fiscal quarter and up from $24.6 million in the prior year's quarter. Interest expense of $4.1 million in the first quarter was flat compared to the prior fiscal quarter and down from $4.1 million in the prior year's quarter. The year-over-year decrease was due to lower outstanding debt level. As we guided, we recorded other income of $2 million related to a consulting contract that runs for the next two years.

Turning to income taxes, our effective income tax rate for the fiscal first quarter was 15% which is also our normalized rate for fiscal 2016. This tax rate was consistent with the prior fiscal quarter and down from 18% in the fiscal first quarter of 2015.

Our fiscal first quarter net income was $21.8 million or $0.40 per diluted share compared to fiscal fourth quarter net income of $18.8 million or $0.34 per diluted share and net income of $14.4 million or $0.29 per diluted share in the prior year's quarter.

EPS grew sequentially 17.7% and 37.9% over the prior year as we continue to leverage margin expansion to deliver EPS growth at significantly higher rates than revenue growth. The share count used to compute EPS was 55 million shares for the fiscal first quarter of 2016 and fiscal fourth quarter of 2015, and 49.2 million shares in the fiscal first quarter of 2015.

GAAP cash flow from operations was $15 million in the fiscal first quarter while first quarter non-GAAP net income was $21.8 million. The difference is primarily due to the growth of operating assets less a lower tax rate.

I'd like to turn to the balance sheet now. At the fiscal quarter end our cash, cash equivalents and short-term investments were approximately $77.6 million down from $161.9 million including the impact of $87 million expended for the two acquisitions during the quarter. Accounts receivable were $92.5 million compared to $84 million at the end of the prior quarter.

Days sales outstanding were 73 days compared to 68 days at the end of the prior fiscal quarter. Inventory was $101 million compared to $79.9 million in the prior fiscal quarter. Inventory turns remained at two times unchanged from the prior fiscal quarter.

Long-term debt was $342.2 million inclusive of acquired capital leases and we had $130 million of availability in an undrawn credit line. Capital expenditures in the fiscal first quarter were $6.2 million or 5.4% of revenue compared to $6.6 million or 5.9% of revenue in the fiscal fourth quarter. GAAP depreciation expense on property and equipment for the fiscal first quarter was approximately $3.9 million as compared to $3.8 million in the prior quarter and $3.4 million in the prior year's quarter.

I'll now turn the call back to John.

John R. Croteau - President, Chief Executive Officer & Director

Thanks, Bob. I'd like to start with an update on our laser capacity expansion efforts. I'm proud to say that we've met our stated goal of doubling yet again laser capacity by January 2016. Our Lowell facility is now fully qualified for the first of three high volume runners and serving demand in our most cost sensitive PON business. This quarter, we expect to fully qualify the remaining two PON products in Lowell.

Not only will this solve what has been a particularly acute capacity problem in the industry but it will provide surge capacity that allows our customers to avoid the need to build buffer inventories or double or triple order products. We believe Lowell will also yield a cost structure that enables M/A-COM's further market share expansion through 2016.

To fully appreciate the significance of this milestone, you have to look one step ahead to our qualification of lasers for use in 100G data centers which, much like PON, is a cost-driven market. We expect that our cost structure, quality and sheer capacity in Lowell for lasers for 100-gig data centers will serve as the first in a series of disruptive moves in this explosive emerging market. If you attend our Analyst Day on March 10 in New York, you will see the full scope of our data center strategy laid out in further detail.

Speaking of data centers, 100-gig optical is no longer a matter of speaking in future tense in data centers. Today, we announced a multi-million dollar order from AOI that spans the full scope of our 100-gig portfolio. We believe that our current data center backlog, taken in its entirety, is traceable to demand from all major cloud service providers.

This speaks to our strategy of being a pure-play supplier of high-speed analog and photonic components at 100G, 200G and 400G for pluggable coherent technology such as CFP2 ACO and for emerging direct detect systems. We're agnostic, serving CWDM, PSM4 as well as PAM4 if indeed it becomes relevant in data centers.

Okay, moving onto Active Antennas. Last week, we announced that prime contractor Northrop Grumman has entered into a five-year exclusive teaming agreement with M/A-COM aimed at winning major defense programs by employing our tile arrays. This agreement is a major milestone in our plan to monetize seven years of work with MIT Lincoln Labs on civil radar innovations.

Northrop has identified M/A-COM's tile arrays as a solution of choice for winning future domestic and foreign military programs. We expect the cost advantage our solution affords and the combined strength of M/A-COM-Northrop team to translate into substantial wins for Northrop and game changing revenue for M/A-COM's A&D business over the next five years.

Now let me touch briefly on our GaN program status. Last quarter, we described our new base station team delivered complete production worthy reference designs and convinced the premier base station OEMs that our GaN on silicon was ready for prime time. Those engagements have since progressed to commercial discussions with a broad scope of program opportunities now open to us at three major base station OEMs. We hope to disclose more details of those engagements around Mobile World Congress and our Analyst Day in March.

Our remaining gate on the path to revenue remains successful process and product qualification at one or both of our target wafer production facilities. We'll know a lot more over the next four to six weeks, again leading up to our Analyst Day in March.

In summary, I'm proud of the execution by our team as a whole last quarter, delivering solid organic performance amidst seasonal headwinds, complemented by our ability to close on two tuck-in acquisitions. Before I move onto guidance, I'd like to mention that, on a go forward basis, we'll report one set of numbers, fully inclusive of M/A-COM, Aeroflex/Metelics and FiBest operations. We will not report these acquisitions separately.

We anticipate the next few quarters to be ones of transition, as we complete the integration of these newly acquired assets and realize COGS synergies. We expect that our gross margin will be slightly diluted during this period, but we'll still see accretion in EPS.

Now moving over to guidance, for the fiscal second quarter ending April 1, 2016, M/A-COM expects revenue to be in the range of $128 million to $132 million. Adjusted gross margin is expected to be between 56% and 59% and adjusted earnings per share between $0.42 and $0.45 on an anticipated 56.5 million diluted shares outstanding.

For context, six months ago, we reported our fiscal third quarter with $130.7 million in revenue, 54% gross margin, and $0.42 EPS, inclusive of our former automotive business. Comparing those results with our second quarter guidance, I'm proud to say that five months following the automotive divestment, we replaced that revenue and EPS contribution and repositioned the company with higher quality revenue, faster growth, and stronger earnings potential.

I'd like to close today's scripted remarks by thanking the team for another quarter of solid execution. Operator, you can now open the call to questions.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Blayne Curtis of Barclays. Your line is now open.

Blayne Curtis - Barclays Capital, Inc.

Hey, guys. Thanks for taking my question. John, I know you didn't want to break out the acquisitions but I was wondering maybe a different way, if you could just talk about the direction of your organic business into the March quarter. I mean, any color that you want to provide? I mean, obviously, you could take the stub that you broke out in December and do math. I just wanted to make sure I was doing the right math.

John R. Croteau - President, Chief Executive Officer & Director

Sure. Well, everything on the optical side of the business, which is nearly 50% of the company now, looks very strong, forward looking growth prospects, short term, medium term, long term. The PON business, we've been supply constrained on the laser side, as you know. That remains unbounded in terms of revenue potential.

The good news is fiber backhaul is back strong, and it's entirely our ability to ramp and capture production this quarter and next – I mean, in Q2 and Q3. The long haul business continues to grow moving into Metro. And as we announced with AOI today, we're actually seeing data center demand materialize. That was a several million dollar order from AOI.

So, optical looks great. I think the outlook for A&D and multi-market exclusive of the Metelics acquisition is a little cloudy. We saw demand in last quarter and backlog remains pretty much flat within a few hundred K, so it's unclear. I think certainly things have bottomed out. And on a forward-looking basis, it's only up from here.

Blayne Curtis - Barclays Capital, Inc.

That's helpful. And then just a question on the gross margin, you said, obviously, it would be depressed for a couple quarters until you get the COGS synergies. Does the kind of 56% to 59% level, the midpoint of that, is that what you're saying is depressed and you should think about kind of flat at that level? And then if you could just talk about how much these synergies could be and where you think the gross margins get back to.

John R. Croteau - President, Chief Executive Officer & Director

Sure. So that midpoint is indeed depressed relative to the fact that we just did 60% on our core business. So it's kind of disappointing hitting 60% and then receding at all. But we believe the core business exclusive of the acquisitions will continue to operate at 60% plus minus 100 basis points and actually continue lifting, to be honest. I would say – I'm sorry, what was the second part of the question?

Blayne Curtis - Barclays Capital, Inc.

I wondered if you could give any color in terms of the synergies, timing and kind of where the gross margins would get back to.

John R. Croteau - President, Chief Executive Officer & Director

Yeah, so within the calendar year, hopefully within the fiscal year we will get all the COGS synergies and those businesses will be operating at our model of 60/30. So we generally think it's about a matter of a couple of quarters before we get back to the operating model.

Blayne Curtis - Barclays Capital, Inc.

Great, thanks guys.

John R. Croteau - President, Chief Executive Officer & Director

No problem.

Operator

Thank you. And our next question comes from the line of Vivek Arya of Bank of America/Merrill Lynch. Your line is now open.

Vivek Arya - Bank of America Merrill Lynch

Thank you for taking my question. John, maybe just following along to that question, so on the gross margin side, there is an impact near term but you said you expect to get there hopefully sometime this fiscal calendar or hopefully fiscal year. On the operating margin side, also you think you can get to the 30% target within this calendar year?

John R. Croteau - President, Chief Executive Officer & Director

Yes. So both FiBest and Metelics were operating with relatively modest OpEx. The problem they had was on the gross margin line for both businesses, and it's the reason why frankly we got them for very attractive valuations. And the ability to realize COGS synergies was well-defined, very clear action items. The reason why this is going to take a few quarters is there are actually factories that get impacted to realize the COGS synergies and you can't do that within 100 days. But certainly we will get them in that 60/30 model.

Vivek Arya - Bank of America Merrill Lynch

Got it. And then as we look out the next couple of quarters, I think in the past you had mentioned three clear growth opportunities for the company, whether it was GaN or optical or your defense programs. Given all the turmoil in the market, so optical you did speak to, but what about GaN and the defense programs? Do you think they are on track to provide some contribution in the back half of the year or has the ongoing market turmoil changed the timing as to when you might benefit from those new opportunities?

John R. Croteau - President, Chief Executive Officer & Director

Absolutely zero change in the last quarter in terms of the outlook for both the GaN program and the Active Antenna programs. And I would say no change meaning it's unclear whether we can impact our fourth fiscal quarter, which, by the way, ends in September. So it's that much more of a challenge for us within this fiscal year.

But I would say, on the optical side of things, we have all of the growth actions in place that give us confidence that we could replicate the kind of growth we saw last year, without the contribution of any of those top-level kind of hyper growth opportunities.

Vivek Arya - Bank of America Merrill Lynch

Got it. And lastly, in optical, do different end markets provide different gross margin contributions? So I think you mentioned PON, you mentioned backhaul and long-haul. So how do you balance the growth versus different gross margin profile in these different opportunities?

John R. Croteau - President, Chief Executive Officer & Director

Actually, the real magic there is the answer is there isn't a material difference. We have a cost structure in the stuff that we ship into the PON market, that is spectacular and we're delivering gross margins consistent with what we're doing in long haul. And I would say, data center is where the financial model may change a little bit. It's that much more concentrated in terms of the cloud service providers.

But I'm personally fixated on continuing to expand the operating margin. Gross margin may be a variable for some of the big massive businesses, but data centers, if that were to happen, would really double the size of our company. So I think for the M/A-COM that exists now and the growth opportunities in the current optical markets, there really isn't a material difference between the different segments.

Vivek Arya - Bank of America Merrill Lynch

Got it. Thank you.

John R. Croteau - President, Chief Executive Officer & Director

You're welcome.

Operator

Thank you. And our next question comes from the line of Gabriela Borges of Goldman Sachs. Your line is now open.

Mark Delaney - Goldman Sachs & Co.

Yes, good afternoon. This is Mark Delaney asking questions on behalf of Gabriella. I appreciate the time.

John R. Croteau - President, Chief Executive Officer & Director

Hey, Mark.

Mark Delaney - Goldman Sachs & Co.

John, first, (25:47) I was hoping first you could elaborate a little bit more some of the comments you were making on the data center and optical business. I think you could replicate the kind of growth that you did last year and I just wanted to understand was that just a piece of the networks segment or were trying to talk about the overall networks and enterprise segment which I think was about 49% in fiscal 2015?

John R. Croteau - President, Chief Executive Officer & Director

Yes, well, networks now is up well over 70% if I'm not mistaken. Optical is approaching 50%, if not at 50%. And the way to think about it is, if we were to grow that 50% as we did last year, that alone would match our 24% top line growth.

And I'm not saying the other things exist not to grow. I'm just saying there's so much growth potential across all the segments of optical and those are customers and programs that are in motion. We're not talking about futures. We're talking about present tense. We're talking about orders being captured, OEMs, we share commitments, so that juice is real. And like I said we have a high degree of confidence that we're going to replicate the kind of growth we did last year.

Mark Delaney - Goldman Sachs & Co.

Okay. You mentioned data center backlog giving you confidence in your market share. Are you guys willing to disclose what your backlog is?

John R. Croteau - President, Chief Executive Officer & Director

No, we don't, as a matter of policy, disclose our backlog but that was a several million dollar order.

Mark Delaney - Goldman Sachs & Co.

Okay.

John R. Croteau - President, Chief Executive Officer & Director

It's not a meaningless order. Now I should be clear, we're not implying that the inflection point for the mass adoption of 100-gig in data centers is there, but the initial engagements and the initial traction for 100-gig is it's kind of walking before you run. And given the amount of content that we're capturing in that gives us the confidence that our ambitions to drive it to the kind of mass market adoption that we're on the right track.

Mark Delaney - Goldman Sachs & Co.

And maybe if I could ask it just a little bit differently and focusing on the laser piece of the business. Now that you've been getting capacity up, has there been any change in the pace of orders for your laser business? I know you talked about risk of double or triple orders. Just wondering if, as you guys have gotten more capacity online, if you've seen any fall-off in orders?

John R. Croteau - President, Chief Executive Officer & Director

No, not at all. In fact, customers are still pounding on us for allocation and we're dealing with very difficult conversations with customers that haven't been happy that we couldn't supply even more. So, there is no indication whatsoever. I'm highly confident there has been no double and triple ordering.

There is no buffer inventories with our customers or in the channel because if that were the case, we would not have the kind of conversations with our customers that we've had. And we're also very confident that our sales and operations team has been in the field with the major customers in the matter of the past few weeks and agreed upon share commitments and ongoing revenue contributions. So I think it's going to be a very smooth transition out of the supply constraint to the unlimited supply conditions.

Mark Delaney - Goldman Sachs & Co.

Okay. And then just lastly for me on active radar, I know there's a military and a commercial component to that. Can you help us think about 2016 and 2017 revenue potential from active radar for the company?

John R. Croteau - President, Chief Executive Officer & Director

Yes, so 2016, I mean, the real mover is the airborne retrofit program that we have that we had the initial production shipment last quarter that's being built up. And then sometime in the second half of our fiscal year, the orders will flow and the shipments will begin on a steady state basis for ongoing production of those aircraft retrofits. That will be the primary contributor for the A&D growth, and it's – I wouldn't call it a game changer but it is material growth on top of our catalog A&D business.

The tiles are the thing that's a very difficult to predict. I'm glad that we managed to get Northrop public in terms of – that's the defense prime that is committed to the tile-based programs. It's just impossible to predict which programs they capture for which tile-based designs. That will become clear as we go through the year. I can say I am extremely confident that, by 2017, there will be an inflection point and a game-changing revenue for that business, for the A&D business. The good news is we're on the leading edge of these new secular trends. The bad news is it is very difficult to predict the front end of those ramps, those hockey sticks.

Mark Delaney - Goldman Sachs & Co.

Understood, thank you very much.

John R. Croteau - President, Chief Executive Officer & Director

You're welcome.

Operator

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

Harlan Sur - JPMorgan Securities LLC

Hi. Good afternoon. Thanks for taking my question and nice job on the quarterly execution. On the partnership with Northrop Grumman for the tile-based active array technology, is this more for airborne or ground-based defense applications? And I know it's hard kind of near term to call the timing of it, but if you look at over the lifespan of the five-year agreement, what's your estimate on the total potential dollar opportunity for this one engagement?

John R. Croteau - President, Chief Executive Officer & Director

So the total opportunity for the tiles, we believe very much that we could double the existing size of the company on the back of that alone in that time, in that five-year time horizon because, in the latter half of that, you get the civil radar deployments, the Empire program beginning to ramp in the front end of that. Really towards the middle of it, you end up with the defense programs with Northrop Grumman ramping.

And it is very – the ASPs are very large. These are large assembled products. Very consistent with our financial model, by the way. So it's genuinely got the juice both on the civil and defense side to be several hundred million dollars for us, in that five-year horizon. Time is the critical variable there.

Harlan Sur - JPMorgan Securities LLC

Is the Northrop opportunity more airborne or ground-based defense systems?

John R. Croteau - President, Chief Executive Officer & Director

Well, we've got – so the tiles, from a form factor standpoint, don't fit into an airframe. But a lot of the technology and a lot of the principles do apply. So we do have airborne activity with Northrop, but I wouldn't call it the same thing as the Empire-based tiles.

Harlan Sur - JPMorgan Securities LLC

Got it. Okay. Great. And then a question for you, Bob, given the FiBest and Aeroflex acquisitions, how should we think about the OpEx step up in the March quarter and then how do you expect that to trend through the remainder of the calendar year?

Robert McMullan - Chief Financial Officer & Senior Vice President

Harlan, the implied growth of our business including the acquisitions is about $2 million a quarter, going forward. If we hit a major inflection point on revenue, then it could go up a little higher, but for next quarter, it's $2 million.

Harlan Sur - JPMorgan Securities LLC

Okay. And then post – is that how we think about it for the remainder of the calendar year, kind of $2 million step up or is that just for the March quarter?

Robert McMullan - Chief Financial Officer & Senior Vice President

Just for the March quarter. As you know, we only give guidance for the current forward quarter. And it could go up little but more in the back half of the year, but for next quarter, it's $2 million.

Harlan Sur - JPMorgan Securities LLC

Any identifiable OpEx synergies associated with the two acquisitions?

Robert McMullan - Chief Financial Officer & Senior Vice President

Definitely. One more so than others. But the majority of the synergies is a cost of sales for both companies, both acquisitions. So that's why we're comfortable and confident of our ability to get back to that 60% gross margin.

Harlan Sur - JPMorgan Securities LLC

All right, thanks a lot.

Robert McMullan - Chief Financial Officer & Senior Vice President

You're welcome.

Operator

Thank you. And our next question comes from the line of Harsh Kumar of Stephens. Your line is now open.

Harsh V. Kumar - Stephens, Inc.

Hey, guys. Got a couple here. John, question for you, the deal with AOI this morning, how does that jive with what you do with FiBest? My understanding is FiBest make module for data center. Correct me if I'm wrong. I don't know AOI very well, but I think they do something very similar. Maybe you could help explain how the two fit for you within your corporate structure and business opportunity?

John R. Croteau - President, Chief Executive Officer & Director

Yeah, good question. It's a point of subtlety, I guess. One of the things that we're very clear when we announced the acquisition last quarter, and especially one-on-one with all of our customers is this is not primarily an integration play. It's primary purpose is to get our arms around the entire optical chain including the lenses, and be able to deliver more refined and more cost effective and higher performing solutions. Whether customers take those components and build their own optical modules or if they want to source for certain programs, our toses and roses from what was previously known as FiBest, we genuinely don't care. We remain primarily a component supplier and it's all about doing a better job with components.

It is becoming clear since the acquisition being out with more customers where customers on the telecom side, as well as datacom side would prefer to go with a off-the-shelf solution as opposed to their own and it really differs by customer to customer. But I would generalize by saying there are just some programs that they would prefer to buy rather than make. And it's not all or nothing and it's not competing with our customers. Like I said, if they use our components, we're not inclined to compete.

Harsh V. Kumar - Stephens, Inc.

Got it. Understood, thank you for that clarity, John, and maybe one for Bob. Bob, the guidance of 57.5% versus a goal of 60%, I understand you're going to take out cost of the two acquisition at the gross margin level. Would we expect steady improvement or would you work on the cost structure and then all of a sudden just get it done and get it fixed? I mean, how should we think about the gross margin between now and, let's say, your September quarter? Steady or just a major uptick at some point in time?

Robert McMullan - Chief Financial Officer & Senior Vice President

Well, without giving forward guidance beyond next quarter, it will be steady.

Harsh V. Kumar - Stephens, Inc.

Steady, okay. Great, that's helpful. And then John back to you -- sorry to go back and forth, the Metro market is happening for you now. It seems like based on commentary you've got some revenue streams and some opportunities at this point in time. I'm wondering if you could characterize your total available market and how you see the growth in that market?

John R. Croteau - President, Chief Executive Officer & Director

Yeah, so it's very difficult to generalize because the dynamics in PON are profoundly different than long haul and long haul morphing over to the Metro, Metro deployments and now with data center kicking in, initially using some of the same components, it's very, very tough to isolate the difference. I would say the more meaningful comment I can make is Metro is at least the size of the long haul opportunity.

Long haul, we entered kind of midpoint with the – as the designs were going, we established, I don't know, probably going to say 40% share. We have a much greater share on the Metro side now. Probably double that, we believe we have about 80% design win share so we're very well-positioned. There a lot of analysts that come out and say that Metro is about twice the size of long haul which would be nice. And arguably, that could be two times larger market in place of the share, arguably four times our run rate previously on long haul. Regardless, there's a lot of juice in it for growth through the course for this year and next.

Harsh V. Kumar - Stephens, Inc.

Understood. Guys, thank you so much.

John R. Croteau - President, Chief Executive Officer & Director

You're welcome.

Operator

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

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Yes, thank you. Now my math may be a little bit off here, but just looking at your guidance, it seems like the core business is kind of flattish. And again, does that assume the optical business continuing to grow, but then maybe some weakness in A&D and multi-market?

John R. Croteau - President, Chief Executive Officer & Director

No, there's growth in the business excluding the acquisitions. I would describe it differently. In our course of guidance, especially in the first combined quarter of operations, we try to be very cautious in terms of guiding. There's a lot of moving parts when you're integrating companies and integrating operations, and there's certainly the possibility for revenue leakage or delayed shipments and what have you.

So I would say that the optical business continues to grow quarter-on-quarter. Looking forward, the A&D and multi-market stuff, like I said, the visibility is still not quite there. We believe things are probably up but dwarfed frankly by the growth opportunity with the optical for the next quarter, in fact for the whole year. But the real question is judgment in terms of caution about how the integration goes.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

That's really helpful, John. And you talked about having already pretty decent backlog with the cloud guys for 100-gig data center. Does that backlog suggest initial ramps perhaps in the second half of the year and then maybe an inflection point starting next year?

John R. Croteau - President, Chief Executive Officer & Director

That's my guess. I mean, like I said, you have to walk before you run. This is the year of walking for 100-gig in data centers. And there's clearly demand. Clearly, the cloud service guys and the people who we have backlog with are moving forward with those 100-gig programs.

So again, seeing them walk leads you to believe that their running will come sooner rather than later. And to be honest it is comforting when you stop talking future tense and start talking present tense about things like data centers.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Yes. And a question for Bob, Bob, the inventory days came in at 192. Obviously, there is some acquisitions, some of the capacity expansion there. But is this kind of the peak you think as far as days are concerned? Or maybe you could talk a little bit about how you plan to manage the inventories next few quarters.

Robert McMullan - Chief Financial Officer & Senior Vice President

They do look up significantly quarter-over-quarter $16 million is related to the acquisitions. Of that $16 million, $3 million is a step up to fair market value under purchase accounting. So it's a little I would say, it's at a peak relative to the operations of the business.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Sounds good. Thank you very much, guys.

Robert McMullan - Chief Financial Officer & Senior Vice President

You are welcome.

John R. Croteau - President, Chief Executive Officer & Director

You are welcome.

Operator

Thank you. And our next question comes from the line of Mark Lipacis of Jefferies. Your line is now open.

Mark Lipacis - Jefferies LLC

Hi. Thanks for taking my questions. A couple questions on the 100-gig in the data center market, John, you suggested that we're not quite at the knee in the curve for mass adoption in the data center. What has to happen to hit that curve? Is it a matter of price point or customers just feeling comfortable that the products work? And if it's the price point, where are we with the price point of the 100-gig modules and where do you think it has to get to, to get to that volume?

John R. Croteau - President, Chief Executive Officer & Director

It's a fascinating question. I can give you my crystal ball speculation. But I would describe the current state of 100 gig in data centers as modified telecom products attempted to fit into datacom , whereas, the datacom market is actually profoundly different than telecom.

In telecom, people expect decades of use in field reliably and they pay for it. In datacom, they literally have a three-year life and then they pull them out and re-facilitate the data centers. So you have to design – ultimately, you have to design for costs rather than long-term reliability, so it's just a different set of product instantiations. But I would say we're in the early stages of beginning to apply some of that technology.

If you come to our Analyst Day, we're actually going to be outlining a lot of the details of exactly how we're going to cost optimize for data center deployments. And it's that generation of product which would be discussed and I think we'll be sampling pretty much most if not all of it in that timeframe, so in the next 90 days, which would lead to cost structures, which we believe can hit those inflection points.

To answer your question more directly, the rule of thumb the cloud service guys keep saying, $1 per gigabit, so $100 per transceiver, that may or may not be the real target. But it's certainly not where the telecom price points have been, which is several integer multiples above that price. But again, to get there, you really have to design for the data center with a cost optimized solution set.

Mark Lipacis - Jefferies LLC

That's helpful, thank you. And I'll follow-up if I may on the AOI announcement. They're sourcing your PMD and using their own laser diode. Are the lasers from BinOptics, are those shipping into 100-gig modules? And if so, what kind? Is it 4x25 or how should we think about BinOptics participating in the 100-gig data center market? That's all I had, thank you.

John R. Croteau - President, Chief Executive Officer & Director

No, problem. Yeah, so absolutely our laser business, our photonic solutions business, previously known as BinOptics, is actually well-positioned. That's actually a time dimensional answer as it relates to AOI. Initially, the designs were locked down before we had gotten our 25-gig lasers to full production qualification. That is slated for this quarter consistent with all the other stuff that we talk about our qualifications in Lowell and as those become qualified, as we understand that they're going to cut over to the M/A-COM supplied lasers. But that is not gating the revenue and solution set from getting to market even before we're ready with the laser. Hoping that answered the question.

Mark Lipacis - Jefferies LLC

Thank you.

John R. Croteau - President, Chief Executive Officer & Director

Yeah, very good, thank you.

Operator

Thank you. And our next question comes from the line of Steve Smigie of Raymond James. Your line is now open.

J. Steven Smigie - Raymond James & Associates, Inc.

Great, thanks a lot. I'm just following up, there was some news I think recently out of Sprint that they may turn to doing some more microwave backhaul for some of their towers or small cells and I was just curious, you guys have or had a pretty decent high margin set of products for microwave backhaul. Have you heard of that as an opportunity for you guys? If not, is that something you could pretty actively get involved with?

John R. Croteau - President, Chief Executive Officer & Director

Well, that's an interesting question. I had not heard that. I apologize. We still have a very healthy microwave backhaul business. It's nice. It's high margin. It comes and goes with the wireless CapEx. I think from my personal standpoint, the fiber – one of the things that became apparent is when we picked up the laser business, you just see how prevalent fiber backhaul is compared to wireless. And so a lot of our focus, frankly, our management focus goes towards fiber and then wireless. But if Sprint's going to deploy wireless, that may be indeed a great opportunity for us. So thanks for the heads up.

J. Steven Smigie - Raymond James & Associates, Inc.

Great. Thanks. And then on AOI, in terms of your win there, in terms of the TIAs and CDRs, et cetera, can you give us any color about why they selected you versus competition there?

John R. Croteau - President, Chief Executive Officer & Director

I don't want to talk like I'm smug but we've just got a great set of 100-gig products. Whether it's CDRs, modulator drivers, TIAs, lasers as we bring those on, some of the other things that we'll be talking about at our Analyst Day, very competitive products, competitively priced, proven in the field, so high performing.

And AOI, I would describe it, they accurately perceive us as long-term committed to making the data center opportunity a reality. And by the way, they're not the only ones. I think everybody who's participating in data centers sees M/A-COM as a viable supplier/partner in helping realize their ambitions in data centers.

J. Steven Smigie - Raymond James & Associates, Inc.

Okay. Great. And I don't want to push too hard, but you just got, I think, the 25 lasers out. At what point does a 50-gig laser become important and when would you think you might have something like that out?

John R. Croteau - President, Chief Executive Officer & Director

I would be purely speculating on – we're still fixated on getting 25-gig out. We don't see any urgent – I have not heard of any urgency of getting the 50-gig laser out in the short to medium term. It may will be there, but I just have not heard it from our business unit.

J. Steven Smigie - Raymond James & Associates, Inc.

Okay, fair enough. And it's probably (48:19) as you mentioned in your press release, you guys – so you can do PAM-4 and stuff in there, a lot of argument around which standards are going to take off. You seem to think that you're agnostic. Is there one or the other that you think you're strongest at, that you can quickly jump onto or does it not really work that way?

John R. Croteau - President, Chief Executive Officer & Director

Well, I mean, we generally don't care. We've got PAM-4 designs. The observation we make is where all the action is is CWDM and PSM4 because its backward compatible. There's no latency issues. You can upgrade smoothly from the past to the future and ongoing. So that's where the action is.

There's is designs. There's business, latent business opportunities with PAM-4 but – and make no mistake about it, when you get to 200 and 400-gig, PAM-4 is very clearly solution of choice. It's just short term, in data centers, what we're focused on is providing the analog and photonic content which is genuinely agnostic. We couldn't care what the modulation scheme is in the DSPs.

J. Steven Smigie - Raymond James & Associates, Inc.

Okay. And can you talk a little bit about what the Aeroflex growth potential is and sort of what the motivation was there to bring those guys in?

John R. Croteau - President, Chief Executive Officer & Director

Yeah. So I mean, the first order, it's a classic consolidation move. They had a large number of factories servicing really to modest business. We had about 50% share microwave diodes. They had about 25% share. So, to bulk up into a preeminent position, with lots of COGS synergies, and, by the way, their product portfolio is very complementary to our own. It's not like you're competing with the exact same products. So, it really fit very nicely.

So there is growth opportunity. I would call it latent growth opportunity. Specifically, they have a very strong confidence and capability and installed infrastructure to do gen S (50:31) so class-S space and high (50:36) devices. So the latent opportunity is to take the M/A-COM portfolio and be able to qualify it and provide it to the broad market. We think there's about a $200 million SAM for that product, but again, first, that's a slam dunk by a business at about 1X revenues and be able to drive those synergies within the year. The growth is icing on the cake.

J. Steven Smigie - Raymond James & Associates, Inc.

Okay. Last one just on multi-market, clearly, other areas have probably greater opportunity, maybe just curious as to how we should think about multi-market going forward. Is it more – is the cash now or still some interesting stuff going on there?

John R. Croteau - President, Chief Executive Officer & Director

Yeah. Multi-market ends up the beneficiary of a lot of the investments that we drive in the networks and A&D. So, a great example is our GaN investments driving into base stations, drives technology and that we productize into devices for things like RF energy. These are ISM bands, whether it's plasma lighting or industrial heating and cooking applications and so on which will end up being reported as multi-market. So it's not – you don't invest in multi-market technology and products as a – it's icing on the cake.

In fact, there is a lot of people who believe that multi-market opportunity for that particular technology is as big in the medium-term as the base station opportunity. And that's not just – so you have the GaN, you've got a lot of stuff that we do in A&D which produces monolithic microwave ICs, MMICs, and the ability to drive those into multi-market and replace what had previously been serviced by Hittite before they were required. I would say in the medium to long term, it's a very lucrative growth story. It's just without big targets like big base station guys or big prime defense contractors, it's not a (52:40) revenue story.

J. Steven Smigie - Raymond James & Associates, Inc.

Okay, great. Thanks very much.

John R. Croteau - President, Chief Executive Officer & Director

You're welcome.

Operator

Thank you. And our final question comes from the line of Richard Shannon of Craig-Hallum. Your line is now open.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

John and Bob, thanks for taking my question maybe just a couple for me. I'll ask again on the announcement of the planned option here today, a few quick questions around that. Is this the actual first customer you have for these TIAs and drivers, CDRs for datacom or just the first announced one? Is this relationship exclusive any way and kind of what over time period do you expect this initial order to ship? Is this a couple quarters or a year timeframe or any characterization you can offer would be great?

John R. Croteau - President, Chief Executive Officer & Director

Yes, so I would say this is not the first backlog that we have in data centers. We have the other guys, obvious candidates, who have component design wins that are using our 100-gig component servicing, the other cloud service guys. This happened to be a very large order, at several million dollars. AOI has clear customer engagement that people are probably aware of and very substantial short-term ambitions. I would say, what I expect is the revenue to be realized over a two-year – two-quarter period for that particular order, and then continue on. It not like it's one and done.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay. And again, I wouldn't guess these to be exclusive but is there any exclusivity implied or actual ones in that relationship?

John R. Croteau - President, Chief Executive Officer & Director

None whatsoever.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay. I didn't think so. Second, related to your PON lasers, I think you mentioned you qualified one variance of the new products in your Lowell fab and said you're working on two others. Can you repeat – I think your mentioned something about timeframe expecting to have those samples completed. Is that something in this quarter? Could there even potentially be revenue shipping this quarter from that?

John R. Croteau - President, Chief Executive Officer & Director

Absolutely. So these are all three close siblings. Different flavors, DFB and FB lasers for EPON and GPON. In fact, I believe one of them gets called by extension. So it's – and it is volume material flowing through our Lowell factory now, servicing demand.

The one thing I should say is, never really talked about it before, but I'd point out that customers have to qualify these products. Moving from a factory in Ithaca, a 3-inch to a 4-inch factory and supply chain in Lowell is not a trivial qualification for customers. So that's what we've been working on in parallel with our own qualifications and that's the reason why you don't see frankly a big step function in revenue instantly with the capacity coming on.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay, I guess to be clear the – after the first laser just qualified, have you included any material revenues from these follow-on two lasers in this quarter's guidance?

John R. Croteau - President, Chief Executive Officer & Director

Yes.

Richard Cutts Shannon - Craig-Hallum Capital Group LLC

Okay. Great. That's all the questions for me, thank you.

John R. Croteau - President, Chief Executive Officer & Director

You're welcome.

Operator

Thank you. And we do have a question from the line of Quinn Bolton from Needham & Company. Your line is now open.

Quinn Bolton - Needham & Co. LLC

Hey, John, I just wanted to coming back to the 100-gig datacom opportunity. Obviously, you've got the AOI announcement with a lot of the PMD parts. Just wondering if you could size kind of a dollar content for us and I think we all see various datacom forecast in terms of the number of ports, 100-gig ports that maybe needed over the next several years but trying to get a sense just on the PMD offering that you have currently shipping. Is that $10 of content per module or could it reach into the hundreds?

And then just a follow-up question on the lasers. I know you said you're going to qualify the 25-gig lasers here in the March quarter. How long will it take to get those into production? Is there another, say, six to nine months as the module guys take those qualified lasers and get them into production or can you move pretty quickly to production if the demand is their? Thanks.

John R. Croteau - President, Chief Executive Officer & Director

Okay. So let me start with the easy one first. So, I would say it's one quarter to revenue and volume production for 25-gig lasers. So assuming everything goes as planned and everything so far has been going as planned and normal so we have a very high degree of confidence.

I would say, the thing I'm going to be careful about is I really don't like to talk about ASPs specifically in sales to named customers. That is so inappropriate. I would say it's not in the tens to the hundreds given the current state of 100-gig technology. Again, we're using – largely reusing telecom products in the Datacom application. But saying anything more than that, to be honest, would be inappropriate.

Quinn Bolton - Needham & Co. LLC

Understood. Thanks very much John.

John R. Croteau - President, Chief Executive Officer & Director

You're welcome.

Operator

And I'm showing no further questions at this time.

John R. Croteau - President, Chief Executive Officer & Director

Very good. So, thank you, operator. Before closing out today's call, please note that M/A-COM will be attending Morgan Stanley's TMT Conference on February 29 in San Francisco. As a reminder, our Analyst Day will be March 10 in New York. To request an invitation to our Analyst Day or be notified of the next time we plan to be in your area for investor meetings, you can e-mail us at ir@macom.com.

Operator, that completes today's call. You may now disconnect.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.

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