MACOM Technology Solutions Holdings, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Quarter ended January 3, 2020. The quarter covered 14 weeks; the prior-year comparison, ended December 28, 2018, covered 13 weeks. MACOM designs and manufactures semiconductor products for telecommunications, industrial and defense, and data center applications.
Financial performance and liquidity
| Metric | Q1 FY2020 | Prior comparable quarter |
|---|---|---|
| Revenue | $119.1 million | $150.7 million |
| Gross profit / margin | $58.2 million / 48.9% | $76.6 million / 50.8% |
| Operating loss | $10.5 million | $14.4 million |
| Net loss | $28.4 million | $23.4 million |
| Loss per share, basic / diluted | $(0.43) / $(0.43) | $(0.36) / $(0.44) |
| Operating cash flow | $37.7 million | $2.9 million |
| Capital expenditures | $4.2 million | $11.5 million |
- Revenue fell 21.0%. Gross margin contracted 1.9 percentage points, while operating loss narrowed as operating expenses declined.
- Net loss increased chiefly amid a $4.1 million warrant fair-value expense, versus a $5.5 million gain in the prior period, and $8.6 million of net interest expense. The warrant remeasurement is non-cash and stock-price-sensitive.
- Operating cash flow benefited from an $18.0 million reduction in receivables and other working-capital movements. Management said it did not expect a similar receivables-related cash benefit in later FY2020 quarters.
- At January 3, 2020, cash and cash equivalents were $108.2 million and short-term investments were $101.9 million. The company also had $160.0 million of undrawn revolver capacity.
- Term-loan principal was $671.3 million, including $6.9 million classified as current; the effective interest rate was 4.05%. The term loans mature in May 2024, with approximately $645.4 million scheduled in FY2024. The $160 million revolver matures in November 2021.
- Current assets were $410.6 million and current liabilities were $94.6 million. Lease adoption added recognized operating-lease assets and liabilities; total lease liabilities were $73.0 million at quarter-end.
Material changes and business developments
- Data Center revenue declined 46.8% to $23.0 million, primarily on lower distributor sales of optical products and lasers. Telecom revenue fell 9.1% to $45.6 million, including lower carrier optical sales in Asia, lower sales to Huawei and reduced fiber-to-the-home sales. Industrial & Defense revenue decreased 11.9% to $50.5 million, mainly from legacy product lines.
- Management cited lower revenue as the principal pressure on gross profit. R&D expense fell 19.2% and SG&A fell 23.9%, reflecting strategic realignment, lower compensation costs and lower intangible amortization.
- The 2019 restructuring plan includes an approximately 250-employee workforce reduction and exit from seven development facilities. MACOM discontinued investment in designing and developing optical modules and subsystems for Data Center applications. It expects another $1.8–$2.0 million of restructuring costs through FY2020 and approximately $50 million of annual expense savings once the plan is fully implemented.
- MACOM adopted the new lease accounting standard in FY2020. At adoption, it recorded approximately $37.1 million of additional assets and $39.0 million of additional liabilities, with an approximately $1.9 million reduction to retained earnings; management reported no material effect on quarterly earnings or cash flows.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management identifies 5G and communications infrastructure as potential Telecom drivers, broad catalog applications as I&D drivers, and cloud adoption and higher-speed optical components as Data Center drivers.
- Management believes cash, investments, operating cash generation and revolver availability will cover working-capital needs for at least 12 months. It noted that additional capital could be required and may not be available on favorable terms.
- The company added a risk concerning Coronavirus and other epidemics, citing customers and suppliers in China and company facilities there; potential impacts include operational interruptions and adverse effects on demand, supply and results.
- Customer concentration remains notable: the top ten customers represented 60% of quarterly revenue; Customer A represented 16%. No material pending legal proceedings were reported for the quarter.
- Other important exposures include variable-rate debt, foreign exchange and the Level 3 warrant liability, whose valuation depends on unobservable inputs and changes with MACOM’s share price. MACOM reported no material changes to previously disclosed risk factors other than the epidemic risk.
Investor verification priorities
- Check subsequent results for stabilization or further weakness in Data Center revenue and the drivers of declines in Telecom and Industrial & Defense.
- Assess whether the projected $50 million annual restructuring savings are achieved, and compare realized costs with the remaining $1.8–$2.0 million estimate.
- Separate recurring operating cash generation from the quarter’s working-capital benefit, particularly the receivables reduction.
- Review debt repayment capacity and interest-rate sensitivity; a 1 percentage-point rate change on constant outstanding debt would change annual interest expense by approximately $6.7 million.
- Monitor China-related health, customer, supplier and operating disruptions, along with customer concentration and the warrant liability’s fair-value movements.