MACOM Technology Solutions Holdings, Inc. — Q2 FY2019 Form 10-Q
Business context and reporting period. The quarter ended March 29, 2019; the filing also reports six-month results. MACOM designs, develops and sells RF, microwave, millimeterwave and lightwave semiconductor products. It reports one segment and serves Telecom, Data Center, and Industrial & Defense (I&D) markets.
Financial performance and liquidity
- Revenue: Q2 revenue was $128.5 million, down 14.6% year over year. Six-month revenue was $279.2 million, down 0.8%.
- Profit and margins: Q2 gross profit was $57.3 million and gross margin 44.6%, versus $65.6 million and 43.6% a year earlier. Six-month gross profit was $134.0 million and margin 48.0%, versus $126.6 million and 45.0%. Operating losses were $30.2 million for Q2 and $44.6 million for six months; net losses were $46.2 million and $69.6 million, respectively. Q2 diluted loss per share was $0.71; six-month diluted loss per share was $1.12.
- Cash flow: Six-month operating cash flow was $26.8 million, compared with $11.2 million in the prior-year period. Capital expenditures were $22.6 million. Cash and cash equivalents declined by $2.0 million to $92.7 million during the six months.
- Liquidity and debt: At March 29, cash and cash equivalents were $92.7 million and short-term investments were $99.7 million. The company had $160.0 million of undrawn revolving capacity. Term-loan principal was $676.4 million, with a 4.74% effective interest rate; debt is predominantly long-term, with $6.9 million current. The company said available cash, investments, operating cash flow and revolver capacity should cover working-capital needs for at least 12 months.
Material changes versus the prior comparable period
- Q2 Telecom revenue fell 26.0% to $47.3 million and Data Center revenue fell 28.0% to $30.7 million. I&D revenue rose 15.0% to $50.5 million. For the six months, I&D increased 27.4%, while Telecom declined 18.3% and Data Center declined 4.5%.
- Management attributed Telecom weakness primarily to the LR4 business sale, lower carrier optical sales in Asia and lower fiber-to-the-home sales. Data Center weakness reflected lower legacy optical and laser sales, partly offset by $7.0 million of licensing revenue. I&D growth reflected higher sales across the product portfolio.
- Q2 operating loss widened to $30.2 million from $23.4 million. Higher R&D, SG&A and restructuring expense contributed; six-month operating loss improved to $44.6 million from $46.4 million.
- Reported other income/expense was volatile due to warrant fair-value changes: Q2 had a $1.6 million expense versus a $17.0 million gain in the prior-year quarter. For six months, the gain was $3.9 million versus $31.6 million. The Compute minority investment generated $9.0 million of losses in the six-month period, recorded in other expense.
Outlook, commentary, risks and unusual items
- No specific quarterly revenue or earnings guidance is provided in the filing. Management identifies 5G and telecom infrastructure, higher-speed data-center optical links, and upgrades to defense and industrial systems as longer-term market drivers, while noting market sales can slow or decline and defense demand depends on government programs and budgets.
- Restructuring charges were $8.2 million for six months, including actions involving the Ithaca production facility and certain design facilities and activities. Management expected a further $0.5–$0.7 million of restructuring costs in the remainder of FY2019.
- On April 24, 2019, MACOM agreed to form a China-focused GaN-on-Silicon RF power joint venture with Goertek. Goertek is to acquire 51% of MACOM HK for consideration of up to $134.6 million, including $30.0 million at closing and up to $95.0 million in milestone payments plus interest. Closing was expected in the second half of calendar 2019, subject to conditions including Chinese antitrust approval; MACOM would retain 49%.
- Key risks include international and China exposure, trade restrictions and export controls, customer concentration, variable-rate debt, and execution and governance risks from the proposed joint venture. The top ten customers represented 55% of Q2 revenue; one customer represented 14%. No material legal proceedings were pending in the quarter.
- The company maintained a full valuation allowance against U.S. deferred tax assets; U.S. losses therefore did not generate a recognized tax benefit. It also disclosed that adoption of the new lease standard was expected to materially affect its financial statements because it has significant operating leases.
Important facts for investors to verify
- Whether Telecom and Data Center demand stabilizes and I&D growth continues, and the sustainability and economics of licensing revenue.
- Progress, approvals, payment conditions and MACOM’s control and technology-transfer arrangements for the Goertek joint venture.
- Cash generation relative to capital expenditures, debt service and restructuring costs; assess the impact of variable rates on interest expense.
- Recoverability of the $17.1 million carrying value of the Compute investment and the assumptions underlying its reported losses.
- Customer concentration, China-related export and trade risks, and the potential effects of the lease-standard adoption.