MACOM Technology Solutions Holdings, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 29, 2017. MACOM designs and sells high-performance semiconductor and module products serving Telecom, Datacenter, and Industrial & Defense markets. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Revenue | $130.9 million | $151.8 million |
| Gross profit / margin | $61.0 million / 46.6% | $78.5 million / 51.7% |
| Operating income (loss) | $(23.0) million | $10.5 million |
| Continuing-operations loss | $(17.0) million | $(2.2) million |
| Net loss | $(22.6) million | $(1.0) million |
| Basic / diluted loss per share | $(0.35) / $(0.57) | $(0.02) / $(0.02) |
| Cash from operating activities | $0.5 million | $20.4 million |
Revenue fell 13.7% year over year. Telecom revenue declined 39.4% to $55.5 million, Datacenter revenue rose 106.9% to $34.8 million, and Industrial & Defense revenue declined 6.2% to $40.7 million. Management attributed Telecom weakness mainly to lower carrier optical sales in Asia and lower fiber-to-the-home sales; Datacenter growth mainly reflected AppliedMicro products. Gross margin contracted 5.1 percentage points, reflecting unfavorable mix and higher acquisition-related amortization and depreciation, partly offset by lower compensation costs.
Operating expenses rose to $83.9 million from $68.0 million, including R&D of $41.7 million, SG&A of $37.6 million, and restructuring charges of $4.7 million. Other income included a $14.6 million gain from remeasuring the warrant liability, versus a $4.8 million expense in the prior-year quarter. The gain materially affected reported results and diluted loss per share, which also reflects warrant-related dilution adjustments.
Liquidity, debt, and other balance-sheet items
At December 29, 2017, MACOM held $152.1 million in cash and cash equivalents and $44.6 million in short-term investments. It had $685.0 million of term-loan principal outstanding and $160.0 million of unused revolving-credit capacity. The term loans mature in May 2024, carry a reported effective interest rate of 3.80%, and are secured by a first-priority lien on substantially all company assets. Cash plus short-term investments totaled $196.7 million. Management said available cash, investments, operating cash generation, and revolver capacity should cover working-capital needs for at least 12 months.
Operating cash flow was nearly break-even, compared with $20.4 million a year earlier. A $38.9 million reduction in accounts receivable supported cash flow, offset in part by lower accounts payable and higher inventory and prepaid expenses. Capital expenditures were $13.8 million. Cash and cash equivalents were $353.9 million at the end of the prior-year quarter; the filing attributes the current-period cash balance partly to the timing of investment maturities and purchases.
Transactions, outlook, and risks
- MACOM completed the sale of AppliedMicro’s Compute business to Ampere on October 27, 2017, receiving an equity interest valued at approximately $36.5 million, representing less than 20% of Ampere. The quarter included a $5.6 million discontinued-operations loss associated with the Compute business.
- Restructuring actions include consolidating the Long Beach, California facility and closing facilities in Belfast and Sydney. MACOM expected an additional $0.7 million to $1.5 million of restructuring costs during the remainder of fiscal 2018.
- The filing provides no specific near-term revenue or earnings guidance. Management describes long-term opportunities in Telecom upgrades, higher-speed Datacenter optical links, and modernization of defense systems, while noting that defense demand depends on government programs and budgets.
- The Tax Act was expected to result in an approximately $3.7 million non-cash tax-expense reduction for fiscal 2018, primarily from remeasuring U.S. deferred tax liabilities. MACOM preliminarily estimated cash tax from the transition tax at less than $1.0 million, with calculations still ongoing. It maintained a full valuation allowance against U.S. deferred tax assets.
- MACOM is pursuing litigation against Infineon concerning GaN-related patents and contractual rights. The Federal Circuit affirmed in part and reversed in part the preliminary-injunction ruling in January 2018. MACOM said it could not reasonably estimate any potential loss and recorded no related accrual.
- Revenue remains concentrated: the top ten customers accounted for 51% of quarterly revenue. The company also disclosed substantial debt, variable-rate exposure, and restrictive credit-facility covenants.
Most important facts for investors to verify
- Whether the sharp Telecom decline stabilizes and Datacenter growth persists beyond acquisition-related contributions.
- Whether margins recover as mix, acquisition amortization, and elevated operating expenses evolve.
- Cash generation and working-capital trends, including the sustainability of the receivables-related cash benefit and planned capital spending.
- Debt-service capacity, covenant compliance, and exposure to interest-rate increases; a 1 percentage-point rate change would alter annual interest expense by approximately $6.9 million if debt remains constant.
- Final Tax Act calculations, continued U.S. deferred-tax valuation allowance, restructuring costs, and the outcome and potential financial effects of the Infineon litigation.