MACOM Technology Solutions Holdings, Inc. — Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 29, 2018; comparisons are to the periods ended June 30, 2017 unless noted. MACOM designs, manufactures and sells semiconductor and module products for Telecom, Datacenter, and Industrial & Defense (I&D) markets.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $137.9m | $194.6m | $419.2m | $532.4m |
| Gross profit / margin | $48.2m / 34.9% | $92.6m / 47.6% | $174.7m / 41.7% | $240.0m / 45.1% |
| Operating income (loss) | $(42.6)m | $6.6m | $(89.0)m | $(16.4)m |
| Net loss | $(85.4)m | $(27.7)m | $(123.5)m | $(158.8)m |
| Basic and diluted loss per share | $(1.32) | $(0.43) | $(1.91) basic; $(2.28) diluted | $(2.67) |
| Cash from operating activities | Not separately provided | Not separately provided | $11.2m | $48.7m |
Q3 revenue fell 29.1%; nine-month revenue fell 21.3%. Q3 gross margin contracted 12.7 percentage points. Management attributes margin pressure to lower revenue, $16.2m of inventory charges tied to planned product-line exits, ZTE-related charges, and acquisition-related depreciation and amortization; lower acquisition inventory step-up costs partly offset these items. R&D expense rose to $48.2m in Q3, while SG&A declined to $42.5m.
Q3 other expense included a $34.0m loss on the LR4 business sale and $3.1m of losses on the Compute equity investment; interest expense was $8.0m. The nine-month period included a $24.9m non-cash gain from remeasurement of warrant liabilities. Income tax benefit was $9.5m in Q3 and $11.2m for nine months; MACOM continued to maintain a full valuation allowance against U.S. deferred tax assets.
Liquidity, debt and balance sheet
- At June 29, 2018, cash and cash equivalents were $85.3m and short-term investments were $97.7m, totaling $183.0m in cash and liquid investments. Cash was down from $130.1m at September 29, 2017.
- Nine-month operating cash flow was $11.2m; investing cash outflow was $53.6m, including $39.4m of capital expenditures. Financing cash outflow was $2.4m. The resulting cash decrease was $44.8m.
- Term-loan principal was $681.6m, with a 4.34% effective interest rate; the revolving facility had $160.0m available and no reported borrowings. The revolver matures in November 2021 and term loans in May 2024. Approximate net debt based on term-loan principal less cash and short-term investments was $498.6m, excluding lease and other obligations.
- Current assets were $454.4m and current liabilities $91.5m. Management said available cash, investments, operating cash generation and revolver capacity should meet working-capital needs for at least 12 months.
Material changes, outlook and risks
- Q3 Telecom revenue fell 45.3% to $50.6m, and Datacenter revenue fell 32.6% to $38.9m. I&D revenue increased 8.9% to $48.4m. Management cited weaker carrier optical and fiber-to-the-home sales, legacy optical and laser declines, and the LR4 sale; I&D gains reflected broader product demand.
- For the nine months, Telecom revenue declined 38.0%, Datacenter declined 7.1%, and I&D was essentially unchanged. China revenue was $39.0m in Q3 versus $51.2m a year earlier. The filing provides no formal revenue or earnings guidance; management describes long-term market drivers but notes that demand may vary and government program funding is difficult to predict.
- After quarter-end, on July 30, MACOM committed to exit certain production and product lines, including its Ithaca, New York facility. It expects $4.9m–$6.2m of restructuring costs during the remainder of calendar 2018, including $2.0m–$2.5m of future cash expenditures. The company had already recorded $16.2m of related inventory charges in Q3.
- MACOM sold certain LR4 business assets in May for $5.0m received, with another $12.3m expected subject to government approvals and other conditions. The disposal generated a $34.0m loss. The buyer transition-services arrangement could require up to $2.0m of operating expenses; $0.4m had been incurred.
- Risks include export restrictions and international trade disruption, especially involving China and ZTE; customer concentration (top ten customers were 59% of Q3 revenue); execution and demand risks from product exits; and variable-rate debt exposure (a 1 percentage-point rate change would affect annual interest expense by about $6.8m at the reported debt level).
- MACOM’s GaN-related litigation with Infineon remained pending, with trial scheduled for May 2019. The company said it could not reasonably estimate potential loss and had not accrued an amount. It also reported no material changes to previously disclosed risk factors apart from added cybersecurity and international-business risk disclosures.
- MACOM expected adoption of Topic 606 at the start of FY2019 using the modified retrospective method and did not expect a material impact on financial position or results.
Important facts for investors to verify
- Whether Telecom and Datacenter demand stabilizes, and how revenue trends vary by end market, geography and major customer.
- The scale and timing of the planned production exits, including future restructuring cash costs and any additional inventory or asset charges.
- Whether the expected $12.3m of additional LR4 sale consideration is received and what final disposal economics result.
- Cash generation, capital spending and debt-service capacity against the $681.6m term-loan principal and variable interest rates.
- Potential developments in the Infineon litigation, U.S. export restrictions affecting customers, and the carrying value of the Compute investment.