MACOM Technology Solutions Holdings, Inc. — Form 10-Q Summary
Business context and period. MACOM designs and sells analog, RF, microwave, millimeterwave and optical semiconductor products. This fiscal third-quarter report covers the three and nine months ended June 30, 2017; comparisons are to the three and nine months ended July 1, 2016. Results include AppliedMicro from its January 26, 2017 acquisition. All amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Three months ended June 30, 2017 | Prior-year quarter | Nine months ended June 30, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $194.6 million | $142.3 million | $532.4 million | $391.6 million |
| Gross profit / margin | $92.6 million / 47.6% | $74.0 million / 52.0% | $240.0 million / 45.1% | $199.8 million / 51.0% |
| Operating income (loss) | $6.6 million | $10.2 million | $(16.4) million | $3.2 million |
| Net income (loss) | $(27.7) million | $22.6 million | $(158.8) million | $(3.7) million |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $48.7 million | $54.3 million |
| Capital expenditures | Not separately provided for quarter | Not separately provided for quarter | $24.5 million | $24.1 million |
| Basic and diluted EPS | $(0.43) | $0.42 basic; $0.13 diluted | $(2.67) | $(0.07) |
- Quarterly revenue increased 36.7%; nine-month revenue increased 35.9%. Networks revenue rose 43.5% for the quarter and 40.7% for the nine months, largely reflecting AppliedMicro and stronger Cloud Data Center product sales. A&D and Multi-market revenue also grew.
- Gross margin declined year over year, principally due to higher acquired-intangible amortization and AppliedMicro acquired-inventory step-up costs. The company recorded $12.6 million of inventory step-up expense in the quarter and $44.0 million for the nine months.
- Nine-month net loss included $93.6 million of income tax expense, primarily associated with establishing a full valuation allowance against U.S. deferred tax assets. Other notable items included $16.5 million of nine-month warrant-liability expense, $21.3 million of change-in-control compensation, and $11.0 million of AppliedMicro transaction costs.
Balance sheet, debt and liquidity
- At June 30, 2017, cash and cash equivalents were $167.6 million and short-term investments were $81.6 million, or $249.2 million combined. Cash had fallen from $333.0 million at September 30, 2016. Current assets were $569.9 million and current liabilities $101.6 million.
- The debt note reports $688.5 million of term-loan principal, $682.4 million net of unamortized discount, and a $160.0 million undrawn revolving facility. The balance sheet reports current and long-term debt totaling $669.3 million; the provided filing text does not clearly reconcile this amount to the debt-note figures.
- In May 2017, MACOM refinanced term loans with a May 2024 maturity and borrowed an additional $100 million. The stated effective interest rate was 3.5% at quarter-end. Debt is secured by substantially all assets and subject to covenants.
- Nine-month investing cash use was $290.4 million, including $231.7 million net cash used for AppliedMicro and $24.5 million of capital expenditures. Management said cash, investments, operating cash generation and revolver availability should meet working-capital needs for at least the next 12 months.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management describes growth opportunities in cloud data centers, optical and wireless network upgrades, defense applications and multi-market products, while noting that demand may vary across markets.
- MACOM planned to divest AppliedMicro’s Compute business, classified as discontinued operations and held for sale. As of June 30, negotiations were preliminary; the company expected a divestiture within 12 months of acquisition. The business contributed a $15.6 million loss from discontinued operations in the quarter; total discontinued-operations loss was $13.7 million.
- Risks highlighted include unpredictable or cancelable customer orders and resulting inventory exposure; slower or changing demand in China for carrier-side optical and PON products; reliance on international sales and Asian manufacturing; and potential U.S. export restrictions affecting major customers. The top ten customers represented 51% of quarterly revenue and 55% of nine-month revenue.
- The company’s GaN-related lawsuit against Infineon remained active, with appeals concerning a preliminary injunction pending. MACOM stated it could not reasonably estimate possible losses and recorded no related accrual.
- Management expected an additional $0.3 million to $1.3 million in restructuring costs during the remainder of calendar 2017. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How AppliedMicro integration, acquired-intangible amortization and inventory step-up costs affect normalized margins and future earnings.
- The sustainability of Cloud Data Center and Networks growth, including demand trends in China and carrier optical markets.
- The U.S. deferred-tax-asset valuation allowance and the conditions required for any future release.
- The debt balance reconciliation between the balance sheet and debt note, together with covenant headroom and variable-rate exposure.
- Progress and eventual proceeds from the planned Compute-business divestiture, and developments in the Infineon litigation.