MACOM Technology Solutions Holdings, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 28, 2018; comparative period ended December 29, 2017. The company designs, develops, manufactures and sells RF, microwave, millimeterwave and lightwave semiconductors and modules across Telecom, Data Center, and Industrial & Defense (I&D).
Key financial results
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $150.7 million | $130.9 million | Up 15.1% |
| Gross profit / margin | $76.6 million / 50.8% | $61.0 million / 46.6% | Margin up 4.2 percentage points |
| Operating loss | $14.4 million | $23.0 million | Loss narrowed |
| Net loss | $23.4 million | $22.6 million | Loss widened slightly |
| Basic / diluted loss per share | $(0.36) / $(0.44) | $(0.35) / $(0.57) | Mixed comparison |
| Operating cash flow | $2.9 million | $0.5 million | Improved |
Operating expenses were $91.0 million, including $43.5 million of R&D, $42.5 million of SG&A, and $5.0 million of restructuring charges. Interest expense was $8.8 million. The $5.5 million warrant-liability fair-value gain partially offset other expenses; the comparable gain was $14.6 million. A $4.6 million loss on the Compute minority investment was included in other expense. Q1 FY2019 had no discontinued-operations loss, versus $5.6 million in the prior-year quarter; continuing-operations loss increased from $17.0 million to $23.4 million.
Revenue mix and material changes
| Market | Q1 FY2019 revenue | Year-over-year change |
|---|---|---|
| Telecom | $50.2 million | Down 9.5% |
| Data Center | $43.2 million | Up 24.4% |
| Industrial & Defense | $57.3 million | Up 40.7% |
Telecom declined primarily following the sale of the LR4 business and lower sales of carrier optical products in Asia and fiber-to-the-home products. Data Center growth reflected higher sales of legacy optical products and lasers; I&D growth reflected higher sales across the portfolio. Gross margin improved with higher revenue, partly offset by the LR4 sale. R&D rose 4.5%, principally due to compensation, depreciation and Data Center initiatives; SG&A increased 13.0%, primarily due to compensation, acquisition-related amortization and depreciation.
Financial position, liquidity and debt
- At December 28, 2018, cash and cash equivalents were $87.1 million and short-term investments were $98.7 million. Cash plus short-term investments totaled approximately $185.8 million.
- Current assets were $459.4 million and current liabilities were $93.2 million. Total assets were $1.46 billion; stockholders’ equity was $657.3 million.
- Term-loan principal outstanding was $679.9 million, with a 4.59% effective interest rate; the balance-sheet carrying amount, net of discount and financing costs, was $666.2 million. The company had $160.0 million of undrawn revolving capacity. Term loans mature in May 2024; the revolver matures in November 2021.
- Investing cash outflow was $12.3 million, including $11.5 million of capital expenditures and net purchases of short-term investments. Financing cash inflow was $1.9 million. Cash declined by $7.6 million during the quarter.
Management stated that cash, investments, operating cash generation and revolver availability should be sufficient for working capital needs for at least 12 months. The company reported no off-balance-sheet arrangements. A 1% change in interest rates on the outstanding debt would change annual interest expense by approximately $6.8 million, assuming debt remained constant.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance for the next quarter or fiscal year is provided in the filing. Management described longer-term demand drivers including telecom network upgrades, higher-speed data-center optical links, and radar and communications upgrades in I&D; I&D demand is subject to government programs and budgets.
- The company expected $1.5 million to $2.0 million of additional FY2019 restructuring costs related to Ithaca production and product-line exits. A separate plan to exit certain design facilities was committed to on February 1, 2019; expected remaining FY2019 costs were $3.7 million to $4.2 million, including $0.9 million to $1.1 million of expected cash expenditures.
- The GaN dispute with Infineon was settled in October 2018; claims and counterclaims were dismissed in November, and disputed patents were assigned back to MACOM, among other terms.
- International sales and operations, trade restrictions and tariffs—particularly involving China—are identified risks. The top ten customers accounted for 61% of quarterly revenue; one customer accounted for 15%. A U.S. export ban affecting a major customer could materially reduce revenue.
- MACOM adopted ASC 606 in the quarter; management said adoption had no material impact. The company expected the forthcoming lease standard to materially affect its financial statements because of its operating leases.
Important facts for investors to verify
- Whether Telecom weakness persists and whether Data Center and I&D growth can continue to offset it.
- Underlying operating performance excluding non-cash warrant-liability gains, acquisition-related amortization, share-based compensation and restructuring costs.
- Progress and cash costs of the announced restructuring plans, including the February 2019 design-facility exit.
- Debt servicing capacity, variable-rate exposure, and the availability and terms of the revolving facility.
- Customer concentration and the potential effects of export controls, tariffs or other trade restrictions on international sales.
- Collection of the expected additional LR4 divestiture consideration: the filing states approximately $12.2 million net of tax was expected before FY2019 year-end.