Business context and reporting period
MACOM designs and sells analog semiconductor and module products serving Telecom, Datacenter, and Industrial & Defense (I&D) markets. This unaudited Form 10-Q covers the fiscal second quarter and six months ended March 30, 2018; comparisons are with the periods ended March 31, 2017. MACOM reports one operating segment.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data; figures are rounded.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $150.4 | $186.1 | $281.3 | $337.8 |
| Gross profit / margin | $65.6 / 43.6% | $68.9 / 37.0% | $126.6 / 45.0% | $147.4 / 43.6% |
| Operating loss | $(23.4) | $(33.6) | $(46.4) | $(23.1) |
| Net loss | $(15.5) | $(130.1) | $(38.1) | $(131.1) |
| Operating cash flow | — | $11.2 | $20.8 |
Q2 revenue fell 19.2% year over year; six-month revenue fell 16.7%. Q2 gross margin improved, but the six-month operating loss widened as revenue declined and R&D, impairment, and restructuring costs increased. The much smaller net loss versus 2017 primarily reflects the prior-year tax charge and changes in the warrant liability, rather than a return to operating profitability. Q2 warrant remeasurement produced a $17.0 million gain; the six-month gain was $31.6 million.
By market, Q2 Telecom revenue declined 29.3% to $63.9 million, Datacenter declined 15.7% to $42.6 million, and I&D declined 2.8% to $43.9 million. For the six months, Telecom declined 34.4%, Datacenter rose 14.8%, and I&D declined 4.5%. Management cited lower carrier optical and fiber-to-the-home sales, especially in Asia, for Telecom weakness; Datacenter’s six-month increase reflected a full period of AppliedMicro product revenue.
At March 30, cash and cash equivalents were $162.7 million and short-term investments were $27.4 million, totaling $190.1 million. Current assets were $475.2 million versus current liabilities of $88.6 million. Operating cash flow was $11.2 million, capital expenditures were $26.6 million, and cash increased by $32.6 million during the six months. The company had $683.3 million of term-loan principal outstanding (carrying value $666.8 million) at a 4.14% effective rate, plus $160 million of undrawn revolving capacity. Management said available cash, investments, operating cash generation, and revolver capacity should cover working-capital needs for at least 12 months.
Material changes, outlook, and risks
- Operating expenses included $6.6 million of impairment charges and $6.2 million of six-month restructuring charges. The impairment was associated with assets and inventory intended for ZTE-related use following U.S. export restrictions; ZTE-related sales were less than 2% of revenue in the fiscal 2017 and six-month 2018 periods. Management expected another $0.1–$0.5 million of restructuring costs as facility closures and consolidation were completed.
- MACOM closed its Long Beach consolidation and Belfast and Sydney facility closures. The Compute business divestiture was completed in October 2017 in exchange for an equity interest initially valued at $36.5 million; MACOM recorded a $4.1 million share of the investee’s loss in Q2.
- There is no specific revenue or earnings guidance in the filing. Management described longer-term demand drivers in Telecom, cloud and higher-speed Datacenter links, and defense upgrades, while noting that market sales can vary and defense demand depends on government programs and budgets.
- After quarter-end, MACOM amended its revolver on May 2: $130 million of borrowing availability was extended to November 2021, while $30 million remained due to mature in May 2019. The facility was undrawn as of May 2. Also after quarter-end, MACOM agreed to sell assets and license intellectual property related to its LR4 product line; closing was anticipated in fiscal Q3, subject to conditions and approvals.
- The GaN-related lawsuit against Infineon remains unresolved. A preliminary injunction preserving a license was affirmed in part on appeal; trial was scheduled for February 2019. MACOM said it could not reasonably estimate possible losses and recorded no accrual.
- MACOM maintained a full valuation allowance against U.S. deferred tax assets. It estimated the Tax Act would reduce fiscal 2018 tax expense by about $3.7 million, and that cash tax on the transition tax would be less than $1 million; calculations remained preliminary.
- Risks highlighted include international and China exposure, export restrictions, customer concentration (top ten customers were 58% of Q2 revenue), variable-rate debt, cybersecurity and privacy compliance, and uncertain litigation outcomes. The filing states there were no material changes to previously disclosed risk factors apart from the matters noted.
Investor verification points
- Reconcile the reported per-share figures: the statements show basic Q2 loss per share of $0.24 and diluted loss per share of $0.50; the notes explain warrant-gain adjustments to the diluted numerator and denominator. Confirm the calculation and presentation before relying on EPS comparisons.
- Track Telecom demand, especially China and Asia carrier optical sales, and the timing and scale of Datacenter growth.
- Assess the sustainability of operating cash flow against capital spending, restructuring needs, and the $683.3 million term-loan balance; verify the amended revolver terms and covenant requirements.
- Monitor the financial and customer effects of ZTE restrictions, the proposed LR4 asset transaction, and the carrying value of the Compute investment.
- Follow the GaN litigation, U.S. deferred-tax valuation allowance and Tax Act estimates, and the effects of customer and geographic concentration.