MACOM Technology Solutions Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 28, 2019; comparative results are for the quarter ended June 29, 2018. Year-to-date figures cover nine months. Amounts are in U.S. dollars.
Business context and financial performance
MACOM designs and sells semiconductor and module products for Telecom, Data Center, and Industrial & Defense (I&D) markets. It reports one operating segment.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $108.3 million | $137.9 million | $387.5 million | $419.2 million |
| Gross profit / margin | $33.8 million / 31.2% | $48.2 million / 34.9% | $167.8 million / 43.3% | $174.7 million / 41.7% |
| Operating loss | $323.8 million | $42.6 million | $368.4 million | $89.0 million |
| Net loss | $324.7 million | $85.4 million | $394.3 million | $123.5 million |
| Diluted loss per share | $4.95 | $1.32 | $6.09 | $2.28 |
| Operating cash flow | Not separately presented for the quarter | $28.3 million | $11.2 million |
Q3 revenue fell 21.4% year over year; nine-month revenue fell 7.6%. Q3 revenue by market was Telecom $43.9 million, Data Center $17.6 million, and I&D $46.8 million. For the nine months, market revenue changed year over year by -16.8% for Telecom, -21.3% for Data Center, and +16.2% for I&D.
Cash, debt, and liquidity
- At June 28, 2019, cash and cash equivalents were $85.3 million and short-term investments were $100.5 million. Current assets were $413.1 million and current liabilities were $94.6 million.
- Operating cash flow for the nine months was $28.3 million. Investing cash outflow was $33.1 million, including $31.9 million of capital expenditures; financing cash outflow was $4.8 million. Cash declined $9.4 million from fiscal year-end.
- Term-loan principal outstanding was $674.7 million; the balance-sheet carrying amount, net of discount and financing costs, was $662.9 million. The loans bear variable interest; the stated effective rate was 4.69%. The $160.0 million revolving facility was undrawn and available.
- Management said cash, short-term investments, operating cash generation, and revolver availability should cover working-capital needs for at least the next 12 months. Debt is secured by substantially all assets and is subject to financial and non-financial covenants.
Material changes and unusual items
- Q3 included $264.1 million of impairment charges, primarily related to intangible assets and equipment. The charges followed reassessment of expected future revenue growth and a decision to exit certain products and facilities. The impairment was the main driver of the sharp increase in reported operating and net losses.
- Gross margin declined in Q3, which management attributed in part to lower revenue, the prior sale of the LR4 business, and higher Data Center inventory reserves. Nine-month gross margin increased year over year.
- Q3 Data Center revenue fell 54.7%, partly reflecting lower sales of legacy optical products and lasers. Telecom revenue declined 13.2%, reflecting the LR4 divestiture and weaker sales in certain customer and product areas. Management said Huawei-related lower sales contributed to Telecom weakness.
- Other income/expense included a $1.9 million Q3 gain from remeasurement of the warrant liability and $5.0 million of Q3 income from the Compute equity-method investment. These items are subject to valuation and performance variability.
Outlook, management commentary, and risks
- In June 2019, MACOM announced a restructuring plan including an approximately 250-employee workforce reduction, exit from seven development facilities, and cessation of investment in optical modules and subsystems for Data Center applications. Management expects approximately $50 million of annual expense savings when fully implemented, with an estimated $2.9 million to $3.9 million of additional restructuring costs through fiscal 2020.
- Management cited 5G and communications upgrades as potential Telecom drivers, higher-speed optical links and cloud adoption as Data Center drivers, and its product portfolio and application demand as I&D drivers. The filing gives no specific revenue or earnings guidance.
- Risks include continued weakness in Data Center and Telecom demand; export restrictions, tariffs, and geopolitical developments affecting China and customers such as Huawei; customer concentration; execution and retention risks from restructuring; variable-rate debt exposure; and potential further impairment if business expectations weaken. The top ten customers represented 54% of revenue in both the quarter and nine-month period.
- The filing reports no material pending legal proceedings for the quarter. Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue, particularly Data Center and Telecom sales, stabilizes after the reported declines and product realignment.
- Whether the restructuring delivers the stated annual savings, on schedule, without impairing product development or customer relationships.
- Whether the assumptions underlying the large impairment are reasonable and whether additional impairment charges may arise.
- Whether operating cash generation and liquidity remain adequate alongside substantial variable-rate debt and covenant requirements.
- How export controls and customer concentration, including Huawei-related exposure, affect future sales and cash flows.