MACOM Technology Solutions Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; comparisons are to the periods ended April 1, 2016. MACOM designs and sells analog and optical semiconductors and modules across Networks, Aerospace and Defense, and Multi-market applications.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $186.1 million | $133.6 million | $337.8 million | $249.4 million |
| Gross profit / margin | $68.9 million / 37.0% | $65.5 million / 49.1% | $147.4 million / 43.6% | $125.8 million / 50.5% |
| Operating loss | $33.6 million | $7.2 million | $23.1 million | $7.0 million |
| Net loss | $130.1 million | $10.6 million | $131.1 million | $26.2 million |
| Diluted loss per share | $2.14 | $0.20 | $2.29 | $0.49 |
- Q2 revenue rose 39.3%; six-month revenue increased 35.5%. Networks revenue grew 46.3% in Q2, principally reflecting AppliedMicro and stronger cloud-data-center product sales. A&D increased 23.3% and Multi-market 19.3%.
- Gross margin declined substantially. Management cited acquisition-related inventory step-up amortization, integration costs and depreciation, plus lower margins on certain products sold under forward pricing. Acquired inventory step-up expense was $31.4 million in the six-month period.
- Operating expenses increased with acquisitions and higher R&D investment. Q2 SG&A included acquisition costs and $12.0 million of change-in-control compensation. The reported loss also reflects a $89.8 million Q2 income-tax expense, principally from establishing a full valuation allowance against U.S. deferred tax assets; the allowance totaled $88.0 million.
Cash, debt and liquidity
- Cash and cash equivalents were $112.6 million at March 31, 2017, down from $333.0 million at September 30, 2016; short-term investments were $31.6 million. Current assets were $480.2 million and current liabilities $106.1 million.
- Six-month operating cash flow was $20.8 million, versus $35.1 million a year earlier. Investing used $231.7 million, including $229.4 million net cash for AppliedMicro; financing used $9.3 million. Capital expenditures were $16.3 million.
- Term-loan principal outstanding was $588.5 million; the reported balance-sheet carrying value was lower after unamortized discount. The loans mature in 2021, with $567.3 million of principal scheduled for 2021. The company had no revolver borrowings and $160.0 million of revolving capacity. The March amendments reduced term-loan rates; the effective rate was 3.86%. MACOM reported compliance with debt covenants.
- Management said cash, investments, operating cash generation and revolver availability should cover working-capital requirements for at least 12 months. Cash held by foreign subsidiaries was $60.3 million and was expected to support international operations and working capital.
Material developments, outlook and risks
- MACOM completed its AppliedMicro acquisition on January 26, 2017, to expand in cloud and enterprise data centers. AppliedMicro contributed $36.4 million of post-acquisition revenue and a $30.3 million loss from continuing operations in the reported quarter. Purchase accounting remained preliminary.
- MACOM planned to divest AppliedMicro’s Compute business, classified as discontinued operations and held for sale; a sale was expected within 12 months, but negotiations were preliminary. The quarter’s discontinued-operations income also included the $18.0 million release of escrow related to the prior Automotive business sale.
- Management described Networks growth opportunities in cloud data centers, optical and wireless links, and communications upgrades; A&D demand depends partly on government programs and budgets. No numerical earnings or revenue guidance was provided in this filing.
- Management expected another $0.6–$1.6 million of restructuring costs during the remainder of calendar 2017, primarily related to facility consolidation.
- Key risks include product-development delays or failure to win customer adoption, pricing pressure, cloud-market execution and supply or manufacturing constraints. Revenue remained customer-concentrated: the top ten customers accounted for 56% in Q2.
- MACOM’s GaN patent and licensing dispute with Infineon continued. MACOM had a preliminary injunction, appealed a modification to it, and was unable to estimate potential losses; Infineon Americas asserted counterclaims, including patent infringement and breach of contract.
- Variable-rate debt creates interest-rate exposure: management estimated a 1% rate change would alter annual interest expense by approximately $6.0 million, assuming debt remained constant.
Investor verification checklist
- Track whether AppliedMicro integration, acquired inventory step-up amortization and the Compute business divestiture affect future margins and reported results as expected.
- Verify the impact and duration of the U.S. deferred-tax-asset valuation allowance and any subsequent changes in tax expense.
- Monitor operating cash generation, acquisition-related cash use, remaining liquidity and the large 2021 term-loan maturity.
- Follow gross-margin recovery, cloud-data-center product adoption, customer concentration and demand conditions in carrier optical markets.
- Review developments in the Infineon litigation and the company’s estimated exposure, which was not quantifiable in this filing.