MACOM Technology Solutions Holdings Inc
NASDAQ:MTSI
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
79.92
142.46
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
MACOM Technology Solutions Holdings Inc
You don't have any saved screeners yet
Welcome to MACOM’s Fourth Fiscal Quarter 2021 Conference Call. This call is being recorded today, Thursday, November 4, 2021. At this time, all participants are in a listen-only mode.
I will now turn the call to Mr. Steve Ferranti, MACOM’s Vice President of Strategic Initiatives and Investor Relations. Mr. Ferranti, please go ahead.
Thank you, Olivia. Good morning. And welcome to our call to discuss MACOM’s fourth fiscal quarter and fiscal year 2021 financial results. I would like to remind everyone that our discussion today will contain forward-looking statements, which are subject to certain risks and uncertainties as defined in the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOM’s filings with the SEC. Management’s statements during this call will also include discussion of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the company’s press release and related Form 8-K, which was filed with the SEC today.
With that, I’ll turn over the call to Steve Daly, President and CEO of MACOM.
Thank you, Steve, and good morning. I will begin today’s call with a general company update. After that, Jack Kober, our Chief Financial Officer will provide a more in-depth review of our fourth quarter and full year results for fiscal 2021. When Jack has finished, I will provide revenue and earnings guidance for the first fiscal quarter of 2022. And then we will be happy to take some questions.
Our fourth fiscal quarter financial results represent continued improvements and overall performance. Revenue for Q4 was $155.2 million and adjusted EPS was $0.61 per diluted share. Notably, we exceeded 30% adjusted operating margin, which is an important milestone for the MACOM team. With another quarter of strong cash flow, we ended our fiscal year with $345 million in cash and short-term investments on our balance sheet.
For the full fiscal year ending October 1, 2021, revenue was $607 million and adjusted EPS was $2.15 per diluted share. We are pleased to report 14.5% year-over-year revenue growth and 126% year-over-year earnings growth. Our financial results this year would not have been possible without the hard work and dedication of all our employees.
In spite of certain supply chain challenges and COVID-19 headwinds, we met our internal corporate goals, our new product development schedules and our revenue and earnings targets. I would like to thank the entire team for their extraordinary efforts and commitment. MACOM is fortunate to have such a hardworking and dedicated management team and employees. Our Q4 and full year book-to-bill ratio was 1.2:1. In our turns business was approximately 13% of total revenue.
We believe that the strong Q4 bookings reflect market share gains a few large long-term I&D orders, which will ship over multiple quarters as well as orders being placed by customers one or two quarters ahead of required ship dates due to a longer than normal manufacturing cycle times. Our strong bookings over the course of FY2021 allows us to start FY2022 with a higher than typical backlog.
We continue to manage various supply related interruptions and challenges due to COVID-19 and production capacity limitations with certain semiconductor, package and substrate technologies. Our operations, planning and logistics teams have done an excellent job managing through these industry dynamics and they are working around the clock to meet customer commitments.
Fiscal Q4 revenue by end market was generally as expected with Industrial and Defense at $75.1 million, telecom at $46.6 million and data center at $33.5 million. I&D was up 5% sequentially, telecom was down 3% sequentially and data center was up around 1% sequentially. For fiscal year 2021, I&D was up 44%, data center up 10% and telecom down 10%. And FY2021, our top 10 end customers represented 26.5% of our total revenue. In our revenue concentration on any one product was less than 1.6% of our total revenue.
We maintain a diversified technology portfolio as well as a very diversified customer base with thousands of customers. Our Industrial and Defense end markets performed well during fiscal Q4 and for the 2021 fiscal year. Our success in this end market is the result of the efforts that we began in 2019 within our engineering groups to revitalize our portfolio of RF and microwave products, including increasing the pace of new product introduction, expanding to fill in the gaps of our product lines, developing new innovative technologies, and re-engaging major customers with a more focused sales and marketing effort.
More recently, we also began ramping up efforts to cross sell our optical and high performance analog products to Industrial and Defense customers, which creates a sizeable growth opportunity for us. Overall, I am pleased with the level of engagement our sales and business development teams have had at major defense OEMs over the last few quarters, involving a variety of ground, airborne, ship based programs, including radar, electronic warfare, avionics, in RF and optical communication applications. These programs are typically long lifecycle programs and we expect they will contribute to our growth in FY2022 and beyond.
Our telecom end market revenue was slightly down in Q4, primarily due to softness in the 5G market, which was offset by strong demand and broadband access. And DOCSIS 3.1 cable TV infrastructure markets. MACOM has a broad CATV product portfolio, including single ended and differential amplifiers, transformers, power dividers, combiners, couplers and diplex filters. 5G represents a large growth opportunity for MACOM as worldwide demand for approved connectivity at higher data rates grows.
In addition, we see growth opportunities in PON, CATV infrastructure, microwave radios and SATCOM during FY2022, primarily driven by strong end market dynamics, new product introductions and market share gains. Our data center end market revenue was essentially flat in Q4. Nevertheless, we believe data center remains a large growth opportunity for MACOM.
We expect new product introductions will be the primary driver for growth for us in this market. Some examples include 25G DFB lasers and 50G CW lasers, photo detectors, laser drivers, and transimpedance amplifiers. I’ll note that earlier this week, we announced a new linear equalizer product line, which will support high data rate applications, including active copper cables used inside the data center.
We believe our strategy to collaborate with leading DSP chip suppliers allows MACOM to stay focused on designing and producing the industry’s next-generation high speed TIAs and laser drivers. I’ll note with the ramp up of 400G ZR and data center interconnects, we are seeing an increased interest in the development of coherent solutions for next-generation 800G and higher data rates for connections both between and within data centers.
Coherent ZR technology typically utilizes silicon photonic objects along with a coherent DSP transmit a QAM modulated optical signal on a single wavelength. MACOM is a leading merchant supplier of modulator drivers and linear TIAs for coherent modules. And we are currently in volume production with 32 gigabyte, 64 gigabyte and 96 gigabyte product families.
We are also beginning to see the proliferation of coherent optics into the access market with low costs tunable 100G solutions. As a merchant supplier, we are working with our module customers in the data center and enterprise markets to support their development of coherent optics with our existing product portfolio and are developing new products, as the requirements for higher bandwidth continues to emerge across all market segments.
We had many technical accomplishments in fiscal 2021, and I would like to highlight a few. First, we internally documented 43 new invention disclosures. We formally submitted 49 new patent applications to the U.S. patent office. And we were awarded 44 new patents, innovation and invention is critical to our future success. And I would like to congratulate our engineering community for their excellent work in this area. Second, during the year, we introduced over 130 standard products and we expect to grow product introductions in FY2022 by an additional 35%.
In addition, we had great success with our custom IC development activities, which compliments the build-out of our standard product portfolio. During the year, we supported approximately 20 customer funded major IC developments and many smaller unfunded projects. Further, I am pleased to provide a progress report on four important strategic technology developments. First, our 0.14 GaN on silicon carbide process transfer from AFRL is on plan in our fab and device engineering teams have done remarkable work over the past 12 months.
To-date, we have verified the processes, small signal performance, and more importantly, we have measured over 4.5 watts per millimeter at 25 volts at X-band frequencies. We believe this power density performance is extremely competitive. In the coming months, we will be optimizing the process with the goal to achieve even higher power levels. I’ll note, we have recently designed to mimic power amplifier and processed it on both the AFRL and MACOM process.
And with the exception of power levels, we have almost identical performance. During FY2022, we plan to complete the installation of new backside process equipment, as well as installing atomic layer deposition or ALD capability for device passivation. We recognize we have a lot of work ahead. However, our engineering results to-date are compelling and we believe in time, we will capture market share in the high frequency GaN mimic market.
Second, we are making excellent progress on our silicon photonics product development. As I reported last quarter, we are now working with our fab partner on producibility in yields. Third, our pure carbide high power GaN amplifier product line continues to expand since its introduction over one year ago. Notably, we recently released three additional high power products including a 60 watts narrow band C-band product for radar and two general purpose 15 watt broadband products operating at DC to 12 gigahertz and 30 megahertz to 3.5 gigahertz.
And last, as a reminder, our 1000 volts chip capacitor product line or KV CAPS is fully production released. And we are beginning to take orders and gain traction in the market. KV CAPS are ideal for high voltage applications where small size and reliability is critical. As we look ahead to fiscal year 2022, our priorities include further accelerating in streamlining our new product development process. Gaining market share by staying focused on addressing customer needs and providing continuous engineering support, strengthening our competitive advantage by introducing new products based on MACOM’s proprietary semiconductor processes, increasing our direct business with major OEMs and further optimizing the efficiency of our operations to improve profitability and cash flow.
Our organization is lean and can move quickly to ensure we capture market share. We believe that making modest internal investments in our business can provide opportunities to achieve higher than average return on invested capital. And therefore, supports our goal of establishing best-in-class profitability. The risk to reward ratios on these internal investments can be compelling since they leverage existing assets that we already have in place. For example, we are investing in our Massachusetts and Michigan wafer fabs to modernize, develop new process technologies, to improve quality and expand capacity. We believe investments in new and existing process technologies like 0.14 and 90 nanometre GaN on silicon carbide or high voltage capacitors will enable differentiation across our RF and optical products, which ultimately supports our goals of very profitable growth.
Related to our wafer fab investment, we are pleased to announce that our low wafer fab recently achieved IATF16949 certification for automotive quality management systems. As a reminder, this certification focuses on defect prevention, waste reduction and supply chain management for the international automotive industry. We believe this certification will help to open new doors for us in the automotive industry. In particular, we believe our lightwave, RF and microwave, KV capacitor and high speed analog technologies are ideal for automotive applications, such as sensors, LiDAR under the hood power management and autonomous driving applications.
In addition to investing in our fab facilities, we’re also expanding our assembly, new product prototyping and engineering test capabilities at some of our other facilities. For example, we anticipate that our Nashua, New Hampshire facility will expand its manufacturing operation space by 100% over the next 12 months. This facility supports a wide range of commercial and defense related product development and production programs.
In addition, we just opened a new state-of-the-art product engineering and application lab at our Newport Beach, California facility. All of these activities require strong and expanding workforces, and we have not been standing still in hiring. We are focused on expanding R&D with best-in-class talent. And as an example, in fiscal year 2021, we hired over a dozen PhDs to join our already strong workforce.
In summary, MACOM has a wide range of products in production today, spanning dozens of different product lines, serving thousands of customers. Many of these products have long life cycles and produce revenue for years after they’ve been introduced. We view this diversity of technology, products and end market applications as an inherent strength of the company, helping to provide a broad revenue base.
Jack will now provide a more detailed review of our financial results.
Thank you, Steve and good morning everyone. We continue the trend of improving profitability during the fourth fiscal quarter ended October 1, 2021. Revenue, gross margin, operating margin and earnings per share all showed improvement on a sequential and year-over-year basis. Adjusted operating margin exceeded 30%, which is a notable milestone for the company. Revenue for the fourth quarter was $155.2 million up 1.7% quarter-over-quarter. As expected, the sequential improvement in revenue was driven primarily by an increase in industrial and defense. Data center was up modestly partially offset by a modest decline in telecom end market.
For the full fiscal year, revenue was $607 million in fiscal 2021 up 14.5% from $530 million in fiscal 2020. On a geographic basis, domestic customers represented approximately 46% of both our fiscal Q4 and fiscal year 2021 results. These amounts represent increases from the approximate 36% and 41% of sales to domestic customers in fiscal Q4 2020 and fiscal year 2020 respectively.
Adjusted gross profit in fiscal Q4 was $94.9 million or 61.1% of revenue, another 80 basis points, sequentially. Adjusted gross margin for the full fiscal year 2021 was 59.6% up 460 basis points from 55% in fiscal 2020. The strong gross margin performance for fiscal year 2021 was the result of a variety of ongoing initiatives that we’ve touched on in the past. We have numerous internal actions focused on improving the efficiency of our operations, including optimizing yields, reducing scrap, cycle time enhancements and supply chain management. We’ve also been focused on pricing across our product lines in customer base. We believe all of these efforts will support our gross margins to continue to be above 60% and over time further contribute to additional gains in gross margins.
Total adjusted operating expense was $48.1 million consisting of R&D expenses of $30.2 million and SG&A expense of $17.9 million. Total operating expenses were sequentially flat from fiscal Q3 levels. For fiscal year of 2021 total adjusted operating expense was $191.2 million, down 2.4% from fiscal year 2020 levels. For fiscal year 2022, we believe that operating expenses will increase as we expand sales and marketing activities and enhance our R&D capabilities by investing in new programs to support our future growth, while also continuing to be very disciplined with our discretionary spending.
Adjusted operating income in fiscal Q4 was $46.8 million up from $43.9 million in fiscal Q3. Adjusted operating margin was 30.2% for fiscal Q4 sequentially up from 28.7% in Q3. Adjusted operating margin in excess of 30% represents a new record for MACOM since we went public back in 2012. For fiscal year 2021 adjusted operating income was $170.3 million compared to $96 million for fiscal 2020, representing 77% year-over-year increase. Depreciation expense for fiscal Q4 was $5.7 million and adjusted EBITDA was $52.5 million. For fiscal year 2021, our last 12 months adjusted EBITDA was $194 million as compared to $124.5 million in fiscal 2020, representing a 56% increase year-over-year.
Adjusted net interest expense for fiscal Q4 was $1.4 million, sequentially flat from fiscal Q3. Fiscal year 2021 adjusted net interest expense was $11 million down from $23.3 million in 2020, primarily due to the restructuring of debt in March of 2021. Our adjusted income tax rate in fiscal Q4 remained at 5% and resulted in an expense of approximately $2.3 million. Our cash tax payments were $200,000 for the fourth quarter and $1.6 million for fiscal year 2021. We expect our adjusted income tax rate to remain at 5% for fiscal 2022.
Fiscal Q4 adjusted net income was $43.3 million compared to $40.3 million in fiscal Q3. Adjusted earnings per fully diluted share was $0.61, utilizing the share count of 71.1 million shares compared to $0.57 of adjusted earnings per share in fiscal Q3. For fiscal year 2021 adjusted net income was $151.9 million more than double fiscal year 2020 income of $67.1 million. Fiscal year adjusted EPS was $2.15 compared to $0.98 in fiscal year 2020.
Now moving on to the balance sheet and cash flow items. Our Q4 accounts receivable balance was $84.6 million up from $71.6 million in fiscal Q3. As a result, day sales outstanding were 49 days. Our accounts receivable balance reflects an increase over prior periods as our revenue has been increasing and also due to more shipments occurring later in the quarter as compared to prior quarters.
Inventories were $82.7 million at quarter end down a little less than $1 million sequentially. Inventory churns were flat sequentially at 2.9x during the fourth fiscal quarter. Our fiscal Q4 cash flow from operations of approximately $40.8 million was down $4.1 million sequentially, primarily due to the increase in accounts receivable balances. Capital expenditures totaled $5 million in fiscal Q4, fiscal 2021 CapEx of $18 million was up slightly from $17.6 million in fiscal 2020, primarily attributable to investments in our fabs as well as R&D infrastructure.
We expect CapEx to increase in fiscal year 2022 and be in the range of $30 million to $35 million as we continue to invest in our internal fab and production capabilities as well as R&D equipment. Free cash flow was $35.8 million for the fourth fiscal quarter and $130.5 million for fiscal 2021. Cash, cash equivalents and short-term investments for the fourth fiscal quarter were $345 million, up $36 million from fiscal Q3 and up by $11.8 million versus the same quarter in the prior year.
As a reminder, in March 2021, we repaid $100 million of our outstanding term loans and also entered into a $450 million convertible note arrangement, utilizing the proceeds to further pay down our outstanding term loans. Our long-term debt currently consists of $450 million of convertible notes due in 2026 and $121 million remaining on our term loans due in 2024. Neither of these arrangements requires any principal repayments until the maturity. We also have $29 million of finance leases. With the improvements in trailing 12 month EBITDA, we exit the fourth quarter with a net leverage ratio of around 1.7x and gross leverage of 3.1x, down from 3.4x and 5.5x, respectively, in fiscal 2020.
During September, Standard & Poor’s upgraded our credit rating from B to B+. We view this as a recognition of our operational and financial achievements during the fiscal year and our continued efforts to strengthen our balance sheet. These improvements across the business would not have been possible without the teamwork and dedication of the entire MACOM organization.
I would like to note that MACOM is a diverse business with a strong financial model and possesses many opportunities to grow and expand as we execute our strategic priorities moving into fiscal year 2022 and beyond.
I will now turn the discussion back over to Steve.
Thank you, Jack. MACOM expects revenue in fiscal Q1 ending December 31, 2021 to be in the range of $157 million to $161 million. Adjusted gross margin is expected to be in the range of 60% to 62% and adjusted earnings per share is expected to be between $0.60 and $0.64, based on 71.4 million fully diluted shares. In fiscal Q1, we estimate Industrial and Defense revenues to be flat, data center to be down 10% and Telecom to be up 15%.
As I have noted, we maintain a long-term perspective on executing our strategy, and we are confident that we can continue to improve our financials and take market share in the months and years ahead. Based on the opportunities in front of us, we believe that MACOM has the potential to achieve at least 10% year-over-year revenue growth in FY 2022. In addition, we believe our business model has leverage to improve profitability. Our product portfolio is stronger than it was a year ago. And for this reason, we are confident we can meet or exceed our FY2022 targets.
I would now like to ask the operator to take any questions.
Thank you. [Operator Instructions] And our first question coming from the line of Vivek Arya with Bank of America. Your line is open.
Thanks for taking my question. Steve, on the last call, you kind of outlined this march to $1 billion or so in terms of sales by 2025. So that implies kind of a low double-digit growth CAGR and you were above that trend line in the last fiscal year. Just curious to get your thoughts as you start the new fiscal year, you’re starting Q1 at a growth rate that’s below that trend line. What helps you accelerate later in the year? Just give us some puts and takes as you start the year? And what role does supply constraints kind of play as you think about the growth prospects for the coming year?
Sure. Thank you, Vivek. So I think our comments from the last call still stand. I think we are on a good trajectory to hit our long-term goals of $1 billion, so not much has materially changed since those comments were made three months ago. I will say that we are starting the year with almost a near-record backlog. We have been diligently working on bringing better and better products to market. So I think we’re in a stronger point today than we were, say, a year ago. I also would just highlight not to look at any one particular quarter as a bellwether of sort of long-term growth because we are in dynamic markets, and we are constantly seeing some markets accelerate and others decelerate at different times. So I wouldn’t read too much into any particular quarter.
And I’ll also just highlight that the underlying growth driver for our business is new products. And as I talked about, in my prepared remarks, we continue to increase the velocity of new products that we’re bringing to market. So generally speaking, I think we’re on plan. As I noted in the script also, as we look forward, we think we can achieve at least 10% year-over-year growth. This is similar to the messaging that we gave really a year ago at this time when we looked into our fiscal 2021.
Got it. And then one more question on the supply side. Which is the bottleneck? Is it the ability to get your components out? Is it the ability of somebody else in the supply chain, which is gating your growth because the customer cannot complete the bill of materials? What is the real bottleneck for you? Or is the bottleneck somebody else in the industry? And what is changing or can change to help ease those bottlenecks over the next few quarters? Thank you.
Thank you. So I think we see both dynamics at play. First one being our ability to, let’s say, get capacity or deliver products on the required schedule. So we are constrained in certain areas there. And those areas would revolve around, in some instances, semiconductor technology or package technology and also in some instances, OSAT capacity, which is the assembly and test portion. So there are some constraints there. And then I would say within the last three months, we have seen some of our customers actually coming up short on components necessary for them to build their systems, and that has resulted in push-outs of schedules and whatnot.
But I have to say one thing. These I view as short-term issues. These are not going to stand in the way of MACOM growing and hitting its long-term targets. We look at these issues as tactical issues that our operations team needs to manage and work with our customers. And the fact that we have such a diversified business, I think, puts us in a very enviable spot. And as I highlighted on my remarks again, the highest volume product that we sold last year was less than 2% of our total revenue. So we have a very diverse business.
So while there are constraints in the industry, we are not getting too focused on that. We are focused on developing the new technologies and the products that we need to grow over the long term.
Maybe we’ll take the next question.
And our next question coming from the line of Quinn Bolton with Needham & Company. Your line is open.
Great. Congratulations on the nice results and outlook. Steve, I wanted to ask two questions on the Data Center business. You guided it down 10%. Wondering if there’s any specific factors for the weakness in the December quarter. And then a follow-on question. You mentioned the new equalization product for active copper cables. It seems like there’s growing interest for active copper cables to extend reach in the data center. I’m just wondering if you could give us your outlook for the adoption of active cables in the data center and where your opportunities may lie with that product? Thank you.
Sure. Thank you. So – maybe I’ll make some a few broader comments on our business in the data center and then talk about some of the sub product areas that we address. So if we put things in perspective, I’d just highlight first that the data center is one of our smallest end markets, it’s the third smallest. In fiscal year 2019, we had about $114 million of revenue. In fiscal year 2020, that grew to $126 million in revenue. And then last year, it grew to $138 million in revenue. And as we look out over the next 12 months, we think that there’ll be continued growth of in the range of 8% to 10%. So that will be four consecutive years of growth in the data center. This is also with the backdrop, as we discussed two quarters ago that some of our legacy AMCC business was tailing off, and we expected about a $15 million decline fiscal year 2022 compared to fiscal year 2021.
So I’ll mention those points as the backdrop. As we ended the year, we actually – our fiscal year, we had a very strong backlog. Our book-to-bill in the Data Center segment was the strongest of the three. But then when you start to look at our business in the different areas where we sell our products, we see a lot of different moving parts. So for example, our core business of 100G CWDM4 analog solutions for optical modules has been down in the last few quarters. In fact, our lead customer, their volumes are down 30% to 40%. But what’s been happening here is we’ve been gaining market share at other accounts, and that’s been offsetting that decline. And we see that as a good thing. We see that as diversifying our overall business. So when we look out into our full fiscal year 2022, we would expect our core 100G CWDM4 business to grow.
The other two areas that we’re very active, of course, is active optical cables where we sell products to both 25G and 100G applications. The 25G business last year was very strong, primarily due to build out in international markets. That has slowed this year, and we think that will slow in the next few months as well. The 100G applications for active optical cables has also declined. We think that there’s a lot of inventory. And we also think some of our customers are having issues getting supply of other components, and that’s putting a bit of a headwind on our ability to ship to them. When we think about the areas that will be very strong over the next year, we look at 100G and 400G DR1 and DR4, as being very strong. We’re seeing tremendous growth. These are PAM4 platforms. We’re also seeing very strong growth with 200G PAM4 solutions as well. So that’s an area of very strong growth.
We’re also seeing growth in the data center from crosspoint switches. We haven’t talked about that a lot recently. And we sell into two applications in the data center. One is redundant switching and the other is areas that are requiring very low latency. We have fairly sophisticated 160 x 160 crosspoint switches that we sell into this market.
And then as I pointed out in the script, 400ZR applications are growing. And this is an area where as this market is growing, it’s sort of coming to MACOM in the sense that we are a leader with modulator drivers, whether we’re driving lithium niobate or indium phosphide or silicon photonic modulators, we have the industry’s best drivers and best TIAs. And so as this market is beginning to develop where coherent is coming closer to the data center, and perhaps inside the data center, we think that will drive growth. So there’s a lot of moving parts within the data center, depending on the type of product we’re selling.
And then as you asked specifically about active copper cable, we are excited about the new launch of the product line. It’s an area that we have core competency. I’ll say that we’re not quite sure how big it could be. We do know that passive cables are one of the highest volume areas within the data center. And so as our customers adopt active solutions, we’ll have to see what the adoption rate is. I don’t think anybody really knows. We’ll have to wait and see. But our products, I can tell you, support 50G, 100G, 200G and 400G applications.
And so we are very actively working with companies that are building copper cables that want to use our products. So there’s a lot of moving parts within the data center. I haven’t really spoken also about the fact that we are starting to see early traction with our laser portfolio. And so we’re also excited about that.
Okay. Thank you for the great, great color.
You’re welcome.
And our next question coming from the line of Tom O’Malley with Barclays. Your line is open.
Good morning, guys. Thanks for taking my question. I just want to hit on another one of the large segments in telecom. You had talked about earlier this year some weakness in front haul. You’re obviously guiding that business up pretty strong in December. Is that a return to some growth there? And then if you could just address some of the supply issues that we’re hearing on that side of the business that would be really helpful.
Yes. So in terms of telecom, there’s also it’s a very diverse end market. It’s one of our – potentially one of our most diverse and possibly fastest growing over the next three to five years. Your question about weakness in front haul, I would say that it’s at a steady run rate at the moment, which is definitely lower than where it was 1.5 years ago. But I wouldn’t necessarily categorize it as weak. I would say that there’s a steady pull of products for 5G front haul but not at the rate that it was 1.5 years ago.
Where we’re seeing growth in telecom is certainly cable infrastructure and PON, and we think these areas will continue to grow over the next one to two years. And so that’s an area that we’re very, very focused on. The last item I’ll mention just about telecom in general is our activity on the RF side of 5G telecom infrastructure. We’ve been making great progress with our front-end modules and also our power amplifiers. Our GaN on silicon carbide power amplifiers are starting to gain traction, and we expect growth from that product line over the next 12 months.
That’s helpful. And then just as a follow-up, we’re seeing some consolidation in the optical universe this morning with Lumentum and Neo. Could you talk about – I know it’s very early here, and you guys probably just learned about it this morning as well. But could you talk about downstream impact there, obviously, you’d assume that there’s some analog componentry that you’re selling across multiple customers. How do you think that consolidation may impact you guys?
Yes. So Tom, I haven’t really thought about that, and that hasn’t been a focus for MACOM here in the last 24 hours. So this industry has seen consolidation, and we’ll continue to see consolidation in our position in the market as a merchant supplier to companies that build RF, microwave, optical, telecom equipment. And so from our perspective, at a very high level, nothing has really changed from that merger or any other mergers that may happen in the future.
Our next question coming from the line of Harsh Kumar with Piper Sandler. Your line is open.
Yes. Hey guys. First of all, congratulations, once again, solid execution and avoiding a lot of supply issues that the industry is seeing. Steve, if I can ask you on that question, did you happen to leave any revenues behind? I know you mentioned some supply issues, but I was curious if you would characterize the amount that you might have locked behind on the table?
Yes. I’ll just make a comment and maybe ask Jack to also help answer that question. When we put forward our guidance for the next quarter, we take all things into consideration, including customer schedules, availability material. We make judgments based on turns business. And so we come up with what we consider a reasonable target for the next period. And in areas where we think there may be supply constraints, we have to factor that in and then make a judgment.
So I would view all of that activity as normal business operations. And so I would – I don’t look at that – those projections as leaving revenue on the table and that’s not how we look at it. We look at it strictly how do we service the customers, what can we do in a reasonable amount of time. And we don’t necessarily want to start putting a dollar value on what revenues we might have shipped in the past. But Jack, maybe you can help answer the question more completely.
Yes. Thanks, Steve. Good morning, Harsh. I think we performed as expected when we set our forecast, there can be a certain amount of variability with any forecast as the quarter evolves. But it’s through that interaction that we’ve had with our customers and to some extent with our suppliers as well that we’re able to end up coming in where we did. And we just haven’t put a number on the impact to any one quarter. And as Steve had mentioned earlier, it really just become part of our day-to-day processes that we have here as opposed to a one-time issue that we’re dealing with.
Understood, guys. And if I can ask a two-part question here for my follow-up. So with data center, the initial turn that happened in MACOM two years ago when you came on was that data center was going to grow and then we had a little bit of a setback for the customer, I think last quarter, a quarter ago, something like that. As you look out into the next year and you try to compare the growth of data center for next fiscal year versus your 10%, at least 10% target. Do you think data center will overgrow that 10% number and contribute to growth? Or will it be in line with the rest of the corporate number.
[Technical Difficulty]
Please stand by while speaker line reconnected.
Hello, everyone. We’re back on. We apologize for that technical difficulty. We got disconnected for a brief moment. So hopefully, everybody is still there, and we’ll continue with the Q&A at this moment.
Yes. So can you guys hear me okay?
Yes, we can hear you now, Harsh.
Okay. Great. So let me just repeat my question. I guess the question was, do you see data center in this coming fiscal year to grow faster than your overall corporate at least 10% sort of outline that you gave? And then you talked about the – to Vivek’s question, you talked about a $1 billion number last quarter. I was wondering if you could help give us a little bit more color on what kind of margin structure you would expect the company to have at that sort of run rate?
Sure. So the first part of your question, as we look at the three markets, we’re estimating today that the industrial and defense and data center will be in the range of 8% to 10% and telecom will be around 15% for year-over-year growth figures. So that’s our best estimate today. And those are – we want to caveat those comments as it’s still early in the year, and a lot can happen in the next 12 months. And then your question around what our margin profile might look like as we grow in scale, we really have to wait and see on that. I mean, it’s very difficult for us to make that level of a projection.
I can tell you that as we’re launching our products, we are focused on launching products that are having above corporate average margins so that we can drive additional profitability. When we start to bring on products like the KV CAPS, when we start to bring on our GaN-on-silicon carbide, when we start to diversify and sell products into the automotive industry, we think that we’re going to have a stronger position with our customers, and they’re going to be willing to pay a premium for our products. So we’d like to think that things will continue to improve, but it’s very difficult for us to really quantify that specifically at this point.
Understood, guys. Thank you so much.
Our next question coming from the line of Harlan Sur with JPMorgan. Your line is open.
Good morning, guys. Great job on the quarterly and fiscal year execution and strong margins. The team has had a strong execution on new product introductions across all of the end markets. It’s clearly a strong indicator of the forward revenue growth potential. I believe that you guys had a target to grow new product introductions by 15% last year. How does that translate to the 130 new standard products that you talked the bottom of the call? Did you guys hit that 15% target? And then just as importantly, what’s the profile of gross margin across those new products? I would assume the majority of them are above current corporate gross margins, but wanted to get your views.
Sure. So we did hit our targets in terms of new product introductions last year. And as we look into fiscal year 2022, we’ll be launching even more products. So we’re accelerating the rate of product introduction, and it’s coming across all of our different business units. And as you remember, we organized our business into technology area. So each of our six technology areas is just doing a great job, hitting their targets and they’ve been very focused. We don’t typically break out gross margins by end market or product line or technology. So I can’t really comment further on that.
Recognize that we are always focused on improving profitability. But also, it’s important to us to increase absorption and make sure that our fabs are full. And so we have to make sure that we balance volume with pricing at some point. But I will say we have a tremendous amount of leverage in our business model to grow without bringing on any significant incremental costs? And maybe, Jack, you can talk about that for a moment.
Yes. Thanks, Steve. And we do have a variety of different gross margin profiles that some of the new product introductions that we do have that they may meet. And with the current business model that we have, where we’ve got certain products that are internally manufactured from a fab and also from a back-end process perspective. And then we’ve got other product lines and areas of the business where the fab and the back end are all outsourced. So that gives us a fair amount of leverage as we go forward where we could expand the top line without having to meaningfully impact some of the incremental costs.
So we are very focused on overall on the bottom line improvements as well as these – as the top line improvements that we might get through new product introductions. So all in all, we think we’ve got a fair amount of leverage within the existing model where we can continue to grow.
Yes. Thanks for that. And you guys already have a pretty strong position in metro and long-haul coherent optics, TIAs, drivers. So it’s good to see that you guys are leveraging that on the new coherent 400ZR DCI technology. This is a new technology that’s just starting to ramp up. I believe Microsoft is just starting to fire in the second half of this year. You’ve got the other cloud titans firing next year. So I guess the question for you guys is, does the team already have design wins for its modulated drivers and coherent amplifiers with the qualified 400ZR pluggable module vendors? And do you expect these products to contribute to revenues this fiscal year?
So the short answer is yes, we do have customer traction, and we do expect a very modest contribution in our fiscal 2022. The big growth will come in 2023. So I think we’re doing all the right things. We are known in the metro long-haul area, as you’ve highlighted, to have best-in-class products. And so we’re busy right now focusing on supporting a wide range of module manufacturers that want to get into this business. It’s going to break away from being a captured market to more of a merchant market for module solutions here. And we think we will have a very strong position in the next one to two years.
The next question coming from the line of Karl Ackerman with Cowen & Company. Your line is open.
Yes. Thank you. Two questions, if I may. First, you’ve continued to transition the business overall to industrial and aerospace applications that tend to have product cycles longer than your average. I was hoping you could discuss some of the key drivers as you look into your fiscal 2022 such as selling more of a module and/or subsystem versus a discreet solution.
So the vast majority of our business is component based business. So the growth that we have this year will not be coming from modules per se, in some of our RF and microwave product lines, we do packaged assemblies, but we would consider those components where we might have a few active devices and substrates, and it might be a connectorized box. But we don’t really view that as a sub [Technical Difficulty]
Can you hear me?
Ladies and gentlemen, please stand by.
Hello everyone. We apologize again for the technical difficulties. We are back here. And we’ll pick up where we left off on Karl’s question.
And Karl, I’m not sure how much of that you heard, but my short answer is in the next in 12 months, we do not expect strong contribution from module and subsystem. It’s primarily a component based business. However, we are over the long-term going to be going after this business. We recently opened up a remote design center, which is explicitly focused on very high frequency modules and subsystems. So it’s an area of strong strategic interest.
Thank you for that. I appreciate that. From my follow-up, I wanted to focus on data center and follow-up with your comments and response to Quinn’s question on data center. Is the growth of a 100 gig next year coming from outside the U.S.? And then second, as you answer that question, do you have a view of when your PAM-4 solutions would reach revenue crossover versus say NRZ products, as you gain these opportunities in 100 gig and 400 gig on Tier 1 offerings? Thank you.
Yes. So a lot of the growth is coming from international markets for the 100G CWDM4. So that’s absolutely correct. In terms of when there’ll be that crossover that you talked about, it’s very difficult for me to make an estimate there. So I really don’t have a comment on that.
Next question coming from the line of Chris Caso with Raymond James. Your line is open.
Yes. Thanks. Good morning. Just a clarification regarding some of the fiscal 2022 growth numbers that you’ve mentioned, in response to some of the questions, it would seem, if I heard you right with the telecom about 15% a year, and then data center and I&D up each about 8% to 10% year-on-year, it suggests that all of the sequential growth that you get through the year comes from data center with the other segments kind of being flat on a quarterly basis, is that interpretation correct? And maybe you could just address that what – is there a seasonal aspect to it or is that just data center driving all the growth incrementally through the year?
Yes, I think there’s some truth to what you’re saying, but I would say that we’re not giving such specific guidance that we can comment on sequential growth. I think there’s going to be periods where markets are going up and markets are going down over the course of fiscal year 2022. And we saw that even in this past quarter where telecom was down and I&D was up and data center was essentially flat.
So I would essentially set the expectation that you’ll continue to see on a sequential basis, a lot of variability and the growth rates, and it has to do with just the timing orders, our ability to execute given supply issues and demand, which is oftentimes difficult to predict. So I wouldn’t want you to draw that conclusion. Instead I would step back and look at and understand that the three end markets should grow if not all double-digit, close to double-digit with the exception of telecom, we feel that will certainly be at a minimum double-digit growth.
Got it. Okay. As a follow-up, if you could address some of your prior comments on pricing and obviously, we’ve seen across the space that pricing is starting to go up. Particularly in response to some of the input cost increases. So if you talk about what you’re doing with respect to the input cost, how that’s applying the pricing, and is that a headwind or a tailwind or perhaps neutral gross margins?
Sure. And I think Jack did even mention of pricing in some of his comments regarding strategies and whatnot. So pricing is strategic in areas where we believe we have pricing strength. We try to optimize pricing, but generally speaking, we’re in very competitive markets and customers really understand the value of their components. They’re constantly comparing your performance against your competitors. And so I wouldn’t say that there’s this wholesale opportunity to increase pricing across the board in this environment that is not our approach.
We look at pricing very strategically. We try to win market share and set pricing. That’s compelling for customers while also optimizing profitability. When we see areas where there is cost increases, we would always try to absorb that first and if that’s not possible, then we would have to work with customers and figure out a path to potentially pass some of that cost along.
Our next question coming from the line of Tore Svanberg with Stifel. Your line is open.
Yes. Thank you. And congratulations on the operating margin milestone. First question is and congratulations on getting the automotive certification, but once the earliest we can expect revenues from MACOM and automotive and you listed a few applications. We just wondering if there’s one or two that you think you could get the traction in earlier?
Yes. So we today have some parts in production for automotive customers. Those are generally on the RF side of our technology, and we want to expand that into our Lightwave and also capacitors and even power management. In addition, our high performance analog team is working at studying some of the new standards that are coming out for high speed data connectivity within automobiles. So our view of this certification and our view with automotive in general is really long-term growth. We think there may be some near-term opportunities with some of our high voltage capacitors since they’re run in our fab, which is automotive certified.
We think that will be compelling technology for customers. We also want to try to take advantage of some of the shortages that we’re seeing within the industry and we’ve been actively reacting to opportunities that are coming our way across various parts of our portfolio. So it is, Tore, it’s a long-term effort, and it will incrementally support our growth.
Great. Thank you for that. And as my follow-up, could you just give us a little bit more of a detailed update on the DFB laser business, timing, ramps, so on and so forth?
Yes. So as everybody knows, we announced the Clear Diamond portfolio in June of 2021, and that was essentially a portfolio of 25G DFB lasers. We were initially targeting telecom so that would be front hall and mid hall type applications. So it’s been about five months since we made that announcement. And I can tell you that we’re very pleased with the results today. We see that we are gaining market share.
We have numerous customers that have qualified the product. Those customers are in low rate production and we’re supporting of a variety of protocols, including devices that operate at 1310 nanometers, as well as BiDi modules, which is 1270 and 1330, which is typically used for international 5G as well as CWDM6, which is for China. So we’re very pleased with the traction, we’re very pleased that we’re shipping in low volume production today.
And we think that fiscal year 2022 will be a growth year for 5G laser business for MACOM. What’s really surprised us with our laser activities is the traction that we are getting from customers that are building modules for the data center. And we’re actually seeing an equal amount of activity with CWDM4 modules, which is up to about two kilometers and also LAN-WDM4, which is up to 10 kilometers for data center interconnect.
Again, we have multiple customers where we’re qualified and we’re beginning to ship low rate volume production, and that’s been a bit of a surprise for us and so certainly a pleasant surprise. And then the last area for the lasers that I’ll just highlight is on our 25G FP lasers. We are actively working to bump out competitors, 10G DFBs with our lower cost in higher performance, 25G [indiscernible]. And we think this solution lowers the overall module cost for our customers. And so it’s compelling for them.
So when we step back and look at our laser business, we think we’re going to have very strong growth. It’s going to support not only our telecom growth this year, but also it’ll start to support data center. And again, our philosophy of having a portfolio where we have 2.5G all the way up to 50G lasers, we have EML lasers, CW lasers. We’re also working on laser arrays for next-generation data center platforms. We’re pleased with the results from the team and this next 12 months will be a period where we start ramping to higher volumes.
Our next question coming from the line of David Williams with Benchmark. Your line is open.
Hey, good morning. And thanks for taking the question. I just wanted to maybe touch on the supply side, and it seems like you side set some of the Southeast Asia COVID issues that some of your peers have noted. And I think last quarter you had noted maybe a higher risk execution in the fourth quarter. And just kind of curious how you’re seeing that as we head into the first quarter here, is that risk still there? Do you feel like maybe some of that’s abated a bit?
So one of the things we were concerned about last quarter was we were seeing certain countries shutting down and having factories either go idle or operate at less than 100% utilization. And we’ve seen that situation improved dramatically. So Thailand, Vietnam, Malaysia, they’re all starting to sort of come back to normal. And so that risk has come down dramatically.
Okay, great. Thanks. And then maybe just on the base station deployments of China, it seems like they’ve been a little bit slower to roll out and COVID pockets are starting to appear. Just kind of curious as to thinking about the base station deployments and just generally overall kind of the China, Mainland, how you see that forming over the next maybe 12 months?
So I think there’s going to be steady, very moderate growth. That’s our expectation. There’s been a lot of tenders out earlier in the year. Mostly for 700 megahertz, we have little exposure to that platform. So from our point of view, deployment in China will be very muted. I would say based on our current outlook.
And from our point of view, what’s important is that we win market share, and we get our newest products, including our GaN-on silicon carbide, massive MIMO, power amplifiers designed in, wherever we can. And that’s the focus for the business. We are seeing also an uptick in interest with O-RAN, we’re seeing an increased interest from international companies that outside of China that are interested in MACOM’s products, not only on the RF side, but also on the optical side, as well as on the PON side of telecom networks. So while, China might be a bit muted, we see other opportunities outside of China.
Our next question coming from the line of Sam Peterman with Craig-Hallum Capital. Your line is open.
Hi, guys. Thanks for taking my question. I wanted to go back to telecom and ask about growth drivers for the next year. I think at the beginning of the call, you listed out four things, if I remember right, as growth drivers there, including PON, cable infrastructure, microwave radios and SATCOM. And I was curious if you guys could just kind of rank order those, how you think those will impact your telecom growth in F2022? And then if you could kind of comment on how you see potential cable CapEx spending rollover, balance out between kind of a lot of the new initiatives for fiber and fiber-to-the-home that have been going out here in the last couple of months? Thanks.
Thank you. So it’s very difficult for us to rank order those end markets. I think they’re going to grow at different rates at different times during the next 12 months. We think that, as I talked about at a high level, our expectation is 15% year-over-year growth for the entire segment. Certainly, 5G will contribute, no doubt. Cable infrastructure is very strong right now here in the U.S. We do expect that to continue, to your question about sort of CapEx spending.
We think this is a multiyear cycle. This will not be a 12-month cycle. This is a three-year cycle minimum. We also believe that we’re winning market share in 10G PON, specifically on first mode TIAs and drivers, where we have a very strong position and lasers. So the 10G PON market will be an area where we have very strong growth. We also, I’ll just point out – and again, this speaks to the – our thesis that our growth is product driven, we are gaining traction with our Avalanche photodetectors inside of GPON equipment. And so that’s also exciting for us. So really, as we think about telecom, it’s our core product lines getting stronger and winning market share, whether it’s high-power switches, front-end modules for base stations, components for front-haul and GPON. So a lot of moving parts. I wouldn’t necessarily want to rank order any one of them as being more important than the other.
Got it. Okay. Thanks for all the color there. And then just a quick follow-up on CapEx, it looks like a pretty big step up to – from $20 million-ish the last two years to over $35 million this next year. You said it was mostly around production capacity in your fabs. Is this kind of ramping for certain products, maybe within auto or elsewhere? Or could you just give any color on kind of what that CapEx spend is going for?
Yes. Maybe I’ll say a few words and then Jack can follow up. So if we go back to 2019, we effectively shutoffs CapEx spending to do a thorough top-to-bottom review of current assets. And so then we – after that reset in the middle of our fiscal 2019, we began to open it up. And our goal for the first two years was to have more depreciation roll off than we rolled on with new CapEx spending, and we were able to do that very successfully for, let’s say, year one and year two, but that did create a bit of a pent-up demand for CapEx spending.
And so what you’re seeing this year is us increasing capital in the range of $10 million. But if you look at the three-year average, we’ve actually – our depreciation and CapEx is almost a wash in terms of increasing our overall depreciation. And that’s – we’re happy. When we think about where that – where those dollars are going, we’re spending about $8 million a year on general refresh expansion, new equipment upgrades within our fab here in Massachusetts.
And then the balance of that spending goes across the business units for test and measurement equipment or other general uses to support growth. So there’s no – not any one program driving the CapEx increase. We think it’s continued investment in the business. It’s true we are developing new technologies like our 0.14 again on silicon carbide, but the capital expenditure on that program is actually quite modest. It’s not a big driver of our overall spending. And Jack, I don’t know whether you want to add some color to that?
Yes. And Sam, I think the number we put out there was some CapEx to be in the range of $30 million to $35 million. So not over the $35 million number that I think you had mentioned. And we are looking at each of our CapEx investments very closely to make sure we have the appropriate return. There are certain infrastructure items that we believe will support the business and some of the new products that we are introducing over time. And there’s a combination of manufacturing capabilities as part of that CapEx number, but there’s also some capital equipment that is working its way into our R&D investments as well, once again, supporting some of the new product introductions that we have.
Our last question is coming from the line of Harsh Kumar with Piper Sandler. Your line is open.
Sorry. Hey, guys, I wanted to go back to Chris Caso’s question earlier that related to the data center cadence for call it, 8% to 10% growth. Would – if I understood it correctly, I think your starting point is down 10% sequentially into the December quarter. So you start the year down. And to get to 10%, we have to basically plug in kind of double-digit sequential growth numbers for all practical purposes to get to that 8% to 10% cadence. Is that feasible? And if so, Steve, could you maybe elaborate? I know you talked a lot about data center business, but what would be the one or two things that would drive it?
So one of the things we’ve seen with our data center business is impact from back-end supply and packaging. So if we were to look at all of our end markets and pick one that has the most impact it would certainly be the data center. We use very high-density traits that are used in some of our packages and we’re having issues associated with supply on those technologies.
So that’s causing the revenue to be, I’ll say, back-end loaded for this fiscal year, and it’s primarily driven by supply. So we think that will open up towards the back half. And as a result, that will – that’s why we’re starting the year, let’s say, at a low point, but we do think there will be strong sequential growth after that with ending the year in a very strong position. But supply definitely has a play here.
Understood. Thank you, guys.
Thank you. And I’m showing no further questions at this time. I would now like to turn the call back over to Mr. Steve Daly for any closing remarks.
Thank you, Olivia. And I’d first like to apologize to all of our attendees for the two interruptions on the call today. We’ll have to work on our infrastructure here to make sure that doesn’t happen again. And then in closing, I’d like to thank all of our employees for the support during fiscal year 2021 and we all look forward to having a great fiscal 2022. Thank you for attending.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.