MACOM Technology Solutions Holdings Inc

NASDAQ:MTSI

Earnings Call Analysis

Telecom Weakness Partially Offset by Other Market Gains

In a year when revenue and EPS both fell by 4%, the company managed to slightly raise Q4 revenue to $150.4 million, where Data Center gains and a diversified customer base formed a backdrop to the telecom sector's 20% sequential decline. Strength in Industrial & Defense (I&D), which grew by 8% over the year, contrasts with an overall challenging market, although details about the upcoming fiscal year's margin improvement plans were sparse. Despite softening in telecom and industrial markets, strategic acquisitions and maintained adjusted gross margins of over 60% suggest resilience as the company navigates a shifting landscape, ending FY2023 with $515 million in cash.

Strategic Focus and Geographic Expansion

The company underscored its progress in capturing market share, driven by new product offerings, technology expansion, and strengthening geographic presence, especially in Europe with the opening of the European Semiconductor Center. The acquisition, although small, is viewed as strategic with the potential for significant growth. Furthermore, the company highlighted its execution on a disciplined investment plan, maintaining stability in capital expenditures. With 170 new standard products launched, a 15% increase year-over-year, and developments in custom integrated circuits (ICs), the company is poised to further accelerate its product introductions, potentially by 50% in the coming fiscal year.

Financial Solidity Amidst Industry Pressures

MACOM ended fiscal year 2023 with a net positive cash position and was able to maintain healthy adjusted gross margins above 60%. The company has successfully closed two strategic acquisitions and paid off a significant term loan. Despite a revenue contraction of 4%, MACOM's gross margin goals remain consistent, with expectations to improve margins through post-closing synergies from the Wolfspeed RF business acquisition, which is anticipated to be accretive to MACOM's non-GAAP earnings.

Technology Innovations for Data Rate Demands

As the demand for higher data rates increases, MACOM is positioning itself well by leveraging a range of process technologies to bring forth applications like TIAs, drivers, and equalizers for PMDs. This strategy allows them to cater to unique customer designs, ensuring their products are deeply integrated and not easily replaced—contributing to the company's attractive business metrics. However, they have recognized a decline at lower data rates and are adjusting their approach accordingly.

Financial Discipline and Operational Leverage

The company has displayed a disciplined approach to managing its operating expenses, absorbing costs from new acquisitions without compromising on its base business performance. This fiscal prudence is aimed to be carried into fiscal year '24, signaling an intention to ensure that any increase in operating expenses continues to trail revenue growth, thus securing operational leverage.

Inventory Management and Long-term Growth

MACOM is actively managing its inventory to support customer needs while integrating acquired businesses to improve inventory metrics. Looking long-term, the company has renewed focus on achieving a billion-dollar revenue target, adopting a strategy of expanding serviceable available market (SAM) and adding growth vectors without sacrificing profitability. Current expectations place the revenue goal's realization in the fiscal '25 or '26, given consistent improvements and business expansion.

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to MACOM's Fourth Fiscal Quarter 2023 Conference Call. This call is being recorded today, Thursday, November 9, 2023. [Operator Instructions]. I will now turn the call to Mr. Steve Ferranti, MACOM's Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead.

[Stephen Ferranti, executive]

Thank you, Olivia. Good morning, and welcome to our call to discuss MACOM's Fourth Fiscal Quarter and Fiscal Year 2023 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 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. And with that, I'll turn over the call to Steve Daly, President and CEO of MACOM.

[Stephen Daly, executive]

Thank you, and good morning. I will begin today's call with a general company update. After that, John Kober, our Chief Financial Officer, will provide a more in-depth review of our fourth quarter and full year results for fiscal 2023. When Jack is finished, I will provide revenue and earnings guidance for the first fiscal quarter of 2024, and then we will be happy to take some questions.

Revenue for Q4 was $150.4 million, a slight increase over the prior quarter. Adjusted EPS was $0.56 per diluted share and operating cash flow was approximately $50 million. For the full fiscal year ending September 29, 2023, revenue was $648 million, and adjusted EPS was $2.70 per diluted share. Fiscal 2023 revenue and EPS were both down 4% year-over-year.

We completed 2 small but strategic acquisitions in fiscal '23, which combined contributed approximately 2% to our total fiscal year '23 revenue. During the fiscal year, we eliminated all of our remaining short-term debt and funded these acquisitions using cash recently generated by the business. We ended the fiscal year with approximately $515 million in cash and cash equivalents.

In Q4, our book-to-bill ratio was 1.1:1, and our turns business, or orders booked and shipped within the quarter, was approximately 16% of total revenue. These are positive trends and notably, Q4 bookings improved across all 3 of our end markets. Improvements were led by pockets of strength at certain defense and data center customers.

Our total company backlog increased slightly quarter-over-quarter, and it remains at a healthy level. We are starting the new fiscal year in a strong position. While we are pleased with the recent improvement in total bookings in certain markets, orders remained weak in Q4. Demand continues to be weak in telecom and to a lesser degree, in certain parts of the industrial markets and we remain negative on the near-term outlook for these markets.

However, more positively, we see growing demand in data center, aerospace and defense as well as in satellite communication markets. Fiscal Q4 revenue by end market was as expected, with industrial and defense at $79.2 million, data center at $40.5 million and telecom at $30.6 million. IND was down 5% sequentially. Data center was up 52% sequentially and telecom was down 20% sequentially.

Notably, our top 10 end customers represented approximately 30% of our total revenue in fiscal 2023 and no one customer was more than 10% of our total revenue. We maintain a highly diversified customer base consisting of thousands of customers.

Industrial and Defense was a strong market for us during fiscal 2023 and revenues achieved a historic level. Fiscal 2023 represented our third consecutive year of growth within the IND market, with 8% year-over-year growth. In fact, over the last 3 years, our IND revenues achieved an 18% compounded annual growth rate. We believe our growth initiatives for this market are on track.

Core to our strategy is expanding our serviceable addressable market, or SAM, within the IND market by launching compelling new products. As a reminder, examples of new growth initiatives, which we've discussed in prior quarterly calls, includes our new 0.14 GaN on silicon carbide process, kilovolt capacitors or KV caps and BAW filters. These product lines are still in the early stages of their growth in product life cycles.

One important area of the IND market we are supporting is the RF over fiber segment. In these applications, customers convert RF or microwave signals into light by directly modulating a linear laser. This resulting signal can be transmitted over fiber with minimal signal degradation or loss versus traditional coax cable. Fiber provides a lower weight and more secure transmission compared to coax. RF over fiber is ideal for demanding applications like Satcom ground station networks, distributed antenna systems and many defense applications like secure communications, critical GPS systems and radar systems, all of which require high reliability and long life cycles while operating in harsh environments.

MACOM's strength in microwave and optical design, laser and detector technologies and ruggedized packaging and subsystem manufacturing capabilities positions us for growth in this segment of the defense market. We are seeing a growing number of long-term program opportunities today.

Another area of focus for MACOM in industrial and defense is further penetrating the test and measurement market. A notable recent new product introduction for this market segment is our optical clock recovery or OCR solutions. Here, our high-performance connectivity team is leveraging our [ 5], our high-speed optical receivers and high-performance analog design expertise. MACOM's OCRs can be used in our customers' production test environment to validate their performance of their short-reach 400G and 800G optical transceiver products.

Our telecom end market revenues continues to be weak. In fiscal year 2023, telecom was down 24% year-on-year. Weakness in this market is broad-based, spanning most of our larger subsegments, including 5G, metro long haul, cable infrastructure and passive optical networks. That said, we believe the secular growth drivers for telecom remain intact. Global telecom infrastructure needs to expand capacity to carry higher data rates and more bandwidth, all while having lower latency.

As an example, recently, a U.S. carrier completed field trials in New York State, which demonstrated 1.2 terabits per second of data over a single wavelength of long haul -- in a long-haul metro application as part of an ongoing fiber optic upgrade. MACOM supported this trial with our products. One segment in the telecom market, which we believe is growing is broadband satellite communications or SATCOM and many of these ground and satellite systems operate at microwave or millimeter wave frequencies, which plays to our expertise. Telecom remains an attractive and diverse market, and we see numerous opportunities to expand our position in this market.

Our data center end market revenues grew sequentially in Q4. In addition, for the full fiscal year 2023, data center revenues grew by 6% year-over-year, growth that was primarily driven by high data rate short-reach applications. The data center market continues to provide growth opportunities for MACOM, and we expect new product introductions will be the primary growth driver for us in this market. We are focused on designing and producing industry-leading XPoint switches, high-speed TIAs and laser drivers for a wide range of applications. Our strategy is to be the first to market when data rates jump to higher speeds.

As an example, we recently announced and demonstrated an industry-leading [ 200G per lane transom penetsamplifier], or TIA, for short-reach applications and a 200G per lane linear equalizer for use in active copper cables. Both products will support 1.6G deployments. Data center architectures continue to evolve. We believe many of today's deployments require significantly more short-reach optical and/or copper cable to make connections. Our high-performance connectivity team offers an industry-leading portfolio of products at 50G, 100G and 200G per channel to support these requirements.

In some applications, our solutions enable lower cost lower latency and lower power consumption versus traditional solutions. Additionally, our linear equalizer products enable copper interconnects to be extended in reach and into higher-speed applications. Previously, a market segment addressed with more expensive active optical cables or AOCs and pluggable transceivers. Our solutions have been tested with the latest generation of switch [ ASIC ] available on the market today, and our customers are pleased with the performance.

Given we are at the start of a new fiscal year, I would like to review our long-term strategy, briefly recap some of last year's accomplishments and review our priorities for fiscal 2024. Simply put, our strategy is to focus on the highest power, highest frequency and highest data rate applications in our 3 core markets. We align our R&D and product development resources around these themes and then using our annual strategic planning process, establish near- and long-term goals to strengthen our portfolio's competitiveness and to position the company for future success.

Our goal is to have our technical teams work closely with our customers to provide unique options for them to consider. By leveraging a wide breadth of unique technologies with world-class manufacturing strength, we believe we can attract many customers and gain additional market share. We believe customers will seek out suppliers who can, over the long term, become strategic partners.

During last year's Q4 earnings call, we outlined our priorities for fiscal '23. Our team made meaningful progress against those stated priorities. As a reminder, a central theme we communicated then was to capture market share in '23. We believe we've been gaining market share by increasing our new product offerings, expanding our technology base and strengthening our presence in certain geographic regions.

As I've mentioned, a key component of our strategy involves building a portfolio of compelling semiconductor processes to support high frequency and high-power applications. The opening of our MACOM European semiconductor center expanded our manufacturing capacity, added epitaxial growth expertise, bolstered our European presence and strengthened our design teams. This acquisition supports our strategic goal to establish a leadership position in very high frequency semiconductor mimic process technologies and products.

While this was a relatively small acquisition, we believe it is strategic and it brings us tremendous growth potential. We are confident our strategy will enable higher-than-average return on invested capital and, therefore, support our goals of establishing exemplary profitability and cash flow.

In support of diversifying our revenues geographically, we are expanding our sales efforts across Europe. During Q4, we attended the European Microwave week in Berlin, where we hosted a number of live demonstrations at our booth, which featured our latest products and technologies. In addition, we are pleased that the European Space Agency, or EASA, recently completed a site visit at our France facility. We intend to build new relationships with major organizations and customers across Europe with the goal of driving long-term revenue growth, diversifying our customer base and adding further stability to our overall business.

During the year, we introduced 170 standard products, an increase of 15% compared to last year. We also had great success with our custom IC development activities and we supported a wide range of customer-funded projects. We recognize that continued investments in expanding our design engineering, new product prototyping and engineering test capabilities will ensure we move quickly and rapidly bring products to market and ultimately gain market share.

As we look ahead to fiscal year 2024, we anticipate that the rate of new product introductions will further accelerate. In fact, we believe it is possible to launch 50% more products in FY '24 compared to FY '23. As we focus on fiscal year '24, our priorities include extending our leadership in RF and microwave applications, taking market share on [ gas ] and GaN mimics, continuing to gain traction with our high-speed analog solutions for short-reach data center applications, completing the integration activities of our recent and pending acquisitions, driving additional growth of our RF power, analog and lightweight product areas, building out and growing our module and subsystems business in select high-performance markets ensuring management challenges, develops and rewards employees and supports their needs to ensure they have a long and enriching career at MACOM and last, managing the business and strategy to enable us to achieve record earnings for the future.

In summary, MACOM has a wide range of products in production today. Many of these products have long life cycles and can produce revenues for years after they've been introduced. We view these business attributes as an inherent strength of our business model. And last, I'll note that MACOM and Wolfspeed have been working collaboratively on a carve-out of their RF business over the past few months, I would like to thank the integration planning teams from both companies for their great work. Our integration planning efforts include aligning the team we are hiring, their organizations and the ERP and other data systems with MACOM's infrastructure, so we are fully operational and independent at closing. I have no doubt this transaction will be a win for MACOM. Jack will now provide a more detailed review of our financial results.

[John Kober, executive]

Thank you, Steve, and good morning, everyone. Before getting into the details of our quarterly results, I would like to summarize a few items associated with our fiscal year 2023 financials. As Steve noted, fiscal 2023 was down approximately 4% from a top and bottom line perspective. Despite this, we've been able to maintain adjusted gross margins in excess of 60%, with full year fiscal 2023 adjusted gross margin of 61.3%.

During fiscal 2023, we have maintained solid and consistent cash flow generation, which has allowed us to close and fund 2 strategic acquisitions with available cash and also pay off the remaining $121 million balance of our term loan that was scheduled to mature in May 2024.

Now on to our Q4 quarterly results as well as some additional commentary on our full fiscal year 2023 and outlook on fiscal year 2024. Revenue for the fiscal fourth quarter was $150.4 million, up 1.2% sequentially based on growth in our data center end market. On a geographic basis, revenue from U.S. domestic customers represented approximately 46% of our fiscal Q4 results down from 49% in fiscal Q3. We have been working to geographically diversify our business and are pleased to have a healthy mix of U.S. and international-based revenue opportunities.

On a fiscal year '23 annual basis, revenue from U.S. domestic customers represented 48%, up slightly from 47% in the prior year. A notable trend is our fiscal year '23 revenue from the China market decreased, while revenue to our European-based customers grew compared to the prior year. Adjusted gross profit for fiscal Q4 was $90.3 million or 60.1% of revenue, essentially flat from the third quarter.

Total adjusted operating expense for our fourth fiscal quarter was $53.1 million consisting of research and development expense of $33.8 million and selling, general and administrative expense of $19.3 million. The modest sequential increase in adjusted operating expense was primarily driven by incremental costs from our recent acquisitions, partially offset by lower spending across the remainder of the MACOM based business.

Depreciation expense for fiscal Q4 was $6.3 million and $24 million for fiscal year 2023, essentially flat on an annual basis. MACOM's asset base includes a variety of production and research and development equipment that we are continuously working to optimize, which has helped to keep our capital expenditures and the associated depreciation expense relatively stable over the years.

Adjusted operating income in fiscal Q4 was $37.2 million, up slightly from $37 million in fiscal Q3. For fiscal year 2023, adjusted operating income was $189.6 million compared to $211 million for fiscal 2022 resulting in a 200 basis point reduction in adjusted operating margin compared to fiscal '22. For fiscal year 2024, our team plans to further integrate and optimize our acquisitions. Further executing on incremental synergies and cost savings, while running the entire business with a continuous improvement mindset and working to increase our operating margin over the course of the year.

For fiscal Q4, we had adjusted net interest income of $4.2 million compared to net interest income of approximately $2.8 million in fiscal Q3. Fiscal year 2023 adjusted net interest income was $10 million compared to an expense of $2.6 million in 2022. The increase in fiscal year 2023 adjusted net interest income was driven primarily by higher yields on our short-term investment balances.

Our adjusted income tax rate in fiscal Q4 was 3% and resulted in an expense of approximately $1.2 million. Our net cash tax payments were approximately $100,000 for the fourth quarter and $2.9 million for fiscal year 2023. We expect our adjusted income tax rate to remain at 3% for fiscal year 2024. As of September 29, 2023, our deferred tax asset balance was $218 million as compared to $237 million at the end of fiscal 2022. We anticipate further utilizing our deferred tax asset balance through fiscal 2024 and into fiscal 2025, helping to keep our cash tax payments relatively low over these periods.

Fiscal Q4 adjusted net income increased to $40.1 million compared to $38.5 million in fiscal Q3. Adjusted earnings per fully diluted share was $0.56 utilizing a share count of 71.8 million shares compared to $0.54 of adjusted earnings per share in fiscal Q3.

Now moving on to operational balance sheet and cash flow items. Our Q4 accounts receivable balance was $91.3 million, down from $105.9 million in fiscal Q3 due to improved shipment linearity and strong collection activity during the quarter. As a result, days sales outstanding were 55 days compared to 65 days in the prior quarter.

Inventories were $136.3 million at quarter end, down sequentially from $139 million. Inventory turns were 1.8x, up sequentially in Q4 from 1.7x in the prior quarter. We recognize that our inventory balance is relatively high and associated turns continue to be relatively low. However, the quality and mix of our inventory is strong and continues to support our strategic backlog.

Fiscal Q4 cash flow from operations was approximately $50.4 million, up $4.5 million sequentially. Capital expenditures totaled $5.8 million in fiscal Q4. Fiscal 2023 annual CapEx of $24.7 million decreased slightly from $26.5 million in fiscal 2022. Our operations and facilities teams are very disciplined and do a great job managing our capital expenditure budget. As we move into fiscal year 2024, we expect our capital expenditures to be in the range of $30 million to $35 million for the full year.

Next, moving on to other balance sheet items. Cash, cash equivalents and short-term investments for the fourth fiscal quarter were $514.5 million, down $73.1 million sequentially driven by the $121 million paydown of the remaining term loan. I am pleased to note that as of the end of our fiscal year 2023, we were in a net positive cash position of approximately $25 million after closing 2 acquisitions and paying off the term loan. Our balance sheet and cash generation remains sound, and we continue to exercise leverage over our operations and discretionary spending to support MACOM's target margins through ongoing cyclical pressure.

In summary, fiscal 2023 was a solid year for MACOM, and I am proud of our team's performance and accomplishments and believe the diverse, resilient portfolio we have built will support future growth of the business. In addition, we are working with Wolfspeed to close our previously announced acquisition of their radio frequency business before the end of December. As we have previously discussed, we expect the RF business to be immediately accretive to MACOM's non-GAAP earnings, and this acquisition is not expected to change MACOM's long-term adjusted gross margin goals of being above 60%.

We also expect the business to generate enough cash to provide a 100% return of the purchase price in around 3 years. We believe that based on the structure of the transaction, actions to be taken prior to closing, as well as post closing synergies, we will be able to improve the current gross margins of the Wolfspeed's RF business. That said, given MACOM's and Wolfspeed RF business' current revenue levels we anticipate modest gross margin pressure immediately following closing as certain post-closing synergies will take time to realize.

We believe the acquisitions announced during fiscal 2023 will be strategic for MACOM's capacity, capability and customer base for fiscal year 2024 and beyond. I will now turn the conversation back over to Steve.

[Stephen Daly, executive]

Thank you, Jack. MACOM expects revenue in fiscal Q1 ending December 29, 2023 to be in the range of $149 million to $153 million. Adjusted gross margin is expected to be in the range of 59% to 61%, and adjusted earnings per share is expected to be between $0.55 and $0.59 based on 72.2 million fully diluted shares.

In fiscal Q1, we expect industrial and defense and telecom revenues will be down or flat quarter-over-quarter and data center revenues will be up 10% quarter-over-quarter. Our guidance does not include any contributions from the pending acquisition of Wolfspeed's RF business, which we expect to close prior to the end of December.

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. Our level of engagement with leading customers is improving, and we have a robust opportunity pipeline. In short, we believe MACOM will be bigger, stronger and more profitable in fiscal 2024. I would now like to ask the operator to take any questions.

[Operator]

[Operator Instructions] And our first question coming from the line of Tore Svanberg with Stifel.

[Tore Svanberg, analyst]

Yes. My first question is on the industrial and defense business, especially near term, Steve, you said there's some puts and takes there with -- especially in industrial, perhaps some areas still doing okay, but others perhaps weak. So could you just elaborate on which of the segments that are holding up versus those that may potentially seeing some weakness?

[Stephen Daly, executive]

Sure. I would say, in general, across the board, our defense business is strong. So that segment is doing quite well. And it's our expectation that, that strength will continue as we move into 2024. On the industrial side, I would say that there's probably 3 areas that I would call out as being weak. One would be the Medical segment, which we support primarily with MRI systems and things like that. Second would be general sensors. These could be automotive traffic sensors or industrial sensors. And then the third would be our supporting the general RF and microwave test and measurement segment where we see our major customers' demand is quite weak.

[Tore Svanberg, analyst]

Yes. That's very helpful. And as my follow-up for Jack. Obviously, we're not including any financials from the [ Bolton ] acquisition this quarter, although, obviously, it's going to -- it sounds like it's going to close before the end of the quarter. But you mentioned some gross margin pressure initially. Could you maybe expand on the magnitude of that? I mean, are we talking about maybe a couple of hundred basis points? Or should we start to think about more potential more dilution than that?

[John Kober, executive]

Yes. Thanks, Tore. And I think you're referring to the [ Wolfspeed RF ] pending acquisition. So I think --

[Tore Svanberg, analyst]

I apologize.

[John Kober, executive]

Just wanted to make sure we were aligned. Yes. So there may be some slight dip that we may see as we work through the closing, but I wouldn't expect that to be that significant in to last for a longer duration. Our gross margin story remains intact and expectations are to be back up into the 60% range. And even as we work our way through the closing and shortly after that time period, there's a possibility that we could remain above the 60%. There's just a lot going on that we need to digest as we work our way through the closing period and integration time period.

[Operator]

And our next question coming from the line of David Williams with the Benchmark Company.

[David Williams, analyst]

Congrats on navigating this challenging environment. I guess, first maybe on the data center business. Do you expect to see any seasonality there? And how long do you think the continuation of demand can be sustained? Is it throughout 2024? Or do you see a period in which we might see maybe a step back in the data center to maybe slow a bit for you.

[Stephen Daly, executive]

Thank you for the question, David. So the data center, which is today our smallest segment is probably our most volatile segment. And I would probably characterize the revenue as dependent on ramps -- ramping up and ramping down as opposed to seasonality, sort of calendar-based seasonality.

Today, what we see is, certainly, we saw this quarter, very strong growth primarily from short-reach applications. And we believe that growth will continue as we're guiding 10% growth this quarter off of tremendous growth in Q4. As we look into '24 and even into our fiscal '25, we think the strength will remain, but there will definitely be a shift from what today is, let's say, 400 and 800 gig demand to more 1.6 terabit-based demand. And we feel we're on that cutting edge.

So we do believe there'll be volatility over the next 24 months as things turn on and turn off. But generally speaking, we think we're well positioned, and we'll have a good '24 and we'll see how things shake out in our fiscal '25.

[David Williams, analyst]

And then just if I recall, most of the Wolfspeed acquisition, most of the products are expected to kind of flow through that industrial side. How do you think about this segment? Just kind of given the macro weakness you're seeing and we've been hearing about on the industrial side. Anything changed there in terms of your short-term thinking and synergies or other fundamentals?

[Stephen Daly, executive]

Well, yes. And I think we have a lot of thoughts about the Wolfspeed business, and I really don't want to comment on sort of the -- how they characterize their business today. We'll certainly do that on our next earnings call when we talk very specifically about perhaps some of the changes we're going to be making and some of the focus that we'll make.

But I would highlight that it's a very strategic acquisition for us. They have compelling technology in growing markets, whether it's A&D, industrial or telecom. They have a tremendous built-in customer base today that really spans our industry. And they have a real strong portfolio of high-voltage, lower frequency process technology that today, MACOM does not have. So we're very excited about it. We've been working with the management team.

As Jack mentioned, we've gone through and done a lot of work to make sure that the resources that we bring over support our growth as well as financial targets. And we think we've done a reasonable job there trying to sort of pick the team that will ensure success in the future. So very excited about that, but I really can't comment about exactly their business today, and we'll talk more about that after the close.

[Operator]

And our next question coming from the line of Quinn Bolton with Needham.

[Quinn Bolton, analyst]

Echo my congratulations on steady execution in a challenging market. Steve, I wanted to kind of follow up on the data center question. You guys have seen some pretty strong growth in September and forecast to continue to grow in December. Admittedly off a low base, but it sounds like to transition to 400 to 800 and the future 1.6%. Modules is driving a lot of that growth. And I guess I'm wondering on the PMD side of the business, are you benefiting from a move back to more discrete PMDs that are silicon germanium or compound semiconductor based rather than CMOS-based as we move to those higher speeds? Do you see that trend to higher speeds benefiting your PMD portfolio?

[Stephen Daly, executive]

Right. So I would say that a few things. Certainly, the trend to the higher data rates is an area where we want to position ourselves. We use a wide range of process technologies, not just silicon-based but also [ 35 ] based. And so we'll make sure we bring the right technology to bear on the application. So I don't necessarily want to comment any further in terms of what flavors or what process of technology we're using for certain applications. That's a competitive -- that's competitive information, let's say.

The other thing I'll highlight is we have -- while we are seeing very strong growth on the higher data rates, we are seeing a lot of weakness at the lower data rates, including the [ NRC], both that 25 and 100G, whether it be AOCs or pluggable transceivers for the data center. So the data center -- our data center business is shifting. It's a bit of a mixed bag. But the good news is we have some real bleeding edge technology for those PMDs that you mentioned, specifically the TIAs and the drivers, the equalizers and we've really built out a really nice portfolio there.

And I have to highlight that within each one of these product categories, there's multiple products. We find that our customers are designing their systems in a very unique way. So oftentimes, we target applications in target footprints that are unique to those sockets. And given the speeds and the data rates, we feel like that's necessary. So this is not a commodity product. It's not something that's easily removed from a platform, let's say. And so for that reason, it has very attractive business attributes.

[Quinn Bolton, analyst]

And then my follow-up question on the data center business. I wanted to ask about the linear pluggable or just linear drive optics, kind of feels like at recent trade shows that [ Ecash and Open Compute Summit], everybody in the industry seems to be acknowledging that there's been progress made on linear optics. I'm just kind of wondering if you could give us an update as to what you're seeing on the linear side and when you may start to see linear drive or linear optics starting to move to production applications.

[Stephen Daly, executive]

Thanks, Quinn. So certainly, in our fiscal '24 is when you're going to really start to see linear drive kick in. And I would just add to that, that linear drive is not for all applications. It's really for applications where you have either a 100G or 200G per lane. So an [ 8 by 100 ] or an [ 8 by 200 ] is sort of the optimal case and then that being a short-reach application. So some of the other applications like 850G, those type applications are going to continue to use DSPs and gearboxes, and that's really not an area of the market we're focused on.

So I would just highlight that linear drive is not for all applications. It's not going to eliminate the necessity of DSPs within the data center. I think it's applicable in certain applications and those are the applications that we're focused on.

[Operator]

And our next question coming from the line of Karl Ackerman with BNP Paribas.

[Karl Ackerman, analyst]

Two questions, if I may, as well. I guess sticking to the datacom theme. Could you remind us which portion of your products are at 25 gig per lane and below? I ask because I'm hoping you can juxtapose the demand trends you're seeing across hyperscale versus on-prem and enterprise campus applications.

[Stephen Daly, executive]

So 25G or below would be products like clock and data recovery type products. It could be what we call combo chips, which could be a CDR and driver or CDR in TIA. I would say that's the bulk of the type of product we sell into that market. Then sort of a second degree to that would be some of our lightweight products, including some of our lasers.

[Karl Ackerman, analyst]

Okay. I guess pivoting to telecom then, how should we think about the linearity of your telecom segment outlook in fiscal '24 or over the next couple of quarters? I ask because several of your end customers suggest a mixed recovery but noted an inventory overhang for DWDM transceivers that may extend in mid-2024. So just curious to hear your thoughts on that segment.

[Stephen Daly, executive]

Yes. So in this case, I think, as you're defining telecom, your focus on the sort of optical segment or the long haul. So in this case, we would -- in our vernacular, we call that metro long haul business. We do think that there will be pockets of strength in 2024 with our metro long-haul business. We see that some of those networks are being upgraded and also as I mentioned in my script, we're participating in some of those transitions.

And I'll just highlight that these newer platforms are at 130 gigabytes. So they're extremely high frequency it's -- the equipment is extremely expensive, and that's an area where we want to position ourselves.

[Operator]

Our next question coming from the line of [ Dani Pace ] with Raymond James.

[Unknown Analyst]

A couple of questions. Steve, first on a little bit of a longer-term question. You talked about market share gains contributing to fiscal '23 growth. Could you maybe elaborate on that? What -- I guess, subsegments would end markets -- you are seeing market share opportunities. I guess where were the market share opportunities last fiscal year? And how should we think about going forward? What sort of opportunities do you see? And what sort of, I guess, top line contribution you expect from share gains?

[Stephen Daly, executive]

Sure. So the first thing I would just highlight is that we have a very diverse business, and we don't typically see a significant portion of revenue on any one product. So when we talk about gaining market share, it's a lot of small- and medium-sized wins at a lot of different customers. So I'll just highlight that right up front.

Certainly, we are gaining market share in industrial and defense, 18% CAGR over the past 3 years. That is due to the company's renewed focus on the market primarily. It's based on doing more custom development work, doing modules and subsystems for certain applications. And so we are really very focused on that market. Today, that market is about 50% of our total business at least it was in fiscal '23, 49%. And we think we have leading technology that will be a great interest to the major OEMs across this space.

The second thing I'd highlight is we're definitely gaining market share in satellite communications, both in ground stations as well as on the satellite themselves with our various components. So that's an area where we're definitely focused. We think this subsegment of the market will grow for us in fiscal '24 and sort of related to that is something I mentioned in the script, which is RF over fiber, which is a very attractive application within not only commercial communication systems, but also defense applications. And so those are just 3 general areas that we're focused on.

But remember, it's all about the new products. And so to the extent we can launch more and more products every year, that will be the driver for our growth. And this past year, we did 15% more new products than the prior year. And I mentioned in my script, our goal for fiscal '24 is to do 50% more new products. And certainly, that takes into account the closing of the Wolfspeed team in December and then adding their contributions to our metrics. So we are a product-driven growth company.

[Unknown Analyst]

Got it. And Jack, on the book-to-bill, it's good to see. It's -- I guess it came in at 1.1. And just trying to get some color on where you're seeing the most improvement? Is this being driven by any particular subsegment? Or I see that data center you're guiding for growth. But if you could just give us some color on what's driving this improvement? Because the other 2 segments seems to be just checking along at the bottom, if anything, maybe some declines in industrial. So just wondering what's driving the improvement in book-to-bill?

[John Kober, executive]

Yes. And with regard to the book-to-bill, we have challenges, as Steve had mentioned in some of his prepared remarks that we had gone through. But if you look at some of the strength that we had seen here in the current quarter, much of that was around defense as well as data center bookings that had come in. And some of these are longer-term type delivery arrangement. So they have longer lead times. So you'll see some of that benefit us as we work our way through fiscal year '24.

[Operator]

And our next question coming from the line Harlan Sur with JPMorgan.

[Harlan Sur, analyst]

In telecom, it just seems that all aspects of wired and wireless infrastructure money continues to be at low levels and obviously making that -- I think it's a little bit difficult for you guys to clear some of the excess inventories. But it does seem like quarter-over-quarter declines are shrinking. So does it feel like the telco business is at a bottom after 3 to 4 quarters of other shipping consumption? Have things like orders started to sort of flatten out here in telco?

[Stephen Daly, executive]

So unfortunately, I don't know the answer to that question, Harlan. And it's -- you're correct that the telecom -- our telecom segment has come down significantly. In fact, I think that the performance we had in Q4 was, I think, at a 3- or 4-year low. So just a few quarters ago, we were in the low $60 million run rate, and we had been at that run rate for 4 quarters.

So we really can't say with a lot of confidence what that -- where that's going in sort of in the broader sense. Year-over-year, down 24%. When we look out into our fiscal '24, we think that the data center will continue to be a strong market for us. We think the defense market will be a strong market for us. And we are the most worried about the telecom market. We think that certainly, it's weak now, and when it turns and how it turns and who turns has yet to play out.

[Harlan Sur, analyst]

I appreciate that. And then on the data center segment, in addition to the strong demand pull for AI, which is obviously driving a lot of strong demand for 100-gig per channel solutions from you guys, there's been one large cloud and hyperscaler that up until this point in time, has not started their broader data center footprint upgrade to 400 gig, which is more like 50 gig per channel. Is that U.S. player finally starting to deploy 400 gig? Or is still most of the data center strength for you guys still around AI and maybe some incremental networking capacity build-outs?

[Stephen Daly, executive]

Yes. So without talking customer specific, I would say that the strength that we're seeing we saw in our fiscal '23, and we think we'll continue to see will be at the higher data rates. So 200, 400 and 800 short reach, multichannel devices that can support those data rates. And then we have different levels of penetration at different accounts. And we're by no means omnipresent in the industry. We're a small player, but we have solid relationships not only with some of the ASIC manufacturers, but also the merchant DSP manufacturers.

We want to support them. If they're offering a DSP, we want to make sure that we have our drivers and TIAs designed in as reference components if possible. So that's where we're positioning ourselves. That's our focus. And then again, I'll just highlight that we've done a lot of work over the past 3 to 4 years. Developing a laser portfolio that would be competitive and we have a variety of lasers in low-rate production right now. It's been a bit disappointing in the past 12 months in terms of getting sort of a breakout for that product area, but we have some great technology there, including CW lasers, which can support silicon photonics and also laser arrays, which can support next-generation systems.

[Operator]

And our next question coming from the line of Mark Lipacis with Jefferies.

[Mark Lipacis, analyst]

I had a couple I did have a question on the 50% increase. Steve, you suggested that Wolfspeed is adding into that, which is why it's higher. So is there -- so would we think about a normal productivity improvement of another 15% organically and then the balance added from Wolfspeed, I'm wondering if you are accelerating on what appears to be a kind of a flattish or slightly growing R&D expense base?

[Stephen Daly, executive]

Yes. So I would say there's sort of 2 pieces there. One, we will have a full year contribution from our European semiconductor center. So there's a segment of products or a grouping of products that will come to market in 2024. So that was not there in '23. And then, of course, there will be a Wolfspeed contribution. And then there'll be some modest growth from our existing base MACOM. I think that's the way you should really look at it.

I'll just add that a lot of the work that our linear module systems group does we don't really include those in the product count. Most of their work is custom development and not made public.

[Mark Lipacis, analyst]

Got you. Okay. That's helpful. And then if you look at your revenues here, like peak to trough, assuming things don't go down from here, it looks like your peak to trough revenues like down 18%. Can you share with us your view, to what extent is that decline in inventory correction versus just a drop-off of end market consumption of your products?

[Stephen Daly, executive]

Thanks for the question. So I think certainly, inventory is an element of it. There's also end demand, and you see major carriers throttling back some of their spending. So there's certainly shifts within the end-user community, let's say, in certain segments of the telecom specifically. I think generally speaking, industrial and defense budgets are going up and will continue to go up. So that will be a secular benefit to our business.

I think we're in a good spot in the data center for the next few years. And certainly, on telecom, there's broad-based weakness due to a variety of reasons, some of which you've highlighted. We are not good at predicting the future, and we would definitely get it wrong. So it's -- we're aware of the situation where as a result of that, we're being very conservative with our financials. We're focused on generating cash. As Jack highlighted, we have been very reserved on our capital spending. When we look at to making investments, we want to make sure we get good returns, whether that is investments internally or looking at targets and acquisitions.

So this is the time when you want to be sort of conservative and generate cash. And that's our posture as a company. And with that, if we can continue to grow our portfolio and strengthen the portfolio, I think we will do just fine.

[Operator]

And our next question coming from the line of Robert Agan with Piper.

[Unknown Analyst]

This is Robert on for Harsh Kumar here. You guys talked about a little bit on China customers and revenue decreasing it and shifting over to Europe. Can you shed some more light on how you're thinking about that geography and whether or not a bounce back or any sort of recovery matters in your forecast going forward? So any updates on that would be nice.

[Stephen Daly, executive]

Thanks for the question. So we are definitely forecasting conservatively when it comes to growth within the China region. We, today, have facilities in 4 different cities. We have about 85 to 90 employees there that are focused on growing our telecom business, our data center business. There's still a significant amount of hardware that's supporting global networks that's manufactured, designed and manufactured in China.

So we will continue to have a strong presence and grow our presence to make sure that we're gaining market share in that area. That said, we are definitely investing in other areas to strengthen up our overall global footprint. And so we recognized a few years ago that we needed to strengthen our position within Europe. That was one of the drivers for our acquisition and to open up a small fab and we now call that MACOM European Semiconductor Center, and we want to build off of that.

So in our minds, having a balanced portfolio of products, customers and geographic revenue is the goal. And -- but to the extent that China continues to be a major player in the markets we're in, we will continue to support them.

[Unknown Analyst]

And just on the cost side as well as my follow-up. How should we be thinking about OpEx contribution as maybe revenues come back to more normalized levels following this inventory correction. I guess, we're in and around the 30% op margin going before this. Any color on recovery there would be as helpful as well.

[Stephen Daly, executive]

Sure. Maybe I'll say just a comment and then pass it to Jack for more complete answer. I would just highlight that the team here at MACOM did a great job managing our total OpEx. And if you compare our total OpEx from fiscal year '22 to fiscal year '23, it's almost flat for total OpEx. And so I think that's a credit to the work that the finance organization, our operations, R&D, everybody has really stepped up to try to manage overall expenses and we will continue to carry this footing. Jack, do you want to add to that?

[John Kober, executive]

Yes, that's helpful, Steve. And we do take a very disciplined approach to our operating expenses a lot of those operating expenses are within our research and development area. And as Steve had mentioned in his earlier response, making sure we're getting returns from our investments in those R&D OpEx numbers that we're spending is a critical area of focus for us. But along the way, we continue to make some structural-type changes to our overall organization, to continue to optimize it, and that's resulting in the stability we've seen in our operating expenses.

And also, we had with fiscal year '23, we had 2 new acquisitions come online, and we were able to absorb some of the additional operating expenses that came through those businesses by being disciplined with our base business. So I think there's still some leverage that we have. Obviously, as the top line grows, we will be adding some operating expenses. But I think we'll be very disciplined as we were going back to fiscal year '20 and '21 and into '22 when we were growing the top line and we were growing the operating expenses at a much lower rate than our revenue growth. So more of the same as we continue going into fiscal year '24.

[Operator]

Our next question coming from the line of Vivek Arya with Bank of America.

[Unknown Analyst]

This is Lauren Guy on for Vivek. So I'll just start with noting that inventory dollars seemed to come down sequentially in the quarter. Could you just speak a little bit on how you're managing inventory and utilization during the downturn? And if you can give any comments segment specific on how inventory is looking. That would be great.

[John Kober, executive]

Yes. No problem, Laurie. With regard to inventory, we were pleased with some of the reduction that we had seen here in the current quarter. Things continue to be challenged. We are careful in terms of where we invest our inventory dollars as well. We had noted this a couple of quarters back, where we did see a bit of an uptick in our inventory, and some of that was to support some of the orders and backlog that we had coming through.

It's a careful balance as we work our way through the cycles here in terms of maintaining the appropriate levels of inventory to support our customer needs. But we've got a number of different metrics that we look to across the business that we're working to try and manage. And I'll also add that we did have the 2 acquisitions that had come to us over the past fiscal year, so that was a bit additive to our inventory balances as well, and we're working through some of the integration with those businesses as well. And hopefully, we'll see a further refinement and improvement in some of the inventory metrics as we go forward but we are keeping a constant eye on the dynamics that we have across the business. So it's something that we pay close attention to.

[Unknown Analyst]

Okay. Great. And for my follow-up, just wondering how are you thinking about recent industry consolidation between Lumentum and Cloud Light and optical transceivers. How does that kind of impact your component first strategy?

[Stephen Daly, executive]

I don't think it changes our overall strategy.

[Operator]

And our next question is coming from the line of Matt Ramsay with TD Cowen.

[Sean O'Loughlin, analyst]

This is Sean Alain on for Matt. Just 2 quick ones for me. First off, I was wondering if you could talk about the long-term model a little bit more. I know that you guys at one point had this $1 billion revenue target and that got pushed out a little bit. But I think it also came with a maybe double-digit growth rate expectation. Obviously, a lot has changed since then. But I was just wondering how you're thinking about it from here.

[Stephen Daly, executive]

Thanks for the question, Sean. So achieving $1 billion in revenue is a question of not if but when. So -- and when we originally put that out there, we had targeted our fiscal '25 and this was going back maybe about 18 months or 2 years ago. And certainly, there's been a lot of headwinds in the industry that have slowed us down. So we definitely, over the past few quarters have stepped back from that target given our growth rate declining year-over-year, certainly, that makes sense.

Right now, we have a run rate of about $150 million if you annualize that and then add [ Wolfspeed ] on to that. You can see MACOM getting into the low $700 million run rate just by simple math, and then a 10% growth rate on that for a few years gets us into that $1 billion revenue range. So I think it's -- our crystal ball sort of says sometime in the late '25 or '26 time frame is not unreasonable. That would mean that we would have to put up some pretty strong growth numbers. So there's tremendous risk associated with that.

So -- but when we think about planning and execution and focusing on positioning ourselves, we -- that is the goal that we're targeting. And I'll highlight that the way we're going to get there is expanding our SAM and we're adding very new vectors of growth to our portfolio, and that should allow us to achieve these targets.

And the other thing I'll highlight is we will not sacrifice profitability for growth. We are focused on earnings per share. As I mentioned and Jack mentioned, $2.70 this year. We generated close to $200 million of net income for the full year. And as we grow over the next 2 to 3 years, we want to grow the top line, and more importantly, we want to grow the bottom line. And our model should support that. Our model consists of internal unique process technologies and products and going to the merchant market and being in running sort of a fabless business model. So we make full use of all of the major foundries on the silicon side. GlobalFoundries, TowerJazz, TSMC and others. So we think we have a strong fighting chance to achieve our targets, but there's lots of dynamics and lots of wood to chop between now and then.

[Sean O'Loughlin, analyst]

That's really helpful. And then a very quick clarification on the acquisition from Wolfspeed. Are there any regulatory impediments to closing that? Or is it just getting the paperwork in order?

[Stephen Daly, executive]

So there were 2 regulatory hurdles, which we've gone through. One is HSR waiting period, which expired and the second was a U.K. approval, which was received. So -- after that, it's just making sure that Wolfspeed and MACOM do the final work on aligning so that when we close, we will be operational and this is rather unique. Most companies would acquire a business and that integrate we are organizing in a way to have a lot of planning upfront so that when we close, it can be an instantaneous integration, so to speak. And so -- outside of that, there's nothing stopping us.

[Operator]

And so we have another question from Tore Svanberg from Stifel.

[Tore Svanberg, analyst]

Just 2 quick follow-ups. So Steve, first of all, you commented a little bit on the laser business, but I know it's been a bit sort of fits and stops there. And I'm just wondering if -- is it a market issue? Is it a yield issue? Is it because the technology is so unique? Just trying to understand when the laser business could really start to grow.

[Stephen Daly, executive]

So we -- MACOM was very late to the market with our 25G DFB laser portfolio. And so it's -- I would put it in the category of timing. And then when we really had our portfolio established and we're selling it in the market, our timing just was not good in terms of generations and focus of a lot of the transceiver companies. We're starting to break through some of that, and we're starting to gain traction. So we don't see a performance issue. We don't see a yield issue. It's not a cost issue. It's really just knocking out the competition, so to speak, and that takes time, and it's taking more time than we had originally thought.

The other thing I'll add is as we go into the next fiscal year, we are adding -- we plan to add EMLs to the portfolio. So this will mean CW lasers, FP lasers, DFP lasers and EMLs. We do not manufacture VCSELs. But we are -- the next add-on to the product line will be EMLs, which generally speaking, are considered high-value lasers and they generally command higher price points.

[Tore Svanberg, analyst]

That's great. And one quick one for Jack. For turns this quarter, should we sort of assume a similar level as you achieved in the September quarter?

[John Kober, executive]

Yes. And I think you're referring to our turns business where we receive orders and ship them in the same quarter. Where we've been in the, I'd say, the mid-teens. So I think that's a safe assumption as we go forward.

[Tore Svanberg, analyst]

Great. Thank you very much, and congrats.

[Operator]

I will now turn the call back over to Mr. Steve Daly for any closing remarks.

[Stephen Daly, executive]

Thank you. In closing, I would like to thank the entire MACOM team for their outstanding effort and commitment during fiscal 2023. MACOM is fortunate to have such hard-working and dedicated employees, which make these financial results possible. And we all look forward to welcoming the Wolfspeed team to MACOM. I'm confident that together we can achieve great results. Thank you.

[Operator]

Ladies and gentlemen, that [ concludes ] our conference for today. Thank you for your participation. You may now disconnect.