MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC. The following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and the notes thereto included elsewhere in this Quarterly Report on
Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
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"MACOM," "MACOM Technology Solutions ," "MACOM KV CAPS" and related logos are trademarks ofMACOM Technology Solutions Holdings, Inc. All other brands and names listed are trademarks of their respective owners. Cautionary Note Regarding Forward-Looking Statements This Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report on Form 10-Q contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements regarding our business outlook, strategic plans and priorities, expectations, anticipated drivers of future revenue growth, industry trends, the potential impacts of COVID-19 on our future operations and results, our plans for use of our cash and cash equivalents and short-term investments, our ability to meet working capital requirements, estimates and objectives for future operations, our future results of operations and our financial position and other matters that do not relate strictly to historical facts. Forward-looking statements generally may be identified by terms such as "anticipates," "believes," "could," "continue," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "seeks," "should," "targets," "will," "would" or similar expressions or variations or the negatives of those terms. These statements are based on management's beliefs and assumptions as of the date of this Quarterly Report on Form 10-Q, based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and the 2021 Annual Report on Form 10-K. We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We design and manufacture semiconductor products for Telecommunications ("Telecom"), Industrial and Defense ("I&D") and Data Center industries. Headquartered inLowell, Massachusetts , with operational facilities throughoutNorth America ,Europe andAsia , we design, develop and manufacture differentiated semiconductor products for customers who demand high performance, quality and reliability. We have more than 70 years of application expertise, combined with expertise in analog and mixed signal circuit design, compound semiconductor fabrication (including gallium arsenide ("GaAs"), indium phosphide ("InP") and specialized silicon), advanced packaging and back-end assembly and test. We offer a broad portfolio of thousands of standard and custom devices, which include integrated circuits ("IC"), multi-chip modules ("MCM"), diodes, amplifiers, switches and switch limiters, passive and active components and complete subsystems, across dozens of product lines serving over 6,000 end customers in three primary markets. Our semiconductor products are electronic components that our customers incorporate into larger electronic systems, such as wireless communication systems including basestations, high capacity optical networks, data center applications, radar, medical systems and test and measurement applications. Our primary end markets are: (1) Telecom, which includes carrier infrastructure such as long-haul/metro, 5G and Fiber-to-the-X ("FTTx")/passive optical network ("PON"), among others; (2) I&D, which includes military and commercial radar, radio frequency ("RF") jammers, electronic countermeasures, communication data links, satellite communications and multi-market applications, which include industrial, medical, test and measurement and scientific applications; and (3) Data Center, which includes intra-Data Center, Data Center Interconnect ("DCI") applications, at 100G, 200G, 400G, 800G and higher speeds, enabled by our broad portfolio of analog ICs and photonic components for high speed optical module customers. COVID-19 Impact COVID-19 has spread throughout areas of the world where we operate and resulted in authorities implementing numerous measures to try to contain the virus. As a result of these measures and the spread of COVID-19, we have modified our business practices and may further modify our practices as required, or as we determine appropriate. While these measures, as well as other disruptions, have impacted our operations, the operations of our customers and those of our respective vendors and suppliers, such impacts did not, through the three months endedDecember 31, 2021 , have a material impact on our consolidated operating results. Given the significant continued economic uncertainty and volatility created by the pandemic, it is difficult to predict the nature and extent of impacts on the demand for our products. The continued spread of COVID-19 could cause a further economic slowdown or recession and could result in adverse impacts to our overall business, such as increased credit and collectability risks, adverse impacts on our supply chain, asset impairments, declines in the value of our financial instruments and adverse impacts on our capital resources. The degree to which the COVID-19 pandemic impacts our future business, financial condition, results of operations, liquidity and cash flows will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the duration and spread of the outbreak, its severity, any resurgence of 18
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COVID-19 cases, including as a result of variant strains of the underlying virus, actions taken to contain the virus or treat its impact, the availability and efficacy of vaccines against COVID-19, how quickly and to what extent normal operating conditions can resume, and the economic impact on local, regional, national and international markets. For additional information on risk factors that could impact our future results, please refer to the section entitled "Risk Factors" in the 2021 Annual Report on Form 10-K. Description of Our Revenue Revenue. Our revenue is derived from sales of high-performance RF, microwave, millimeter wave, optical and photonic semiconductor products. We design, integrate, manufacture and package differentiated semiconductor-based products that we sell to customers through our direct sales organization, our network of independent sales representatives and our distributors. We believe the primary drivers of our future revenue growth will include: •continued growth in the demand for high-performance analog, digital and optical semiconductors in our three primary markets; •introducing new products using advanced technologies, added features, higher levels of integration and improved performance; •increasing content of our semiconductor solutions in customers' systems through cross-selling our product lines; •leveraging our core strength and leadership position in standard, catalog products that service all of our end applications; and •engaging early with our lead customers to develop custom and standard products. Our core strategy is to develop and innovate high-performance products that address our customers' most difficult technical challenges in our primary markets: Telecom,I&D and Data Center . We expect our revenue in the Telecom market to be driven by 5G deployments, with continued upgrades and expansion of communications equipment, and increasing adoption of our high-performance RF, millimeter wave, optical and photonic components. We expect our revenue in the I&D market to be driven by the expanding product portfolio that we offer which services applications such as test and measurement, satellite communications, civil and military radar, industrial, scientific and medical applications, further supported by growth in applications for our multi-market catalog products. We expect our revenue in the Data Center market to be driven by the adoption of cloud-based services and the upgrade of data center architectures to 100G, 200G, 400G and 800G interconnects, which we expect will drive adoption of higher speed optical and photonic components. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements. The preparation of financial statements, in conformity withU.S. GAAP, requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and could be material if our actual or expected experience were to change unexpectedly. On an ongoing basis, we re-evaluate our estimates and judgments. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date of filing of this Quarterly Report on Form 10-Q with theSEC . These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and material effects on our operating results and financial position may result. The accounting policies which our management believes involve the most significant application of judgment or involve complex estimation, are inventories and associated reserves; goodwill and long-lived asset valuations and associated impairment assessments; revenue reserves; share-based compensation valuations and income taxes. For additional information related to these and other accounting policies refer to Note 2 - Summary of Significant Accounting Policies to our Consolidated Financial Statements included in Item 8 of Part II, "Financial Statements and 19
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Supplementary Data," of the 2021 Annual Report on Form 10-K and Note 1 - Basis of Presentation and Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Results of Operations The following table sets forth, for the periods indicated, our statements of operations data (in thousands):
Three Months Ended
December 31, January 1,
2021 2021
Revenue $ 159,620 $ 148,504
Cost of revenue (1) 65,477 68,242
Gross profit 94,143 80,262
Operating expenses:
Research and development (1) 35,470 36,936
Selling, general and administrative (1) 31,604 31,252
Total operating expenses 67,074 68,188
Income from operations 27,069 12,074
Other income (expense):
Warrant liability expense (2) - (11,130)
Interest expense (1,693) (4,734)
Other income (expense), net (3) 114,908 (4,504)
Total other income (expense), net 113,215 (20,368)
Income (loss) before income taxes 140,284 (8,294)
Income tax expense 1,457 674
Net income (loss) $ 138,827 $ (8,968) (1) Includes (a) Amortization expense related to intangible assets arising from acquisitions and (b) Share-based compensation expense included in our condensed consolidated statements of operations as set forth below (in thousands):
Three Months Ended
December 31, January 1,
2021 2021
(a) Intangible amortization expense:
Cost of revenue $ 2,505 $ 3,877
Selling, general and administrative 6,782 8,116
(b) Share-based compensation expense:
Cost of revenue $ 1,033 $ 871
Research and development 3,599 3,554
Selling, general and administrative 5,317 5,706
(2) Represents changes in the fair value of common stock warrants recorded as
liabilities and adjusted each reporting period to fair value. See Note 10 -
Stockholders' Equity to our Condensed Consolidated Financial Statements in this
Quarterly Report on Form 10-Q.
(3) The three months ended
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The following table sets forth, for the periods indicated, our statements of operations data expressed as a percentage of our revenue:
Three Months Ended
December 31, January 1,
2021 2021
Revenue 100.0 % 100.0 %
Cost of revenue 41.0 46.0
Gross profit 59.0 54.0
Operating expenses:
Research and development 22.2 24.9
Selling, general and administrative 19.8 21.0
Total operating expenses 42.0 45.9
Income from operations 17.0 8.1
Other income (expense):
Warrant liability expense - (7.5)
Interest expense (1.1) (3.2)
Other income (expense), net 72.0 (3.0)
Total other income (expense), net 70.9 (13.7)
Income (loss) before income taxes 87.9 (5.6)
Income tax expense 0.9 0.5
Net income (loss) 87.0 % (6.0) %
Comparison of the Three Months Ended
Three Months Ended
December 31, January 1, %
2021 2021 Change
Telecom $ 55,822 $ 51,532 8.3 %
Industrial & Defense 73,146 61,618 18.7 %
Data Center 30,652 35,354 (13.3) %
Total $ 159,620 $ 148,504 7.5 %
Telecom 35.0 % 34.7 %
Industrial & Defense 45.8 % 41.5 %
Data Center 19.2 % 23.8 %
Total 100.0 % 100.0 %
In the three months ended
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In the three months endedDecember 31, 2021 , our Data Center market revenue decreased by$4.7 million , or 13.3%, compared to the three months endedJanuary 1, 2021 . The decrease in the three months endedDecember 31, 2021 was primarily due to a decrease in sales of our high-performance analog Data Center products due to supply constraints. Gross profit. Gross margin was 59.0% and 54.0% for the three months endedDecember 31, 2021 andJanuary 1, 2021 , respectively. Gross profit was$94.1 million and$80.3 million for the three months endedDecember 31, 2021 andJanuary 1, 2021 , respectively. Gross profit increased for the three months endedDecember 31, 2021 as compared to the three months endedJanuary 1, 2021 primarily as a result of higher sales, favorable revenue mix, production efficiencies, as well as decreases in intangible amortization and warranty expense, partially offset by increases in employee-related costs. Research and development. Research and development expense decreased by$1.5 million , or 4.0%, to$35.5 million , or 22.2% of our revenue, for the three months endedDecember 31, 2021 , compared to$36.9 million , or 24.9% of our revenue, for the three months endedJanuary 1, 2021 . Research and development expense decreased in the three months endedDecember 31, 2021 primarily as a result of lower equipment rental charges and supplies and foundry costs. Selling, general and administrative. Selling, general and administrative expense increased by$0.4 million , or 1.1%, to$31.6 million , or 19.8% of our revenue, for the three months endedDecember 31, 2021 , compared to$31.3 million , or 21.0% of our revenue, for the three months endedJanuary 1, 2021 . Selling, general and administrative expense increased in the three months endedDecember 31, 2021 primarily due to an increase in employee-related and variable selling costs, offset by a decrease in intangible amortization. Warrant liability expense. There was no warrant liability expense for the three months endedDecember 31, 2021 , compared to an expense of$11.1 million for the three months endedJanuary 1, 2021 . The expense for the three months endedJanuary 1, 2021 was driven by a change in the estimated fair value of common stock warrants, primarily driven by the increase in the underlying price of our common stock, which was recorded as a liability at fair value. DuringNovember 2020 , all of the warrants were exercised and 857,631 shares of common stock were issued. For additional information refer to Note 10 - Stockholders' Equity to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Interest expense, net. In the three months endedDecember 31, 2021 , interest expense, net was$1.7 million , or 1.1% of our revenue, compared to$4.7 million , or 3.2% of our revenue, for the three months endedJanuary 1, 2021 . The decrease for the three months endedDecember 31, 2021 is primarily due to the adoption of ASU 2020-06 resulting in a lower effective interest rate on our long-term debt and the decrease in our long-term debt balance. Other income (expense), net. In the three months endedDecember 31, 2021 , other income, net was$114.9 million , or 72.0% of our revenue, compared to other expense, net of$4.5 million , or 3.0% of our revenue, for the three months endedJanuary 1, 2021 . The increase in the three months endedDecember 31, 2021 is primarily due to the gain on sale of our equity method investment of$118.2 million . See Note 3 - Investments to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information. Provision for income taxes. Our income tax expense and effective income tax rates for the periods indicated were (in thousands, except percentages): Three Months Ended December 31, January 1, 2021 2021 Income tax expense 1,457 674 Effective income tax rate 1.0 % (8.1) %
Our estimated annual effective tax rate for the year ended
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