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Welcome to MACOM’s First Fiscal Quarter 2023 Conference Call. This call is being recorded today, Thursday, February 2, 2023. 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 financial results for the first fiscal quarter of 2023. 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, 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 financial results for the first quarter of fiscal 2023. When Jack is finished, I will provide revenue and earnings guidance for our second fiscal quarter, and then we will be happy to take some questions. Revenue for our first fiscal quarter of 2023 was $180.1 million and adjusted EPS was $0.81 per diluted share. Our financial performance translated to strong cash flow from operations of $38 million, and we ended the quarter with $595 million in cash and short-term investments on our balance sheet. Our book-to-bill ratio for Q1 was 0.9. This was the first time in eight quarters that our book-to-bill was less than 1. Our turns business or revenue booked and shipped within the quarter was approximately 13% of our total revenue. Overall, our sales team executed well in Q1, albeit in a challenging market environment. On our last earnings call, we highlighted that demand was weakening in our three end markets. Today, I can report that the business environment has not improved. For this reason, we expect our Q2 book-to-bill ratio to be less than 1. Weakness is most prevalent at our largest 5G telecommunications and broadband access infrastructure customers as well as many of our data center customers. Generally speaking, our major customers in these markets are slowing orders, and they are focused on reducing inventory levels. Beyond our main customers, broadly speaking, demand is also weak. However, one bright spot is that our Industrial and Defense end market continues to perform well, and demand for our products is strong. Additionally, our backlog entering fiscal Q2 remains at historically high levels despite the current softness in bookings. I think it’s important to emphasize that we balance our short-term financial goals with a long-term perspective. And despite the current slowdown, we remain confident in our strategic plan and our future growth prospects. MACOM is positioned to capitalize on a number of secular trends across our end markets related to growing bandwidth needs and increasing data rates, which in turn drive the need for higher power levels and higher frequency transmission signals. Our customer systems are more complicated than ever before and they need specialized suppliers like MACOM to provide high performance solutions. Many of our products have long life cycles and produce revenue for years after they’ve been introduced with the potential to generate best-in-class financial returns. We view the diversity of our technologies, products and end markets as an inherent strength of our company, helping to provide financial stability. And finally, the quality of competitiveness of our products released to the market over the past few years is outstanding, and it continues to improve. Turning to our end markets for fiscal Q1. Industrial and Defense revenue was $77.2 million, down 1.8% sequentially, Telecom was $61.5 million, down 0.8% sequentially and Data Center was $41.5 million up 10.2% sequentially. The sequential growth in Data Center was driven by a combination of increased shipments of our Crosspoint switches and networking products, both of which had been supply constrained during much of FY2022, along with a modest increase in our high performance analog portfolio. While we see softness in current large production programs, we remain engaged in a wide range of exciting new opportunities, which we believe will drive MACOM’s future success. I would like to highlight a few recent engagements to illustrate the breadth of our customer base and applications. All of these wins have multi-million dollar revenue potential. Our diode team continues to be a leader in the market for discrete control products in diode circuits, including high power switching and high power limiters. We have secured a new high power limiter socket on an Aegis shipborne radar platform. The team has also won new sockets on automatic toll detection platforms and achieved two design wins on an automotive wireless communication system. Our high performance analog, or HPA team, continues to diversify their revenue and has successfully penetrated a Tier 1 U.S. defense OEM with custom IC design wins. The application is a mobile Manpack high power radio. They also secured a large IC development contract from a major customer to support next-generation and DDR memory test infrastructure. Our MMIC team is actively supporting various U.S.-based radar and satellite system requirements that utilize our trusted foundry and gallium arsenide technologies. Specifically, our MMIC team has won close to $10 million in development contracts across a wide range of customers, functions and solutions. Our metro long haul design team is supporting data center customers that are designing next-generation coherent light or

Thanks, Steve, and good morning, everyone. The first quarter of fiscal 2023 was in line with our expectations with sequential improvements in revenue as well as record operating margin and earnings per share. Revenue for the first quarter was $180.1 million, up 1% quarter-over-quarter. The sequential increase was driven by a modest increase in data center revenue. On a geographic basis, sales to domestic U.S. customers represented approximately 49% of our fiscal Q1 results compared to 50% in the fourth fiscal quarter of 2022. Q1 sales to China customers represented approximately 23% compared to approximately 26% for both our Q4 and full year fiscal 2022. I would also like to highlight that sale to European customers over the past four quarters has been approximately 6%. And as Steve highlighted, focusing on growing revenue in this region is a strategic priority for us. Adjusted gross profit was $112.7 million, or 62.6% of revenue flat sequentially. As we’ve discussed in the past, MACOM utilizes a flexible manufacturing model leveraging our Lowell and Ann Arbor fabs, as well as third-party foundries. This allows us to access a portfolio of proprietary leading process technologies and also provides financial leverage as business cycles change. Total adjusted operating expense was $53.9 million consisting of R&D expense of $33.9 million and SG&A expense of $20 million. Total operating expenses were down sequentially by $600,000 from fiscal Q4 2022 due to slightly lower R&D expenses. Adjusted operating income in fiscal Q1 was $58.8 million, up from $56.9 million in fiscal Q4. Adjusted operating margin was a record 32.7% for fiscal Q1 sequentially up from 32% in Q4. We are closely managing our operating expenses as we balance investments in the business while maintaining profitability. Over the longer term, we see leverage in our operating model as we introduce new products and they contribute to future revenue growth. Depreciation expense for fiscal Q1 was $6 million and adjusted EBITDA was $64.9 million. Trailing 12 months, adjusted EBITDA was $244.7 million as compared to $234.8 million in Q4 fiscal 2022. Adjusted net interest income for fiscal Q1 was $1 million, up from $40,000 in fiscal Q4. The higher returns on our growing portfolio of short-term marketable securities more than offset the increased interest expense associated with our floating rate term loan. Our adjusted non-GAAP income tax rate in fiscal Q1 remained at 3% and resulted in an expense of approximately $1.8 million. Our cash tax payments were $300,000 for the first quarter, down slightly from fiscal Q4 2022. We expect our adjusted income tax rate to remain at 3% for the remainder of fiscal year 2023 and into fiscal year 2024. Fiscal Q1 adjusted net income was $58 million compared to $55.1 million in fiscal Q4. Adjusted earnings per fully diluted share was $0.81, utilizing a share count of 71.4 million shares compared to $0.77 of adjusted earnings per share in fiscal Q4. Now moving on to balance sheet and cash flow items. Our Q1 accounts receivable balance was $112 million, up from $101.6 million in fiscal Q4. As a result, day sales outstanding were 57 days compared to 52 days in the prior quarter. Our accounts receivable balance reflects an increase over prior periods due primarily to the increase in sales and the timing of shipments in the quarter. Inventories were $121.3 million at quarter end, up by $6.4 million sequentially. We had a modest increase in certain finished goods due to customer requested delivery postponements occurring during the quarter. Inventory turns were 2.2 times in Q1, down slightly on a sequential basis from 2.3 times in the prior quarter. The quality of our inventory remained strong and based on lower customer orders and shortening lead times, we expect to reduce our net inventory balance as we progress through fiscal year 2023. Fiscal Q1 cash flow from operations was approximately $38.3 million. As we’ve noted on our prior call, we experienced a sizable increase in cash flow from operations during our September quarter due to the timing of working capital items and our current fiscal Q1 figure represents a moderated operating cash flow level. Capital expenditures totaled $9.6 million for fiscal Q1, up from $7.7 million in the prior quarter. We plan to continue to make CapEx investments to expand our fab capacity and expand technical process capabilities over the next few quarters. We still expect fiscal 2023 CapEx to be in the range of $40 million. As we’ve done in the past, we will continue to carefully manage our capital spending, balancing investments in new technologies, process development capabilities and efficiency programs with the overall profitability of the business. In addition to pursuing CHIPS Act funding, I would also like to highlight that we expect the CHIPS Act to provide an advanced manufacturing investment tax credit of 25% for certain of our capital expenditures placed into service after January 1, 2023. This tax credit will apply to certain qualifying capital items, and we do not expect the associated cash from these credits to be received until fiscal year 2024. We expect these tax credits will be recognized as an offset to depreciation expense over time. And as such, we do not anticipate this tax credit to have a material impact on our financials for fiscal year 2023. Cash, cash equivalents and short-term investments for the fiscal first quarter were $594.7 million, up from $586.5 million in fiscal Q4 2022. Our first quarter gross leverage is down to less than 2.5, and our net debt is now less than $10 million. I would also like to highlight that during the quarter, the MACOM team has engaged in our annual stockholder outreach to better understand and discuss governance items with our top stockholders as we approach our annual meeting on March 2, 2023. Before turning it back to Steve, I’d like to note a few items. First, our Q2 guidance includes plans to manage our discretionary spending down by approximately 10%, including reduced variable compensation, outside service fees and supplies expense to name a few. Through these efforts, we expect to support healthy margins and remain cash flow positive over the course of these business cycles. Second, MACOM is excited to acquire OMMIC’s valuable European-based operation. It’s new and differentiated technology, as well as a dedicated and talented workforce at what we believe to be a favorable valuation. In the short term from a financial perspective, OMMIC should not have a meaningful impact on our revenue or EPS. However, longer term as we invest in the business, we expect that it will provide growth and profitability opportunities, which will drive additional stockholder value. I look forward to 2023 and the continued investments MACOM plans to make in our people, plant and processes, and also to welcome the OMMIC team to MACOM. I will now turn the discussion back over to Steve.

Thank you, Jack. MACOM expects revenue in fiscal Q2 ending March 31, 2023 to be in the range of $166 million to $170 million. Adjusted gross margin is expected to be in the range of 61.5% to 63.5%. And adjusted earnings per share is expected to be between $0.76 and $0.80 based on 71.5 million fully diluted shares. This guidance does not include any revenue contributions or financial impact from the plant OMMIC acquisition. In Q2, we expect our sequential Industrial and Defense and Data Center revenues to be down slightly in the balance coming from weakness in our Telecommunications business. As I have noted, we maintain a long-term perspective on executing our strategy. We are confident that we can continue to improve our financials and take market share in the months and years ahead. Our product portfolio is stronger than it was one year ago, and we are confident we can meet or exceed our targets. I would now like to ask the operator to take any questions.

Thank you. [Operator Instructions] Now first question coming from the line of Quinn Bolton with Needham. Your line is open.

Hey guys. Congratulations on the strong 2022 results. I guess as we look into the first part of 2023, obviously, you’re guiding down for March on weakness and demand and some inventory correction. But do you have a sense, how long do you think the inventory correction across your end markets you will last? Do you think that’s largely a first half of the calendar year event and you see recovery and revenue as you look into the second half of the year? Or can you give us any sort of senses how you think the revenue pattern may look this year?

Yes, good morning, Quinn. So it’s really difficult for us to be giving guidance on customers inventory trends. So I think that’s something that we would struggle to give an accurate answer on. When we – so that’s the sort of the first part of your question. And then when we look at the balance of our fiscal 2023 and we look at the markets and our backlog and make projections what we’re thinking is at least two of our three markets will be up. We believe I&D, Industrial and Defense, will continue to grow during the course of the year. And we also believe that our data center will continue to do well and should certainly grow on a year-over-year basis. The one area that we’re probably most concerned about is the telecom. As everybody knows, we had a very, very strong FY 2022 with 30% growth. And so this year we do see that weakening. As I mentioned on my prepared remarks, 5G and the broadband markets are weak at the moment, and it’s difficult for us to understand when those might turn. And the other point I’ll make is generally speaking, there is a macro overhang on many of the – our markets. And so it’s difficult for us to make these longer-term projections. I hope that answers your question, Quinn?

It does. Thank you, Steve. And then I guess, either for Steve or Jack, I guess as you look at the OMMIC acquisition, it sounds like they maintained manufacturing operations with the fixed expense of operating the three-inch fab plus having an idle six-inch fab. And so I guess, can you just walk us through sort of the impact as you close that transaction? It sounds like there’s enough revenue through that fab that largely offset any fixed expenses of maintaining those operations. Is that the right way to think about it?

I think that’s right. I think you should think of their overall revenue run rate at sort of that 1% to 2% of our total revenue. So it’s a very low number today. And so our plan is as we talked about to not only build out the product line, market the product line globally, but also begin to migrate their products to the six-inch line. And in doing all of that, we think that the business has tremendous potential for growth. And let me just maybe highlight if I could. This is the first acquisition that the MACOM, new management team has done. And I just like to say that the rationale for this acquisition I think are important for investors to understand. OMMIC brings to MACOM an expertise that we don’t currently have today. As everybody knows, we just launched to production our 0.14 or 140 nanometer process. OMMIC is working on 100 nanometer and 60 nanometer and even 40 nanometers. So that’s – they are further along in developing and producing those products, which would take MACOM years to do. So tremendous amount of time spent or saved by bringing OMMIC into the MACOM portfolio. Second, they have a tremendous barriers of entry. They have an incredible epitaxial growth capability which is quite unique. They have developed some very interesting metal contact technology to improve high frequency performance which will very much complement the work that we’re doing. This business is also not a commodity business. These products will have high margins, high ASPs, and will be targeting medium to – small to medium niches. And when we look at the market opportunity, we size that to be about a $100 million SAM. So our goal is to take this business today that arguably is hovering just below breakeven, and we want to drive it to be a growing profitable part of our business. That will take time, but we think when we’re successful, we will be in a leadership position at the millimeter wave frequencies. And we look forward to that position.

Thank you, Tom. So I’ll take the first part of that question, then Jack can handle the second piece. As you know, last year for MACOM, Industrial and Defense was a record year. And I believe Q4 may have even been Q4 FY 2022 was a record quarter, and we’re seeing continued opportunities to grow. Most of this is coming from gaining market share not only in Defense, but also Industrial. And we’ve talked over the last year or two that we believed over the long term, I&D would continue to be a strong end market for us. So we think we’re doing a lot of good things in this market. We actually are projecting that market will grow low single digits for the full year. In terms of the industrial ordering pattern, I think there are pockets of weakness for sure. But generally speaking, what we see is the larger companies are burning down their inventories, while the medium and smaller companies are continuing to order on a regular sort of more normal basis. And then before I turn it over to Jack about the OpEx, I’ll just highlight that. As we mentioned in the script, we focus very much on short-term financial performance as well as long-term financial performance. And the team here at MACOM has done a super jaw dealing with that day when Huawei went on the entity list, when we had to deal with COVID shutdowns. And then while we had to deal with now the macro global issues and the softness in the industry. So we have a very talented team that is ready to address issues as they come and try to get in front of them. And that’s a little bit of what you’re seeing as we think about Q2 and throttling back some of our spending. So we were ready for this. We were not surprised by sort of the current environment and we’re taking actions to address those and Jack can add some detail to that.

Thank you. One moment for our next question. And our next question coming from the line of Vivek Arya with Bank of America. Your line is open.

Hi, this is Blake Friedman on for Vivek. Thanks for taking my question. I’m just focusing on revenue from a geography perspective. Based on your comments and seems like sales to China customers were down about 10% sequentially in the quarter. Can you quantify the potential headwind heading into Q2? Or in general, can you provide any commentary on demand trends by geography? Thanks.

Yes, this is Jack, Blake. With regard to the China revenues, I think we had mentioned that China represented 23% of our total revenue compared to 26% back in Q4 and for our full fiscal year. So not down quite as steep as what you were referring to. But it’s an area that we thought was worth noting. [Indiscernible]

Yes, I’ll just add to that comment. So China continues to be a strategic market for MACOM. We see a lot of growth opportunities, not only with our high performance analog products, our laser and light wave products but also a lot of the RF and microwave components that we sell into the industrial markets there. They also have some emerging markets including green energy and electric vehicles. And so we’re constantly looking for opportunities to break into those applications with our technology. And then since you brought up the issue of geography, I just wanted to sort of highlight again that we believe that there’s tremendous growth opportunities in Europe in setting up a manufacturing facility and a wafer fab in the backyard of some major OEMs inside of the European Union will help us take our European-based revenue, which is about 6% up into the double digits.

Got it. Understood. Thank you. And then just as a quick follow-up. On past calls, I believe you mentioned a $1 billion revenue target. I think we believe it was fiscal 2025. Just given the weaker macro – weakening macro today, just curious if there’s any adjustment to that target?

Well, we’re not changing the target of $1 billion. We’re still confident we can hit that. And as we’ve talked about in the past, that is an aspirational goal. I think what’s changed here in the last number of months is really the time line associated with that given the current claimant. I think it’s reasonable to assume that we’ll be shifting the timing of that $1 billion of revenue out in time. And so we haven’t fully reviewed that. I’ll highlight that. Our targets come through a very detailed bottom-up analysis, which typically is aligned with our strategic planning process. And so I would suspect in the July and August time frame when we complete that cycle, we’ll be evaluating where we think we’ll be in fiscal 2025 and fiscal 2026. But it’s fair to – I think, to your point, it’s fair to assume that the environments are providing a headwind, which one would conclude would push that out in time.

Thank you. [Operator Instructions] And our next question coming from the line of Harsh Kumar with Piper Sandler. Your line is open.

Yes. Hey, thanks, guys. Appreciate you guys are clamping on OpEx to maintain profitability as investors we do appreciate that very much. Jack and Steve, I wanted to ask about gross margins. They were steadily going up for a while and now for the last couple of quarters, you’ve been kind of stuck in the 62%, 62.5% kind of range. But I know you have plans and aspirations to be higher than that. So I was curious, just mid-term to long-term, what would be some of the things that might make that margin go up to maybe the mid-60%s if potentially that’s your goal? And then I have a follow-up.

Sure. So I’ll take the first part of that question and maybe Jack can add on. So we are – I think the gross margins that we’re delivering today really represent the business and the portfolio that exists today. And the way we’re going to drive our margins from the low-60s to the high-60s is through new product development and products that can come in to higher price. Examples would be the entire OMMIC portfolio where these are the highest frequency products in the market, leading cutting-edge performance. That portfolio would be an example of a business that we would expect to come into our portfolio that would drive margins often be accretive. Second, our 140-nanometer GaN process that we just announced, as we talked about, that’s a $300 million SAM that we’ll be addressing. And we believe that our latest products coming from that process will drive margins up. So our theme here at MACOM is the highest frequency, highest power and highest data rate. And if we stay on that edge, within the markets and the technologies that we develop, we will be successful driving the margins up. And so that is thematically how we will do it. I’m not sure we’re going to be driving margins up by operational and executional issues. Maybe there’s additional potential there. But moving to the next phase is about the technology and the strength of your differentiated products.

Very helpful – sorry.

And just to add to that, Harsh, in terms of our gross margins as we work before, we’ve been pleased with some of the progress we’ve made over the past number of quarters. I think if you look back over, I think, it’s seven or eight quarters, we’ve been above that 60% number and have made sequential improvements. And with our flexible manufacturing model that we have with certain of our products being fab internally and certain of them also going out to third parties, that provides us with some protection over the varying different business cycles that allows us to ramp as well. So that kind of protects our overall gross margins. From a gross margin point of view, from as we look at our operations and all the contributions that the teams have been making over the past couple of years, we feel like we’re in a much stronger place and those improvements that we’ve made will continue as we go forward.

Thanks, guys. And for my follow-up, I wanted to go back to a question that Tom O’Malley asked earlier. So maybe phrase the question a little bit differently. In the core industrial space, the hard core industrial space where you play, there are not too many companies that are calling out any weakness in that. They’re all – most of the other sort of industrial players are calling out weakness in consumer. So I wanted to understand if maybe it’s a function of the growth you had last year or you’re actually starting to see some issues with one or two customers or if it’s broader based than that, where maybe we should put our blinders on and start focusing on that area as something of interest, but just curious if you could provide some more color around that.

Yes. And I think it really comes down to MACOM specific industrial business, which may be different than some of the bellwethers that service that industry with microcontrollers or large ASICs. So we have – so that would be the first point. I think you’re seeing MACOM specific performance. We sell, for example, into door openers, sensors, medical equipment and test and measurement. So I would say that those markets have been performing well for MACOM, and we expect that to continue. But we don’t consider ourselves really a bellwether. So I wouldn’t read a lot into our trend the fact that we’re maybe deviating from industry trends.

Thank you. And our next question coming from the line of David Williams with Benchmark. Your line is open.

Hey, good morning. Thanks for the question and congrats on the execution here. I wanted to ask, maybe first just kind of about China and some of the demand, and there was a question on this earlier, but thinking more about the demand environment as we head into the second quarter, maybe into the back half of the year, it feels like the freedom of movement there. And once we kind of get through some of this COVID impact, that feels like a market that could rebound fairly quickly. And just kind of curious how you’re seeing that if that’s a possibility and if that could potentially be an upside that we can look forward to?

Yes. Thank you for the question. So we think it is possible, and there could be some upside. But with that said, we are taking probably a little bit more of a conservative view just coming off of Chinese New Year. We haven’t really – people are sort of getting back to work. We have been monitoring the inventory levels within the channel in China, and we’re seeing some positive trends there. But quite frankly, we think it’s way too early to call which way China is going to go over the next three months to six months. But I do think there’s the potential of it improving. There’s also the potential that things will remain at a muted pace. So the way we’re going to counter that is we’re going to continue to introduce products. Obviously, we’re going to focus on North America and Europe. But also when China really starts to open up and we can send more and more of our staff into China to engage with customers, we think that will be the activity that really ignites better growth and stronger revenue for MACOM. The COVID overhang has really slowdown and hampered our ability to engage customers directly. Today, MACOM has about just under 100 employees in China. We operate in four different cities. These are typically sales and application centers that are visiting customers, and they’ve been doing a great job keeping MACOM in front of customers, but we also feel like we need to rotate our business development folks and application engineers and to drive that growth. So if that happens towards the middle of the calendar year, we think good things will fall from that.

Great color. Thanks so much for that. And then maybe for my follow-up is just around the data center and any areas of particular weakness or maybe strength that you’re seeing and maybe anything from a customer or even areas that are better or worse. So we’re just kind of color there would be helpful, I think.

Yes. So just one point I want to make about the data center in our revenues this year because we are hearing a lot of – and seeing a lot of negative trends inside the data center. But our – we actually think our revenue will be reasonably strong this year because a lot of the products we couldn’t ship last fiscal year will roll into this fiscal year. And so that will provide a growth opportunity for MACOM. And that includes many of our Crosspoint switches that had complex packaging or substrate materials included in the product. So supply chain is improving. That’s helping our revenue this year for the data center. Outside of that, I would say, generally speaking, the short-reach, NR

Thank you. And our next question coming from the line of Tore Svanberg with Stifel. Your line is open.

Yes. Thank you and good morning. Steve, I was hoping you could talk a little bit more about OMMIC and where the revenues are today. So I mean it sounds like maybe it’s a $10 million business. Should I assume that that’s primarily in satellite today? And as you obviously grow this business, will satellite still be sort of the main segment? Or are there other areas where you intend to introduce the technology as well?

Right. So I just want to be a little careful about talking too specifically about their business, given we haven’t closed the deal yet. So what I – there’s a tremendous amount of information on their website. I would encourage everybody to visit ommic.com. They actually list some of their legacy customers. And what you’ll see based on that public information is really a blend of satellite manufacturers, some North American and European defense OEMs. So because they’ve been operating on a 3-inch line, they have typically been targeting satellites, satellite manufacturers as well as defense applications. And so as we think about the business in the future, we want to bring them into the high-volume commercial worlds, including many different markets that MACOM today is already in, but not at the higher frequencies. Remember, their products can operate up to W band. So it’s just – provides the company a great opportunity to grow. But you’re thinking about it the right way. Generally speaking, they’re in satellite and defense applications today.

That’s very helpful. And perhaps a question on sort of business dynamics. So you mentioned you turned about 30% this quarter. I know there’s been nothing normal the last few years in the semiconductor industry. But is sort of 15% to 20% terms where you expect the business to run it going forward? And maybe you can even comment on how much turns you need to get to the midpoint of your guidance for the March quarter?

So we have seen an increase in the turns business. Last quarter, I believe it was 10% – or the quarter before Q1. And then in Q1, it was 13%. So we do see a trend of increasing turns business. We think this is coming from the fact that lead times are coming down, cycle times are coming down. Many customers are now waiting and buying, knowing that suppliers like MACOM have inventory. So we’re on the other side of that curve where people are not placing long lead orders, they’re actually returning to, let’s say, a more normal dynamic in performance. We can’t really comment on what percent were booked to meet our current targets. I would say that we’re following the same methodology that we have in the past in terms of looking at our backlog, making assumptions on what we think will book and ship within the quarter. So – but we are seeing that trend of book-to-bill increase, and we think that’s a good thing. And I’ll just highlight that one – I think an important point here, which is we had a tremendous booking performance last fiscal year. We had a 1.1:1 book-to-bill for our fiscal 2022. And everybody knows in Q4, we had a book-to-bill of 1 and then last quarter, 0.9. So we are in a very strong position regarding our backlog. We don’t have consumer exposure. Our top 10 is about 30% of our total revenue and no big 10% customers, and no one product is more than 2% of our revenue. So we truly have a very diversified business. And so I think that’s important to note.

Right. If that’s true, then that would certainly support MACOM strategy, we, today do not sell LDMOS. We focus on gallium arsenide HBT, pHEMT, and, of course, GaN. So to the extent that different market segments are focusing on again, I would consider that a good thing for MACOM. I would also highlight that when we look at the overall GaN opportunity, you have the commercial and communications sector and you have industrial and defense. And we believe that those markets are about equal in size, but the profit is on the defense side of the line, and we are very focused on that.

Thank you. And our next question coming from the line of C.J. Muse with Evercore ISI. Your line is open.

Yes, good morning. I was hoping you could speak a little bit to kind of cyclical metrics. I guess as you think about the three different businesses and perhaps the sub-segments within each, how are you thinking about kind of normalization of lead times backlog? And I guess, what normal visibility will look like once we kind of get through inventory correction and whatever kind of potential shortages that remain?

Great. Thanks for the question. So it’s hard to summarize that in aggregate because of our diverse portfolio as well as the technologies. As you know, we’re building in manufacturing two terminal diodes all the way up to PAM-4 DSP. So the manufacturing cycle, the test time, the back end time, all of these are very different across the portfolio and our customers know that. So depending on where we’re selling our products, our customers have very different ordering patterns. And so when we think about normalized – a normalized environment, I just think it’s hard to parse that here. So I’m not sure I can really answer your question specifically.

I guess, what I’m trying to get at is how much of your, I guess, relative optimistic view for 2023 is based on kind of current backlog versus not?

So I would say that it’s not necessarily based on backlog. It’s based on looking at the markets because we still need to book a significant amount of business to achieve the goals that we need to. So we’re making assumptions based on a bottoms-up sales forecast where we identify customers and programs and part numbers and in speaking with customers, getting an understanding of their future demands. And so when we talk about the fiscal year, we – that’s the data we’re looking at, not specifically in only our backlog. And so as you go out in time, as you can imagine, there’s more risk, and that’s one of the reasons why we generally don’t give full year guidance. Clearly, in this environment, I think it would be even more difficult to give full year guidance.

Thanks so much.

Thank you.

[Operator Instructions] And our next question coming from the line of Richard Shannon with Craig-Hallum. Your line is open.

Well, thanks guys for taking my question. Maybe one digging into the telecom side of the business, Steve, I’m checking my notes, and hopefully, I got them correctly here, calling out the areas of weakness here with 5G and broadband. I just want to confirm that you’re not seeing in other areas within telecom specifically coherent. And then within those two weaker segments, 5G and broadband, are you seeing different dynamics here either by differences in customer activity levels of inventory or expectations of when those businesses return to more normal patterns.

Right. So I would say that if I heard you correctly, are we seeing weakness in coherent? Was that your question?

Yes, I’m wondering if that was…

Yes. I would say that we are definitely seeing a bit of weakness primarily due to inventory adjustments. And then when we look at the weakness in 5G and broadband, there are very different dynamics there, very different markets, particularly in broadband, we have large CATV customers that we believe have a significant amount of inventory, and that’s really the back story with broadband. And then on 5G, we think there’s inventory burn down from our major customers primarily on the RF side, so front end – things like front end modules or amplifiers.

Okay. Perfect. That’s great. And then following up on the topic of OpEx, I may have missed the kind of team here, but you talked about some reductions here going into the March quarter here. They sound mostly structural in nature. So just want to make sure that’s the case here. And then is there a pattern we should see from an absolute dollar basis going through the rest of the year.

Yes. And Richard, this is Jack. I would say a majority of the items are not structural. There is some of that in there in our guide going into Q1, but it’s more on the discretionary side as you look to what we’re doing from an OpEx standpoint. So having said that, as you look a little bit further out, there will be some rebounding as some of those discretionary items are pushed out into future periods. But amongst all the things that we do here, we want to make sure we’re maintaining an appropriate level of profitability. So we will be judicious with all of our spending as we go forward.

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. In closing, I would like to thank our employees for their contributions this past quarter. We look forward to closing the acquisition and welcoming the OMMIC team to MACOM. Have a nice day.