Leanne Sievers - EVP, IR, Shelton Group John Croteau - President and CEO Bob McMullan - SVP and CFO.

Blayne Curtis - Barclays Vivek Arya - Bank of America Merrill Lynch Steven Smigie - Raymond James Harsh Kumar - Stephens, Inc. Tore Svanberg - Stifel Nicolaus Mark Lipacis - Jefferies & Company Quinn Bolton - Needham & Company.

Good afternoon, and welcome to M/A-COM Technology Solutions’ Fiscal Second Quarter 2015 Financial Results Conference Call. At this time all participants are in a listen-only mode. At the conclusion of today’s conference call instructions will be given for the question-and-answer session.

As a reminder this conference call is being recorded today, Tuesday, April 28, 2015. I would now like to turn the call over to Leanne Sievers of Shelton Group, the Investor Relations agency for MACOM. Leanne, please go ahead..

Good afternoon, and welcome to M/A-COM Technology Solutions second quarter 2015 earnings conference call. I’m Leanne Sievers, Executive Vice President of Shelton Group, MACOM’s Investor Relations firm. With us today are MACOM’s President and Chief Executive Officer, John Croteau; and Senior Vice President and Chief Financial Officer, Bob McMullan.

If you’ve not yet received a copy of the press release, you can obtain a copy on MACOM’s website at www.macom.com under the Investor Relations section. Before I turn the call over to Mr.

Croteau I’d like to remind our listeners that management’s prepared remarks and answers to your questions contain forward-looking statements which are subject to risks and uncertainties.

Because actual results may differ materially from those discussed today MACOM claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and refers you to a more detailed discussion of risks and uncertainties that could result in those differences in MACOM’s filings with the Securities and Exchange Commission, including its current report on Form 8-K and quarterly report on Form 10-Q filed on February 2, 2015.

Any projections as to the company’s future performance represent management’s estimates as of today, April 28, 2015 and MACOM assumes no obligation to update these projections in the future.

The company’s press release and management’s statements during this conference call will include discussions of certain non-GAAP measures and financial information.

These financial measures and a reconciliation of GAAP to non-GAAP results are provided in the company’s press release and related current report on Form 8-K, which was filed with the SEC today and can be found at the Investor Relations section of MACOM’s website.

For those of you unable to listen to the entire call at this time a recording will be available via webcast for 30 days in the Investors Relations section of MACOM’s website. And now I’d like turn the call over to MACOM’s President and CEO, John Croteau. John, please go ahead..

Thank you Leanne and welcome everyone and thanks for joining us today. I will begin today’s call with an overview of our second quarter results for fiscal 2015 and then turn the call over to Bob McMullan, our CFO, who will review our financial performance in further detail.

I’ll then conclude today’s prepared comments by providing an overview of our execution during the quarter and an update on some of our key growth drivers followed by guidance for the fiscal third quarter of 2015.

Straight to the results, in our first full quarter, including BinOptics revenue for the second quarter was $124.9 million and came in above the top end of our guidance.

Gross margin was 53.1% coming in just above the midpoint of our guidance due to strength in our high margin optical business, partly offset by strong demand in our lower margin automotive business. Net income came in at $21.3 million or $0.41 earnings per diluted share, based on our new share count after the February offering.

Looking at our end markets, networks was up strong quarter-on-quarter on the back of our optical business as we begin to see 100 G metro deployments ramp. Automotive was similarly up strong quarter-on-quarter due to the increase in global demand at Ford.

As expected multi-market demand snapped back from the broad-based seasonal softness we saw in Q1, returning close to our fiscal fourth quarter run rate. Similarly A&D performed as expected with demand slightly down quarter-on-quarter within the range of usual lumpiness we see in Radar program timings.

We anticipate that this will improve as early as our fiscal fourth quarter as active electronically scanned array radar programs begin to ramp. In Submarine we are very pleased with another solid quarter of execution by the team. Let me now turn it over to Bob to review our fiscal second quarter financials in more detail. .

Thank you John and good afternoon everyone. During the course of my comments as well as those made by John, all income statements, amounts and percentages will be discussed on a non-GAAP basis and are provided to enhance the understanding of our core operating performance.

A reconciliation of each figure to the most comparable GAAP measure is included in today’s earnings press release. Revenue was a $124.9 million representing a sequential increase of 8.7%, compared to reported revenues of $114.9 million in the prior quarter, and an increase of 16.2% compared to the $107.5 million in the fiscal second quarter of 2014.

The 2014 fiscal quarter included revenues from the CP business sold in May of 2014 of $9.7 million. Adjusting for the CP business revenue grew 27.8% over the prior year’s fiscal quarter. Networks grew $67.1 million, aerospace and defense was $19.5 million, automotive was $22.5 million and multi-market was $15.8 million.

Gross profit in the fiscal second quarter was $66.3 million or 53.1% of revenue, compared to $61.7 million or 53.7% of revenues in the prior quarter and $53 million or 49.3% in the fiscal second quarter of 2014.

Gross margin benefited from selling higher gross margin products but down 50 basis points due to a different product mix in the fiscal first quarter, including higher automotive revenue.

Operating expenses for the second quarter; total operating expenses were $36 million compared to $34.6 million in the prior quarter and $31.6 million in the prior year’s quarter. The overall increase in operating expense was the full quarter’s inclusion of BinOptics expenses.

Research and development expense for the second fiscal quarter was $18.7 million. This compares to R&D expense of $18.5 million in the prior quarter and $17 million in the fiscal second quarter of 2014.

R&D as a percentage of revenue represented 15% in the fiscal second quarter compared to 16.1% in the previous quarter and 15.8% in the prior year’s quarter. The expense increase was due to the inclusion of BinOptics’ expenses, offset by lower variable compensation expense.

Selling, general and administrative expenses for the fiscal second quarter were $17.3 million. This compared to SG&A expense of $16.1 million in the prior quarter and $14.6 million in the prior year’s quarter.

SG&A as a percentage of revenue represented 13.9% in the fiscal second quarter compared to 14.1% in the previous quarter and 13.6% in the prior year’s quarter. The expense increase was due to inclusion of BinOptics expenses and higher commission expenses offset by lower variable compensation expense.

Income from operations was $30.3 million or 24.3% of revenue. This compares to $27.1 million or 23.6% of revenues in the prior quarter and $21.4 million or 19.9% of revenues in the prior year’s quarter.

Solid gross profits and leveraging of our global infrastructure drove the continued improvement in operating income and margin in the fiscal second quarter, further towards our goal of 30% operating margin.

EBITDA or earnings before interest, taxes, depreciation and amortization was $34.1 million, up from $30.6 million in the prior fiscal quarter and $24.8 million in the prior year’s fiscal second quarter. This represents growth of 11.4% sequentially and 37.4% year-over-year.

Interest expense was $4.3 million in the fiscal second quarter, even with $4.3 million in the fiscal fourth quarter. $100 million of proceeds of the primary shares sold in February were used to pay down our revolving credit agreement.

Turning to income taxes, our effective income tax rate for the fiscal second quarter was 18%, the same as the prior fiscal quarter and 23.6% in the year-ago quarter. Our cash taxes paid in the fiscal second quarter were just 3%.

Our fiscal quarter net income was $21.3 million or $0.41 per diluted share, near the top of our range of our previous guidance, even as the effect of the additional shares outstanding for the $4.5 million primary offering we completed in February, compared to fiscal first quarter net income of $18.7 million or $0.38 per diluted share and net income of $15.2 million or $0.32 per diluted share in the prior year’s quarter.

This represents EPS growth of 7.9% sequentially and 28.1% year-over-year. The share count to compute EPS was 52.5 million shares in the fiscal second quarter, 49.2 million shares in the fiscal first quarter and 48.2 million shares in the fiscal second quarter of 2014.

Fiscal second quarter cash from operations was $13.9 million compared to $2.1 million in the fiscal first quarter and use of cash of $6.6 million in the fiscal second quarter of 2014. Working capital increased with the acquisition of BinOptics.

Turning to the balance sheet; at fiscal quarter end, our cash and cash equivalents were approximately $74 million; outstanding long-term debt was $341 million after the pay down of $100 million of the revolving credit agreement. We have available a $130 under the existing revolving credit agreement for future use.

Accounts receivable of $89.4 million compares to $79.5 million at the end of the prior quarter. Days sales outstanding were 65 days compared to 63 days at the end of the prior fiscal quarter. Inventory was $84.1 million, compared to $89.2 million in the prior quarter. Inventory turns were 2.8 times compared to 2.4 times in the prior fiscal quarter.

Capital expenditures in the fiscal second quarter was $11.1 million or 8.9% of revenue compared to 2.6% of revenues in the fiscal first quarter. The majority of the CapEx was for the plant expansion of laser capacity in the Ithaca and Lowell fabs.

Depreciation expense on property and equipment for the fiscal second quarter was approximately $3.8 million as compared to $3.5 million in the fiscal first quarter. Now I’ll turn the call back over to John. .

Thanks Bob. I’d like to begin by providing an update on our recent acquisition of BinOptics. As many of you know on December 15, 2014 we successfully completed the acquisition of BinOptics Corporation and kicked off our 100 day integration exercise. It’s now clear that BinOptics provides strategic upside potential beyond that originally anticipated.

The deal has emerged as a catalyst for our networks business overall, raising MACOM to strategic vendor status in some of the largest telecommunications OEMs worldwide.

For example in the last quarter this transaction enabled us to negotiate strategic supply agreements for much sought after BinOptics lasers and other products spanning the breadth of our networks portfolio.

We expect our new strategic supplier status to help drive our optical and photonics products front [ph] position as well as share of wallet at major customers worldwide. We are right on track to meet our two-step goal of doubling unit capacity by the end of June, while quadrupling unit capacity by the beginning of calendar year 2016.

Step one in Ithaca, we have successfully identified and addressed key yield and throughput bottlenecks which we believe will enable doubling of capacity by the end of June. One byproduct of doubling capacity would be material cogs reductions that in turn should allow us to expand gross margin.

On the second step of capacity expansion I'm proud to report that we've already produced high yielding Indium Phosphide laser wafers at our [indiscernible] facility in [indiscernible] which builds confidences in our ability to achieve that capacity expansion by the beginning of 2016.

This warrants some clarification, doubling unit capacity does not linearly equate to doubling revenue as some have inferred. Part of the incremental demand to be serviced is naturally at lower ASPs. That said, capacity expansion will result in material cogs reductions that should allow us to aggressively expand our addressable market.

We're now confident that our cogs reductions will outpace ASP declines allowing us to expand markets, grow share and still meet our target gross margin model of 60% for this new high growth business for MACOM.

In summary on BinOptics, I'm extremely proud of our team and their ability to execute yet another strategic acquisition with rapid integration. With the main integration actions behind us you'll see BinOptics fully rolled up in to MACOM's financial projections and performance as we report going forward.

All right moving on; as we mentioned last quarter, we've been working to realize the full potential of our GaN strategy. We're a year into transferring process modules with two high volume manufacturing partners that are currently running qualification wafers in parallel in two target production lines.

During the remainder of 2015 we expect to qualify the process and the initial products with the goal of volume production in 2016. Our manufacturing partners were chosen based upon their manufacturing scale and cost structure and ability to service the most challenging customers and applications, notably 4G LTE base stations.

We believe these partnerships will deliver manufacturing scale and cost structure that to date was previously unavailable to the compound semiconductor industry.

This in turn will knock a whole new set of RF energy applications with the ability to drive hundreds of millions of units of demand and the potential for transformational revenue impact in the years to come.

Reducing this vision to practice I'm proud to say that MACOM will be showcasing it's GaN 4 game technology and initial products at the upcoming IMS trade show in Phoenix, Arizona May 19th through the 21st.

Delivering performance that matches expensive GaN on silicon carbide at a cost structure below that of incumbent LD [ph] mass technology MACOM’s Gen 4's GaN is positioned to realize the potential of our technology and supply chain partnerships.

Now moving over to the optical space, with the recent news of deployments such as Verizon’s selection of Cisco and Cienna to deploy next generation 100G metro networks we believe that the metro market will drive the next phase of our 100 gig optical growth.

We have seen an inflection point in our demand in the last quarter for optical components across the board feeding into these deployments.

We've established a pre-eminent position in design servicing the 100G metro market due to our breadth of semiconductor technology coupled with our expertise in packaging optoelectronics and photonics products in the high performance packages. Moving forward we see this as a key growth driver for MACOM for years to come.

Stepping back and looking at our full portfolio in balance, demand in our broad based business across many of our end markets recovered from seasonal softness in Q1, close to the previous quarter run rate. Looking forward we hear the reports of currency effects beginning to impact semiconductor industry results.

First off we transact the majority of our business in US dollars. That said a stronger dollar does make our product to more expensive to certain customers and may delay orders or impair short term business entirely. Currency effects are very hard to quantify so we remain cautious.

Our strategic investments have resulted in a balanced and diversified portfolio that should enable us to outgrow our peers by a factor of 2X to 3X. We remain bullish with the future of our optical deployments in GaN more than compensating for the slower growing parts of our portfolio.

As I mentioned in the past, disruption resulting from consolidation in our corner of the industry continues to benefit MACOM, whether it be customer design wins or access to talent that was previously unavailable. We are seizing the opportunity to diversify our leadership team and deepen our bench for continued execution and competitive share gains.

A great example of this, effective this quarter, Thomas Hwang is firmly in the saddle as our Senior VP of Worldwide Sale. His selling strategy and structure, new to MACOM is in my experience best practice in the industry bar none.

Thomas’ model covers multiple selling methodologies from securing orders and share of wallet for catalog product through designing and complex RF and microwave and high speed networking solution. With the addition of BinOptics and our breakout networks the timing of Thomas joining MACOM could not have been better.

He has already proven instrument in realizing many of our recent customer wins. On a similar note I am proud to say we have successfully retained all key players from the BinOptics team.

Most notably, Alex Behfar, Founder and CEO whose vision spans entirely new applications for photonic technology, everything from mass storage to hyperscale data centers and basic productivity, all new fields of long-term secular growth that will benefit from etch capacitive technology.

I would like to close today’s scripted remarks by thanking the team for yet another quarter of solid execution. It’s clear that we have the right strategy, addressing the right secular growth drivers with the correct technology, intellectual property and leadership team to assure long-term success for MACOM and our shareholders.

Moving over to the guidance, for the fiscal third quarter MACOM expects another quarter of solid execution with revenue expected to be in the range of $126 million to $130 million. Non-GAAP gross margin is expected to be between 51% and 54% and non-GAAP earnings per diluted share between $0.38 and $0.41 based on 55 million shares outstanding.

Operator, you may now open the call to questions..

[Operator Instructions]. And our first question comes from the line of Blayne Curtis of Barclays. Your line is open. Please go ahead. .

Hey, guys, thanks for taking my question. Maybe just to start off, if you can just talk about end of June by segment, if there is any variances between the different segments, that would be helpful..

Blayne can you repeat that? We didn’t catch it all, the first part of the….

I am just asking about, in your outlook for June, if you could provide any color in terms of directional by segment that would be helpful..

Yes, I would say the strongest growth that we are anticipate is actually on the network side, continued growth on the optical business, modest growth in multi market and A&D business and effectively flat in automotive..

Okay, thanks. And then John, I just want to follow-up with your question, you obviously are adding the capacity for BinOptics.

I was just curious with your comments about the revenue wouldn’t necessary equate timing wise to when you add the capacity but when do you think you can actually increase the revenue in that business, is it next year story or is it still kind of back half this year you can see some uptick?.

Actually with the fourth fiscal quarter, which is the third calendar quarter, actually we will see a slight lift this quarter in that business but that’s really where we see the full impact of the capacity expansion.

Let me clarify my comments about the doubling in revenue versus doubling unit capacity, there were a few reports published that inferred that our revenue in that business would double and it is not quite a doubling effect and the rational is quite logical.

When anytime in a capacity constraint you always service the higher quality, the higher ASP revenue. The logical extension of that is when you expand your capacity then the incremental demand you service is going to be at somewhat lower ASPs. So it is not a one-for-one linear doubling of revenue.

So we just want to make sure people are modeling the right assumptions into the plan..

Great.

And then just finally Bob if you can just talk about the gross margin midpoint of that guidance is about 100 basis points down, can you just talk about what the moving factors within that thing?.

Blayne, I think that’s pretty consistent where we have been in the last three quarters with respect to the margin, gross margin range. It's 51 to 54. So again it's a guidance number. I think overall there are, on the -- just on the edges there is some [indiscernible] kind of same, like in force [ph] things.

But again we're very comfortable that this is a stepping stone to the 60% overall target. .

Yes, Blayne actually let me add a comment. The previous two quarters we’re careful to emphasize that we had a perfect storm in terms of very favorable mix. So the slight decrease this time is really due to fact that we got some strength in automotive which is at the lower end of our margin business.

And as Bob said our guidance is kind of the same as previous quarters. And depending on how the mix comes, I mean we could end up at the upper end versus middle end and theoretically at the lower end. .

Okay, thanks. .

You're welcome. .

Thank you. Our next question comes from the line of Vivek Arya of Bank of America Merrill Lynch. Your line is open. Please go ahead. .

Thanks for taking my question.

One more on the June guidance, when you look at the growth that you are targeting, are you already including some effect, I think John you mentioned some headwinds from FX but does it you already include that and just how much is that and are you seeing any additional headwinds from the slowdown in base station deployments for example or a consolidation between networking OEMs.

I'm just trying to get a sense for if there are any headwinds that you see in the June quarter guidance that you've already baked in. .

Yes. So I would say there is some stuff like we have limited exposure to base stations. We did have some high power switch business, that was nice business but not really material compared to the exposure that other folks have. So yes that's softening a little bit frankly it's within noise of the overall puts and takes for our business.

So I would say less so on that. It's hard to describe the other -- on the multi-market in broader -- broad-based kind a catalog business. It isn't things that we see, it's the things that we don't see that concern us with the currency effects, I mean we transact business primarily in dollars, so there isn't a direct impact.

Our concern as the behavior of customers may change in terms of delaying orders or having some business impaired entirely. So I would just describe it more that we're cautious in our guidance rather than guiding down because of some known problem. .

Got it and then for my follow-up, Bob if you could give us a sense of how we should think about OpEx.

Now that you have the full quarter of BinOptics OpEx already in the numbers, as we look out the next several quarters do you anticipate any big need for any specific R&D or other programs?.

We are forecasting expense increases, $1.5 million to $2 million sort of the next two quarters. There are some specific areas where we are investing and continue to see the OpEx grow here along with the increase in margins and revenues. .

Got it. One last one if I may. We know that NXT is trying to sale their RF amplifier business. I'm wondering if that depending on who they sell it to does it have any implication on your GaN strategy over the next few years at all. .

No, I would consider -- NXT we always consider them to be not a natural competitor, the DMOS technology is pretty clearly the incumbent for 4G LTE 3G base stations. The home next generation of GaN is really a different set of players. So I guess it could go to someone with a GaN portfolio that could end up implicitly being a threat.

We are actually quite confident that our GaN on silicon position is very powerful, regardless of what other flavor of GaN is brought against us. So I would say if anything that disruption that would occur could only play in our favor. I don't see it really playing against us in any material way. .

Terrific, thank you. .

You're welcome. .

Thank you. Our next question comes from the line of Steve Smigie of Raymond James. Your line is open. Please go ahead..

Great, thanks a lot guys. I just wanted to follow-up on the BinOptics a little bit in terms of the doubling and I think ultimately quadrupling capacity there.

So in terms of new parts is it roughly a trade off in terms of size so if you bringing on shifts that for pawn [ph] or something versus a chip for a 100G optical of kind of the same size and builds up the wafers that way, so we should think about as a one for one exchange or is it much more complex in that. .

I'd say there is a lot of levers. That is one of them but I think on a apples-to-apples basis it's genuinely doubling of capacity. But of course a large part of the market, the existing TAM for those lasers is and part is an access. So logically speaking a lot of the incremental demand that we would be servicing is indeed in excess.

And that's in a more ASP constrained environment so that's exactly much as -- ..

Okay. can you talk a little bit about what kind of mix you might be thinking over the course of the next 18 months roughly between the lasers versus the PONs [ph] for like 100G lasers versus PON..

Well it's an interesting equation because fundamentally, the access market is where the action is today, very healthy business in fiber backhaul and mobile infrastructure. And the future is by orders of magnitude greater in datacenter. So time dimensionally 100G is the fastest growing but as growing from a relatively smaller number.

So in the short term when we talk about doubling or quadrupling capacity implicitly it applies to a greater position of access.

It's really a leading capacity towards getting a cost structure that's very attractive for datacenters because if yeah the different products but the cost structure of lasers is based upon the same, I think the factory utilization, yields overhead structure and so on. .

Okay great. And just a quick question about your GaN solutions. So I think you said in upcoming conference you're going be talking actually about your GaN on Silicon Carbide solutions I thinks as your fourth generation. So can you talk a little bit about your GaN strategy going forward.

Obviously have a certain markets where you play -- on silicon carbide and then certain markets you'll have GaN on silicon. So can you talk a little bit about how those two pieces should kind of develop and grow over the next 18 months. .

Yes, actually one correction, our Gen 4 GaN is actually again on silicon. And it is real breakthrough because we have now demonstrated in volume production ability for the performance in terms of efficiency and power gain which will be two critical specifications for GaN performance to exactly match the performance of GaN on silicon carbide.

But the cost structure as you know for GaN on silicon is much closer to LDMOS. In fact we have the 4X benefit of power density versus LDMOS. The cost structure of GaN on silicon is actually less than LDMOS when you normalize for die cost. So it's really a breakthrough in terms of next generation of our power systems.

Because you don't have to go to the expense of GaN on carbide, GaN on silicon carbide to get the performance. So for commercial applications notably 4G LTE base stations this is the last step in terms of product and technology delivery to actually make it viable to basically take out LDMOS..

Okay great. And then if I could just ask a little bit about aerospace and defense so again over the next year, you’ve obviously got a bunch of radar applications ramping but same time you've got I think some defense wins ramping.

So can you talk a little bit about how you see those pieces of that business ramping over the next year?.

Yeah so we've got some program wins that are in the airborne defense space where they use a radar. Those will begin material revenue contribution as early as our fourth fiscal quarter.

Even more wonderfully we've got a lot of traction than what we have talked about last year at our Analyst day in [indiscernible], which was kind of in advanced development with MIT Lincoln Labs.

And then the next quarter or so I expect to be able to talk much more publicly about some commercial breakthrough as where that's going to be brought into mainstream defense as were those radar applications.

And I can say tell people that are both from a defense industry standpoint as well as civil, talking about this is disruptive in terms of cost structure of radar systems .So as that comes to fore, as we can become fully transparent in terms of who we’re working with and how that’s going to be pretty compelling and that will ramp over the course of 2016 especially ’17.

There are some programs that have already been bid and will be awarded in the summer/fall timeframe. So we’ll leave it at not that when you start adding up that capability it starts arriving our optical and again potential from the end market growth potential. .

That’s great, thank you very much. .

Thank you. Our next question comes from the line of Harsh Kumar from Stephens. Your line is open please go ahead. .

Yes thanks for letting me ask a I had a couple of quick questions could you, we’ve heard from a couple of companies that China is actually seeing a lot of strength in wireline.

I'm wondering since you play in that area and you play in that territory if you could be the clarifier or just have some commentary on this statement?.

When you say wireline you mean…?.

Optical. .

Optical, yeah absolutely so there are some government programs that are we’ve heard both two and three air programs from different customers the guys who know, and I believe there was 20% growth in the PON market and they expect that to remain stable for the next two to three years.

That in fact was what triggered the shortage of laser supply that I’d been referring to with BinOptics acquisition and what we had in the scripted remarks. .

Hey, thanks about clarification and then John I couldn’t help but notice but in the R&D numbers you guys put up despite the fact that BinOptics or BinOptics was supposed to your research intent to your R&D actually didn’t go up by much at all was there any specific reason John or Bob or was it just the way the numbers fell down this quarter?.

That’s an interesting question and so believe it or not if we could spend more in the laser and photonic solutions we would it’s just a limited talent pool but one can grow up on so we do our best to spend more but it’s on track. .

Okay and then my last question was you’re starting to generate some well hopefully quarters out you will start to generate some cash.

What would be the primary use of cash at this point in time would you just be to build up the balance sheet or would it be to look at the debt and start to pay that off?.

That’s a great question and I appreciate the question actually so we do have some expenses related to transactions in some of the restructuring that have consumed a cash we have invested in the working capital of the business to be in a position to be very responsive to our customers as opportunities present themselves.

The long term debt is fixed at a small rate of principal repayment and so short term here we would look to add to the balance sheet and to continue to invest from our strategic plan perspective and potential acquisitions.

We do though reiterate our conservative and shareholder friendly approach to delivering neutral to accretive acquisitions in the first year of transaction. .

Thanks guys and if I can ask just one last one on the GaN on silicon manufacturing agreements that you’re working on and you’ve got me for close going on there what would trigger you to announce those would it be successful sort of wafers or would it be would you wait for revenues to come in, when can we expect these announcements as they get done?.

Yeah that’s a great question. In fact I think I was alluding to possibly the announcing sooner rather than later -- I think the simple answer is there’s been some competitive developments with businesses that have come on the market where we’d decided to kind of hold our cards closer to our vest for another quarter.

There’s really no need until we can sample broad based and fulfill demand from those production foundries with the material that we’re confident will be qualified and ultimately production material there’s really no urgent need to announce those. So again we’ve a lot of turbulence in our competitive landscape.

We figured it’s better safe you know keeping things financial that longer..

That’s great, thanks guys..

You are welcome..

Thank you. Our next question comes from the line of Tore Svanberg of Stifel Nicolaus. Please go ahead. .

Yeah, thank you, nice quarter.

Few questions, first of all coming back to BinOptics and not a question on revenue but gross margin so, it sounds like you feel a little bit better about to contribution to gross margin from the additional capacity and I was just wondering as we get through the June quarter and into the second-half of the calendar you know what types of gross margin expansion should we expect I mean we are talking about sort of 50 basis points per quarter very gradual improvement so could you get potential into to 100 to 200 basis points per quarter?.

You know there are scenarios where it could be very rapid.

As we bring on that capacity you know the utilization goes way up and it would be very attraction now that the other flip side of the equation is we now have capacity to sale, to find homes for and getting more we would addressing cost sensitive parts of the market not the least of which is the PON fiber to the home stuff.

So there is kind of moving ASPs, there is moving COGS and until you have capacity landed with agreements at the higher volumes it is really hard to predict which way the gross margin is going to end up.

I can tell you the things look so attractive on the cost reductions that we are pretty confident that meeting our target of 60% when things settle down will be on the cards..

That is very helpful. On the optical business as it relates to the metro markets you said you are already starting to see some revenue there.

But should we expect our business to see some more meaningful event in the second-half of the year or would you expect it to be sort of more gradual increases?.

Yes, it is a very question I think it is going to be some pretty interesting growth. If you read all the reports about forecast about the metro market it is going to be unequivocally the growth driver. Today a lot of our 100 gig revenue has come from long haul.

We have a fabulous design win position in terms of clear market share leadership and the initial metro deployment and in the next wave of TFT2 form factors which are really optimized for metro applications.

So we would expect that with the metro ramp and we are starting to see the announcements now that, that would be really fueling growth I would say through 2016 how quickly it is in the next quarter or two remains to be seen but unequivocally with RISN [ph] said to go live in 2016 there is some real end market demand that will be fueling that growth..

Very good.

And one the GaN on silicon PA products that will eventually be in production as they penetrate, let’s say a base station would you expect your customers to maybe design it into maybe a product or there or would they right away, just given the performance and the cost advantages would they right away design it into several platforms you think?.

I do have some experience with this. What I would expect is it’s less to do about the technology and more to do with the supply chain.

So they would start cautious with some initial programs to test to make sure that we can in fact supply their volumes with commensurate quality that they need in those applications and then kind of the proliferation within those customers tends to go geometrically, you go from a couple of designs to four, eight, sixteen and so on and it before you know it within a couple of years you are at full adoption..

Very good. Last question for Bob, on CapEx, it’s obviously a little bit higher right now because of the capacity additions.

It’s 9% of revenue when do you think it would come back down to sort of the 4%-5% range, would that happen this year at all or is that more in 2016?.

No, it will get back to that range this quarter..

Okay, perfect. Very good, thank you very much..

Thank you. .

Thank you. Our next question comes from the line of Mark Lipacis of Jefferies. Your line is open. Please go ahead. .

Hi thanks for taking my questions. I had a question on the pricing strategy of the new products and then a second one on the competitive environment.

John, I think you mentioned that you'd be demoing in May the GaN on silicon products, you are showing them in the cost, you expected it to be below LDMOS which for me that's new and I think that's interesting because my understanding is the products have much higher efficiency than LDMOS products.

So I was wondering if you could help us understand on both that product and on the BinOptics products, how -- like how much better is the pricing or then would you expect in the marketplace are we talking like 5% to 10% better, are we talking like orders of magnitude better of the cost structure. That's the first question. .

Okay. So let me separate the cost question from the price question. Two independent variables right. So on the cost side of things the reason why we say it's lower -- lowered down cost structure than LDMOS is we've demonstrated four times the power density.

So to get the equivalent power output you would need an LDMOS size that is the four times the size of our GaN on silicon dye. So in theory our wafer cost could be four times the cost of a LDMOS wafer and you would still be at parity.

The reality is a GaN on silicon wafer is a fractional increase in cost structure, primary materials cost compared to LDMOS. So pretty much under any conditions at maturity the cost structure will be below that of LDMOS at maturity.

Quite separate from that is the value proposition and the pricing strategy with customers and I would describe at this way; customers initially view these products through the lens of their existing experience with GaN on silicon carbide which is a substantially higher price than LDMOs.

At the same time they understand that our ability to get it to address their mainstream programs is there. So it's really the pricing question becomes a time dimensional one. They understand that in the early phases of production you're not at that mature cost structure. So it ends up not a price driven equation.

The real transition comes as we bring on these scale manufacturing sources. Then we'll have a cost structure and we can take a much more aggressive stance in the subsequent year proliferating across their programs and really taking out the bulk of the market. Did that answer your question. .

That's very helpful. And I got my follow up or two and then how about on the cost structure of the etch asset versus the cleave [ph] asset lasers set better in the market. Are we talking, is the like a measured -- is the benefit measured in the 10s of percentages or is this like an order of magnitude a cheaper lower cost product. .

Well I would infer from the public information that we know acquisition of one of the BinOptics competitors by another company in the industry. Based on their reported gross margins that you can infer multiples difference in cost structure based upon their reported gross margins compared to BinOptics.

And I would say the improvements we're talking about in moving not just to the doubling of capacity in Ithaca but into our 4 inch line in Lowell is integer multiples yet again lower cost. So we have a profound cost advantage that's really all -- in the fact that the Etch Facet technology is a wafer scale technology.

It's a classic semiconductor wafer manufacturing model that to us in MACOM we've been doing these compound semiconductor, fairly sophisticated devices for decades.

So it's right now we don't have it -- so it's really sweet and that's not just for the access market that's cost sensitive both the implication about when you get into datacenters with orders of magnitude higher, higher demand rates the ability to scale manufacturing simply from a capacity standpoint is a huge deal, never mind from a cost standpoint.

So there is a lot of juice there on both the gross margin side and the market expansion. .

And then thank you and that just leaves me with my final question the competitive environment can you discuss where to the extent that you have a moat or a wall around the etch facet technology on BinOptics or the GaN on silicon, what do you think your lead on your closest competitors there? Thank you..

Yeah, I mean we really given the strong patent position and it is not just patent so I mean Alex Behfar and IT expert coming out from IBM Micro Electronics. He put together a multi-layer a multi-dimensional IP strategy that included trade secrets not just patents and intellectual property. So it’s very well protected.

I don’t believe they see anybody really I think you are on horizon with something equivalent you know you always have to be healthy skepticism with paranoia, I should say healthy paranoia about someone coming out of the blue but there is nothing that I think we have seen that causes us any concern at this juncture..

And how about on the GaN on silicon side?.

It is interesting that there are people who are out there talking publically gallium silicon for RF applications and it is going to be an interesting period where we begin to defend our intellectual property position.

The Nytronics team I think they invested $60 million in building the pattern base in the IP base it shared between Infineon originally International Rectifier and MACOM originally Nytronics.

So and you can see what kind of valuation Infineon put on that for the power conversion fuel they have used, we consider this a very high value asset and we are going to defend it..

Bob, thank you very much..

Thank you. Our next question comes from the line of Quinn Bolton of Needham & Company. Your line is open. Please go ahead. .

Hey, John just wanted to come back and I apologize the part of the prepared script but looking in to the laser business obviously I understand that a lot of growth today is coming from access segment but as you look out you know over the next full year data and opportunities seems pretty significant at OXC this year there are significant number of 25 gig modules you know 4 by 25 configuration wondering if you can comment on your design position in some of those -- lasers and if you are not in today when do you think you can intersect that market? And then I have got a couple of follow-up questions.

Thanks..

Yeah, as I understand the BinOptics team had established a very respectable designing position into a lot of those first generation designs. I can say that the way they were perceived at the time is profoundly different the way that we are perceived now.

You can imagine when people are talking about orders of magnitude of incremental demand you know a venture capital back $15 million start-up was not exactly at the top of the list priorities for strategic vendor status. That’s profoundly changed now.

So in terms of our ability to penetrate the 100 gig, the 25 gig, 100 gig data center opportunities, I think especially as we bring our cost structure to bear it bode extremely well I mean that is from a future growth standpoint and volume standpoint five years out the real prize.

Right now access is where the actions is, is where the volume is, it’s where share gains, the availability for share gains are and you know 20% top line growth with the share with the China program building out real access to fiber, fiber to the home, you know it is quite substantial..

Okay, great and just wanted to move out again on silicon, you mentioned you are working with two production line to ramp the process and hopefully start to beta position the sample mix I think ROE 2016.

If that is the timing can you, given your experience in the base stations power amp business, as you think you start sampling products to the base station vendors, how long does it them to first design in the product and then once they design in to take those productions to a volume ramp I know some others semiconductor companies can say you know may take a year plus maybe as long as two years from when actually receive a design in base station to when it actually ramps.

So just trying to get a handle of when you think you could be in production volume production shipping in base stations with the GaN on silicon given its advantages. .

Sure let me answer the question two parts. One is where we stand and then get to the part of your question which is the behavior of the base station market.

Where we stand we've actually been sampling customers, we're announcing our Gen 4 GaN products those have been sampling we've been demonstrating capabilities and customers have given us the feedback, they gave us the target specs.

They now gave us the production spec performance and basically everyone who matters in that market, it’s a heavily concentrated market. So we've got our sites set clearly on what we need to do to execute on the product side. So it’s not a theory it's actually being it is the practice.

The real task now is we have to deliver those products with that same performance from the production mines that I referred to who are capable of supplying the volume and quality that's required by the base station industry. And that will be happening through the rest of this year.

We actually have customers who would ideally like to begin production in the beginning of calendar 2016. Now whether we can get there and get the process qualified and get the production ramp the capacity in place is the real challenge and until we've got it, we don't have it. So we're not going to forecast it. So we need to be cautious.

I would describe it that sometime in 2016 is when thing start turning on. Now to the second part of your question behavior of the base station guys it really depends upon which one some intend to have power amplifier platforms that are intend to long-term technology roadmaps.

They take as much as two years to really sync up and turn on production programs. There are others that move much more rapidly and are much more aggressive in terms of deploying new technology and taking share. And we're working with all the above. .

Okay great. And then just wanted to this is for Bob follow up on Blayne’s question on gross margin.

If I look at the fact you have revenue is increasing in the June quarter and you intent to have pretty good fall through on incremental revenue, I think you commented that the networks specifically optics are probably be the strongest part of the business. And lastly the auto business probably flattish in June.

All three of those factors to me sound like they're positive for gross margin. Just wondering if there is anything that offsets that in the June quarter. .

Quinn, it's nothing that offsets it, just the mix. there is some variability to the mix that comes on. So as you've seen it can go up and down a little bit. So we're managing our in terms of the guidance to the range. .

So but mix perhaps then within segments not necessarily among segments. .

Yes it's product lines versus end markets. .

Got it. okay, thank you for the clarification. .

Thank you. And that does conclude our question-and-answer period. I would like to turn the conference back over to Mr. John Croteau for any closing remarks. .

Thank you operator. Before closing out today's call please note that Bob will be attending the Cowen TMT conference New York on May 27. We welcome the opportunity to meet with any investors in attendance.

To request a meeting with management at a future event or be notified at the next time that we plan to be in your area please e-mail us at ir@macom.com. Thank you all for joining us on today's call. And I look forward to reporting our fiscal third quarter results and progress in late July. Operator, you may now disconnect the call. .

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day..