Leanne Sievers - EVP, Investor Relations, Shelton Group John Croteau - Chief Executive Officer, Director Bob McMullan - Chief Financial Officer, Senior Vice President.

Blayne Curtis - Barclays Gabriela Borges - Goldman Sachs Vivek Arya - Bank of America Harsh Kumar - Stephens Tore Svanberg - Stifel Steve Smigie - Raymond James.

Good afternoon, and welcome to M/A-COM Technology Solutions' Fiscal Fourth 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, November 17, 2015. I will now 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 fourth quarter 2015 earnings conference call. I am 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 have not received a copy of the press release, you can obtain a copy at MACOM's website at www.macom.com under the Investor Relations section. Before I turn the call over to Mr.

Croteau I would 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 filed today and quarterly report on Form 10-Q filed on August 12, 2015.

Any forward-looking statements represent management views only as of today November 17, 2015, and MACOM assumes no obligation to update these statements 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. Now, I will turn the call over to MACOM's President and CEO, John Croteau. John, please go ahead..

Thank you, Leanne. Welcome, everyone, and thanks for joining us today. I will begin today's call with an overview of our fourth 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 will then conclude today's prepared comments by providing a summary of our execution during the quarter followed by guidance for the fiscal first quarter of 2016.

Straight to the results, I am pleased to report that for our fiscal fourth quarter after closing the divestiture of the automotive business, Autoliv, revenue was $112.6 million; gross margin was 57.4% and net income $18.8 million or $0.34 earnings per diluted share.

Looking at our end markets, networks grew 7% sequentially on the back of strong demand for our optical products, mainly 100G for long haul in metro networks and lasers in the access market. Multi-market was flat quarter-on-quarter with POS and OEM demand for our catalog products effectively flat, sequentially.

Moving over to aerospace and defense, during the quarter we realized growth from our previously mentioned airborne defense radar program, however this was more than offset by push-outs in legacy ground based radar and satellite communication programs.

All-in-all, we had another solid quarter of growth, with particular strength in our breakout optical business, which more than offset unanticipated weakness in aerospace and defense. Let me now turn it over to Bob to review our fiscal fourth quarter financials in further detail..

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

Reconciliation of each figure to the most comparable GAAP measure is included in today's earnings press release. Also, with the sale of our automotive business Autoliv in August, all historical numbers I discussed today exclude the automotive business now treated as a discontinued operation.

As this is our fiscal fourth quarter and fiscal year end, my comments will be on the quarterly results followed by the fiscal year.

Revenue was $112.6 million, representing a sequential increase of 3.2% compared to reported revenues of $109.1 million in the prior quarter and an increase of 19.9% compared to $93.9 million in the fiscal fourth quarter of 2014.

Revenue by end markets for networks $79.3 million or 70.4%, A&D $18.7 million, 16.6% and multi-market $14.6 million and 13% of total revenues. Gross profit in the fiscal fourth quarter was $64.6 million or 57.4% of revenues compared to $63.3 million or 58% of revenues in the prior quarter and $54.5 million or 58% in the fiscal fourth quarter of 2014.

The gross margin decline sequentially of 600 basis points was a result of slightly different product mix. Operating expenses in the fiscal fourth quarter, total were $38.4 million, up 2.4% compared to $37.5 million in the prior quarter and up 11.6% compared to $34.4 million in the prior year's quarter.

Research and development expense for the fiscal fourth quarter was $19.3 million. This compares R&D expense of $19.3 million in the prior quarter and $18.1 million in the fiscal fourth quarter of 2014.

R&D as a percentage of revenue represented 17.1% in the fiscal fourth quarter compared to 17.7% in the previous quarter and 19.3% in the prior year's quarter.

Selling general and administrative expenses for the fiscal fourth quarter were $19.1 million as compared to SG&A expense of $18.2 million in the prior quarter and $16.3 million in the prior year's quarter.

SG&A as a percentage of revenue represented 17% in the fiscal fourth quarter compared to 16.7% in the previous quarter and 17.4% in the prior year's quarter. The increase sequentially was due to higher variable compensation. Income from operations was $26.2 million or 23.3% of revenue.

This compares to $25.8 million or 23.6% of revenues in the prior quarter and $20 million or 21.3% of revenues in the prior year's quarter. Operating margin in the fiscal fourth quarter was down 300 basis points from the fiscal third quarter due to the higher variable compensation expense in the fiscal fourth quarter.

Adjusted EBITDA was $29.9 million, up from $29 million in the prior fiscal quarter and up from $23.2 million in the year's prior quarter. Interest expense was $4 million in the fiscal fourth quarter compared to $4.1 million in the fiscal third quarter and down slightly from $4.1 million in the prior year's quarter.

Turning to income taxes, our effective income tax rate for the fiscal fourth quarter was 15%.

The sell the automotive business did generate a taxable gain for federal income tax purposes and combined with our taxable earnings anticipated for fiscal 2015 reduced by our net operating losses and carry-forwards resulted in a $21 million tax payment in our fiscal fourth quarter.

Based on our current view of international versus domestic revenue, we see 15% as our normalized rate through fiscal 2016.

Our fiscal fourth quarter net income was $18.8 million and $0.34 per diluted share compared to fiscal third quarter net income of $18.4 million and $0.33 per diluted share and net income of $13 million and $0.27 per diluted share in the prior year's quarter. This represent EPS growth of 3%, sequentially, and 21.4% year-over-year.

The share count used to compute EPS was 55 million shares in the fiscal fourth quarter, 55.2 million shares for the fiscal third quarter and 48.9 million shares in the fiscal fourth quarter of 2014. For the fiscal year ended 2015, revenue was $420.6 million growing 24.4% over fiscal 2014 revenue of $338.1 million.

Gross margin expanded 320 basis points to 57.5% from 54.3% in fiscal 2014. EPS grew to a $1.28, up 40.7% from $0.91 in fiscal 2014. We generated $111 million of adjusted EBITDA in the fiscal 2015, up from $75.7 million or 46%.

In summary, revenue grew 24.4%, gross margins expanded 320 basis points to 57.5% closing in on our target of 60% and we delivered 40.9% EPS growth. On a GAAP basis, cash flow from operations for fiscal 2015 was $33.7 million.

This includes the cash use of $14.6 million noted on the statement as prepaid retention, an increase in the current asset account related to the BinOptics employee retention plan funded as part of the original acquisition payment of $230 million.

Adding this acquisition related amount and 5.6 million for associated transaction fees, adjusted cash flow from operations would be $48.3 million.

The difference between net earnings of $68.1 million and the adjusted cash flow from operations of $48.3 million was the use of cash to an increase in working capital in line with our growing revenues and business.

Turning to the balance sheet, at the fiscal quarter end our cash and short-term investments were approximately $161.9 million, outstanding long-term debt was $343.5 million and we had $130 million in credit availability.

Accounts receivable of $84 million compares to $77.1 million at the end of the prior quarter and $62.3 million at the end of the year ago quarter. Day sales outstanding were 67.9 days compared to 64.3 at the end of the prior fiscal quarter and 59.8 days at the end of the year ago quarter.

Inventory was $79.9 million compared to $82.2 million in the prior quarter and $71.5 million in the year ago quarter. Inventory turns were 2.4 times compared to 2.2 times in the prior fiscal quarter and 2.9 times in the year ago quarter.

Capital expenditures in the fiscal fourth quarter were $5.8 million or 5.1% of revenue compared to 18% of revenues in the fiscal third quarter 6.1% of revenues in the fiscal fourth quarter of 2014. Total capital expenditures for fiscal 2015 were $38.3 million compared to $17 million for fiscal year 2014.

The increase was due to the purchase of our Lowell facility for approximately $8.3 million and approximately $12 million for the expansion of laser capacity in Ithaca and Lowell.

Depreciation expense on property and equipment for the fiscal fourth quarter was approximately $3.8 million, $3.3 million in the prior quarter and $3.2 million in the prior year's quarter. Depreciation expense was $14.1 million for fiscal year 2015 compared to $12.6 million for fiscal 2014.

I will now turn the call back over to John, who will provide additional color on our fiscal fourth-quarter and our business outlook for the fiscal first quarter of 2016..

Thanks Bob. This quarter we began to unveil progress that we have made in realizing the potential of our third major secular growth driver, Active Antenna Arrays.

Moving forward, we believe that active antennas can deliver MACOM substantial short-term, medium-term as well as long-term growth potential consistent magnitude with our other two second the growth drivers optical and GaN.

In addition, earlier today we announced the tuck-in acquisition that we believe will complement and accelerate our success in 100G optical an already proven area of growth and profitability. First, let me address our progress with Active Antenna Arrays.

Working collaboratively with MIT Lincoln Labs, we have moved the MPAR platform successful field trials to commercial reality, including the receipt of our first production order for a full scale civil radar implementation.

We recently announced relationships and endorsements with the likes of the FAA, NOAA and DARPA, which we believe will lead to both, civil and defense radar deployments through the latter part of the decade. Further, as many of you know, we have been working with MIT Lincoln Labs for over seven years on tile-based radar system.

This approach enables rapid design and deployment of Active Antennas with as much a five times cost reduction to the radar sensor arrays. That is more than 80% cost down as estimated by MIT Lincoln Labs versus traditional radar and antenna technology.

We believe this tile-based approach has the potential to drive a dislocation in the way radar systems will be designed and constructed moving forward, propelling MPAR technology towards mainstream adoption and deployment. To frame the business opportunity, single program awards could be up to $100 million wins for MACOM.

Our tile products are already part of active competing bids in such programs today. First applications beginning ground-based civil and defense radar systems and will expand to airborne and seaborne radar platforms. Once awarded, these programs tend to be highly predictable, long-term and stable revenue drivers.

To put this in context, our current cataloging A&D business is on the order of $80 million annually. Single program awards of tile-based radar systems can be up to $100 million and MACOM is positioned to compete in dozens of domestic and international defense in civil programs through the latter part of this decade.

Moving forward, you will hear us refer to this new tile-based antenna business using the acronym and trademark, SPAR, which stands for Scalable Planar ARrays.

SPAR Tiles are RF and subassemblies containing antenna elements, gas and GaN semiconductors, transmit and receive modules and analog beam-forming functions, which together form the basic building block for active electronically scanned antenna or AESA radar systems.

SPAR Tiles enable the transition from cumbersome brick architectures to a more efficient planar approach. Leveraging MACOM's commercial manufacturing and antenna expertise, we anticipate that SPAR Tiles will help drive cost efficiencies that will propel planar arrays to mainstream adoption and deployment.

Given this context, you can understand why we believe that active antennas will be a fundamental and profound growth driver for MACOM for many years to come. We have established yet another leadership position, addressing a major industry trend that plays directly to our long-term competitive strengths and core competencies.

Now, let me touch briefly on our GaN status. We remain on track with our process qualification and customer adoption timeline leading to mainstream GaN adoption in 4G LTE base stations in 2016.

Last quarter, our team delivered our top target customers power amplifier designs that fully meet performance targets that will lead to mainstream displacement of incumbent LDMOS technology. This quarter, we begin sampling and qualifying material produced using our high-volume supply chain.

We expect this will ultimately deliver the highest performing as well as the lowest cost solutions available. Turning to optical, our business in long haul and metro was very strong, sequentially, as we begin to see the effect of metro deployments ramp.

Our laser business was also up strong sequentially and remained supply constrained for the foreseeable future. However, we remain cautious on growth for the next quarter, due to traditional seasonality and continued supply constraints as Lowell comes online after the first of the New Year.

Now, onto our acquisition, this afternoon we announced the acquisition of FiBest, a leading supplier of 100 gig optical subassemblies. This is a tuck-in acquisition valued at approximately $60 million and delivering $25 million trailing 12-month revenues.

This move is consistent with our philosophy of pouring [ph] on in areas of already proven breakout growth. In this case optical. Starting at 100G, but especially 200G and beyond, optical packaging technology becomes a significant factor in determining the performance, power efficiency and cost structure of an optical transceiver.

We believe that acquiring FiBest will allow MACOM to assume a commanding position, targeting mainstream 100G optical adoption and datacenters.

Secondary benefit, with a strong organizational foundation and presence in Japan, we believe that FiBest will help unlock what was previously a largely untapped $500 million market for our RF and microwave components.

Similar to our BinOptics and Mindspeed opened up the Chinese market for MACOM's growth and global expansion, we expect FiBest will do the same for us in Japan. In total, acquiring FiBest makes MACOM unique and enhances our strategic value in the eyes of our customers worldwide.

Everything from Indium Phosphide to silicon germanium, lasers, the subassemblies, access and fiber-to-the-home to long-haul and metro networks and explosive growth potential in datacenters, we now have all of the requisite technology, products and packaging that can enable our customers to achieve their most ambitious goals.

For these reasons, you will understand why we are bullish on our optical growth potential for many years to come. In summary, I am proud of our execution by our team as a whole, delivering strong organic growth despite tough market headwinds, complemented by our ability to put the proceeds of the sale of the automotive business to good work.

We hope to further accelerate growth and MACOM's shareholder value. Now, moving over to guidance, we will guide this quarter without the contribution of FiBest although we do expect it to close this quarter.

For the fiscal first quarter ending January 1, 2016, MACOM expects revenue to be in the range of $110 million to $114 million, adjusted gross margin is expected to be between 58% and 60% and adjusted earnings per share between $0.37 and $0.40 on an anticipated 56 million diluted shares outstanding.

I would like to close today's scripted remarks by thanking the team for another quarter of solid execution. Operator, you can now open the call to questions..

Thank you. [Operator Instructions] Our first question is from Blayne Curtis of Barclays. Your line is open..

Hey, guys. Thanks for taking my question. Just a couple, John, in the outlook you mentioned that network's seasonality.

Just curious, by segment are they expected to be down and if any are down more than other?.

Hi, Blayne. Good question. In the December quarter, what we have seen given the fact that a lot of our networks business is over in Asia, there tends to be a fair bit of stick handling of the customer inventories at the end of the year, end of the calendar year.

We have seen that for the past few years and that kind of contributes for our caution over there. We have also seen an element of seasonality last year with the PON business and that we have both, lasers as well as drivers, laser drivers and TIAs case in plan, so that is really the source of our caution.

There is not anything beyond that to the first approximation..

Then you talked about the SPAr opportunity obviously quite huge in terms of dollar amount. Is there a way to think about how many years that revenue would unfold over? Then if you can talk about, you said you are in the bidding process.

How many parties are you bidding against and what is the right timeline to think about any early contributions there?.

Yes. Another great question, so the way to think about it is there is a small number of primes, defense primes bidding on programs. One of those is very deep into adoption of the SPAR Tiles. They are actively bidding programs.

Some of these programs are actually being awarded for production beginning this year, so none of those are landed yet, so we can't say that we have revenue contribution this year, but given the magnitude of single wins, if one of those gets landed then it can obviously have substantial impacts sooner rather than later, but I would say that it is really the near-term contribution is the fourth SPAR Tiles.

It is in the airborne defense program, which is actually beginning to ramp starting last quarter. When the SPAR stock picks up, it is going to pickup in a big way..

Just finally for Bob, you mentioned a negative mix in the September quarter on gross margin, but then December it seems you have a nice tailwind, so what are the moving pieces there driving the uplift in gross margins?.

It is very hard to pinpoint exactly. Blayne, we ship about 2,000 products in a quarter and a little mix here and a little mix there and the final outcome is not a big. I said 300 basis points, but it was really 30 basis points, but or I said 600 versus 60 basis points, so my error. It really is not that greater difference.

It is just a slight mix change..

Okay. Thanks guys..

Thank you. Our next question is from Gabriela Borges of Goldman Sachs. Your line is open.

Great. Thanks so much for taking my question. I thought that you could help us understand all of the growth drivers of the business in fiscal 2016.

How should we think about the medium top-line growth rate for the Company, either in absolute terms and maybe as a function of the industry whatever you are willing to share?.

Yes, excellent question. Let me share with you the way we are thinking about growth on a forward-looking basis. We have got a core RF microwave business, which continues to grow. It grew year-on-year.

In fact it grew actually quarter-on-quarter, sequentially, last quarter, so it is a very healthy foundation, which would be market growth on the order of 5% plus incremental share gains. Then layered on top of that is the optical growth and that is.

I think last year optical grew 50% year-on-year, so that is really a hyper growth contributor, so when we talk about the GaN stuff kicking in sometime in 2016, likewise Active Antenna Arrays you would similarly have hyper growth layered on top of that base, so you back in and if you look at each one of these growth drivers literally and we model this the very carefully, each of those could arguably double the size of our Company within three years on the outside five years, so we could double, triple or quadruple if we bet a 1,000 on those three secular growth drivers, so it is time dimensionally three to five years in [ph] your multiples revenue percentage for the hyper scale stuff..

That is helpful. Thank you. Maybe as a follow-up on the planned acquisition of FiBest, I think one of the points in the press release was a potential inflection in demand in 2017 sort of timeframe.

Maybe help us understand given that 2017 is so little ways out, what are the risks to hitting those sort of milestones or what are the key milestones that have be hit in order to achieve that inflection demand and how you feel the Company is positioned competitively speaking? Thank you..

Yes. Another great question, so FiBest comes at 100G, as well as 200 and 400, primarily from the telecom background with customers like Fujitsu and Huawei and Alcatel-Lucent. The reason why we acquired that is a very healthy business, they are there growing, growing in on the same kind of scale as we are top-line, but the real play is in datacenters.

One of things we saw as we now have 100% semiconductor content in the 300 gig optical subsystem, all the analog, laser, photonics content, but we saw the packaging as the last piece to complete that puzzle and it really has a significant impact on the cost performance and power consumption of the overall solution.

As that comes together, in fact those designs are, I believe, completing this quarter, so it is not a forward-looking, but I should say FiBest was a customer of ours as TOSA/ROSA supplier. It is really that inflection point depends upon when and how big 100 gig takes off and obviously how well we do.

I think, we have established a preeminent position given the cost structure and performance of all that semiconductor content.

We believe we are second to none for each of that, but they are wrapping that up and being able to put that in the optical subassembly and further refinement of that component set solution really positions us well to ride that data center wave, which frankly is integer multiples if not orders of magnitude bigger than what we have addressed so far, which is long-haul and now the early stages of metro adoption, so that is very explosive.

The real dependency and how big and how quickly that market develops. For that reason we say 2017..

That is very helpful color. Thanks very much..

You are welcome..

Thank you. Our next question is from Vivek Arya of Bank of America. Your line is open..

Thank you.

First question, John, maybe just over all demand environment, if you could give us some color as to how much is your exposure to the China market whether it is in the networking or the multi-market market segment? Are you seeing trends there still a little bit on the weaker side, are they stabilizing or how should we think about what your exposure is to that market, where there are a lot of concerns about growth?.

Great question, so a large part of our transactional revenue is now in China. I would point out though the bulk of that demand is actually in other parts of the world.

China now supplies very large majority of equipment and component manufacturing feeding into those networks markets, so we do have some exposure on the fiber-to-the-home prime deployments that are in China right now, that is the old the piece of our prime business that is rock solid stable and if anything growing for at least another two years, so there is no indication whatsoever of any impairment on that market.

The other slight exposure that we had was on wireless backhaul and then fiber backhaul and that is markedly improving. There are clear signs of orders are coming in, recoveries happening, how much of that we capture in December versus the March quarter is the only remaining question, but there is no question that is coming back..

Then second question is, if you could also give us a sense for how large is the Optics business today in and what importantly is that mix between 40 gig and 100 gig, where does that go and what are the ASP implications of that shift?.

Sure. I would say optical overall if you include everything from access, fiber-to-the-home, the lasers and the backhaul as well as long-haul and metro line drivers and everything we do crosspoint switches that we sell into optical, it is about 45% of our revenues, so it is substantial. The reason why it is that big frankly is it is growing.

There are chunks of that business that are growing multiple double digits quarter-on-quarter, so it is truly a breakout for us.

I would genuinely say there is not a single piece of what I just described that we would describe as below our corporate operating model in terms of gross margin and operating margins, so it is not only high-growth, but it is a very growth favorable margin business for us..

Got it. Then lastly maybe, Bob, how should we think about the milestones to generating free cash flow on a more consistent basis? Is there a certain revenue level, where we should start modeling free cash flow right at a certain level? Do you have any specific targets around that? Any color would be helpful. Thank you..

Right. Going through our cash flow from operations on a GAAP basis as I mentioned in my scripted remarks $15 million approximately of the prepaid retention program we put in place for the Management team and employees of BinOptics. That actually came in at the $230 million proceeds.

If they leave and do not realize the benefit of staying with MACOM, for example that actually - the pause [ph] to the previous shareholders. It is a new option accounting GAAP accounting that it is a current asset that makes you go through cash flow from operations.

As we had transactional expenses, we do have some use of cash that is not aligned to the cash flow of the business, per se.

As we do have some synergies and some other integration costs that as well reduces cash flow from operations on a GAAP perspective, but as we move forward here, big change with respect to this year accounting that wash that deferred revenue through the balance sheet and that is behind us.

We should come closer to non-GAAP earnings as we go through fiscal '16. As we sit here today based upon what we see today. If we do another large transaction or other tuck-in transactions, there may be some synergies or integration cost of transaction costs that basically are outside of operations that reduce cash flow from operations..

Is there a certain level, Bob, at which we should think that free cash flow will be X percent of sales.

I understand the business is going through a transformation, but is there a target that you have in mind?.

Well, I think it is really from the other perspective. We are projecting growth in revenues, so we have as we said before we have deferred to caring inventory to be in a position to meet turns business and opportunistic business that exist because we have products.

When you also look at some of the market in the past, some of that inventory levels are also driven by supply constraints where our partners has longer lead time because of their - from many other customers that really hasn't had a material effect other than us increasing our inventories.

These growing markets as we anticipate demand as inventory grows, it is really a function of the difference in many ways between the cash generated by the balance sheet EBITDA for example and our decision to make investments in working capital. We can scale that back as visibility of business is clear to us overall for the longer-term.

It is not so much a level of business it is more of where we want to make the investment from a working capital perspective. That is the majority of the change here.

As you know also we tax effect at 15% to get a normalized run rate, sometimes in cash flow from operations on the GAAP basis that that also penalizes cash flow from operations, because we are basically not doing anything and it is balance sheet changes in current assets that affect use of capital, use of cash, so some of it is accounting, but more of it is transactional expenses and our decision to invest in working capital..

Understand. Thank you..

Thank you. [Operator Instructions] Our next question is from Harsh Kumar of Stephens. Your line is open..

Yes. Hey, guys. A couple of questions, my first one is it seems like Bob there are two moving parts. There is the legacy ground based business, which I think in the press releases you said is off a little bit. Then I think I also heard you talk about the networks piece, particularly maybe some seasonality in the optical side.

I am curious what is the magnitude of each of those if one is larger than the other, equal size, any color?.

I am sorry, I did not quite follow, you are talking about the effects last quarter or….

No, the effects going forward..

I would say that the lumpiness in our traditional catalog transistor business is the radar is really a quarter-to-quarter effects. We can effects our and Asian and European customers who are deploying or doing retrofits of old radar systems.

It is just lumpy and that is the way it kind of is, but it is on the order of a few million a quarter and we have had up quarters surprisingly. I think last quarter, previous quarter was an up quarter, so it is kind of hard to predict, so bouncing around.

On the seasonality, I am sorry, the other aspect of the question was the seasonality on the optical?.

Correct. That is right. Yes..

Yes. It is really what we have seen in previous years and it looks like the behavior is similar is our customers are especially over in China, where a lot of our business is transacted right now, mange inventories now at the end of the year as I understand it you know personal incentive who rewards are given for year-end inventories.

From a demand standpoint, it is seasonal not end market demand necessarily, although we have seen an element of that last year in PON. That was our first year with Mindspeed in the portfolio for instance.

Now we doubled that down, but now we have a position in lasers as well, so you could have that effects and traditionally we could offset that or previous quarters we could offset that with strong growth and in other parts of our optical business, but this quarter right now we are tapped out from a supply standpoint if you remember what was the double capacity in the first half of the year and then by January next year have Lowell, which at least doubles capacity yet.

Again, it is just the December quarter that capacity hasn't come on so we are kind of tapped out from a supply standpoint..

Hey, John, that was very helpful. It does not sound like you have seen anything specific in the marketplace. It sounds like it is just your expectation of managing inventory down and is that fair for me to think from that angle and you guys maybe not having the supply.

Is that the larger issue?.

I would say they are equal..

Okay..

We just can't supply more units in this particular quarter. Again, the March quarter, it is basically unbounded and then the other thing is just caution from a demand standpoint that it is kind of pushing customers to sustained inventories levels at the end of the year is something that we do not really choose to do..

No. That is fair, John..

Other people do it, we do not..

I am hearing you talk about long-haul optical after a long time. In the past, you have always said the big driver at least in front of your eyes was the access side, but this press release, also your commentary is talking a little bit more about long-haul optical.

Is there something you are starting to see along with maybe the return of the base station market that is making you more optimistic John?.

As I had mentioned previously, we have seen some unanticipated orders come in for backhaul related business, so unquestionably there is there signs of life there.

Again, the real issue is race against time, because here we are mid-November, so to capture additional orders and turn them this quarter, you know, there is no variability [ph], so that is really the only issue there.

On the other side of things, I mean, to be clear, and I had it in the scripted remarks, the strongest sequential growth we saw last quarter was in our long-haul and metro drivers. The lasers were up and up strong, sequentially, but the real blowout and we believe we are beginning to see the impact of metro deployments driving demand.

If that is the case that can continue through the next year very nicely, because the reports we have seen is up through the middle part of the year only about 3%. Certainly less than 5% of metro deployments were at 100 gig, so the transition to 100 gig in the metro space is just in the early stages.

As that ramps to 50%, for instance long-haul over 50% of the ports are 100 gig there is a lot of runway there. We think metro is probably 2X minimum if not for 4X the size of long-haul..

I understood, very helpful, again. I think you talked a little bit about loosely on the GaN silicon timing. I think you mentioned 2016. Maybe if you were more specific I missed it. John, could you maybe try to pin us down a little bit more. You are getting close to the finish line there with production orders.

Should we be thinking first half or second half or any kind of granularity would be great..

In terms of a material inflection point in our revenue, the contribution would be in the second half, simply because until you reach qualification customers, [ph] programs and those don't magically start instantaneously.

The reason why we remain cautious on making any sort of investor commitments in the second half is until those customer decisions are made, they are not made. That said, our entire qualification timeline, we are definitely absolutely on track.

There was giant milestones we accomplished this quarter, where now customers have been delivered fully operational power amplifier designs that meet every target specification they have given to us and they have nodded their heads on approval and basically open up programs across multiple platforms.

We have the full target right before us to execute to and I have said it before and I will say it again. Until we pass qual, we have not passed qual, so that is the reason why we maintain the caution..

That is fair guys. Great. Thank you..

You are welcome..

Thank you. Our next question is from Tore Svanberg of Stifel. Your line is open..

Thank you. A few questions, first of all on the BinOptics business, I just want to understand the moving parts there, so you were ramping capacity.

Did you have some contribution from that capacity already or is sort of the main contribution coming in the first of next year?.

No. I mean, the sequential growth on our laser business was close to 10% sequential. I mean, it was a very nice strong sequential growth. That is after we had originally done. I think you can go on our investor site and we have got a slide.

If I remember, Slide 6 or Slide 8 on the slide deck that show the actual doubling of capacity through the first half of the year, so that is another 9% on top of what that original doubling occurred. On a forward-looking basis, right now that 9% is pretty much tapped out for the factory in Ithaca, New York. That was original BinOptics factory.

The next inflection point in terms of supply, which we remain supply constrained not demand constrained. That comes on after the first of the year in January in our Lowell factory and at that point it is basically unconstrained from a supply standpoint, but we just got to pause here, because we pretty much tapped out Ithaca..

Very good. Then on the FiBest business, just looking at the website they are only talking about 10 gig products. I assume obviously they had some new products in the pipeline, but how should we think about their ramp into 100 gig, especially if you think about the $25 million they have in revenue today.

I assume that is all 10 gig?.

I would not say it is all, but I would say the majority of the revenue on a backward looking basis, probably 90% - in the past would have been 10 gig. I believe this quarter is a transition. I should point out, I do not think they have updated their website at least nine months..

Okay..

…commercial supplier in that respect..

Sure..

But anyway, I believe, about 90% this quarter coming in is 100 gig..

Okay..

…a telecom business..

Got it. Then last question for Bob. CapEx, it kind of doubled year-over-year fiscal '15 over '14.

How should we think about CapEx in '16, especially in light of capacity of BinOptics and also the FiBest acquisition?.

Sure.

Tore, the spending the capital investment for BinOptics and the laser business has been made, so there is a small parts filling - As we sit here today, we would say looking forward, our traditional model of 4% of revenues maybe increases slightly to 5% outside of an occasional special thing, but an acquisition may drive or something else like that is not really visible today.

Again, you point out that we had an opportunity to purchase our building at very favorable terms and that is critical to our ability to control our destiny longer-term, so that was sort of an exception on top of the BinOptics investments last year, so about 5% is our normalized model for CapEx..

Very helpful. Thank you very much..

Thank you. Our next question is from Steve Smigie of Raymond James. Your line is open..

Great. Thanks a lot guys. I was hoping if you could talk a little bit about how fast you laser business could grow in calendar '16.

If you are able to fill all the past capacity you plan to build out this year, so assuming demand was there, how fast could laser business grow?.

I do not want to sense, but if we were to sell every element of capacity we have that will probably grow 1,000%. The factory in Lowell is just in order of magnitude larger in the equipment capacity than Ithaca, so it is the reason why and we said doubling capacity by the first year.

Once we were are - basically unlimited and which is the key, because from a unit volume standpoint data centers could absolutely consume a sizable chunk of that, whether it is tenfold or more or less, remains to be seen, but I think for the first approximation with the way to think about it is infinite supply for the foreseeable two or three years..

Okay.

Then on the $100 million wins potentially on the active antennas side, how would that revenue play out? You win the contract, because it rolled out over 10 years you have a certain number of radars you are building out, how does that work out?.

Particular radar system from what we have seen on the defense side, the programs that we have been exposed to are typically three years build-outs sometimes five year build-outs. The civil programs, I mean you are talking about the wholesale upgrade of the weather and the air traffic control radar system in the U.S.

that would be hundreds of millions of dollars of opportunity to us over decades literally.

Now, that is not imminent in the next year or so, but when that happens we are very well-positioned and it is transformative from a Company standpoint, but I would say there are some programs in the $20 million, $30 million range on the defense side some that are $100 million and I know of at least one that is over 200.

Again, the build-outs, I would say would average three to five years..

Revenue recognition, Steve, is on a shipment basis and title transfer just as any other component we ship today..

Okay. Then on the FiBest stuff, can you talk about the products a little bit more? Again, just look at the website. It is not clear. Is it they are just doing the package or they are doing a complete transceivers, so they are buying components from everybody else and then packaging and selling that or has the revenue were….

The simplest way to think about is a packaging option.

We have got all the semiconductor content that those in those transmit receive optical subassemblies and such watches packaging but it is high-value at packaging, because when you talk about the lens assembling for these complex optical devices at a 100 gig and beyond, that has a big impact on the performance in power consumption in the overall a solution has a lot to do with IP around alignment of the light source and so, but let me emphasize something we are not making an integration play to transceivers.

That is very opposite direction of the way other people are going. That is in our opinion a low value add agent commodity play. We are remaining a component supplier and whether people want to use our subassemblies or just our components, frankly, we do not care. It is all good business to us.

I would say that having the packaging capability allows us to improve and refine the quality of our solutions at a component level. When this is not integration play, it is really a packaging option..

Okay. Great.

Last question is just on the aerospace and defense side, what would be the breakout at this point between aerospace versus defense and how you sort of think about that as we think over the next few years as you got a bunch of these pre-sizable a program ramping up?.

Okay. The A&D business today and looking backwards is profoundly different than what we have talked about on a go forward basis. Looking backward, we have a catalog of dials and transistors and we sell them by frequency bands and there are bands that are used both, civil and defense purposes.

By the way, they go into customers who have both civil and defense divisions, so it is effectively impossible to be really quantified civil versus defense usage. Other than a rough cut of how much of our customers' business is that way and the last time we looked it was about 50-50, so I think that is probably a fair assessment going back.

Going forward these large programs are things like our peers have had and captured during the days when MACOM was owned by Tyco and they did not really care to invest in aerospace and defense programs.

Now, as we capture these, they are large chunks, very predictable, very reliable long-term programs all the nice characteristics that we talked about in our traditional MACOM business. It is just literally in order magnitude bigger than our A&D business looking back..

Yes. Going forward Steve, it is easier the MPAR program is obviously a similar deployment. As we get certain programs if they allow us to we can identify whether they are a defense military versus or applications..

Okay. Great. Thanks a lot guys..

Thanks..

Thank you. Our next question is from Harsh Kumar of Stephens. Your line is open..

Yes. Hey, guys. Thanks for the opportunity for a follow-up. John, I was wondering if you could talk about who do you see in the optical space as your primary competitors, who do you run into for most part? Also, I have heard a few tidbits about the cost advantage that BinOptics products or your product has over the competition.

I am wondering if you could elaborate that a little bit..

Sure. Depending on the product category, we have a totally different set of competitors. For instance, high-performance analog stuff which came over from Mindspeed tends to compete more with Semtech.

The traditional competitors for our long-haul business compound semi-stuff global one time had a substantial business I am not sure what they have left at this point.

We have in five that tends to try to compete they can do a very good job transimpedance amplifiers, whereas we tend to do a great job with the line drivers our modulated drivers and from an overall TAM standpoint the drivers are more like 80%, 10% on the receive side on transimpedance amplifiers and then we talk about lasers if you remember it was a Mitsubishi and CyOptics division of Avago, so there is no one who really transcends all of those things.

I would say Avago, when we talk about data centers I would say would have the strongest position and great a Company we like to compete with..

Sure. From the cost benefits, I was referring more to the laser side..

Yes. Sorry. I missed the question. Yes. The Etched Facet technology, if you know when we picked the BinOptics last year, it is transformative. A lot of the laser supplied into the market are using decades old cleaved facet technology.

What BinOptics did was a venture-capital funded startup that developed Etched Facet technology which is a wafer skill process, very familiar to what semiconductor guys do like us.

In the compound semiconductor world, it is I think I calculated of time of the acquisition it was minimally a factor or two that are cost advantage of BinOptics versus their competition, competition being CyOptics in the publicly stated financials at that time. Since that time by doubling capacity, you get a proportional reduction in cost structure.

As we go into the Lowell, it is again from three-inch to four-inch higher yields, I mean we have several integer multiples of cost advantage where it is the reason frankly and the most price-sensitive part of the laser world and PON fiber-to-the-home access is very much consumer market.

We are above and arguably ending up well above our target financial model, so you could imagine whether you are talking about wireless backhaul, fiber backhaul or even datacenters. The cost advantage can really be brought to bear..

Got it. Understood, guys. Thank you very much..

You are welcome..

Thank you. Our next question is the follow-up from Tore Svanberg of Stifel. Your line is open..

Yes. Thanks.

Just two quick follow-ups, first of all how should I think about the possibility profile of the thus far in [ph] business?.

It is consistent with our financial model on a go-forward basis. Out of the gate..

Okay. Very good, and then how should we think about OpEx in the December quarter. I think, maybe we talked about somewhere around $35 million, $36 million, when we excluded the automotive business.

Is that sort of the good starting point?.

We did in totaled $38.5 million in operating expenses. As we have talked about in the past, our fourth quarter settlement a lot of variable compensation, so that can trend down as much as $2 million, so it is in between $36.5 million and $38.5 million overall..

Okay. Perfect. Thank you very much..

You are welcome..

Thank you. At this time, I see no other questions in queue. I would like to turn to back to Mr. Croteau for any closing remarks..

Thank you, operator. Before closing our today's call, please note that we will be attending the Goldman Sachs Conference this Thursday in New York, The Barclays Conference December 9th in San Francisco and the Needham Conference January 12-14 in New York. To request a meeting with Management, please email us at ir@macom.com.

With that, I would like to wish everyone a happy holiday season and a healthy and prosperous New Year. Operator, you may now disconnect the call..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone have a great day..