Good afternoon, and welcome to the M/A-COM Technology Solutions Fiscal Third Quarter 2016 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Tuesday, July 26, 2016. .

I will now turn the call to Leanne Sievers of Shelton Group, the Investor Relations agency for M/A-COM. Leanne, please go ahead. .

Good afternoon, and welcome to M/A-COM Technology Solutions Third Quarter 2016 Earnings Conference Call. I'm Leanne Sievers, Executive Vice President of Shelton Group, M/A-COM's Investor Relations firm. With us today are M/A-COM's President and Chief Executive Officer, John Croteau; and Senior Vice President and Chief Financial Officer, Bob McMullan. .

If you've not received a copy of the press release, you can obtain a copy on M/A-COM'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, M/A-COM 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 M/A-COM's filings with the Securities and Exchange Commission, including its current report on Form 8-K filed today, annual report on Form 10-Q filed on November 24, 2015, and quarterly report on Form 10-Q filed on April 27, 2016.

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Any forward-looking statements represent management's views only as of today, July 26, 2016, and M/A-COM 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 adjusted non-GAAP measures and financial information, including all income statement amounts and percentages other than revenue referred to on today's call unless otherwise noted.

These financial measures and a reconciliation of GAAP to adjusted 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 M/A-COM's website. .

M/A-COM has modified its format from past press releases of its reconciliation of GAAP to adjusted non-GAAP results, reduced the number of reconciling adjustments and expanded its discussion of adjustments to GAAP and the reasons for exclusion from GAAP, in line with recent SEC commentary and requirements.

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 Investor Relations section of M/A-COM's website. .

And now I'll turn the call to M/A-COM's President and CEO, John Croteau. John, please go ahead. .

Thank you, Leanne. Welcome, everyone, and thanks for joining us today. We're going to do things a little bit differently today. Coming off of a very well-received Analyst Day, we're adding a few aspects to our earnings call.

Bob and I have been fielding a lot of questions about our Optical business, and in light of the favorable results despite current market conditions, going forward, we've decided to provide a greater level of detail as well as balance, highlighting the puts and takes, headwinds and tailwinds across our optical markets.

This should better underpin our quarterly performance, guidance and long-term prospects. With that, I'll begin today's call with a quick snapshot of our third quarter results for fiscal 2016 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 a summary of our execution during the quarter, along with end market insight, followed by guidance for the fiscal fourth quarter of 2016. .

Straight to the results. I'm pleased to report that for our fiscal third quarter of 2016 revenue was $142.3 million, at the top end of guidance, with adjusted gross margin coming in at 57.3%. Adjusted net income was $27.9 million, with adjusted earnings per diluted share at $0.51. Networks was up 8.6% sequentially, within which Optical was up 4.4%.

Aerospace and Defense was essentially flat and Multi-market was up 1.9% sequentially. Our catalog business, which spans Networks, Multi-market and A&D, grew strong sequentially on the back of new product growth in MMICs.

All in all, despite headwinds in PON, our market share gains in lasers and strong demand in our catalog business enabled us to grow revenue 6.5% and adjusted EPS 10.9% sequentially, another quarter of solid execution by the team. .

Now let me turn it over to Bob to review our fiscal third 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 statement amounts and percentages will be discussed on an adjusted non-GAAP basis.

We have further highlighted in our earnings press release what the caption adjusted amounts include and why we have excluded each to enhance the core understanding of our financial performance. A reconciliation to the most comparable GAAP measure is included in today's earnings press release tables. .

Revenue was $142.3 million during the third quarter, representing a sequential increase of 6.5% compared to revenue of $133.6 million in the prior quarter, an increase of 30.4% compared to $109.1 million in the fiscal third quarter of 2015.

Internal growth contributed 85% of total sequential growth before adjusting from M/A-COM revenue from FiBest, a former customer, which would have further increased organic contribution. .

Revenue by end markets. Networks, $104.6 million and 73.5% of total revenue, up 8.6% sequentially. Multi-market, $19.6 million and 13.8% of total revenue, up 1.9% sequentially. And A&D, $18.1 million and 12.7% of total revenues, up 0.5%. Of the total network revenue, total optical was $76.7 million, up 4.4% sequentially.

Specifically, long-haul, metro and data center increased 9.3% sequentially to $28.1 million. Lasers, including access, backhaul or CPRI, data center and other, including silicon photonics, increased 12.6% sequentially to $34 million. And other optical, including PON electronics, declined 16.5% sequentially to $14.7 million.

Long-haul, metro and data center revenue was negatively impacted by certain supply constraints of key materials during the fiscal third quarter. The supply issue has been resolved over the past few weeks satisfactorily and should not be an issue in the fiscal fourth quarter.

The strength of a diversified portfolio beyond optical products contributed to growing 21.8% sequentially to $28 million. Adjusted gross profit in the fiscal third quarter was $181.5 million or 57.3% of revenue compared to $77.6 million or 58.1% of revenue in the prior quarter and $63.3 million or 58% in the fiscal third quarter of 2015. .

lower gross margin products from fabs, we are in the process of consolidating into our Lowell facility; lower gross margins than average for FiBest revenue as products have not yet fully transitioned to incorporating M/A-COM components; and a declining gross margins for PON lasers due to forward pricing and exchange for volume orders.

PON laser still contributed gross margin above our target operating model of 60%. In fact, excluding the recent FiBest and Metelics acquisitions, gross margin exceeded our target gross margin at 62%. .

In terms of operating expenses for the fiscal third quarter. Total adjusted operating expenses were $46.6 million compared to $45.2 million in the prior quarter and $37.5 million in the prior year's quarter. Operating expenses were up 3.2% sequentially, about 1/2 the rate of sequential revenue growth, primarily due to higher variable costs. .

Adjusted income from operations were $34.9 million or 24.5% of revenue. This compares to $32.4 million or 24.3% of revenue in the prior quarter and $25.8 million or 23.6% of revenues in the prior year's quarter. .

Adjusted interest expense of $4.1 million for the fiscal third quarter was flat compared to the prior quarter and the prior year's quarter. Other adjusted income of $1.9 million represents revenue from a consulting contract from our automotive business divestment that continues through fiscal '17. .

Our normalized income tax rate for the fiscal third quarter was 15%. This tax rate was consistent with the prior fiscal quarter and down from 18% in the fiscal third quarter of 2015. We paid cash taxes of approximately $400,000 in the fiscal third quarter. .

Our fiscal third quarter adjusted net income was $27.9 million or $0.51 per fully diluted share compared to fiscal second quarter net income of $25.7 million or $0.46 per fully diluted share and net income of $18.4 million or $0.33 per fully diluted share in the prior year's quarter.

EPS grew sequentially 10.9% and 54.5% over the same quarter in the prior year. The share count used to compute adjusted fully diluted EPS was 55.3 million shares for the fiscal third quarter, 55.4 million shares for the fiscal second quarter of 2016 and 55.2 million shares in the fiscal third quarter of 2015. .

Adjusted EBITDA, or earnings before interest taxes, depreciation and amortization, was $42.1 million, up 7.9% from $39 million in the prior fiscal quarter and up 45.2% from $29 million in the prior year's quarter.

GAAP cash flow from operations was $19.2 million in the fiscal third quarter as compared to $19.6 million in the fiscal second quarter or 68.9% and 76.3%, respectively, of non-GAAP net income. .

Inventories grew $10.1 million over the prior fiscal quarter, as we manufactured buffered stocks in advance of previously noted fab closings and longer manufacturing cycle for certain products, including long-haul and metro optical. .

After deducting capital expenditures for the third and second fiscal quarters, free cash flow was $12.1 million and $8.6 million, respectively, or 43.3% and 33.5% of adjusted non-GAAP net income for the fiscal third and second quarter, respectively. .

Turning to the balance sheet. At the fiscal quarter end, our cash, cash equivalents and short-term investments were approximately $90.6 million, up $8.8 million over the fiscal second quarter. Accounts receivables were flat at $92 million at the end of the prior quarter.

Days sales outstanding were 59 days compared to 62 days at the end of the prior fiscal quarter. Inventory was $117.1 million compared to $107 million in the prior quarter. Inventory turns were 2.1x flat with the prior quarter.

We are building inventory in line with our future revenue expectations and specifically to allow for buffer stocks for customers affected by the closing and consolidation of the former Metelics fab into our Lowell fab and, as noted already, due to a longer manufacturing cycle for certain products, including optical.

Conversely, our distribution and channel inventories are at the lowest level in 2 years. .

Long-term debt was $340.6 million, inclusive of acquired capital leases, and we had $130 million of availability in an undrawn credit line. Capital expenditures in the fiscal third quarter were $7.1 million or 5% of revenue compared to $11 million or 8% of revenue in the fiscal second quarter.

Capital expenditures are necessary as we continue to grow our engineering resources, design centers and on-site customer support of steep ramps and customer design wins in base stations and data centers as well as expanding wafer test and packaging capability and capacity for GaN and high-speed lasers. .

Related depreciation expense for the fiscal third quarter was approximately $5.3 million or compared to $4.8 million in the prior quarter and $3.3 million in the prior year's quarter.

Our depreciation expense is a fraction of our capital expenditures, which is logical based upon our accelerating growth but in the short term is negative to free cash flow. Specifically, fiscal year-to-date, we generated positive free cash flow of $29.5 million, including $14 million of depreciation expense and capital expenditures of $24.9 million.

This artifact impacts free cash flow by $10.9 million. .

Before handing it back to John, I would like to provide a quick update on our ongoing litigation with Infineon Technologies. As you know, last quarter, we initiated legal action to confirm and defend M/A-COM's contractual rights to use pioneering and patented GaN on silicon technology developed by Nitronex in M/A-COM's core markets.

Infineon recently disclosed new information that we believe explicitly confirms our claims in that litigation. Infineon has, in fact, been developing certain products that it is prohibited from marketing or selling based on our agreements. Based on this information, we have added new claims of breach of contract to the case as of the last week. .

We're encouraged by Infineon's response so far, which has been to engage in procedural delay tactics in an attempt to avoid, as the lawyers would say, engaging on the merits of our claims. We are confident that our full GaN rights remain in force and effect and expect the federal court to confirm those rights.

I reiterate, the outcome of this litigation is immaterial to our near-term operating results. The litigation has everything to do with securing long-term investment returns for M/A-COM shareholders, as we have invested in moving the industry, technology and society forward. .

Back to you, John. .

Thanks, Bob. And to continue with the GaN update. On the customer engagement front, we remained on track with M/A-COM GaN adoption in base stations, with customer forecast now showing volume production programs beginning in the first half of 2017. We did experience a slight setback last quarter.

Our Gen4-processed quals slipped 6 weeks from July to mid-September. Some of our qual lots had been missed processed during fabrication, so we had to restart the material. The new lots are now in-house and on track for this final step in qualification.

It's important to note that this slip was not in the critical path and will have no impact to the ramp of production revenue. Customer design-ins continued in parallel and remain on track without delay. .

Last quarter, we successfully delivered complete amplifier lineups, meeting key program milestones for our first production programs at 2 Tier 1 customers. We now have purchased orders in-house for prototype quantities, servicing mainstream and emerging higher frequency 4G LTE bands.

Customers have begun sharing their own demand forecast such that we can align our own capacity ramps accordingly. Some of these initial programs are at the platform level, which means once we qualify the initial radio then M/A-COM can, can more readily proliferate across customer programs.

This is key in terms of time to revenue and the rate of growth and adoption in 2017. We have now successfully completed customer design reviews for the first of these platform designs. Again, in summary, we remain on track with customer forecast, showing volume production programs beginning in the first half of 2017. .

Okay, switching over to Optical. In aggregate, our optical business grew 4.4% sequentially and now constitutes 53% of our total business. Overall, based on our customers' quantitative feedback, the PON markets saw a sequential decline in unit shipments in the June quarter due to a short-term inventory correction.

In line with that, we saw a sequential decline of 23% in laser drivers in TIAs shipped into PON. At the same time, our sales of lasers into PON increased by 32%, as we believe we expanded share by more than 20 percentage points in one quarter.

Customers have naturally begun consolidating their supplier base down to a few viable alternatives, including M/A-COM. We estimate our market share in Q3 for lasers and PON to now be at 68%.

So in aggregate, our share expansion in lasers more than compensated for the soft market conditions such that the total sales into PON increased sequentially by 10%.

This success, in the presence of strong market headwinds, highlights the economic benefits and the operating leverage that we get from our wafer skill manufacturing for HPAs at lasers, which coupled with our preeminent market position enabled us to sustain financial performance even in compressed market conditions.

As a natural consequence of these kind of share gains where we support forward pricing in return for volume, we did see some degree of pressure on gross margin, which we estimate as less than 100 basis points in our fiscal third quarter.

That said, adjusted gross margin on lasers, even in PON, remain accretive to corporate margins and are above our target model of 60%. .

data centers. Our Etched Facet Technology and manufacturing infrastructure can service the expected ramp in data center volumes, which, much like PON, will benefit from the available capacity and cost structure from our Lowell fab. .

Switching to metro, long-haul and data centers. In total, our business in this area grew 9.3% last quarter. Strength in metro drove growth on top of what otherwise was flat demand in long-haul. Revenue last quarter was, in fact, supply constrained due to limited access to key materials to support aggressive product ramps.

We see full recovery and unconstrained supply in this our fourth fiscal quarter. .

Rounding out our Optical segment. Fiber backhaul declined 15% sequentially due to temporary softening in demand in mobile build-outs. Likewise, wireless backhaul declined 10% as well. To close on my comments on the Optical business, let me make some observations. .

There was a lot of chatter last quarter about M/A-COM's exposure to volatile optical demands. Given our recent success, many claimed that we would now be exposed to inevitable surprises. Acknowledging there was a lot of that negative sentiment out there, let me emphasize something.

We are unique in applying semiconductor economics to the optical networking industry. We invest in proprietary products and technologies that address broad market demand, remaining agnostic to industry standards, network configurations, transceiver suppliers and form factors.

That model stands in stark contrast for those who service the captive needs of one standard, one part of the network or one transceiver supplier. That's where you see surprises. To us, there are many such puts and takes each quarter that tend to offset one another.

Overall, our Optical business should generally rise with the tide of secular growth that is the insatiable demand for Internet bandwidth. That's the advantage of applying semiconductor economics to an area of strong secular growth. And that's our model for growth at M/A-COM.

And that's why in aggregate our Optical business grew sequentially in Q3 despite multiple isolated headwinds, and that's why we believe our success in optical is sustainable over the short, medium, as well as long term. .

Now rounding out the rest of the Networks. Recognizing that 20% of total sales was wired and wireless products outside of optical, we saw strong sequential growth on the back of new MMICs, such as switches, LNAs, mixers, frequency multipliers, VCOs and power amplifiers.

As articulated at our Analyst Day, this is a wide-open playing field for M/A-COM as we regain our natural market share from traditional competitors like Hittite, Corvil and Microsemi. .

Moving on to active antennas. Another bright spot last quarter was the progress that we saw in our A&D business, notably in active antennas. While revenue last quarter was relatively flat, program awards and purchase orders for A&D are shaping up to deliver twice the growth rate of our target operating model through fiscal 2017.

This initial growth wave comes from the back of MMICs, not yet Tiles, as we outlined at our Analyst Day. .

With regards to SPAR Tiles, we're still in the very early stages of market adoption. The defense programs where we have the most traction are actually among the most sensitive in terms of national security interests, so we are unlikely to disclose successes, even as we secure the business. .

Now that said, on the civil side we understand the FCC under legislative direction has begun the process to potentially sell L-band spectrum, part of the proceeds of which is slated to fund civil radar deployments.

So it actually appears that the opportunity may be pulling into the left, with some of these civil programs possibly materializing sooner than we previously expected. .

In preparation for that possibility, again, moving the ball down the field each quarter, this quarter, our fourth fiscal quarter, we'll complete shipments for the first full-scale prototype Empire system for deployment at the severe storm center in Norman, Oklahoma.

So all told, across both civil and defense programs, MMICs, as well as Tiles, the short-, medium- and long-term growth prospects in A&D is attractive, along with Optical and GaN, as articulated at our Analyst Day. .

With that, let's talk about next-quarter guidance. For the fiscal fourth quarter ending September 30, 2016, we expect revenue to be in the range of $148 million and $152 million; adjusted gross margin between 57% and 59%; and adjusted earnings per share between $0.54 and $0.58 on an anticipated $56 million fully diluted shares outstanding. .

Now adding some color to that guidance. We expect A&D to experience a breakout quarter in terms of sequential growth on the back of MMICs, with Multi-market and Networks showing sequential growth as well. We remain cautious on any significant recovery in the PON market.

We also expect dilution of gross margins to continue for another quarter as we integrate recent acquisitions. We expect that, combined with higher variable compensation, will moderate the rate of growth of adjusted EPS next quarter. .

Let me make one final observation. Hitting the midpoint of our guidance would yield annual revenue and adjusted EPS growth of approximately 30% and 50%, respectively, over fiscal 2015.

As outlined at our Analyst Day, we can achieve this through the combination of disciplined M&A, integration and organic execution across multiple secular growth drivers, not just Optical, and within those secular growth drivers not just PON.

We're realizing our aggressive market share ambitions, and we're executing in the face of tough market conditions.

Based upon another quarter of product execution and customer progress, our confidence and excitement grows daily that our prospects for long-term growth and profitability are fully in line with our vision, as articulated at our Analyst Day in New York. .

With that, I'd like to close today's script and my remarks by thanking the team for yet another quarter of solid execution. Operator, you can now open the call to questions. .

[Operator Instructions] Our first question comes from the line of Blayne Curtis of Barclays. .

This is Tom O'Malley on for Blayne Curtis.

Can you talk a little bit more about the margin puts and takes as we head through June, September and maybe even into December here? Can you talk about levers just both ways, how you see them kind of shaking out in the next few quarters?.

Yes, good questions. So forward-looking, we continue to have growth in new products. A lot of those new products, as we articulated and showed during the Analyst Day, are in fact in excess of 70% gross margin.

So we should be able to see continued steady progress on organic gross margin, that is before the acquisitions, Metelics and FiBest acquisitions. That said, depending on what -- how the PON market plays out, we're currently very cautious in terms of predicting any better conditions, so that pressure on gross margins remains for another quarter or so.

We have a very aggressive road map on further reducing COGS in that space, but modest quarter-to-quarter improvements. So in general, that will remain above our 60% target, kind of our organic gross margin was 62% last quarter and should remain there in pretty good shape.

And then quarter-by-quarter, we'll see progression as we complete the closings of the Metelics factories in Sunnyvale and Londonderry, New Hampshire. And those are the key actions to get the gross margin drag and dilution off for Metelics.

And then FiBest is a little more complex because it has to do with the amount of M/A-COM first-party content that goes into the modules. And there's a whole bunch of levers that are going there. But we're pretty confident that over the next 2 quarters we'll get all of that dilutive effect off the books, and we should be back over 60%. .

Great. And just one more quick one in terms of GaN. You're saying there's some volume production in first half '17.

Can you give us the -- any kind of vector on that and where we should look for some kind of the first results? I know in defense it's a little hard to track, but where should we look first some progress at GaN?.

Yes. Well, base station is the existing market. The other big market opportunity is in RF energy. We had a fantastic launch of our 300-watt transistor at MTT and IMS, ended up with, I think, we were voted #1 GaN product coming out of the show. But base station is the market that exists today. We are squarely locked on to multiple first-tier guys.

It's a very concentrated market. So the targets are very well set. As I mentioned in the scripted remarks, we've got the first programs locked in. Customers are sharing demand forecast now, which is vitally important because we may need to make the capital investments in scaling our capacity consistent with the customer expectations through next year.

Beyond the inflection point that we expect in that first half of the year, it is very hard to predict the rate beyond those initial first programs. It has to do with how quickly we proliferate from the first radio designs to the second, third, 10th and 20th designs.

And that turns out to be experiential, experiential with the OEMs and experiential with the service providers. So we -- I should say our growth model of 20% assumes very, very modest GaN contribution. If that really takes off like it could, then it's all upside to the growth model. .

Our next question comes from Mark Delaney of Goldman Sachs. .

Yes. The first question is a follow-up on the gross margin topic. I think you reported gross margin in total for Aeroflex/Metelics and FiBest as running around 30% this past quarter.

Once that's fully integrated, what sort of gross margin do think you can achieve for those acquired companies?.

It'll be consistent with the rest of our business, our targets. .

Okay, that's helpful. And then also a follow-up on the GaN for base station topic. And John, you're talking about multiple customers in -- at least in first radio opportunities.

Could you clarify, I mean, if it's only the initial deployments for some -- that your customers are looking for, what sort of revenue you could maybe get in 2017? And then, how many customers and the revenue opportunity could be in 2017 if you continue to see follow-on orders for GaN on base stations next year?.

That speculation about how much it can be next year is what I try to avoid. As you know, Mark, we have a management style where we're really trying to be -- set expectations such that we can deterministically deliver, meet and beat. So as I said, our 20% growth model assumes, frankly, negligible contribution from that.

Not because we believe that, it's just that we don't want to set expectations for something which is not squarely in our control. And when you talk about customer adoption, you talk about customer risk aversion and service provider experience, all indicators are extremely positive.

We -- there's kind of a herd mentality in these markets where you start making progress with customer A, and customer B and C start moving, and customer D says, "Wait, we're too late." And we've hit that critical mass. So to me, at least in my mind, the question about M/A-COM GaN adoption in base station is behind us.

The real issue is how quickly we can proliferate across and it gets exactly to your question is how much of that ramp do we experience in the second half of '17. And again, those inflection points ramp are, frankly, nearly impossible to predict. .

That's helpful. And one last one from me on PON. And again, appreciate the incremental color the company provided this quarter on that segment. I think last call, John, you mentioned, there's maybe the potential for the PON market to grow next year. Now you talked about seeing an inventory reduction and a more cautious outlook.

Can you just reconcile some of the changes you're seeing in the PON market? And any more color on that segment would be helpful. .

Yes, it's a great question.

So we did a lot -- as you can imagine, when you see these doomsday scenarios and a lot of, frankly, competitors coming out with extremely pessimistic comments and results, we made sure we went to all of our customers, got very detailed quantitative inputs about what their end business is doing, where their inventory stand and where the channel inventory stand.

And the conclusion was interesting. If you add the third and fourth calendar quarter box shipments last year, you do the same thing for the first half of this year and the second half of this year what the outlook is, it's amazingly constant. What happened was in the first quarter there was an inventory build.

It's about constant at about $52 million per half year, so $104 million for the year. But there was $28 million in the first quarter and then a substantial decline in the second quarter. Now the indications are demand is flat, it's healthy. We're being beaten upon for delivering 10G PON designs now in design wins, building upon the 2.5G.

Customers are not backing off expectations. There's lots of healthy indications that people like China Mobile have new deployments. So the degree of pessimism last quarter I think it's a classic inventory cycle, right. But again, until we see the orders and the shipments recover, we're going to remain cautious in calling it flat.

But that's not what our customers are telling us. .

Our next question comes from Harsh Kumar of Stephens. .

John -- I'm sorry. Bob, question for you. You mentioned 3 factors for the lower gross margin.

If you had to pick one as the major culprit, would that be Metelics and the gross margin associated there?.

It's really equal between the acquisitions. There is -- gross margins are affected by the increased bonuses and variable comp in the quarter. But it's pretty balanced, because as you see the revenues are pretty equal between the 2, so their impact is about equal.

But the visibility towards Metelics mix at the moment based upon FiBest's product mix is a little clearer to us. So I think we solved that one first before the second. .

Got it. Okay. Understood. And then you talked about some supplier constraints, I think, in the metro side.

If -- can I ask you how much revenues you had to leave behind because of that? Was it even tangible or just insignificant?.

It would have enhanced our growth rate and would have added to the top line in the $1 million-plus range. .

Okay, fair enough. And then, John, maybe a question for you. You talked at length about your litigation with Infineon.

I guess, let's just say you go to battle and you win, what would you want? Are you looking for complete stoppage? Do you believe that this is a market that is yours? Or are you looking to collect some money, punitive damages, or maybe even work out a license deal with them eventually?.

Well, I got to be careful what I say because there's confidentiality provisions in the original Nitronex-IR agreement. So we're very cautious to make sure we adhere to everything. The reality is we simply want them to adhere to the agreement they inherited with the acquisition of IR. It's pretty much that plain and simple.

It could not be more black and white. And if you read the redacted versions of our claims and our revised claims, you'll see exactly how black and white it is. And it's pretty much that simple. It's just honor the agreements that you inherited with the purchase of -- the acquisition of IR. .

That's fair. And last one, and I'll get back in line. I heard a statement saying that if you hadn't had FiBest and Metelics and all the others sort of one-time things your margins would have been probably 62%.

Did I hear that correctly?.

Yes. In fact, we've -- as we noted in the preliminary statement, we've enhanced the reporting in the press release. We actually disclosed that individually. You can reconcile those 2 numbers and the revenues and the margins. .

[Operator Instructions] Our next question comes from the line of Tore Svanberg of Stifel. .

This is Erik calling in for Tore. I just wanted to circle back one clarification or maybe just kind of follow the thought. It sounds -- looks like gross margins are kind of moderating a little bit, and I think you said that maybe the next 2 quarters you might have that cleared up.

So when should we -- when do you think about that 60:30 model? How should we be looking at that in terms of our modeling?.

Yes. I can take this one, Bob. So again, gross margins, excluding the acquisitions, and as we progress through the integration of acquisitions, we're 62% and are progressing past our 60% model.

And as we complete those integrations, shut down the 2 factories and Metelics and also do the actions that we're doing on the FiBest acquisition, those will be consistent with our 60% model as well. So some time in the next few quarters as we complete that integration, we'll be north of 62%.

So that gross margin is not, to us, the issue of getting to our model. And 30%, it's all about growth and operating leverage. Recognize we're fully invested in GaN for base stations and RF energy, and we're invested in data centers.

We've invested in active antennas, a lot of MMICs going after the old Hittite Corvil business that's been left on the table. There's a lot of growth that's turning on right now, starting amazingly with MMICs in our catalog business and in A&D. As that growth comes, the drop-through is fabulous because we're already fully invested.

So as we grow in the coming quarters and through the next year, through operating leverage, we'll meet and surpass 30%. And then -- that progression will continue; it will not stop at 30%. .

That's... .

Erik, if I could just refine the comments. 62% is in the current mix of products, not a future mix of products, as John mentioned. .

Yes, I understand. And then on the -- so on the active antenna business, obviously, there's 2 sides. There's the defense programs. Can you just maybe give a little bit more insight into that? You're being a little bit more cautious on that now, and it sounds like civil being a little bit more of an uptick that you're seeing.

Any thoughts there?.

Yes. So one big point of clarification is, I guess, if you attended -- for those who attended the Analyst Day in New York, Jack Kennedy, who presented that active antenna section, started with a description of the short-term and immediate-term opportunity with growing MMICs. MMICs are monolithic microwave ICs.

It's the semiconductor content that goes into these active antennas, whether it's airborne, ground based, seaborne and what have you. That is front and center right now.

And again, so the programs and the purchase orders that we've secured in the past quarter are fully underpinning growth at least beyond the 20 -- 2x our stated growth rate for the company. So beyond 2x 20%. So that's off to the races. We don't have to wait for Tiles and [indiscernible] and worry about civil versus defense programs and so on.

So that's happening regardless. On the Tiles stuff, again, it's still early days. It was early days when we presented it at the Analyst Day. We thought we were emphasizing that. On the defense side, there are some very national security-sensitive programs that are on the table. If we land those, which very well could happen, it's substantial.

But there's no way that we can talk about those, and we can't give any forward-looking indication of those, especially what they are and who they're with. So it's not worth even discussing the defense side. On the civil side, that is medium to long term. That is not short term. We did not represent it that way, and it's not.

That said, I mean, the news right now is the FCC has begun preparing to sell L-band spectrum. I mean, you're talking about... .

The 15th of August. .

15th of August. I should say, $86 billion is the... .

Estimate. .

Yes. And part of those proceeds are to go to building out civil radar deployment. So this is shaping up that, that could be pulling in. And again, we're not representing it as short-term 2017 programs necessarily, although you could start prototype built in that time frame, but it's still too early to tell on that one as well.

But for the next year, it looks like A&D could actually be driving -- be the star in terms of growth percentage rate for the portfolio. .

And that's on top of the heavy growth that you're seeing in optical. .

Exactly. .

Yes. .

Our next question comes from Steve Smigie of Raymond James. .

Great. I just wanted to ask on the laser business. You sound like you're closing in on 70% share there. What does the growth profile look like after that? I mean, it's an amazing feat in and of itself.

But I can imagine it could still be pretty good but maybe tapers off a little bit in terms of the growth going forward?.

Yes, we captured something like 20% share quarter-on-quarter. At 70%, there isn't much further to go. And there just gets to be natural limitations in terms of people supporting alternate vendors.

And what basically happened was, in these kind of conditions customers really want to go down to a very stable, secure, long-term supply chain, which includes a small number of financially stable long-term suppliers; and frankly, the tertiary vendors just gets squeezed out. That is exactly what happened last quarter. Now PON, we can speculate about.

Is it a flat business? Does it tail off? Does it drop and then pick off -- pick up again with 10G PON deployments? Our stated assumption at the Analyst Day was we thought it was going to fade off. We came right back out, and that OFC became clear to us. Now the customers think it's actually going to grow with 10G PON.

Frankly, our assumptions are we're going to sustain share, transition from 2.5G to 10G PON, and will be -- it'll be a very, very, very nice cash cow for us. The growth is in things like CPRI, fronthaul and mobile infrastructure, but most notably, data centers.

The laser technology that we have and the scale and cost structure in Lowell is absolutely perfect for deployment in data centers, which is -- has the unit volumes of data -- of PON but a value proposition closer to metro. .

Okay, great. And I was hoping you could just clarify your comments on Norman, Oklahoma. Was that -- I think, you have indicated that one was civil and that's sort of a test deployment.

And would that one potentially have Tiles on it? I know you said that the Tiles was a ways out, but I was just kind of curious, just as a milestone, if there's actually something going up the trial, when we put some Tiles out there functioning, et cetera?.

Yes. So if you remember back to the Analyst Day, we actually had pictures in the Norman, Oklahoma storm center and around radar where our first panel is going to be deployed. To be clear, it is the production Empire panel that we've manufactured. And this quarter, we'll be competing shipments of Tiles that go into the first full-scale implementation.

The field trials so far have been smaller arrays. This goes to a full-scale array for a complete demonstration vehicle for the FAA and NOAA, which is, you can imagine, you need to have that as a critical milestone on the path to triggering the ultimate investments and deployment.

And that's -- beyond the successful field trials, that's the next major milestone. And we expected that, that would tee up when they would be going out for the RFI for the production deployments. .

Our next question comes from Quinn Bolton of Needham & Company. .

John, just wanted to come back -- but just wanted to sort of ask. On the laser said, it sounds like, clearly, a good part of that laser business is affected by the PON market. And so your comments about caution on PON, that didn't seem to stop the laser growth in the June quarter.

But wondering as you look forward to perhaps a flatter market in PON, do we start to see that hit the laser business? And can you give us any sense within laser how much is PON? How much is optical access fronthaul -- non-PON applications?.

Yes. I'd say, first of all -- how can I say this? The growth in the June quarter was despite a fairly dramatic sequential decline in demand due to an inventory correction. The reason why we could grow was because we captured 20 points of incremental share quarter-on-quarter. So that was fortuitous.

You can imagine if the decline didn't happen in the end market what would have happen in terms of our sequential results. And we could have shipped, by the way. We have the capacity to be able to support that. The reality is that will flatten inevitably because there's limits to how much share you can take.

PON in aggregate will show some growth as it recovers from the inventory correction. But that I would not present as a sustainable long-term growth. There's some that say that with 10G PON that there will be growth, but that's not what our working model is.

The growth on a go-forward basis in our laser business is all about things like mobile infrastructure, both backhaul and fronthaul and then, most notably, data center. So on aggregate, we have a lot of room -- I mean, data center shipments are at the very, very early stages.

The backhaul mobile infrastructure stuff I would guess is 20% of our total, and it was depressed, so that's going to show a recovery and growth. So there's a lot of -- from our prospective, especially with the data center opportunity, there's a lot of juice for growth beyond PON. Again, PON, we'll just treat as a very, very nice cash cow. .

And then just to follow up on the laser business. You kind of touched on those 25-gig laser opportunities in data center. I think last quarter you said you were progressing through the quals.

Just wondering if you had any update for us in terms of production design wins on the laser side given the significant unit opportunity on the data center side?.

Our initial design wins and our initial business in data centers is actually on the auto electronics, not the lasers. We're layering the 25-gig laser design wins after our position with things like laser drivers supporting other people's lasers as well as some of the modulator drivers and CDRs and so on. So we're a player in all the major accounts.

We're bringing in the lasers now at the major accounts. But it's too early to broadcast where we succeed and so on. In fact, it would be inappropriate to our customers. I think we learned that lesson commenting on AOI a few quarters ago. .

Got it. And then just on the OpEx. Bob you mentioned some variable compensation expenses that you come into the September quarter and the end of the fiscal year.

Could you give sort of any sense on what you think non-GAAP OpEx does sequentially in the September quarter?.

Yes. I think the easiest way to do it is take the midpoint of everything. That's about somewhere between $46 million and $47 million. .

Our next question comes from Richard Shannon of Craig-Hallum. .

I probably just have a couple left here. John, I think you mentioned in your prepared remarks -- and at one time you did a little bit fast, but in terms of your guidance for the September quarter, can you give us the puts and takes -- or the -- I guess, your thoughts on what Optical will grow and then some of the puts and takes inside.

I think we understand it on the PON side, but maybe on mobile infrastructure and metro, long-haul, et cetera. It would be good to repeat how much the growth is. .

Yes. So the growth -- we obviously guided strong sequential growth again and strong EPS growth. But the hero this time, believe it or not, is A&D. We've got MMIC programs and airborne radar, but that's less than half. There's lots of other things that our MMIC is turning on in A&D as well as our catalog business, MMICs in Networks as well as A&D.

There is some modest growth in Networks, and they're coming from Optical. But the real growth there is in metro. As we indicated, we left not insignificant revenue on the table with the metro business due to supply constraints. We are -- we, like a lot of people right now, are struggling to keep up with that potentially exploding demands.

So metro will continue to grow. We're assuming in PON, like I said, we're very modest in our expectations sequentially in terms of what we'll do certainly for the next quarter. At some point, that market, we're told by our customers, will recover, but we're not calling that for the September quarter.

So it's really -- it's an A&D show for the next quarter, probably with metro and long-haul. .

Okay, great. And just to follow up on that.

John, can you give us any more clarity or details on the materials that were an issue for your supply constraints? And also, just as a quick follow on also on your comments, just kind of reiterate what you think your share is with the optoelectronics within the aggregate metro space?.

Yes. I think it would be inappropriate to mention the supplier and embarrass them publicly, but the key material shortage was -- it's not appropriate. And frankly, I don't want to telegraph to our competition what challenges we've had operationally. But suffice to say, that has now recovered.

We've got the material flowing in to be able to realize all available demand for the next quarter.

And what was the other -- the second part of the question?.

Just the share in 100G metro for optoelectronic?.

Yes. We estimated our design win share. And if things don't change, it's approaching 80%, minimally 70% from modulator drivers. That's where we really play very well. That's about -- our content that we supply in there is about 80% of available TAM. And we've done very well with those modulated drivers, and we're, frankly, the de facto standard.

So as metro does, we think we will go. Our design win footprint transcends several transceiver guys, several network deployments, several system guys. So it's not like we're exposed to any one customer, any one deployment. As metro goes, our growth should mirror that. .

We have a follow-up question from Harsh Kumar of Stephens. .

Hey, a follow-up question for you, John.

This Norman, Oklahoma, deal, should I be thinking of that as another step in the program and you're going to get these kind of spotty deals? Or is this the start of something that we can start the model perhaps maybe? Any kind of clarity that you have would be appreciated?.

No. I mean, they're completing the shipments for the Empire system at -- in Norman, Oklahoma was exactly what Jack Kennedy said in our Analyst Day, that in the June -- in the September quarter, we'll be completing the first full-scale prototype.

Once installed in Norman, Oklahoma, there, over the coming months, that is the necessary milestone for the RFI to be issued. And FAA and NOAA, I mean, everything is on track. We heard that was kind of pulling in. They're really encouraging.

I mean, the $10,000 question, frankly, is who's going to pay for the stuff, right? And the fact -- the indication now is FCC directing the sale of L-band spectrum to the tune of -- Bob, your number was $86 billion?.

It'll be -- all those proceeds are shared with the television broadcasters that are given but -- to some extent, but it's enough to build a few Tiles. .

We'll take our few percent of that, Bob. But I mean, it's -- but obviously when the funding source starts becoming visible, it becomes more real. Now again, I'll caution -- use the same caution we used in the Analyst Day and what we keep doing. Until we get passed the RFI and until that the time line gets solidified, it's a latent opportunity.

And it's really an issue of -- from our perspective, it's an issue of timing, not if. .

And at this time, I'd like to turn the call over to John Croteau for any closing remarks.

Sir?.

Very good. So before closing out today's call, please note that we will be attending a number of upcoming investor events, including the Jaffray's Corporate Access Day in Chicago on August 30, the Crédit Suisse Small-Mid Cap Conference in New York on September 15 as well as road shows to Dallas, Houston, Atlanta and Hong Kong.

If you would like to request a meeting while we are in your area, please e-mail us at ir@macom.com. We look forward to reporting our fiscal year-end results and continued progress on next quarter's call. That concludes today's remarks. Operator, you may now disconnect the call. .

Thank you, sir. Ladies and gentlemen, that does conclude your program. You may disconnect your lines at this time. Have a wonderful day..