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MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) Q3 2020 Earnings Conference Call July 29, 2020 5:00 PM ET

Company Participants

Steve Ferranti - VP, IR

Steve Daly - President and CEO

Jack Kober - CFO

Conference Call Participants

Michelle Waller - Needham

Tom O’Malley - Barclays

Tore Svanberg - Stifel

Tom Diffely - D.A. Davidson

Tim Savageaux - Northland Capital

Richard Shannon - Craig-Hallum

Operator

Good afternoon and welcome to MACOM’s Third Fiscal Quarter 2020 Conference Call. This conference call is being recorded today, Wednesday, July 29th, 2020. At this time, all participants are in a listen-only mode.

I will now turn the call to Mr. Steve Ferranti, MACOM’s Vice President of Investor Relations. Mr. Ferranti, please go ahead.

Steve Ferranti

Thank you, Operator. Good afternoon. And welcome to MACOM’s third fiscal quarter 2020 earnings conference call. I would like to remind everyone that our discussion today will contain forward-looking statements, which are subject to certain risks and uncertainties as defined in the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those discussed today. For more detailed discussions of the risks and uncertainties that could result in those differences, we refer you to MACOM’s filings with the SEC.

Management’s statements during this call will include discussions of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the company’s press release and related Form 8-K, which was filed with the SEC today.

And with that, I will turn over the call to Steve Daly, President and CEO of MACOM.

Steve Daly

Thank you and good afternoon. I will begin today’s call with a general company update. After that, Jack Kober, our Chief Financial Officer, will provide a more in-depth review of our third quarter financial results for fiscal year 2020. When Jack has finished, I will provide revenue and earnings guidance for Q4, and then we would be happy to take some questions.

Revenue for our third fiscal quarter was $137.3 million and adjusted EPS was $0.33 per diluted share. We are pleased with these results and we are pleased that demand for our products continues to increase primarily, from the data center and telecom markets.

Equally important, as Jack will discuss later, our Q3 gross margins have improved and our operating expenses were well-controlled and the net result was continued improvement at profitability and cash generation.

Notably, our operating margin exceeded 20% for the first time since 2017. Our strategy is to execute on product and technology developments so that we may take full advantage of the growth opportunities in front of us, while also improving profitability.

Q3 revenue by end market was as follows; Data Center was $32.4 million, Telecom was $56.8 million, and Industrial and Defense was E48 million. Data Center and Telecom had sequential growth rates of 21% and 10% respectively, while our Industrial and Defense business was essentially flat.

On a geographic basis, approximately 40% of third quarter revenue was from domestic customers and 60% was from international customers. Our book-to-bill ratio was approximately 1.4 to one in our churn business or business booked and shipped within the quarter was approximately 25% of total revenue.

Our book-to-bill ratio was exceptional, driven in part by the current 5G infrastructure and data center spending cycles. We also estimate the COVID-19 pandemic motivated some customers to order ahead of end demand due to concerns of future component shortages or potential supply chain disruptions.

Additionally, we received some long lead-time Industrial and Defense orders in Q3 that will be shipped beyond Q4. For all these reasons, we believe that in the coming quarters, our book-to-bill ratio or return to a more typical level. We remain in regular contact with our largest customers and we are closely monitoring channel inventory, general order activity, and long-term demand forecasts.

For Q3, sequential growth in our Data Center end market revenue was driven by cloud data center demand, both from domestic and international deployments. Our 100G high performance analog products and our emerging 200G and 400G analog product lines are supporting the growth in this market segment today.

I'll note that our international data center growth is driven by Asia-based Data Center expansion, where we sell both 25G and 100G analog products. We view ongoing to demand for bandwidth and associated infrastructure upgrades inside the data centers to be an opportunity for MACOM in the years ahead and we see the expansion of 100G and the emergence of 200G and 400G to be opportunities to expand our position in the market.

Sequential growth in our Telecom end market revenue was driven by demand for 5G Wireless RF products, 5G front-haul and mid-haul HBA products, improvements in the GPON market and market share gains in the metro long-haul market from new coherent products.

We view 5G infrastructure deployments as a key growth driver for MACOM revenue. In the coming quarters, we anticipate further expanding our current 5G portfolio by launching additional optical components, more discrete RF components, and more high performance analog and mixed signal ICs.

Our Industrial and Defense end market revenue consists of a variety of end applications including long-term defense programs, satellite communication applications, MACOM [ph], and public safety handheld radio applications, and test and measurement equipment.

We recognize this end market has not been growing for MACOM over the past few years and we are implementing new strategies to initiate growth, including improving our sales channels, refocusing on key accounts, increasing cross-selling of all technologies into the market, and developing additional standard and custom products, which will appeal directly to these customers.

This end market has tremendous growth potential for MACOM; however, we believe that it will take us time to grow our business in I&D given the long design cycles.

Our next slides highlight a few corporate initiatives aimed at enhancing our quality standards across MACOM. We have kicked off an effort to certify all our major facilities to the ANSI/ESD S2020 quality standard, and this past quarter, four of our main facilities were certified.

This standard is a multi-industry standard which defines control programs to protect ESD sensitive components, assemblies, and equipments. Our engineering operations and quality staff are doing a great job updating our procedures in order to achieve these certifications and we look forward to additional site certifications over the next 12 months.

In June, we kicked-off new efforts to certify MACOM come on to additional quality standards. The first is AS 9100D, which builds upon the ISO 9001 standards, but modified to meet the DoD, NASA, International Aviation, and FAA quality standards. And the second is TS 16949 which is also built upon the ISO 9001 framework and focuses on defect prevention, waste reduction, and supply chain management for the automotive industry.

Expanding the capability of our quality systems supports our growth strategy to enter new markets and to find new customers and these actions will open up new doors for us in the aerospace and automotive industries.

Broadly speaking, MACOM has a wide range of differentiated products and production today. A number of these products have extraordinarily long life cycles and produce revenues years after they've been introduced.

In total, we have dozens of different product lines servicing thousands of customers. We view this diversity of technology, products, and end market applications as an inherent strength of the company

MACOM come with its 65-year history is known for its RF diodes, gallium arsenide MMICs, and silicon bipolar power transistors. We have also taken the lead position in the market with our high-performance analog drivers, clock and data recovery, circuits or CDRs, and Trans-Impedance amplifiers are TIAs, which are amongst the best-in-class in the industry. We complement these products with high speed coherent drivers and TIAs for next generation metro long-haul optical networks.

And last interest in our proprietary EFT laser technology is expanding because of our performance and because of our four inch indium phosphide wafers are giving us a tremendous manufacturing advantage.

We see numerous opportunities to grow our business and we believe that our current portfolio of products should provide a stable foundation for future profit and revenue growth.

Our strategy is to build upon this foundation by developing technologies in new products, which will differentiate MACOM and help drive additional growth, including gallium nitride or GaN, high performance lasers, PSPs, and silicon photonics. These technologies are compelling and they have the potential to generate significant revenues and profits for the company in the years ahead. We continue to slowly move these technologies closer to productization.

One of the highlights in the quarter was the completion of our first 100G Pam-4 DSP program. I want to congratulate our engineering team for successfully finishing the design and our production teams for transitioning this product from engineering to production.

While we do recognize we are entering an established market, the 100G PAM-4 DSP market is large and growing, and we will aggressively pursue opportunities to win market share and maximize our return on investment. The completion of this project highlights our management team's ability to focus and execute.

I'll also note that this project created a wide range of compelling intellectual property, including high-speed logic, data converters, and high-speed [Indiscernible]. We will leverage this foundational IP into a variety of new product initiatives to maximize our future growth.

I mentioned on last quarter's call that our 25G FP front-haul lasers have been sampling to customers and we have been receiving positive initial feedback. Our 25G FP lasers work in 300-meter and the more difficult 2 kilometer front-haul applications

Today, this market is supported by our competitors expensive 25G GFP lasers, or in some applications by over driven 10G GFP lasers. Now, customers will have the option to switch to a MACOM 25G FP laser product, which was designed specifically for this application and one that offers compelling performance, superior reliability, and supply chain security due to our high volume manufacturing capability.

And our customers have quickly recognized one big advantage that our lasers do not need additional support hardware, which can simplify the overall logical design and lower the bond cost.

Our lightweight team has been achieving strong revenue growth in recent quarters, primarily driven by expanding their portfolio with new laser and photo detector products.

Our silicon photonics R&D work also continues. We are making slow but steady progress on three critical elements needed to launch an LPIC product, namely one, a robust continuous wave or CW laser design; two, a silicon photonics IC, and three, an active laser aligning manufacturing process which mounts from one to four lasers on a single silicon photonic IC. This is exciting technology and there is still a lot of work to do before we launch our first product.

As a merchant supplier of ICS and to maximize our opportunity, we have updated our go-to-market product strategy to include selling silicon photonics ICs without lasers, and selling CW lasers to those that have their own silicon photonics,

Our RF power team has been extremely busy over the past 12 months. Under our new leadership -- under our new technical leadership, we have learned a tremendous amount about the attributes of our existing GaN on silicon process and we have made significant improvements in both our driver and Doherty amplifier designs.

We do recognize there are limitations of GaN on silicon in certain applications. And over the past months, our RF power design team has made new efforts to incorporate GaN on silicon carbide into our portfolio as a priority.

And I am pleased that in early August, time to be coincide with the Virtual International Microwave Symposium or IMS, we will be introducing our first wave of GaN on silicon carbide standard products. We will be branding this product line under the MACOM PURE CARBIDE trademark.

I'll note the team has already been sampling our first PURE CARBIDE products to customers in areas where silicon carbide has a technical advantage and where it makes sense to do so.

ST continues to work on the installation of capital equipment and their path to support the development of an improved next generation GaN on silicon process. At this moment, it is too early in the development project to discuss schedules.

I'll note that our RF power growth strategy includes winning market share in both the Telecom and the Industrial and Defense markets using our full portfolio of gallium arsenide, GaN, and silicon bipolar processes. We view these two markets as equally rich with opportunities.

We have another strong quarter of new product introductions from all our engineering teams with over 30 products introduced. Engineering leadership is focused on executing product plans efficiently and we are challenging our designers and technologists to raise the level of innovation with more best-in-class products. And our semiconductor technologists are preparing to reinvigorate our low wafer fab by enhancing and adding additional process technologies to the fab.

Our design and applications engineering staff are preparing for both the IMS and the China International Optoelectronic Exposition or CIOE Conference to be held in Shenzhen, China in August and early September respectively. Well, IMS will be a virtual trade show, CIOE is expected to be held in-person and our local China-based applications and sales teams will host customers and showcase new products across our Data Center, 5G, and PAM [ph] portfolio.

In summary, we stand in front of multi-billion dollar markets with a unique technology portfolio. I expect we will experience periods of high growth and periods of low growth, and possibly even negative growth, which is normal for our cyclical industry.

For these reasons, we maintain a long-term perspective on executing our strategy and we will work to manage our business to be profitable throughout all business cycles. We are confident that we can continue to improve our financials and take market share in the months and years ahead.

Jack will now provide a more detailed review of our Q3 financial results.

Jack Kober

Thank you, Steve and I hope everyone is having a good afternoon. Our fiscal Q3 results were another tangible step toward improving MACOM's overall profitability and cash flow. We posted sequential improvements in revenue, margins, and adjusted earnings per share in fiscal Q3. We also reported another quarter of strong cash flow and grew our cash balance.

Revenue in the third fiscal quarter of 2020 was $137.3 million. On a year-over-year basis, revenue was up 27% from $108.3 million in the third fiscal quarter of 2019, which was our lowest revenue quarter over the past four years.

Sequentially revenue was up 9% from Q2. Sequential improvement in revenue was driven by continuing positive trends in our Telecom and Data Center end markets. Overall, Industrial and Defense demand continues to be healthy, despite revenue being relatively flat over the past few quarters.

During the third fiscal quarter of 2020, we had three customers that exceeded 10% of total revenue. Two of them are located in Asia. These customers were all channel partners and serviced multiple end customers.

Adjusted gross profit in fiscal Q3 was $76.2 million, or 55.5% of revenue. Adjusted gross margin was up 100 basis points sequentially. As we've discussed in the past, gross margin improvement is a corporate priority for us, with our sales and operational teams focused on continuing continuous improvement opportunities.

Over the past few quarters, we have made incremental progress with improving the efficiency of our manufacturing, supply chain, and other operations. As you may know, we have a very diverse product portfolio with varying customer demands, and our products generally have long production cycle-times.

In an effort to help better optimize our structure, we are expanding our sales, inventory, and operations planning process known as SIOP. We believe this improved SIOP process and other initiatives will help us further improve our cycle-times, customer responsiveness, inventory metrics, and overall profitability going forward.

Another longer term item to highlight is a multiyear project we recently kicked off to help reduce utility costs in our dependency on the local power grid, and our Lowell, Massachusetts fabrication facility.

This is expected to be a turnkey gas-fired cogeneration system that will produce uninterruptible power, heating and cooling for low fab operations. Once up and running in about 18 months, we expect the system to provide annual savings of approximately $1 million and improve our cash flow primarily to lower utility costs. Equally important the system is expected to improve our fab resiliency and uptime by eliminating the impact of power grid surges and outages.

And finally, we expect to improve our carbon footprint with estimated savings of carbon dioxide emissions of over 8 million pounds per year, the equivalent of removing approximately 800 cars from the road each year.

Total adjusted operating expense was $46.9 million consisting of R&D expenses $30.6 million, and SG&A expense of $16.3 million.

Operating expenses were down $2.4 million sequentially. Our corporate-wide focus on streamlining operating expenses continues to provide positive impacts with further new opportunities for savings being identified in action almost daily.

Our employees are focused on supporting our product development growth opportunities, while also proactively looking for new and innovative ways to more efficiently run the business.

The sequential decline in operating expenses was attributable to these continuing efficiency improvements, as well as lower travel and promotional expenses in Q3 due to impacts from COVID-19.

Looking ahead, we expect operating expenses to increase modestly from the Q3 levels. We will continue to balance investments in new product opportunities while managing our discretionary spending.

Adjusted operating income in fiscal Q3 was $29.3 million, up from $19.6 million in fiscal Q2. Adjusted operating margin was 21.4%. As Steve mentioned, we view the 20% operating margin we recorded in Q3 as a significant milestone. We expect the combination of topline growth, improving gross margins, and stable operating expenses provide continued operating leverage for the remainder of the calendar year.

Depreciation expense for fiscal Q3 was $7.1 million and adjusted EBITDA was $36.4 million. I would like to note that our adjusted EBITDA was a $9.5 million sequential improvement over the $26.9 million we reported in fiscal Q2.

Fiscal Q3 adjusted net interest expense was approximately $4.8 million, down approximately $2 million from fiscal Q2 2020. The decline was primarily driven by the reduction of LIBOR rates on our floating rate term loan. Looking ahead, we expected adjusted net interest expense to remain roughly at these levels.

Our non-GAAP adjusted income tax rate in fiscal Q3 continued at 8% and resulted in expense of approximately $2 million. We expect our non-GAAP adjusted income tax rate to remain 8% for the remainder of the fiscal year.

Fiscal Q3 adjusted net income was $22.7 million, compared to $11.9 million in fiscal Q2. Adjusted earnings per fully diluted share was $0.33 in fiscal Q3, utilizing a share count of 68.6 million shares compared to $0.17 of adjusted earnings per share in fiscal Q2.

Now, moving on to cash flow and balance sheet items. Fiscal Q3 cash flow from operations was $34.1 million. Improvements in operating income and inventory management helped to enable strong cash generation for the quarter.

Capital expenditures total $3.6 million for fiscal Q3. We remain focused on achieving appropriate returns on capital that we deploy. We expect overall capital expenditures in fiscal 2020 to come in at approximately half of our fiscal 2019 levels.

Free cash flow was $30.4 million for the third fiscal quarter and $20.5 million in Q2. These fiscal 2020 improvements in cash flow continue to be a result of improved operating income, continuing revenue linearity, reduced CapEx, and other working capital improvements.

We believe the numerous structural changes and ongoing operational and financial improvement initiatives we have made, and continue to make throughout the organization, will further help to drive positive cash flow going forward.

Our Q3 accounts receivable balance was $60.5 million, up from $53 million in Q2. As a result, day sales outstanding were 40 days, slightly up from 38 days in Q2, driven primarily by increases in revenue during the quarter.

Inventories were $95.6 million at quarter end, down another $4 million sequentially in spite of our higher Q3 revenue levels. Inventory turns improved to 2.6 times during the third fiscal quarter, which is the highest inventory turns we've achieved since 2017.

As I noted earlier, inventory management remains an area of emphasis and we see opportunities to further improve our metrics going forward.

Cash, cash equivalents, and short-term investments for the third fiscal quarter were $265.1 million, up $43.5 million from Q2. In addition to the strong Q3 cash from operations, we recorded a cash inflow from investing activities of approximately $11 million associated with payment we received from the sale of assets which took place over a year ago. As a reminder, our short-term investments are comprised of corporate bonds and commercial paper and are classified as held for sale.

Total debt was $691 million inclusive of $31 million of finance leases. Our long-term debt of $668 million is covenant-light and has minimal annual principal repayments until its maturity in May 2024.

It's worth noting that our trailing 12-month EBITDA increased significantly in fiscal Q3, more than doubling sequentially. We believe the combination of growing cash on the balance sheet coupled with improving trailing 12-month EBITDA will result in declines in net leverage over time.

In summary, we feel Q3 was another period of solid financial performance and we are pleased with the progress our team has been making. We also understand that there is still much more for us to do in order to achieve our longer term objectives.

I will now turn the discussion back over to Steve.

Steve Daly

Thank you, Jack. MACOM expects revenue in Q4 ending October 2nd, 2020, to be in the range of $144 million to $148 million, adjusted gross margin is expected to be in the range of 55% to 57%, and adjusted earnings per share is expected to be between $0.36 and $0.40 based on 69.5 million fully diluted shares.

Our Q4 revenue projections include expectations that are three end market will grow sequentially. Specifically, we believe our revenue growth will be driven by the increase in data center traffic, 5G network deployments, and increased demand for our RF and microwave products and defense applications.

We are excited about the multiple growth opportunities in front of us and I would now like to ask the operator to take any questions.

Steve Ferranti

Operator, we will take questions when you're ready.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

I show our first question comes from the line of Quinn Bolton from Needham. Please go ahead.

Michelle Waller

Hi, guys. It's Michelle on for Quinn. Thanks for taking the question and congrats on the solid results and guidance. So, for my first question, could you guys provide a little color on how you expect your end markets to perform in the fiscal fourth quarter, like which segments do you expect will be leading the growth? Any color you can give that's great.

Steve Daly

Sure. Thanks Michelle. So, looking into the fourth quarter, we are expecting the strongest growth to come from the Data Center end market where we'll see strong double-digit growth. Telecom, we believe will also grow close to 10%. And I&D will probably be mid-single-digits, maybe 5%.

Michelle Waller

Okay, great. Thanks. That's helpful. And then just as my follow-up, we were wondering if you guys give an update on your 25-gig laser opportunity in the 5G front-haul space. Where are you in the qualification process? I know you guys mentioned it in your prepared remarks, but I'm just kind of curious when you think that opportunity will start getting into the model?

Steve Daly

Right. So, I think that we are -- as we said in the script, making good progress within sampling, we're getting good traction. We do now need to intercept the qualification cycle, which our customers need to go through with the major OEMs.

We expect that activity to kick off towards the end of this calendar year. And that should line us up for deployments next year -- next calendar year, when the new bids go out for the optical module.

So, we're hoping to position ourselves for revenue with this product line sometime early next calendar year. And by the way, just want to come back to the first question you asked. I think I misspoke Telecom for Q4, we're expecting sort of, 3% to 4% to 5% in that range. I just want to correct that.

Michelle Waller

Okay. Thank you. That's very helpful. And thanks again on the -- congrats again on the great results.

Steve Daly

Thanks.

Operator

Thank you. Our next question comes from Tom O’Malley from Barclays. Please go ahead.

Tom O’Malley

Hey, guys, congrats on the really nice results. My first question is about the data center. In your prepared remarks you talked about, from the International side, most of demand coming from Asia and 100G, and I think some 200G applications. And you also mentioned, you know, 60% of the demand is international. Can you talk about what trends you're seeing from China, as we move into the second half year?

Obviously, you guys are aware of potentially some pre-building, but what's the confidence that you have? The data portion of the business can keep up clearly data centers got it up pretty strongly is that continue China's strength or is that other strings kind of kicking in from elsewhere?

Steve Daly

Sure. So there's a -- there's a few items there in your question that I'll try to address. The first is sort of the overall business in China. It's been strong over the past few quarters that we expect that strength to continue. As we enter into Q4, and possibly even Q1, a lot of that strength is being driven by the 5G infrastructure deployments that I talked about in the script, that we are able to support those customers primarily with 5G front-haul products, for example, RF fans or front-end modules for the radio boards.

And also, we're supporting metro long-haul equipment that that we also include in this segment. When we think about the data center and the trends associated with that we see -- we sort of look at things differently.

Number one, we're actually picking up new data center customers in China, which is sort of an independent activity to what's going on 5G and what's going on with overall -- our overall strategy in China. And so we see that as a very positive trend. And we expect that will provide strength for MACOM going into next year.

Tom O’Malley

Great. And then a follow up is really on the RF portfolio. Congrats on the pure carbide trademark and your progress there. I just wanted to kind of understand timing, you said you're sampling to customers, but, Asia is obviously ramping 5G now you're expecting early next year, the North American and European customers to start ramping.

Do you have a timeline for where you're trying to intersect that product with the ramp? Obviously, you're hearing from some competitors such as NXP saying that LDMOS really cutting it at the high end. When do you think that you'll be able to shift that for revenue?

Steve Daly

Well, that's certainly a great question, and I'll just highlight that in our -- in our GaN business, we were really trying to force folks to ask a broader question, which is what's your RF power strategy? And where we look at 5G and the opportunities, and 5G is just one element of rather complex strategy. So when we think of -- but to answer your question, specifically, when we think about 5G, there's been a lot of effort over the past few years with scan on silicon.

And as I made comments, just a moment ago, that we are doing more and more work with GaN on silicon carbide, not only for 5G applications, but all applications including I&D, test and measurement and in other non-5G telecom type applications.

So, to look forward in terms of the growth associated with these activities, I think we're looking at the back half of 2021 at the earliest, where we begin to see revenue ramps coming from the new strategy that would be at the earliest.

Tom O’Malley

Thanks. Congrats again, guys.

Operator

Thank you. Our next question comes from Tore Svanberg from Stifel. Please go ahead.

Tore Svanberg

Yes, thank you, and congratulations on reaching that 20% opening milestone is such a short time, quite impressive. My first question is on your PAM-4 you mentioned the 100G product that design is now finished. Can you elaborate a little bit on where you intend to sell that product either by speeds or by segments of the market?

Steve Daly

Sure. So it's that product is targeting the data center first. So it's 25 -- it's a four lane 25G NRZ input and a PAM-4 output. So that is the fundamental platform, we are targeting DR1 type applications. I can tell you that the team has done an absolutely phenomenal job finishing the design and going through the qualifications and now transitioning to production we are actually have just started some very initial shipments of our DSP. So we're quite excited about that.

As I mentioned, we do feel like we're late to market and it's -- there are many existing solutions in the market today. But I would say that, customers are looking for alternatives and our part is compelling, it has integrated -- an integrated driver, it's competitive on power. And so we do believe that we can over time, win market share. I'll also add that, we're not standing still with using this platform and we will go after other applications including mid-haul, which requires a DSP functionality.

And then last, I'll add that the project, it was a multi-year project and it created really a treasure trove of IP. And we have mentioned publicly that we won't be doing, new DSPs. at smaller nodes. However, we will take full advantage of all the IP we have to go after a variety of markets with new products so that we maximize the value of this IP.

Tore Svanberg

Great. Thank you for that detail. And that's a follow up, maybe a similar question on silicon photonics. Obviously, this is a bit more longer term but again, what segments of the market do you intend to sample those products as they become available?

Steve Daly

We'll probably start with 400G and work from there. So, for example, a 400G DR4 type pick might be one of the first products, we would probably follow that up with an FR4 type application in product. So, you know, these are -- these are complex assemblies, as I've talked about where we're mounting lasers up to four lasers on a single silicon photonic device, I can tell you that, we've made tremendous progress over the past year, we've changed our changed our strategy in terms of design approach, not only on lasers, but also silicon photonics. And we've completely changed up our approach with putting together the L-PIC.

So there's been a lot of change of strategy as it relates to this R&D project. And so, you know, we're feeling very confident that we have a viable plan, let's say. But I would just caution everybody, it is early, we still have a lot of work to do. We are working with some lead customers that have done some funding of some of the projects.

So I think, you know, this year, maybe early next year, we'll have small amounts of R&D dollars, or R&D revenue, let's say, going out the door to support some of these custom programs. And so we'll continue to work on this, but it is a long term project. And once we feel we're getting close to product launches, and product introductions, then we'll talk about schedules in product revenue ribs.

Tore Svanberg

Thank you, Steve. Congratulations again. Very impressive.

Steve Daly

Thank you.

Operator

Thank you. Our next question comes from Tom Diffely from D.A. Davidson. Please go ahead.

Tom Diffely

Yes, good afternoon. Thanks for taking the question. So the first question is on the really strong book-to-bill 1.4 to 1, and then your comments that you expect that to come back down in subsequent quarters. So I'm curious, does that mean you expect a bit of a slug of revenue to happen in the fourth fiscal quarter as a result of this?

Steve Daly

Yes, so why don't I say a few words on that, then maybe Jack, also say a few words. So as we highlighted on the call, we do, we had a tremendous bookings period this past three months and we're very excited about that. We're seeing new design wins. We're seeing old customers increase production rate run rates. And we won some major programs here in the U.S.

So, collectively, we certainly had a very strong book-to-bill, now that's not to say that there's a bubble coming out in Q4. I think we've given reasonable guidance we are guiding up. And you know, we have a good position on our backlog. And we'll have to see how things go as we move into Q4 and beyond.

You know, where, as we talked about on the script, where we're taking a very careful look at our customers and demand, we're looking at inventory levels in the channel. We want to make sure that not only do we keep up with demand from a from an inventory point of view, but we also don't want to have too much inventory, if things start to slow down next year. So, Jack, do you want to add any comments to that?

Jack Kober

Just once again, we obviously don't go out more than more than one quarter in terms of our guidance. And some of those orders that we have are reflected in that forward guidance that we put out from a top line perspective. But just to build upon what Steve was saying, we do, you know, make sure we stay in contact with our customers and believe that that in demand is there. You know, the timing of it just might be pushed out a little bit further.

Tom Diffely

Okay. Now the extra color is helpful. And as a follow-up, when you look at the industrial defense, you talked about a little restructuring going on, is there going to be meaningful cost reduction with that? Is it strictly just a reorganization of how it's set up?

Steve Daly

Well, I'm not sure we signal we're doing any restructuring with IND. We're not what we're doing is we're changing our strategies and our approach to that market. So you should not expect any restructuring in this end market or any of our end markets or across the business at large. We've recognized that our IND business has been flat for a number of years.

And so we believe the medicine to fix that is, number one, really doing a reset on the quality standards throughout the business to make sure that we have the right quality systems in place so that we can approach Tier 1 OEMs in the aerospace, aviation as well as automotive industries.

And so, that is a major commitment to those end markets. And then second, we have to make sure we have the products that these customers want. And that means doing more custom design work. It means making sure that the existing products we have today are being properly cross sells into these end markets. You know, we looked at an automobile that we see a tremendous amount of semiconductor content and we have very little sales to this end market.

So yet we have the right technology. We have high speed analog circuitry. We have RF components. We have power products. So we are absolutely doing a reset on the go to market strategy. But we're not sort of structurally changing the way we run the business. It's more of a business strategy change.

Tom Diffely

Okay. I appreciate the clarification, and thanks for your time today.

Steve Daly

Thank you.

Operator

Our next question comes from Tim Savageaux from Northland Capital. Please go ahead.

Tim Savageaux

Hi, good afternoon, and congrats on the results. Question and then a follow-up. First, on the telecom side, you mentioned a number of drivers for 10% or so to sequential growth in Q3 from front-haul to PON to even Metro long-haul, as you look at your guidance for that to move to more of a low to mid-single-digit sequential growth rate, is there anything changing there with regard to the contribution of those various growth drivers? That kind of propelled Q3 relative to what you expect for Q4, any puts and takes their worth calling out?

Steve Daly

Tim, there's really not I would say that, it's more of a plateau the growth going into Q3 was very strong as you highlighted, and going into Q4 being the mid-single-digits. So nothing's, nothing. No major puts and takes really it's just a matter of revenues catching up to some of the strong bookings we had in the earlier quarters. And as you will, as we've talked about, a lot of this growth is coming from 5G, which includes front-haul includes front end modules, which are put on the RF board,

To some degree, it includes mid haul, where we have drivers for the mid haul applications. And the telecom market also, as I highlighted has two other pieces to it. One is the PON, and PON had a very strong quarter here in Q3. I think that may have anything to highlight that may be a little bit weaker going into Q4. And then the last is Metro long-haul where we continue to win market share with some of our new products.

Tim Savageaux

Thanks very helpful and your follow up and kind of along the lines of your discussion about monitoring inventory levels as you look at the strength on the data com side. Where can you discern whether you've seen any pull forward in demand?

Whether that's you know, in preparation for a transition to 400 gig later on, or reaction to increase traffic from, work from home, or any variety of potential drivers, as you kind of assess this supply chain, or do you think you're just kind of running it kind of natural demand levels may be enhanced by the pandemic and work from home traffic?

Steve Daly

Well, I think there's elements of truth to all of those points that you just made. So I would agree that at some level, those are contributing to the strong performance of our business in the data center, and market. I'll just add as the foundation of our business is really 100G analog products that are mostly CWDM4 type products.

And then, we begin to layer on some of the newer products including 400G, email drivers as well as our linear TIAs. So, it's -- I would say that, it's, we sort of believe it's end demand driven, primarily, and then we'll layer on all those factors that you highlighted.

Tim Savageaux

Maybe as a quick follow-up, any of the higher speed stuff and data com contributing meaningfully in either your results or your guide, 200 gig and above.

Steve Daly

I would say the contributions are beginning to be meaningful at 400G, more so than 200G.

Tim Savageaux

Thanks a lot.

Steve Daly

Did you get that Tim?

Tim Savageaux

I did. Thanks very much.

Steve Daly

Okay.

Operator

Thank you. Our next question comes from the line of Richard Shannon from Craig-Hallum. Please go ahead.

Richard Shannon

Well, thanks, guys for taking my question. I think my first will be on data center. Steven, I think you'd in your remarks regarding that segment, he talked about China business, so I don't know if your intention was to signal it's bigger share of your data center business or not. But can you indicate whether there's some sort of share gain going on or just a bigger, bigger trends of business going on there to delineate that please?

Steve Daly

Yes, I would say that it's a new color of revenue. And it's still a smaller piece of the overall business. Most of it is that 25G, short reach type applications inside the data center. And what we're excited about is the fact that these are new customers using our MACOM products for the first time.

Richard Shannon

Okay. You aware whether you're getting share there or what's, what's going on there?

Steve Daly

Well, hard for me to say at this moment, I think what we see is actually a new build out. So this is new hardware being built for the first time. So I would probably not categorize it as share gain. I would categorize it as a new market.

Richard Shannon

Okay. That's fair enough. My follow on question here is this again, inquiring about how many inventory builds here. I may have missed your prepared remarks around what markets or products that is, if you can -- if you can specify what that is, and to what degree are you? Are you seeing that as an issue here or built into your guidance for the quarter?

Steve Daly

Yes. We didn't specifically talked about that question in the prepared remarks, but I will say that, our book-to-bill was very strong. We've seen tremendous demand across all three markets. So we've had really an extraordinary bookings period, this past quarter. And interesting fact is that the -- our channel inventory is actually quite low right now.

Whether it be -- our buy and resell distributors or whether it be you know, the large multinational distributors or whether it be a local reseller that's servicing a particular number of customers, say in Europe or somewhere in Asia.

So, our feeling is the inventory levels are being well managed by MACOM throughout our chain. And we get the sense that our customers are also carrying low levels of inventory, because the expedite levels are quite high, even as we speak today.

Richard Shannon

Okay. Fair enough. That is all the questions for me. Thank you.

Operator

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call over to Mr. Steve Daly, President and CEO for closing remarks.

Steve Daly

Thank you. In closing Jack and I would like to thank our employees for their extraordinary efforts and accomplishments throughout the past quarter. Thank you and good evening.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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