MACOM Technology Solutions Holdings (MTSI) Q3 2019 Earnings Call Transcript

MACOM Technology Solutions Holdings (MTSI 1.94%)
Q3 2019 Earnings Call
Aug 01, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to MACOM's third fiscal quarter 2019 conference call. This call is being recorded today, Thursday, August the 1st 2019. [Operator instructions] I would now turn the call to Mr. Steve Ferranti, MACOM's vice president of investor relations.

Mr. Ferranti, please go ahead.

Steve Ferranti -- Vice President of Investor Relations

Thank you, Latif. Good afternoon, everyone, and welcome to MACOM's third fiscal quarter 2019 earnings conference call. Our discussion today will contain forward-looking statements, which are subject to certain risks and uncertainties as defined in the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today.

For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOM's filings with the SEC. Management statements during this call will include discussions of certain 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'll turn over the call to Steve Daly, president and CEO of MACOM.

Steve Daly -- President and Chief Executive Officer

Thank you, and good afternoon. Today's conference call will be structured as follows: First, I will provide a general company overview and discuss a few recent events. After that, Jack Kober, MACOM's new chief financial officer, will review our Q3 financial results. When Jack is finished, I will provide revenue and earnings guidance for the fourth fiscal quarter of 2019.

I can characterize the third quarter as a pivotal quarter for the company, with Jack and I starting in our positions in the middle and end of May. We are both familiar with the business. Jack is the company's corporate controller for four years; and me, in the role of an independent director since 2015. Because of this advantage, the leadership transition has been smooth and efficient.

Jack and I share the same philosophy on how to create shareholder value, and we recognize that changes need to be made. At a high level, our first priority is to improve MACOM's P&L and decrease spending across engineering, operations, business development, sales and general administration. We also believe establishing a streamlined organization in which engineers are empowered to design products quickly and release them to the market efficiently to satisfy customer demand as needed. We see many opportunities to make changes, which we believe will have a positive impact on the business and our future financial results.

As many of you know, MACOM has a long heritage as a technology leader in the semiconductor industry, going back decades. The company's wafer fab is widely recognized for providing unique compound semiconductor diodes and MMIC products. In recent years, MACOM has used the cash generated from the business, along with debt, to expand the breadth of its technology portfolio. Notably, MACOM has completed 11 acquisitions since December 2013.

As a result of these activities, we have a combination of mature and emerging or new technologies in our portfolio. To review, we view our mature technologies as silicon and gallium arsenide diodes and gallium arsenide MMICs and a wide range of silicon germanium, high-performance analog and mixed signal ICs. In emerging or new technologies for MACOM include silicon photonic devices, lasers, APDs and PINs for optical applications, CMOS, system on a chips, for DSPs and GaN on Silicon power amplifiers for telecom applications. All of MACOM's technologies are intended to serve major markets, including telecom infrastructure, network and data center and industrial and defense.

In particular, we see our markets, such as data centers and 5G infrastructure, as future growth areas for the company. And I would like to highlight our technology portfolio is underpinned with high-caliber engineering and support organizations and robust intellectual property. One of our tasks is to focus on completing technology developments and the associated product developments to achieve our goals in a manner that is fiscally disciplined. On June 18, we announced a restructuring initiative, which included a 20% workforce reduction in the closing of seven design centers.

These actions were companywide and affected most, if not, all departments. I want to highlight that while the restructuring plan is substantial in scope, we do not believe these actions will have a negative impact on our ability to achieve our growth objectives. And going forward, our goal will be to manage our business and spending at levels which allow us to maintain profitability through the peaks and troughs of market cycles. Coinciding with the restructuring initiative, a strategic decision was made to exit the design and development of optical modules and subsystems for data center applications.

We will now exclusively focus on being a merchant supplier of optical ICs and silicon photonic devices. Our new strategy is to support all data center module manufacturers at the IC or component level. The rationale for this decision is threefold. One, ICs command higher gross and operating margins.

Two, we do not want to compete with our customers. And three, the return on capital employed for the IC business model is more attractive. I would like to clarify that we will continue to expand our high-performance optical module manufacturing, primarily receivers, for specialized niche applications in defense, test and measurement and medical end markets. Next, I would like to update investors on the status of our GaN on Silicon technology and associated developments.

As a reminder, MACOM completed the purchase of Nitronex in 2014. And since then, we have been maturing and perfecting GaN on Silicon technology. Today, we produce GaN on Silicon products for both mobile radio and telecom infrastructure applications. These products are manufactured at a third-party, U.S.-based, four-inch GaAs wafer foundry exclusively for us using our proprietary technology.

The revenue and associated production volumes for these products has been incrementally growing, and that trend is expected to continue. Separate from that effort, we have an active process development program and partnership with STMicroelectronics. This program was kicked off a few years ago with the goal of producing very low-cost GaN on Silicon wafers in a very high-volume silicon fab. The key point to highlight here is that this effort is not a simple process transfer from MACOM to ST, as was the case when we transferred our GaN on Silicon technology to another GaAs fab.

Our effort with ST is an order of magnitude more complex because we are adapting our technology to fit inside a silicon fab. Process chemistry, metal stacks, gate structures, contact layers and processing equipment are all different. And as a result, each process step needs to be developed and then qualified. This effort is making forward progress.

However, based on my review, I conclude there is still significant work ahead to complete the project. Given the process is still in development, today, it is difficult to accurately forecast the timing of our 5G, GaN-based product revenue ramp. I will provide an update on schedules when we move closer to the end of the development phase. We will continue to work on the development with ST as a priority.

And when we launch our first products, they will be compelling. MACOM and ST make a formidable team, and both companies are eager to complete development and initiate production. I would note that we have other emerging technologies in development for 5G. These include small-signal RF products, 25G DML lasers and analog and mixed signal products for fronthaul applications.

The company has a large and diverse customer base comprised of over 8,000 customers, serviced by dozens of product lines and thousands of part numbers. I'll highlight in Q3, MACOM immediately suspended shipments to Huawei and certain of its subsidiaries and affiliates when the U.S. commerce department placed these entities on the entity list, which is part of the Export Administration Regulations. MACOM is committed to ensuring full compliance with all U.S.

export control regulations, and our team responded appropriately. After a legal review of the Export Administration Regulations and the scope of the entity list restrictions, we determined that we could lawfully resume delivery of certain products that fall outside the jurisdiction of the Export Administration Regulations. In Q4, we began shipping certain of these select products. We will continue to prohibit the shipment of products that are subject to the regulations until these restrictions are changed or the commerce department grants us a license to do so.

I believe having a diverse product portfolio, low customer concentration and broad exposure to multiple end markets is the best strategy to ensure business and financial stability. I further believe MACOM is well-positioned in this regard. Our future growth and profitability will be driven by launching best-in-class products, and we will work to accelerate our new product introduction pace. As an example, I would like to highlight a new product released in the quarter, the MAOM-2311, which is a single-channel, surface mount, directly modulated laser driver product.

This product is geared toward 50G, 100G and 200G applications inside the data center, which use 28 gigabaud PAM4 modulation schemes. This product was developed to have very low power consumption and includes integrated laser biasing in passive devices to minimize the overall footprint on our customers' PCBs. MACOM's engineering did an outstanding job designing this best-in-class product. Revenue in the fiscal third quarter was $108.3 million, down 11% sequentially and approximately 25% year over year.

On a geographic basis, 48% of third-quarter revenue was from domestic customers and 52% was from international customers. Q3 revenue by end market is as follows: industrial and defense was $46.8 million, down 7% sequentially; telecom was $43.9 million, down 7% sequentially; and data center was $17.6 million, down 26% sequentially. For the quarter, our book-to-bill was 1.2:1. Our turns business or business booked and shipped within the quarter was 40% of our total revenue, which is slightly higher than typical.

In summary, Q3 was a pivotal quarter for MACOM's leadership. Jack and I are excited to be leading MACOM, and we continue to evaluate all aspects of the business, including technology road maps, R&D investments, product line strategies, sales strategies, operational and supply chain activities and company positioning within the markets we serve. In the near term, we are focused on cost control, planning and organizational structure, which we expect will lead to incrementally improving our financial performance in the coming quarters and years ahead. Jack will now provide a more detailed review of our Q3 financials.

Jack Kober -- Chief Financial Officer

Thanks, Steve. Good afternoon, everyone. I'm excited to take on the role of MACOM CFO and look forward to continuing to partner with Steve, the management team and all of our employees to help improve the company's profitability. I believe in a straightforward, data-driven and balanced approach to growing our business and creating shareholder value.

MACOM has a long-standing, solid business with many dedicated employees and numerous well-defined processes upon which we can build and improve. And now on to our Q3 financials. Adjusted revenue in fiscal Q3 was $108.3 million, down 25% year over year from $144.9 million in Q3 of fiscal 2018. The year-over-year decline was driven by a combination of softness in the data center market, a reduction in sales to Huawei and its affiliates as well as our decision to lower shipments into the distribution channel.

Adjusted gross profit and adjusted gross margin in fiscal Q3 were $42.6 million and 39.4% of revenue, respectively. These amounts included $15 million of additional inventory reserves or roughly 1,400 basis points of gross margin impact. Also, at current revenue levels, lower absorption of overhead has a more pronounced impact on gross margins. As revenue improves over time and depending on product mix, we expect to see an associated gross margin benefit.

Total adjusted operating expenses were $64.9 million, which consisted of R&D expenses of $40.1 million and SG&A expenses of $24.8 million. Total adjusted operating expenses were sequentially up, approximately $1.5 million or 2.5% due primarily to additional R&D-related mass costs incurred during the quarter partially offset by reduced spending in other areas. Adjusted loss from operations in the third quarter was $22.3 million, translating into negative 20.6% operating margin. As noted earlier, on June 18, we announced a restructuring initiative, which once fully implemented is expected to result in approximately $50 million in annualized cost savings.

We do not have a significant benefit in the third quarter from these restructuring actions but do expect a significant operating expense benefit beginning in our fourth fiscal quarter as reflected in our guidance. The majority of the total savings are expected to be fully realized by the end of fiscal Q2 2020. We incurred $9 million of charges in the third fiscal quarter associated with this initiative, including cash cost of roughly $2 million, primarily associated with employee severance obligations. We expect to incur additional restructuring charges of approximately $1.6 million during the fourth fiscal quarter and approximately $2.3 million during fiscal 2020.

The total cash costs associated with this initiative are expected to be approximately $9 million. I will also note that in connection with the restructuring initiative, during Q3, we determined that certain intangibles and fixed assets were impaired and others were required to be revalued, resulting in noncash impairment charges of $264 million. Adjusted EBITDA for fiscal Q3 was negative $15 million. Adjusted net interest expense was approximately $8 million.

Our normalized adjusted income tax rate in fiscal Q3 continued at 8%. Fiscal Q3 adjusted net loss was $27.7 million, translating into a loss of $0.42 per fully diluted share, utilizing 66 million fully diluted shares to calculate this fiscal Q3 adjusted net loss per share. And now moving on to cash flow and balance sheet items. GAAP cash flow from operations was $1.4 million in fiscal Q3, aided by reductions in net working capital of $31.9 million.

We did generate positive operating cash flow in spite of the significant third-quarter losses. Fiscal Q3 capital expenditures totaled $9.3 million or 7.6% of revenue and depreciation expense was $7.3 million. We note that a significant portion of our capital expenditures for fiscal Q3 as well as expected fiscal Q4 2019 are associated with commitments we entered prior to May of this year. We are currently reviewing all of our investments closely and intend to actively manage capital expenditures going forward.

Q3 free cash flow was negative $7.9 million, down sequentially from a positive $12.8 million in Q2. Cash, cash equivalents and short-term investments were $185.8 million, down $7.1 million from $192.9 million at the beginning of our fiscal year. As a reminder, our short-term investments are comprised of corporate bonds and commercial paper and are classified as held for sale. Inventories were $111 million at quarter end.

Inventory turns were 2.4 times, up from 2.1 times sequentially. Excluding the $15 million of additional inventory reserves recorded during fiscal Q3, our inventory turns would have been 1.9 times. We do recognize the need to focus on and improve our inventory management. As Steve noted, we have a broad product portfolio, a large and diverse customer base and we utilize the combination of internal and external foundries that contribute to long lead times.

In addition, our internal fab can be characterized as a high-mix operation. Notwithstanding these items, we do see opportunities for improvements on our inventory metrics going forward. Long-term debt was $684.9 million, inclusive of capital leases. Long-term debt of $656 million, which is covenant-light is termed with minimal annual principal repayment until its maturity in May 2024.

MACOM also has an undrawn $160 million credit line available through November 2021. So in summary, we are confident in our liquidity position and remain focused on improving profitability and cash flow. We believe that our recent restructuring initiative, along with tight management of operating expenses, capital expenditures and working capital, will help set the stage for improving our financial results. I'll now turn the call back over to Steve.

Steve Daly -- President and Chief Executive Officer

Thanks, Jack. MACOM expects revenue in the fourth fiscal quarter ending September 27, 2019, to be in the range of $108 million to $112 million. Adjusted gross margin is expected to be 52% to 54%. And adjusted earnings per share is expected to be minus $0.04 to $0.00 per share based on 66.5 million fully diluted shares.

Our Q4 projections include expectations that our data center and industrial and defense revenues will be up slightly and our telecom revenues will be flat to down slightly. In summary, we have multiple growth opportunities in front of us, and we are very focused on execution and planning. As part of this process, we are establishing a detailed bottoms-up strategic plan, which will drive revenue and profitability. I would now ask the operator to take any questions.

Latif, are you on?

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Harsh Kumar of Piper Jaffray. Your line is open.

Harsh Kumar -- Piper Jaffray -- Analyst

Yeah. Hey, welcome, Steve and Jack, to your first call. Guys, I had two quick ones. First of all, if I just do some simple math, $110 million revenues by kicking the gross margins that you guys guided to and associated math, I get like $52 million roughly in opex projected for September quarter.

If I compare that to where you were in June, that's already about a $12-something million reduction. So that is basically pretty much all of the restructuring that you guys announced. But in your scripted call, you mentioned that there's more coming. So I'm trying to reconcile how much is left.

And how do I work around this math? And then I have a quick follow-up.

Steve Daly -- President and Chief Executive Officer

Right. Well, thank you for the question. So generally speaking, your math -- your gross math levels are correct, but there will be some incremental improvements in the next few quarters. And Jack, if you want to add to that?

Jack Kober -- Chief Financial Officer

Yeah. Sure. Harsh, we're probably about 80% of the way there here in the fourth quarter in terms of reaching that annualized savings target with some of those savings being spread out for the next couple of quarters as they work their way in. There were a couple of items that we had here in the third quarter.

We touched upon some of the mass costs that drove our Q3 up a little bit, and then there were some also -- some other expenses that we had here with the transitions that drove that operating expense number up a little higher.

Harsh Kumar -- Piper Jaffray -- Analyst

Understood, guys. And one for you, Steve. Long term, as you think about -- so let's call it 12 months to 18 months, what are some of the drivers -- out of the three end markets that you have, which are the ones that you're expecting incremental growth out of -- where you would outperform the market?

Steve Daly -- President and Chief Executive Officer

Well, I think, generally speaking, the growth story for MACOM is really about products and our ability to launch the products into the market at a faster pace. So I would say that generally speaking, those products are aiming at 5G, and that includes a variety of product lines, including lasers, APDs, PINs, where you look to -- we're looking to expand our GaAs and SiGe portfolio into the 5G market as well. But I think MACOM is very well-positioned in the three main markets that we serve, certainly industrial and defense, the data center and the telecom. So the growth drivers for us is not necessarily the movement of these markets at the moment.

It's more about us launching products into the market.

Harsh Kumar -- Piper Jaffray -- Analyst

Thanks, guys.

Operator

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

Jeremy Kwan -- Stifel Financial Corp. -- Analyst

Yes. Hi. This is Jeremy calling for Tori. I just had a question about the GaN on Silicon.

I understand that you're not commenting in terms of the timing. But can you give us a sense of the magnitude of the expected investment and kind of the -- maybe the TAM that you're hoping to address? And are you still ramping at both the Singapore and European locations?

Steve Daly -- President and Chief Executive Officer

Right. So certainly, the GaN opportunity for the company is quite large. And that thesis of growth driver remains. As you know, we've been working on GaN for a number of years.

Today, we have products selling into the market, as I mentioned in my prepared remarks, including mobile radio and also we're beginning to see the market with some of our products in the telecom space, specifically 4G and 5G. So the underlying thesis of growth around GaN is intact. We do have, as everybody knows, a relationship with STMicroelectronics. And the thinking with this relationship is to be able to bring the company into very high-volume production with a very low cost of goods sold.

So that is a project that's well under way. We don't want to give specific guidance on when that development will be completed because it's still a moving target. We are encouraged that we have working prototypes in the lab. But because we see there's still a lot of work to do, one of the first things Jack and I did in the past month is we literally, certainly met with the management team.

But we essentially put the program on hold, so that we could do a full review of all of the technical issues associated with the program, the capital spending associated with the program, so that we could really understand what was going to be necessary to get into the market. Ultimately, we concluded that this is still a very interesting opportunity for the company. As you know, with the 5G infrastructure architectures, many of these base stations have very large antenna systems. So for example, you'll have a three-sector antenna system with 64 elements per sector.

So you're looking at 192 amplifiers per base station. And so our goal is to use the GaN on Silicon to address that market. So the opportunity is quite large. You can measure the volume of amplifiers in the tens of millions of units, and that opportunity is really coming right at MACOM.

So it's really about us finishing the development. The customers are certainly interested on the technology. We're excited about the technology. And we think that GaN on Silicon fits very nicely between LDMOS and GaN on Silicon carbide.

And so we will make sure that we optimize our development program to win the sockets that we can be very competitive on with regards to performance. We believe we have a cost advantage in the very high-volume applications, so now it's about addressing the areas where we can be on par with GaN on Silicon carbide, whether it be the bandwidth, certainly the efficiency and also how the product is actually used in the application. So the timing of that is yet to play out. I can say that we are certainly excited about the opportunity, and it is very large.

Jeremy Kwan -- Stifel Financial Corp. -- Analyst

Thank you for that very thorough answer. Just turning to the industrial and defense for the next quarter. If I can -- can you parse out maybe the two different moving parts there? I think both expected to grow slightly sequentially. Or is one maybe outperforming the other a little bit?

Steve Daly -- President and Chief Executive Officer

Yeah. I would say that, on balance, they're about the same with a slight advantage to test and measurement or the industrial piece. We do see that -- that business has been relatively steady with the build-out of 5G testers to support the infrastructure rollout. And then what will follow that is, of course, testers for the handsets, which will be another big advantage.

And so we have a lot of different products across our MMIC product line, the diode product line. We have very nice control products. So we do see some, I would say, stable to slightly up opportunities in the coming months ahead.

Operator

Thank you. Our next question comes from the line of Quinn Bolton of Needham. Your question, please.

Michelle Waller -- Needham and Company -- Analyst

Hi, guys. This is Michelle on for Quinn. Thanks for taking the question. So I guess just on Huawei.

Do you guys -- did you guys see any pull-ins in orders in like the first half of the June quarter? And you mentioned you guys are -- might be applying for some of the licenses with the Department of Commerce. Have you actually submitted for those? Or are you guys still evaluating that?

Steve Daly -- President and Chief Executive Officer

Right. So we have a very broad product line that addresses many different divisions of Huawei. And so when the company was put on the entity list, obviously, we halted all shipments and we began to next really do an evaluation of the situation. I would say that -- well, so the short answer is, yes, we are in the process of applying for licenses.

We actually haven't done that yet. But separate to that, as we have gone through and reviewed some of the products we have, we have determined that we are able to make shipments, and these products are typically foreign-made shipping from outside the U.S. And they've gone through a very careful vetting process not only internally with our trade compliance, but also with the support of outside council to make sure that we're following the Export Administration Regulations and that these parts are not controlled for national security reasons. I don't want to specifically comment on the behaviors around pull-ins or pushouts on a customer-by-customer basis, so I'll sidestep that one.

But I would just add that this is an evolving situation. The vast majority of products today are on hold and we're suspending shipments. And there's just a very small amount of products that fit into the category of being outside the EAR.

Michelle Waller -- Needham and Company -- Analyst

OK. That's all for me. Thanks.

Steve Daly -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Mark Delaney of Goldman Sachs. Your question, please.

Mark Delaney -- Goldman Sachs -- Analyst

Yes. Good aternoon. Thanks very much for taking the questions. Steve and Jack, welcome to both of you in the new roles.

I certainly wish you both all the success. My first question is a follow-up related to the GaN on Silicon opportunity. I don't know if you can give us a sense about what percentage of those process, qualification steps have been done. But maybe more importantly, I think one of the challenges with the company for GaN on Silicon in the last couple of years have been in the 4G era, the equipment had already been designed with LDMOS, and so customer didn't want to redesign.

And so I wondered, while MACOM is working to complete the qualification with STMicro in those factories, are you going to be missing out on some of the design-ins for 5Gs? So that when the company does figure out some of these qualification issues, are you still going to be able to -- have one -- the stocks that you need today -- you'll be able to ship in volume when you're ready? Thank you.

Steve Daly -- President and Chief Executive Officer

Thanks. So a few comments. And I'm not sure I agree with the setup on your question but -- regarding 4G and how we participated there. So I don't necessarily want to address that, but I do want to address the size of the market and our ability to take the market.

I look at it like this, we want to launch products that are compelling for the customers. And so the rollout of the 5G is starting now, and it's going to continue for the next five years, probably peaking in terms of power amplifier requirements maybe two or three years from now. And so I don't get the sense that MACOM is going to be late. I think when we enter the market, our product will be compelling from a performance point of view.

From an ability-to-scale-quickly point of view, remember also that these applications for 5G are also at higher frequencies, 3.5 gigahertz, in some cases, 4.8. So those higher frequencies begin to be challenging for the LDMOS community. And so the frequencies are higher, the volume is at actually the lower power levels, specifically the massive MIMO platforms. And so that is certainly front and center at what we're focused on at the moment.

So we may miss some of it, but we certainly recognize that it's a big opportunity. It's a multiyear opportunity. And when we're ready to enter the market with our partners, we believe we'll be successful.

Operator

Thank you. Our next question comes from the line of Richard Shannon of Craig-Hallum. Your question, please.

Richard Shannon -- Craig-Hallum Capital Group LP -- Analyst

Guys, thank you for taking my questions. I look forward to working with you. So I guess you've made some restructuring changes here, and you've given us a sense maybe on a dollar level where we're going to see opex start here in this quarter and into the next couple. But maybe if you can give us a little bit longer-term view on where you think your operating model can go both from a gross margin and operating margin or opex point of view, that would be helpful.

Steve Daly -- President and Chief Executive Officer

Sure. So just as -- sort of as on a go-forward basis, we probably won't be putting out what I would consider the -- a target model. If I look at MACOM's financial situation at the moment, we're underperforming, and our goal is to incrementally improve that. We want to become an average performing semiconductor company financially, then we want to be an above-average performing company, which means controlling costs, driving gross margins up and increasing the earnings per share.

So that's the priority for the business. And to do that, we need to balance our investment in R&D. We need to really manage carefully our growth aspirations, so that we're investing in projects that we can start and finish and bring to market in a timely manner. So I would say -- I would just generally signal to you that, going forward, you're going to see a tight control on the opex lines.

We're going to continue to work on the projects that we believe in. And in projects that we feel we're not going to be successful or they're not going to create financial returns, we'll certainly pivot away from those and we'll start new projects. Jack and I are very focused on return on capital employed. If you look at the capital the company has spent over the past two to three years, for me, it's been quite high, $53 million last year, $32 million the year before that.

This year, we're on a pace to be somewhere between $45 million and $50 million. And so one of the first things Jack and I are doing is taking a very critical look at these investments. And as we go into our next fiscal year, fiscal year 2020, we're going to drive that number down. And I think we already have tremendous leverage in the business with the foundation with a lot of that spending behind us.

But on a go-forward basis, we're going to be very careful on the capital investments. And so, Jack, maybe you want to comment further on the model?

Jack Kober -- Chief Financial Officer

Yeah. That's fine, Steve. Thank you. So with regard to ongoing operating expenses, we did lay out in our prepared remarks the $50 million of annualized cost savings, and the earlier estimate was we're going to be about 80% of the way there through our fourth quarter.

And that, coupled with many of the things that Steve was referring to, will be driving some additional efficiencies and operating expense leverage as we work our way through 2020. But we're still working through some of the details, and we're still working through our budgeting process and going to be doing a bottoms-up. So there's more to come in terms of where we think we're going to shake out as we work our way through 2020.

Richard Shannon -- Craig-Hallum Capital Group LP -- Analyst

OK. That's helpful perspective. My follow-on question is related to your data center business. They're down quite a bit in the June quarter, and your prepared remarks mentioned a little bit of growth here in September.

Seeing a little bit of a tepid market here, particularly in the 100-gig generation, which I think MACOM has very position, what are you seeing here in terms of bookings for this market for -- and view to the couple of quarters? And then what do you think your position is going to be for 400-gig? And when does that start to inflect?

Steve Daly -- President and Chief Executive Officer

So the bookings specifically for our data center end market have been improving in the last month and a half. Some of our lead customers are beginning to order some of their HPA products, high-performance analog products. These are typically very sophisticated CDR driver-type products. We also are seeing some of our optical customers that service this market -- optical module customer servicing this market also beginning to step up a little bit in terms of bookings activity.

So we are forecasting improvements going into the next quarter from a revenue point of view, and we do see a little bit of our backlog growing. And we did, as you heard in the remarks, report a 1.2:1 book-to-bill ratio for the full quarter. Regarding 400G, so that's actually something that we do have some R&D working on. I would say our main focus for this application revolves around our silicon photonic products, specifically the L-PIC products where we have a CW laser being placed on our silicon photonic device.

And so I would say that it's early days on that right now. It's something that's in development. Very interesting results, and so we're certainly going to continue the work in this area. We think that when we finish the development, it will be meaningful for the company.

But, again, I would say that this is in the early phase in terms of development. We are fortunate to have a lead customer that we're working with, and we believe they're a leader in the industry. And so we have a good collaboration engineer to engineer to work out some of the technical issues.

Operator

[Operator instructions] Our next question comes from the line of Tim Savageaux of Northland Capital. Your line is open.

Tim Savageaux -- Northland Securities Inc. -- Analyst

Hi. Good afternoon. I want to follow up on that book-to-bill, 1.2 book-to-bill. And wonder if you could provide any color on what the drivers there were maybe from an end-market segment standpoint in terms of the bookings strength?

Steve Daly -- President and Chief Executive Officer

It really was the two of the three markets, industrial and defense and the data center is where the strength came from. As I mentioned a moment ago, on the industrial and defense end market, primarily test and measurement for 5G-type customers that are working on testers. And then on the data center, primarily 100G-type applications, and we are starting to see some improvements in the general traffic in this area.

Jack Kober -- Chief Financial Officer

And I would just also add to that, the actual billings came in at $108 million, which was relatively low, so that improved the book-to-bill ratio.

Tim Savageaux -- Northland Securities Inc. -- Analyst

Got it. And on -- to follow up on the telecom side. It came down -- I guess with the Huawei impact, maybe less than I might have expected, can you quantify the impact of the Huawei ban in the quarter and then maybe relate that to what you expect to get back heading forward as you resume some shipments?

Steve Daly -- President and Chief Executive Officer

Right. So we don't want to necessarily give too much detail on the customer by customer. But I can say historically, going back a few years, Huawei was a greater than 10% customer. In recent times, they were inching up to hit that threshold.

When we made our pre-announcements back in June, we talked about a drop in revenue this quarter based on two factors, one was ceasing shipments to Huawei as well as slowing the sales into the distribution channel. If you look at those numbers, I would say it's almost a 50-50 split between the distribution and Huawei in terms of dollars -- dollar reduction for the quarter. I think that should be helpful for you.

Tim Savageaux -- Northland Securities Inc. -- Analyst

It is. Thank you very much.

Steve Daly -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of C.J. Muse from Evercore. Your line is open.

C.J. Muse -- Evercore ISI -- Analyst

Yeah. Thank you for taking the question. I just wanted to follow up on a previous question related to synergies and perhaps we're benchmarking it off the wrong opex level the prior quarter. But it looks like you've garnered already $52 million quarter to quarter in your opex guide, and you talked about only being 80% there.

So it sounds like what you're telling us is that the pro forma opex actually in the March quarter should be roughly $49 million. Is that what you're trying to tell us?

Steve Daly -- President and Chief Executive Officer

I would say that, first of all, the $52 million number, plus or minus some amount, is a reasonable number to dial into the models for exiting Q4. And what we'd like you to understand is as we enter next quarter and our fiscal 2020, we'd like to control that number. We're not forecasting going below $50 million or to that level of detail. The message we want to send tonight is we are controlling our costs.

As you know, in some instances, there's lumpiness within the opex if we have a large mass flowing through. For example, some of the products that we work on have mass costs that are between $1 million and $4 million. And so if one of those comes through in a particular quarter, it can certainly move the needle. But generally speaking, we're trying to control costs.

That's a big theme of what Jack and I are doing. But we really don't want to have you get ahead and think we're going to be below $50 million for opex. I think that would be -- we don't want you to come away with that understanding. I don't know, Jack, if you want to add to that.

C.J. Muse -- Evercore ISI -- Analyst

Very helpful. And I guess, Steve, as my follow-up, as you've gone out and talked with customers about your transformation of MACOM and real -- focused efforts, I guess, how have those discussions gone? Is there a willingness for greater partnership? Do you see perhaps more content wins at customers? Would love to hear just kind of initial thoughts on those conversations?

Steve Daly -- President and Chief Executive Officer

Sure. So I guess, I'll answer it in the following way. So we have very compelling technology in certain areas of the business, and those customers are very excited to see these developments be finished and have the products launched. So that covers a whole wide area.

If I look at our photodetectors, if I look at our lasers, if I look at L-PIC, these are major initiatives that customers are waiting for. And so our job, as I mentioned earlier on the script, is to really finish these projects and enable our customers to build the equipment they want. And just to give you an example of some of the complexities around these product developments, let me talk about lasers for a second. So there's been a lot of talk about 25G lasers and whatnot.

But when we look at our laser product line, we're addressing three different markets: access, mobile fronthaul and backhaul and the data center. We do it at six different data rates, 2.5G, 10G, 25G, 100G, 200G and 400G. We have two different laser structures, FP and DFB; two modulation schemes, direct modulated and CW using Mach-Zehnder devices that are on our L-PIC. We have to be -- four different temperature requirements, and we sell these devices in three form factors, chips, these TO-cans and then we design in the lasers for our L-PIC structures.

So when you look at all of that and then do that over four different wavelengths, there's a lot there. And so we have very good relationships with our customers. They understand our road maps. MACOM needs to finish these developments.

We have an advantage in cost. We have an advantage to mass produce. And as an example, a few years ago, we were selling about $20 million a quarter in lasers at 2.5 just for the 2.5G PON end market, right? So there's tremendous possibility with finishing all of these different projects and bringing them to market. We're specialized -- we understand the EPI formulas for each one of these lasers.

We understand the grading required to make the DFB devices. There's a very complicated back-end manufacturing process to make lasers. So when I -- when you talk about getting customers excited, they want to see MACOM be successful with lasers, as an example. But I could really go across the businesses and the technology centers and say the same thing and tell the same story.

And so frankly, MACOM is internally focused to execute these product development plans, so that we can bring these products to market. And that is really the main focus of our activities. Both Jack and I, we're critically looking at everything, including organizational structure, our resource loading and budget, so that we optimize the balance and then optimize the returns for our shareholders and our investors.

C.J. Muse -- Evercore ISI -- Analyst

Thank you.

Operator

Thank you. Our next question is a follow-up from Mark Delaney of Goldman Sachs. Your line is open.

Mark Delaney -- Goldman Sachs -- Analyst

Yes. Thanks for taking the question. My follow-up question is for Steve. And Steve, I was hoping you can maybe compare and contrast what your impressions are of MACOM and compare that with Hittite.

And I ask because I know a lot of investors that I speak with remember all the success that you had with Hittite and the revenue growth that they had. And so certainly not looking for any sort of financial targets or top line, but in terms of some of the steps you're taking at MACOM in getting the organization to where you'd like it to be. Maybe if you could reflect on what went well at Hittite that allowed that type of growth and where you think you are in the process at MACOM in terms of making some of the changes that you'd like to implement? Thanks.

Steve Daly -- President and Chief Executive Officer

Sure. Well, let me talk about MACOM and let me talk about some of the things that we want to do here as a management team. So one of the things we want to do is we want to take a very critical review of our process to develop products and launch products. I think there's opportunities to streamline these processes and get more products to the market faster.

As I mentioned earlier, the growth driver and the growth engine for MACOM will be product based. We're in the right markets. We have the right technology. We now need to complete the developments of the processes, the semiconductor processes as well as the product development for those processes.

The one thing I absolutely think is a tremendous advantage for MACOM in the market is we practice a fab model and a fabless model. Today, we work with actually nine external foundries both in silicon and gallium arsenide and indium phosphide. We have two fabs internally. We have, as Jack mentioned in his comments, a very high-mix, high-performance fab that is very capable of ramping up very quickly to address the needs of the market.

So -- and we also have a fab out in Michigan that is producing world-class photodetectors. And we think we have some of the best APDs and PINs in the market. And so these are very compelling technologies. And I think that our goal, like I mentioned a moment ago, is to make sure that we finish these process developments and launch products.

Overlay that, strong design teams, great sales channels, looking at our multiple sales channels, including distribution and the relationships with our distributors, our rep sales force and our direct sales channels. We want to optimize that and look for opportunities possibly to get better coverage, fill gaps in the channel, collaborate with our distributors on margin control. So these are things that are very important to the company to make sure that we optimize the profitability. The theme tonight is profitability, and that's captured by paying very close detailed -- or attention to the details along the entire process, whether it's engineering, the sales channels or G&A and supporting the business at large.

So the success of MACOM going forward will be focusing on all the little details. I think I'll leave it at that.

Mark Delaney -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. At this time, I'd like to turn the call back over to President and CEO Steve Daly for any closing remarks. Sir?

Steve Daly -- President and Chief Executive Officer

Thank you. In closing, Jack and I would like to thank our employees for the warm welcome and support that they've provided us over the past two months. We have a strong management team, a world-class employee base. And together, I'm confident we can achieve our new objectives.

Thank you.

Operator

[Operator signoff]

Duration: 72 minutes

Call participants:

Steve Ferranti -- Vice President of Investor Relations

Steve Daly -- President and Chief Executive Officer

Jack Kober -- Chief Financial Officer

Harsh Kumar -- Piper Jaffray -- Analyst

Jeremy Kwan -- Stifel Financial Corp. -- Analyst

Michelle Waller -- Needham and Company -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

Richard Shannon -- Craig-Hallum Capital Group LP -- Analyst

Tim Savageaux -- Northland Securities Inc. -- Analyst

C.J. Muse -- Evercore ISI -- Analyst

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