MACOM Technology Solutions Holdings, Inc.
MACOM Technology Solutions Holdings, Inc. (Form: 10-Q, Received: 02/07/2018 06:08:23)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number: 001-35451
 
MACOM Technology Solutions Holdings, Inc.
(Exact name of registrant as specified in its charter)  
 
Delaware
 
27-0306875
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Chelmsford Street
Lowell, MA 01851
(Address of principal executive offices and zip code)
(978) 656-2500
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x

  
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of February 2, 2018 , there were 64,405,673 shares of the registrant’s common stock outstanding.




MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page No.
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item1A.
Item 2.
Item 6.




PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
December 29,
2017
 
September 29,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
152,085

 
$
130,104

Short term investments
44,585

 
84,121

Accounts receivable (less allowances of $8,924 and $9,410, respectively)
97,123

 
136,096

Inventories
143,136

 
136,074

Income tax receivable
18,933

 
18,493

Assets held for sale

 
35,571

Prepaid and other current assets
25,363

 
22,438

Total current assets
$
481,225

 
$
562,897

Property and equipment, net
132,010

 
131,019

Goodwill
316,239

 
313,765

Intangible assets, net
601,920

 
621,092

Deferred income taxes
948

 
948

Other investments
41,500

 

Other long-term assets
7,418

 
7,402

TOTAL ASSETS
$
1,581,260

 
$
1,637,123

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of lease payable
$
796

 
$
815

Current portion of long-term debt
6,885

 
6,885

Accounts payable
25,807

 
47,038

Accrued liabilities
50,981

 
60,237

Liabilities held for sale

 
2,144

Total current liabilities
$
84,469


$
117,119

Lease payable, less current portion
19,163

 
17,275

Long-term debt, less current portion
660,696

 
661,471

Warrant liability
26,167

 
40,775

Deferred income taxes
15,555

 
15,172

Other long-term liabilities
7,409

 
7,937

Total liabilities
$
813,459


$
859,749

Stockholders’ equity:
 
 
 
Common stock
64

 
64

Treasury stock, at cost
(330
)
 
(330
)
Accumulated other comprehensive income
2,999

 
2,977

Additional paid-in capital
1,055,636

 
1,041,644

Accumulated deficit
(290,568
)
 
(266,981
)
Total stockholders’ equity
$
767,801


$
777,374

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,581,260

 
$
1,637,123

See notes to condensed consolidated financial statements.

1



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
Revenue
$
130,925

 
$
151,752

Cost of revenue
69,971

 
73,257

Gross profit
60,954

 
78,495

Operating expenses:
 
 
 
Research and development
41,651

 
30,174

Selling, general and administrative
37,634

 
36,496

Restructuring charges
4,662

 
1,287

Total operating expenses
83,947

 
67,957

(Loss) income from operations
(22,993
)
 
10,538

Other (expense) income
 
 
 
Warrant liability gain (expense)
14,608

 
(4,823
)
Interest expense, net
(7,239
)
 
(7,350
)
Other income (expense)
7

 
(4
)
Total other income (expense), net
7,376

 
(12,177
)
Loss before income taxes
(15,617
)
 
(1,639
)
Income tax expense
1,353

 
532

Loss from continuing operations
(16,970
)
 
(2,171
)
(Loss) income from discontinued operations
(5,599
)
 
1,206

Net loss
$
(22,569
)
 
$
(965
)
 
 
 
 
Net (loss) income per share:
 
 
 
Basic (loss) income per share:
 
 
 
Loss from continuing operations
$
(0.26
)
 
$
(0.04
)
(Loss) income from discontinued operations
(0.09
)
 
0.02

Loss per share - basic
$
(0.35
)
 
$
(0.02
)
Diluted (loss) income per share:
 
 
 
Loss from continuing operations
$
(0.49
)
 
$
(0.04
)
(Loss) income from discontinued operations
(0.09
)
 
0.02

Loss per share - diluted
$
(0.57
)
 
$
(0.02
)
Shares used:
 
 
 
Basic
64,325

 
53,737

Diluted
65,109

 
53,737

See notes to condensed consolidated financial statements.


2



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
Net loss
$
(22,569
)
 
$
(965
)
Unrealized loss on short term investments, net of tax
(267
)
 
(46
)
Foreign currency translation gain (loss), net of tax
289

 
(9,597
)
Other comprehensive income (loss), net of tax
22

 
(9,643
)
Total comprehensive loss
$
(22,547
)
 
$
(10,608
)
See notes to condensed consolidated financial statements.


3



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

 
 
 
 
 
Accumulated
Other
Comprehensive Income
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Common Stock
 
Treasury Stock
 
Shares
 
Amount
 
Shares
 
Amount
Balance at September 29, 2017
64,279

 
$
64

 
(23
)
 
$
(330
)
 
$
2,977

 
$
1,041,644

 
$
(266,981
)
 
$
777,374

Cumulative effect of ASU 2016-09

 

 

 

 

 
1,018

 
(1,018
)
 

Stock options exercises
14

 

 

 

 

 
46

 

 
46

Vesting of restricted common stock and units
24

 

 

 

 

 

 

 

Issuance of common stock pursuant to employee stock purchase plan
114

 

 

 

 

 
3,195

 

 
3,195

Shares repurchased for stock withholdings on restricted stock awards
(9
)
 

 

 

 

 
(259
)
 

 
(259
)
Share-based compensation

 

 

 

 

 
9,992

 

 
9,992

Other comprehensive loss, net of tax

 

 

 

 
22

 

 

 
22

Net loss

 

 

 

 

 

 
(22,569
)
 
(22,569
)
Balance at December 29, 2017
64,422

 
$
64

 
(23
)
 
$
(330
)
 
$
2,999

 
$
1,055,636

 
$
(290,568
)
 
$
767,801

See notes to condensed consolidated financial statements.


4



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
 
December 29, 2017
 
December 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(22,569
)
 
$
(965
)
Adjustments to reconcile net loss to net cash provided by operating activities (net of acquisitions):
 
 
 
Depreciation and intangibles amortization
26,874

 
18,475

Share-based compensation
9,992

 
8,183

Warrant liability (gain) expense
(14,608
)
 
4,823

Acquired inventory step-up amortization
224

 

Deferred financing cost amortization
1,029

 
702

Deferred income taxes
403

 
(1,054
)
Changes in assets held for sale from discontinued operations
(6,219
)
 

Other adjustments, net
966

 
582

Change in operating assets and liabilities (net of acquisitions):
 
 
 
Accounts receivable
38,874

 
(4,488
)
Inventories
(8,017
)
 
(1,583
)
Prepaid expenses and other assets
(6,583
)
 
(673
)
Accounts payable
(14,445
)
 
931

Accrued and other liabilities
(2,225
)
 
(5,547
)
Income taxes
(3,162
)
 
1,021

Net cash provided by operating activities
534

 
20,407

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of businesses, net

 
875

Purchases of property and equipment
(13,823
)
 
(4,942
)
Proceeds from sale of assets

 
104

Proceeds from sales and maturities of investments
57,382

 
8,822

Purchases of investments
(17,987
)
 
(8,902
)
Purchases of other investments
(5,000
)
 

Payments associated with discontinued operations
(263
)
 

Net cash provided by (used in) investing activities
20,309

 
(4,043
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from stock option exercises and employee stock purchases
3,241

 
2,600

Payments on notes payable
(1,721
)
 
(1,513
)
Payments of capital leases and assumed debt
(216
)
 
(288
)
Repurchase of common stock
(259
)
 

Proceeds from corporate facility financing obligation

 
4,250

Other adjustments

 
(38
)
Net cash provided by financing activities
1,045

 
5,011

Foreign currency effect on cash
93

 
(435
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
21,981

 
20,940

CASH AND CASH EQUIVALENTS — Beginning of period
$
130,104

 
$
332,977

CASH AND CASH EQUIVALENTS — End of period
$
152,085

 
$
353,917

See notes to condensed consolidated financial statements.

5



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information —The accompanying unaudited, condensed consolidated financial statements have been prepared according to the rules and regulations of the United States (the “U.S.”) Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statement of comprehensive income, condensed consolidated statements of stockholders' equity and condensed consolidated statements of cash flows of MACOM Technology Solutions Holdings, Inc. (“MACOM”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles we use for our annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The consolidated balance sheet at September 29, 2017 is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our September 29, 2017 consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended September 29, 2017 filed with the SEC on November 15, 2017 . We recommend that the financial statements included in this Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for our fiscal year ended September 29, 2017 .
Principles of Consolidation— We have one reportable segment, semiconductors and modules. The accompanying consolidated financial statements include our accounts and the accounts of our majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
We have a 52 or 53-week fiscal year ending on the Friday closest to the last day of September. The fiscal years 2018 and 2017 include 52 weeks. To offset the effect of holidays, for fiscal years in which there are 53 weeks, we typically include the extra week arising in our fiscal years in the first quarter.
  Use of Estimates —The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities during the reporting periods, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, we base estimates and assumptions on historical experience, currently available information and various other factors that management believes to be reasonable under the circumstances. Actual results may differ materially from these estimates and assumptions.
Recent Accounting Pronouncements —Our Recent Accounting Pronouncements are described in the notes to our September 29, 2017 consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended September 29, 2017 .
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers , which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date ("Topic 606"), which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method, and we are currently evaluating the method of adoption. We are currently in the process of completing our analysis on the impact of this new accounting standards update. We do not expect the adoption of ASU 2015-14 will have a material impact on our financial position and results of operations.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation ("Topic 718"), which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities. We adopted this ASU as of September 30, 2017. Prior to ASU 2016-09, the accounting for share-based compensation required forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. ASU 2016-09 allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. ASU 2016-09 requires an entity that elects to account for forfeitures when they occur to apply the accounting change on a modified retrospective basis as a cumulative-effect adjustment to retained

6



earnings as of the date of adoption. We elected to account for forfeitures when they occur, and recorded a $1.0 million cumulative-effect adjustment to beginning retained earnings as of September 30, 2017. We did not record any adjustments to retained earnings for the tax effect of the adoption of ASU 2016-09 as we are in a full valuation allowance position against our U.S deferred tax asset. ASU 2016-09 requires all excess tax benefits and tax deficiencies to be recorded in the consolidated income statement on a prospective basis when the awards vest or are settled. Due to our full U.S. valuation allowance, ASU 2016-09 had no impact to our tax expense for the three months ended December 29, 2017 .
2. ACQUISITIONS
Acquisition of Applied Micro Circuits Corporation— On January 26, 2017, we completed the acquisition of Applied Micro Circuits Corporation (“AppliedMicro”), a global provider of silicon solutions for next-generation cloud infrastructure and Cloud Data Centers, as well as connectivity products for edge, metro and long-haul communications equipment (the “AppliedMicro Acquisition”). We acquired AppliedMicro in order to expand our business in enterprise and Cloud Data Center applications. In connection with the AppliedMicro Acquisition, we acquired all of the outstanding common stock of AppliedMicro for total consideration of $695.4 million , which included cash paid of $287.1 million , less $56.8 million of cash acquired, and equity issued at a fair value of $465.1 million . In conjunction with the equity issued, we granted vested out-of-money stock options and unvested restricted stock units to replace outstanding vested out-of-money stock options and unvested restricted stock units of AppliedMicro. The total fair value of granted vested out-of-money stock options and unvested restricted stock units was $14.5 million , of which $9.3 million was attributable to pre-combination service and was included in the total consideration transferred. We funded the AppliedMicro Acquisition with cash on hand and short term investments. We recorded transaction costs related to the acquisition in selling, general and administrative expense. For the three months ended December 29, 2017 , we recorded no transaction costs. For the three months ended December 30, 2016 , we recorded transaction costs of $3.5 million . The AppliedMicro Acquisition was accounted for as a stock purchase and the operations of AppliedMicro have been included in our consolidated financial statements since the date of acquisition.
We recognized the AppliedMicro assets acquired and liabilities assumed based upon the fair value of such assets and liabilities measured as of the date of acquisition. The aggregate purchase price for AppliedMicro has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, none of which will be tax deductible.
In connection with the acquisition of AppliedMicro, we entered into a plan to divest a portion of AppliedMicro's business specifically related to its compute business (the "Compute business"). The divestiture of the Compute business was completed on October 27, 2017. See Note 3 - Discontinued Operations for further details of the divestiture.
The following table summarizes the total estimated acquisition consideration (in thousands):
Cash consideration paid to AppliedMicro common stockholders
$
287,060

Common stock issued (9,544,125 shares of our common stock at $47.53 per share)
453,632

Equity consideration for vested "in the money" stock options and unvested restricted stock units
2,143

Fair value of the replacement equity awards attributable to pre-acquisition service
9,307

Total consideration paid, excluding cash acquired
$
752,142


7



We finalized the purchase accounting during the fiscal quarter ended December 29, 2017. The final purchase price allocation is as follows (in thousands):
 
Preliminary Allocation as of
 
Allocation Adjustments
 
Adjusted Allocation
 
September 29, 2017
 
 
December 29, 2017
 
 
 
 
 
 
Current assets
$
70,434

 
$
(553
)
 
$
69,881

Intangible assets
412,848

 

 
412,848

Assets held for sale
40,944

 

 
40,944

Other assets
9,800

 

 
9,800

Total assets acquired
534,026

 
(553
)
 
533,473

Liabilities assumed:
 
 
 
 
 
Liabilities held for sale
4,444

 

 
4,444

Other liabilities
17,627

 
651

 
18,278

Total liabilities assumed
22,071

 
651

 
22,722

Net assets acquired
511,955

 
(1,204
)
 
510,751

Consideration:
 
 
 
 
 
Cash paid upon closing
230,298

 

 
230,298

Common stock issued
455,775

 

 
455,775

Equity instruments issued
9,307

 

 
9,307

Total consideration
$
695,380

 
$

 
$
695,380

Goodwill
$
183,425

 
$
1,204

 
$
184,629

The components of the acquired intangible assets were as follows (in thousands):
 
Included In Assets Held For Sale
 
Included in Retained Business
 
Useful Lives (Years)
Developed technology
$
9,600

 
$
78,448

 
7 years
Customer relationships

 
334,400

 
14 years
Total acquired intangible assets
$
9,600

 
$
412,848

 
 
The overall weighted-average life of the identified intangible assets acquired in the AppliedMicro Acquisition is estimated to be 12.7 years and the assets are being amortized over their estimated useful lives based upon the pattern over which we expect to receive the economic benefit from these assets.
The following is a summary of AppliedMicro revenue and earnings included in our accompanying condensed consolidated statements of operations for the three months ended December 29, 2017 (in thousands):
 
Three Months Ended
 
December 29, 2017
Revenue
$
22,624

Loss from continuing operations
(5,441
)
Loss from discontinued operations
(5,599
)

8



The pro forma statements of operations data for the three months ended December 30, 2016 , below, give effect to the AppliedMicro Acquisition, described above, as if it had occurred at October 2, 2015. These amounts have been calculated after applying our accounting policies and adjusting the results of AppliedMicro to reflect transaction costs, retention compensation expense, the impact of the step-up to the value of acquired inventory, as well as the additional intangible amortization that would have been charged assuming the fair value adjustments had been applied and incurred since October 2, 2015. This pro forma data is presented for informational purposes only and does not purport to be indicative of our future results of operations.
 
December 30, 2016
Revenue
$
194,469

Income from continuing operations
9,019

Loss from discontinued operations
(17,923
)
Acquisition of Assets of Picometrix LLC— On August 9, 2017, we completed the acquisition of certain assets of Picometrix LLC ("Picometrix"), a supplier of optical-to-electrical converters for Cloud Data Center infrastructure (the "Picometrix Acquisition"). We acquired Picometrix in order to expand our business in enterprise and Cloud Data Center applications. The purchase consideration was $33.5 million , comprised of an upfront cash payment of $29.5 million , and  $4.0 million  placed in escrow for potential satisfaction of certain indemnification obligations that may arise from the closing date through December 15, 2018. For the three months ended December 29, 2017 , we recorded no transaction costs. The Picometrix Acquisition was accounted for as an asset purchase, and the operations of Picometrix have been included in our consolidated financial statements since the date of acquisition.
We recognized the Picometrix assets acquired based upon the fair value of such assets measured as of the date of acquisition. The aggregate purchase price for the Picometrix assets has been allocated to the tangible and identifiable intangible assets acquired based on their estimated fair value at the date of acquisition. The excess of the purchase price over the fair value of the acquired assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, all of which will be tax deductible.
The purchase accounting is preliminary and subject to completion including certain fair value measurements, particularly the finalization of the valuation assessment of the acquired tangible and intangible assets. The adjustments arising from the completion of the outstanding matters may materially affect the preliminary purchase accounting.
The preliminary allocation of purchase price as of December 29, 2017 is as follows (in thousands):
 
Preliminary Allocation as of
 
Allocation Adjustments
 
Adjusted Allocation
 
September 29, 2017
 
 
December 29, 2017
 
 
 
 
 
 
Current assets
$
7,375

 
$
(1,131
)
 
$
6,244

Intangible assets
19,000

 

 
19,000

Other assets
3,301

 

 
3,301

Total assets acquired
29,676

 
(1,131
)
 
28,545

 
 
 
 
 
 
Current liabilities
2,169

 
242

 
2,411

Other liabilities
190

 
(77
)
 
113

Total liabilities assumed
2,359

 
165

 
2,524

Net assets acquired
27,317

 
(1,296
)
 
26,021

Consideration:
 
 
 
 
 
Cash paid upon closing, net of cash acquired
33,500

 

 
33,500

Goodwill
$
6,183

 
$
1,296

 
$
7,479

The pro forma financial information for fiscal years 2018 and 2017, including revenue and net income, is immaterial, and has not been separately presented.

9



3. DISCONTINUED OPERATIONS
On October 27, 2017, we entered into a Purchase Agreement with Ampere Computing Holdings LLC (formerly known as Project Denver Holdings LLC) ("Ampere"), to sell the Compute business. In consideration for the transfer and sale of the Compute business, we received an equity interest in Ampere valued at approximately $36.5 million , and representing less than 20% of Ampere's total outstanding equity. The operations of the Compute business were accounted for as discontinued operations through the date of divestiture.
In August 2015, we sold our automotive business (the "Automotive business") to Autoliv ASP Inc. (“Autoliv”), as the Automotive business was not consistent with our long-term strategic vision from both a growth and profitability perspective. Additionally, we entered into a consulting agreement pursuant to which we were to provide Autoliv with certain non-design advisory services for a period of two years following the closing of the transaction for up to $15.0 million (the "Consulting Agreement"). During the three months ended December 30, 2016 , we recognized $1.9 million of income from the consulting agreement with Autoliv. No income was recognized during the three months ended December 29, 2017 .
The accompanying consolidated statements of operations includes the following operating results related to these discontinued operations (in thousands):
 
 
Three Months Ended
 
 
December 29, 2017
 
December 30, 2016
Revenue (1)
 
$
(2
)
 
$

Cost of revenue (1)
 
(540
)
 

Gross profit
 
538

 

Operating expenses:
 
 
 
 
Research and development (1)
 
4,710

 

Selling, general and administrative (1)
 
1,427

 

Total operating expenses
 
6,137

 

Loss from operations
 
(5,599
)
 

Other income (2)
 

 
1,875

(Loss) income before income taxes
 
(5,599
)
 
1,875

Income tax provision
 

 
669

(Loss) income from discontinued operations
 
$
(5,599
)
 
$
1,206

 
 
 
 
 
Cash flow from operating activities
 
(10,309
)
 

(1) Amounts are associated with the Compute business.
(2) Amounts are associated with the Automotive business.
4. INVESTMENTS
Our short term investments are invested in corporate bonds, restricted money market funds, commercial paper and agency bonds, and are classified as available-for-sale. The amortized cost, gross unrealized holding gains or losses, and fair value of our investments by major investment type as of December 29, 2017 and September 29, 2017 are summarized in the tables below (in thousands):
 
December 29, 2017
 
Amortized
Cost
 
Gross
Unrealized
Holding Gains
  
Gross
Unrealized
Holding Losses
 
Aggregate Fair
Value
Corporate bonds
$
26,458

  
$

 
$
(409
)
 
$
26,049

Commercial paper
18,544

 
3

 
(11
)
 
18,536

Total short term investments
$
45,002

  
$
3

 
$
(420
)
 
$
44,585


10



 
September 29, 2017
 
Amortized
Cost
 
Gross
Unrealized
Holding Gains
 
Gross
Unrealized
Holding Losses
 
Aggregate Fair
Value
Corporate bonds
$
26,366

  
$
10

 
$
(166
)
 
$
26,210

Commercial paper
57,943

 
4

 
(36
)
 
57,911

Total short term investments
$
84,309

 
$
14

 
$
(202
)
 
$
84,121


The contractual maturities of investments were as follows (in thousands):
 
 
December 29, 2017
 
September 29, 2017
Less than 1 year
$
19,561

 
$
60,433

Over 1 year
25,024

 
23,688

Total short term investments
$
44,585

 
$
84,121

Available-for-sale investments are reported at fair value and as such, their associated unrealized gains and losses are reported as a separate component of stockholders’ equity within accumulated other comprehensive income.
Other Investments — We record non-marketable equity investments at cost, which approximates fair value at the date of purchase, if we do not have the ability to exercise significant influence or control over the investment. We determine the appropriate classification of our investments at the time of acquisition and evaluate these investments for impairment at each balance sheet date. As of December 29, 2017 , we had minority non-marketable equity investments of less than 20.0% of the outstanding equity in two privately held companies which were classified as other long-term investments. One of these investments is a minority equity ownership in Ampere, a technology company, for approximately $36.5 million . This investment was acquired in conjunction with the divestiture of the Compute business during the fiscal quarter ended December 29, 2017 . The other investment is a Series B preferred stock ownership of a manufacturing company with preferred liquidation rights over other equity shares. This investment had a fair value of $5.0 million at the date of purchase.
5. FAIR VALUE
We group our financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1  - Quoted prices in active markets for identical assets or liabilities.  
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
Level 3  - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by us.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
We measure certain assets and liabilities at fair value on a recurring basis such as our financial instruments and derivatives. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the three months ended December 29, 2017 .

11



Assets and liabilities measured at fair value on a recurring basis consist of the following (in thousands):
 
December 29, 2017
 
Fair Value
 
Active Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Money market funds
$
268

 
$
268

 
$

 
$

Commercial paper
57,924

 

 
57,924

 

Corporate bonds
26,049

 

 
26,049

 

Total assets measured at fair value
$
84,241

 
$
268

 
$
83,973

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
1,106

 
$

 
$

 
$
1,106

Common stock warrant liability
26,167

 

 

 
26,167

Total liabilities measured at fair value
$
27,273

 
$

 
$

 
$
27,273

 
September 29, 2017
 
Fair Value
 
Active Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Money market funds
$
36

 
$
36

 
$

 
$

Commercial paper
57,911

 

 
57,911

 

Corporate bonds
26,210

 

 
26,210

 

Total assets measured at fair value
$
84,157

 
$
36

 
$
84,121

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
1,679

 
$

 
$

 
$
1,679

Common stock warrant liability
40,775

 

 

 
40,775

Total liabilities measured at fair value
$
42,454

 
$

 
$

 
$
42,454

As of December 29, 2017 and September 29, 2017 , the fair value of the common stock warrants has been estimated using a Black-Scholes option pricing model.
The quantitative information utilized in the fair value calculation of our Level 3 liabilities is as follows:
 
 
 
 
 
Inputs
Liabilities
Valuation Technique
 
Unobservable Input
 
December 29, 2017
 
September 29, 2017
Contingent consideration
Discounted cash flow
 
Discount rate
 
9.2%
 
9.2%
 
 
 
Probability of achievement
 
80% - 90%
 
70% - 100%
 
 
 
Timing of cash flows
 
5 months
 
2 - 8 months
 
 
 
 
 
 
 
 
Warrant liability
Black-Scholes model
 
Volatility
 
47.7%
 
44.9%
 
 
 
Discount rate
 
1.98%
 
1.62%
 
 
 
Expected life
 
3.0 years
 
3.2 years
 
 
 
Exercise price
 
$14.05
 
$14.05
 
 
 
Stock price
 
$32.54
 
$44.61
 
 
 
Dividend rate
 
—%
 
—%
The fair values of the contingent consideration liabilities were estimated based upon a risk-adjusted present value of the probability-weighted expected payments by us. Specifically, we considered base, upside and downside scenarios for the operating metrics upon which the contingent payments are to be based. Probabilities were assigned to each scenario and the probability weighted payments were discounted to present value using risk-adjusted discount rates.

12



The changes in liabilities with inputs classified within Level 3 of the fair value hierarchy consist of the following (in thousands):
 
September 29,
2017
 
Net Realized/Unrealized Losses Included in Earnings
 
Purchases
and
Issuances
 
Sales and
Settlements
 
December 29,
2017
Contingent consideration
$
1,679

 
$
(573
)
 
$

 
$

 
$
1,106

Common stock warrant liability
$
40,775

 
$
(14,608
)
 
$

 
$

 
$
26,167

 
September 30,
2016
 
Net Realized/Unrealized Losses Included in Earnings
 
Purchases
and
Issuances
 
Sales and
Settlements
 
December 30,
2016
Contingent consideration
$
848

 
$
18

 
$

 
$

 
$
866

Common stock warrant liability
$
38,253

 
$
4,823

 
$

 
$

 
$
43,076

6. INVENTORIES
Inventories consist of the following (in thousands):
 
December 29,
2017
 
September 29,
2017
Raw materials
$
81,734

 
$
78,999

Work-in-process
13,131

 
13,962

Finished goods
48,271

 
43,113

Total
$
143,136

 
$
136,074

7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
 
December 29,
2017
 
September 29,
2017
Construction in process
28,811

 
22,195

Machinery and equipment
160,936

 
160,955

Leasehold improvements
12,931

 
13,809

Furniture and fixtures
2,399

 
2,078

Computer equipment and software
16,927

 
16,539

Capital lease assets
20,407

 
20,410

Total property and equipment
$
242,411

 
$
235,986

Less accumulated depreciation and amortization
(110,401
)
 
(104,967
)
Property and equipment, net
$
132,010

 
$
131,019

Depreciation and amortization expense related to property, plant and equipment for the three months ended December 29, 2017 was $7.7 million . Depreciation and amortization expense related to property, plant and equipment for the three months ended December 30, 2016 was $6.0 million .
8. DEBT
As of December 29, 2017 , we are party to a credit agreement dated as of May 8, 2014 with a syndicate of lenders and Goldman Sachs Bank USA, as administrative agent (as amended on February 13, 2015, August 31, 2016, March 10, 2017 and May 19, 2017, the “Credit Agreement”). As of December 29, 2017 , the Credit Agreement consisted of term loans with an aggregate principal amount of $700.0 million (“Term Loans”) and a revolving credit facility with an aggregate borrowing capacity of $160.0 million (“Revolving Facility”). The Revolving Facility will mature in May 2021 and the Term Loans will mature in May 2024 and bear interest at: (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 2.25% ; and (ii) for base rate loans, a rate per annum equal to the greater of (a) the prime rate quoted in the print edition of the Wall Street Journal, Money Rates Section, (b) the federal funds rate plus one-half of 1.00% and (c) the LIBOR rate applicable to a one-month interest period plus 1.00% (but, in each case, not less than 1.00% ), plus an applicable margin of 1.25% .

13



All principal amounts outstanding and interest rate information as of December 29, 2017 , for the Credit Agreement were as follows (in millions, except rate data):
 
Principal Outstanding
Base Rate
Margin
Effective Interest Rate
Term loans
$685.0
1.55%
2.25%
3.80%
As of December 29, 2017 , approximately $13.0 million of deferred financing costs remain unamortized, of which $11.9 million is related to the Term Loans and is recorded as a direct reduction of the recognized debt liabilities in our accompanying consolidated balance sheet, and $1.1 million is related to the Revolving Facility and is recorded in other assets in our accompanying consolidated balance sheet.
The Term Loans are secured by a first priority lien on substantially all of our assets and provide that we must comply with certain financial and non-financial covenants.
As of December 29, 2017 , we had $685.0 million of outstanding Term Loan borrowings under the Credit Agreement and $160.0 million of borrowing capacity under our Revolving Facility.
As of December 29, 2017 , the following remained outstanding on the Term Loans (in thousands):
Principal balance
$
685,019

Unamortized discount
(5,532
)
Unamortized deferred financing costs
(11,906
)
Total term loans
$
667,581

Current portion
6,885

Long-term, less current portion
$
660,696

As of December 29, 2017 , the minimum principal payments under the Term Loans in future fiscal years were as follows (in thousands):
2018 (rest of fiscal year)
$
5,163

2019
6,885

2020
6,885

2021
6,885

2022
6,885

Thereafter
652,316

Total
$
685,019

The fair value of the Term Loans was estimated to be approximately $694.4 million as of December 29, 2017 and was determined using Level 2 inputs, including a quoted rate from a bank.
9. CAPITAL LEASE AND FINANCING OBLIGATIONS
Corporate Facility Financing Obligation
On May 26, 2016, we entered into a Purchase and Sale Agreement (“Purchase and Sale Agreement”) with Calare Properties, Inc., a Delaware corporation (together with its affiliates, the “Buyer”), for the sale and subsequent leaseback of our corporate headquarters, located at 100 Chelmsford Street, Lowell, Massachusetts. The transactions contemplated by the Purchase and Sale Agreement closed on December 28, 2016, at which time we also entered into three lease agreements with the Buyer including: (1) a 20 year leaseback of the facility located at 100 Chelmsford Street (the “100 Chelmsford Lease”), (2) a 20 year build-to-suit lease arrangement for the construction and subsequent lease back of a new facility to be located at 144 Chelmsford Street (the “144 Chelmsford Lease”), and (3) a 14 year building lease renewal of an adjacent facility at 121 Hale Street (the “121 Hale Lease”, and together with the 100 Chelmsford Lease and the 144 Chelmsford Lease, the “Leases”).
Because the transactions contemplated by the Purchase and Sale Agreement and the related Leases were negotiated and consummated at the same time and in contemplation of one another to achieve the same commercial objective, the transactions are accounted for by us as a single unit of accounting. In addition, the Leases were determined to represent a failed sale-leaseback due to our continuing involvement in the properties in the form of non-recourse financing. As a result, the Leases are accounted for under the financing method and we will be deemed the accounting owner under the arrangement, including the assets to be constructed under the 144 Chelmsford Lease. We will continue to recognize the existing building and improvements sold under

14



the Purchase and Sale Agreement, capitalize the 121 Hale Street building as well as the assets constructed under the Leases, and depreciate the assets over the shorter of their estimated useful lives or the lease terms. The sale proceeds from the Purchase and Sale Agreement of $8.2 million (which includes $4.2 million in cash and $4.0 million in construction allowances) and the fair value of the 121 Hale Street building of $4.0 million were recognized as a financing obligation on our consolidated balance sheet and are being amortized over the 20 year lease term based on the minimum lease payments required under the Leases and our incremental borrowing rate. Future construction costs funded by the Buyer under the 144 Chelmsford Lease will be recognized as additional financing obligations on our consolidated balance sheet as incurred, and will be amortized over the 20 year lease term based on the minimum lease payments required under the Leases and our incremental borrowing rate.
As a result of the failed sale-leaseback accounting, we calculated a financing obligation as of the December 28, 2016 inception of the lease based on the future minimum lease payments discounted at 8.5% . The discount rate represents the estimated incremental borrowing rate over the lease term of 20 years. The minimum lease payments are recorded as interest expense and in part as a payment of principal reducing the financing obligation. The real property assets in the transaction remain on the consolidated balance sheets and continue to be depreciated over the remaining useful lives. As of December 29, 2017 , approximately $17.9 million of the financing obligation was outstanding associated with the Leases, of which $5.7 million was associated with the 144 Chelmsford Lease that has not yet been placed in service.
Additionally, we have certain capital equipment lease obligations, of which approximately  $2.0 million was outstanding as of  December 29, 2017 .
As of December 29, 2017 , future minimum payments under capital lease obligations and financing obligations related to the Leases were as follows (in thousands):
Fiscal year ending:
 
Amount
2018 (rest of fiscal year)
 
$
1,405

2019
 
1,790

2020
 
1,618

2021
 
1,485

2022
 
1,276

Thereafter
 
19,264

Total minimum capital lease payments
 
26,838

Less amount representing interest
 
(14,425
)
Present value of net minimum capital lease payments (1)
 
$
12,413

(1) Excludes $5.7 million associated with the 144 Chelmsford Lease that has not yet been placed in service.
10. INTANGIBLE ASSETS
Amortization expense related to intangible assets is as follows (in thousands):
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
Cost of revenue
$
8,147

 
$
6,001

Selling, general and administrative
10,993

 
6,467

Total
$
19,140

 
$
12,468

    
Intangible assets consist of the following (in thousands):
 
December 29,
2017
 
September 29,
2017
Acquired technology
$
251,650

 
$
251,655

Customer relationships
556,620

 
556,648

Trade name
3,400

 
3,400

Total
$
811,670

 
$
811,703

Less accumulated amortization
(209,750
)
 
(190,611
)
Intangible assets — net
$
601,920

 
$
621,092


15



Our trade name is an indefinite-lived intangible asset. A summary of the activity in intangible assets and goodwill follows (in thousands):
 
Intangible Assets
 
 
 
Total Intangible Assets
 
Acquired
Technology
 
Customer
Relationships
 
Trade Name
 
Goodwill
Balance at September 29, 2017
$
811,703

 
$
251,655

 
$
556,648

 
$
3,400

 
$
313,765

Fair value adjustment

 

 

 

 
2,500

Currency translation adjustment
(33
)
 
(5
)
 
(28
)
 

 
(26
)
Balance at December 29, 2017
$
811,670

 
$
251,650

 
$
556,620

 
$
3,400

 
$
316,239

As of December 29, 2017 , our estimated amortization of our intangible assets in future fiscal years was as follows (in thousands):
 
2018 Remaining
2019
2020
2021
2022
Thereafter
Total
Amortization expense
$
63,659

90,420

88,023

79,156

65,463

211,799

$
598,520

Accumulated amortization for acquired technology and customer relationships were $114.8 million and $94.9 million , respectively, as of December 29, 2017 , and $106.8 million and $83.9 million , respectively, as of September 29, 2017 .
11. STOCKHOLDERS' EQUITY
We have authorized 10 million shares of $0.001 par value preferred stock and 300 million shares of $0.001 par value common stock as of December 29, 2017 and September 29, 2017 .
Common Stock Warrants —In March 2012, we issued warrants to purchase 1,281,358 shares of common stock for $14.05 per share. The warrants expire December 21, 2020 , or earlier as per the terms of the agreement, including immediately following consummation of a sale of all or substantially all assets or capital stock or other equity securities, including by merger, consolidation, recapitalization, or similar transactions. We do not currently have sufficient registered and available shares to immediately satisfy a request for registration, if such a request were made. As of December 29, 2017 , no exercise of the warrants had occurred and no request had been made to register the warrants or any underlying securities for resale by the holders.
We are recording the estimated fair values of the warrants as a long-term liability in the accompanying consolidated financial statements with changes in the estimated fair value being recorded in the accompanying statements of operations. See Note 5 - Fair Value for additional information related to the fair value of our warrant liability.

16



12. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation for basic and diluted net loss per share of common stock (in thousands, except per share data):
 
Three Months Ended
 
December 29, 2017
 
December 30, 2016
Numerator:
 
 
 
Loss from continuing operations
$
(16,970
)
 
$
(2,171
)
(Loss) income from discontinued operations
(5,599
)
 
1,206

Net loss
$
(22,569
)
 
$
(965
)
Warrant liability gain
(14,608
)
 

Net loss attributable to common stockholders
$
(37,177
)
 
$
(965
)
Denominator:
 
 
 
Weighted average common shares outstanding-basic
64,325

 
53,737

Dilutive effect of warrants
784

 

Weighted average common shares outstanding-diluted
65,109

 
$
53,737

(Loss) earnings per share-basic:
 
 
 
Continuing operations
$
(0.26
)
 
$
(0.04
)
Discontinued operations
(0.09
)
 
0.02

Net loss to common stock holders per share-basic
$
(0.35
)
 
$
(0.02
)
(Loss) earnings per share-diluted:
 
 
 
Continuing operations
$
(0.49
)
 
$
(0.04
)
Discontinued operations
(0.09
)
 
0.02

Net loss to common stock holders per share-diluted
$
(0.57
)
 
$
(0.02
)
As of December 29, 2017 , we had warrants outstanding which were reported as a liability on the consolidated balance sheet. During the three months ended December 29, 2017 we recorded a $14.6 million gain, associated with adjusting the fair value of the warrants, in the consolidated income statement primarily as a result of changes in our stock price. When calculating earnings per share we are required to adjust for any changes in income or loss to show the maximum dilution possible and therefore during the quarter, we adjusted the numerator by the warrant gain of $14.6 million and denominator by the incremental shares of 783,508 under the treasury stock method. The table above excludes the effects of 499,831 and 1,875,326 shares for the three months ended December 29, 2017 and December 30, 2016 , respectively, of potential shares of common stock issuable upon exercise of stock options, restricted stock and restricted stock units as the inclusion would be antidilutive.
13. COMMITMENTS AND CONTINGENCIES
From time to time we may be subject to commercial disputes, employment issues, claims by other companies in the industry that we have infringed their intellectual property rights and other similar claims and litigations. Any such claims may lead to future litigation and material damages and defense costs. Other than as set forth below, we were not involved in any material pending legal proceedings during the fiscal quarter ended December 29, 2017 .
GaN Lawsuit Against Infineon. On April 26, 2016, we and our wholly-owned subsidiary Nitronex, LLC brought suit against Infineon Technologies Americas Corporation ("Infineon Americas") and Infineon Technologies AG ("Infineon AG" and collectively, with Infineon Americas, "Infineon") in the Federal District Court for the Central District of California, seeking injunctive relief, monetary damages, and specific performance of certain contractual obligations. On July 19, 2016, we filed a first amended complaint, and, on November 21, 2016, we filed a second amended complaint. After motions to dismiss certain claims from MACOM’s second amended complaint were denied on February 28, 2017, Infineon AG answered on March 24, 2017, asserting no counterclaims. Infineon Americas also answered and counterclaimed on March 24, 2017 and then submitted amended counterclaims on April 14, 2017. The district court dismissed one of the counterclaims on June 5, 2017, and Infineon filed further amended counterclaims on June 19, 2017. MACOM answered the counterclaims on August 16, 2017.
The suit arises out of agreements relating to GaN-on-Silicon ("GaN") patents that were executed in 2010 by Nitronex Corporation (acquired by us in 2014) and International Rectifier Corporation ("International Rectifier") (acquired by Infineon AG in 2015). We assert claims for breach of contract, breach of the covenant of good faith and fair dealing, declaratory judgment of contractual rights, declaratory judgment of non-infringement of patents, and, against Infineon AG only, intentional interference with contract. If successful, the relief sought in our second amended complaint would, among other remedies, require Infineon to assign back to us certain GaN-related Nitronex patents that were previously assigned to International Rectifier and enjoin Infineon

17



from proceeding with its marketing and sales of certain types of GaN products. In an order dated October 31, 2016, the district court granted us a preliminary injunction against Infineon, which then issued on December 7, 2016 and was modified on March 6, 2017. The preliminary injunction declared, among other things, that a licensing agreement between us and Infineon that Infineon had purported to terminate is still in effect. On January 29, 2018, the Federal Circuit affirmed the district court’s decision to enter a preliminary injunction declaring the license agreement to still be in effect, although it reversed other aspects of the district court’s decision. Meanwhile, the district court case has been proceeding, with a claim construction hearing set for March 26, 2018 and trial set to begin on February 26, 2019.
With respect to the above legal proceeding, we are not able to reasonably estimate the amount or range of any possible loss, and accordingly have not accrued or disclosed any related amounts of possible loss in the accompanying consolidated financial statements.
14. RESTRUCTURINGS
We have periodically implemented restructuring actions in connection with broader plans to reduce staffing, reduce our internal manufacturing footprint and, generally, reduce operating costs. The restructuring expenses are primarily comprised of direct and incremental costs related to headcount reductions including severance and outplacement fees for the terminated employees, as well as facility closure costs.
During the fiscal quarter ended December 29, 2017, we initiated plans to restructure our facility in Long Beach, California and to close our facilities in Belfast, United Kingdom and Sydney, Australia. The operations from the Long Beach facility will be consolidated into our other California locations in order to achieve operational synergies. The Belfast and Sydney facilities will be closed as we discontinue certain product development activities that were performed in those locations. The following is a summary of the restructuring charges incurred for the three months ended December 29, 2017 under these restructuring plans:
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
Employee related expenses
$
2,571

 
$
1,287

Facility related expenses
2,091

 

Total restructuring charges
$
4,662

 
$
1,287

The following is a summary of the costs incurred and remaining balances included in accrued expenses for the three months ended December 29, 2017 (in thousands):
Balance as of September 29, 2017
$
627

       Current period expense
4,662

       Charges paid/settled, net
(1,365
)
Balance as of December 29, 2017
$
3,924

Our remaining accrued restructuring expenses are expected to be paid through the remainder of fiscal year 2018 . We expect to incur additional restructuring costs of approximately $0.7 million to $1.5 million during the remainder of fiscal year 2018 as we complete these restructuring actions.
15. SHARE-BASED COMPENSATION
Stock Plans
As of December 29, 2017 , we had 14.3 million  shares available for future issuance under our 2012 Omnibus Incentive Plan (as Amended and Restated) (the “2012 Plan”), and 3.4 million shares available for issuance under our Employee Stock Purchase Plan (“ESPP”). Under the 2012 Plan, we have the ability to issue incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), performance based non-statutory stock options, stock appreciation rights, restricted stock (“RSAs”), restricted stock units (“RSUs”), performance-based stock units (“PRSUs”), performance shares and other equity-based awards to employees, directors and outside consultants. The ISOs and NSOs must be granted at a price per share not less than the fair value of our common stock on the date of grant. Options granted to date primarily vest based on certain market-based and performance-based criteria as described below. Options granted generally have a term of seven to ten years. Certain of the share-based awards granted and outstanding as of December 29, 2017 are subject to accelerated vesting upon a change in control. There were no modifications to share-based awards during the periods presented. As of December 29, 2017 , total unrecognized compensation cost related to the employee stock purchase plan was $1.2 million .

18



Share-Based Compensation
The following table shows a summary of share-based compensation expense included in the Condensed Consolidated Statements of Operations for the three months ended December 29, 2017 and December 30, 2016 (in thousands):
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
Cost of revenue
$
945

 
$
720

Research and development
3,662

 
1,945

Selling, general and administrative
5,385

 
5,518

Total share-based compensation expense
$
9,992

 
$
8,183

As of December 29, 2017 , the total unrecognized compensation costs related to outstanding stock options, restricted stock awards and units including awards with time-based and performance based vesting was $75.6 million , which we expect to recognize over a weighted-average period of 2.5 years.
Stock Options
We had 1.6 million stock options outstanding as of December 29, 2017 , with a weighted-average exercise price per share of $33.17 and weighted-average remaining contractual term of 5.4 years . The aggregate intrinsic value of the stock options outstanding as of December 29, 2017 was $5.2 million which represents our closing stock price value on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options outstanding.
We had 0.4 million stock options exercisable as of December 29, 2017 , with a weighted-average exercise price per share of $24.52 and weighted-average remaining contractual term of 4.0 years . The aggregate intrinsic value of the stock options exercisable as of December 29, 2017 was $5.1 million which represents our closing stock price value on the last trading day of the period in excess of the weighted-average exercise price multiplied by the number of options exercisable.
During November 2017, we granted 325,000 non-qualified stock options with a grant date fair value of $5.0 million that are subject to vesting only upon the market price of our underlying public stock closing above a certain price target within seven years of the date of grant. These non-qualified stock options with market related vesting conditions are valued using a Monte Carlo simulation model, using a volatility rate of 45.8% , a risk-free rate of 2.26% , a weighted-average strike price of $36.58 and a term of seven years . Share-based compensation expense is recognized regardless of the number of awards that are earned based on the market condition and is recognized on a straight-line basis over the estimated service period of approximately three years . If the required service period is not met for these options then the share-based compensation expense would be reversed. In the event that our common stock achieves the target price of $98.99 per share based on a 30 days trailing average prior to the end of the estimated service period, any remaining unamortized compensation cost will be recognized.
During November 2017, we also granted 10,924 incentive stock options and 69,076 non-qualified stock options with a total grant date fair value of $1.4 million . These stock options are valued using a Black Scholes model, using a volatility rate of 45.7% , a risk-free rate of 2.21% , a strike price of $36.61 and an expected term of 6.5 years . Share-based compensation expense is recognized on a straight-line basis over the service period of approximately 4.5 years. If the required service period is not met for these options then the share-based compensation expense would be reversed.
The total intrinsic value of options exercised was $0.5 million for the three months ended December 29, 2017 , and was $1.5 million for the three months ended December 30, 2016 .
Restricted Stock, Restricted Stock Units and Performance-Based Restricted Stock Units
A summary of restricted stock, restricted stock unit and performance-based restricted stock unit activity for the three months ended December 29, 2017 , is as follows (in thousands, except per share data):
 
Number of RSUs
 
Weighted-
Average
Grate Date Fair Value
 
Aggregate
Intrinsic
Value
(in thousands)
Balance at September 29, 2017
1,907

 
$
39.20

 
$
72,165

Granted
291

 
35.55

 
 
Vested and released
(24
)
 
30.04

 
 
Forfeited, canceled or expired
(75
)
 
29.37

 
 
Balance at December 29, 2017
2,099

 
$
39.16

 
$
68,285


19



Restricted stock, restricted stock units and performance-based restricted stock units that vested during the three months ended December 29, 2017 and December 30, 2016 had fair value of $0.7 million and $0.9 million as of the vesting date, respectively.
16. INCOME TAXES
We are subject to income tax in the U.S. as well as other tax jurisdictions in which we conduct business. Earnings from non-U.S. activities are subject to local country income tax and may also be subject to current U.S. income tax. For interim periods, we record a tax provision or benefit based upon the estimated effective tax rate expected for the full fiscal year, adjusted for material discrete taxation matters arising during the interim periods.
The difference between the U.S. federal statutory income tax rate of 35% and our effective income tax rate for the three months ended December 30, 2016 , was primarily impacted by changes in fair values of the common stock warrant liability which is neither deductible nor taxable for tax purposes, income taxed in foreign jurisdictions at generally lower tax rates, non-deductible compensation, research and development tax credits and non-deductible merger expenses, offset by U.S. state income taxes. The difference between the U.S. federal statutory income tax rate of 35% and our effective income tax rate for the three months ended December 29, 2017 was primarily driven by a full valuation allowance against any benefit associated with U.S. losses and income taxed in foreign jurisdictions at generally lower tax rates.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making this determination, we consider available positive and negative evidence and factors that may impact the valuation of our deferred tax asset including results of recent operations, future reversals of existing taxable temporary differences, projected future taxable income, and tax-planning strategies. A significant piece of objective negative evidence evaluated was the cumulative U.S. loss incurred over the three-year period ended March 31, 2017 which we believe limited our ability to consider other subjective evidence, such as our projections for future growth. Certain transaction and integration related expenses incurred in the U.S. primarily associated with the AppliedMicro Acquisition during the three months ended March 31, 2017 resulted for the first time in significant negative objective evidence in the form of adjusted cumulative losses in the U.S. over the past three-year period. This resulted in our determination during the fiscal quarter ended March 31, 2017 that there was not sufficient objectively verifiable positive evidence to offset this negative objective evidence and we concluded that a full valuation allowance was required for our U.S. deferred tax assets. Significant negative objective evidence in the form of adjusted cumulative losses in the U.S. over the past three-year period ended December 29, 2017 resulted in our continued determination that there was not sufficient objectively verifiable positive evidence to offset this negative objective evidence and we concluded that a full valuation allowance was still appropriate for our U.S. deferred tax assets.
The balance of the unrecognized tax benefit as of December 29, 2017 and September 29, 2017 did not change and remained at $1.7 million . The unrecognized tax benefits primarily relate to positions taken by us in our 2014 U.S. tax filings. The entire balance of unrecognized tax benefits, if recognized, will reduce income tax expense. It is our policy to recognize any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the fiscal quarters ended December 29, 2017 and September 29, 2017 , we did not make any accrual or payment of interest and penalties due to our U.S. Net Operating Loss ("NOL") carryover position.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to,
reducing the highest marginal U.S. federal corporate income tax rate from 35% in the period ending December 29, 2017 to 21% , effective January 1, 2018;
requiring companies to become liable for a one-time deemed repatriation transition tax (“Transition Tax”) based on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries for our year ending September 28, 2018;
generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries that would apply to our year beginning September 29, 2018;
requiring the inclusion of certain income such as Global Intangible Low Taxed Income (“GILTI”) earned by controlled foreign corporations (“CFCs”) in our U.S. federal taxable income that would apply to our year beginning September 29, 2018;
eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized that would apply to our year beginning September 29, 2018;
repealing the performance-based compensation exception to the section 162(m) $1.0 million deduction limitation and revising the definition of a covered employee for our year beginning September 29, 2018;
creating the base erosion anti-abuse tax, a new minimum tax that would apply to our year beginning September 29, 2018;

20



creating a new limitation on deductible interest expense that would apply to our year beginning September 29, 2018;
limiting the degree to which net operating losses can be utilized against taxable income that would apply to losses created beginning with our year beginning September 29, 2018;
changing rules related to the ability to apply net operating losses against later or earlier tax years that would apply to losses created beginning with our year beginning September 30, 2017; and
an increase in the allowable deduction for costs to acquire qualified property placed into service after September 27, 2017.
Based on preliminary calculations, we currently estimate that our financial results for the year ending September 28, 2018 will include a non-cash reduction in income tax expense of approximately $3.7 million resulting primarily from the re-measurement of our U.S. deferred tax liabilities to reflect the new 21% U.S. federal tax rate. For the fiscal year ending September 28, 2018 our blended U.S. federal income tax rate is expected to be 24.5% .
To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of E&P of the relevant subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of the Transition Tax and have determined that we expect to have sufficient net operating losses to reduce any cash tax payments associated with the one-time repatriation of E&P down to the alternative minimum tax, which we estimate to be less than $1.0 million . On a preliminary basis we have estimated the one-time repatriation of E&P would result in a release of the valuation allowance corresponding with utilization of our NOLs, resulting in no impact to our tax expense for the fiscal quarter ended December 29, 2017. We are continuing to analyze additional information to more precisely compute the amount of the Transition Tax.
The Tax Act creates a new requirement that certain income such as GILTI earned by CFCs must be included in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder's net CFC tested income over the net deemed tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
The Company must assess whether its valuation allowance analyses are affected by various aspects of the Tax Act (e.g., the Transition Tax, GILTI inclusions and new categories of foreign tax credits). The changes included in the Tax Act are broad and complex. Although we are not able to finalize our evaluation of the impact of the Tax Act at this time due to uncertainties related to any future legislative or regulatory actions related to the Tax Act and availability of information needed to perform the final calculations, we do believe that a full valuation allowance continues to be required. However, we will continue to evaluate the impact the Tax Act may have on our financial statements including the impact on our full valuation allowance against our U.S. deferred tax assets and any impact this would have on our tax expense.
The Securities Exchange Commission has issued Staff Accounting Bulletin No. 118 that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the application of Accounting Standards Codification Topic 740, Income Taxes . We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending September 28, 2018.
17. RELATED PARTY TRANSACTIONS
Cadence Design Systems, Inc. ("Cadence") provides us with certain engineering licenses on an ongoing basis. Geoffrey Ribar, who joined our board of directors on March 22, 2017, served as an officer of Cadence through September 30, 2017 and now serves as a Senior Advisor of Cadence. During the three months ended December 29, 2017 , we made payments of $1.8 million to Cadence.
18. SUPPLEMENTAL CASH FLOW INFORMATION
As of December 29, 2017 and December 30, 2016 , we had $1.2 million and $1.4 million in unpaid amounts related to purchases of property and equipment included in accounts payable and accrued liabilities during each period, respectively. These amounts have been excluded from the payments for purchases of property and equipment in the accompanying condensed consolidated statements of cash flows until paid.
During the three months ended December 29, 2017 , we capitalized $2.1 million of net construction costs relating to the 144 Chelmsford Street facility. This was accounted for as a non-cash transaction as the costs were paid by the developer.
During the three months ended December 29, 2017 , we divested the Compute business with net assets valued at approximately $36.5 million in exchange for an equity interest in Ampere.

21



The following is supplemental cash flow information regarding non-cash investing and financing activities (in thousands):
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
Cash paid for interest
$
6,938

 
$
5,426

Cash paid (refunded) for income taxes
$
4,155

 
$
(712
)
19. GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
We have one reportable operating segment that designs, develops, manufactures and markets semiconductors and modules. The determination of the number of reportable operating segments is based on the chief operating decision maker’s use of financial information for the purposes of assessing performance and making operating decisions. In evaluating financial performance and making operating decisions, the chief operating decision maker primarily uses consolidated revenue, gross profit and operating income (loss).
Information about our operations in different geographic regions, based upon customer locations, is presented below (in thousands):
 
Three Months Ended
Revenue by Geographic Region
December 29,
2017
 
December 30,
2016
United States
$
55,356

 
$
43,961

China
37,688

 
60,301

Asia Pacific, excluding China (1)
22,886

 
36,929

Other Countries (2)
14,995

 
10,561

Total
$
130,925

 
$
151,752


(1)
Asia Pacific represents Taiwan, Japan, Singapore, India, Thailand, South Korea, Australia, Malaysia, New Zealand, the Philippines and Vietnam.
(2)
No international country or region represented greater than 10% of the total revenue as of the dates presented, other than China and the Asia Pacific region as presented above.
 
 
As of
Long-Lived Assets by Geographic Region
 
December 29,
2017
 
September 29,
2017
United States
 
$
100,404

 
$
101,044

Asia Pacific (1)
 
26,641

 
24,945

Other Countries (2)
 
4,965

 
5,030

Total
 
$
132,010

 
$
131,019


(1)
Asia Pacific represents Taiwan, Japan, India, Thailand, South Korea, Australia, Malaysia, New Zealand, the Philippines, Vietnam and China.
(2)
No international country or region represented greater than 10% of the total net long-lived assets as of the dates presented, other than the Asia Pacific region as presented above.
The following is a summary of customer concentrations as a percentage of revenue and accounts receivable as of and for the periods presented:
 
Three Months Ended
Revenue
December 29,
2017

December 30,
2016
Customer A
10
%

12
%
Customer B
9
%

22
%

22



Accounts Receivable
December 29,
2017
 
September 29,
2017
Customer A
13
%
 
13
%
Customer C
10
%
 
14
%
No other customer represented more than 10% of revenue or accounts receivable in the periods presented in the accompanying consolidated financial statements. For the three months ended December 29, 2017 , our top ten customers represented 51% of total revenue, and for the three months ended December 30, 2016 , our top ten customers represented 63% of total revenue.

23




ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 29, 2017 filed with the SEC on November 15, 2017 .
In this document, the words “Company,” “we,” “our,” “us,” and similar terms refer only to MACOM Technology Solutions Holdings, Inc. and its consolidated subsidiaries, and not any other person or entity.
“MACOM,” “M/A-COM,” “M/A-COM Technology Solutions,” “M/A-COM Tech,” “Partners in RF & Microwave” and related logos are trademarks of MACOM Technology Solutions Holdings, Inc. All other brands and names listed are trademarks of their respective owners.
Cautionary Note Regarding Forward-Looking Statements
This Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and our future expectations and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as “anticipates,” “believes,” “could,” “continue,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “targets,” “will,” “would” and similar expressions or variations. These statements are based on management's beliefs and assumptions as of the date of this Quarterly Report on Form 10-Q, based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 29, 2017 filed with the SEC on November 15, 2017 . We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We are a leading provider of high-performance analog semiconductor solutions that enable next-generation Internet applications, the cloud connected apps economy and the modern, networked battlefield across the radio frequency ("RF"), microwave, millimeterwave and lightwave spectrum. Our technology enables next-generation radars for air traffic control and weather forecasting, as well as mission success on the modern networked battlefield. We help our customers, including some of the world’s leading communications infrastructure and aerospace and defense companies, solve complex challenges in areas including network capacity, signal coverage, energy efficiency and field reliability, utilizing our best-in-class team and broad portfolio of analog RF, microwave, millimeterwave and photonic semiconductor solutions.
We design and manufacture differentiated, high-value products for customers who demand high performance, quality and reliability. We offer a broad portfolio of over 5,000 standard and custom devices, which include integrated circuits ("IC"), multi-chip modules ("MCM"), power pallets and transistors, diodes, amplifiers, switches and switch limiters, passive and active components and complete subsystems, across more than 60 product lines serving over 6,500 end customers in three primary markets. Our semiconductor products are electronic components that our customers incorporate into their larger electronic systems, such as, point-to-point wireless backhaul radios, high density networks, active antenna arrays, radar, magnetic resonance imaging systems ("MRI") and unmanned aerial vehicles ("UAVs"). Our primary markets are: Telecom, which includes carrier infrastructure, wired broadband and cellular backhaul, and cellular infrastructure; Datacenter which includes optical and photonic components and solutions for Cloud service provider and enterprise applications; and Industrial and Defense ("I&D"), which includes military and commercial radar, RF jammers, electronic countermeasures and communication data links; and multi-market components spanning industrial, medical, test and measurement and scientific applications.
Description of Our Revenue
Revenue. Substantially all of our revenue is derived from sales of high-performance RF, microwave, millimeterwave and lightwave semiconductor solutions. We design, integrate, manufacture and package differentiated product solutions that we sell to customers through our direct sales organization, our network of independent sales representatives and our distributors.

24



We believe the primary drivers of our future revenue growth will include:
engaging early with our lead customers to develop products and solutions that can be driven across multiple growth markets;
leveraging our core strength and leadership position in standard, catalog products that service all of our end applications;
increasing content of our semiconductor solutions in our customers’ systems through cross-selling of our more than 60 product lines;
introducing new products through internal development and acquisitions with market reception that command higher prices based on the application of advanced technologies such as GaN, added features, higher levels of integration and improved performance; and
continued growth in the market for high-performance analog and optical semiconductors in our three primary markets in particular.
Our core strategy is to develop and innovate high-performance products that address our customers’ most difficult technical challenges in our primary markets: Telecom, Datacenter and I&D. While sales in any or all of our primary markets may slow or decline from period to period, over the long-term we generally expect to benefit from strength in these markets.
We expect our revenue in the Telecom market to be primarily driven by continued upgrades and expansion of communications equipment to support the proliferation of mobile computing devices such as smartphones and tablets, increasing adoption of bandwidth rich services such as video on demand and cloud computing. We expect our Datacenter market to be driven by the rapid adoption of cloud-based services and the migration to an application centric architecture, which we expect will drive adoption of higher speed, 100G and higher speed optical and photonic wireless links.
We expect our revenue in the I&D market to be driven by the upgrading of radar systems and modern battlefield communications equipment and networks designed to improve situational awareness. Growth in this market is subject to changes in governmental programs and budget funding, which is difficult to predict. We expect revenue in this market to be further supported by growth in applications for our multi-purpose catalog products.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. The preparation of financial statements, in conformity with generally accepted accounting principles in the U.S. (“GAAP”), requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and could be material if our actual or expected experience were to change unexpectedly. On an ongoing basis, we re-evaluate our estimates and judgments.
We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates and material effects on our operating results and financial position may result. The accounting policies which our management believes involve the most significant application of judgment or involve complex estimation, are inventories and associated reserves; goodwill and intangible asset valuations and associated impairment assessments; revenue reserves; restructuring reserves; deferred tax valuation allowances; contingent consideration valuations and share-based compensation valuations.
For additional information related to these and other accounting policies refer to Note 2 - Summary of Significant Accounting Policies to our Consolidated Financial Statements included in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2017 Annual Report on Form 10-K for the fiscal year ended September 29, 2017 .

25



Results of Operations
The following table sets forth, for the periods indicated, our statements of operations data (in thousands):
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
Revenue
$
130,925

 
$
151,752

Cost of revenue (1) (4)
69,971

 
73,257

Gross profit
$
60,954

 
$
78,495

Operating expenses:
 
 
 
Research and development (1)
41,651

 
30,174

Selling, general and administrative (1) (2) (5)
37,634

 
36,496

Restructuring charges
4,662

 
1,287

Total operating expenses
$
83,947

 
$
67,957

(Loss) income from operations
$
(22,993
)
 
$
10,538

Other (expense) income
 
 
 
Warrant liability gain (expense) (3)
14,608

 
(4,823
)
Interest expense
(7,239
)
 
(7,350
)
Other income (expense)
7

 
(4
)
Total other income (expense), net
$
7,376

 
$
(12,177
)
Loss before income taxes
(15,617
)
 
(1,639
)
Income tax expense
1,353

 
532

Loss from continuing operations
$
(16,970
)
 
$
(2,171
)
(Loss) income from discontinued operations (6)
(5,599
)
 
1,206

Net loss
$
(22,569
)
 
$
(965
)
(1)
Includes (a) Amortization expense related to intangible assets arising from acquisitions and (b) Share-based compensation expense included in our consolidated statements of operations as set forth below (in thousands):
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
(a) Intangible amortization expense:
 
 
 
Cost of revenue
$
8,147

 
$
6,001

Selling, general and administrative
10,993

 
6,467

(b) Share-based compensation expense:
 
 
 
Cost of revenue
$
945

 
$
720

Research and development
3,662

 
1,945

Selling, general and administrative
5,385

 
5,518


(2) Includes acquisition and transaction related costs of $3.5 million associated with the AppliedMicro Acquisition during the three months ended December 30, 2016 .
(3) Represents changes in the fair value of common stock warrants recorded as liabilities and adjusted each reporting period to fair value.
(4) Includes acquisition fair market value inventory step-up related expenses of $0.2 million for the three months ended December 29, 2017 , associated with the Picometrix Acquisition.
(5) Includes specific litigation costs of $0.8 million and $0.3 million incurred in the three months ended December 29, 2017 and December 30, 2016 , respectively, primarily related to the GaN lawsuit. See Note 13 - Commitments and Contingencies to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.
(6) For additional information related to this item refer to Note 3 - Discontinued Operations to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q.



26



The following table sets forth, for the periods indicated, our statements of operations data expressed as a percentage of our revenue:  
 
Three Months Ended
 
December 29,
2017
 
December 30,
2016
Revenue
100.0
 %
 
100.0
 %
Cost of revenue
53.4

 
48.3

Gross profit
46.6

 
51.7

Operating expenses:
 
 
 
Research and development
31.8

 
19.9

Selling, general and administrative
28.7

 
24.0

Restructuring charges
3.6

 
0.8

Total operating expenses
64.1

 
44.8

(Loss) income from operations
(17.6
)
 
6.9

Other (expense) income
 
 
 
Warrant liability gain (expense)
11.2

 
(3.2
)
Interest expense
(5.5
)
 
(4.8
)
Other income (expense)

 

Total other income (expense), net
5.6

 
(8.0
)
Loss before income taxes
(11.9
)
 
(1.1
)
Income tax expense
1.0

 
0.4

Loss from continuing operations
(13.0
)
 
(1.4
)
(Loss) income from discontinued operations
(4.3
)
 
0.8

Net loss
(17.2
)%
 
(0.6
)%
Comparison of the Three Months Ended December 29, 2017 to the Three Months Ended December 30, 2016
Revenue. Our revenue decreased by $20.8 million , or 13.7% , to $130.9 million  for the three months ended December 29, 2017 , from $151.8 million for the three months ended December 30, 2016 . The decrease in revenue in the three months ended December 29, 2017 is further described by end market in the following paragraphs.
We have historically reported our revenue by reference to three primary markets: Networks, Aerospace and Defense ("A&D") and Multi-market. Given the recent increase in the size of the Networks market relative to other markets, and our increasing focus on Cloud Data Center applications, beginning in our fiscal year 2018 we are reporting our revenue by reference to the following three primary markets: I&D (roughly corresponding to the former A&D and Multi-market combined), Datacenter and Telecom.
Revenue from our primary markets, the percentage of change between the periods presented, and revenue by primary markets expressed as a percentage of total revenue in the periods presented were (in thousands, except percentages):
 
 
Three Months Ended
 
 
 
 
December 29,
2017
 
 
December 30,
2016
 
%
Change
Telecom
$
55,450
 
$
91,550
 
(39.4
)%
Datacenter
 
34,761
 
 
16,804
 
106.9
 %
Industrial & Defense
 
40,714
 
 
43,398
 
(6.2
)%
Total
$
130,925
 
$
151,752
 
(13.7
)%
 
 
 
 
 
 
 
 
Telecom
 
42.4
%
 
 
60.3
%
 
 
Datacenter
 
26.6
%
 
 
11.1
%
 
 
Industrial & Defense
 
31.1
%
 
 
28.6
%
 
 
Total
 
100.0
%
 
 
100.0
%
 
 

27



In the three months ended December 29, 2017 , our I&D market revenue decreased by $2.7 million , or 6.2% , compared to the three months ended December 30, 2016 . The decrease was primarily related to lower revenue from sales of certain legacy defense products, partially offset by increases in revenue from sales of products acquired in recent acquisitions.