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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 March 29, 2019
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 every Interactive Data File required to be submitted 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 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
¨
 
  
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of exchange on which registered
Common Stock, par value $0.001 per share
MTSI
Nasdaq Global Select Market
As of May 3, 2019, there were 65,700,409 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)
 
March 29,
2019
 
September 28,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
92,677

 
$
94,676

Short-term investments
99,708

 
98,221

Accounts receivable (less allowances of $5,912 and $6,795, respectively)
87,386

 
97,375

Inventories
119,940

 
122,837

Income tax receivable
15,765

 
17,601

Assets held for sale

 
4,840

Prepaid and other current assets
29,783

 
23,311

Total current assets
$
445,259

 
$
458,861

Property and equipment, net
149,952

 
149,923

Goodwill
314,361

 
314,076

Intangible assets, net
472,570

 
512,785

Deferred income taxes
2,298

 
2,272

Other investments
22,123

 
31,094

Other long-term assets
13,383

 
13,484

TOTAL ASSETS
$
1,419,946

 
$
1,482,495

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of lease payable
$
1,194

 
$
467

Current portion of long-term debt
6,885

 
6,885

Accounts payable
35,080

 
41,951

Accrued liabilities
45,430

 
49,945

Deferred revenue
215

 
7,757

Total current liabilities
$
88,804


$
107,005

Lease payable, less current portion
29,147

 
29,023

Long-term debt, less current portion
656,821

 
658,372

Warrant liability
9,268

 
13,129

Deferred income taxes
452

 
389

Other long-term liabilities
18,429

 
5,902

Total liabilities
$
802,921


$
813,820

Stockholders’ equity:
 
 
 
Common stock
66

 
65

Treasury stock, at cost
(330
)
 
(330
)
Accumulated other comprehensive income
3,798

 
2,188

Additional paid-in capital
1,091,067

 
1,074,728

Accumulated deficit
(477,576
)
 
(407,976
)
Total stockholders’ equity
$
617,025


$
668,675

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,419,946

 
$
1,482,495

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
 
Six Months Ended
 
March 29,
2019
 
March 30,
2018
 
March 29,
2019
 
March 30,
2018
Revenue
$
128,465

 
$
150,414

 
$
279,154

 
$
281,338

Cost of revenue
71,135

 
84,813

 
145,199

 
154,784

Gross profit
57,330

 
65,601

 
133,955

 
126,554

Operating expenses:
 
 
 
 
 
 
 
Research and development
42,361

 
41,596

 
85,885

 
83,246

Selling, general and administrative
41,998

 
39,287

 
84,518

 
76,922

Impairment charges

 
6,575

 

 
6,575

Restructuring charges
3,182

 
1,539

 
8,160

 
6,200

Total operating expenses
87,541

 
88,997

 
178,563

 
172,943

Loss from operations
(30,211
)
 
(23,396
)
 
(44,608
)
 
(46,389
)
Other (expense) income
 
 
 
 
 
 
 
Warrant liability (expense) gain
(1,607
)
 
17,015

 
3,862

 
31,624

Interest expense, net
(9,402
)
 
(7,970
)
 
(18,175
)
 
(15,209
)
Other expense
(4,440
)
 
(4,139
)
 
(9,010
)
 
(4,133
)
Total other (expense) income, net
(15,449
)
 
4,906

 
(23,323
)
 
12,282

Loss before income taxes
(45,660
)
 
(18,490
)
 
(67,931
)
 
(34,107
)
Income tax expense (benefit)
544

 
(3,024
)
 
1,669

 
(1,671
)
Loss from continuing operations
(46,204
)
 
(15,466
)
 
(69,600
)
 
(32,436
)
Loss from discontinued operations

 
(18
)
 

 
(5,617
)
Net loss
$
(46,204
)
 
$
(15,484
)
 
$
(69,600
)
 
$
(38,053
)
 
 
 
 
 
 
 
 
Net loss per share:
 
 
 
 
 
 
 
Basic loss per share:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.71
)
 
$
(0.24
)
 
$
(1.06
)
 
$
(0.50
)
Loss from discontinued operations

 

 

 
(0.09
)
Loss per share - basic
$
(0.71
)
 
$
(0.24
)
 
$
(1.06
)
 
$
(0.59
)
Diluted loss per share:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.71
)
 
$
(0.50
)
 
$
(1.12
)
 
$
(0.98
)
Loss from discontinued operations

 

 

 
(0.09
)
Loss per share - diluted
$
(0.71
)
 
$
(0.50
)
 
$
(1.12
)
 
$
(1.07
)
Shares used:
 
 
 
 
 
 
 
Basic
65,531

 
64,549

 
65,404

 
64,437

Diluted
65,531

 
65,132

 
65,610

 
65,120

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
 
Six Months Ended
 
March 29,
2019
 
March 30,
2018
 
March 29,
2019
 
March 30,
2018
Net loss
$
(46,204
)
 
$
(15,484
)
 
$
(69,600
)
 
$
(38,053
)
Unrealized gain (loss) on short-term investments, net of tax
606

 
(247
)
 
350

 
(514
)
Foreign currency translation gain, net of tax
351

 
4,421

 
1,260

 
4,710

Other comprehensive income, net of tax
957

 
4,174

 
1,610

 
4,196

Total comprehensive loss
$
(45,247
)
 
$
(11,310
)
 
$
(67,990
)
 
$
(33,857
)
See notes to condensed consolidated financial statements.


3



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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
Accumulated
Other
Comprehensive Income
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Common Stock
 
Treasury Stock
 
Shares
 
Amount
 
Shares
 
Amount
Balance at December 28, 2018
65,395

 
$
65

 
(23
)
 
$
(330
)
 
$
2,841

 
$
1,086,052

 
$
(431,372
)
 
$
657,256

Stock options exercises
12

 

 

 

 

 
24

 

 
24

Vesting of restricted common stock and units
490

 
1

 

 

 

 

 

 
1

Shares repurchased for stock withholdings on restricted stock awards
(174
)
 

 

 

 

 
(3,085
)
 

 
(3,085
)
Share-based compensation

 

 

 

 

 
8,076

 

 
8,076

Other comprehensive income, net of tax

 

 

 

 
957

 

 

 
957

Net loss

 

 

 

 

 

 
(46,204
)
 
(46,204
)
Balance at March 29, 2019
65,723

 
$
66

 
(23
)
 
$
(330
)
 
$
3,798

 
$
1,091,067

 
$
(477,576
)
 
$
617,025

 
Six Months Ended
 
 
 
 
 
Accumulated
Other
Comprehensive Income
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Common Stock
 
Treasury Stock
 
Shares
 
Amount
 
Shares
 
Amount
Balance at September 28, 2018
65,202

 
$
65

 
(23
)
 
$
(330
)
 
$
2,188

 
$
1,074,728

 
$
(407,976
)
 
$
668,675

Stock options exercises
12

 

 

 

 

 
24

 

 
24

Vesting of restricted common stock and units
545

 
1

 

 

 

 

 

 
1

Issuance of common stock pursuant to employee stock purchase plan
156

 

 

 

 

 
2,392

 

 
2,392

Shares repurchased for stock withholdings on restricted stock awards
(192
)
 

 

 

 

 
(3,426
)
 

 
(3,426
)
Share-based compensation

 

 

 

 

 
17,349

 

 
17,349

Other comprehensive income, net of tax

 

 

 

 
1,610

 

 

 
1,610

Net loss

 

 

 

 

 

 
(69,600
)
 
(69,600
)
Balance at March 29, 2019
65,723

 
$
66

 
(23
)
 
$
(330
)
 
$
3,798

 
$
1,091,067

 
$
(477,576
)
 
$
617,025

See notes to condensed consolidated financial statements.

4



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
March 29, 2019
 
March 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(69,600
)
 
$
(38,053
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and intangibles amortization
55,478

 
54,439

Share-based compensation
17,349

 
15,342

Warrant liability gain
(3,862
)
 
(31,624
)
Acquired inventory step-up amortization

 
224

Deferred financing cost amortization
2,031

 
2,536

Deferred income taxes
46

 
(573
)
Restructuring and impairment related charges
4,696

 
9,143

Loss on minority equity investment
8,971

 
4,085

Changes in assets held for sale from discontinued operations

 
(6,237
)
Other adjustments, net
377

 
841

Change in operating assets and liabilities:
 
 
 
Accounts receivable
9,989

 
28,992

Inventories
2,904

 
(9,240
)
Prepaid expenses and other assets
(1,256
)
 
749

Accounts payable
(4,103
)
 
(11,438
)
Accrued and other liabilities
1,407

 
(4,115
)
Income taxes
2,411

 
(3,915
)
Net cash provided by operating activities
26,838

 
11,156

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of businesses, net
(375
)
 

Purchases of property and equipment
(22,600
)
 
(26,580
)
Proceeds from sales and maturities of short-term investments
86,447

 
77,853

Purchases of short-term investments
(86,951
)
 
(21,612
)
Purchases of other investments

 
(5,000
)
Proceeds associated with discontinued operations

 
(263
)
Net cash (used in) provided by investing activities
(23,479
)
 
24,398

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from stock option exercises and employee stock purchases
2,416

 
3,252

Payments on notes payable
(3,442
)
 
(3,442
)
Payments of capital leases and assumed debt
(518
)
 
(405
)
Repurchase of common stock
(3,426
)
 
(3,846
)
Proceeds from corporate facility financing obligation

 
1,081

Payments of contingent consideration and other
(577
)
 

Net cash used in financing activities
(5,547
)
 
(3,360
)
 
 
 
 
Foreign currency effect on cash
189

 
397

NET CHANGE IN CASH AND CASH EQUIVALENTS
(1,999
)
 
32,591

CASH AND CASH EQUIVALENTS — Beginning of period
$
94,676

 
$
130,104

CASH AND CASH EQUIVALENTS — End of period
$
92,677

 
$
162,695

 
 
 
 
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 loss, 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 28, 2018 is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our September 28, 2018 consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended September 28, 2018 filed with the SEC on November 16, 2018. 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 28, 2018.
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 2019 and 2018 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 such fiscal years in the first quarter.
Use of Estimates—The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the U.S. ("GAAP") 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.
Revenue Recognition—Substantially all of our revenue is derived from sales of high-performance radio frequency ("RF"), microwave, millimeterwave and lightwave semiconductor solutions into three primary markets: Telecom, Data Centers and Industrial and Defense ("I&D"). Revenue is recognized when a customer obtains control of products or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements within the scope of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, we perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy performance obligations. Sales, value add and other taxes collected on behalf of third parties are excluded from revenue. Our revenue arrangements do not contain significant financing components.
Contracts with our customers principally contain only one distinct performance obligation, which is the sale of products. However, due to multiple products potentially being sold on a single order, we are required to allocate consideration based on the estimated relative standalone selling prices of the promised products.
Periodically, we enter into non-product development and license contracts with certain customers. We generally recognize revenue from these contracts as services are provided based on the terms of the contract. Revenue is deferred for amounts billed or received prior to delivery of the services. Certain contracts may contain multiple performance obligations for which we allocate revenue to each performance obligation on a relative stand-alone selling price.
Our product revenue is recognized when the customer obtains control of the product or services, which generally occurs at a point in time, and is based on the contractual shipping terms of a contract. Non-product revenue is generally recognized overtime. For each contract, the promise to transfer the control of the products or services, each of which is individually distinct, is considered to be the identified performance obligation. We provide an assurance type warranty which is not sold separately and does not

6



represent a separate performance obligation. Therefore, we account for such warranties under ASC 460, Guarantees, and the estimated costs of warranty claims are generally accrued as cost of revenue in the period the related revenue is recorded.
We have agreements with certain customers which may include certain rights of return and pricing programs, including returns for aged inventory, stock rotation and price protection which affect the transaction price. Sales to these customers and programs offered are in accordance with terms set forth in written agreements, which require us to assess the potential revenue effects of this variable consideration utilizing the expected value method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. As such, revenue on sales to customers that include rights of return and pricing programs are recorded net of estimated variable consideration, utilizing the expected value method based on historical sales data. We believe that the judgments and estimates we utilize are reasonable based upon current facts and circumstances, however utilizing different judgments and estimates could result in different amounts.
Practical Expedients and ElectionsASC 606 requires that we disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of the reporting periods presented. The guidance provides certain practical expedients that limit this requirement and, therefore, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which we have the right to invoice for services performed. We have elected not to disclose the aggregate amount of transaction prices associated with unsatisfied or partially unsatisfied performance obligations for contracts where these criteria are met.
Our policy is to capitalize any incremental costs incurred to obtain a customer contract, only to the extent that the benefit associated with the costs is expected to be longer than one year. Capitalizable contract costs were not significant both at the date of adoption and as of March 29, 2019.
We account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. When shipping and handling costs are incurred after a customer obtains control of the products, we have elected to account for these as costs to fulfill the promise and not as a separate performance obligation. Shipping and handling costs associated with the distribution of products to customers are recorded in costs of revenue generally when the related product is shipped to the customer.
Recent Accounting Pronouncements—Our Recent Accounting Pronouncements are described in the notes to our September 28, 2018 consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended September 28, 2018.
Pronouncements Adopted in Fiscal Year 2019
We adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, on September 29, 2018. The FASB subsequently issued several amendments and updates to the new revenue standard. We refer to ASU 2014-09 and its related ASUs as "ASC 606". We applied ASC 606 using the modified retrospective method and elected to apply this initial application of the standard only to contracts that are not completed at the date of initial application. We have analyzed this effect and found the adoption of the new guidance did not have a material impact on our consolidated financial statements as of the adoption date. The reported results for our fiscal year 2019 reflect the application of ASC 606 guidance while the reported results for our fiscal year 2018 were prepared under the guidance of ASC 605, Revenue Recognition.
We adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, on September 29, 2018. In February 2018 the FASB issued further amendments to this guidance. This update made amendments to the guidance in GAAP on the classification and measurement of financial instruments. The new standard significantly revised an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amended certain disclosure requirements associated with the fair value of financial instruments. The adoption of this update did not have a material impact on our consolidated financial statements and related disclosures.
We adopted ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, on September 29, 2018. This update addressed debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The adoption of this update did not have a material impact on our consolidated financial statements and related disclosures.
We adopted ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, on September 29, 2018. This update amended the guidance on recognizing the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendment eliminated the exception for an intra entity transfer of an asset other than

7



inventory. The adoption of this updated standard did not have a material impact on our consolidated financial statements and related disclosures.
Pronouncements for Adoption in Subsequent Periods
In February 2016, the FASB issued ASU 2016-02, Leases ("Topic 842"). In September 2017, January, July and December 2018 and March 2019, the FASB issued additional guidance related to Topic 842. The new standard increases transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under Topic 842, leases are classified as either operating or finance, based on criteria similar to current lease accounting, but without explicit bright lines. Certain qualitative and quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We are evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures and we anticipate that this new guidance will have a material impact on our financial statements as we have a significant number of operating leases.
2. REVENUE
Disaggregation of Revenue
We disaggregate revenue from contracts with customers by markets and geography, as we believe it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The following tables presents our revenue disaggregated by markets and geography (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Revenue by Market:
 
 
 
 
 
 
 
Industrial & Defense
$
50,471

 
$
43,882

 
107,754

 
84,596

Data Center
30,657

 
42,597

 
73,904

 
77,358

Telecom
47,337

 
63,935

 
97,496

 
119,384

Total
$
128,465

 
$
150,414

 
279,154

 
281,338

 
Three Months Ended
 
Six Months Ended
 
March 29, 2019
 
March 30, 2018
 
March 29, 2019
 
March 30, 2018
Revenue by Geographic Region:
 
 
 
 
 
 
 
United States
$
64,714

 
$
74,323

 
$
132,832

 
$
129,679

China
32,419

 
38,364

 
77,041

 
76,052

Asia Pacific, excluding China (1)
20,598

 
23,347

 
44,013

 
46,232

Other Countries (2)
10,734

 
14,380

 
25,268

 
29,375

Total
$
128,465

 
$
150,414

 
$
279,154

 
$
281,338

(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.
Contract Balances
We record contract assets or contract liabilities depending on the timing of revenue recognition, billings and cash collections on a contract-by-contract basis. Our contract liabilities primarily relate to deferred revenue, including advance consideration received from customers for contracts prior to the transfer of control to the customer, and therefore revenue is recognized upon delivery of products and services.
The following table presents the changes in contract liabilities during the six months ended March 29, 2019 (in thousands):
 
March 29, 2019
 
September 28, 2018
 
$ Change
 
% Change
 Contract liabilities
$
8,915

 
$
7,757

 
$
1,158

 
15
%

As of March 29, 2019, approximately $8.7 million of our contract liabilities were recorded as other long-term liabilities on

8



our balance sheet with the remainder recorded as deferred revenue. The increase in contract liabilities during the six months ended March 29, 2019 was primarily from the deferral of revenue for funds received prior to when the customer obtains control of the product or services, partially offset by the recognition of $7.0 million associated with licensing.
During the three and six months ended March 29, 2019, we recognized the following net sales as a result of changes in the contract liabilities balance (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 29, 2019
 
March 29, 2019
Net revenue recognized in the period from:
 
 
 
Amounts included in contract liabilities at the beginning of the period
$
7,338

 
$
7,612


3. DIVESTED BUSINESS AND DISCONTINUED OPERATIONS
Divested Business
On May 10, 2018, we completed the sale and transfer of certain assets associated with our Japan-based long-range optical subassembly business (the “LR4 Business”), pursuant to an Asset Purchase and Intellectual Property License Agreement, dated April 30, 2018 (the “LR4 Agreement”). The LR4 Agreement provided that the buyer would pay us $5.0 million within 30 days following the closing of the transactions contemplated by the LR4 Agreement, provide us with the opportunity to supply components, and would pay us further amounts to be determined for inventory and fixed assets within 60 days of receipt of required government approvals. As of March 29, 2019, we have received $5.0 million of consideration and expect additional consideration before the end of fiscal 2019 of $12.2 million, net of tax, which has been recorded as other current assets. As of September 28, 2018, $7.4 million had been recorded as other current assets and $4.8 million had been recorded as assets held for sale, as the assets had not been transferred to the buyer as of September 28, 2018.
As a result of the transaction, during fiscal year 2018 we recorded a loss on disposal of $34.3 million associated with the LR4 Business as other expense, comprised of expected proceeds of $17.2 million, subject to receipt of required government approvals, less the carrying value of assets sold, primarily including customer relationship intangible assets of $27.7 million, inventory of $13.7 million, fixed assets of $7.6 million and goodwill of $2.6 million. The transaction did not meet the criteria of discontinued operations. We also entered into a transition services agreement (the "LR4 TSA") with the buyer, pursuant to which we agreed to incur up to $2.0 million of operating expenses for certain ongoing administrative services to support the buyer for up to six months after the closing of the transaction. During the three and six months ended March 29, 2019, we have incurred no expenses associated with the LR4 TSA.
Discontinued Operations
On October 27, 2017, we entered into a purchase agreement to sell the Compute business. In consideration for the transfer and sale of the Compute business, we received an equity interest in the buyer, a privately held limited liability company ("Compute"), valued at approximately $36.5 million, and representing less than 20.0% of Compute's total outstanding equity. The operations of the Compute business were accounted for as discontinued operations through the date of divestiture.
We also entered into a transition services agreement (the "Compute TSA"), pursuant to which we agreed to perform certain primarily general and administrative functions on Compute's behalf during a migration period and for which we are reimbursed for costs incurred. During the three months ended March 29, 2019, we received no reimbursements under the Compute TSA. During the six months ended March 29, 2019, we received $0.1 million of reimbursements under the Compute TSA, which was recorded as a reduction of our general and administrative expenses. During the three and six months ended March 30, 2018, we received $1.5 million and $2.5 million, respectively, of reimbursements under the Compute TSA.

9



The accompanying consolidated statements of operations include the following operating results related to these discontinued operations (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
March 30, 2018
 
March 30, 2018
Revenue
 
$
2

 
$

Cost of revenue
 
(56
)
 
(596
)
Gross profit
 
58

 
596

Operating expenses:
 
 
 
 
Research and development
 
(12
)
 
4,698

Selling, general and administrative
 
88

 
1,515

Total operating expenses
 
76

 
6,213

Loss from operations
 
(18
)
 
(5,617
)
Loss before income taxes
 
(18
)
 
(5,617
)
Income tax provision
 

 

Loss from discontinued operations
 
$
(18
)
 
$
(5,617
)
 
 
 
 
 
Cash flow from operating activities
 
(18
)
 
(10,327
)

4. INVESTMENTS
Our short-term investments are invested in corporate bonds and commercial paper, 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 March 29, 2019 and September 28, 2018 are summarized in the tables below (in thousands):
 
March 29, 2019
 
Amortized
Cost
 
Gross
Unrealized
Holding Gains
  
Gross
Unrealized
Holding Losses
 
Aggregate Fair
Value
Corporate bonds
$
28,949

  
$
97

 
$
(211
)
 
$
28,835

Commercial paper
70,885

 
1

 
(13
)
 
70,873

Total short-term investments
$
99,834

  
$
98

 
$
(224
)
 
$
99,708

 
September 28, 2018
 
Amortized
Cost
 
Gross
Unrealized
Holding Gains
 
Gross
Unrealized
Holding Losses
 
Aggregate Fair
Value
Corporate bonds
$
28,731

  
$

 
$
(460
)
 
$
28,271

Commercial paper
69,966

 

 
(16
)
 
69,950

Total short-term investments
$
98,697

 
$

 
$
(476
)
 
$
98,221



The contractual maturities of available-for-sale investments were as follows (in thousands):
 
 
March 29, 2019
 
September 28, 2018
Less than 1 year
$
71,679

 
$
70,200

Over 1 year
28,029

 
28,021

Total short-term investments
$
99,708

 
$
98,221


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.

10



Other Investments— As of March 29, 2019, we held two non-marketable equity investments classified as other long-term investments.
One of these is an investment in a Series B preferred stock ownership of a privately held manufacturing corporation with preferred liquidation rights over other equity shares. As the equity securities do not have a readily determinable fair value and do not qualify for the practical expedient under ASC 820 we have elected to hold this investment at cost less any impairment. As of March 29, 2019, the cost of this investment was $5.0 million. We evaluate this investment for impairment at each balance sheet date, and through March 29, 2019 no impairment has been recorded for this investment.
In addition, we have a minority investment of less than 20.0% of the outstanding equity of Compute that was acquired in conjunction with the divestiture of the Compute business during the fiscal quarter ended December 29, 2017 and had an initial value of $36.5 million. We have no obligation to provide further funding to Compute. This was a non-cash transaction as we contributed net assets valued at approximately $36.5 million in exchange for this equity interest. This investment value is updated quarterly based on our proportionate share of the losses or earnings of Compute utilizing the equity method. During the three and six months ended March 29, 2019 we recorded losses of $4.4 million and $9.0 million, respectively, associated with this investment as other expense in our consolidated statements of operations. During the three and six months ended March 30, 2018, we recorded losses of $4.1 million associated with this investment. As of March 29, 2019 and September 28, 2018, the carrying value of this investment was $17.1 million and $26.1 million, respectively.
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 and six months ended March 29, 2019.
Assets and liabilities measured at fair value on a recurring basis consist of the following (in thousands):
 
March 29, 2019
 
Fair Value
 
Active Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Money market funds
$
252

 
$
252

 
$

 
$

Commercial paper
70,873

 

 
70,873

 

Corporate bonds
28,835

 

 
28,835

 

Total assets measured at fair value
$
99,960

 
$
252

 
$
99,708

 
$

Liabilities
 
 
 
 
 
 
 
Common stock warrant liability
9,268

 

 

 
9,268

Total liabilities measured at fair value
$
9,268

 
$

 
$

 
$
9,268


11



 
September 28, 2018
 
Fair Value
 
Active Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Money market funds
$
253

 
$
253

 
$

 
$

Commercial paper
69,950

 

 
69,950

 

Corporate bonds
28,271

 

 
28,271

 

Total assets measured at fair value
$
98,474

 
$
253

 
$
98,221

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
585

 
$

 
$

 
$
585

Common stock warrant liability
13,129

 

 

 
13,129

Total liabilities measured at fair value
$
13,714

 
$

 
$

 
$
13,714


As of March 29, 2019 and September 28, 2018, the fair value of the common stock warrants has been estimated using a Black-Scholes option pricing model.
The fair value of the contingent consideration liability was 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.
The quantitative information utilized in the fair value calculation of our Level 3 liabilities is as follows:
 
 
 
 
 
Inputs
Liabilities
Valuation Technique
 
Unobservable Input
 
March 29, 2019
 
September 28, 2018
Contingent consideration
Discounted cash flow
 
Discount rate
 
N/A
 
9.2%
 
 
 
Probability of achievement
 
N/A
 
90%
 
 
 
Timing of cash flows
 
N/A
 
1 month
 
 
 
 
 
 
 
 
Warrant liability
Black-Scholes model
 
Volatility
 
71.9%
 
60.7%
 
 
 
Discount rate
 
2.30%
 
2.81%
 
 
 
Expected life
 
1.7 years
 
2.2 years
 
 
 
Exercise price
 
$14.05
 
$14.05
 
 
 
Stock price
 
$16.71
 
$20.60
 
 
 
Dividend rate
 
%
 
%

The changes in liabilities with inputs classified within Level 3 of the fair value hierarchy consist of the following (in thousands):
 
September 28,
2018
 
Net Realized/Unrealized Losses (Gains) Included in Earnings
 
Purchases
and
Issuances
 
Sales and
Settlements
 
March 29,
2019
Contingent consideration
$
585

 
$
65

 
$

 
$
(650
)
 
$

Common stock warrant liability
$
13,129

 
$
(3,861
)
 
$

 
$

 
$
9,268

 
September 29,
2017
 
Net Realized/Unrealized Gains Included in Earnings
 
Purchases
and
Issuances
 
Sales and
Settlements
 
March 30,
2018
Contingent consideration
$
1,679

 
$
(549
)
 
$

 
$

 
$
1,130

Common stock warrant liability
$
40,775

 
$
(31,624
)
 
$

 
$

 
$
9,151



12



6. INVENTORIES
Inventories, net of reserves, consist of the following (in thousands):
 
March 29,
2019