fibeReality has discovered a definite gulf in opinion on the prospects for MACOM Technologies Solutions’ new CEO, Steve Daly (along with the other top-level executives), to turn the company around, between the engineering crowd, which is inclined to be pessimistic on its future, and Wall Street analysts, who are leaning in at least a cautiously bullish direction. Such a dichotomy, one way or the other, is hardly an uncommon occurrence, when it comes to the evaluation of optical vendors. As we discussed in the past, financial institutions (as well as the overwhelming bulk of market research firms) apparently do not tend to have adequate long-term relationships with trusted, independent sources of information, particularly technologists, especially on the all-important, demand side of the marketplace. In the case of MACOM, we have been impressed (and even a bit shocked) by the visceral nature of the comments expressed to us, again most notably, by some of our technical contacts. In our opinion, based on this intelligence gathering, there is not only a lack of confidence in the aptitude of the current leadership to get the job done, but there is even the anticipation of an outright disaster. More specifically, we are aware of criticism already about decision-making concerning changes in the lower level management, as well as even Daly’s low-key, demeanor not being a good match for the current conditions at the company, as overall morale, is quite low. We obviously take such charges from our reputable sources very seriously.
In the interest of fairness, there is the realization that these denunciations are only somewhat based on critical nuts-and-bolts concerns, that they need to take into consideration that the CEO did have a good track record at Hittite Microwave, and that one should avoid automatically assuming that people will fail to rise to the occasion. Most vitally, a portion of the disapproval is unquestionably based on what we believe is the false presumption by a number of folks that optical solutions will remain a primary business for MACOM.
On this last point, while there is universal agreement that there had to be a change in supervision, the new VP, Business Line Manager, Gary Shah, is marketing-centric, despite the new corporate emphasis on engineering no longer taking a backseat. So, naturally there are questions about the ability of the company to take on the major hurdles in new development efforts, such as at higher data rates. He is also from Mindspeed Technologies, which we understand ran out of money, before MACOM rescued it, and so, the prevailing attitude is expected to be of avoiding expenditures, regardless of the circumstances.
Of course, intensive cash conservation may be just what Daly desires, as we believe that Macom will gradually scale back significantly on the optical side. Given the large investments in these types of acquisitions, MACOM cannot just turn on a dime.
Before Daly left Hittite, this business category was its second smallest market. If, indeed, the ultimate intention is to divest most of its optical assets, then even the idea of MACOM playing a very targeted role in helping to create “band-aids” at the datacom high end, similar to what we suspect Semtech may have in mind, can assuredly be eliminated. There is also the problem, at least in the coherent space, of widespread movement towards vertical integration with drivers/TIAs.
One would imagine the ultimate aim of Daly is kind of a “Hittite II,” given some of the obvious commonality with the product lines, but he lacks the experience in turning around such a truly distressed situation. While even the financial analysts would be hard-pressed to provide a road map to success, once again, the attacks on the ability of this specific executive team, continue to give us pause, because the chance of any group of managers to overcome these formidable hurdles would not be favorable at all. Naturally, if Daly and his team do pull it off, it would be widely viewed as an extraordinary achievement.
As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.
[written by Mark Lutkowitz]