MACOM (NASDAQ:MTSI) Posts Better-Than-Expected Sales In Q2 But Quarterly Guidance Underwhelms

Anthony Lee /
2023/05/04 7:38 am EDT

Network chips maker MACOM Technology Solutions (NASDAQ: MTSI) reported results in line with analyst expectations in Q2 FY2023 quarter, with revenue up 2.58% year on year to $169.4 million. However, guidance for the next quarter was less impressive, coming in at $147.5 million at the midpoint, being 11% below analyst estimates. MACOM made a GAAP profit of $25.8 million, down on its profit of $29.6 million, in the same quarter last year.

Is now the time to buy MACOM? Access our full analysis of the earnings results here, it's free.

MACOM (MTSI) Q2 FY2023 Highlights:

  • Revenue: $169.4 million vs analyst estimates of $168.1 million (0.81% beat)
  • EPS (non-GAAP): $0.79 vs analyst estimates of $0.78 (1.59% beat)
  • Revenue guidance for Q3 2023 is $147.5 million at the midpoint, below analyst estimates of $165.8 million
  • Free cash flow of $26.5 million, roughly flat from previous quarter
  • Inventory Days Outstanding: 180, up from 158 previous quarter
  • Gross Margin (GAAP): 60.6%, up from 59.9% same quarter last year

“While we were generally pleased with our first half results, we expect that the second half will be more challenging,” said Stephen G. Daly, President and Chief Executive Officer.

Founded in the 1950s as Microwave Associates, a communications supplier to the US Army Signal Corp, today MACOM Technology Solutions (NASDAQ: MTSI) is a provider of analog chips used in optical, wireless, and satellite networks.

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

MACOM's revenue growth over the last three years has been mediocre, averaging 14.9% annually. And as you can see below, last year has been even less strong, with quarterly revenue growing from $165.1 million to $169.4 million. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

MACOM Total Revenue

While MACOM beat analysts' revenue estimates, this was a very slow quarter with just 2.58% revenue growth. This marks 12 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

MACOM's revenue growth was positive this quarter, but the company is guiding to decline of 14.4% YoY next quarter, while analysts expect to see declines of 1.08% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

MACOM Inventory Days Outstanding

This quarter, MACOM’s inventory days came in at 180, 40 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from MACOM's Q2 Results

With a market capitalization of $4.03 billion MACOM is among smaller companies, but its more than $577.3 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was nice that MACOM improved their operating margin, even if just slightly. And we were also happy to see that earnings topped expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and inventory levels increased. Overall, it seems to us that this was a complicated quarter for MACOM. The company is flat on the results and currently trades at $57.04 per share.

MACOM may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.