MACOM (NASDAQ:MTSI) Reports Q3 In Line With Expectations, Next Quarter Growth Looks Optimistic

Radek Strnad /
2023/08/03 7:44 am EDT

Network chips maker MACOM Technology Solutions (NASDAQ: MTSI) reported results in line with analysts' expectations in Q3 FY2023, with revenue down 13.8% year on year to $148.5 million. Guidance for next quarter's revenue was also better than expected $150 million at the midpoint, 1.26% above analysts' estimates. MACOM made a GAAP profit of $11.9 million, down from its profit of $32.2 million in the same quarter last year.

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MACOM (MTSI) Q3 FY2023 Highlights:

  • Revenue: $148.5 million vs analyst estimates of $147.4 million (small beat)
  • EPS (non-GAAP): $0.54 vs analyst estimates of $0.54 (small beat)
  • Revenue Guidance for Q4 2023 is $150 million at the midpoint, above analyst estimates of $148.1 million
  • Free Cash Flow of $42.5 million, up 60.7% from the previous quarter
  • Inventory Days Outstanding: 203, up from 180 in the previous quarter
  • Gross Margin (GAAP): 58%, down from 60.7% in the same quarter last year

“Our team performed well during our fiscal Q3, which finished in line with our expectations,” said Stephen G. Daly, President and Chief Executive Officer. “Although the markets are currently weak, we believe our long-term growth drivers remain intact.”

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 unremarkable, averaging 11.5% annually. This quarter, its revenue declined from $172.3 million in the same quarter last year to $148.5 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

Even though MACOM surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 13.8% year on year.

MACOM's revenue inverted from positive to negative growth this quarter, which was unfortunate to see. Looking ahead to the next quarter, the company's management team forecasts a 15.8% year-on-year revenue decline. Analysts seem to agree that the poor performance will continue, as their average revenue growth estimates for the next 12 months are -5.54%.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 203, which is 60 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from MACOM's Q3 Results

With a market capitalization of $4.77 billion, MACOM is among smaller companies, but its $587.6 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

This was a very "middle of the fairway" quarter. Revenue beat slightly and EPS was relatively in line with expectations. Revenue guidance for next quarter beat and EPS guidance for that same period was slightly ahead. Although gross margin missed this quarter, the company's guidance for next quarter's gross margin was in line with Wall Street analyst expectations. Operating margins decline year on year and inventory levels increased, which we don't like seeing. Overall, this was a quarter with no major surprises. The CEO remarked that “Although the markets are currently weak, we believe our long-term growth drivers remain intact.” The stock is flat after reporting and currently trades at $67.26 per share.

MACOM may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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