MACOM Technology (NASDAQ:MTSI) Exceeds Q3 Expectations But Inventory Levels Increase

Kayode Omotosho /
2022/07/28 7:39 am EDT

Network chips maker MACOM Technology Solutions (NASDAQ: MTSI) reported results ahead of analyst expectations in the Q3 FY2022 quarter, with revenue up 12.8% year on year to $172.2 million. The company expects that next quarter's revenue would be around $177.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. MACOM Technology made a GAAP profit of $32.2 million, improving on its profit of $15 million, in the same quarter last year.

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

MACOM Technology (MTSI) Q3 FY2022 Highlights:

  • Revenue: $172.2 million vs analyst estimates of $170 million (1.3% beat)
  • EPS (non-GAAP): $0.73 vs analyst estimates of $0.70 (4.23% beat)
  • Revenue guidance for Q4 2022 is $177.5 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $33.7 million, roughly flat from previous quarter
  • Inventory Days Outstanding: 148, up from 128 previous quarter
  • Gross Margin (GAAP): 60.6%, up from 57.1% same quarter last year

“We remain focused on designing compelling products to meet our customers’ needs,” 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. The biggest secular growth drivers currently are the adoption of electric vehicles, 5G networks and Internet of Things connectivity, and demand for chips that reduce power consumption. 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 Technology's revenue growth over the last three years has been unremarkable, averaging 8.33% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $152.6 million to $172.2 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 Technology Total Revenue

While MACOM Technology beat analysts' revenue estimates, this was a very slow quarter with just 12.8% revenue growth. This marks 9 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.

However, MACOM Technology believes the growth is set to even accelerate, and is guiding for revenue to grow 14.3% YoY next quarter, and Wall St analysts are estimating growth 10.7% 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 Technology Inventory Days Outstanding

This quarter, MACOM Technology’s inventory days came in at 148, 7 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 Technology's Q3 Results

With a market capitalization of $3.81 billion MACOM Technology is among smaller companies, but its more than $536.3 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed by the strong improvements in MACOM Technology’s operating margin this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was less good to see the inventory levels increase and the revenue growth was quite weak. Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $54.56 per share.

Should you invest in MACOM Technology 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.

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