Network chips maker MACOM Technology Solutions (NASDAQ: MTSI) beat analysts' expectations in Q1 FY2024, with revenue down 12.7% year on year to $157.1 million. Guidance for next quarter's revenue was also optimistic at $181 million at the midpoint, 11.6% above analysts' estimates. It made a non-GAAP profit of $0.58 per share, down from its profit of $0.81 per share in the same quarter last year.
MACOM (MTSI) Q1 FY2024 Highlights:
- Market Capitalization: $6.22 billion
- Revenue: $157.1 million vs analyst estimates of $152.7 million (2.9% beat)
- EPS (non-GAAP): $0.58 vs analyst estimates of $0.57 (2.2% beat)
- Revenue Guidance for Q2 2024 is $181 million at the midpoint, above analyst estimates of $162.2 million
- Free Cash Flow of $28.45 million, down 36.1% from the previous quarter
- Inventory Days Outstanding: 208, up from 195 in the previous quarter
- Gross Margin (GAAP): 55.6%, down from 61.3% in the same quarter last year
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.MACOMs peers and competitors include Analog Devices (NASDAQ:ADI), Texas Instruments (NASDAQ:TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), Monolithic Power Systems (NASDAQ: MPWR), Marvell Technology (NASDAQ:MRVL), and Microchip (NASDAQ:MCHP).
Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods.
MACOM's revenue growth over the last three years has been unimpressive, averaging 4.5% annually. This quarter, its revenue declined from $180.1 million in the same quarter last year to $157.1 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).
Even though MACOM surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 12.7% year on year. This could mean that the current downcycle is deepening.
MACOM looks like it's on the cusp of a rebound, as it's guiding to 6.8% year-on-year revenue growth for the next quarter. Analysts seem to agree as consesus estimates call for 13.6% growth over the next 12 months.
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.
This quarter, MACOM's DIO came in at 208, which is 59 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. MACOM's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 55.6% in Q1, down 5.7 percentage points year on year.
Despite declining over the last 12 months, MACOM still retains reasonably high gross margins, averaging 57.9%. These margins point to its solid competitive offering, disciplined cost controls, and lack of significant pricing pressure.
MACOM reported an operating margin of 24.5% in Q1, down 8.1 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
MACOM's operating margins have been trending down over the last year, averaging 26.9%. The company's profitability is in line with the broader semiconductor industry and it's working to appropriately manage its operating expenses.
Earnings, Cash & Competitive Moat
Analysts covering MACOM expect earnings per share to grow 22.9% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. MACOM's free cash flow came in at $28.45 million in Q1, roughly the same as last year.
As you can see above, MACOM produced $142 million in free cash flow over the last 12 months, an eye-popping 23% of revenue. This is a great result; MACOM's free cash flow conversion places it among the best semiconductor companies and, if sustainable, puts the company in an advantageous position to invest in new products while remaining resilient during industry downturns.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Understanding a company’s ROIC (return on invested capital) gives us insight into this because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also a management team's ability to allocate limited resources.
MACOM's five-year average ROIC was 6.6%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, MACOM's ROIC has averaged a 43.6 percentage point increase each year. This is a good sign, and if MACOM's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from MACOM's Q1 Results
We were impressed by MACOM's revenue guidance for next quarter, which blew past analysts' expectations. We were also glad this quarter's revenue outperformed Wall Street's estimates, driven by strong demand from the industrial and defense, telecommunications, and data center markets. On the other hand, its operating margin fell, its gross margin shrunk, and its EPS guidance for next quarter underwhelmed. Overall, this was a mixed quarter for MACOM. The stock is up 4.3% after reporting and currently trades at $89.94 per share.
Is Now The Time?
When considering an investment in MACOM, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
Although we have other favorites, we understand the arguments that MACOM isn't a bad business. Although its revenue growth has been weak over the last three years with analysts expecting growth to slow from here, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion. Investors should still be cautious, however, as its relatively low ROIC suggests it has struggled to grow profits historically.
MACOM's price-to-earnings ratio based on the next 12 months is 29.4x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that MACOM doesn't trade at a completely unreasonable price point.
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