Network chips maker MACOM Technology Solutions (NASDAQ: MTSI) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 12.8% year on year to $180.1 million. However, guidance for the next quarter was less impressive, coming in at $168 million at the midpoint, being 6.04% below analyst estimates. MACOM Technology made a GAAP profit of $29.5 million, down on its profit of $138.8 million, in the same quarter last year.
MACOM Technology (MTSI) Q1 FY2023 Highlights:
- Revenue: $180.1 million vs analyst estimates of $179.5 million (small beat)
- EPS (non-GAAP): $0.81 vs analyst estimates of $0.80 (1.83% beat)
- Revenue guidance for Q2 2023 is $168 million at the midpoint, below analyst estimates of $178.8 million
- Free cash flow of $28.6 million, down 45.2% from previous quarter
- Inventory Days Outstanding: 158, up from 150 previous quarter
- Gross Margin (GAAP): 61.2%, up from 58.9% 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 Technology's revenue growth over the last three years has been mediocre, averaging 14.5% annually. And as you can see below, last year has been even less strong, with quarterly revenue growing from $159.6 million to $180.1 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).
While MACOM Technology beat analysts' revenue estimates, this was a very slow quarter with just 12.8% revenue growth. This marks 11 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 continue, and is guiding for revenue to grow 1.72% YoY next quarter, and Wall St analysts are estimating growth 5.3% over the next twelve months.
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.
This quarter, MACOM Technology’s inventory days came in at 158, 19 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
MACOM Technology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 61.2% in Q1, up 2.3 percentage points year on year.
Over the past year, MACOM Technology has seen its already strong gross margins continue to rise, averaging 60.7%, indicative of a potent competitive offering, pricing power, and efficient inventory management.
MACOM Technology reported an operating margin of 34.6% in Q1, up 11.5 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending up over the last year, averaging 32.2%. MACOM Technology's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.
Earnings, Cash & Competitive Moat
Analysts covering the company are expecting earnings per share to be fairly flat over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. MACOM Technology's free cash flow came in at $28.6 million in Q1, roughly the same as last year.
MACOM Technology has generated $150.1 million in free cash flow over the last twelve months, translating to 21.5% of revenues. This is a strong result; MACOM Technology's free cash flow conversion was higher than most semiconductor companies, in the last year. If it maintains this level of cash generation, it will be able to invest plenty in new products, and ride out any cyclical downturn more easily.
MACOM Technology has an average return on invested capital (ROIC) of 11%, over the last 5 years. That's not bad, and suggests the business can grow profits, but it isn't particularly impressive compared to other semiconductor companies.
Key Takeaways from MACOM Technology's Q1 Results
With a market capitalization of $4.84 billion MACOM Technology is among smaller companies, but its more than $594.7 million in cash and positive free cash flow over the last twelve months give us confidence that MACOM Technology has the resources it needs to pursue a high growth business strategy.
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 unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and inventory levels increased. Overall, this quarter's results could have been better. The company is down 1.91% on the results and currently trades at $67.16 per share.
Is Now The Time?
When considering MACOM Technology, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although MACOM Technology is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there.
MACOM Technology's price to earnings ratio based on the next twelve months is 22.1x. 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 Technology doesn't trade at a completely unreasonable price point.
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