MACOM (NASDAQ:MTSI) Reports Q3 In Line With Expectations, Stock Soars

November 07, 2024 at 08:39 AM EST

MTSI Cover Image

Network chips maker MACOM Technology Solutions (NASDAQ: MTSI) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 33.5% year on year to $200.7 million. The company expects next quarter’s revenue to be around $215 million, coming in 5.1% above analysts’ estimates. Its non-GAAP profit of $0.73 per share was also in line with analysts’ consensus estimates.

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MACOM (MTSI) Q3 CY2024 Highlights:

Revenue: $200.7 million vs analyst estimates of $200.5 million (in line)
Adjusted EPS: $0.73 vs analyst expectations of $0.73 (in line)
Revenue Guidance for Q4 CY2024 is $215 million at the midpoint, above analyst estimates of $204.6 million
Adjusted EPS guidance for Q4 CY2024 is $0.78 at the midpoint, above analyst estimates of $0.75
Gross Margin (GAAP): 54.7%, down from 57.6% in the same quarter last year
Inventory Days Outstanding: 195, in line with the previous quarter
Operating Margin: 13.7%, up from 10.4% in the same quarter last year
Free Cash Flow Margin: 28.5%, down from 29.6% in the same quarter last year
Market Capitalization: $8.80 billion

“Our team continues to identify opportunities to expand our customer base and gain share with our leading products and technologies,” said Stephen G. Daly, President and Chief Executive Officer.

Company Overview

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.

Analog Semiconductors

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

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, MACOM’s 8.2% annualized revenue growth over the last five years was decent. This is a useful starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but recency is necessary for semiconductors because of Moore's Law, which suggests the pace of technological innovation is so high that yesterday's hit new product could be obsolete today. MACOM’s recent history shows its demand slowed as its annualized revenue growth of 4% over the last two years is below its five-year trend. MACOM Year-On-Year Revenue Growth

This quarter, MACOM’s year-on-year revenue growth of 33.5% was wonderful, and its $200.7 million of revenue was in line with Wall Street’s estimates. Management is currently guiding for a 36.8% year-on-year increase next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 19% over the next 12 months, an improvement versus the last two years. This projection is healthy and indicates the market believes its newer products and services will catalyze higher growth rates.

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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 195, which is 40 days above its five-year average, suggesting that the company’s inventory levels are higher than what we’ve seen in the past.

Key Takeaways from MACOM’s Q3 Results

We were impressed by MACOM’s strong operating margin improvement this quarter. We were also glad next quarter’s revenue guidance came in higher than Wall Street’s estimates. On the other hand, its EBITDA missed and its gross margin decreased. Zooming out, we think this was a very solid quarter. The stock traded up 6.5% to $130.00 immediately following the results.

Is MACOM an attractive investment opportunity right now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.

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