MACOM Technology Solutions Holdings, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2023; comparative periods ended July 1, 2022. MACOM designs and manufactures semiconductor products serving telecommunications, industrial and defense (I&D), and data center markets.
Financial results
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $148.5 million | $172.3 million | $498.0 million | $497.0 million |
| Gross profit / margin | $86.1 million / 58.0% | $104.5 million / 60.7% | $299.2 million / 60.1% | $297.7 million / 59.9% |
| Operating income / margin | $17.3 million / 11.7% | $36.0 million / 20.9% | $91.8 million / 18.4% | $95.6 million / 19.2% |
| Net income | $11.9 million | $32.2 million | $67.1 million | $200.6 million |
| Diluted EPS | $0.17 | $0.45 | $0.94 | $2.82 |
| Operating cash flow | Not stated separately | Not stated separately | $116.6 million | $117.0 million |
Q3 revenue fell 13.8% year over year; nine-month revenue was approximately flat. Q3 gross margin declined 2.7 percentage points, while nine-month margin increased 0.2 points. Q3 operating expenses were $68.8 million versus $68.5 million, with lower revenue contributing to sharply lower operating income. Nine-month 2022 net income included a $118.2 million gain from the sale of an equity-method investment, making the year-over-year net income decline less comparable to underlying operating performance.
Markets, liquidity and debt
- Q3 revenue by market: Telecom $38.3 million, down 38.2%; I&D $83.5 million, up 10.6%; Data Center $26.6 million, down 23.4%. For nine months, Telecom declined 15.0%, I&D grew 10.2%, and Data Center grew 5.9%.
- Cash and investments: At June 30, cash and cash equivalents were $121.5 million and short-term investments were $466.1 million. Current assets were $852.1 million against current liabilities of $210.6 million.
- Debt: Debt principal totaled $570.8 million at June 30: $120.8 million of term loans due May 2024 and $450.0 million of 0.25% convertible notes due March 2026. On August 2, 2023, MACOM repaid the term loans and accrued interest using cash on hand.
- Cash flows: Nine-month investing cash outflow was $87.4 million, including $87.7 million for acquisitions net of cash acquired and $18.9 million of capital expenditures. Financing cash outflow was $27.8 million, primarily reflecting share withholding for employee tax obligations.
Changes, outlook and risks
- Management attributed Telecom weakness to lower sales in 5G, carrier optical, broadband/video infrastructure and legacy backhaul products, especially in China. I&D growth reflected defense shipments, acquisitions and expanded analog products. Q3 Data Center weakness was primarily in high-performance analog products.
- Management said macroeconomic conditions were negatively affecting the business and could result in weaker near-term demand. It cited demand, trade restrictions and tariffs, pricing pressure, and global economic uncertainty as risks to results and forecasting.
- MACOM completed the Linearizer Technology acquisition for approximately $51.6 million and the MESC asset acquisition for approximately $36.9 million during the period. Purchase-price allocations remained preliminary; acquisition results were not material to the reported periods. The MESC acquisition expands European manufacturing capabilities.
- Management expects an approximately 30% effective tax rate for FY2023, subject to discrete items; Q3 and nine-month effective rates were 39.6% and 30.2%, respectively. Higher taxes versus the prior-year periods were attributed principally to GILTI, Section 174 R&D capitalization, nondeductible compensation and state taxes.
- Management stated cash, short-term investments and operating cash generation should be sufficient for working capital needs for at least the next twelve months. The filing provides no quantified revenue or earnings guidance.
- No material pending legal proceedings were reported. The company disclosed no material changes to previously reported risk factors other than the macroeconomic risk discussion, and reported effective disclosure controls.
Important facts for investors to verify
- Whether Telecom and Data Center demand stabilizes, and whether I&D growth can offset weakness in other markets.
- Post-quarter liquidity and debt balances following the August 2 term-loan repayment, including the remaining convertible-note obligations.
- Final acquisition purchase-price allocations, integration costs, and the contributions of Linearizer and MESC to future revenue and margins.
- Whether inventory growth, gross-margin pressure and the estimated FY2023 tax rate evolve as management expects.
- Exposure to China and trade restrictions, customer concentration, and the impact of broader macroeconomic conditions on orders.