M/A-Com (MTSI) Down 14.6% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for M/A-Com (MTSI). Shares have lost about 14.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is M/A-Com due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

MACOM's Q1 Earnings Beat, Revenues Fall Y/Y

MACOM Technology Solutions Holdings reported fiscal first-quarter 2020 non-GAAP earnings of 7 cents per share, beating the Zacks Consensus Estimate by 133.3%. The figure improved significantly from earnings of 1 cent per share in the prior quarter.

However, the bottom line decreased 65% year over year.

Revenues of $119.1 million surpassed the Zacks Consensus Estimate by 3.5%. Notably, the figure surged 6.1% sequentially but declined 21% from the year-ago quarter.

The suspension of shipments to Huawei, which resulted in reduction in MACOM’s sales to Huawei, remained a major concern during the reported quarter.

Nevertheless, the company witnessed sequential improvement in all the key end-markets in the fiscal first quarter.

The company is benefiting from several U.S. defense programs that are aiding performance in the industrial and defense market. Further, MACOM’s high-performance analog components such as TIAs, CDRs and drivers, which are required in 100G deployment, are driving momentum in the data center space.

Additionally, the company remains optimistic about 5G related growth opportunities and thereby it is strongly focused on introduction of new products such as optical components, discreet RF components and high-performance analog and mixed signal ICs, to strengthen 5G portfolio.

End-Market in Details

Telecom Market: The company generated $45.6 million revenues (38.3% of total revenues) from this market, up 15% sequentially.

Data Center Market: This market yielded $23 million revenues (19.3% of total revenues), which improved 2% from the prior quarter.

Industrial & Defense Market: MACOM generated $50.5 million revenues (42.4% of total revenues), improving 1% on a sequential basis.

Operating Details

In the fiscal first-quarter 2020, non-GAAP gross margin came in 53.5%, which contracted 280 bps from the year-ago quarter.

Non-GAAP operating expenses came in 42.6% as a percentage of revenues, which expanded 90 bps from the prior-year quarter.

Consequently, the company’s non-GAAP operating margin was 10.9%, contracting 360 bps year over year.

Adjusted EBITDA margin was 17.1%, contracting 250 bps year over year.

Balance Sheet & Cash Flow

As of Jan 3, 2020, cash equivalents and short-term investments were $210.1 million, up from $176.7 million as of Sep 27, 2019. Inventories were $106.9 million, down from $107.9 million a year ago.

Long-term debt obligations, excluding current portion, were $654.5 million in the fiscal first quarter compared with $655.3 million in the previous quarter.

Cash generated from operations was $37.7 million compared with $7.6 million of cash utilized in operations in the last quarter.

Further, the company’s free cash flow in the reported quarter came in $33.4 million compared with ($13.6) million in the previous quarter.

Guidance

For fiscal second-quarter 2020, MACOM expects revenues between $122 million and $126 million.

MACOM expects telecom and data center markets to show improvements while industrial and defense market is expected to be flat.

Further, the company’s adjusted earnings per share is anticipated to lie in a range of 9 cents to 13 cents.

Moreover, non-GAAP gross margin is anticipated to lie within the range of 53-55%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 60% due to these changes.

VGM Scores

At this time, M/A-Com has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, M/A-Com has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.