2023-10-11 08:12:02 ET
Summary
- MACOM's Industrial & Defense segment has shown strong growth, with an average growth rate of 10.8% and becoming the company's largest revenue contributor.
- The semiconductor market for defense applications is expected to grow, driven by rising military spending, equipment modernization, and demand for high-performance technology.
- Recent acquisitions, such as Wolfspeed RF and Linear Communications, strengthen MACOM's defense product capabilities and align with its focus on the defense industry.
In this analysis of MACOM Technology Solutions Holdings, Inc. (MTSI), we focused on the company's Industrial & Defense segment which is the largest segment of the company to determine whether it could continue to support its growth outlook. Firstly, we analyzed the company's revenue breakdown by segments including I&D and compared its growth and revenue contribution with its other segments to highlight the significance of the segment to the company. Moreover, we then analyzed the semicon market for defense applications and the growth drivers for the market as well as the competitive landscape. Finally, we examined how its acquisitions support its Defense segment's product capabilities and enhance its competitiveness.
Large Focus on the Defense Industry
MACOM Revenue Breakdown ($ '000s) | 2018 | 2019 | 2020 | 2021 | 2022 | 2023F | Average |
Telecom | 222,940 | 180,938 | 209,477 | 188,391 | 242,702 | 204,893 | |
Growth % | -34.4% | -18.8% | 15.8% | -10.1% | 28.8% | -15.6% | -3.7% |
% of Revenue | 39.1% | 36.2% | 39.5% | 31.0% | 35.9% | 30.9% | |
Industrial & Defense | 185,360 | 204,638 | 194,506 | 280,221 | 294,341 | 317,215 | |
Growth % | -0.5% | 10.4% | -5.0% | 44.1% | 5.0% | 7.8% | 10.8% |
% of Revenue | 32.5% | 41.0% | 36.7% | 46.2% | 43.6% | 47.8% | |
Data Center | 162,098 | 114,132 | 126,054 | 138,308 | 138,127 | 141,935 | |
Growth % | -6.0% | -29.6% | 10.4% | 9.7% | -0.1% | 2.8% | -3.1% |
% of Revenue | 28.4% | 22.8% | 23.8% | 22.8% | 20.5% | 21.4% | |
Total | 570,398 | 499,708 | 530,037 | 606,920 | 675,170 | 664,043 | |
Growth % | -18.4% | -12.4% | 6.1% | 14.5% | 11.2% | -1.6% | 0.2% |
Source: Company Data, Khaveen Investments
Based on the table above, we compiled the company's revenue breakdown by its end market segments from 2018 to 2022 and forecasted its 2023 revenues based on its prorated Q1 to Q3 2023 results. The company's total revenue has overall improved in the past 5 years in terms of its growth from negative growth in 2018 and 2019 which turned positive in 2020 and grew by double digits in the last years. On average, the company's average growth is flattish at only 0.2%. When examining its segment breakdown, its Industrial & Defense segment had grown significantly over the past 5 years with the highest average growth rate of 10.8%. The segment's % of revenue increased substantially as its other 2 segments had a negative average growth of around -3.1 and -3.7%. The company's Industrial & Defense segment % of revenue increased by 11 percentage points, against the Data Center segment which % of decreased by 8% and Telecom which decreased by 3%.
According to the company, the strong growth of the Industrial & Defense segment is attributed to…
…primarily related to new program wins and expansion of our product lines. - Annual Report
In its recent earnings briefing , the company highlighted a contract with the US Air Force Research Labs for advanced gallium nitride ((GAN)) and silicon carbide (SiC), supporting millimeter wave MMIC products. According to the company, the contract has a value of $4 mln which is 1.4% of its I&D segment. This follows after in 2021, the company announced that it entered a partnership with the United States Air Force Research Laboratory "to transfer AFRL's production ready 0.14 micron GaN-on-SiC semiconductor process to MACOM's Massachusetts-based U.S. Trusted Foundry".
Based on its annual report , the company received Trusted Foundry status from the US Department of Defense, signifying its credibility as a chip manufacturer for military and aerospace applications. Additionally, it was awarded platinum supplier status by a major US Tier 1 defense contractor which we believe further demonstrates its focus on the defense industry.
Furthermore, based on the company's investor day presentation slide , the company's I&D segment has a segment of $2 bln. Based on its 2022 segment revenue, its I&D segment only accounted for 14.7% of its SAM which highlights further growth opportunities in the segment.
Overall, when considering the overall growth performance of MACOM's segments, the Industrial & Defense segment stands out with the highest average growth rate of 10.8%. Despite a slow start in 2018, it consistently expanded over the years. Furthermore, the segment's share of revenue had increased substantially against both its other segments to become the largest segment since 2021, which highlights the company's large focus on the industrial & defense segment particularly in the defense industry.
Semiconductors for Defense Industry
Based on the company's annual report, it expects its I&D segment growth to be driven by its "product portfolio which services test and measurement, satellite communications, civil and military radar, scientific, medical and other industrial application". According to Allied Market Research, the semiconductor market for military application s is forecasted to grow at a CAGR of 7.6% and include growth drivers such as:
- Rising Military Spending : US military spending has grown at an average of 6% in the past 5 years to $876 bln. According to the Department of Defense in its FY2023 budget request document, around $130.1 bln or 14.8% was requested for R&D activities at a growth of 9.5%.
- Equipment Upgradation & Modernization : The company highlights the importance of advanced electronic systems in meeting diverse military needs, including radar, communication, drones, RF countermeasures, and smart munitions. According to National Interest , the US military anticipates the arrival of 24 new weapons systems by 2023, with semiconductors deemed critical for US defense systems, as noted by the Center for Strategic and International Studies . For example, over 200 semiconductors are used in a Javelin.
- Demand For High Performance in The Military : The company stated that as the demands placed on military technology grow more complex, there is a growing requirement for high-speed bandwidth and enhanced performance. According to Military Embedded Systems , GaAs and GaN technologies are preferred in the military for their high power density, improved efficiency, and versatility.
Two of the main chips used in the Industrial & Defense segment are RF and Microwave Predistortion. RF chips are used in a variety of military applications , including secure communications, electronic warfare, and radar systems. According to Spirent , one of the important equipment in the military is tactical radios and communication protocols which are specifically engineered with a primary focus on security to mitigate the risk of enemy interception and ensure robust resistance against jamming attempts. In the dynamic and high-stakes environments of the modern battlefield, adversaries often employ radio frequency ((RF)) jamming as a routine tactic to disrupt communication and gain an advantage. Additionally, BAE Systems produces high-power RF transistors and integrated circuits designed for harsh conditions, integrated into transmitter assemblies for applications such as radar, communications, and electronic warfare systems.
Furthermore, military satellites "perform the all-ubiquitous role of navigation, communications, broadcast relays and provision of meteorological data". The US has the highest number of military satellites (239) followed by China. According to the US Space Force , "DSP satellites help protect the United States and its allies by detecting missile launches, space launches and nuclear detonations". According to Straits Research , the space-based microwave technology market was projected to grow at a CAGR of 7.2%, supported by growth drivers such as technological developments in space-based microwave components.
All in all, we believe the growth drivers of the semiconductor market for defense applications could bode well for the growth outlook of the company's I&D segment due to increasing military spending for technological development, modernization of weapon systems and use of radiation-tolerant semiconductors.
Acquisitions Strengthen Defense Product Capabilities
The company recently announced it will acquire Wolfspeed's RF Business, known for its GaN on SiC products in high-performance RF and microwave applications, with annualized revenues of approximately $150 mln. We estimated the company's revenue contribution from the Wolfspeed RF acquisition below which we forecasted based on the RF GaN market CAGR of 12.9%.
MACOM Revenue ($ mln) | 2021 | 2022 | 2023F | 2024F | 2025F | 2026F |
MACOM Revenue | 606.9 | 675.2 | 664.0 | 689.9 | 716.8 | 744.8 |
Growth % | 14.50% | 11.30% | -1.65% | 3.90% | 3.90% | 3.90% |
Wolfspeed RF | 37.5 | 171.3 | 193.4 | 218.3 | ||
Growth % | 356.80% | 12.90% | 12.90% | |||
Total Revenue with Wolfspeed RF | 606.9 | 675.2 | 701.5 | 861.2 | 910.2 | 963.2 |
Growth % | 14.50% | 11.25% | 3.90% | 22.76% | 5.69% | 5.81% |
Source: Company Data, Markets and Markets , Khaveen Investments
According to the company , the acquisition of Wolfspeed's RF Business significantly strengthens MACOM's defense capabilities by adding their extensive GaN and SiC product lineup. Additionally, Wolfspeed's Category 1A trusted foundry status aligns well with MACOM's defense-focused business. MACOM's presence in aerospace, defense, and telecommunications, expands its customer base among tier 1 defense clients. Moroever, it includes a long-term supply agreement for silicon carbide materials and access to a vast intellectual property portfolio with over 1,400 patents, enhancing MACOM's innovation potential in the RF power GaN market with a SAM of $2 bln according to the company.
Furthermore, the company acquired Linear Communications for $49 mln, enhancing its capabilities in microwave technology for SATCOM, satellite payloads, and defense applications. Based on its recent earning briefing…
Over the past three decades, the Linearizer team has developed an outstanding reputation in the SATCOM industry and forged strong relationships with many leading TWT manufacturers, Tier 1 U.S. defense prime contractors, SATCOM ground station OEMs, and satellite manufacturers. This acquisition strengthens our market position within the defense industry and improves our ability to capitalize on the estimated incremental $250 million TAM. - Steve Daly, President and CEO
All in all, we believe the acquisitions complement the company's focus on its largest segment which is the I&D segment to target the defense industry as its acquisitions such as Wolfspeed RF's business with products catering to radar systems as well as its Linear Communications acquisition enhancing the company's I&D segments with microwave pre distortion products for SATCOM and defense customers.
Risk: Geopolitics Risk with China
We believe one of the risks of the company is the threat of geopolitical risks as a US-based semicon company supplying the US military with its largest segment being the I&D segment. We believe the company would not easily be able to sell to customers in other markets especially China where the US had imposed an entity list of companies with ties with the Chinese military that US suppliers are banned from selling to.
Verdict
We believe MACOM's Industrial & Defense (I&D) segment has demonstrated remarkable growth, averaging a 10.8% annual growth rate. Despite a slow start in 2018, it has become the company's largest revenue contributor since 2021, signaling a strong focus on the defense industry. In our view, the semiconductor market's growth in defense applications could benefit MACOM's I&D segment due to increased military spending for technological advancements and weapon system modernization. Additionally, recent acquisitions, such as Wolfspeed RD and Linear Communications, align with MACOM's focus on the defense industry, providing radar systems and microwave predistortion products for SATCOM and defense customers.
However, based on analyst consensus , the company has an average price target of $84.92 with an upside of only 4.75%. Moreover, its P/E ratio of 27.68x is higher than the sector median of 18.24x. Thus, we rate it as a Hold.
For further details see:
MACOM: A Chipmaking Defense Contractor With Value Potentials