On August 6, MACOM Technology Solutions Holdings (NASDAQ:MTSI) reported fiscal third-quarter results for the period ended July 3, and the numbers moved faster than the top line already suggests. Revenue climbed 35.8% year over year to $342.2 million, but net income more than tripled, jumping from $36.5 million to $100.7 million. When profit grows at nearly triple the rate of sales, something structural is shifting inside the business, not just demand.
The clearest story in this report is margin expansion. Gross margin rose to 58.3%, up from 55.3% a year earlier and 56.9% just one quarter ago, a steady climb rather than a one-time pop. That flowed straight through to operating performance: income from operations reached $77.1 million, or 22.5% of revenue, compared with 14.9% in the same quarter last year. On an adjusted basis, the picture is even sharper, with adjusted operating income hitting $107.7 million, or 31.5% of revenue, versus 25.2% a year ago.
Diluted earnings per share tell the same story from a different angle. GAAP EPS came in at $1.28, up from $0.48 a year earlier, while adjusted EPS reached $1.40 against $0.90 last year. Sequentially, adjusted EPS rose from $1.09 in the prior quarter to $1.40, a jump that outpaced the 18.4% sequential revenue increase. That combination, revenue accelerating while margins widen at the same time, is what turns a good quarter into a business inflection point rather than a single strong print.
MACOM's own outlook is where the story gets more demanding. For the fiscal fourth quarter ending October 2, the company guided to revenue of $415 million to $425 million. That represents sequential growth of roughly 21% to 24% on top of the $342.2 million just reported, a bigger jump than the 18.4% sequential gain the company just delivered. Beating one strong quarter is one thing. Guiding to an even larger jump the very next quarter raises the execution bar rather than lowering it.
The margin assumptions embedded in that guidance are comparatively modest, with adjusted gross margin expected between 60% and 61%, just above the 59.7% adjusted margin already posted. The bigger swing factor sits in the earnings guide itself: adjusted diluted EPS of $1.97 to $2.03 depends on a 3% non-GAAP tax rate and 78.9 million fully diluted shares outstanding, both of which are assumptions rather than guarantees. And the gap between GAAP and adjusted results this quarter, $100.7 million versus $109.8 million in net income, is a reminder that some of the costs stripped out of the adjusted figures are still real dollars leaving the business.
Hedge fund ownership of MACOM rose from 45 funds to 59 in the most recent quarter, a meaningful pickup in institutional conviction. Short interest sits at just 3.57% of float, which suggests little organized skepticism is betting against the stock right now. At the same time, MACOM trades at a forward P/E of 30.40 as of September 4, a multiple that already prices in a good chunk of the growth and margin expansion the company just reported. That combination means that the stock has room to disappoint if the next quarter's numbers come in soft.
MACOM just posted a quarter where profit growth outran even a strong revenue number, and the market has responded by adding shares rather than shorting them. But the company's own guidance calls for a bigger sequential jump than the one it just achieved, built on assumptions about tax rate and share count that have not yet played out. For the bulls, the margin trend already in hand is the evidence that matters most.
While we acknowledge the potential of MTSI as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.
READ NEXT: 10 Best Future Stocks to Buy Under $10 and 12 Best Performing Semiconductor Stocks to Invest In.
Disclosure: None. Follow Insider Monkey on Google News.