M/A-COM Technology Solutions Holdings, Inc. (MTSI, Financial) designs and manufactures high end analog semiconductors used for industrial, military and communications end markets. Its analog chips are primarily for radio-frequency and microwave applications, and act on natural phenomena versus manipulating binary signals composed of ones and zeros (as is the case with digital processor chips). This adds engineering complexity which allows for increased product differentiation and higher margins. M/A-COM has some unique capabilities that we believe will lead to increased market share in its key end markets. In the data center market (driven by the ever-increasing need by companies such as Facebook, Google, Amazon and Microsoft to upgrade to higher speed networks), M/A-COM has unique optical electronic and laser chips plus packaging that we believe give it technology and cost advantages. In the radar market, M/A-COM has some unique technologies including Gallium Arsenide (GaN) on Silicon, which should make it a low cost/high performance leader for military and civilian projects. M/A-COM has already won some military radar contracts, as well as a pilot FAA radar program. Given our research effort in the defense industry, we believe there will be many more projects to come. And the GaN technology should also give M/A-COM an advantage in the cellular base station market, where we believe it will replace older technology. We believe that M/A-COM has design wins (currently under qualification) with three of the four major manufacturers of this equipment, so this could be a large new opportunity for the company. Shares increased in the quarter as investors started to realize the size of some of the company’s opportunities that should start to shape up in 2016.
M/A-COM currently has 50% gross and 19% cash flow margins, which we believe can increase to 65% and 35%, respectively, over time, driven by what we think could be 20% revenue growth. And management has been diligent in using its cash flow to re-position the portfolio by buying higher margin, unique technologies (laser chips, GaN on Silicon), and selling lower margin (auto) businesses.
From Baron Discover Fund's fourth quarter 2015 commentary.
