Semiconductor maker Himax Technologies (NASDAQ:HIMX) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 13.2% year on year to $227.7 million. It made a GAAP profit of $0.14 per share, down from its profit of $0.24 per share in the same quarter last year.
Himax (HIMX) Q4 FY2023 Highlights:
- Revenue: $227.7 million vs analyst estimates of $226.8 million (small beat)
- EPS: $0.14 vs analyst estimates of $0.11 (22.7% beat)
- Free Cash Flow of $53.69 million, up from $13.42 million in the previous quarter
- Inventory Days Outstanding: 125, down from 144 in the previous quarter
- Gross Margin (GAAP): 30.3%, in line with the same quarter last year
- Market Capitalization: $983.7 million
Taiwan-based Himax Technologies (NASDAQ:HIMX) is a leading manufacturer of display driver chips and timing controllers used in TVs, laptops, and mobile phones.
Himax was founded in 2001 by B.S. Wu, who pioneered flat panel technologies at Chimei Electronics as CTO. In March of 2006, Himax went public with a listing on the NASDAQ exchange.
Himax products primarily address the flat panel display industry. These products are critical components of displays ranging from TVs to driver displays to mobile phones and tablets. Himax’s emerging technologies include products such as WiseEye AI Image Sensing, which brings computer vision AI to endpoint devices such as smart doors and locks with extremely low power requirements.
The company’s customers are primarily panel manufacturers and mobile device module manufacturers, who in turn design their products for consumer end-use products such as notebook computers, desktop monitors, and TVs. Because Himax operates primarily in a fabless model that utilizes third-party foundries, the company relies on semiconductor manufacturing service providers for wafer fabrication, assembly, testing, and packaging.
Competitors in fabless display imaging semiconductors include Fitipower Integrated Technology (TPE:4961), FocalTech Systems (TPE:3545), Novatek Microelectronics (TPE:3034), and Raydium Semiconductor Corporation (TPE:3592).
Himax's revenue growth over the last three years has been mediocre, averaging 13.6% annually. This quarter, its revenue declined from $262.3 million in the same quarter last year to $227.7 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
This was a slow quarter for the company as its revenue dropped 13.2% year on year, in line with analysts' estimates.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Himax's DIO came in at 125, which is 6 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Himax's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 30.3% in Q4, down 0.2 percentage points year on year.
Himax's gross margins have been trending down over the last 12 months, averaging 27.9%. This weakness isn't great as Himax's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Himax reported an operating margin of 9.7% in Q4, up 5 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Himax's operating margins have been trending down over the last year, averaging 7%. This is a bad sign for Himax, whose margins are already below average for semiconductor companies. To its credit, however, the company's margins suggest modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Analysts covering Himax expect earnings per share to grow 150% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Himax's free cash flow came in at $53.69 million in Q4, up an awesome 1,602% year on year.
As you can see above, Himax produced free cash flow of $129.5 million in the last year, which is 13.7% of revenue. It's good to see Himax generate positive free cash flow since it allows the company to strengthen its balance street, but we'd be uncomfortable if its FCF margin dropped any lower.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Understanding a company’s ROIC (return on invested capital) gives us insight into this because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also a management team's ability to allocate limited resources.
Himax's five-year average ROIC was 22.8%, slightly better than the broader sector. Just as you’d like your investment dollars to generate returns, Himax's invested capital has produced decent profits.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Himax's ROIC has averaged a 8.3 percentage point increase each year. This is a good sign, and if Himax's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from Himax's Q4 Results
We were impressed by Himax's strong improvement in inventory levels. We were also glad its operating margin improved. Overall, we think this was a good quarter that should please shareholders. The stock is flat after reporting and currently trades at $5.7 per share.
Is Now The Time?
When considering an investment in Himax, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Himax, we'll be cheering from the sidelines. Its revenue growth has been mediocre over the last three years, and analysts expect growth to deteriorate from here. And while its above-average ROIC suggests its management team has made good investment decisions in the past, the downside is its operating margins reveal subpar cost controls compared to other semiconductor businesses. On top of that, its gross margin indicate some combination of pricing pressures or rising production costs.
Himax's price-to-earnings ratio based on the next 12 months is 13.9x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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