Semiconductor maker Himax Technologies (NASDAQ:HIMX) fell short of analysts' expectations in Q2 FY2023, with revenue down 24.8% year on year to $235 million. Himax made a GAAP profit of $888 thousand, down from its profit of $70.2 million in the same quarter last year.
Himax (HIMX) Q2 FY2023 Highlights:
- Revenue: $235 million vs analyst estimates of $241.6 million (2.71% miss)
- EPS: $0.01 vs analyst estimates of -$0.01 ($0.01 beat)
- Free Cash Flow of $48.4 million, down 23.9% from the previous quarter
- Inventory Days Outstanding: 147, down from 174 in the previous quarter
- Gross Margin (GAAP): 21.7%, down from 43.6% in the same quarter last year
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).Sales Growth
Himax's revenue growth over the last three years has been strong, averaging 22.3% annually. But as you can see below, its revenue declined from $312.6 million in the same quarter last year to $235 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).
Himax had a difficult quarter as revenue dropped 24.8% year on year, missing analysts' estimates by 2.71%. This could mean that the current downcycle is deepening.
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 147, which is 32 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.
Pricing Power
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 21.7% in Q2, down 21.9 percentage points year on year.
Himax's gross margins have been trending down over the last 12 months, averaging 29.1%. 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.
Profitability
Himax reported an operating margin of 1.53% in Q2, down 27.2 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 7.19%. This is a bad sign for Himax, whose margins are already among the lowest for semiconductors. The company will have to improve its relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering Himax expect earnings per share to grow 175% 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 $48.4 million in Q2, up an awesome 631% year on year.
As you can see above, Himax produced free cash flow of just $108 million in the last year, resulting in a measly 11.1% free cash flow margin. Himax will need to improve its free cash flow conversion if it wants to stay competitive.
Over the last five years Himax has averaged a 26.1% return on invested capital (ROIC), implying that it has a defensible competitive position and has invested in profitable growth.
Key Takeaways from Himax's Q2 Results
With a market capitalization of $1.14 billion, Himax is among smaller companies, but its $211.4 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by Himax's strong improvement in inventory levels. That really stood out as a positive in these results. On the other hand, it was unfortunate that its revenue missed analysts' expectations and its operating margin declined. Overall, this was a mediocre quarter for Himax. The company is down 3.36% on the results and currently trades at $6.33 per share.
Is Now The Time?
Himax may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. Although Himax is't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its solid ROIC suggests its business can grow over time, the downside is that its operating margins reveal subpar cost controls compared to other semiconductor businesses and 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. In the end, beauty is in the eye of the beholder. While Himax wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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