Chip manufacturer NXP Semiconductors (NASDAQ: NXPI) reported results in line with analysts' expectations in Q1 CY2024, with revenue flat year on year at $3.13 billion. The company expects next quarter's revenue to be around $3.13 billion, in line with analysts' estimates. It made a non-GAAP profit of $3.24 per share, improving from its profit of $3.19 per share in the same quarter last year.
NXP Semiconductors (NXPI) Q1 CY2024 Highlights:
- Revenue: $3.13 billion vs analyst estimates of $3.13 billion (small miss)
- EPS (non-GAAP): $3.24 vs analyst estimates of $3.18 (2% beat)
- Revenue Guidance for Q2 CY2024 is $3.13 billion at the midpoint, roughly in line with what analysts were expecting, but EPS (non-GAAP) guidance for Q2 CY2024 is $3.20, 2.9% ahead of expectations
- Gross Margin (GAAP): 57%, in line with the same quarter last year
- Inventory Days Outstanding: 142, up from 132 in the previous quarter
- Free Cash Flow of $627 million, down 34.8% from the previous quarter
- Market Capitalization: $62.15 billion
Spun off from Dutch electronics giant Philips in 2006, NXP Semiconductors (NASDAQ: NXPI) is a designer and manufacturer of chips used in autos, industrial manufacturing, mobile devices, and communications infrastructure.
NXPI manufactures high performance Mixed Signal (HPMS) chips, which is a hybrid of digital and analog chips that are used to convert analog signals to digital signals so that digital devices can process them.
NXP IPO-ed in 2010, and merged with Freescale Semiconductor in 2015. That merger made NXPI the leading producer of chips used in autos globally. Its mixed signal chips are used to monitor engines and fuel economy, along with the infotainment systems, and even in the systems that power keyless entry.
NXP is used in Industrial and IoT applications, where its chips power the sensors used in factory automation and smart home devices. Its chips are used to power mobile wallets and fast charging in mobile devices, and secure IDs for uses like RFID tags used to monitor supply chains, and chips in payment cards or passports.
NXPIs peers and competitors include Texas Instruments (NASDAQ:TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), ON Semi (NASDAQ:ON), Microchip Technology (NASDAQ: MCHP) , and Analog Devices (NASDAQ: ADI).Analog Semiconductors
Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods.
Sales Growth
NXP Semiconductors's revenue growth over the last three years has been mediocre, averaging 14.3% annually. As you can see below, this was a weaker quarter for the company, with revenue growing from $3.12 billion in the same quarter last year to $3.13 billion. 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).
NXP Semiconductors had a tough quarter as its weak 0.2% year-on-year revenue growth missed analysts' estimates by 0%. Despite these results, we believe NXP Semiconductors is still in the early days of an upcycle, as this was just the second consecutive quarter of growth and a typical upcycle tends to last 8-10 quarters.
NXP Semiconductors's revenue is projected to contract next quarter, with the company guiding to a 5.3% year-on-year decline. On the other hand, analysts seem to disagree and forecast 0.4% revenue growth over the next 12 months.
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, NXP Semiconductors's DIO came in at 142, which is 39 days above its five-year average, suggesting that the company's inventory has grown to higher levels than 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. NXP Semiconductors'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 57% in Q1, up 0.3 percentage points year on year.
NXP Semiconductors's gross margins have been stable over the past year, averaging 57.1%. The company's unit economics remain ahead of its semiconductor peers, pointing to its solid competitive offering, disciplined cost controls, and lack of meaningful pricing pressure.
Profitability
NXP Semiconductors reported an operating margin of 34.5% in Q1, down 0.2 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.
NXP Semiconductors's operating margins have been trending down over the last year, averaging 35.1%. However, the company's profitability remains one of the strongest in the industry, driven by its solid gross margins and economies of scale generated from its highly efficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering NXP Semiconductors expect earnings per share to be relatively flat 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. NXP Semiconductors's free cash flow came in at $627 million in Q1, up 64.6% year on year.
As you can see above, NXP Semiconductors produced $2.93 billion in free cash flow over the last 12 months, an impressive 22.1% of revenue. This is a strong result; NXP Semiconductors's free cash flow conversion was higher than most semiconductor companies, and if it can maintain this level of cash generation, it can invest in plenty of new and existing products to ride out cyclical downturns more easily.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
NXP Semiconductors's five-year average ROIC was 14.5%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, NXP Semiconductors's ROIC has significantly increased. This is a good sign, and if the company's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from NXP Semiconductors's Q1 Results
It was good to see NXP Semiconductors beat analysts' EPS expectations this quarter. Additionally, while revenue guidance for next quarter was roughly in line with expectations, EPS guidance for the same period was above. Overall, this was a solid quarter for NXP Semiconductors. The stock is up 5.7% after reporting and currently trades at $261.22 per share.
Is Now The Time?
When considering an investment in NXP Semiconductors, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
Although we have other favorites, we understand the arguments that NXP Semiconductors isn't a bad business. Although its revenue growth has been mediocre over the last three years with analysts expecting growth to slow from here, its strong free cash generation allows it to sustainably invest in growth initiatives. Investors should still be cautious, however, as its mediocre ROIC suggests it has grown profits at a slow pace historically.
NXP Semiconductors's price-to-earnings ratio based on the next 12 months is 17.6x. In the end, beauty is in the eye of the beholder. While NXP Semiconductors wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price right now.
Wall Street analysts covering the company had a one-year price target of $249.13 per share right before these results (compared to the current share price of $261.22).
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