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NXP Semiconductors (NASDAQ:NXPI) Q2 Sales Beat Estimates, Next Quarter Sales Guidance Is Optimistic


Full Report / September 21, 2022
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Chip manufacturer NXP Semiconductors (NASDAQ: NXPI) announced better-than-expected results in the Q2 FY2022 quarter, with revenue up 27.5% year on year to $3.31 billion. Guidance for next quarter's revenue was $3.42 billion at the midpoint, 2.95% above the average of analyst estimates. NXP Semiconductors made a GAAP profit of $683 million, improving on its profit of $406 million, in the same quarter last year.

NXP Semiconductors (NXPI) Q2 FY2022 Highlights:

  • Revenue: $3.31 billion vs analyst estimates of $3.26 billion (1.43% beat)
  • EPS (GAAP): $2.53
  • Revenue guidance for Q3 2022 is $3.42 billion at the midpoint, above analyst estimates of $3.32 billion
  • Free cash flow of $551 million, roughly flat from previous quarter
  • Inventory Days Outstanding: 93, up from 88 previous quarter
  • Gross Margin (GAAP): 56.8%, up from 54.7% same quarter last year

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.

NXPI's 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. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

Sales Growth

NXP Semiconductors's revenue growth over the last three years has been unremarkable, averaging 11.9% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $2.59 billion to $3.31 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 Total Revenue

This was a good quarter for NXP Semiconductors as revenues grew 27.5%, topping analyst estimates by 1.43%. This marks 8 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, NXP Semiconductors believes the growth is set to continue, and is guiding for revenue to grow 19.7% YoY next quarter, and Wall St analysts are estimating growth 8.31% over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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.

NXP Semiconductors Inventory Days Outstanding

This quarter, NXP Semiconductors’s inventory days came in at 93, 2 days below the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

Pricing Power

NXP Semiconductors's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 56.8% in Q2, up 2 percentage points year on year.

NXP Semiconductors Gross Margin (GAAP)

Over the past year, NXP Semiconductors has seen its already strong gross margins continue to rise, averaging 56.2%, indicative of a potent competitive offering, pricing power, and efficient inventory management.

Profitability

NXP Semiconductors reported an operating margin of 36% in Q2, up 4 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

NXP Semiconductors Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 35%. NXP Semiconductors's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 11.7% over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. NXP Semiconductors's free cash flow came in at $551 million in Q2, up 13.3% year on year.

NXP Semiconductors Free Cash Flow

NXP Semiconductors has generated $2.37 billion in free cash flow over the last twelve months. This is a solid result, which translates to 19.2% of revenue. That's above average for semiconductor companies, and should put NXP Semiconductors in a relatively strong position to invest in future growth.

NXP Semiconductors has an average return on invested capital (ROIC) of 10%, over the last 5 years. That's not bad, and suggests the business can grow profits, but it isn't particularly impressive compared to other semiconductor companies.

Key Takeaways from NXP Semiconductors's Q2 Results

Sporting a market capitalization of $45.9 billion, more than $3.54 billion in cash and with positive free cash flow over the last twelve months, we're confident that NXP Semiconductors has the resources it needs to pursue a high growth business strategy.

We enjoyed seeing NXP Semiconductors’s improve their operating margin materially this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the inventory levels increase. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company currently trades at $161 per share.

Is Now The Time?

When considering NXP Semiconductors, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although NXP Semiconductors is not a bad business, it probably wouldn't be one of our picks. 

NXP Semiconductors's price to earnings ratio based on the next twelve months is 12.7x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that NXP Semiconductors doesn't trade at a completely unreasonable price point.

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