Chip manufacturer NXP Semiconductors (NASDAQ: NXPI) announced better-than-expected results in Q2 FY2023, with revenue flat year on year at $3.3 billion. Guidance for next quarter's revenue was also $3.4 billion at the midpoint, 2.79% above analysts' estimates. NXP Semiconductors made a GAAP profit of $704 million, improving from its profit of $683 million in the same quarter last year.
NXP Semiconductors (NXPI) Q2 FY2023 Highlights:
- Revenue: $3.3 billion vs analyst estimates of $3.21 billion (2.88% beat)
- EPS: $2.67 vs analyst estimates of $2.52 (5.76% beat)
- Revenue guidance for Q3 2023 is $3.4 billion at the midpoint, above analyst estimates of $3.31 billion
- Free cash flow of $556 million, up 45.9% from the previous quarter
- Inventory Days Outstanding: 135, up from 133 in the previous quarter
- Gross Margin (GAAP): 57%, in line with the 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.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).
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.
NXP Semiconductors's revenue growth over the last three years has been mediocre, averaging 17.1% annually. But as you can see below, its revenue declined from $3.31 billion in the same quarter last year to $3.3 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).
Even though NXP Semiconductors surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 0.39% year on year. This could mean that the current downcycle is deepening.
NXP Semiconductors may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 1.31% next quarter, analysts are expecting revenue to grow 1.67% 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 135, which is 36 days above its five-year average, suggesting that the company's inventory has grown to higher levels than 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. 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 Q2, up 0.3 percentage points year on year.
Over the last 12 months, NXP Semiconductors has seen its already high gross margins rise, averaging 57%. These margins are indicative of its solid competitive offering, disciplined cost controls, and relatively low pricing pressure.
NXP Semiconductors reported an operating margin of 35% in Q2, down 1 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 up over the last year, averaging 35.8%. On top of that, the company's margins remain towards the high end of semiconductor companies, driven by its efficient operating model and economies of scale.
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 $556 million in Q2, roughly the same as last year.
As you can see above, NXP Semiconductors produced $2.64 billion in free cash flow over the last 12 months, a solid 19.9% of revenue. This FCF margin is above average for semiconductor companies and should put NXP Semiconductors in a relatively strong position to invest in future growth initiatives.
Over the last five years, NXP Semiconductors has reported an average return on invested capital (ROIC) of just 12.2%. This suggests it struggled to find compelling reinvestment opportunities within the business.
Key Takeaways from NXP Semiconductors's Q2 Results
With a market capitalization of $55.4 billion, a $3.86 billion cash balance, and positive free cash flow over the last 12 months, we're confident that NXP Semiconductors has the resources needed to pursue a high-growth business strategy.
It was good to see NXP Semiconductors's strong revenue and gross margin guidance for next quarter, which topped analysts' expectations. These beats were accomplished in the face of cyclical headwinds and softness in China. We were also glad that its revenue growth outperformed Wall Street's expectations, driven by strong demand across its segments (auto, core-industrial, mobile, and communications infrastructure). Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 1% after reporting and currently trades at $213.08 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 we have other favorites, we understand the arguments that NXP Semiconductors is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last three years. And while its its relatively low ROIC suggests suboptimal growth prospects, the good news is its strong operating margins are indicative of a well run business.
NXP Semiconductors's price to earnings ratio based on the next twelve months is 15.2x. 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 point right now.
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