Chip manufacturer NXP Semiconductors (NASDAQ: NXPI) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 3.3% year on year to $3.42 billion. On the other hand, next quarter's revenue guidance of $3.13 billion was less impressive, coming in 1.2% below analysts' estimates. It made a non-GAAP profit of $3.71 per share, down from its profit of $3.73 per share in the same quarter last year.
NXP Semiconductors (NXPI) Q4 FY2023 Highlights:
- Revenue: $3.42 billion vs analyst estimates of $3.40 billion (small beat)
- EPS (non-GAAP): $3.71 vs analyst estimates of $3.64 (1.8% beat)
- Revenue Guidance for Q1 2024 is $3.13 billion at the midpoint, below analyst estimates of $3.16 billion
- Free Cash Flow of $962 million, up 22.1% from the previous quarter
- Inventory Days Outstanding: 131, down from 133 in the previous quarter
- Gross Margin (GAAP): 56.6%, in line with the same quarter last year
- Market Capitalization: $55.42 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).
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 16.5% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $3.31 billion in the same quarter last year to $3.42 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).
This was a sluggish quarter for the company as its revenue dropped 3.3% year on year, in line with analysts' estimates. NXP Semiconductors's growth, however, flipped from negative to positive this quarter. This encouraging sign will likely be welcomed by shareholders.
NXP Semiconductors returned to positive revenue growth this quarter and its management team expects the trend to continue. The company is guiding to 0.1% year-on-year growth next quarter, and analysts seem to agree, forecasting 2.5% 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 131, which is 29 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. 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 56.6% in Q4, down 0.5 percentage points year on year.
NXP Semiconductors's gross margins have been stable over the past year, averaging 56.9%. 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.
NXP Semiconductors reported an operating margin of 35.6% in Q4, down 0.9 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 $962 million in Q4, up 14.1% year on year.
As you can see above, NXP Semiconductors produced $2.69 billion in free cash flow over the last 12 months, an impressive 20% 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'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.
Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.
NXP Semiconductors's five-year average ROIC was 13.6%, 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 growth initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, NXP Semiconductors's ROIC has averaged a 18.8 percentage point increase each year. This is a good sign, and if NXP Semiconductors's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from NXP Semiconductors's Q4 Results
It was good to see NXP Semiconductors beat analysts' revenue and EPS expectations this quarter. That stood out as a positive in these results. On the other hand, its revenue guidance for next quarter missed analysts' expectations, although not by a small margin. Overall, the results could have been better, but there is likely relief from the market that results weren't worse given some of the poor prints reported by other semiconductor companies this earnings season. The stock is up 2.9% after reporting and currently trades at $227.52 per share.
Is Now The Time?
NXP Semiconductors may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Although we have other favorites, we understand the arguments that NXP Semiconductors isn't a bad business. Its revenue growth has been solid over the last three years, and growth is expected to increase in the short term. And while its relatively low ROIC suggests it has struggled to grow profits historically, the good news is its strong operating margins show it's a well-run business.
NXP Semiconductors's price-to-earnings ratio based on the next 12 months is 15.3x. 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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