Chip manufacturer NXP Semiconductors (NASDAQ: NXPI) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 8.98% year on year to $3.31 billion. However, guidance for the next quarter was less impressive, coming in at $3 billion at the midpoint, being 5.62% below analyst estimates. NXP Semiconductors made a GAAP profit of $734 million, improving on its profit of $610 million, in the same quarter last year.
NXP Semiconductors (NXPI) Q4 FY2022 Highlights:
- Revenue: $3.31 billion vs analyst estimates of $3.29 billion (small beat)
- EPS: $2.76 vs analyst expectations of $2.77 (small miss)
- Revenue guidance for Q1 2023 is $3 billion at the midpoint, below analyst estimates of $3.17 billion
- Free cash flow of $843 million, roughly flat from previous quarter
- Inventory Days Outstanding: 114, up from 97 previous quarter
- Gross Margin (GAAP): 57%, up from 56.1% 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 15.3% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $3.03 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).
While NXP Semiconductors beat analysts' revenue estimates, this was a very slow quarter with just 8.98% revenue growth. This marks 10 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.
NXP Semiconductors's revenue growth was positive this quarter, but the company is guiding to decline of 4.33% YoY next quarter, while analysts expect to see declines of 2.12% 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.
This quarter, NXP Semiconductors’s inventory days came in at 114, 18 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
NXP Semiconductors's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 57% in Q4, up 0.9 percentage points year on year.
Over the past year, NXP Semiconductors has seen its already strong gross margins continue to rise, averaging 56.8%, indicative of a potent competitive offering, pricing power, and efficient inventory management.
NXP Semiconductors reported an operating margin of 36.4% in Q4, up 1.6 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.
Operating margins have been trending up over the last year, averaging 36.2%. 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
Wall St analysts are expecting earnings per share to decline 6.64% 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 $843 million in Q4, up 62.4% year on year.
NXP Semiconductors has generated $2.83 billion in free cash flow over the last twelve months, translating to 21.4% of revenues. This is a strong result; NXP Semiconductors's free cash flow conversion was higher than most semiconductor companies, in the last year. If it maintains this level of cash generation, it will be able to invest plenty in new products, and ride out any cyclical downturn more easily.
NXP Semiconductors has an average return on invested capital (ROIC) of 10.2%, 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 Q4 Results
With a market capitalization of $47 billion, more than $3.84 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and inventory levels increased. Overall, this quarter's results could have been better. The company is down 2.04% on the results and currently trades at $175.81 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. We cheer for everyone who is making the lives of others easier through technology, but in the case of NXP Semiconductors we will be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there.
NXP Semiconductors's price to earnings ratio based on the next twelve months is 13.9x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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