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No Surprises In NXP Semiconductors's (NASDAQ:NXPI) Q3 Sales Numbers But Quarterly Guidance Underwhelms


Full Report / October 31, 2022
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Chip manufacturer NXP Semiconductors (NASDAQ: NXPI) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 20.4% year on year to $3.44 billion. However, guidance for the next quarter was less impressive, coming in at $3.3 billion at the midpoint, being 3.35% below analyst estimates. NXP Semiconductors made a GAAP profit of $738 million, improving on its profit of $526 million, in the same quarter last year.

NXP Semiconductors (NXPI) Q3 FY2022 Highlights:

  • Revenue: $3.44 billion vs analyst estimates of $3.42 billion (small beat)
  • EPS: $2.79 vs analyst estimates of $2.75 (1.4% beat)
  • Revenue guidance for Q4 2022 is $3.3 billion at the midpoint, below analyst estimates of $3.41 billion
  • Free cash flow of $863 million, up 56.6% from previous quarter
  • Inventory Days Outstanding: 97, up from 93 previous quarter
  • Gross Margin (GAAP): 57%, up from 55.3% 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.

NXP'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 mediocre, averaging 14.2% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $2.86 billion to $3.44 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 decent quarter for NXP Semiconductors as revenues grew 20.4%, topping analyst estimates by 0.58%. This marks 9 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 8.58% YoY next quarter, and Wall St analysts are estimating growth 4.62% 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 97, 2 days above the five year average, suggesting that inventory has grown to a level slightly above the long term average.

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 57% in Q3, up 1.8 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 56.6%, indicative of a potent competitive offering, pricing power, and efficient inventory management.

Profitability

NXP Semiconductors reported an operating margin of 36.8% in Q3, up 3.4 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 35.8%. 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 be fairly flat 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 $863 million in Q3, up 19.1% year on year.

NXP Semiconductors Free Cash Flow

NXP Semiconductors has generated $2.51 billion in free cash flow over the last twelve months. This is a solid result, which translates to 19.4% 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 11.2%, 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 Q3 Results

Sporting a market capitalization of $39.8 billion, more than $3.75 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.

It was good to see NXP Semiconductors improve their operating margin this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the inventory levels increased a little. Overall, it seems to us that this was a complicated quarter for NXP Semiconductors. The company is down 1.52% on the results and currently trades at $143.85 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 10.6x. 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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