Semiconductor designer Power Integrations (NASDAQ:POWI) missed analyst expectations in Q4 FY2022 quarter, with revenue down 27.7% year on year to $124.7 million. Power Integrations made a GAAP profit of $22.8 million, down on its profit of $40.7 million, in the same quarter last year.
Power Integrations (POWI) Q4 FY2022 Highlights:
- Revenue: $124.7 million vs analyst estimates of $125.5 million (0.62% miss)
- EPS (non-GAAP): $0.48 vs analyst estimates of $0.46 (4.72% beat)
- Revenue guidance for Q1 2023 is $105 million at the midpoint, below analyst estimates of $126.6 million
- Free cash flow of $18.3 million, down 58.6% from previous quarter
- Inventory Days Outstanding: 215, up from 160 previous quarter
- Gross Margin (GAAP): 53.9%, in line with same quarter last year
A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ:POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.
Power Integrations was founded in 1988 by Ray Orr and Steven Sharp. The company went public in December of 1997 and is currently headquartered in San Jose, California.
Almost all electronic devices that plug into a wall socket require a power supply to convert the high-voltage alternating current provided by electric utilities into the low-voltage direct current required by most electronic devices. POWI’s products address this need by converting alternating current (AC) to direct current (DC) or vice versa, reducing or increasing the voltage, and regulating the output voltage/current according to customer specifications.
POWI serves customers in four end-market groups: Consumer (e.g. manufacturers of home appliances, TVs), Communications (e.g. mobile phone chargers, adapters for routers), Industrial (e.g. motor controls, battery-powered tools), and Computer (smart home devices, wearables). POWI then contracts with three foundries for the manufacture of most of its silicon wafers.
Competitors in the market for high-voltage ICs include ON Semiconductor (NASDAQ:ON) STMicroelectronics (NYSE:STM), NXP Semiconductors (NASDAQ:NXPI), and Infineon.Sales Growth
Power Integrations's revenue growth over the last three years has been solid, averaging 18.5% annually. Last year the quarterly revenue declined from $172.6 million to $124.7 million. 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 difficult quarter for Power Integrations, with revenue declining 27.7%, missing analyst estimates by 0.62%.
Power Integrations's revenue growth has decelerated for the last three quarters and the company expects growth to turn negative next quarter guiding to a 42.3% year on year decline, while analysts are estimating a NTM revenue decline of 0.38%.
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, Power Integrations’s inventory days came in at 215, 75 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Pricing Power
Power Integrations's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 53.9% in Q4, up 0 percentage points year on year.
Over the past year, Power Integrations has seen its already strong gross margins continue to rise, averaging 56.1%, indicative of a potent competitive offering, pricing power, and efficient inventory management.
Profitability
Power Integrations reported an operating margin of 22.4% in Q4, down 9.6 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 30.9%. Power Integrations'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 5.49% 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. Power Integrations's free cash flow came in at $18.3 million in Q4, down 39.2% year on year.
Power Integrations has generated $176.1 million in free cash flow over the last twelve months, translating to 27% of revenues. This is a great result; Power Integrations's free cash flow conversion was very high compared to most semiconductor companies, in the last year. This high cash conversion, if maintained, puts it in a great position to invest in new products, while also remaining resilient during industry down cycles.
Power Integrations’s average return on invested capital (ROIC) over the last 5 years of 28.1% implies it has a strong competitive position and is able to invest in profitable growth over the long term.
Key Takeaways from Power Integrations's Q4 Results
With a market capitalization of $5.12 billion Power Integrations is among smaller companies, but its more than $353.8 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
We liked to see that Power Integrations beat analysts’ earnings expectations pretty strongly this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the revenue growth was quite weak and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Power Integrations. The company is down 4.43% on the results and currently trades at $84 per share.
Is Now The Time?
Power Integrations 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 Power Integrations is not a bad business. However, its revenue growth has been a little slower, and analysts expect growth rates to deteriorate from there. But on a positive note, its impressive operating margins are indicative of an highly efficient business model.
Power Integrations's price to earnings ratio based on the next twelve months is 33.2x. 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 Power Integrations doesn't trade at a completely unreasonable price point.
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