Semiconductor designer Power Integrations (NASDAQ:POWI) reported results in line with analysts' expectations in Q2 FY2023, with revenue down 33% year on year to $123.2 million. However, next quarter's revenue guidance of $130 million was less impressive, coming in 13.3% below analysts' estimates. Power Integrations made a GAAP profit of $14.8 million, down from its profit of $55.8 million in the same quarter last year.
Power Integrations (POWI) Q2 FY2023 Highlights:
- Revenue: $123.2 million vs analyst estimates of $122.4 million (small beat)
- EPS (non-GAAP): $0.36 vs analyst estimates of $0.34 (6.4% beat)
- Revenue Guidance for Q3 2023 is $130 million at the midpoint, below analyst estimates of $149.9 million
- Free Cash Flow of $3.05 million, down 75.6% from the previous quarter
- Inventory Days Outstanding: 226, down from 248 in the previous quarter
- Gross Margin (GAAP): 51%, down from 58.1% in the 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 unremarkable, averaging 10% annually. This quarter, its revenue declined from $184 million in the same quarter last year to $123.2 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).
Even though Power Integrations surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 33% year on year. This could mean that the current downcycle is deepening.
Power Integrations may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 18.9% next quarter, analysts are expecting revenue to grow 28.1% 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, Power Integrations's DIO came in at 226, which is 74 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.
Pricing Power
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. Power Integrations'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 51% in Q2, down 7.1 percentage points year on year.
Despite declining over the past year, Power Integrations still retains industry standard gross margins, averaging 53.3%, pointing to its competitive offering, decent cost controls, and possibly modest pricing pressure.
Profitability
Power Integrations reported an operating margin of 16.1% in Q2, down 19.4 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.
Power Integrations's operating margins have been trending down over the last year, averaging 20.9%. This is a bad sign for Power Integrations, whose margins are already below average for semiconductor companies. To its credit, however, the company's margins suggest modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Analysts covering Power Integrations expect earnings per share to grow 74.9% 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. Power Integrations's free cash flow came in at $3.05 million in Q2, down 94.3% year on year.
As you can see above, Power Integrations produced free cash flow of $78.2 million in the last year, which is 14.1% of revenue. It's good to see Power Integrations generate positive free cash flow since it allows the company to strengthen its balance street, but we'd be uncomfortable if its FCF margin dropped any lower.
Over the last five years Power Integrations has averaged a 24.9% return on invested capital (ROIC), implying that it has a defensible competitive position and has invested in profitable growth.
Key Takeaways from Power Integrations's Q2 Results
With a market capitalization of $5.23 billion, Power Integrations is among smaller companies, but its $346.3 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by Power Integrations's strong improvement in inventory levels. We were also excited that its earnings growth outperformed Wall Street's expectations. On the other hand, its underwhelming revenue guidance for next quarter was disappointing and its operating margin declined. Overall, this was a mixed quarter for Power Integrations. The stock is flat after reporting and currently trades at $90.01 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. We think Power Integrations is a solid business. However, its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. But on a positive note, while its operating margins are below average compared to its semiconductor peers, the good news is its solid ROIC suggests its business can grow over time and its gross margins are about normal for a semiconductor business.
Power Integrations's price-to-earnings ratio based on the next 12 months is 32.4x. There are definitely things to like about Power Integrations and looking at the semiconductors landscape right now, it seems that the company trades at a pretty interesting price point.
Wall Street analysts covering the company had a one year price target of $95.5 per share right before these results, implying that they saw upside in buying Power Integrations even in the short term.
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