SMART (NASDAQ:SGH) Reports Weak Q2

Jabin Bastian /
2023/04/04 4:18 pm EDT
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Semiconductor maker SMART Global Holdings (NASDAQ:SGH) missed analyst expectations in Q2 FY2023 quarter, with revenue down 4.45% year on year to $429.2 million. SMART made a GAAP loss of $26.8 million, down on its profit of $2.97 million, in the same quarter last year.

Is now the time to buy SMART? Access our full analysis of the earnings results here, it's free.

SMART (SGH) Q2 FY2023 Highlights:

  • Revenue: $429.2 million vs analyst estimates of $435 million (1.34% miss)
  • EPS (non-GAAP): $0.76 vs analyst estimates of $0.60 (26.4% beat)
  • Revenue guidance for Q3 2023 is $375 million at the midpoint, below analyst estimates of $409.6 million
  • Free cash flow of $87.9 million, up from negative free cash flow of $85.6 million in previous quarter
  • Inventory Days Outstanding: 84, down from 109 previous quarter
  • Gross Margin (GAAP): 25.7%, up from 25.1% same quarter last year

“Our second quarter fiscal 2023 results demonstrate the resilience of our business, highlighted by strong non-GAAP gross margin of 28.9% and non-GAAP EPS of $0.76, which was above the high end of our guidance range. We exited Q2 with a strong balance sheet, including $376 million in cash and cash equivalents,” commented CEO Mark Adams.

Based in the US, SMART Global Holdings (NASDAQ:SGH) is a diversified semiconductor company offering memory, digital, and LED products.

The biggest demand drivers for processors (CPUs) and graphics chips at the moment are secular trends related to 5G and Internet of Things, autonomous driving, and high performance computing in the data center space, specifically around AI and machine learning. Like all semiconductor companies, digital chip makers exhibit a degree of cyclicality, driven by supply and demand imbalances and exposure to PC and Smartphone product cycles.

Sales Growth

SMART's revenue growth over the last three years has been strong, averaging 21.7% annually. But as you can see below, last year quarterly revenue declined from $449.2 million to $429.2 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).

SMART Total Revenue

This was a difficult quarter for SMART, with revenue declining 4.45%, missing analyst estimates by 1.34%.

SMART's looks headed into the trough of the semi cycle, as it is guiding to revenue declines of 18.9% YoY next quarter, and analysts are estimating 7.4% declines over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

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.

SMART Inventory Days Outstanding

This quarter, SMART’s inventory days came in at 84, 11 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher than what we used to see in the past.

Key Takeaways from SMART's Q2 Results

With a market capitalization of $826.1 million SMART is among smaller companies, but its more than $375.9 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 were very impressed by the strong improvements in SMART’s inventory levels. And we were also excited to see that earnings outperformed Wall St’s expectations. 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 SMART. The company is down 3.44% on the results and currently trades at $15.98 per share.

Should you invest in SMART right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.