Semiconductor manufacturer Magnachip Semiconductor (NYSE:MX) fell short of analysts' expectations in Q3 FY2023, with revenue down 14% year on year to $61.2 million. Turning to EPS, Magnachip made a GAAP loss of $0.13 per share, improving from its loss of $0.38 per share in the same quarter last year.
Magnachip (MX) Q3 FY2023 Highlights:
- Revenue: $61.2 million vs analyst estimates of $61.8 million (0.95% miss)
- EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.17
- Revenue Guidance for Q4 2023 is $52.5 million at the midpoint, below analyst estimates of $62.2 million
- Free Cash Flow of $973 thousand is up from -$11.2 million in the previous quarter
- Inventory Days Outstanding: 60, down from 70 in the previous quarter
- Gross Margin (GAAP): 23.6%, down from 24.2% in the same quarter last year
With its technology found in common consumer electronics such as TVs and smartphones, Magnachip Semiconductor (NYSE:MX) is a provider of analog and mixed-signal semiconductors.
Magnachip is headquartered in South Korea and was founded in 2004 after Hynix Semiconductor’s non-memory business was separated from the parent company. Magnachip went public in 2011.
Magnachip’s product portfolio is divided into two segments: Display Solutions and Power Solutions. The company’s Display Solutions technology delivers defined analog voltages and currents that activate pixels on displays. One example is Magnachip’s display drivers, which are chips that serve as interfaces between microprocessors and LCD screens in smartphones. Another example is timing controllers, which are chips that receive and convert image data on screens.
Magnachip’s Power Solutions technology allows for power consumption regulation and efficiency in devices. Examples include various transistors, which enable low standby power consumption in consumer electronics such as laptops so as not to drain the battery when in sleep or standby modes. Driver and regulator technologies in Power Solutions also aid in the heat dissipation needed for many consumer electronics such as tablets to prevent them from getting too hot.
Magnachip’s customers are largely consumer, computing, and industrial electronics OEMs (original equipment manufacturers). The company manufactures most of its Display Solutions products at external foundries, while Power Solutions products are manufactured through a combination of both in-house manufacturing and external foundries.Competitors offering analog and mixed-signal semiconductors for display and power management include Diodes (NASDAQ:DIOD), Infineon Technologies (XTRA:IFX), and Novatek Microelectronics (TWSE:3034).
Magnachip's revenue has been declining over the last three years, dropping by 18.4% on average per year. This quarter, its revenue declined from $71.2 million in the same quarter last year to $61.2 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).
Magnachip had a difficult quarter as revenue dropped 14% year on year, missing analysts' estimates by 0.95%. This could mean that the current downcycle is deepening.
Magnachip may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 13.9% next quarter, analysts are expecting revenue to grow 6.69% 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, Magnachip's DIO came in at 60, which is 2 more days than its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are slightly above the long-term average.
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. Magnachip'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 23.6% in Q3, down 0.5 percentage points year on year.
Magnachip's gross margins have been trending down over the last 12 months, averaging 23.4%. This weakness isn't great as Magnachip's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Magnachip reported an operating margin of -11.5% in Q3, up -2.2 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.
Magnachip's operating margins have been trending down over the last year, averaging -14.9%. This is a bad sign for Magnachip, whose margins are already among the lowest for semiconductors. The company will have to improve its relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering Magnachip expect earnings per share to grow 62.8% 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. Magnachip's free cash flow came in at $973 thousand in Q3, down 93.5% year on year.
As you can see above, Magnachip failed to produce positive free cash flow over the last 12 months and shareholders will likely want to see an improvement in the coming quarters.
Over the last five years, Magnachip has reported an average return on invested capital (ROIC) of just 7.34%. This suggests it struggled to find compelling reinvestment opportunities within the business.
Key Takeaways from Magnachip's Q3 Results
Although Magnachip, which has a market capitalization of $299.1 million, has been burning cash over the last 12 months, its more than $166.6 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.
We were impressed by Magnachip's strong improvement in inventory levels. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its revenue guidance for next quarter underwhelmed, something we've consistently noticed with semiconductor companies this quarter. Lastly, Magnachip announced that the formal separation of its display and power businesses is expected to be completed on January 1st, 2024. This will likely help investors analyze the business better. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $7.76 per share.
Is Now The Time?
When considering an investment in Magnachip, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Magnachip, we'll be cheering from the sidelines. Its revenue growth has been poor over the last three years, and analysts expect growth to deteriorate from here. On top of that, its operating margins reveal subpar cost controls compared to other semiconductor businesses and its gross margin indicate some combination of pricing pressures or rising production costs.
Magnachip's price-to-earnings ratio based on the next 12 months is -11.6x. 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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