Semiconductor manufacturer Magnachip Semiconductor (NYSE:MX) reported Q4 FY2022 results beating Wall St's expectations, with revenue down 44.7% year on year to $61 million. However, guidance for the next quarter was less impressive, coming in at $57 million at the midpoint, being 8.51% below analyst estimates. Magnachip made a GAAP profit of $2.97 million, down on its profit of $53.6 million, in the same quarter last year.
Magnachip (MX) Q4 FY2022 Highlights:
- Revenue: $61 million vs analyst estimates of $59.7 million (2.22% beat)
- EPS: $0.07 vs analyst estimates of -$0.31 ($0.39 beat)
- Revenue guidance for Q1 2023 is $57 million at the midpoint, below analyst estimates of $62.3 million
- Free cash flow was negative $56.7 million, down from positive free cash flow of $15 million in previous quarter
- Inventory Days Outstanding: 81, up from 79 previous quarter
- Gross Margin (GAAP): 26.4%, down from 35% 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).Sales Growth
Magnachip's revenue has been declining over the last three years, dropping annually on average by 11.8%. Last year the quarterly revenue declined from $110.3 million to $61 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).
Despite Magnachip revenues beating analyst estimates, this was still a slow quarter with a 44.7% revenue decline.
Magnachip appears to be headed for an upturn. While the company is guiding to revenue declines of 45.2% year on year next quarter, analyst consensus sees 21.3% growth 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.
This quarter, Magnachip’s inventory days came in at 81, 28 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
Magnachip's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 26.4% in Q4, down 8.6 percentage points year on year.
Magnachip' gross margins have been trending down over the past year, averaging 29.2%. The weakness isn't great as Magnachip's margins are already below other semiconductor companies as is, reflective of weakening pricing and cost controls.
Profitability
Magnachip reported an operating margin of -14% in Q4, down 27.1 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 down over the last year. That is not great to see as Magnachip's operating margins are below industry average, a result of a cost structure that isn't particularly efficient.
Earnings, Cash & Competitive Moat
Wall St analysts are expecting earnings per share to decline 225% 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. Magnachip's free cash flow came in at -$56.7 million in Q4, down 246% year on year.
Magnachip didn't produce any free cash flow in the last year, so shareholders will want to see that improve in the short term.
Over the last 5 years Magnachip has reported an average return on invested capital (ROIC) of just -17.1%. This suggests it may struggle to find compelling reinvestment opportunities within the business.
Key Takeaways from Magnachip's Q4 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Magnachip’s balance sheet, but we note that with a market capitalization of $453.7 million and more than $225.5 million in cash, the company has the capacity to continue to prioritise growth over profitability.
It was good to see Magnachip outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see that revenue has declined significantly and the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Magnachip. The company is flat on the results and currently trades at $10.27 per share.
Is Now The Time?
When considering Magnachip, 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 Magnachip we will be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And on top of that, unfortunately its its relatively low return on invested capital suggests suboptimal growth prospects, and operating margins reveal subpar cost controls compared to other semiconductor businesses.
Magnachip's price to earnings ratio based on the next twelve months is 28.0x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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