Semiconductor manufacturer Magnachip Semiconductor (NYSE:MX) fell short of analysts' expectations in Q4 FY2023, with revenue down 16.7% year on year to $50.82 million. Next quarter's revenue guidance of $48.5 million also underwhelmed, coming in 9.8% below analysts' estimates. It made a non-GAAP loss of $0.21 per share, improving from its loss of $0.36 per share in the same quarter last year.
Magnachip (MX) Q4 FY2023 Highlights:
- Revenue: $50.82 million vs analyst estimates of $52.47 million (3.1% miss)
- EPS (non-GAAP): -$0.21 vs analyst estimates of -$0.26
- Revenue Guidance for Q1 2024 is $48.5 million at the midpoint, below analyst estimates of $53.75 million
- Free Cash Flow was -$7.50 million, down from $973,000 in the previous quarter
- Inventory Days Outstanding: 76, up from 68 in the previous quarter
- Gross Margin (GAAP): 22.7%, down from 26.4% in the same quarter last year
- Market Capitalization: $252.7 million
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 21.2% on average per year. This quarter, its revenue declined from $60.99 million in the same quarter last year to $50.82 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 16.7% year on year, missing analysts' estimates by 3.1%. 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 14.9% next quarter, analysts are expecting revenue to grow 23.3% 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 76, which is 17 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
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 22.7% in Q4, down 3.7 percentage points year on year.
Magnachip's gross margins have been trending down over the last 12 months, averaging 22.4%. 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 negative 27.7% in Q4, down 13.7 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 negative 17.9%. 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
Wall Street expects earnings per share to decline 143% 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 negative $7.50 million in Q4, up 86.8% 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.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
Magnachip's five-year average ROIC was negative 8.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the semiconductor sector.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Magnachip's ROIC averaged 13.2 percentage point increases each year. This is a good sign and we hope the company can continue to improving.
Key Takeaways from Magnachip's Q4 Results
We were impressed by Magnachip's EPS this quarter, which beat analysts' expectations. On the other hand, its revenue and gross margin missed, and its full-year 2024 revenue and operating profit guidance fell short of Wall Street's estimates as the company announced it would transition its Gumi Fab from lower-margin Transitional Foundry Services products to higher margin higher-margin Power products.
Magnachip announced that starting in Q1, it will begin reporting its results under two new business segments: MSS (Mixed-Signal Solutions) and PAS (Power-Analog Solutions). Its PAS segment is expected to have lower gross margins in 2024 during the transition period. Furthermore, the company's Display business will now focus on the Chinese OLED market.
Overall, this was a tough quarter for Magnachip. The stock is flat after reporting and currently trades at $6.69 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 has declined over the last three years, and analysts expect growth to deteriorate from here. On top of that, its relatively low ROIC suggests it has struggled to grow profits historically, and its operating margins reveal subpar cost controls compared to other semiconductor businesses.
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.
Wall Street analysts covering the company had a one-year price target of $11.50 per share right before these results (compared to the current share price of $6.69).
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