Semiconductor manufacturer Vishay Intertechnology (NYSE:VSH) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 8.2% year on year to $785.2 million. On the other hand, next quarter's revenue guidance of $735 million was less impressive, coming in 5.5% below analysts' estimates. It made a non-GAAP profit of $0.37 per share, down from its profit of $0.69 per share in the same quarter last year.
Vishay Intertechnology (VSH) Q4 FY2023 Highlights:
- Revenue: $785.2 million vs analyst estimates of $788.2 million (small miss)
- EPS (non-GAAP): $0.37 vs analyst estimates of $0.37 (small beat)
- Revenue Guidance for Q1 2024 is $735 million at the midpoint, below analyst estimates of $777.7 million
- Free Cash Flow was -$138.9 million, down from $55.5 million in the previous quarter
- Inventory Days Outstanding: 101, up from 95 in the previous quarter
- Gross Margin (GAAP): 25.6%, down from 29.1% in the same quarter last year
- Market Capitalization: $2.99 billion
Named after the founder's ancestral village in present-day Lithuania, Vishay Intertechnology (NYSE:VSH) manufactures simple chips and electronic components that are building blocks of virtually all types of electronic devices.
Vishay mainly manufactures discrete semiconductors and passive electronic components that can be found in almost any electronic device. Discrete semiconductors are chips that have a small number of transistors and are used for basic functions. Discrete semiconductors essentially exist in an on or off state and function alongside more complex chips in virtually every electronic device. The company also manufactures passive electronic devices such as resistors, inductors, and capacitors. These components are essential for the operation of electronic devices and work in tandem with more complex parts from other manufacturers. Through the manufacturing of discrete semiconductors and passive electronic components, Vishay is essentially supplying the most basic elements of any electronic device.Vishay’s peers and competitors include Analog Devices (NASDAQ: ADI) Texas Instruments (NASDAQ: TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), ON Semi (NASDAQ:ON), Marvell Technology (NASDAQ:MRVL), and Microchip (NASDAQ:MCHP).Sales Growth
Vishay Intertechnology's revenue growth over the last three years has been unremarkable, averaging 11.7% annually. This quarter, its revenue declined from $855.3 million in the same quarter last year to $785.2 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).
Vishay Intertechnology had a difficult quarter as revenue dropped 8.2% year on year, missing analysts' estimates by 0.4%. This could mean that the current downcycle is deepening.
Vishay Intertechnology looks like it's headed into the trough of the semiconductor cycle, as it's guiding for a year-on-year revenue decline of 15.6% next quarter. Analysts are also estimating a 3.2% decline 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, Vishay Intertechnology's DIO came in at 101, which is 13 days above its five-year average, suggesting that the company's inventory has grown to higher levels than 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. Vishay Intertechnology'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 25.6% in Q4, down 3.6 percentage points year on year.
Vishay Intertechnology's gross margins have been trending down over the last 12 months, averaging 28.6%. This weakness isn't great as Vishay Intertechnology's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Profitability
Vishay Intertechnology reported an operating margin of 16.3% in Q4, up 0.5 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.
Vishay Intertechnology's operating margins have been trending down over the last year, averaging 15.8%. This is a bad sign for Vishay Intertechnology, 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
Wall Street expects earnings per share to decline 10.9% 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. Vishay Intertechnology's free cash flow came in at negative $138.9 million in Q4, down significantly year on year.
As you can see above, Vishay Intertechnology produced free cash flow of just $37.45 million in the last year, resulting in a measly 0.6% free cash flow margin. Vishay Intertechnology will need to improve its free cash flow conversion if it wants to stay competitive.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Understanding a company’s ROIC (return on invested capital) gives us insight into this because it factors the total debt and equity needed to generate operating profits. This metric is a proxy for not only the capital efficiency of a business but also a management team's ability to allocate limited resources.
Vishay Intertechnology's five-year average ROIC was 19.8%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Vishay Intertechnology's ROIC has averaged a 7.2 percentage point increase each year. This is a good sign, and if Vishay Intertechnology's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from Vishay Intertechnology's Q4 Results
Despite a small revenue miss, EPS beat by a small amount. However, the company's revenue guidance for next quarter missed analysts' expectations and its gross margin shrunk. Overall, this was a mixed quarter for Vishay Intertechnology with weak outlook likely weighing on shares. The company is down 3.9% on the results and currently trades at $20.73 per share.
Is Now The Time?
When considering an investment in Vishay Intertechnology, 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 Vishay Intertechnology, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last three years, but at least growth is expected to increase in the short term. On top of that, its low free cash flow margins give it little breathing room, and its gross margin indicate some combination of pricing pressures or rising production costs.
Vishay Intertechnology's price-to-earnings ratio based on the next 12 months is 11.2x. 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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