Semiconductor manufacturer Vishay Intertechnology (NYSE:VSH) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue up 3.31% year on year to $892.1 million. However, next quarter's revenue guidance of $860 million was less impressive, coming in 3.69% below analysts' estimates. Vishay Intertechnology made a GAAP profit of $95.4 million, down from its profit of $112.8 million in the same quarter last year.
Vishay Intertechnology (VSH) Q2 FY2023 Highlights:
- Revenue: $892.1 million vs analyst estimates of $881.8 million (1.17% beat)
- EPS (non-GAAP): $0.68 vs analyst estimates of $0.63 (7.51% beat)
- Revenue Guidance for Q3 2023 is $860 million at the midpoint, below analyst estimates of $893 million
- Free Cash Flow of $36.3 million, down 57.2% from the previous quarter
- Inventory Days Outstanding: 95, down from 101 in the previous quarter
- Gross Margin (GAAP): 28.9%, down from 31% in the same quarter last year
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).
Vishay Intertechnology's revenue growth over the last three years has been mediocre, averaging 14% annually. As you can see below, this was a weaker quarter for the company, with revenue growing from $863.5 million in the same quarter last year to $892.1 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).
While Vishay Intertechnology beat analysts' revenue estimates, this was a sluggish quarter for the company as its revenue only grew 3.31% year on year. This marks 12 straight quarters of growth, showing that the current upcycle has had a good run, as a typical upcycle usually lasts 8-10 quarters.
Vishay Intertechnology's revenue is projected to contract next quarter, with the company guiding to a 7.01% year-on-year decline. On the other hand, analysts seem to disagree and forecast 0.28% revenue growth 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 95, which is 9 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what 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. 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 28.9% in Q2, down 2.2 percentage points year on year.
Vishay Intertechnology's gross margins have been trending up over the last 12 months, averaging 30.3%. This is a welcome development, as Vishay Intertechnology's margins are below the industry average, and rising margins could suggest improved demand and pricing power.
Vishay Intertechnology reported an operating margin of 20.1% in Q2, down 2.6 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 17.1%. This is a bad sign for Vishay Intertechnology, 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 21.8% 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. Vishay Intertechnology's free cash flow came in at $36.3 million in Q2, up 138% year on year.
As you can see above, Vishay Intertechnology produced free cash flow of just $268.1 million in the last year, resulting in a measly 7.46% free cash flow margin. Vishay Intertechnology will need to improve its free cash flow conversion if it wants to stay competitive.
Vishay Intertechnology's average return on invested capital (ROIC) of 22% over the last 5 years isn't bad. This decent ROIC suggests that the company grew profits but wasn't particularly impressive compared to other semiconductor companies.
Key Takeaways from Vishay Intertechnology's Q2 Results
With a market capitalization of $3.74 billion, Vishay Intertechnology is among smaller companies, but its $1.1 billion cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by how significantly Vishay Intertechnology blew past analysts' EPS expectations this quarter. We were also glad that its inventory levels shrunk. On the other hand, its revenue guidance for next quarter underwhelmed, coming in below expectations, and its gross margin shrunk. Gross margin guidance for next quarter was also below Wall Street analysts' expectations. Overall, this was a mixed quarter for Vishay Intertechnology. The stock is flat after reporting and currently trades at $27 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, and analysts expect growth rates to deteriorate from there. And while its ROIC suggests it is a decent quality business, the downside is that its gross margin indicate some combination of pricing pressures or rising production costs and its growth is coming at a cost of significant cash burn.
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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