Yahoo Finance NXP Semiconductors (NXPI) Research Report: Q2 CY2024 Update
Chip manufacturer NXP Semiconductors (NASDAQ: NXPI) reported results in line with analysts' expectations in Q2 CY2024, with revenue down 5.2% year on year to $3.13 billion. On the other hand, next quarter's revenue guidance of $3.25 billion was less impressive, coming in 2.8% below analysts' estimates. It made a non-GAAP profit of $3.20 per share, improving from its profit of $2.67 per share in the same quarter last year.
NXP Semiconductors (NXPI) Q2 CY2024 Highlights:
Revenue: $3.13 billion vs analyst estimates of $3.12 billion (small beat)
Adjusted Operating Income: $1.07 billion vs analyst estimates of $1.06 billion (small beat)
EPS (non-GAAP): $3.20 vs analyst expectations of $3.20 (in line)
Revenue Guidance for Q3 CY2024 is $3.25 billion at the midpoint, below analyst estimates of $3.34 billion
Gross Margin (GAAP): 57.3%, in line with the same quarter last year
Inventory Days Outstanding: 146, up from 143 in the previous quarter
Free Cash Flow of $577 million, similar to the previous quarter
Market Capitalization: $68.85 billion
Spun off from Dutch electronics giant Philips in 2006, NXP Semiconductors (NASDAQ: NXPI) is a designer and manufacturer of chips used in autos, industrial manufacturing, mobile devices, and communications infrastructure.
NXPI manufactures high performance Mixed Signal (HPMS) chips, which is a hybrid of digital and analog chips that are used to convert analog signals to digital signals so that digital devices can process them. NXP IPO-ed in 2010, and merged with Freescale Semiconductor in 2015. That merger made NXPI the leading producer of chips used in autos globally. Its mixed signal chips are used to monitor engines and fuel economy, along with the infotainment systems, and even in the systems that power keyless entry. NXP is used in Industrial and IoT applications, where its chips power the sensors used in factory automation and smart home devices. Its chips are used to power mobile wallets and fast charging in mobile devices, and secure IDs for uses like RFID tags used to monitor supply chains, and chips in payment cards or passports.
Analog Semiconductors
Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More. The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.
Sales Growth
NXP Semiconductors's revenue growth over the last three years has been unremarkable, averaging 10.3% annually. This quarter, its revenue declined from $3.30 billion in the same quarter last year to $3.13 billion. 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).
This was a slow quarter for the company as its revenue dropped 5.2% year on year, in line with analysts' estimates.
NXP Semiconductors's revenue inverted from positive to negative growth this quarter, which was unfortunate to see. Looking ahead to the next quarter, the company's management team forecasts a 5.4% year-on-year revenue decline. On the other hand, analysts expect revenue to turn positive over the next 12 months, with average estimates of 5% growth.
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, NXP Semiconductors's DIO came in at 146, which is 40 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. NXP Semiconductors'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 57.3% in Q2, up 0.3 percentage points year on year.
NXP Semiconductors's gross margins have been stable over the past year, averaging 57.2%. The company's unit economics remain ahead of its semiconductor peers, pointing to its solid competitive offering, disciplined cost controls, and lack of meaningful pricing pressure.
Profitability
NXP Semiconductors reported an operating margin of 34.3% in Q2, down 0.8 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.
NXP Semiconductors's operating margins have been trending down over the last year, averaging 34.9%. However, the company's profitability is still above average for semiconductor companies, driven by an efficient cost structure.
Earnings, Cash & Competitive Moat
Analysts covering NXP Semiconductors expect earnings per share to grow 33.4% 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. NXP Semiconductors's free cash flow came in at $577 million in Q2, roughly the same as last year.
As you can see above, NXP Semiconductors produced $2.95 billion in free cash flow over the last 12 months, an eye-popping 22.5% of revenue. This is a great result; NXP Semiconductors's free cash flow conversion places it among the best semiconductor companies and, if sustainable, puts the company in an advantageous position to invest in new products while remaining resilient during industry downturns.
Return on Invested Capital (ROIC)
Read MoreEPS and free cash flow tell us whether a company was profitable while growing its 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 it has raised (debt and equity).
Although NXP Semiconductors has shown solid business quality lately, it historically did a mediocre job investing in profitable business initiatives. Its five-year average ROIC was 15.3%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.
The trend in its ROIC, however, is often what surprises the market and moves the stock price. Over the last few years, NXP Semiconductors's ROIC has increased. The company's rising ROIC is a good sign and could suggest its competitive advantage or profitable business opportunities are expanding.
Key Takeaways from NXP Semiconductors's Q2 Results
We struggled to find many strong positives in these results. Its revenue guidance for next quarter missed analysts' expectations and its inventory levels slightly increased. Overall, this quarter could have been better. The stock traded down 7% to $263.99 immediately after reporting.
Is Now The Time?
When considering an investment in NXP Semiconductors, investors should account for its valuation and business qualities as well as what's happened in the latest quarter.
We think NXP Semiconductors is a good business. Although its revenue growth has been uninspiring over the last three years with analysts expecting growth to slow from here, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion. And while its mediocre ROIC suggests it has grown profits at a slow pace historically, its sturdy operating margins show it has disciplined cost controls.
NXP Semiconductors's price-to-earnings ratio based on the next 12 months is 18.9x. There's definitely a lot of things to like about NXP Semiconductors and looking at the semiconductors landscape right now, it seems that the company trades at a pretty interesting price.
Wall Street analysts have a consensus one-year price target of $292.31 on the company (compared to the current share price of $263.99), implying they see upside in buying NXP Semiconductors in the short term.
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