Embedded semiconductor specialist NXP Semiconductors (NASDAQ:NXPI) reported fourth-quarter results on Wednesday, Feb. 6. GAAP earnings fell 57% year over year on 7% lower revenue, but most of the bottom-line weakness stemmed from the year-ago period's generous but non-repeating tax benefits.

Check out the latest NXP earnings call transcript.

NXP's fourth-quarter results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue

$2.40 billion

$2.46 billion

(2.4%)

Net income

$276 million

$753 million

(63%)

GAAP earnings per share (diluted)

$0.94

$2.17

(57%)

Data source: NXP.

What happened with NXP this quarter?

  • Nearly every product category saw sales falling compared to the year-ago period. Automotive revenue declined 1% to $960 million, and chips for secure connected devices fell 2% to $729 million.
  • These falling sales were based on soft demand for automotive and industrial solutions in the Chinese market amid trade tariffs and political turbulence. U.S. sales are holding up well, and Europe is experiencing some delays as carmakers work through the new carbon dioxide testing requirements in that market, but the Chinese-American trade war is really slowing down NXP's business these days. More on this in a minute.
  • The tax reform in Q4 of 2017 triggered a one-time tax benefit of $747 million for NXP in that quarter. If you'd rather measure NXP's business results on their own merits, without the tax-based distortion, pre-tax operating profits rose 7% to $224 million.
  • The company spent $424 million on share buybacks in the third quarter and another $481 million in the fourth quarter, retiring roughly 11 million shares from the open market. All told, NXP's diluted share count decreased by 15% in 2018.
Close-up shot of a small microchip being placed on a circuit board with the help of tweezers.

Image source: Getty Images.

What management had to say

Let's get back to NXP's analysis of business conditions in China. Here's how CFO Peter Kelly explained it on the earnings call, according to a Seeking Alpha transcript (edited for clarity):

In the case of China, that's much more cloudy [than Europe or the U.S.], much more murky as far as determining what's been happening in the last year. I think it does depend on some kind of resolution or confidence in what's going to happen out of the current trade issues that are being discussed.

So if you believe that the trade issues were going to continue, then the world's GDP is not going to be close to 3% for the year. And then that's a different factor.

But as long as you believe that the world's GDP is going to be just under 3%, there probably has to be a trade resolution with China to be able to accomplish that. And with that, we think we'll see a very strong growth in the second half of the year.

That 3% target for global economic growth comes from NXP's review of forecasts by various third-party economists. The company's order trends show a slower start to the year with hopes of an acceleration in the second quarter and second half. But NXP can't do it alone, as Kelly noted here.

Looking ahead

Based on that Chinese trade turmoil, NXP expects first-quarter revenue to fall roughly 8%, landing in the neighborhood of $2.09 billion. Operating income should stop near $44 million, representing a 68% drop from the year-ago period's $138 million.

In a longer view, NXP's management expects its target markets to grow by approximately 4% a year over the next three years. NXP should outpace that marketwide growth rate with compound revenue growth of roughly 6% a year over the same period.