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Was This Report a Turning Point for NXP Semiconductors?

By Anders Bylund - Oct 30, 2019 at 8:07AM

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The Dutch chip designer's third-quarter results showed signs of stabilization and management expects a big upswing in the relatively near future -- political shenanigans permitting.

Netherlands-based microchip maker NXP Semiconductors (NXPI 0.05%) reported third-quarter results late Monday evening. The report struck a chord with investors and NXP's shares closed Tuesday's trading 5.3% higher. Let's take a closer look at NXP's results and general situation.

NXP Semiconductors's third-quarter results by the numbers

Metric

Q3 2019

Q3 2018

Change

Revenue

$2.27 billion

$2.45 billion

(7%)

GAAP net income attributable to shareholders

$109 million

$1.82 billion

(94%)

GAAP earnings per share (diluted)

$0.38

$5.60

(93%)

Data source: NXP Semiconductors. GAAP = generally accepted accounting principles.

What's new with NXP Semiconductors?

  • Management's guidance for this period pointed to revenues near $2.24 billion. NXP beat that projection by a $30 million hair.
  • The third quarter of 2018 included a $2 billion breakup fee from Qualcomm, closing the books on the companies' long-suffering and ultimately failed merger. Backing out all merger-related costs from the results on both sides, NXP provided adjusted operating profit figures in this report.
  • On that adjusted basis, a reasonably apples-to-apples comparison of business-related profits across the third quarters of 2018 and 2019 shows a 6% drop, from $733 million to $687 million.
  • Automotive computing revenues fell 7% year over year to $1.05 billion, held back by lower production levels across the car industry on a global level.
  • Sales declined by 2% in the communications infrastructure and other segment, landing at $470 million. Here, NXP saw "robust" order trends for its radio frequency power control products. Soft production volumes of car security modules, which are categorized in this division, contributed to the shortfall.
  • In the industrial and Internet of Things segment, NXP saw revenues fall 14%, all the way down to $426 million. This was actually slightly better than management had expected three months ago, but still a disappointing result. General-purpose microcontrollers for industrial systems are not in high demand due to the ongoing trade tensions between the U.S. and China.
  • Finally, mobile chips posted a 2% year-over-year revenue increase to $321 million. Here, NXP suffered much lower order volumes from Chinese smartphone makers but still managed to post a modest increase thanks to "robust seasonal ordering patterns" from European and North American customers in the premium handset space.
  • NXP's share count decreased by 13% over the last four quarters, reflecting $1.7 billion's worth of share buybacks. You'll see this effect fading out rather quickly over the next couple of reports because the repurchasing activity has slowed down considerably. In the third quarter, NXP spent just $9 million on net buybacks.
In front of a magnified sheet of uncut semiconductor wafers, one jacket-clad hand gives a thumbs-up sign and another goes with thumbs-down.

Image source: Getty Images.

Color commentary from the executive suite

NXP Semiconductors CEO Rick Clemmer struck an optimistic note in the third-quarter earnings call.

"We believe the worst of the year-on-year declines in our strategic automotive and industrial markets are behind us," Clemmer said. "Specifically, our Q4 guidance for automotive points to a low-single-digit decline year on year versus the high-single-digit decline we've experienced year to date. Additionally, our guidance for industrial business points to a mid-single-digit decline versus the mid-teens decline seen year to date."

The longer-term stabilization trajectory in these key markets remains unclear due to global political tensions and the consumer-level financial caution that follows. Clemmer expects a big upswing at some point, but he also admits that it is impossible to tell exactly where that hockey-stick moment will fall.

So NXP will tighten its fiscal belt and run a lean operation until the real recovery starts. That should keep the company in good shape to take advantage of stronger end markets whenever they start to materialize again.

Looking ahead

In the fourth quarter, NXP's management expects revenues near $2.27 billion. Adjusted net income should stop in the neighborhood of $600 million or approximately $2.15 per share. These targets are a mixed bag in comparison to adjusted earnings of $0.94 per share on $2.40 billion in top-line sales for the fourth quarter of 2018.

NXP shareholders have enjoyed a market-stomping return of 61% over the last 52 weeks, albeit this started from a deep trough in the wake of the canceled Qualcomm merger. I still think that NXP's best days lie ahead, and the stock is trading at very reasonable valuation ratios, such as 13 times forward earnings and 11 times trailing free cash flows. It's not too late to build a rewarding position in this exciting long-term growth stock.

Anders Bylund owns shares of NXP Semiconductors. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.

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