Magnachip (NYSE:MX) Reports Weak Q4

Semiconductor manufacturer Magnachip Semiconductor (NYSE:MX) fell short of analysts' expectations in Q4 FY2023, with revenue down 16.7% year on year to $50.82 million. Next quarter's revenue guidance of $48.5 million also underwhelmed, coming in 9.8% below analysts' estimates. It made a non-GAAP loss of $0.21 per share, improving from its loss of $0.36 per share in the same quarter last year.

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Magnachip (MX) Q4 FY2023 Highlights:

• Revenue: $50.82 million vs analyst estimates of $52.47 million (3.1% miss)
• EPS (non-GAAP): -$0.21 vs analyst estimates of -$0.26
• Revenue Guidance for Q1 2024 is $48.5 million at the midpoint, below analyst estimates of $53.75 million
• Free Cash Flow was -$7.50 million, down from $973,000 in the previous quarter
• Inventory Days Outstanding: 76, up from 68 in the previous quarter
• Gross Margin (GAAP): 22.7%, down from 26.4% in the same quarter last year
• Market Capitalization: $252.7 million

YJ Kim, Magnachip’s Chief Executive Officer commented, “As we reflect on the past year and look ahead, we’re shaping our future with the transformation of our business. First, we have shifted our Display business to be laser-focused on the burgeoning OLED market in China and our efforts there are already showing promising results. We now have two design-wins and a dedicated team on the ground to help build on this momentum. Additionally, we are working to optimize our Gumi Fab to transition from lower-margin Transitional Foundry Services to higher-margin Power products. Finally, we’ve restructured our company to streamline operations, enhance shareholder value and increase transparency for our investors with the completion of our legal separation of historical Display and Power businesses into MSS and PAS”.

With its technology found in common consumer electronics such as TVs and smartphones, Magnachip Semiconductor (NYSE:MX) is a provider of analog and mixed-signal semiconductors.

Analog SemiconductorsDemand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales GrowthMagnachip's revenue has been declining over the last three years, dropping by 21.2% on average per year. This quarter, its revenue declined from $60.99 million in the same quarter last year to $50.82 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).

Magnachip had a difficult quarter as revenue dropped 16.7% year on year, missing analysts' estimates by 3.1%. This could mean that the current downcycle is deepening.

Magnachip may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 14.9% next quarter, analysts are expecting revenue to grow 23.3% over the next 12 months.

Product Demand & Outstanding InventoryDays 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, Magnachip's DIO came in at 76, which is 17 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Magnachip's Q4 Results

We were impressed by Magnachip's EPS this quarter, which beat analysts' expectations. On the other hand, its revenue and gross margin missed, and its full-year 2024 revenue and operating profit guidance fell short of Wall Street's estimates as the company announced it would transition its Gumi Fab from lower-margin Transitional Foundry Services products to higher margin higher-margin Power products.

Magnachip announced that starting in Q1, it will begin reporting its results under two new business segments: MSS (Mixed-Signal Solutions) and PAS (Power-Analog Solutions). Its PAS segment is expected to have lower gross margins in 2024 during the transition period. Furthermore, the company's Display business will now focus on the Chinese OLED market.

Overall, this was a tough quarter for Magnachip. The stock is flat after reporting and currently trades at $6.69 per share.