NXP Earnings: Continuing to Drive Ahead in Automotive and Industrial Semis

Narrow-moat NXP Semiconductors NXPI reported solid first-quarter results and provided investors with a second-quarter forecast that was modestly ahead of our prior expectations, as the company is seeing resilient demand for automotive and industrial semis. We maintain our $225 fair value estimate for NXP and continue to view shares as undervalued, as NXP is one of our top picks in analog and mixed signal semis.

Revenue in the March quarter was $3.12 billion, down 6% sequentially and down 0.5% year over year but above the high end of the firm’s guidance of $2.9 billion-$3.1 billion. Automotive chip sales were the bright spot and performed as expected, up 1% sequentially and 17% year over year, as the chip industry continues to prosper from higher chip content in electric vehicles versus gas powered cars. Communications infrastructure revenue fared better than expected, up 7% both sequentially and year over year, with healthy 5G buildouts in India. Industrial revenue suffered, but not as bad as feared as demand in China started to recover. The segment declined 17% sequentially and 26% year over year. Despite the lower sales levels, a favorable product mix enabled adjusted gross margin to rise 60 basis points year over year and 20 basis points sequentially to 58.2%. An uptick in operating expenses caused adjusted operating margin to fall 170 basis points sequentially to 34.8%.

For the June quarter, NXP expects revenue in the range of $3.1 billion-$3.3 billion, which, at the midpoint, would represent 2.5% sequential growth and only a 3% annual decline. Such a decline would be admirable, in our view, in light of well-publicized mobile device and consumer Internet of Things weakness. NXP foresees a bit of a rebound in these end markets, while automotive should remain strong. We’re encouraged that adjusted gross margin is forecast to be flat at the midpoint of guidance.