NXP delivers bullish guidance despite declining revenue, but investors were not convinced

NXP Semiconductors N.V.’s stock faltered in the after-hours trading session after the chipmaker delivered a forecast that was perhaps less bullish than some investors had been hoping for.

The company reported second-quarter earnings before certain costs such as stock compensation of $2.72 per share on revenue of $2.93 billion, down 6% from a year ago. The results were pretty good, with analysts looking for earnings of just $2.67 per share on slightly lower sales of $2.9 billion.

The chipmaker also reported cash flow from operations of $779 million, and free cash flow of $696 million in the quarter ended June 29. Adjusted gross margin came in at 56.5%, down slightly from 58.6% one year ago.

With its lower margins, it wasn’t surprising to learn that NXP delivered a net profit of $445 million, making it slightly less profitable than it was one year earlier, when it delivered income of $490 million.

NXP’s outgoing Chief Executive Kurt Sievers (pictured), who revealed three months earlier that he’s planning to retire at the end of October, struck an upbeat tone about today’s results, saying the company drove solid profitability and earnings. “[We did this by] strengthening our competitive portfolio and by aligning our wafer fabrication footprint consistent with our hybrid manufacturing strategy,” he explained.

NXP makes computer chips that are used for high-speed digital processing in industries such as the automotive, manufacturing, the internet of things, and telecommunications sectors. The bulk of its sales stem from the automotive segment, which delivered $1.73 billion in revenue in the quarter, flat from a year earlier.

Unfortunately for NXP, that was the best-performing unit. Sales from the communications and infrastructure business fell 27%, to $320 million, mobile sales were down 4%, to $331 million, and industrial and IoT sales fell 11%, to $546 million.

“Apart from the automotive segment, which was stable, NXP’s revenue was down across the board, and this is what caused its declining profit, with diluted earnings per share down by 17 cents from the prior quarter and 79 cents for the year,” said Holger Mueller, an analyst with Constellation Research Inc.

Analysts fear that ongoing demand problems in the automotive and industrial industries could be a drag on NXP’s revenue going forward, as well as rival chipmakers such as Infineon Technologies AG and STMicroelectronics N.V. For instance, Renault SA last week slashed its operating margin guidance for the current fiscal year, citing a decline in demand and intensifying competition.

Just like its peers, NXP has struggled with a stubborn glut of chips that power electric vehicles and manufacturing operations. The oversupply has weighed on chip sales to those industries for more than 18 months already, as demand for electric vehicles in China and other markets has declined.

That may explain why NXP was a tad hesitant in its guidance for the coming quarter. It said it’s expecting third-quarter earnings of between $2.89 and $3.30 per share on revenue of between $3.05 billion and $3.25 billion. The wider-than-usual guidance range suggests some uncertainty, though it did come in ahead of the Street’s forecasts of $3.06 per share in earnings and $3.05 billion in sales.

Some analysts interpreted the outlook as proof that NXP is still contending with a lot of turbulence. The chipmaker’s reliance on the automotive sector means it’s highly susceptible to the whims of U.S. President Donald Trump and the uncertainty of his tariff campaign.

Sievers was again upbeat, saying that the guidance “reflects the combination of an emerging cyclical improvement in NXP’s core end markets” and the “performance of our company-specific growth drivers.”

However, Bloomberg Intelligence analyst Ken Hui said the guidance may have come as a disappointment to investors amid an “uncertain market backdrop.” He pointed out that automotive chipmakers are likely to see “stronger pricing pressure and the end of tariff-beating restocking demand from European customers” as a result of declines in the market.

Hui also warned that industrial revenue recovery may also be “unsustainable” given lower demand from factory automation customers in China.

On the plus side, Mueller noted that NXP has continued to invest in its automotive chipmaking capabilities, which should bode well for its future prospects. “The chipmaker keeps increasing its investment in its largest segment, growing its R&D budget and supplementing that with the recent acquisition of TTTech Auto, so it can focus more on software-defined vehicles of the future,” the analyst said.

NXP’s stock was down 5% after-hours, erasing an earlier gain of 1% during the regular trading session that preceded today’s report. However, the shares are still up just over 9% in the year to date.

Photo: NXP Semiconductors