2023-08-24 14:27:16 ET
Summary
- indie Semiconductor reported solid 2Q23 results, its ninth consecutive quarter of beating or meeting its guidance and targets.
- The company expects to achieve a $240 million annualized revenue run rate in the third quarter, despite pushouts of two OEM programs.
- The two OEM program pushouts are due to the customer and not due to indie Semiconductor and are just deployed a few quarters.
- indie Semiconductor gained a significant design win with Bosch, expanding its customer base and potential for reaching large OEMs.
- The company expects strong growth drivers from 2024 and beyond from the design wins the company has won since its public listing.
indie Semiconductor ( INDI ) has taken a beating since June this year.
This is despite the fact that the company reported robust 2Q23 results in the quarter.
One of the likely reasons for this is the push out of two OEM programs, which I will highlight below.
This, in my view, is not a fundamental issue with indie, but rather more of a customer issue, and thus, something that the company may not have control over.
However, I think that the stock is attractive at the current levels given that the long-term drivers remain intact, and management continues to execute very well.
Solid 2Q23 quarter
indie Semiconductor delivered a ninth consecutive quarter of meeting or beating their guidance in the 2Q23 quarter.
Revenue came in at $52 million for the quarter, up 102% from the prior year and 29% sequentially, and at the higher end of the company's guidance range.
This strong revenue growth at the top end of the guidance range shows that management continues to execute well according to plan and that the demand situation remains robust given the company's current solid pipeline.
In addition, gross profit for the quarter came in at $27 million. Thus, gross margins for the quarter were 52.2%, up 363 basis points from the prior year and beating its own gross margin guidance of 52%.
In my opinion, this improvement in gross profit margins highlights how the increasing scale and strong revenue growth are driving improvements in economies of scale and ramping margins upwards.
R&D expenses came in slightly above plan, at $34 million, up 48% from the prior year.
This was a result of the accelerated product development cost in the second quarter, along with multiple tape-outs in the quarter.
In my opinion, this accelerated R&D spend brings the benefit of bringing in the time to generate revenue as the timeline accelerates revenue generation from earlier announced wins.
SG&A came in at $19 million, up 54% from the prior year. This is a result of indie Semiconductor further extending its sales and marketing reach to regions like Asia.
This is also likely increasingly crucial as the company extends its reach globally to grow its international presence given the continued traction it has seen in its recent design wins.
Operating loss for 2Q23 came in at $16 million, and operating loss margin improved by 35 percentage points from the prior year.
Net loss and net loss per share came in at $16 million and $0.10 per share respectively.
indie Semiconductor ended the quarter with $181 million in cash on its balance sheet. It invested $22 million in working capital, entered a supply agreement with a strategic foundry partner for $4 million, and spent $3 million in capital expenditures to improve its internal test capacity and quality lab capabilities.
In my opinion, all these investments are necessary for its aggressive growth plans and to partially offset these outlays of cash, indie Semiconductor also issued 1.9 million shares under its ATM program for $18 million in cash proceeds.
Clear path to more than $1 billion in annual revenue by 2028
Looking into the third quarter, indie Semiconductor expects to scale into a business with a $240 million annualized revenue run rate, which is up 15% sequentially and 100% from the prior year.
Management did highlight that this growth rate will be achieved despite the pushouts of two OEM programs and a challenging macro backdrop.
At that revenue run rate, management expects gross margin to expand to 53%, as the company reaps the operational synergies from the acquisition of GEO Semiconductor.
SG&A is expected to be flat sequentially while R&D is expected to be elevated at $35.5 million as a result of additional costs needed for growth.
Operating loss is thus expected to once again be narrowed to $13 million in the third quarter and management expects net loss per share to narrow further in the third quarter of 2023 to $0.08 per share.
Management continues to expect to deliver outsized revenue growth along with moving towards its target of 60% gross margins and 30% operating margins.
In my opinion, this will likely be driven by the depth of the company's new product pipeline, along with sustained revenue growth, expansion of gross margins, and operating leverage.
In 2023, management expects to be able to more than double revenues for the third year in a row and reach profitability in the fourth quarter of 2023.
CEO Donald McClymont highlighted that the team sees a clear path to achieve more than $1 billion in annual revenue by 2028.
I think the long-term story for indie Semiconductor remains the same and the drivers to reach there are all intact.
Management continues to execute well quarter after quarter, and I am confident that in the longer term, the company will be significantly larger than it is today.
In my opinion, we are starting to see the synergies, both from a cost and revenue perspective, that are starting to bring positive benefits to indie as a company.
I continue to see that with the added capabilities and network of the acquired companies, indie will be able to extend its reach, scale up more quickly and achieve profitability at a faster pace.
Growing design win momentum
In my opinion, the key driver for the share price in the near term will be continued design win momentum.
As a relatively small company compared to the Goliaths of the industry, indie needs to continue to gain traction in these design wins to highlight its sales strength, technological leadership, and competitive position.
This was what indie continued to do in the quarter, as the company is gaining design win momentum across different segments like ADAS, user experience, and electrification applications.
The most significant win for the quarter was its first program win with Bosch.
In my view, this is a huge win for a company like indie Semiconductor.
Given that Bosch is one of the leading suppliers to the automotive industry, it is a testament to indie Semiconductor's ability to attract large customers and highlights its technological strength and product leadership.
This win also adds to the company's Tier 1 customer base and enables indie Semiconductor to reach out to other OEMs.
With this Bosch win, there is an expectation to reach large OEMs like Toyota, including Lexus.
In particular, this type of design win is hugely important to indie Semiconductor given that it will bring scale to the company as these wins are worth hundreds of millions in lifetime revenue and helps the company improve long-term margins and free cash flows.
Management highlighted that given that Bosch is one of the top two or three players in the industry and that they will likely attach to multiple OEMs, this will be amongst one of the largest design wins made in indie Semiconductor's history.
I am of the opinion that indie Semiconductor continues to show strong momentum in design wins, demonstrating the synergies that the recent acquisitions are bringing along with its own management team's solid execution capabilities.
Push out of two OEM programs
indie Semiconductor highlighted that the macro backdrop remains choppy and that there were two OEM program pushouts in the quarter.
These two OEM programs continue to be with indie Semiconductor, and this remains to be a near-term revenue opportunity for the company.
These two OEM programs are expected to be pushed out by a few quarters.
In addition, the reason for the pushouts was due to the customer and nothing to do with indie Semiconductor.
As a result, this has more to do with the customer's own engineering execution and the indie Semiconductor team does not have control over the timeline here and just needs to allow the customers to do what they need to do on the engineering side.
Both programs are worth $50 million in combined revenue when fully ramped.
This will not impact the expectation that indie Semiconductor will reach profitability in 4Q23 as management expects a combination of factors to enable the company to achieve this target. This includes acceleration of revenue growth into the fourth quarter, gross margins continuing to expand, and improving operating leverage, particularly as operating expenses are expected to be lower than the second and third quarter as a result of less tape-out costs.
Given that the nature of this push out is not due to indie Semiconductor but as a result of the customer, and that revenues are not cancelled but simply just pushed back, the long-term story remains the same and thus to me, this does not change fundamentals materially given these programs take time to ramp as well.
Long-term drivers
When looking towards 2024 and 2025, management expects to see the start of the ramping up of design wins which indie Semiconductor won as a public company.
Because these design wins are significantly larger than the ones won when it was a private company, growth will ramp up significantly as the company scales up.
As a result, these design wins announced since its listing will drive the company's next phase of growth for the second half of the decade.
At the same time, I think we will see margin expansion in the coming years as the company has spent a significant amount of time in the ADAS space.
In the ADAS space, there are higher average selling prices and gross margins, so when this business grows, it will drive revenue and gross margins in 2024 and beyond.
I am of the opinion that given the company's strong backlog, deep product portfolio, new product pipeline, and new product ramps, there are multiple drivers for growth in the several years to come and all that is a rather visible form of revenue growth.
Valuation
I reiterate my 1-year price target for indie Semiconductor of $17.70. This is based on a 40x 2024 P/E assumption, which I think is justified given the strong topline growth backed by a solid strategic backlog, increasing profitability, and growing momentum in the business.
I continue to expect profitability to be achieved in the fourth quarter of 2023 while revenue growth continues to also be visible in the near term given the strong backlog of the company despite the two OEM pushouts.
Risks
Push out risk
While I have highlighted that the two OEM programs that were pushed out were a result of customer-specific issues, if there are more OEM programs that are pushed out, this could dampen near-term growth prospects and cloud near-term hopes of profitability if indie Semiconductor is not able to reach the scale it needs for profitability.
Industry risk
Given that indie Semiconductor is focused on the automotive industry, it is also prone to market slowdowns in the automotive industry. Furthermore, any weakness in the global macroeconomic environment could also result in further downside risks as the automotive industry is bound to be affected as well. This slowdown in the automotive industry will thus have a direct impact on near-term growth.
Competition
indie Semiconductor is a relatively small company in the automotive semiconductor space. This space is dominated by large global firms like Infineon ( IFNNY ), NXP ( NXPI ), and other companies. indie Semiconductor can continue to grow if it remains investing in its business, innovating and releasing new products that bring value add to its customers. Given that competitive pressures are high, if indie Semiconductor fails to do so, it may lose its competitive edge against these large and established players in the industry.
Conclusion
The management team showed strong execution this quarter, delivering on its guidance and targets, and continues to improve the confidence that the market has in the company.
However, the market is cautious after the earnings result likely due to perceived near-term weakness as a result of the two OEMs push out.
Management remains confident in their ability to meet short-term and longer-term guidance as they continue to have multiple levers to pull, and the business growth remains robust in the long term.
indie Semiconductor showed that it continued to have strong design win traction, which highlights its sales strength, technological leadership, and competitive position in the industry given how small the company is relative to the new customer it brought in this quarter, Bosch.
Lastly, these design wins that came in after indie Semiconductor are much larger than what the company won as a private company in scale, and I expect these to ramp up and drive growth and margins in the years to come.
For further details see:
indie Semiconductor: Looking Attractive With Long-Term Drivers Remaining Intact