Melexis Earnings: Strong Sales and Gross Margins; Auto Chip Supplies Keeps Improving

Melexis’ MELE second-quarter results are not surprising given several auto chip companies have already reported healthy results. Demand for auto chips remains steady and the chip shortage is improving. Second-quarter sales were EUR 237 million, at the higher end of the guided range, up 14% year over year and 4% sequentially. For the third quarter management expects sales to grow more than 4% sequentially (at the midpoint of third-quarter guidance). Management also upgraded its full-year guidance targets given the strong performance in the first half and expects a good performance for the remainder of 2023; it now expects sales to be up between 14% and 16% (previously 11% to 16%) with a gross profit margin above 45% and an operating margin of 27% (26% previously). We maintain our EUR 105 fair value estimate and see the shares as fairly valued as of Aug. 2.

The second-quarter gross margin benefited from price increases at the beginning of the year and cheaper wafer costs; however, this should normalize in the second half once price increases in wafer costs kick in. We don’t expect Melexis will have issues passing on cost increases to customers given its products normally don’t have one-for-one replacements and it’s also common in the industry. Management reassured the market that the supply chain situation in auto chips is improving as more capacity becomes available; Melexis is taking advantage of this by delivering more to its clients. Last quarter, management said demand was around 50% higher than what it could deliver, so gradually higher capacity is good news for Melexis. Automotive original equipment manufacturers now require their main distributors to keep higher inventories given the chip shortages in the past three years, which should result in a healthier supply/demand situation. However, the auto supply chain is highly complex, so the impact of this change might be limited.