Semiconductor production equipment provider Amtech Systems (NASDAQ:ASYS) fell short of analysts' expectations in Q4 FY2023, with revenue down 14.3% year on year to $27.71 million. It made a GAAP loss of $0.85 per share, down from its profit of $0.29 per share in the same quarter last year.
Key Takeaways from Amtech's Q4 Results
This was a disastrous quarter. Revenue missed by a large amount, and operating profit did as well, even if we exclude the one-time impairment charge of $5.2 million that the company highlighted. Adding to the woes was guidance. Q1 fiscal 2024 revenue guidance missed by a large amount as well. The stock closed down 31.6% on the results.
Amtech (ASYS) Q4 FY2023 Highlights:
- Market Capitalization: $58.09 million
- Revenue: $27.71 million vs analyst estimates of $30.85 million (10.2% miss)
- Operating Loss (GAAP): -$11.7 million (including $5.2 million impairment charge) vs analyst estimates of -$0.6 million (miss, even when excluding the charge)
- Q1 Fiscal 2024 Revenue Guidance: $22.5 million at the midpoint, well below expectations of $33.0 million (31.8% miss)
- Free Cash Flow was -$1.53 million compared to -$2.77 million in the previous quarter
- Inventory Days Outstanding: 127, down from 160 in the previous quarter
- Gross Margin (GAAP): 10.1%, down from 38.8% in the same quarter last year
Focusing on the silicon carbide and power semiconductor sectors, Amtech Systems (NASDAQ:ASYS) produces the machinery and related chemicals needed for manufacturing semiconductors.
Amtech Systems was founded in 1981 by Jong S. Whang, who previously had experience in both semiconductor processing and manufacturing. The company went public in 2017.
Semiconductor manufacturing begins with a silicon wafer upon which chips are constructed through the application and manipulation of thin layers of film that act as conductors, semiconductors, or insulators. It is a complex process requiring precision tools, specific temperatures at various stages, and ideal environments. Deviations in materials, measurements, or temperatures could result in defects that cost money, time, and other resources.
Amtech's product portfolio primarily focuses on thermal systems and wafer polishing equipment. The company’s horizontal furnaces address the vital fabrication stages of diffusion, oxidation, and annealing. Diffusion is an early stage that uses heat to remove impurities from wafers, oxidation employs high temperatures to turn silicon on the wafer into silicon dioxide to produce insulation properties, and annealing involves heating wafers to change their electrical properties. Amtech's polishing products abrade wafers in a high-precision manner to ensure the flatness, parallelism, and surface finish needed for chip construction.Companies offering competing semiconductor production equipment include Centrotherm, CVD Equipment (NASDAQ:CVV), Vitronics Soltec, and Rehm Thermal Systems.
Amtech's revenue growth over the last three years has been strong, averaging 23.7% annually. But as you can see below, its revenue declined from $32.32 million in the same quarter last year to $27.71 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).
Amtech had a difficult quarter as revenue dropped 14.3% year on year, missing analysts' estimates by 10.2%.
Product Demand & Outstanding Inventory
Days 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, Amtech's DIO came in at 127, which is 20 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Amtech's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 10.1% in Q4, down 28.8 percentage points year on year.
Amtech's gross margins have been trending down over the last 12 months, averaging 31.2%. This weakness isn't great as Amtech's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Amtech reported an operating margin of negative 10.9% in Q4, down 18.9 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Amtech's operating margins have been trending down over the last year, averaging negative 1.9%. This is a bad sign for Amtech, whose margins are already among the lowest for semiconductors. The company will have to improve its relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering Amtech expect earnings per share to grow 998% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Amtech's free cash flow came in at negative $1.53 million in Q4, down 119% year on year.
As you can see above, Amtech failed to produce positive free cash flow over the last 12 months and shareholders will likely want to see an improvement in the coming quarters.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Amtech's subpar returns on capital over the last five years may signal a need for future capital raising or borrowing to fund growth. Its five-year average ROIC was 1.1%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+ returns.
Is Now The Time?
When considering an investment in Amtech, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Amtech, we'll be cheering from the sidelines. Although its revenue growth has been strong over the last three years and its growth over the next 12 months is expected to accelerate, its relatively low ROIC suggests it has struggled to grow profits historically. On top of that, its operating margins reveal subpar cost controls compared to other semiconductor businesses.
Amtech's price-to-earnings ratio based on the next 12 months is 10.6x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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