Semiconductor materials supplier Entegris (NASDAQ:ENTG) reported Q1 FY2023 results beating Wall St's expectations, with revenue up 42% year on year to $922.4 million. Guidance for next quarter's revenue was $885 million at the midpoint, which is 1.54% above the analyst consensus. Entegris made a GAAP loss of $88.2 million, down on its profit of $125.7 million, in the same quarter last year.
Entegris (ENTG) Q1 FY2023 Highlights:
- Revenue: $922.4 million vs analyst estimates of $892.7 million (3.33% beat)
- EPS (non-GAAP): $0.65 vs analyst estimates of $0.52 (25.2% beat)
- Revenue guidance for Q2 2023 is $885 million at the midpoint, above analyst estimates of $871.6 million
- Free cash flow of $17.9 million, up from negative free cash flow of $115.3 million in previous quarter
- Inventory Days Outstanding: 145, up from 137 previous quarter
- Gross Margin (GAAP): 43.5%, down from 47.7% same quarter last year
With fabs representing the company’s largest customer type, Entegris (NASDAQ:ENTG) supplies products that purify, protect, and generally ensure the integrity of raw materials needed for advanced semiconductor manufacturing.
Entegris was founded in 1966 as Fluoroware, a company serving early microelectronics manufacturers. After merging with EMPAK in 1999 and rebranding itself Entegris, the company went public in 2000.
As chip performance advances, semiconductor manufacturing has involved increasing materials content per wafer and generally more process complexity due to smaller geometries, improved architectures, and new materials. These generally lead to ever-increasing requirements for materials purity, quality, and stability to optimize yields. Entegris provides filters, gas, and liquid delivery systems and specialty chemicals that are needed for advanced semiconductor manufacturing environments.
Entegris is organized into three segments to reflect its product portfolio and role in semiconductor manufacturing. The ‘Specialty Chemical and Engineered Materials’ segment offers products such as hazardous gasses and high-fidelity coatings. The ‘Microcontamination Control’ segment offers filters to ensure materials purity. The ‘Advanced Materials Handling’ segment offers technologies to safely and consistently transport materials and products throughout the manufacturing process.
Other competitors who provide materials and chemicals to semiconductor manufacturers include Pall Corporation (part of Danaher (NYSE:DHR)), Shin-Etsu Polymer (TYO:7970), Gemu Valves, and DuPont (NYSE:DD).Sales Growth
Entegris's revenue growth over the last three years has been very strong, averaging 30.6% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $649.6 million to $922.4 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).
This was a great quarter for Entegris with 42% revenue growth, beating analyst estimates by 3.33%. This marks 14 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.
However, Entegris believes the growth is set to continue, and is guiding for revenue to grow 27.8% YoY next quarter, and Wall St analysts are estimating growth 2.69% over the next twelve months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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, Entegris’s inventory days came in at 145, 23 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Pricing Power
Entegris's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 43.5% in Q1, down 4.1 percentage points year on year.
Entegris' gross margins have been trending down over the past year, averaging 42.1%. The weakness isn't great as Entegris's margins are already below other semiconductor companies as is, reflective of weakening pricing and cost controls.
Profitability
Entegris reported an operating margin of 22.2% in Q1, down 5.9 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending down over the last year, averaging 24.3%. Not a great indicator for Entegris, whose operating margins are already a bit below average for semiconductors, driven by only modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Wall St analysts are expecting earnings per share to decline 14.7% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Entegris's free cash flow came in at $17.9 million in Q1, down 187% year on year.
Entegris didn't produce any free cash flow in the last year, so shareholders will want to see that improve in the short term.
Over the last 5 years Entegris has reported an average return on invested capital (ROIC) of just 15.5%. This suggests it may struggle to find compelling reinvestment opportunities within the business.
Key Takeaways from Entegris's Q1 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Entegris’s balance sheet, but we note that with a market capitalization of $11.7 billion and more than $709 million in cash, the company has the capacity to continue to prioritise growth over profitability.
We were impressed by how strongly Entegris outperformed analysts’ earnings expectations this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, it was less good to see the pretty significant deterioration in operating margin and gross margin deteriorated. Overall, this quarter's results were not the best we've seen from Entegris. The company is flat on the results and currently trades at $79.74 per share.
Is Now The Time?
When considering Entegris, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Entegris we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. Unfortunately, its growth is coming at a cost of significant cash burn, and its gross margins are weaker than its semiconductor peers we look at.
Entegris's price to earnings ratio based on the next twelve months is 28.6x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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