Semiconductor materials supplier Entegris (NASDAQ:ENTG) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 30.1% year on year to $901 million. The company also expects next quarter's revenue to be around $887.5 million, roughly in line with analysts' estimates. Entegris made a GAAP profit of $197.6 million, improving from its profit of $99.5 million in the same quarter last year.
Entegris (ENTG) Q2 FY2023 Highlights:
- Revenue: $901 million vs analyst estimates of $886.8 million (1.6% beat)
- EPS (non-GAAP): $0.66 vs analyst estimates of $0.57 (16.4% beat)
- Revenue Guidance for Q3 2023 is $887.5 million at the midpoint, below analyst estimates of $896.3 million
- Free Cash Flow of $11 million, down 38.7% from the previous quarter
- Inventory Days Outstanding: 130, down from 145 in the previous quarter
- Gross Margin (GAAP): 42.6%, down from 44.8% in the 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 31.6% annually. As you can see below, this quarter was especially strong, with revenue growing from $692.5 million in the same quarter last year to $901 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).
Entegris had a strong quarter as its revenue grew 30.1% year on year, topping analysts' estimates by 1.6%. However, this was its third consecutive quarter of decelerating growth, potentially indicating a coming cycle downturn.
Entegris's management team projects growth to turn negative next quarter. As such, the company is guiding for a 10.7% year-on-year revenue decline while analysts are expecting a 4.66% drop over the next 12 months.
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, Entegris's DIO came in at 130, which is 7 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
Pricing Power
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. Entegris'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 42.6% in Q2, down 2.2 percentage points year on year.
Entegris's gross margins have been trending down over the last 12 months, averaging 41.6%. This weakness isn't great as Entegris's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Profitability
Entegris reported an operating margin of 22.3% in Q2, down 4.1 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.
Entegris's operating margins have been trending down over the last year, averaging 23.3%. This is a bad sign for Entegris, whose margins are already below average for semiconductor companies. To its credit, however, the company's margins suggest modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Analysts covering Entegris expect earnings per share to be relatively flat 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. Entegris's free cash flow came in at $11 million in Q2, up 241% year on year.
As you can see above, Entegris 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.
Over the last five years, Entegris has reported an average return on invested capital (ROIC) of just 14.2%. This suggests it struggled to find compelling reinvestment opportunities within the business.
Key Takeaways from Entegris's Q2 Results
With a market capitalization of $15.5 billion, a $567 million cash balance, and near-breakeven free cash flow status, we're confident that Entegris is in a healthy financial position.
We were impressed by Entegris's strong improvement in inventory levels. We were also excited that its earnings growth outperformed Wall Street's expectations. On the other hand, its revenue guidance for next quarter was underwhelming and its operating margin declined. Overall, the results could have been better. The stock is flat after reporting and currently trades at $104.05 per share.
Is Now The Time?
When considering an investment in Entegris, 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 Entegris, we'll be cheering from the sidelines. Its impressive revenue growth suggests that it's expanding its market share, 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 its ROIC isn't as high as we'd like to see.
Entegris's price-to-earnings ratio based on the next 12 months is 35.8x. 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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