Fiber laser manufacturer IPG Photonics (NASDAQ:IPGP) reported Q3 CY2024 results topping the market’s revenue expectations, but sales fell 22.6% year on year to $233.1 million. The company expects next quarter’s revenue to be around $225 million, close to analysts’ estimates. Its non-GAAP EPS of $0.29 per share was above analysts’ consensus estimates.
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IPG Photonics (IPGP) Q3 CY2024 Highlights:
- Revenue: $233.1 million vs analyst estimates of $227.8 million (2.3% beat)
- EPS: -$5.33 vs analyst estimates of $0.18 (Adjusted EPS of $0.29 beat)
- EBITDA: -$238.2 million vs analyst estimates of $15.69 million
- Revenue Guidance for Q4 CY2024 is $225 million at the midpoint, roughly in line with what analysts were expecting
- EPS (GAAP) guidance for Q4 CY2024 is $0.20 at the midpoint, beating analyst estimates by 4.6%
- Gross Margin (GAAP): 23.2%, down from 44.1% in the same quarter last year
- Inventory Days Outstanding: 163, down from 226 in the previous quarter
- Operating Margin: -109%, down from 18.5% in the same quarter last year
- EBITDA Margin: -102%, down from 24.2% in the same quarter last year
- Free Cash Flow Margin: 18.4%, down from 19.9% in the same quarter last year
- Market Capitalization: $3.51 billion
"IPG has made important progress strategically and operationally in the last several months,” said Dr. Mark Gitin, IPG Photonics's Chief Executive Officer.
Company Overview
Both a designer and manufacturer of its products, IPG Photonics (NASDAQ:IPGP) is a provider of high-performance fiber lasers used for cutting, welding, and processing raw materials.
Semiconductor Manufacturing
The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.
Sales Growth
A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. IPG Photonics’s demand was weak over the last five years as its sales fell by 4.9% annually, a rough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. IPG Photonics’s recent history shows its demand has stayed suppressed as its revenue has declined by 15.5% annually over the last two years. 
This quarter, IPG Photonics’s revenue fell 22.6% year on year to $233.1 million but beat Wall Street’s estimates by 2.3%. Management is currently guiding for a 24.7% year-on-year decline next quarter.
Looking further ahead, sell-side analysts expect revenue to decline 5.4% over the next 12 months. While this projection is better than its two-year trend it's tough to feel optimistic about a company facing demand difficulties.
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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, IPG Photonics’s DIO came in at 163, which is 51 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.
Key Takeaways from IPG Photonics’s Q3 Results
We were impressed by IPG Photonics’s strong improvement in inventory levels. We were also excited its revenue and adjusted EPS outperformed Wall Street’s estimates. We note its GAAP EPS and EBITDA fell short of Wall Street’s estimates due to a divestiture. Overall, this was a solid quarter. The stock traded up 3.6% to $82.15 immediately following the results.
So do we think IPG Photonics is an attractive buy at the current price?What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.