Semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) announced better-than-expected results in the Q1 FY2023 quarter, with revenue up 11.2% year on year to $211.1 million. However, guidance for the next quarter was less impressive, coming in at $210 million at the midpoint, being 1.87% below analyst estimates. Photronics made a GAAP profit of $14 million, down on its profit of $31.7 million, in the same quarter last year.
Photronics (PLAB) Q1 FY2023 Highlights:
- Revenue: $211.1 million vs analyst estimates of $201 million (5.02% beat)
- EPS: $0.23 vs analyst expectations of $0.40 (42.5% miss)
- Revenue guidance for Q2 2023 is $210 million at the midpoint, below analyst estimates of $214 million
- Free cash flow was negative $3.42 million, down from positive free cash flow of $13.3 million in previous quarter
- Inventory Days Outstanding: 36, up from 36 previous quarter
- Gross Margin (GAAP): 36%, up from 31.5% same quarter last year
Sporting a global footprint of facilities, Photronics (NASDAQ:PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.
Photronics was founded in 1969 by Constantine S. MacRicostas, who was previously an engineering manager for semiconductor company Qualitron Corporation. Photronics went public in 1987 with a NASDAQ listing.
Semiconductor manufacturing begins with a silicon wafer upon which precise circuit patterns are transferred. This manipulation of thin layers of film results in conductor, semiconductor, or insulator properties on the wafer. It is a complex process requiring precision tools, specific temperatures at various stages, and ideal environments. Photomasks, which are quartz or glass plates containing microscopic images of electronic circuits, are a key precision tool for this transfer of circuit patterns onto silicon wafers.
Photronics’ customers are largely semiconductor foundries (manufacturers) as well as fabless semiconductor companies (designers who outsource manufacturing). The company manufactures photomasks that reflect circuit designs provided by these customers. The typical manufacturing process for a photomask first involves receiving circuit design data from the customer and converting these to manufacturing pattern data. Photronics’ lithography systems, which use electron beams and lasers, then etch the circuit patterns onto photomask blanks. Once the final products pass rigorous testing and assessments, they are shipped to the customer.Photomask manufacturers that compete with Photonics include Compugraphics, Dai Nippon Printing (TSE:7912), Hoya Corporation (TSE:7741), LG Innotek (KOSE:A011070), and Shenzhen Newway Photomask (SHSE:688401).
Photronics's revenue growth over the last three years has been mediocre, averaging 13.7% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $189.8 million to $211.1 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).
While Photronics beat analysts' revenue estimates, this was a very slow quarter with just 11.2% revenue growth. This marks 8 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, Photronics believes the growth is set to continue, and is guiding for revenue to grow 2.68% YoY next quarter, and Wall St analysts are estimating growth 3.79% 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, Photronics’s inventory days came in at 36, which is exactly around the five year average, suggesting there isn't any unusual buildup of inventory at the moment.
Photronics's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 36% in Q1, up 4.5 percentage points year on year.
Photronics' gross margins have been trending up over the past year, averaging 36.7%. This is a welcome development, as Photronics's margins are slightly below the group average, potentially pointing to improved demand and pricing.
Photronics reported an operating margin of 36.4% in Q1, up 15.5 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 up over the last year, averaging 30.1%. Photronics's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.
Earnings, Cash & Competitive Moat
Analysts covering the company are expecting earnings per share to grow 13.3% 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. Photronics's free cash flow came in at -$3.42 million in Q1, down year on year.
Photronics has generated $119.5 million in free cash flow over the last twelve months. This is a solid result, which translates to 14.1% of revenue. That's above average for semiconductor companies, and should put Photronics in a relatively strong position to invest in future growth.
Over the last 5 years Photronics has averaged a 13.5% return on invested capital (ROIC), implying it has has a defensible competitive position and can invest in profitable growth.
Key Takeaways from Photronics's Q1 Results
With a market capitalization of $1.11 billion Photronics is among smaller companies, but its more than $374 million in cash and positive free cash flow over the last twelve months give us confidence that Photronics has the resources it needs to pursue a high growth business strategy.
We were very impressed by the strong improvements in Photronics’s gross margin this quarter. And we were also glad to see the improvement in operating margin. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $18.02 per share.
Is Now The Time?
When considering Photronics, 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 Photronics we will be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. And while its impressive operating margins are indicative of an highly efficient business model, unfortunately gross margins are weaker than its semiconductor peers we look at.
Photronics's price to earnings ratio based on the next twelve months is 9.3x. 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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