Photronics (NASDAQ:PLAB) Misses Q1 Sales Targets

Full Report / February 21, 2024

Semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) missed analysts' expectations in Q1 FY2024, with revenue up 2.5% year on year to $216.3 million. On the other hand, the company expects next quarter's revenue to be around $231 million, in line with analysts' estimates. It made a GAAP profit of $0.42 per share, improving from its profit of $0.23 per share in the same quarter last year.

Photronics (PLAB) Q1 FY2024 Highlights:

  • Revenue: $216.3 million vs analyst estimates of $220 million (1.7% miss)
  • EPS (non-GAAP): $0.48 vs analyst expectations of $0.49 (2% miss)
  • Revenue Guidance for Q2 2024 is $231 million at the midpoint, roughly in line with what analysts were expecting
  • Free Cash Flow was -$1.81 million, down from $54.14 million in the previous quarter
  • Inventory Days Outstanding: 34, up from 32 in the previous quarter
  • Gross Margin (GAAP): 36.6%, up from 36% in the same quarter last year
  • Market Capitalization: $1.95 billion

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).

Sales Growth

Photronics's revenue growth over the last three years has been mediocre, averaging 14.6% annually. As you can see below, this was a weaker quarter for the company, with revenue growing from $211.1 million in the same quarter last year to $216.3 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).

Photronics Total Revenue

Photronics had a tough quarter as its weak 2.5% year-on-year revenue growth missed analysts' estimates by 1.7%.

Photronics's management team believes its revenue growth will continue, guiding to 0.7% year-on-year growth next quarter. Analysts expect the company to grow its revenue by 5.9% 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.

Photronics Inventory Days Outstanding

This quarter, Photronics's DIO came in at 34, which is 4 days below its five-year average. These numbers show that despite the recent increase, there's no indication of an excessive inventory buildup.

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. Photronics'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 36.6% in Q1, up 0.6 percentage points year on year.

Photronics Gross Margin (GAAP)

Photronics's gross margins have been trending up over the last 12 months, averaging 37.8%. This is a welcome development, as Photronics's margins are below the industry average, and rising margins could suggest improved demand and pricing power.

Earnings, Cash & Competitive Moat

Analysts covering Photronics expect earnings per share to grow 19.6% 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. Photronics's free cash flow came in at negative $1.81 million in Q1, up 47.1% year on year.

Photronics Free Cash Flow

As you can see above, Photronics produced $172.5 million in free cash flow over the last 12 months, a solid 19.2% of revenue. This FCF margin is above average for semiconductor companies and should put Photronics in a relatively strong position to invest in future growth initiatives.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Photronics's five-year average ROIC was 20.4%, slightly better than the broader sector. Just as you’d like your investment dollars to generate returns, Photronics's invested capital has produced decent profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Photronics's ROIC averaged a 28.9 percentage point increase each year. The company has historically shown the ability to generate good returns, and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable business opportunities are expanding.

Key Takeaways from Photronics's Q1 Results

We were impressed by Photronics's strong operating margin improvement this quarter, but that's where the good news ends. Its revenue, EBITDA, and EPS unfortunately missed analysts' estimates as demand was weaker than expected. Looking ahead to Q2, its revenue guidance was in line while its EPS outlook fell short. Overall, the results could have been better. The stock is flat after reporting and currently trades at $31.1 per share.

Is Now The Time?

Photronics may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Photronics is a solid business. Although its revenue growth has been mediocre over the last three years, Although its revenue growth has been mediocre over the last three years with analysts expecting growth to slow from here, its solid free cash flow generation gives it re-investment options. On top of that, its above-average ROIC suggests its management team has made good investment decisions in the past.

Photronics's price-to-earnings ratio based on the next 12 months is 13.0x. There are definitely things to like about Photronics and looking at the semiconductors landscape right now, it seems that it doesn't trade at an unreasonable price point.

Wall Street analysts covering the company had a one-year price target of $32 per share right before these results (compared to the current share price of $31.10), implying they saw upside in buying Photronics in the short term.

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