Photronics (NASDAQ:PLAB) Misses Q1 Sales Targets, Stock Drops

Full Report / May 22, 2024

Semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) fell short of analysts' expectations in Q1 CY2024, with revenue down 5.4% year on year to $217 million. Next quarter's revenue guidance of $225 million also underwhelmed, coming in 6.3% below analysts' estimates. It made a GAAP profit of $0.58 per share, down from its profit of $0.65 per share in the same quarter last year.

Photronics (PLAB) Q1 CY2024 Highlights:

  • Revenue: $217 million vs analyst estimates of $231 million (6.1% miss)
  • EPS (non-GAAP): $0.46 vs analyst expectations of $0.55 (16.4% miss)
  • Revenue Guidance for Q2 CY2024 is $225 million at the midpoint, below analyst estimates of $240 million
  • Gross Margin (GAAP): 36.5%, down from 38.6% in the same quarter last year
  • Inventory Days Outstanding: 36, up from 34 in the previous quarter
  • Free Cash Flow of $56.49 million is up from -$1.81 million in the previous quarter
  • Market Capitalization: $1.79 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 13.1% annually. This quarter, its revenue declined from $229.3 million in the same quarter last year to $217 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 difficult quarter as revenue dropped 5.4% year on year, missing analysts' estimates by 6.1%.

Photronics's revenue inverted from positive to negative growth this quarter, but its management team thinks this is but a blip. For the next quarter, Photronics is guiding to 0.4% year-on-year revenue growth. Analysts also think this outcome is likely, as they're projecting 9.1% growth 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 36, which is 2 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 36.5% in Q1, down 2 percentage points year on year.

Photronics Gross Margin (GAAP)

Photronics's gross margins have been trending down over the last 12 months, averaging 37.3%. This weakness isn't great as Photronics's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.

Earnings, Cash & Competitive Moat

Analysts covering Photronics expect earnings per share to grow 14.1% 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 $56.49 million in Q1, roughly the same as last year.

Photronics Free Cash Flow

As you can see above, Photronics produced $173.6 million in free cash flow over the last 12 months, a solid 19.6% 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 19.5%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

Photronics Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Photronics's ROIC has significantly increased. This is a good sign, and if the company's returns keep rising, there's a chance it could evolve into an investable business.

Key Takeaways from Photronics's Q1 Results

We were impressed by Photronics's strong operating margin improvement this quarter. On the other hand, its revenue and EPS both missed by a meaningful amount this quarter. To add insult to injury, guidance for next quarter missed analysts' expectations. Overall, this was a mediocre quarter for Photronics. The company is down 8.6% on the results and currently trades at $25.85 per share.

Is Now The Time?

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

Although we have other favorites, we understand the arguments that Photronics isn't a bad business. Although its revenue growth has been a little slower over the last three years, its growth over the next 12 months is expected to be higher. And while its gross margin indicate some combination of pricing pressures or rising production costs, its solid free cash flow generation gives it re-investment options.

Photronics's price-to-earnings ratio based on the next 12 months is 12.2x. In the end, beauty is in the eye of the beholder. While Photronics wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price right now.

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 $25.85).

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