No Surprises In Entegris's (NASDAQ:ENTG) Q1 Sales Numbers But Quarterly Guidance Underwhelms

Semiconductor materials supplier Entegris (NASDAQ:ENTG) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 16.4% year on year to $771 million. On the other hand, next quarter's revenue guidance of $800 million was less impressive, coming in 1.6% below analysts' estimates. It made a non-GAAP profit of $0.68 per share, improving from its profit of $0.65 per share in the same quarter last year.

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Bertrand Loy, Entegris’ president and chief executive officer, said: “We are pleased with our positive start to the year. Sales of $771 million were at the high end of our guidance. Adjusted EBITDA and non-GAAP EPS were above our guidance, even while we increased critical R&D investments. During the quarter, we sold the Pipeline and Industrial Materials (PIM) business, completing all our planned divestitures of non-core assets. Using the PIM sale proceeds and cash on hand, we paid down over $400 million of debt during the quarter.”

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.

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

Entegris's revenue growth over the last three years has been strong, averaging 22.5% annually. But as you can see below, its revenue declined from $922.4 million in the same quarter last year to $771 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 difficult quarter as revenue dropped 16.4% year on year, missing analysts' estimates by 0.1%. This could mean that the current downcycle is deepening.

Entegris's revenue growth has slowed over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 11.2% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Analysts' estimates call for 5.4% growth over the next 12 months.

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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, Entegris's DIO came in at 136, which is 11 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Entegris's Q1 Results

We were impressed by how significantly Entegris blew past analysts' EPS expectations this quarter. We were also glad its gross margin improved. On the other hand, its revenue guidance for next quarter missed analysts' expectations and its inventory levels increased. Overall, the results could have been better. The stock is flat after reporting and currently trades at $131.75 per share.

So should you invest in Entegris right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.