IPG Photonics (NASDAQ:IPGP) Misses Q3 Sales Targets

Fiber laser manufacturer IPG Photonics (NASDAQ:IPGP) fell short of analysts' expectations in Q3 FY2023, with revenue down 13.6% year on year to $301.4 million. Turning to EPS, IPG Photonics made a GAAP profit of $1.16 per share, down from its profit of $1.47 per share in the same quarter last year.

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IPG Photonics (IPGP) Q3 FY2023 Highlights:

• Revenue: $301.4 million vs analyst estimates of $313.9 million (3.97% miss)
• EPS: $1.16 vs analyst estimates of $1.02 (14.1% beat)
• Revenue Guidance for Q4 2023 is $285 million at the midpoint, below analyst estimates of $316 million
• Free Cash Flow of $59.9 million, up 46.2% from the previous quarter
• Inventory Days Outstanding: 259, up from 233 in the previous quarter
• Gross Margin (GAAP): 44.1%, up from 43.1% in the same quarter last year

"We are navigating through a challenging capital investment cycle and our materials processing sales were impacted by weak global industrial demand and reduced investments in electric vehicle battery capacity in China. Nevertheless, we saw growth in welding applications outside of China, including handheld and e-mobility, and increased demand in 3D printing applications. Our medical sales also increased following an inventory adjustment by a large customer in the prior quarter," said Dr. Eugene Scherbakov, IPG Photonics' Chief Executive Officer.

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 ManufacturingThe 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 GrowthIPG Photonics's revenue growth over the last three years has been unimpressive, averaging 5.3% annually. This quarter, its revenue declined from $349 million in the same quarter last year to $301.4 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).

IPG Photonics had a difficult quarter as revenue dropped 13.6% year on year, missing analysts' estimates by 3.97%. This could mean that the current downcycle is deepening.

IPG Photonics may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 14.6% next quarter, analysts are expecting revenue to grow 5.45% over the next 12 months.

Product Demand & Outstanding InventoryDays 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 259, which is 44 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 IPG Photonics's Q3 Results Sporting a market capitalization of $3.97 billion, IPG Photonics is among smaller companies, but its more than $1.13 billion in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

It was good to see IPG Photonics slightly improve its gross margin this quarter. That really stood out as a positive in these results. On the other hand, its revenue guidance for next quarter underwhelmed, and its revenue missed Wall Street's estimates. The company’s top-line softness was driven by weak industrial demand in China and Europe, a dynamic we've observed across the semiconductor industry this quarter. Furthermore, North America is holding up better, but companies are delaying purchasing decisions and reeling in capital expenditures, limiting revenue visibility. Overall, the results could have been better. The stock is flat after reporting and currently trades at $83 per share.

The author has no position in any of the stocks mentioned in this report.