Shares of fiber optic technologist Photon Control (TSX:PHO) sank 9.5% on Thursday after posting disappointing Q2 results.
Total revenue for the quarter dropped 51% year-over-year to $7.1 million while EBITDA — a key cash flow metric — clocked in at $1.2 million. Net income was $0.1 million versus $3.9 million in the year-ago period. Operating expenses decreased slightly to $3.7 million from $3.8 million.
So what?
Given the big revenue drop, as well as Mr. Market’s strong negative reaction, it’s hard not to be disappointed with the quarter. Even gross margin slipped to 54.8% from 56.9% in the year-ago period, suggesting that competition amid the current market weakness is even fiercer than even the top-line decline indicates.
That said, there are a few positives that Photon investors can take away from the report.
First, Photon’s results are relatively in line with the overall softness in the semiconductor space. As seasoned investors are aware, the semiconductor space is highly cyclical in nature, and capital spending from manufacturers has slowed down significantly in recent months — and should continue to do so.
In fact, Gartner Research forecasts that semiconductor capital spending will decline 16% in 2019 and 5.4% in 2020. Photon’s order backlog for the next six months sits at $10.7 million today versus $10.8 million at the end of March.
So while Photon’s numbers are certainly disappointing, they largely reflect the reduced build-out plans for global semiconductor manufacturers and continued inventory reduction strategies.
A second bright spot is that management seems to be doing well with the variables under its control. Despite the current market weakness, Photon generated EBITDA at the high end of its guidance. Moreover, the company used $3.7 million during the quarter to buy back $2.8 million shares.
Now what?
Looking ahead, management sees Q3 revenue in the range of $6.5 million to $8.5 million. At this level of revenue, Photon expects EBITDA margins to expand sequentially and land in the range of 17% to 21%.
“While the duration of the current capital spending environment is still to be determined,” said CEO Nigel Hunton, “We are delivering solid EBITDA performance while maintaining our investments in research and development, and using our cash strategically in order to position us for growth in revenue, profit and shareholder value when the industry inevitably rebounds.”
With today’s double-digit plunge, Photon shares are now down roughly 60% over the past year. While that is certainly poor performance, shareholders should remember that the stock is highly volatile (beta of 2) — and with high volatility comes many periods of extreme disappointment.
What’s most important is a stock’s performance over the long run, and Photon has proven that it can reward patient shareholders. Even with the recent decline, the stock is up 64% over the past five years and has returned a whopping 5,900% over the past 10.
In other words, long-term investors should take notice.
