EIGHT Capital Note | Still Early in Memory Capex Cycle | | | |
Shares of PHO have more than tripled since mid-March lows and are up nearly 70% YTD, outpacing the TSX Information Technology Index (46.6%) and the Dow Jones Semiconductor Index (12.9%). PHO's outperformance in our view is being driven by recognition of Photon Control's unique opportunity to capitalize on the semiconductor memory capex cycle, which is still in the early stages and being led by investments in cloud computing, 5G, and IoT. Recent commentary from peers has been positive on the prospect of memory equipment spending remaining strong in the coming years. We note how Lam Research (not rated) indicated last week that it sees industry WFE spend in the mid-to-high $50B range in 2020 moving to $60B in 2021, with a growing share coming from memory.
We are raising our target to $3.00. We believe PHO offers a unique way for investors to gain exposure to the semi capex cycle which is showing signs of increasing momentum as we look towards 2021. Maintain BUY. Expecting strong Q2 results on August 6: Ahead of the quarter, we have tweaked our estimates higher and are now expecting revenue of $14.5M (was $13.0M) versus a record $17.3M in Q1. While management did not provide explicit guidance for Q2, it noted revenue would be "in the double-digits", while six-month backlog at the end of Q1 was $31.0M. Given the step down in revenue q/q and increase in opex to account for stepped up growth in R&D investment, we expect EBITDA of $4.2M versus $7.0M in Q1. Our revenue and EBITDA estimates could prove light. Semi component suppliers MKSI and UTCC (both not rated) outperformed their respective Q2 outlooks and beat Street expectations, while Lam Research, who is one of PHO's key customers, indicated it has increased inventory in advance of a strong Q3.
Record revenue anticipated in 2020 and going higher in 2021: Based on PHO's Q1 revenue and backlog, 2020 is poised to deliver a top line of at least $48.0M, which would be a record. We acknowledge how PHO has had a strong start to the year given an acceleration of orders in Q1, modeling a step down in revenue in H2. We estimate revenue in Q3 and Q4 at $12.0M and $9.5M, respectively (was $14.5M and $10.6M). Our estimates also reflect conservatism related to the timing of customer orders and potential supply chain disruptions and result in us moving our 2020 revenue estimate to $53.4M (was $55.4M). We are comfortable with the conservatism given the low visibility in PHO's model, although we note both MKSI and UTCC have guided for a q/q increase in Q3. More importantly, most industry players, including the ones we've mentioned in addition to Micron and Samsung (both noted rated), have pointed to a strong H2 and stronger 2021 as it relates to memory. As such, we continue to see growth in 2021 and forecast revenue of $57.0M (was $61.1M).
Investing for the future: Management is exploring new use cases and verticals for its sensor technology, which should expand PHO's TAM and help diversify the business over time. In Q2, PHO acquired Micronor ($884K), adding expertise in the robotics and medical industries. Earlier this month, PHO obtained exclusive rights to use sensor technology from FiSense in a licensing deal which we view as a very cost effective way to gain access to differentiated technology. We acknowledge PHO's focus on innovation to remain competitive and see the company expanding its Sales and R&D teams over the coming quarters. Largely owing to our lower revenue forecast, we now see EBITDA of $15.3M in 2020 (was $16.4M) and$16.2M in 2021 (was $17.6M).