Photronics Q2 2023 Earnings Call Transcript

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Provided by Quartr
May 24, 2023

There are 7 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Photronics Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this conference is being recorded, Wednesday, May 24, 2023.

Operator

I I would now like to turn the conference over to Rochelle Burr, Chief Administrative Officer. Please go ahead.

Speaker 1

Thank you, Kevin. Good morning, everyone. Welcome to our review of Photronics' Fiscal 2023 Second Quarter Results. Joining me this morning are Frank Lee, our Chief Executive Officer John Jordan, our Chief Financial Officer Chris Prozler, our Chief Technology Officer and Eric Rivera, our Corporate Controller and Chief Accounting Officer. The press release we issued earlier this morning, Together with the presentation material that accompanies our remarks are available on the Investor Relations section of our webpage.

Speaker 1

Comments made by any participants on today's call may include forward looking statements that include such words as anticipate, Believe, estimate, effect, forecast and in our view. These forward looking statements are based upon a number of risks, Uncertainties and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied, and we assume no obligation to update any forward looking information. During the course of our discussion, We will refer to certain non GAAP financial metrics. These numbers are useful for analysts, investors and management to evaluate ongoing performance.

Speaker 1

A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. At this time, I will turn the call over to Frank.

Speaker 2

Thank you, Rachel, and good morning, everyone. 2nd quarter results were strong As we achieve record revenue and profit, demand for our products grew in both IC and FPD With sequential revenue growth in all regions, our position as the largest merchant Photomart supplier Any one sector or region. In addition, we have a talent and dedicated global team. Their performance has enabled Photronics to deliver record results in Q2. IC demand was strong again this quarter, especially for mainstream.

Speaker 2

This sector has been growing for the last several quarters. Demand for the advanced portion of mainstream in the 40 to 55 nanometer range is especially strong. On the other hand, We observed some softness in high end. However, we expect this to recover in the next 1 to 2 quarters And to reserve our growth trend, within FPD, demand for AMOLED grew significantly. Our customers are releasing new designs for mobile displays as they try to get market share In the next generations of smartphones, tablets and PC, demand for LCD has stabilized With sequential growth, we expect this favorable trend to continue.

Speaker 2

Growth and operation margin benefit again this quarter from strong pricing and tight cost management across the organizations. As a result, we earn $0.65 per share on a GAAP basis And $0.454 per share on a non GAAP basis after excluding $0.11 This was an excellent quarter as we continue to bear Total mass demand is driven mainly by new designs. Design activity often follow different demand cycles and capital equipment or wafer starts. For example, Our customer often release new designs when their demand is soft and utilization is low. And that could be a better time to introduce new products into their operations.

Speaker 2

The other condition that drive Photomass demand is capacity expansion, either through new fab or new tools This factor tend to make Photomass demand more sustainable and even counter Since I was named CEO, 1 year ago, I spent a lot of time with our employees across the organization and have enhanced and driven a great team, which has a characteristic to win. In addition, we have strategically invested in technology and developed advanced process know how for our leading Our differentiated EUV product line Continue to expand achieving a number of important milestones, including our first EUV DRAM mask Shipments in Q2. We have a great market position as a leading photomar supplier With 11 strategically located manufacturing sites, based on data recently published By TechInsight, we shipped approximately 30% of all photomask units globally. The leading providers of semiconductors and the display panels trust us to supply their photomask. This confirms our leading position and is an indication of our broad and diverse market exposure.

Speaker 2

Finally, we have a great balance sheet of fund growth. Through cash For our generation and financial discipline, we have built a strong and flexible balance sheet That provides liquidity to invest in growth, while also providing support, should we see a decline in demand. We are on track to deliver another record year in 2023. Later on, John will provide our Q3 guidance in more detail. Photoma's market demand is strong and our team is performing well.

Speaker 2

I'm very optimistic about our future. With that, I will turn the call over to John.

Speaker 3

Thank you, Frank. Good morning, everyone. 2nd quarter revenue of $229,000,000 was another record, A 9% sequential increase and 12% increase over last year's 2nd quarter. That represented the 9th consecutive quarter of year over year revenue growth. Demand remained robust across both IC and FPD reflecting strong design activity from our customers, releasing new products and expanding production capacity.

Speaker 3

Shipments within and into China represented 51% of 2nd quarter revenue. We are the global market leader in merchant photo masks and our customers partner with us to achieve their product Roadmap objectives. IC revenue of $167,100,000 was up 7% sequentially and 15% compared with last year. Demand was strong across all regions and mainstream growth more than offset Pricing remains favorable as demand growth continues to outpace some increases in supply. We are seeing the strongest demand within the higher end of the mainstream technologies, which aligns well with the investments We have made to increase IC capacity.

Speaker 3

Our winning commercial teams are doing a great job of bringing those orders in And we believe new designs and increases in chip capacity driven by regionalization of the semiconductor supply chain We'll continue to drive long term positive trends in the photo mask sector. FPD revenue was also a record in the quarter, improving 14% quarter over quarter and 6% year over year. AMOLED panels used in advanced mobile displays continue to fuel healthy demand for high end masks, which represented 83 percent of the FPD revenue in the quarter. Mainstream revenue also grew sequentially with increased Gross and operating margins Increased quarter over quarter by more than 260 basis points and 2.70 basis points respectively To 38.6 percent 29.2 percent, which were 430500 basis points more And the margins reported in the Q2 last year. The sustained Strong margins benefited from volume leverage, pricing power, favorable mix and disciplined cost management.

Speaker 3

Operating expenses increased by 6%, but at 9.3% of revenue were lower as a percentage of revenue. 2nd quarter operating income of $67,000,000 is the most the company has ever recorded in a quarter. The non operating gain in the quarter of $13,600,000 resulted primarily from the unrealized gain from remeasurement of U. S. Dollar denominated balance sheet items into the local functional currencies of our foreign operations.

Speaker 3

This compares with a loss of $14,400,000 in the Q1, resulting in a $28,000,000 sequential tailwind due to changing FX rates. Similar to last quarter, we provided non GAAP results that exclude the foreign exchange effect For better comparison of operating results. GAAP EPS was $0.65 a share. After eliminating the effects of foreign exchange and the related income tax on minority interest, adjusted EPS was $0.54 for Q2 compared with adjusted EPS of $0.40 last quarter and $0.38 in the same quarter last year. The strong net income performance and tight working capital management produced an outstanding $82,000,000 in cash from operating activities.

Speaker 3

We invested $27,000,000 in capital expenditures

Speaker 4

in the

Speaker 3

quarter, bringing year to date CapEx to 58,000,000 Our 2023 CapEx forecast remains approximately $130,000,000 primarily for increased IC capacity. Our cash balance was $367,000,000 at the end of the quarter And we held an additional $45,000,000 in short term investments. We have $28,000,000 of debt remaining consisting almost entirely Our cash and short term investments combined with funds available under the credit agreement provide ample liquidity for our growth investments and resilience against uncertainties we could face in the future. Before I provide guidance, I'll remind you that our visibility is always limited as our backlog is typically only 1 to 3 weeks And demand for some of our products is inherently uneven and difficult to predict. Additionally, the ASPs for high end mask Sets are high.

Speaker 3

And as this segment of the business grows, relatively low number of high end orders can have a significant impact on our quarterly revenue and earnings. Given those caveats, we expect 3rd quarter revenue to be in the range of $224,000,000 to $234,000,000 We believe Photomass demand will continue to do well In the current semiconductor environment, and we will continue to strive to increase our market leading position. Based on those revenue expectations and our current operating model, we estimate non GAAP earnings per share for the 3rd quarter to be in the range of $0.48 to $0.54 per diluted share. Year to date, we have grown revenue 12% and Expanded operating margins by 5.70 basis points. Demand remains strong and our team is performing well.

Speaker 3

Our confidence that we can achieve our long term targets and continue creating shareholder value is supported by our level of execution, Strong balance sheet and positive outlook on continued strong design activity. I will now turn the call over to the operator for your questions. Thank

Operator

you. Our first question comes from Tom Diffely with D. A. Davidson. Your line is open.

Speaker 5

Hi, good morning. This is Linda on behalf of Tom Diffely. Thank you for letting us ask questions. First of all, congratulations on a great quarter. So I guess my first question, in terms of the continued geopolitical issues We saw in the past few days Japan now tightening export controls in China, this coming after export restrictions by the U.

Speaker 5

S. And I think I believe you mentioned you had 51% shipments into China this quarter. So I'm wondering if you could quantify any headwinds that you've seen from China in terms of like the macro headwinds and then the Japan development And maybe just compare it to your guide for next quarter.

Speaker 3

Yes. Thanks for that, Linda. Good morning. Rachelle Berr, who is our Chief Administrative Officer, will cover that question.

Speaker 1

Hey, Linda. Yes. So, with respect to the geopolitical tensions and our To date, we have not received we have not had a material impact on our quarter because of the export control regulations and the geopolitical Issues that are going on between China and the U. S, we are cognizant of the Japan tightening The controls, but again, we monitor the controls very carefully. We are working closely with our suppliers.

Speaker 1

We have been working with our suppliers so that they can get licenses or we get licenses for Either the tools or the parts that we need to continue our operations in China.

Speaker 5

Okay. Thanks, Michelle. That's helpful. And then I guess, my second question in terms of the demand side of things. You noted strong demand in the quarter, but as memory demand remains sluggish and mature holding up well, What are you seeing on the member funds for you guys?

Speaker 5

And maybe discuss how this is impacting your pricing dynamics as well as your margin profile?

Speaker 4

Hi, this is Chris. I think your question was related to particularly memory Mass demand in the quarter, what the market kind of look like and the dynamics, did I get that correctly?

Speaker 5

Correct. Yes, that's correct.

Speaker 4

Yes. So we have exposure to part of the memory market and those customers haven't been as strong as they were in previous quarters, but Particularly our most advanced DRAM customer is still doing fairly strong roadmap and development cycles, preparing for Recovery of the markets, it looked like some of the memory pricing has started to stabilize, maybe it's hit a bottom, maybe not, but The 2 or 3 primary customers we have on memory seem to be a bit more optimistic about what This might unfold in the second half of twenty twenty three calendar year, and we're seeing pretty strong R and D cycles and pretty strong product development cycles Still, so that hasn't changed. So it was not strong in the quarter, but it looks like at least customers we serve are getting a bit more Mystic about the latter half of twenty twenty three.

Speaker 5

Thank you for the color. And then my last Question is on CapEx. Maybe John, I might have missed it, but what are you thinking in terms of CapEx for this year? And maybe could you give us a split for this year for FPD and IC?

Speaker 3

Yes. Most of the $130,000,000 that we've got planned for this year, Linda, is in IC. It seems as though we've really targeted our CapEx well because the demand is in the high end of that mainstream business, which is where we've invested significantly in the past year. There are also

Speaker 2

some of our tools we call End of Life. So we are planning to replace certain old tours with more Efficient and update tools, so some CapEx in IC spending EndNote Live tool has been present.

Speaker 5

Got it. Thank you for your time.

Speaker 3

Linda, just like to add on the geopolitical situation. Rochelle's comments are well placed And they relate only to IC because the FPD business is not impacted by

Speaker 1

Yes, FPD is not controlled. FPD is uncontrolled. So the animal control regulations, yes, those are those impact, I see, not FPD.

Speaker 5

Got it. Thank you so much for your time.

Speaker 3

Thank you,

Operator

Our next question comes from Gus Richard with Northland. Your line is open.

Speaker 2

Yes. Thanks for taking my question.

Speaker 6

Good morning. I appreciate it. Real quick, could you talk a little bit about expedites? Are you still seeing those in the mature side? Or Has that activity slowed?

Speaker 2

Yes, yes, premium. Yes, premium. Okay, Gus. Thank you. The previous side has been slowed down in Taiwan.

Speaker 2

However, we still have some long term agreement, Which we signed last year or early this year. And in those long term agreements, the premium charge Has been defined and we are continuing to continue through the period of the agreement. And certain agreement is for 2 years, some agreement is for 3 years. So We will maintain certain premium charge in this year and next year.

Speaker 6

Got it. And then in terms of industry wide capacity, It seems like particularly mature, it remains tight. And I'm just wondering as you look across the industry On the IC side of things, is it just tight in certain regions like China or is it Hi. Globally, can you talk about how you see that evolving over the next couple of years?

Speaker 2

In our industries, We do see some expansion, some new local mine house in China. And these new players, some are in a very early stage, some Start to get a customer qualification and enter the market. However, We believe that the impact will start on the low end of the business And also for these new competitors to achieve certain economic scale, It will take several years. So our business in China, basically, we are focused The higher end of the mainstream and so we will have some differentiation with the new competitors. Outside of China, Photomass IC Photomass capacity expansion actually It's not significant.

Speaker 2

And as we just mentioned, we spent some CapEx. Part of those, of course, is for capacity expansion, but some portions of those are for End of life replacement and this kind of end of life situation happen to Every merchant match up, not only to us. So even with every match up is doing JazzX, but Some tour will be end of night. So overall, the capacity increase is still limit.

Speaker 6

Okay. Got it. So basically, just to summarize, overall, you see the capacity Kind of remaining tight and the incremental CapEx is for replacement of all the tools that have that are no longer supported?

Speaker 2

All right.

Speaker 6

Got it. And then, over the last 40 years, I see Photomass margins rarely have gotten into the 30s. And I'm just Kind of curious, what gives you the confidence that that's a sustainable level, Just given the history of the industry.

Speaker 2

I think, in the past Yes, as you mentioned, Photomars is not a Big player is the semi industry. A lot of companies Focusing on wafer fab capacity expansion and pay little attention to photomask supply. So the supply demand, of course, was on the other side, more supply than demand. However, Because most merchant Photomars are not making enough money I will make investment. So gradually, the trend has shift between the supply and demand, Especially in the past 2 years, a lot of new IC application and create a lot NewWave expansion, so the combination of subscriber side of Photomass Do not expand on the demand side a lot of new wafer fab and new product Demand, so the supply and demand is balanced, getting worse.

Speaker 2

And Under such situations, we believe we have some leverage in terms of pricing and also Profit margin.

Speaker 6

Got it. Got it. And just last one for me. Are you seeing an extension in the mature markets of lead times or have they stabilized at this point?

Speaker 2

Yes. Our lead time was very long last year. And before the shortage, the lead time like 7, 10 days, the longest and last year some lead time was as long as 90 days. And at this moment, the lead times have been improved, but still it is much, much longer than The normal lead times before, so we are still seeing some premium charge and This lead time is different from node to node. Certain nodes, The lead time remain very long and certain node lead time has improved.

Speaker 6

Got it. Got it. Thank you so much. I think that's it for me.

Speaker 3

Thank you, Les. Thanks very much.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Frank.

Speaker 2

We are glad that you have chosen to join us this morning and appreciate your interest in Photronics. Our performance through the first half of twenty twenty three has exceeded our expectations. Market demand is strong and financial metrics are improving. I'm proud of the way our team has Perform to serve our customer and continue to contribute to our achievements. We believe we are on our way to achieving our long term target and look forward to updating you again Our progress and have a good day to everyone.

Speaker 2

Thank you.

Operator

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you disconnect your line.

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Photronics Q2 2023
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