Photronics Q4 2024 Earnings Call Transcript

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Provided by Quartr
December 11, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Photronics Q4 FY 'twenty four Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded, Wednesday, December 11, 2024. I would now like to turn the conference over to Ted Muro, Vice President, Investor Relations.

Speaker 1

Thank you, operator. Good morning, everyone. Welcome to our review of Photronics' fiscal 2024 Q4 results. Joining me this morning are Frank Lee, CEO Eric Rivera, CFO and Chris Pragler, CTO. 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 website.

Speaker 1

Comments made by any participants on today's call may include forward looking statements that include such words as anticipate, believe, estimate, expect, 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. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. We are under no duty to update any of the forward looking statements after the date of the presentation to conform these statements to our actual results. During the course of our discussion, we will refer to certain non GAAP financial metrics.

Speaker 1

A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. During our fiscal Q1, we will be participating in the New York CEO Summit on December 17th and the Needham Growth Conference in New York on January 14th. I will now turn the call over to Frank.

Speaker 2

Thank you, Ted, and good morning, everyone. Before we begin, I would like to take a moment to welcome Ted Moreau, who joined us during our Q4 as the Head of Investor Relations. Ted has extensive experience in Capital Markets and Technology Industry. Having previously worked on both the sales side and Investor Relations. We are excited to have him as part of our team as we expand our engagement with investors.

Speaker 2

We delivered a strong Q4 with sales above the high end of guidance. Sales of $223,000,000 were driven by high end IC and G10.5 plus FPD. Full year sales of $867,000,000 were down slightly from the record level we established in 2023. With 2024 coming in as the 2nd highest sales in our history. Regarding our IC end markets, demand turned positively this quarter, primarily for high end designs in Asia and the U.

Speaker 2

S. Leading edge AI chips are driving multi node mass demand to support a rapidly expanding AI ecosystem. This combined with government subsidized supply chain expansion of ICs into all corners of the digital economy we are pushing the mask industry forward for the next several years. As one of the largest merchant IC mask producers with strong global presence, leading market share, process expertise and broad multi node technology. We have positioned ourselves to benefit from these favorable long term trends.

Speaker 2

Turning to display, similar to IC mask, FPD mask demand is driven by new designs, product roadmaps and panel manufacturing capacity. Complex high end ASP mask sets are needed to support AMOLED and LTPS mobile display manufacturing. Nodular display size such as rose beer on G10.5 plus panel lines requires larger photo masks, which are difficult to manufacture and hence command higher ASPs. As the largest global FPD mass supplier, our growth set of FPD mass solutions allow panel makers to design new features in their products. We are excited about our future opportunity in FPD and are well positioned to maintain and extend our leadership.

Speaker 2

Q4 net income of $34,000,000 contributed to record net income of $131,000,000 for the full year. These results translate once again into strong cash flow for both the quarter and full year, further strengthening our balance sheet. Over the past 12 months, we have increased cash and short term investment by $128,000,000 up to $641,000,000 We have the financial flexibility to invest in strategic initiatives such as global footprint expansion, product development and MMA as we continue to evolve our existing network and capture growth opportunity. In 2024, we spent $131,000,000 on CapEx. We are mainly deploying this capital to expand IC capacity and capability in the growing U.

Speaker 2

S. And Asia markets, while also replacing analog equipment to improve network reliability and productivity. In 2025, we plan to spend $200,000,000 with a large focus on our U. S. Multisite capacity and capability to capture regional IC growth opportunities.

Speaker 2

Turning to the China market. 8 years ago, we had little presence in China as we did not have production in the country. Since then, we have successfully installed and scaled our operations in China from our IC facility in Xiamen and FPD facility in Hefei. China is one of the largest and fastest growing region for semiconductor and display production, with mass demand projected to outgrow supply. We expect China to continue to be a profitable growth engine for the country, thanks to our sustainable competitive advantages.

Speaker 2

Furthermore, as evidence of our local customer support, our long term purchase agreement have secured our market leading position. As the largest U. S.-based photo mask producer, we have positioned ourselves as a market leader to benefit from long term industry drivers, including regionalization trends. We will continue to invest in profitable growth. We will also leverage our competitive advantage to maintain our status as a trusted source of photomask and help our customer achieve their technology roadmap.

Speaker 2

I will now turn the call to Eric to review our 4th quarter results and provide 1st quarter's guidance.

Speaker 3

Thank you, Frank. Revenue in the 4th quarter was 223,000,000 dollars up 5% sequentially as we achieved growth across both IC and FPD. IC revenue increased 5% quarter over quarter driven by a 21% surge in high end sales that was partially offset by a slight reduction in mainstream demand. High end improvement was due primarily to increased sales to logic foundries in both Asia and the U. S.

Speaker 3

Sequential growth in logic was partially offset by soft memory demand. By note, the strongest demand was for 22 nanometer to 28 nanometer and for sub-fourteen nanometer, which is inclusive of our specialty EUV business. Mainstream was lower sequentially due to slow market demand mid quarter that has since stabilized. We were pleased to see strong high end demand and remain focused on growing this sector of our IC business. FPD revenue also improved sequentially, up 7% on strong mainstream growth.

Speaker 3

High end was essentially flat with strong growth in G10.5 plus offset by soft demand for advanced mobile displays due to sluggish demand for premium smartphones. Gross margin of 37% in Q4 was flat year over year even though we're no longer benefiting from premium pricing stemming from capacity constraints experienced post COVID. Turning to operating expenses, we recognized higher R and D costs as we experienced increased qualification activity, which typically lasts from 6 to 18 months in duration depending on the technology and complexity. Increased SG and A costs were the result of higher outside services and other period expenses. Going forward, anticipate operating expenses returning to our target of 10% of revenue.

Speaker 3

Operating margins remained strong in Q4 at 25%. For the full year 2024, we realized the 2nd highest operating income in company history and achieved record net income of $131,000,000 We continue to deliver strong results even under mixed economic conditions demonstrating our ability to manage costs and improve operating efficiency. GAAP EPS was $0.54 per share. After removing the impact of the FX loss, non GAAP EPS was $0.59 per share compared with $0.51 in the previous quarter. We generated $68,000,000 operating cash flow in the quarter, bringing the total year to $261,000,000 representing 30% of revenue.

Speaker 3

CapEx was $43,000,000 in the quarter $131,000,000 for the year as we invest in a multi node IC capacity and capability to support market demand and to strategically replace aging tools. In 2025, we anticipate CapEx will grow to 200,000,000 dollars with most of the increase earmarked to expand our IC investment in the U. S. We expect this expansion plan to be completed by mid-twenty 26 to support increasing customer requirements from growing demand as customer regionalization strategies proliferate and semiconductor industry production increases both in the U. S.

Speaker 3

And globally. We strengthened our balance sheet during the year, putting us in a great position to support our investment growth strategy. The combined total of cash and short term investments was $641,000,000 increasing 25% over the year. At the same time, total debt, which consists primarily of low rate equipment leases decreased 27%. We have $18,000,000 in debt remaining, which will virtually all be paid off at maturity during our 2nd fiscal quarter.

Speaker 3

In addition to the ability to invest in growth initiatives such as geographic footprint expansion and business development ambitions, our balance sheet allows us to return cash to shareholders. Last quarter, we announced that our Board of Directors authorized an increase of our share repurchase authorization from the $32,000,000 remaining up to a total of $100,000,000 Share repurchases are one aspect of our capital allocation strategy after reinvesting in our business through CapEx and any potential business development initiatives that arise. Before providing guidance, I'll remind you that demand for our product is inherently uneven and difficult to predict with limited visibility and typical backlog of 1 to 3 weeks. In addition, ASP for high end mass sets are high, meaning a relatively low number of high end orders can have a significant impact on our quarterly revenue and earnings. With those qualifications, we expect Q1 revenue to be in the range of $208,000,000 to $216,000,000 accounting for typical seasonality that impacts our Q1 demand, including Chinese New Year beginning in late January.

Speaker 3

Based on those revenue expectations and our current operating model, we estimate non GAAP earnings per share for the Q1 to be in the range of $0.43 to $0.49 per diluted share. This equates to an operating margin between 23% 25%, reflecting seasonally lower sales volumes while maintaining disciplined cost controls. Beyond the Q1, we are cautiously optimistic that we can grow our 2025 revenue in line with Photomask Industry Dynamics. And we believe due to our leading market and technology position and strategic growth strategy, we should be able to grow along with the Photomask market growth trajectory. As we do, our operating leverage and financial discipline shall allow us to expand margins and deliver another year of excellent cash flow, thereby positioning us to continue our investment growth strategy.

Speaker 3

We delivered great results in the Q4. By leveraging our core competencies, being disciplined in managing cost and cash and prudently investing in high return projects, we are delivering profitable growth, improving ROIC and creating value for our shareholders. I will now turn the call over to the operator for your questions.

Operator

Thank And our first question will come from the line of Tom Diffely with D. A. Davidson. Your line is open.

Speaker 4

Yes, good morning. Thank you for letting me ask a few questions. Maybe first on the operating expenses, they were up quite a bit year over year. And maybe just a little more detail on what it was the one timers that impacted that?

Speaker 5

Hello, Tom. Good morning. Thanks for the question. So our operating expenses were primarily increased SG and A and R and D. For R and D purposes, I'll let Chris probably talk about that.

Speaker 5

From an SG and A perspective, we have increased labor benefits as well as increased outside services. But we expect before moving it over to Chris to talk about R and D, I'll say that we expect our OpEx to return to about 10% of revenue.

Speaker 4

Okay. Well, just real quickly on the SG and A side, how much of it was labor and benefits that I assume are more recurring versus the outside services, which tend to be more one time in nature?

Speaker 5

Sure. So we actually had some non recurring labor and benefits impact, but I would say maybe about half of the increase was nonrecurring versus recurring.

Speaker 4

Okay. Thank you.

Speaker 5

You bet. And Chris, would you like to articulate a little bit more about R

Speaker 1

and D? Yes. Hi, Tom. I can make

Speaker 5

a couple of comments on the R and D side. We had a pretty robust pipeline of new calls in 'twenty four overall, and we see that often when the industry turns down a little bit. Actually, we often see mask activity increase, especially R and D, new product calls. We started another 7 nanometer node optical call that will finish in 2025. So that's a good project.

Speaker 5

We've got some development projects for the EUV high NA product program that's going on. Our EUV revenue is actually record high in 2024. So that seems to be going well. We installed a multi beam tool, Maskwriter in the U. S, and that's driving some of our R and D spend.

Speaker 5

And then the other thing I think I'd point out is we're seeing some kind of mid node migration, 65, 40 down to 22, 28, particularly in the U. S, less so in Europe right now. And there's some process customizations there that we're doing on the R and D side to support that. So overall, it's a good pipeline of things. All have revenue at the back end of them.

Speaker 5

And so money well spent on these projects from our point of view.

Speaker 4

Okay. And maybe, Chris, if I could continue that conversation towards the $200,000,000 of CapEx for 2025, obviously a little bit higher than it's run historically. And it sounds like a lot of it's going to go to reinvestment in the U. S. So I'm curious, is that replacing older tools?

Speaker 4

Is it new capacity, new capabilities? Maybe just a little more color on what you're going to get from that $200,000,000

Speaker 5

So Tom, Eric here. So most of that is for actually new capacity and a lot of it is going to the U. S, as mentioned on the prepared remarks. As we see the opportunity and we're going to invest where we see that opportunity, right? And this is driven by regionalization trends that are in the market.

Speaker 5

And that's why we see this expansion in the U. S. Occurring at this time. But it's also to your point, it's also in that number, we have some amount for replacing some old tools that have gone end of life, but the vast majority of that though is for expanding capacity.

Speaker 4

And is this expansion of capacity for to serve current fabs or is this to serve some of the newer fabs that are in the process of being built right now?

Speaker 5

Yes. It's a mix. Some of the fab projects around the world, which there are a lot started as you know, some of them have slowed down, few have been canceled, but there's still a strong pipeline of new fabs coming online and many of them are in the sweet spot of commercial photo masks. So some of that CapEx is preparing to support increased demand and that's in line with projections we're getting from a lot of our larger customers that where they're showing what their photomask needs are going to be over the next 3 years. And so these are the reliable customers that tend to know what they're doing and also project demand that we believe in.

Speaker 5

So we're investing for some of those new projects as well.

Speaker 4

Okay, great. Any brick and mortar or is this all just equipping the existing facilities that you have?

Speaker 5

No, no four walls going up. There are some expansions within facilities and things like that going on, but no new greenfields are in the CapEx right now.

Speaker 4

Okay. All right. And then probably Chris, I'd also had a question on the mainstream business. You talked about some node migration going on. But I'm just more curious about the health of the mainstream business.

Speaker 4

Over the last several years, we had a period where there was really tight supply. We had nice pricing increases that seems to have waned at this point. How do you view the mainstream business for IC over the next, call it, 3 plus years?

Speaker 5

I think, I mean, my feeling is that mainstream was strong and continues to be healthy, particularly on a units basis. The growth trajectory as we saw over the last couple of years certainly have leveled off and some of the supply demand imbalances have kind of rationalized in the mainstream. But the bulk of the units for mainstream are in our Asia divisions and I think it's appropriate, Frank, make some comments on what's happening in mainstream.

Speaker 2

The mainstream market in U. S. And Europe actually are pretty stable and growing and same in Taiwan market. Of course, in China, we do see a little bit of competition in the mainstream, but overall, the mainstream market continue to grow.

Speaker 4

Okay, great. And Frank, maybe just a broader industry question for you. What is your view of industry growth, Photomask industry growth in 2025? And how do you view maybe the next few years beyond that?

Speaker 2

Okay. I think as we focus on the main topic today is the regionalization. And as we mentioned, the regionalization actually create a lot of new project in different countries, including U. S. So if

Speaker 5

we look

Speaker 2

area, region by region, we see Taiwan is a stable market. Of course, TSMC is unique. But then in China, the market is still growing very fast, but we are focusing on our product mix in China. We want to capture more high end business. And in U.

Speaker 2

S, as Chris mentioned, there are more and more projects in U. S. And that's the main reason we are putting a lot of focus on our U. S. Site capacity and capability upgrade and expansion.

Speaker 2

So basically, the demand for semiconductor and of course, the IC photomask will grow in the next 3 years because AI so we are working on 3 years outlook evaluations and we believe the business will continue to grow for Fotomask.

Speaker 4

Okay. Maybe just a final question for you, Frank. You talked about the AI ecosystem driving some demand for you. What products are using Photomass from Photronics in the AI ecosystem? Just to get my hands around what the opportunity is.

Speaker 2

All right. Tom, I will turn this question to Chris. Chris?

Speaker 5

Hi. Yes. Thanks, Tom. So as far as the main processors like the GPUs that get most of the attention, the NVIDIA chips and all that, that supply chain, as everybody knows, is pretty well locked up by TSMC and they build their own mask. But there's a lot of peripheral circuitry around the GPU that's starting to drive some demand.

Speaker 5

And some of the edge chips, edge network chips, which are available to commercial mask makers that are driven by AI, some of the memory that are going into data centers, we have memory partners that are working on tuning those chips for AI applications. So I would put it as things around the main GPU, which is a substantial set of devices that support that. The other thing we're seeing a little bit is our business is heavily attached to ASIC application specific integrated circuits. And there are a fair number of companies that are trying to deploy ASICs, especially for the inference part of AI, not so much the model building, but the model running. And there's quite a few projects we're involved in on the ASIC side that are AI driven.

Speaker 5

So it's pretty broad and it's part of just building out that ecosystem from the GPU on out to the edge of the network.

Speaker 4

Great. Well, thank you, Chris, Frank and Eric. Appreciate your time today.

Speaker 5

Thank you, Tom. Always a pleasure.

Operator

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Ted Moreau for any closing remarks.

Speaker 1

Thank you, Sherry. Just wanted to thank everybody for joining our call today. We're really appreciative of your interest in Photronics. Hope you have a happy holidays and we will I will be available over the coming weeks months to talk periodically. Hope you guys have a great day.

Speaker 1

Thank you.

Operator

This concludes today's program. Thank you all for participating. You may now disconnect.

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Earnings Conference Call
Photronics Q4 2024
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