Photronics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 6 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Photronics' First Quarter Fiscal 20 24 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.

Operator

As a reminder, this conference is being recorded today, Wednesday, February 21, 2024. I would now like to turn the conference over to Rochelle Furr, Chief Administrative Officer. Please go ahead.

Speaker 1

Thank you, Lydia. Good morning, everyone. Welcome to our review of Photronics' fiscal 2024 Q1 results. Joining me this morning are Frank Lee, our Chief Executive Officer Chris Progler, our Chief Technology Officer John Jordan, our Chief Financial Officer and Eric Rivera, our Chief Accounting Officer and Corporate Controller. The press release we issued earlier this morning, together with the presentation materials that accompany 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, 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. 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. We achieved sales growth compared with last year at both IC and FPD increased with high end growth being partially offset by soft mainstream demand in both sectors. Compared with the Q4, sales were down due to seasonal trends and more fewer days in the Q1. Demand was weaker and sales were softer than we expected during the 1st month of the quarter for both IC and FPD. Demand improved during the quarter, increasing our revenue run rate and giving us confidence that revenue will improve in the second quarter.

Speaker 2

Earnings improved over last year as operation leverage drove higher gross margins. Our quarter over quarter comparison, lower volume caused gross margin to 4. Once again, our team has done where to control expenses and deliver solid margin even with lower sales compared with 4th quarter. The 1st quarter earnings were $0.42 per share on a GAAP basis and $0.48 per share on a non GAAP basis. Operating cash flow improved from the Q1 of last year, allowing us to further strengthen our balance sheet to support our growth plans.

Speaker 2

I would now like to offer some comments on our overall market mass market and demand environment. As I stated earlier, mass demand was soft at the start of Q1 for both IC and FPD. Demand improved through the quarter, including the UUS spike in orders we see ahead of Chinese New Year, which started on February 9. While still early following the holiday break, we do expect demand trends we saw prior to Chinese New Year to continue in Q2. For IC, we are seeing a growing trend in node migration from customer in Asia as they move to 28 and 22 nanometers to improve performance.

Speaker 2

The trend is driving type out demand for our high end business. In memory, the industry is seeing a recovery in demand. Our memory exposure is with Tier 2 providers, not typically high volume applications. They are seeing encouraging demand trends as well. For our FPD, our business outlook looks good even as the overall display industry remains soft.

Speaker 2

As the technology leader with a strong market presence in the more advanced AMOLED displays, we have a competitive advantage that keeps demand high for our display mask. Display for premium smartphone are continually adding new features and panel makers are innovating to gain market share. This benefits us as we have greater we have great relationship with large panel makers and can provide high quality mask to help them achieve their goals. We view momentum during the second half of the first quarter and expect our revenue to grow in the second quarter. As this happens, we will remain focused on controlling costs to increase margins and increasing cash flow to support growth investments.

Speaker 2

I'm optimistic about the rest of the year, expecting the semiconductor industry should transition to the next phase of growth, leading to an increase in photo mask demand during our second to third fiscal quarters. We believe our technology, strong customer relations and global presence will position us to continue to perform well. Before turning the call over to John to review Q1 results, I would like to publicly congratulate John on his upcoming retirement. John has been an important member of our executive team since joining Photronics in 2017 and has been a great partner to me over the entire time, especially during my time as CEO. He has led us through tremendous growth and geographic expansion.

Speaker 2

On behalf of the entire organization, I wish him well in retirement. John, the floor is yours.

Speaker 3

Thank you, Frank, for those kind words. I am looking forward to retirement and spending more time with my family and some favorite projects. Although I'm leaving, I'm confident in the company's continued success. The CFO role in any company is a challenging position. In our case, I believe we have met that challenge with the strong support of an excellent finance organization.

Speaker 3

Eric, our Corporate Controller, who will assume the role of Interim CFO as well as our Treasurer and both their staffs and our international CFOs and their staffs. The Photronics Board is demanding and supportive and the cohesiveness and commitment of the leadership team to a well defined strategy of targeted investment and consistent execution will help ensure that success. Now turning to Q1 results, revenue was $216,300,000 up 2% year over year and 5% less than last quarter. As Frank mentioned, our Q1 began slowly, but gained momentum as end market demand seemed to recover. The Q1 is typically the seasonally slowest quarter in our fiscal year.

Speaker 3

Slower demand at the beginning of the Q1 exacerbated the seasonal decrease and there were 4 fewer days than the previous quarter, all combining for the sequential decrease. 1st quarter IC revenue was $157,600,000 up 1% year over year and 4% lower sequentially. High end revenue increased led by strong foundrylogic demand in Asia and high end revenue in the U. S. Mainstream revenue was lower due to softness in Asia in part related to the stronger high end demand resulting from customers' migration to the more advanced nodes.

Speaker 3

The long term growth drivers remain intact as we support customers' technology roadmaps and investments as they expand capacity to support supply chain regionalization. FPD revenue of $58,700,000 improved 8% compared with last year and was down 7% from Q4's record level. High end FPD revenue improved year over year on an increase in demand for AMOLED displays used in mobile applications, although it was lower sequentially on normal seasonal softness. The mainstream FPD decline was attributable to the slow start to Q1 we alluded to before. We remain the technology leader, which gives us confidence in our ability to continue to outgrow the market as panel makers release innovative products to gain market share.

Speaker 3

Gross margin was 36.6%, slightly higher year over year and slightly lower quarter over quarter consistent with changes in revenue and the effect of high operating leverage in both directions. Operating expenses were higher this quarter, primarily related to higher employee compensation expense. The resulting operating margin was 26.6%. Net income in the quarter was 26 point $2,000,000 or $0.42 per diluted share. Adjusted for the non operating loss, net income was $29,900,000 or $0.48 per diluted share, an improvement from last year and somewhat lower than our very strong Q4 earnings.

Speaker 3

We generated $41,500,000 in operating cash flow, 50% higher than last year due to higher net income and effective working capital management. Our CapEx investments for growth were $43,300,000 in the quarter. Our CapEx guidance for the year will remain at $140,000,000 dollars primarily in both high end and mainstream IC to address anticipated demand. We ended the quarter with a cash balance of 508 point $5,000,000 short term investments of $13,000,000 and debt of $23,400,000 providing us with ample liquidity to fund investments in organic growth. 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.

Speaker 3

Additionally, the ASPs for high end mask sets are high. And as this segment of the business grows, a relatively low number of high end orders can have a significant impact our quarterly revenue and earnings. Given those caveats, we expect 2nd quarter revenue to be in the range of $226,000,000 to $236,000,000 We believe the momentum that built during the Q1 will continue into Q2, driven by solid long term demand drivers across our markets. Our pricing environment has stabilized around the mid-30s, mid to high-30s percentage gross margin level. And at the midpoint of our guidance for Q2, we anticipate a gross margin in the 38% range, somewhat better than the margin in Q1.

Speaker 3

Based on those revenue expectations in our current operating model, we estimate non GAAP earnings per share for the Q2 to be in the range of 0 point 5

Operator

dollars to $0.58 per diluted share.

Speaker 3

After a slow start to the year, we are encouraged by strengthening demand during quarter and into Q2. We anticipate the continuation of these trends along with the performance of our global team to provide sequential improvement in the Q2 and continued growth through 2024. I will now turn the call over to the operator for your questions.

Operator

Thank And our question is coming from the line of Tom Diffely with D. A. Davidson. Your line is open. Yes.

Speaker 4

Good morning and thank you for taking my question. First of all, John, it's been a pleasure working with you and I wish you well in your retirement. And then I guess I'd like to just kind of back up here and hopefully ask a little bit about just the health of the mainstream business and how you see that playing out in terms of pricing, supply demand, seasonality, just focused on the mainstream, you could.

Speaker 2

Yes. Tom, thank you. In the mainstream sector, the season low, especially in China and Taiwan market and in terms of pricing, there are still some new comments into the market in the mainstream. However, we don't see the mainstream business impact this new composition in area outside of China and Taiwan. So the impact on mainstream pricing, there are some pressure in the Great China area.

Speaker 2

However, our MEM business has been migrating to 402228 nanometer. So the portion of mainstream business in our Asia operation are not in a bigger portion. So the increase in product mix has offset the mainstream price pressure in terms of our branded ASP.

Speaker 4

Okay. So when you look at the last few years, you have the nice ramp up in 1st demand. And then because there were supply constraints in industry, you had nice pricing, nice margins. And then it seemed like the margin got a little saturated. At this point, do you feel like the pricing of the margins from the mainstream is in a kind of a stable area where if you look at over the next few quarters, it feels pretty stable for you?

Speaker 4

Or are we going back to kind of the history in mainstream when we have kind of a seasonal or yearly decline in pricing?

Speaker 2

Actually, the pricing I mentioned went up in 2021 2022. So even we adjust the price a little bit right now, however, they are still much higher than before. But at this moment, the pricing of mentholtz has been stabilized and we are not trying to adjust the price because the market in the high end of the mentioned, especially in 40 nanometer area are growing. So that consume a lot of our capacity and we have no need to further adjust our price in the mainstream. So going forward, we will keep our mainstream pricing stable.

Speaker 2

Of course, the premium charge at this moment disappear. However, as I mentioned, we are focusing on the branded ASP, which basically depending on product mix.

Speaker 4

Okay. No, it sounds good. It's encouraging. Moving over to the flat panel business, you talked about some OLED strength and how that helped your advance. I'm curious, what are you seeing in the Gen 10.5 range?

Speaker 4

Is that still fairly light or fairly soft for you?

Speaker 2

It's still very light. Most customers are focusing on MRI product and the total CapEx of G10.5 remain very, very low. So actually in terms of profit margin and the

Speaker 3

overall

Speaker 2

production output is more beneficial if we are focusing on amyloid product instead of G10.5.

Speaker 4

Okay, great. And I'm not sure if Chris Proggler is on the line, but I did have a question. As you start to look at mini and micro LEDs for flat panel displays, how that impacts the photo mass market?

Speaker 5

Let's see. So the mini LEDs, that's just a more sophisticated backlight. There's not a big impact on those in the photomass market except for the switching layer, the transistor layer, those mini LEDs let you take advantage of more advanced TFTs or transistor levels. So it's driving, I think, a more sophisticated and advanced switching layer, thanks to mini LEDs. Although the formation of the mini LEDs is not really photo mask intensive.

Speaker 5

For micro LEDs, it started off to be a relatively simple technology to integrate that is relatively few patterning steps. What we're seeing in most of those products are in prototype or early production phase, actually fairly dense set of photomask and patterning requirements to build those micro LEDs. They're proving to be a little harder to control than initially anticipated. So I think it's a good trend, positive trend on the microLED side for photo mask, especially if it drives more applications for displays. Not a game changer by any means or a tremendous driver, but I think it should be viewed as a positive trend for display mask making.

Speaker 4

All right. Thanks, Chris. And since I have you on the line, any update on activity that's going on with you and EUV? I know you've been part of some consortiums, but curious if there's any, what we call regular business in that space at all for you?

Speaker 5

Yes. I think in 'twenty three and 'twenty four, our AUV customer base expanded modestly.

Speaker 3

There are

Speaker 5

a couple more companies we work with that are starting to dip their toes in the water on EUV using pilot masks and things like that. So we see the customer base expanding. We're doing a few demonstrations on running flows with EUV masks versus optical masks for 1 memory customer to compare what the yields might be under EUV. So I think the customer base is starting to expand a bit. The strongest part of that business for us has been our primary customer who is an OEM.

Speaker 5

That business has been very strong consistent with what their OEM products and the take up in the industry. And then as far as the advanced nodes, we did strike up one new relationship on EUV, which at least we're not at liberty to talk about on this call, but it's so far been a fruitful interaction and maybe we'll have a little more to say about it over the next few calls.

Speaker 4

Great. I appreciate it, Chris. And then last question for John. When you look at the capital spending of $140,000,000 this year, how much of that is, I guess sponsored or do you have contracts to kind of guarantee a certain level of production if you're going to spend that level of money?

Speaker 3

Yes. So as we've discussed over the last several years, Tom, for every major capital investment we get. We have 1st of all, we have an investment analysis that supports at least our threshold IRR And we drill down on the revenue line in those analyses to make sure that the revenues are just not numbers on an Excel spreadsheet. They're supported by either customer commitments or pretty good assurances that that business is going to be there. The request from customers for us to increase capacity and not promises, but assurances of future orders to support the investments.

Speaker 3

And of course, as you've seen, our ROIC from 2017 at about 1.5% has increased to 13% to 14% over the last several years. So that strategy of supporting the investments and making sure that we've got the revenues to support them has been effective in the total turnaround in our ROIC.

Speaker 4

Great. Well, thank all 3 of you for your time today. And John, once again, congratulations.

Speaker 3

Thanks, Tom. Thanks for taking our call and for the questions.

Speaker 4

Thanks.

Speaker 5

Take

Operator

care. Thank you. And there are no further questions in the queue at this time. I will now turn the call over to Frank Lee for any closing comments.

Speaker 2

Thank you for joining us this morning. We are entering the 2nd quarter from a strong position with demand growing across our markets and a solid financial position to support our growth investments. We have a great market position with leading share and technology. We expect to grow to continue growing market share and improving profit margins. I'm proud of our team's performance and confident we are on the way to another new record year in 20 24.

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 please disconnect your line at this time.

Powered by Quartr
Earnings Conference Call
Photronics Q1 2024
00:00 / 00:00