Photronics Inc

NASDAQ:PLAB

Earnings Call Analysis

Revenue and Earnings Growth Despite Slow Start

Photronics reported a revenue of $216.3 million in Q1, marking a 2% increase year-over-year, though it was a 5% fall from the previous quarter. The sequential decline was attributed to softer seasonal demand and fewer days in the quarter. IC revenue reached $157.6 million, while FPD revenue was $58.7 million, an 8% rise compared to last year. The gross margin stood at 36.6%, slightly better than the previous year. Operating cash flow improved by 50%, and the company expects Q2 revenue between $226 million to $236 million with an anticipated gross margin of around 38%. Non-GAAP earnings per share for Q2 are estimated to be $0.50 to $0.58, as demand rises across market segments. Strategic investments and targeted growth remain a focus with a positive outlook continuing into 2024.

Photronics Q1 Performance Highlights and Growth Trajectory

Photronics kicked off the fiscal year with sales growth in comparison to the previous year, attributing the increase to high-end growth in Integrated Circuits (IC) and Flat Panel Display (FPD) orders. However, this was somewhat offset by a softer mainstream demand in both sectors. Despite a robust end to the quarter which boosted confidence in revenue improvement for Q2, the initial demand was weaker than expected. Notably, the company was able to achieve improved earnings over the last year driven by better operational leverage and higher gross margins.

Financial Health and Operational Efficiency

For the first quarter, Photronics reported GAAP earnings of $0.42 per share and non-GAAP earnings of $0.48 per share. A significant takeaway for investors is the company's efficient cash flow management, which not only outperformed Q1 of the previous year but also reinforced the firm's balance sheet, ensuring a solid foundation to support growth initiatives. Furthermore, Photronics has maintained stable investment plans with the annual capital expenditure guidance remaining firmly at $140 million.

Future Prospects and Q2 Guidance

Photronics looks ahead with optimism, forecasting second-quarter revenues to range between $226 million to $236 million. This anticipates a continuation of the positive trend observed towards the end of Q1, fueled by long-term demand drivers. With a stabilized pricing environment, the company predicts a gross margin in the 38% range for Q2, an improvement from the previous quarter. The expected non-GAAP earnings per share for Q2 are estimated to be between $0.50 and $0.58 per diluted share. These projections signal strengthening demand and a potential for sequential improvements throughout 2024.

Market Positioning and Strategic Outlook

Positioned as a technology leader, particularly in AMOLED displays for premium smartphones, Photronics enjoys a competitive edge and strong relationships with large panel makers. The company is poised to leverage its global presence and robust customer relationships to align with industry trends, such as the shift in semiconductor manufacturing to advanced nanometer technologies. While the demand in the memory sector is undergoing a recovery, Photronics' engagement with Tier 2 providers in high-value applications signals encouraging demand trends. As part of its strategic focus, Photronics will continue to manage costs diligently to expand margins and drive cash flow explicitly aiming towards supporting growth investments.

Earnings Call Transcript 2024-Q1

[Operator]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Photronics First Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions]

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

[Richelle Burr, executive]

Thank you, Lilian. Good morning, everyone. Welcome to our review of Photronics fiscal 2024 First Quarter 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 material that accompany our remarks are available on the Investor Relations section of our web page.

Comments made by any participants on today's call may include forward-looking statements and 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. 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.

[KangJyh Lee, executive]

Thank you, Richelle, and good morning, everyone. We achieved sales growth compared with last year and both IC and FPD increase with high-end growth being partially offset by soft mainstream demand in both sectors. Compared with the fourth quarter, sales were down due to seasonal trends and [ 4 ] fewer days in the first quarter. Demand was weaker and sales were softer than we expected during the first 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. Earnings improved over last year as operation leverage drove higher gross margins. Our quarter-over-quarter comparison, [indiscernible] cost gross margin to fall. Once again, our team has done were to control expenses and deliver solid margins even with lower sales compared with fourth quarter.

The first quarter earnings were $0.42 per share on a GAAP basis and $0.48 per share on a non-GAAP basis. Operation cash flow improved from the first quarter of last year, allowing us to further strengthen our balance sheet to support our growth plans. I will now like to offer some comments on the overall market -- mass market and demand environment. As I stated earlier, mass demand was soft at the start of first quarter for both IC and FPD.

Demand improved through the quarter including 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. What I see, we are seeing a growing trend in no migration from customer in Asia as they move to 28 and 22 nanometers to improve performance. The trend is driving type out demand for our high-end businesses. In memory, the industry is seeing a recovery in demand.

Our memory exposure is with Tier 2 providers now typically high-value applications. They are seeing encouraging demand trends as well. For our everyday, our business outlook got go even as our overall display industry remains soft. As a 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.

The spread for premium smartphone are continually new SK new futures [indiscernible] new futures and panel-maker are innovating to gain market share. This benefits us as we as have greater -- we have great relationships with large panel makers and can provide high-quality mask to help them achieve their goal. With [indiscernible] 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.

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 photomask 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 public congratulations Jan on his upcoming retirement. Jan has been an important member of our executive team since joining Photonics in 2017 and has been a great partner to me over entire time, especially during my time as CEO. He helped us through tremendous growth and geographic expansion. On behalf of the entire organization, I wish him well in retirement. John, the floor is yours.

[John Jordan, executive]

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. Eric, our Corporate Controller, who will assume the role of interim CFO as well as our and Treasurer and both their staff and our international CFOs and their staff.

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 first quarter results.

Revenue was $216.3 million up 2% year-over-year and 5% less than last quarter. As Frank mentioned, our first quarter began slowly but gained momentum as end market demand seem to recover. The first quarter is typically the seasonally slowest quarter in our fiscal year. Slower demand at the beginning of the first quarter exacerbated the seasonal decrease and there were 4 fewer days than the previous quarter, all combining for the sequential decrease.

First quarter IC revenue was $157.6 million, up 1% year-over-year and 4% lower sequentially. High-end revenue increase led by strong foundry logic 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.

The long-term growth drivers remain intact as we support customers' technology road maps and investments as they expand capacity to support supply chain regionalization. FPD revenue of $58.7 million 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. 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 $26.2 million or $0.42 per diluted share. Adjusted for the nonoperating loss, net income was $29.9 million or $0.48 per diluted share, an improvement from last year and somewhat lower than our very strong Q4 earnings.

We generated $41.5 million 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 $23.3 million in the quarter. Our CapEx guidance for the year will remain at $140 million, primarily in both high-end and mainstream IC to address anticipated demand.

We ended the quarter with a cash balance of $508.5 million, short-term investments of $13 million and debt of $23.4 million 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.

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 on our quarterly revenue and earnings. Given those caveats, we expect second quarter revenue to be in the range of $226 million to $236 million. We believe the momentum that built during the first quarter 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 gross margin in the 38% range somewhat better than the margin in Q1. Based on those revenue expectations and our current operating model, we estimate non-GAAP earnings per share for the second quarter to be in the range of $0.50 to $0.58 per diluted share. After a slow start to the year, we're encouraged by strengthening demand during the quarter and into second quarter.

We anticipate the continuation of these trends, along with the performance of our global team to provide sequential improvement in the second quarter and continued growth through 2024. I will now turn the call over to the operator for your questions.

[Operator]

[Operator Instructions]

Now a question coming from the line of Tom Diffely with D.A. Davidson.

[Thomas Diffely, analyst]

First of all, John, it's been a pleasure working with you, and I wish you well on 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, if you could.

[KangJyh Lee, executive]

Yes. In the mainstream sector, the season low, especially in China and Taiwan market. And in terms of pricing, they are still some -- there are some newcomers into the market in the mainstream. However, we don't see the mainstream business impact in this new compensation in area outside of China and Taiwan. So the impact on mainstream pricing, there are some pressure in the -- great China area.

However, our main business has been migrating to 40 and 22 -- 28-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 mentoring price pressure in terms of overall branded ASP.

[Thomas Diffely, analyst]

Okay. So when you look at the last few years, you had the nice ramp-up in first demand? And then because there are supply constraints in the industry, you had nice pricing, nice margins. And then it seemed like the March got a little saturated. At this point, it feels like the pricing or 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? Or are we going back to kind of the history in mainstream when we have kind of a seasonal or yearly decline in pricing?

[KangJyh Lee, executive]

Actually, the pricing I mentioned went up in 2021 and '22. 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 mainstream has been stabilized, and we are not trying to adjust the price because the market in high end of the mention, especially in 40-nanometer area are growing. So that consumed a lot of our capacity.

And we have no need to further adjust our price in mainstream. So going forward, we will keep our mainstream pricing stable. Of course, the premium charge at this moment disappear. However, as I mentioned, we are focusing on the branded ASP, which basically depending on the product mix.

[Thomas Diffely, analyst]

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 G10.5 range? Is that still fairly light or fairly soft for you?

[KangJyh Lee, executive]

It's still very light. Most customers are focusing on more product and the total cap of G10.5 remain very, very low. So actually, in terms of profit margin and the -- and overall, production output is more beneficial if we are focusing on AMOLED product instead of G10.5.

[Thomas Diffely, analyst]

Okay. Great. And I'm not sure if Chris Prag was on the line, but I did have a question -- as the -- as you start to look at many micro LEDs for flat panel displays, how that impacts the photomask market?

[Christopher Progler, executive]

Let's say, so the many LEDs that's just a more sophisticated backlight. There's not a big impact on those in the photomask market except for the switching or the transistor layer, those many LEDs let you take advantage of more advanced TFTs or transistor level. So it's driving, I think, a more sophisticated at advanced switching layer, and thanks to many LEDs although the formation of the many LEDs is not really photomask intensive.

For microLEDs, 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, a 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 micro LED side for photomask, especially if it drives more applications for displays, not a game-changer by any means or a tremendous driver, but I think it's should be viewed as a positive trend for display mask making.

[Thomas Diffely, analyst]

All right. 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?

[Christopher Progler, executive]

Yes. So I think in '23 and '24 or EUV customer base expanded modestly. There are a couple of 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 one memory customer to compare with 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. That business has been very strong, consistent with what their OEM products and the takeup 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.

[Thomas Diffely, analyst]

Great. I appreciate it, Chris. And then last question for John. When you look at the capital spending of $140 million 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?

[John Jordan, executive]

Yes. So as we've discussed, over the last several years, Tom, for every major capital investment we get, we have -- first of all, we have an investment analysis that supports at least our threshold IRR. And we drill down on the revenue line and those analyses to make sure 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. 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.

[Operator]

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

[KangJyh Lee, executive]

Thank you for joining us this morning. We are entering the second 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 2024. 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 lines at this time.