Photronics Inc

NASDAQ:PLAB

Earnings Call Analysis

Photronics Sees Steady Growth, Strong Margins Amid Market Changes

In the fourth quarter, Photronics achieved revenue of $223 million, a 5% sequential increase, driven by a 21% rise in high-end sales. The company reported a gross margin of 37% and operating income of $131 million for the year. Looking ahead, Q1 2025 revenue is projected between $208 million and $216 million, with non-GAAP EPS estimated at $0.43 to $0.49. Capital expenditures are set to rise to $200 million in 2025, primarily for expanding U.S. capacity. With a strong cash position of $641 million and a commitment to growth, Photronics remains optimistic about its future in the semiconductor industry.

Strong Financial Performance in Q4

In the fourth quarter, the company reported revenue of $223 million, marking a 5% increase from the previous quarter. This growth was significantly driven by a 21% surge in high-end integrated circuit (IC) sales, despite a slight decline in mainstream demand. Notably, high-end sales benefited from increased orders from logic foundries in both Asia and the U.S. The sequential growth in logic was somewhat diminished due to softer memory demand. Furthermore, the display segment (FPD) also showed improvement, growing 7% from the previous quarter, aided by strong mainstream growth.

Steady Margins Amid Shifting Market Conditions

Gross margin held steady at 37% in Q4, unchanged year-over-year. This stability comes amidst the absence of previously experienced premium pricing due to post-COVID capacity constraints. Operating expenses increased due to a rise in R&D activities and SG&A costs driven by external services. The company anticipates returning operating expenses to approximately 10% of revenue. Operating margin remained robust at 25% for the quarter, reflecting the firm's ongoing efforts to optimize costs and improve efficiency.

Record Net Income and Operating Cash Flow

For the full year 2024, the company achieved a record net income of $131 million, an important milestone underscoring its financial health. The operating cash flow for Q4 was $16 million, contributing to an impressive total of $261 million for the year, which represents 30% of revenue. This strong cash generation allows the company to invest in strategic initiatives and return capital to shareholders.

Capital Expenditures and Future Investment

In 2024, capital expenditures totaled $131 million, mainly targeted at expanding IC capacity and enhancing reliability by replacing aging tools. Looking ahead, the company plans to increase its capital expenditures to $200 million in 2025, focusing heavily on expanding its U.S. capabilities to capture growing regional opportunities. The strategy aligns with increasing customer requirements and national interests in regionalized semiconductor production.

Focus on Growth in Key Markets

The company has made significant inroads into the Chinese market over the past eight years, establishing a strong presence. This area is anticipated to remain a profitable growth engine due to mass demand for semiconductors and displays projected to outstrip supply. The company’s long-term purchase agreements solidify its market-leading position, especially as it seeks to cater to high-end demands in this evolving landscape.

Guidance on Future Performance

For the first quarter of the new fiscal year, the company expects revenue to range between $208 million and $216 million, considering typical seasonality factors. This guidance reflects cautious optimism amid anticipated lower seasonal volumes, with estimated non-GAAP earnings per share set to range from $0.43 to $0.49. The operating margins are projected between 23% and 25% for the quarter. Looking further ahead, the company aims to grow revenues in alignment with overall photomask industry dynamics, underpinned by their leading technology position.

Investment Strengthened by Cash Reserves

The company's balance sheet remains strong with cash and short-term investments totaling $641 million, marking a 25% increase over the year. Concurrently, total debt has decreased by 27%, leaving the company with $18 million in debt that is expected to be fully paid off soon. This strong liquidity not only supports ongoing investment strategies but also allows for increased share repurchase authorization, which has been raised to $100 million as part of a comprehensive capital allocation strategy.

Earnings Call Transcript 2024-Q4

[Operator]

Good day, and welcome to the Photronics Q4 FY '24 Earnings Call. [Operator Instructions]As a reminder, this conference is being recorded, Wednesday, December 11, 2024. I would now like to turn the conference over to Ted Moreau, Vice President, Investor Relations.

[Unknown Executive]

Thank you, operator. Good morning, everyone. Welcome to our review of Photronics' fiscal 2024 Fourth Quarter Results. Joining me this morning are Frank Lee, CEO; Eric Rivera, CFO; and Chris Progler, 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. 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. A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. During our fiscal first quarter, we will be participating in the New York CEO Summit on December 17 and the Needham Growth Conference in New York on January 14. I will now turn the call over to Frank.

[KangJyh Lee, executive]

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 fourth quarter as the Head of Investor Relations, has extensive experience in capital markets and the technology industry. Have we 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.

We delivered a strong fourth quarter with sales above the high end of guidance. Sales of $223 million was driven by high-end IC and G10.5+ FPD. Full year sales of $867 million was founded slightly from the record level we established in 2023 with 2024 coming in as the second highest sales in our history. Regarding the IC end markets, demand turned positively this quarter, primarily for high-end designs in Asia and the U.S.

Being AI chips are driving margin mass demand to support a rapidly expanding AI ecosystem. This, combined with government subsidized supply chain expansion of ISIS into all corners of the digital economy will push the mass industry forward for the next several years. As 1 of the largest merchant IC mass producers with strong global presence, leading market share process expertise and blue marginal technology, we have positioned ourselves to benefit from this favorable long-term trends.

Turning to display, similar to IC mask, epidemic demand is driven by new designs, product road maps and panel manufacturing capacity, compress high-end ASP assets are needed to support AMOLED and LTPS mobile display manufacturing. Nature display size such a roper on G10.5+ panel line requires larger photopic which are difficult to manufacture and hence, command higher ASPs.

As the largest global FPD mask supplier, our growth at TDM solutions allow panel makers to design new features in their products. We are excited about the future opportunity in LPD and are well positioned to maintain and extend our leadership. Q4 net income of $34 million contributed to a record net income of $131 million for the full year. These results -- 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 -- short-term investment by $128 million up to $641 million. We have the financial flexibility to invest in strategic initiatives, such as global footprint expansion, product development and M&A.

As we continue to evolve our existing network and capture growth opportunities. In 2024, we spent $131 million on CapEx. We are mainly deploying this capital to expand IC capacity and capability in a growing U.S. and Asia markets, while also replacing analog equipment to improve network reliability and productivity. In 2025, we plan to spend $200 million with a large focus on our U.S. multisite capacity and capability to capture regional IC growth opportunities.

Turning to the China market. 8 years ago, we had data 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 IT facility in Xiamen and FPD facility in Hefe. China is 1 of the largest and -- 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 company, thanks to our sustainable competitive advantages.

Furthermore, as evidence of our local customer support, our long-term purchase agreements have secured our market-leading position. As the largest U.S. as photomask producer, we have positioned ourselves as a market leader to benefit from long-term leadership 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 customers achieve their technology enrollments.

I will now turn the call to Eric to review our fourth quarter results and provide first quarter guidance.

[Eric Rivera, executive]

Thank you, Frank. Revenue in the fourth quarter was $223 million, up 5% sequentially as we achieved growth across both IC and Deputy. I see 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. Sequential growth in logic was partially offset by soft memory demand.

By note, the strongest demand was for 22- to 28-nanometer for sub 14-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. High end was essentially flat with strong growth in G10.5+ 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&D costs as we experienced increased qualification activity, which typically last from 6 to 18 months in duration, depending on the technology and complexity. Increased SG&A costs were the result of higher outside services and other period expenses.

Going forward, we anticipate operating expenses returning to our target of 10% of revenue. Operating margins remained strong in Q4 at 25%. For the full year 2024, we realized the second highest operating income in company history and achieved record net income of $131 million. 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 [ $16 ] million in operating cash flow in the quarter, bringing the total year to $261 million, representing 30% of revenue. CapEx $43 million in the quarter and $131 million 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 million with most of the increase earmarked to expand our IC investment in the U.S.

We expect the suspension plan to be completed by mid 2026 to support increasing customer requirements from growing demand as customer regionalization strategies proliferate and semiconductor industry production increases both in the U.S. 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 million, increasing 25% over the year. At the same time, total debt, which consists primarily of low rate equipment leases, decreased 27%. We have $18 million in debt remaining, which will virtually all be paid off at maturity during our second fiscal quarter.

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 million remaining up to a total of $100 million. Share repurchases are 1 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 -- uneven and difficult to predict with limited visibility and typical backlog of 1 to 3 weeks. In addition, ASP for high-end assets 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 first quarter revenue to be in the range of $208 million to $216 million, accounting for typical seasonality that impacts our first quarter demand, including Chinese New Year beginning in late January.

Based on those revenue expectations and our current operating model, we estimate non-GAAP earnings per share for the first quarter to be in the range of $0.43 to $0.49 per diluted share. This equates to an operating margin between 23% and 25%, reflecting seasonally lower sales volumes, while maintaining disciplined cost controls. Beyond the first quarter, 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 should allow us to expand margins and deliver another year of excellent cash flow, thereby positioning us to continue our investment growth strategy. We delivered great results in the fourth quarter. 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]

[Operator Instructions] And our first question will come from the line of Tom Diffely with D.A. Davidson.

[Thomas Diffely, analyst]

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.

[Eric Rivera, executive]

Thanks for the question. So our operating expenses were primarily increased SG&A and R&D. for R&D purposes, I'll let Chris probably talk about that. From an SG&A perspective, we have increased labor and benefits as well as increased outside services. But we expect -- before moving it over to Chris to talk about R&D, I'll say that we expect our OpEx to return to about 10% of revenue...

[Thomas Diffely, analyst]

Okay. Just real quickly on the SG&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 onetime in nature?

[Eric Rivera, executive]

Sure. So we actually had some nonrecurring labor benefits impact. But I would say maybe about half of the increase was nonrecurring versus recurring. Chris, would you like to articulate a little bit more about R&D?

[Christopher Progler, executive]

Yes. Tom, I can make a couple of comments on the R&D side. We had a pretty robust pipeline of new calls in '24 overall. And we see that often when the industry turns down a little bit. Actually, we often see mask activity increase, especially R&D and new product calls. We started another 7-nanometer node, optical qual that will finish in '25. So that's a good project.

We've got some development projects for the EUV high NA product program that's going on in our EUV revenue had actually a record high in '24. So that seems to be going well. We installed a multi-beam tool barter in the U.S., and that's driving some of our R&D spend. And then the other thing I think I'd point out is we're seeing some kind of mid node migration, 6540 down to 2228, 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&D side to support that.

So overall, it's a good pipeline of things all have revenue at the back end of them. So money we'll spend on these projects from our point of view.

[Thomas Diffely, analyst]

Okay. And maybe, Chris, if I could continue that conversation towards the $200 million of CapEx for 2025, obviously, a little bit higher than its run historically. And it sounds like a lot of it is going to go to investment in the U.S. So I'm curious, is that replacing older tools? Is it new capacity, new capabilities, maybe just a little more color on what you're going to get for that $200 million.

[Eric Rivera, executive]

Yes. 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 in 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, and that's why we see this expansion in the U.S. occurring at this time.

But it's also -- to your point, is also in that number, we have some amount for new -- for replacing some old tools that have gone in the black, but the vast majority of that is for expanding capacity.

[Thomas Diffely, analyst]

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?

[Christopher Progler, executive]

Yes. It's a mix. There are some of the fab projects around the world, which they're a lot started, as you know. Some of them have slowed down. A few have been canceled, but there's still strong pipeline of new fabs coming online, and many of them are in the sweet spot of commercial photomasks. 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 photos 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. So we're investing for some of those new projects as well.

[Thomas Diffely, analyst]

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

[Christopher Progler, executive]

No. No 4 walls going up, but there are some expansions within facilities and things like that going on. But no new greenfields are in the CapEx right now.

[Thomas Diffely, analyst]

All right. And then probably, Chris, I 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. 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?

[Christopher Progler, executive]

I think -- I mean, my feeling is that a mainstream was strong and continues to be healthy, particularly on a unit 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 rationalize in the mainstream. But the bulk of the units from mainstream are in our Asia divisions.

And I think it's appropriate to Frank make some comments on what's happening in mainstream.

[KangJyh Lee, executive]

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 midstream. But overall, the mainstream market continue to grow.

[Thomas Diffely, analyst]

Okay. Great. And Frank, maybe just a broader industry question for you. What is your view of industry growth -- photomask industry growth in '25? And how do you view maybe the next few years beyond that?

[KangJyh Lee, executive]

Okay. I think as we focus on the main topic today is the region ratio. And as we mentioned, the regionalization actually create a lot of new projects in different countries, including the U.S. So if we look area region by region, we see Taiwan is a stable market. Of course, TSMC is unique. And 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.S., as Chris mentioned, they 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. 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 photomask.

[Thomas Diffely, analyst]

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

[KangJyh Lee, executive]

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

[Christopher Progler, executive]

Yes, yes. Thanks, Tom. So as far as the main processors like the GPUs, they get most of the attention, the NVIDIA chips and all that supply chain, as everybody knows 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. 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 ships 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 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.

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.

[Operator]

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.

[Unknown Executive]

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

[Operator]

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