Photronics (NASDAQ:PLAB) Q3 2026 Earnings Call

0:00 Good day, and thank you for standing by. Welcome to the Photronics Third Quarter Fiscal Year twenty twenty six 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. Please

0:24 be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ted Morrow, Vice President of Investor Relations. Please go ahead. Thank you, operator. Good morning, everyone. Welcome to our review of Photronics' fiscal third quarter twenty twenty six financial results. Joining me this morning are George Macrakastis, Chairman and Chief Executive Officer Eric Rivera, President and Chief Financial Officer and Frank Lee, Senior Executive Asia. The press release issued earlier this morning, along with the presentation materials accompanying our remarks, is available on the Investor Relations section of our website and in the Form eight ks filed with the SEC this morning. This call includes forward looking statements that involve risks and uncertainties, which could cause Photronics' results to differ materially from management's current expectations.

1:15 We encourage you to review the forward looking statements disclosure included in our earnings release and in our most recent 10 ks and subsequent filings. In the coming months, we will be participating in the following investor conferences: three part advisers in Chicago, Lake Street Capital in New York and the CEO Summit at SEMICON West in San Francisco and SEMICON Europe in Munich. With that, I will now turn the call over to George.

1:43 Thank you, Ted, and good morning, everyone. Total fiscal Q3 revenue of $216,000,000 increased 3% year over year and was above the high end of our guidance range. Our fiscal third quarter results reflect the recovery of some of the semiconductor design releases that were delayed and pushed out of our fiscal second quarter. We began to recognize some of this recovery during the month of May as we had previously communicated during our Q2 earnings call. This gradual recovery continued through the remainder of fiscal Q3. As discussed during our prior earnings call, we indicated that delays in new semiconductor design releases were driven by several factors, including elevated fab utilization rates, memory constraints and geopolitical uncertainty.

2:31 While these factors continue to affect the photomask industry, some design releases have moved into production. With semiconductor wafer utilization rates remaining high, fabs are prioritizing higher profitability projects and expanding capacity at higher technology nodes. These node migration actions, especially at 28, twenty two and fourteen nanometer, are occurring across a broad set of customers in different geographic locations. Node migration and a sequential improvement in high end business conditions benefited our high end IC business, which recorded a record 44% of IC's $155,000,000 in revenue. Our ongoing regionalized investments in The U. S. And Korea remain on track.

3:19 At our Allen facility, we continue to target initial revenue late this fiscal quarter with this geographical diversification contribution reflected in fiscal twenty twenty seven revenue and beyond. In Korea, clean room preparation for the expansion project to eight nanometer has been substantially completed. Having received some of the initial tools, the timetable for planned installations remain on schedule. These investments are expected to position Photronics to benefit from node migration and regionalization trends as diversify geographically. Increasing our capabilities and capacity at the faster growing high end portion of the market also expands our potential to capture opportunities from a variety of customers, including captives as they look to increase outsourcing.

4:10 As we remain on track to deliver more advanced eight nanometer capabilities in Korea over the next year and a half, we are further advancing our global technology capabilities beyond eight nanometer with a focus on EUV, customer partnerships and other mask technologies. Over the past several years, we have been leveraging partnerships with industry leaders to supply EUV R and D masks and solutions to customers while the full turnkey EUV merchant market develops. We have also supplied EUV related masks to the semiconductor equipment supply chain. Through focused internal R and D programs and capital investments and the expansion of business partnerships, we intend to gradually introduce new EUV capabilities. This pragmatic EUV strategy should expand our addressable market at the high end.

5:00 Our intentions are to manage the EUV investment cycle by expanding capabilities as the associated business opportunities emerge. Turning to FPD, revenue of $61,000,000 remains near all time highs, reflecting our strength in producing more complex masks. Strong OLED demand was driven by consumer electronics such as flagship and high end smartphones scheduled for launch in developed markets in the coming months. This high NFPD demand is expected to continue through fiscal Q4 and beyond. We received additional G8.6 AMOLED orders from a growing customer base, an indication that the G8.6 market is broadening.

5:49 Combined, these high end projects are expected to be offset by consumer electronics for the emerging markets where the tight memory conditions have disrupted some product launches. Our most advanced FPD writer, which was installed earlier this year, entered mass production during the quarter. It has received strong market traction as it aligns well with our customers' technology road maps. We expect this rider to remain a pivotal tool in strengthening our market leading position in the high end of FPD mask market.

6:24 I now turn the call over to Eric to review our provide fourth quarter guidance. Thank you, George. Good morning, everyone. Fiscal third quarter revenue came in at $216,000,000 an increase of 3% both year over year and sequentially as we recognize some recovery from the semiconductor design release delays that had occurred during our fiscal second quarter. Overall, we experienced improved demand conditions in Taiwan along with The U. S. And Korea, particularly at the high end. IC revenue of 155,000,000 increased nearly 5% both year over year and sequentially and represented 72% of total revenue. The high end portion of IC represented 44% of IC revenue, recovering as business conditions improved and wafer fabs prioritized more profitable chip designs, accelerating known migration trends.

7:20 Our mainstream business declined to 86,000,000 trends. Node migration from mainstream to high end is an overall positive to the company as it is a natural evolution to higher ASPs per chip design. We are expecting mainstream to increase in The U. S. In fiscal twenty twenty seven as we expect to capture market share at higher end nodes once the island expansion is complete.

7:48 Turning to FPD, fiscal Q3 revenue of $61,000,000 declined modestly in the quarter though remains near all time highs. Customer activity in Korea for high end consumer electronics remained strong while China demand was influenced by the timing of certain consumer electronic releases for emerging markets that are being impacted by the industry's tight memory conditions. Overall gross margin of 33% improved sequentially on product mix and increased revenue and the associated operational leverage in our financial model. Operating margin was 21% and diluted GAAP EPS attributable to Photronics shareholders was $0.49 per share. Excluding foreign exchange impacts, non GAAP diluted EPS was $0.50 per share.

8:35 The improved performance of our IC business along with our display operations remaining near all time highs contributed to our earnings during the quarter. Operating cash flow of $76,000,000 represented 35% of revenue. CapEx was $37,000,000 Fiscal year to date CapEx of $130,000,000 reflects the timing of outlays associated with the $330,000,000 of CapEx we have been guiding to for fiscal twenty twenty six. We are updating our fiscal twenty twenty six CapEx guidance to a range of between $255,000,000 and $3.00 $5,000,000 We remain committed to the projects and timelines driving our original $330,000,000 CapEx guidance. However, the cadence of orders and vendor delivery of certain high value tools to our fabs can vary, causing the timing of our capital expenditures to fluctuate.

9:26 To the extent any planned spending shifts beyond this fiscal year, we would expect it to carry over into fiscal twenty twenty seven. I will provide fiscal twenty twenty seven CapEx guidance during our fiscal Q4 earnings release in December. Total cash and short term investments increased by $35,000,000 in the quarter to $673,000,000 including $5.00 $4,000,000 held within our joint ventures in which we hold a 50.01% ownership interest. As we consider the cash needs associated with our planned investments, we are starting from a position of significant financial strength with a strong balance sheet and a business that generates substantial cash from operations. With customers demonstrating a willingness to partner with us, we believe we are well positioned to make these investments while maintaining a disciplined approach to achieving attractive returns.

10:19 To support these investments, which also include our EUV investment strategy George discussed earlier, we may supplement our existing liquidity through borrowing. As a reminder, our capital allocation strategy remains focused on three priorities: reinvesting in the business to support organic growth, pursuing strategic opportunities, and returning capital to shareholders. We will continue to evaluate the most effective use of our cash and remain disciplined and opportunistic in our capital allocation decisions prioritizing investments that offer the highest expected returns. Before providing guidance, I'd like to remind you that demand for our product is inherently variable. High end mass sets carry significantly higher ASPs, meaning even a small number of orders can materially impact revenue and earnings.

11:06 Because of the tight fab capacity, memory and geopolitical conditions, visibility into the timeline of design releases has become even more uncertain as we have recognized over the past two quarters. Meanwhile, the order delivery time remains in the days or weeks requiring rapid response times for our operations. As a result, we are widening our revenue guidance range for fiscal Q4. As of today, we expect fiscal Q4 revenue to be in the range of $2.00 $7,000,000 to $227,000,000

11:38 Based on those revenue expectations in our operating model, we estimate fiscal Q4 operating margin between 1924% and non GAAP diluted EPS between $6 per share. I will now turn the call over to the operator for your questions. Thank you.

12:13 Our first question comes from the line of Christian Schwab with Craig Hallum. Your line is now open. Yes, thanks for taking my questions and congrats on the solid execution in the quarter. I'm wondering as we transition to higher node applications, I know you guys talked to mentioned partnership a little bit more than I remember in previous calls. I'm just wondering if you could elaborate on what type of partnerships that would that you kind of expect that might help drive future success and more competitive lower node applications in particular, if that's what you were trying to hit or suggest? I guess it wasn't clear to me.

13:00 Yeah, the partnership that we're our partnerships that we're referring to are specific to EUV.

13:11 Okay. And then far as partnerships, can you just remind me when you would expect, to be fully ramped on that technology, I guess? I'm sorry, I don't know if that was clear to me either. Sure. Yeah. So we are monitoring the merchant market and seeing how it is developing so that it's effectively economically viable for us to enter it or at least makes sense for us to catch the wave, so to speak, and enter at the right time. That takes a long time to ramp. So we are monitoring that and currently using our partnerships with folks in the industry. That'll hopefully we'll be able to report more on that in quarters to come.

14:00 Okay. And then as far as the Allen, Texas facility, I think last time you talked about entering qualification mass production. And I think initial revenue targets late this year, which seems to be on track. But can you give us an idea or remind us, if you will, of what the potential revenue capacity of that facility fully utilized would be?

14:32 Hello, Christian. Eric here. So we're not going to get into details as to how much revenue capacity we have there other than to say that we are expanding our capacity beyond what we historically have had, particularly in the higher end of the mainstream, and that additional capacity is helping us in essentially two ways. First, it'll help us increase the mainstream at the high end for areas that we haven't been servicing up until now. And furthermore, that's also gonna help us expand

15:05 Boise's ability to focus on the high end. So it's gonna help us in two ways, more expansion at the high end of the mainstream, and also help us grow our high end revenues with Boise focusing on that. So to be clear, we have been servicing the high end out of Boise, and it'll be serviced out of Allen is where we're capturing more of the higher end by bringing it out of Boise. Sort of the mid, how I would call it, the mid range node, like the

15:31 less critical part of the high end, if you will. We're not talking, you know, 14 nanometer, we're talking the mid range nodes. Yep, 65 nanometer, etcetera. Great, great. Thank you. No other questions. Thank you, Christian. Thank you. Our next question comes from the line of Max Michalis with Lake Street Capital. Your line is now open.

15:59 Hey, guys. Congrats on the quarter and thanks for taking my questions. First one for me, on the quarter. Knowing Q2, you guys had some issues related to design releases being delayed. I know that kind of was what drove the growth in Q3 for high end IC. I mean, are we fully caught up or is there still more to do on that front? So a lot of the design releases that were supposed to occur in Q2 but didn't, did in fact come across in Q3. So that was particularly helpful for Q3. Having said that, the conditions that were present in Q2 still largely remain, which are high fab utilization rate, high cost of memory, and of course, the geopolitical conditions.

16:56 Okay. Sounds good. And then, still relatively new to the story, but just given the focus on EUV, can you help me kind of frame why the focus on EUV now and kind of how much incremental capital spending you guys expect on top of sort of this $255,000,000 to $3.00 $5,000,000 CapEx maybe into next year as well too? Sure. So with respect to EUV, as George mentioned,

17:25 on the prepared remarks and as well as just on the previous question, We're waiting for the merchant market to develop on EUV before we make significant investments for a full turnkey, we call it internally, which means we'll be able to process every aspect of an EUV mask internally. In the meantime, we are able to provide those services to our customers via partnerships. But again, it's while we wait for the market to develop. The reason for that is because those are significant levels of CapEx. So, you know, we want to make sure that we have the appropriate internal rate of return on those investments before we dive in.

18:13 Okay. Thanks, guys. You're welcome. Thank you. You. Our next question comes from the line of Ghoshie Shree with Singular Research. Your line is now open. Good morning, gentlemen. Congrats on the high end recovery. Can you all hear me though? Yes, we can, Ghoshie. Thank you. Okay. Alan,

18:34 when that starts generating revenue in Q4, is that work from new customers, mid range,

18:43 over from Boise? Is that how much of it is incremental to the company?

18:49 So we're not going to necessarily get into much detail, but it it we currently do service, these customers. The customers are largely the same, with a few exceptions here and there, but they're largely the same. We have provided the services between both sites, Allen and Boise. This will be incremental to Allen, more capacity, as I mentioned in the previous questions. And more importantly, that'll also help us grow Boise on the high end. Okay, awesome. So on the China side, I know you guys have pointed before that, you know, that's now kind of gearing towards the 2228.

19:38 So was the decline mainly mainstream or is

19:43 there a competition on the high end business as well?

19:49 So China market is competitive as we've, discussed before in previous calls. Primarily on the mainstream, we have some local mask houses as competitors and they're focused on the mainstream and as a result of the last year and a half, two years, we have been focusing our efforts on the high end where we have our competitive advantage and technology leadership.

20:16 Okay. Okay. So on the mainstream designs that are still coming through, are the complete

20:26 market sets or are you seeing more partial reasons? Where were they only kind of replaced a few days?

20:32 Pogashi, I'm going to need you to repeat that question because you broke up midstream. Okay. Okay. On mainstream designs that are still coming through, are the customers ordering complete market sets or is that partial re spins? Oh, usually it's complete market sets. Complete mass sets rather. Okay. And on the gross margin side, I know Q4 was around the same revenue number, but gross margins contracted about 180 basis points even with a better mix. What are we looking at in terms of that margin compression

21:16 versus Q4? So you're referring to what are we expecting for Q4 versus Q3? No, no. Q4 last year did around same number of top line, but Q3 had better mix, but we saw a margin compression. We just kind of try to figure out what's in the cost of goods here. Sure. So a number of things, primarily driven by volumes and market and mix, not just product mix, but also geographical mix of where the earnings and where the revenue occurs. So it's a combination of those items.

22:04 Got you. All right. Thanks. I'll take out the rest offline. Thank you, guys. Thank you, Goshi. Thank you. Our next question comes from the line of Daniel Yermakan with Freedom Broker. Your line is now open. Hey, guys. Thanks for having me. Congrats with the great quarter. Just a quick question. The Q4 revenue guidance range is around $20,000,000 And I mean, what's driving this wider band? Is it mainly timing? Or what does why the visibility is lower than the previous quarter? Sure. Thanks for the question. So as mentioned on prepared remarks, it's because the conditions in the market that were existent in Q2 remain in Q3 and we expect it to remain in Q4 and beyond for some time, which are, number one, high fab utilization rates, number two, high memory costs, and number three, geopolitical conditions.

23:11 Because of those three factors, our visibility is even more limited than it has been in the past. And I think just to add to that, this is George Daniel, is that as we've stated in the past, one mask set on the high end is a big dollar amount that can swing quite a bit of a couple million plus dollars in a quarter easily with one mask set. So you combine that with all the regions that we're in, and what Eric just said, basically, it could get a bit choppier, less predictable results until things, you know, maybe come back to where they were before. So hopefully that helped. Yeah, thanks. And just quickly on the end of life tool upgrades. Last quarter, you mentioned that it's expected to peak in 2026.

24:00 Could you provide any color? Is there any shift to the next year? Yes. Sure. There's some of our CapEx is expected to shift on to fiscal year 2027, as a result of ordering pattern as well as delivery from our vendors. So as a result, the peak may be in '27, as opposed to '26. Yeah, no question from my side. Thank you. Thank you, Daniel. Thank you. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Ted Morrow for closing remarks. Thank you, Shannon, and, thanks everybody for joining us today. We really appreciate your time. Look forward to connecting with everybody throughout the quarter.

24:49 Have a great day. This concludes today's conference. Thank you for your participation. You may now disconnect.