Photronics, Inc. (NASDAQ:PLAB) Q4 2024 Earnings Call Transcript

Photronics, Inc. (NASDAQ:PLAB) Q4 2024 Earnings Call Transcript December 11, 2024

[Operator]: Good day, and welcome to the Photronics Q4 FY 2024 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. Today is Wednesday, December 11, 2024. I would now like to turn the conference over to Ted Moreau, Vice President of Investor Relations.

[Ted Moreau]: Thank you, Operator. Good morning, everyone, and welcome to 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, is 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 “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, levels 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 17th and the Needham Growth Conference in New York on January 14th. I will now turn the call over to Frank.

[Frank Lee]: Thank you, Ted, and good morning, everyone. Before we begin, I would like to take a moment to welcome Ted, who joined us during our fourth quarter as the head of Investor Relations. Ted has extensive experience in capital markets and the technology industry, having previously worked on both the sell-side and in 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 were driven by high-end IC and G10.5+ FPD. Full-year sales of $867 million were slightly below the record level we established in 2023, with 2024 coming in as the second-highest sales in our history.

Regarding IC markets, demand turned positive this quarter, primarily for high-end designs in Asia and the US. VisionEdge AI chips are driving multi-layered mask 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, is pushing the mask industry forward for the next several years. As one of the largest merchant IC mask producers, with a strong global presence, leading market share, process expertise, and broad market knowledge, we are well-positioned to benefit from these favorable long-term trends. Turning to display, similar to IC masks, FPD mask demand is driven by new designs, product roadmaps, and panel manufacturing processes. High-end ASP mask sets are needed to support AMOLED and LTPS mobile display manufacturing.

Q&A Session

Larger display sizes, particularly on the G10.5+ panels, require larger photomasks, which are difficult to manufacture and hence command higher ASPs. As the largest global FPD mask supplier, our growth set of FPD mask solutions allows panel makers to design new features in their products. We are excited about future opportunities in FPD and are well-positioned to maintain and extend our leadership. Q4 net income of $34 million contributed to recurring income of $131 million for the full year. This result translates once again into strong cash flow for both the quarter and the full year, further strengthening our balance sheet. Over the past twelve months, we have increased cash and short-term investments 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 primarily deployed this capital to expand IC capacity and capability in growing US and Asia markets while also replacing aging equipment to improve network reliability and productivity. In 2025, we plan to spend $200 million, with a large focus on our US multi-site capacity and capability to capture regional IC flows. Eight years ago, we had no production in China. Since then, we have successfully installed and scaled our operations in the country, including our IC facility in Suzhou and FPD facility in Xiamen.

China is one of the largest and fastest-growing regions for semiconductor and display production, with mask demand projected to outpace 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 US-based photomask supplier, we have positioned ourselves as a market leader to benefit from long-term industry drivers, including regionalization. We will continue to invest in profitable growth and leverage our competitive advantage to maintain our status as a trusted source of photomasks and help our customers achieve their technology roadmaps.

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

[Eric Rivera]: Thank you, Frank. Revenue in the fourth quarter was $223 million, 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 US. Sequential growth in logic was partially offset by soft memory demand. By node, the strongest demand was for 22-28 nanometers and sub-14 nanometers, which is inclusive of our specialty EUV business. Mainstream was lower sequentially due to slow market demand mid-quarter but 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 are 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 lasts from six to eighteen months 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 $1 million in net income and 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 was $43 million in the quarter and $131 million for the year as we invested in multi-node IC capacity and capability to support market demand and to strategically replace aging tools. For 2025, we anticipate CapEx will grow to $200 million, with most of the increase earmarked to expand our IC investment in the US.

We expect the expansion 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 US 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-rated bonds, 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 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 will remind you that demand for our product is inherently uneven and difficult to predict, with limited visibility and a typical backlog of one to three weeks. In addition, ASP for high-end masks is 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. Due to our leading market and technology position and strategic growth strategy, we believe 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 costs 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]: Please press 11 on your telephone and wait for your name to be announced. To withdraw your question, press 11 again. Momentarily, we will compile the Q&A roster. Our first question will come from the line of Tom Diffely with C.A. Davidson. Your line is open.

[Tom Diffely]: Good morning. Thank you for letting me ask a few questions. First, on the operating expenses, they were up quite a bit year-over-year. Could you provide more detail on what drove the increase and what portion was one-time versus recurring?

[Eric Rivera]: Good morning, Tom, and thank you for the question. Our operating expenses were primarily driven by increased SG&A and R&D costs. For R&D purposes, I will let Chris elaborate further. From an SG&A perspective, we saw increased labor and benefits costs as well as higher outside services. Approximately half of the increase was non-recurring in nature.

[Chris Progler]: Hi, Tom. On the R&D side, we had a robust pipeline of new projects in 2024. We often see mask activity increase during industry slowdowns as customers invest in R&D and new product qualifications. For example, we began another 7nm node optical project that will finish in 2025. Additionally, we have development projects for the EUV high-NA program. Our EUV revenue reached record levels in 2024, driven by increased demand. The installation of the multi-beam mask writer in the US is also contributing to our R&D spend. Furthermore, we are seeing mid-node migrations from 65/40nm to 22/28nm, particularly in the US, which requires process customizations on our end. These investments align with long-term revenue opportunities.

[Tom Diffely]: Thank you, Chris. One follow-up question on the $200 million CapEx for 2025. Is this primarily targeted at new capacity, and could you provide some details on whether this includes any brick-and-mortar expansions?

[Eric Rivera]: Thank you, Tom. Most of the $200 million CapEx is earmarked for new capacity. We are focusing particularly on the US market to support regionalization trends. While there are no entirely new facilities planned, there will be expansions within our existing sites to accommodate this capacity increase.

[Tom Diffely]: Great. And is this expansion primarily targeted at supporting current fabs or new fabs coming online?

[Eric Rivera]: It is a mix. Some of the investment will support current fabs, and some will align with new fabs coming online, especially as regionalization trends drive the semiconductor industry. Many of our larger customers are providing projections for their photomask needs over the next three years, which helps us align our investments.

[Tom Diffely]: That makes sense. And finally, a broader industry question for you, Frank. How do you view the photomask industry’s growth in 2025 and beyond?

[Frank Lee]: Thank you, Tom. We are optimistic about the industry’s growth trajectory. Regionalization, AI, and advanced semiconductor designs are driving new projects and increasing demand for photomasks. For instance, AI ecosystems require a variety of peripheral and specialty chips, not just GPUs, which opens opportunities for photomask suppliers like us. While TSMC produces its own masks for GPUs, we are seeing demand for edge chips and ASICs driven by AI applications, which are fueling growth.

[Operator]: Thank you. I am showing no further questions in the queue at this time. I will now turn the call back over to Ted Moreau for closing remarks.

[Ted Moreau]: Thank you, Operator, and thank you all for joining our call today. We appreciate your interest in Photronics and look forward to updating you in the coming quarters. Have a great day, and happy holidays!

[Operator]: This concludes today’s program. Thank you all for participating. You may now disconnect.