Photronics Inc Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for being here, and welcome to Photronics' earnings call for the third quarter of fiscal year 2021. Currently, all participant lines are set to listen-only mode. Following the speakers’ presentation, there will be a question-and-answer session. This conference is being recorded on Wednesday, August 25, 2021. I will now pass the call over to Troy Dewar, Vice President of Investor Relations.

Thank you, Sarah. Good morning, everyone. Welcome to our review of Photronics' 2021 third quarter financial results. Joining me this morning are Peter Kirlin, our Chief Executive Officer; John Jordan, our Chief Financial Officer; and Chris Progler, our Chief Technology Officer. The press release we issued earlier this morning, along with the presentation material, which accompanies our remarks, are available on the Investor Relations section of our webpage. Comments made by any participants on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast, 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. At this time, I will turn the call over to Peter.

Thank you, Troy, and good morning, everyone. We achieved record revenue in the third quarter as a robust design environment led to growing photomask demand across our markets. This marked the second consecutive quarter of record revenue. As you will hear from John in a few minutes, we expect another record quarter in Q4. The overall outlook for the semiconductor and display industries, including every company within these sectors, continues to improve. Among other things, these indicators point to boosting capital equipment spending by chip and panel makers that will require photomask once installed. All signs point to a prolonged period of market strength. This is truly a very positive period for the industry, for photomask demand, and for Photronics. Gross margin improved in the quarter as the benefit from an increase in revenue on fixed cost absorption was aided by price increases for certain mainstream IC nodes. Operating margin also improved with additional upside due to a one-time gain on the sale of fixed assets. These results place us within the range of our long-term target model, well ahead of the three-year horizon. A growing top line and expanding profit margins are critical elements of our strategy and validate that we are on the right path. Cash flow generated from operations was strong this quarter. We bought new tools and continued our share repurchase activity, while at the same time increasing our cash balance. The significance of this cannot be overstated. We've invested and we continue to invest in organic growth for our business. These investments are targeted and aligned with our customers' technology roadmaps, supported by long-term purchase agreements that provide assurance that newly installed tools will ramp quickly. This reduces the headwind to gross margins that can arise from underutilized tools and improves ROIC. The strong balance sheet we have built and maintained positions us to sustain this investment approach. Since 2017, annual revenue has grown 40%. Throughout the peak, quarterly revenue was up 58%. We are on track to achieve our fourth consecutive year of record revenue, growing at a compound annual rate of 10% per year since repositioning the business in 2017. Over that same time period, high-end IC revenue nearly doubled, and high-end FPD revenue increased fivefold. This did not happen by accident; it's the anticipated result of a clear, deliberate strategy to invest in areas that would generate the highest growth while also enabling improved return on capital. From a market perspective, our investment focus has been clear: geographic expansion into China for both IC and FPD and technology inflections in FPD, particularly the transition to AMOLED in mobile displays. In addition to these macro trends, there are some drivers that are applicable to the photomask sector, including the increased use of EUV by captives for high-end IC and industry photomask capacity being sold out in mainstream IC. We also cannot ignore the growing nationalism that is spurring capacity buildup in multiple regions, including the U.S. and Europe. All these factors support our belief that we are in a prolonged period of growth in photomask demand. A key element of our investment strategy is to align our operations with the fastest-growing sectors in the markets we serve. In FPD, this has included both mobile displays and ultra-large screen TVs. We have already seen the positive impact of past investments in these growth catalysts on our financial results. To maintain this performance, we continue to focus on high-value and high-growth segments of the market. This includes AMOLED for mobile, which is expanding beyond smartphones into large form factors such as tablets and laptops. AMOLED also enables diverse applications, including virtual reality headsets, automotive displays, and even foldable smartphones. In addition to mobile displays, the emergence of premium TVs such as WOLED and QD-OLED drives innovation and requires more complex photomask. Developing technologies such as micro and mini-LED will also drive mask demand as they move to high-volume production. Industry observers are expecting an increase in the installation of display equipment in the coming years. If this happens, then what naturally follows is a period of demand growth for photomasks, and orders for the new tools to be used for manufacturing. Most of these investments are occurring in China, Korea, and Taiwan. It is no coincidence that these are the very same regions of our FPD manufacturing plants, allowing us to invest in locations that are most closely aligned with our customers' operations. This year, we added three new FPD tools to our global operations. All three tools are now installed. Two of the three are contributing meaningfully to revenue during our third quarter, and all three are running at capacity in our fourth quarter, ahead of plan. The investments in these tools are supported by four long-term purchase agreements that have incremental annual revenue in excess of $40 million. This is a great example of our investment strategy in action. We secured the business through long-term contracts, installed the tools, ramped into full production ahead of schedule, and are now seeing the financial benefit as we generate revenue and profit from newly commissioned tools. In IC, a driver of innovation and demand has been node migrations. This happens not only at the bleeding edge but also for mainstream technologies as customers move to smaller nodes to take advantage of lower cost and better performance. The latter has created a shortage of supply in the mainstream market that is giving us pricing power in this segment for the first time in my 35 years in the business. Regarding the former, as the leading chipmakers kept the finance operations, using EUV to a greater extent in their IC fabs, a larger percentage of their mask capacity is being dedicated to EUV production. This means they need to outsource more non-EUV masks to merchant suppliers. We have pointed to this trend over the last few years, and we expect that it will accelerate as the leading logic and memory manufacturers move toward advanced nodes with progressively more EUV lithography steps. In December of last year, we communicated to you our long-term outlook and strategy, providing a three-year target model. Our performance during 2021, plus our outlook for the rest of the year, demonstrates that we are on track to meet or possibly exceed these targets. The semiconductor and display markets are strong. Our revenue is growing. Margins are expanding. We are generating cash. The balance sheet is solid, and we are aligned with several growth vectors to position us for future success. I really like where we are and the direction we're going. We'd like to thank all our employees for your superb effort to generate yet another record quarter for Photronics. At this time, I will turn the call over to John.

Thank you, Peter. Good morning, everyone. Third quarter results benefited from strong demand trends, leading technology, broad customer exposure, and tremendous market presence to deliver record revenue of $171 million in the third quarter, which was 7% over the record set in Q2 and up 8% year-over-year, extending the positive trajectory we established earlier in the year and we believe will continue into the fourth quarter. We also completed our strategic capacity expansion in FPD ahead of the schedule, enabling us to more quickly enjoy the larger production output. IC revenue improved 5% quarter-over-quarter and 8% year-over-year to a record of nearly $118 million. High-end revenue benefited from strong logic demand, especially in Taiwan and China. Mainstream also continued to grow on strong demand and better pricing as we realized the full benefit of the pricing environment on some mainstream IC nodes throughout Asia. Revenues to China overall were a record, 10% better than last quarter and 46% over the same quarter last year. IC revenue into China represented 29% of total IC revenue. We are encouraged by the macro trends driving robust design activity across the semiconductor industry. Additionally, the outlook for wafer fab equipment continues improving, which means more tools in operation that will need photomasks to produce chips. All of this contributes to our optimism that current trends will continue into 2022 and potentially beyond. FPD revenue of nearly $53 million was also a record, 11% better than the second quarter and 7% improvement over the third quarter of last year. Growth in AMOLED displays used in mobile applications was the largest contributing factor. Sequentially, G10.5+ demand improved as our customers are bringing on new capacity and introducing new designs for ultra-large screen TVs. Mainstream FPD also grew as our new tools expanded our output. FPD revenue into China was 53% of total FPD revenue in the quarter, up 9% sequentially and 2% year-over-year. Similar to IC, we expect current demand trends to continue in FPD, fueling continued growth from a full quarter of that new capacity. Mobile demand should continue to be the growth factor as more smartphones, tablets, and laptops adopt high-value AMOLED technology. Elsewhere, there are signs that the LCD pricing move higher over the last several quarters is ending, which would be supportive of new design releases as panel makers move to offer improved features and performance to maintain market share and revenue levels. Overall, we're very optimistic on the demand outlook for display photomasks. Margins improved in the quarter with the slowdown in operating leverage. Gross margin improved to 26.6%, supported by better pricing in mainstream IC and better product mix, particularly in FPD. Operating margin was 16.7%, including a $3.5 million gain on the sale of a lithography tool. We're very pleased with the progress resulting from our focus on margin expansion. Below the line, the income tax provision increased due to increased earnings and the gain I mentioned earlier. Net income to non-controlling interest increased with the strong performance of our joint ventures in China and Taiwan and other income increased due to unrealized gain on foreign exchange. Earnings per diluted share, including about $0.06 a share from the gain on sale of the tool, was $0.28 based on 61.5 million diluted shares outstanding. Cash and equivalents increased to $283 million with $118 million in debt, net cash is $165 million. Operating cash flow in the quarter was $55 million. Year-to-date, we've generated $113 million operating cash flow. Capital expenditures of $19 million in the quarter bring our year-to-date total for CapEx to $87 million, net of nearly $6 million in subsidies received. We're still forecasting CapEx of about $120 million for the year. For next year, we're not yet prepared to provide specific guidance on CapEx, but we do expect it to be lower than this year, focused primarily on IC in the mainstream business. We spent $12.5 million repurchasing close to another 1 million shares of our stock during the quarter, bringing the total year-to-date to 3 million shares for $36 million and cumulatively $53 million spent of the $100 million authorization currently active. We believe there is significant value in PLAB, so we intend to continue buying shares under this authorization. Before I provide fourth quarter 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. Government actions to address health concerns or trade policy may also impact our results. Given those caveats, we expect fourth quarter revenue to be in the range of $171 million to $179 million. As we've discussed throughout our commentary, end market demand factors are favorable, and we expect them to stay that way at least through the fourth quarter. In addition, we expect further benefit from our recent capacity expansion. Based on those revenue expectations in our current operating model, we estimate earnings per share for the fourth quarter to be in the range of $0.21 to $0.29 per diluted share. In summary, third quarter results were a continuation of the trajectory begun earlier in the year and ahead of the outlook we provided at the beginning of 2021. The catalysts energizing that trajectory are constructing a market environment for photomask that we anticipate will last for the next several quarters and potentially longer. We have invested to align our operations with these market trends, and we'll continue to strategically invest to grow revenues, expand margins, optimize cash flow, and improve our return on capital. I will now turn the call over to the operator for your questions.

Our first question comes from Tom Diffely with D.A. Davidson.

Okay. First, I was wondering if you had seen any supply chain issues or COVID-related impacts on your quarter or if it needs embedded in your outlook?

We continue to operate everywhere around the world, right, with COVID and we, I think, have been aggressive at managing our supply chain. So we do have, like our customers, some challenges with the tool suppliers, in particular, and their ability to service tools that obviously showed up or was in the quarter, and it's baked into our guidance moving forward. So overall, the quality of support has deteriorated somewhat. We historically have done a lot of our own self-maintenance. So this internal capability that we have developed for years to drive costs out of our business, I think, has paid great benefits during COVID, and we expect business to continue more or less uninterrupted as it has.

Okay. That's great to hear. And then, Peter, obviously, you sound like you're very encouraged by the flat panel display market and all the drivers going forward. But it seems on a near-term basis, you're somewhat capacity limited, ramping revenues with new tools coming online. I was just curious, you talked about not really expanding investments with capital spending next year on the flat panel side, and the focus will be on IC. So just kind of curious how you reconcile the fact that that's a fast-growing market, and you seem to be not investing as heavily into it going forward?

Yes. If you look at that market, Tom, our IC business, as we, I think, elaborated, the high end is strong. The mainstream is sold out. The FPD business is not the case. We are sold out because of our technology position. But to the best of our ability to discern it, none of our competitors are. So we're operating in a market where our tools are fully loaded, while others are not. This gives us some degree of conservatism as we look at investments we're willing to make. We continue to talk to customers. I'll highlight again, the new tools we just installed. I've never seen in my career here or any career period, new tools installed and ramped so quickly. It's obvious why that happened. We had commitments from customers to make it happen in advance of the tools being installed. So we're aspiring to create the same scenario in that market in a situation where all the competitors have excess capacity. To the extent we can continue to drive the strategic approach we have used there, we'll get more aggressive. We'll see how it goes. There's a lot of AMOLED photomask capacity coming online, not to miss but AMOLED display capacity coming online in China this year. Basically, the way we count it, almost doubling from the beginning of the year to the end of the calendar year. So there's a lot of AMOLED mask demand. Samsung's market share is dropping. The Chinese market share is increasing. LG's business is growing, yet their market share, we think, is basically relatively consistent, but because the market is so strong, their business is up. So the market looks good as far as downstream is concerned. We're sold out. It's a way to make money. The conservatism comes because none of our competitors are.

Okay. Great. That's encouraging. And then finally, when you look at the mainstream market and very tight supply right now, are you seeing anybody add capacity, photomask-making capacity on the mainstream side? Or is it still not economical to buy new tools to service this market?

What we observe from our competitors is that they are also trying to incorporate additional tools to maximize output from the existing installed base. As the market improves, we and our competitors are finding sensible ways to add tools instead of just increasing the number of lines. This is clearly a priority for us in the coming year. Additionally, we have pointed out that the mainstream markets in Asia are oversold, and this trend is now becoming evident in Europe as well. Consequently, our European business is also oversold, which could lead to increased prices in Europe, similar to what we’ve seen in Asia. Whether this trend will extend to the U.S. remains uncertain. However, it is clear that the mainstream market is strengthening across the board. Historically, node transitions have been a key driver for our business, typically at the cutting edge. Now, we are seeing a significant and increasing number of node transitions within the mainstream sector, which has been developing for some time but is now more apparent. These transitions from 110 to 90, 90 to 65, 65 to 55, or 40 are product revisions that would not have occurred in the past. Due to factors like the slowing of Moore's Law and its economic implications, we are experiencing a notably larger number of node transitions in the mainstream business. This represents new growth that has not been present in such a significant way before.

Our next question comes from Gus Richard with Northland.

First of all, you mentioned some of the captives are outsourcing as they fill in more EUV in their internal shops. I was wondering if you could give us a sense of where captive versus merchant has been over the last few years, where it is today, and where you think it might be in a couple of years from now?

Yes. So the captive versus merchant is a long story. When I look back 35 years when I started in the business, the market was about 15% merchant. If you look back 20 years, it has extended to about 65%. What's happened is that in the IT space, anyways, it's pushed back to now where the merchant market is about 35% and holding. It looks pretty stable. If you look at our business, when you look back to 2017, when outsourcing from EUV really started, our captive business has about doubled over that period of time to the point where it's now approaching almost $100 million. So we've seen that as a growth vector for us. We expect that it will continue. That's kind of a broad brush. As Moore's Law comes to a halt, it's very hard to understand what purpose a captive has. In the very long term, we'll see a shift back to buy versus make. That's not within the horizon of a typical Wall Street investor. So is that going to have a big effect in the next year or two? No. But in the 5- to 10-year horizon, it's hard to see why IT manufacturers will want to be making their own masks, in my opinion.

Actually, your answer leads me to the next question. Because Moore's Law is slowing more, advanced processor companies are moving to heterogeneous integration with trailing edge die co-package with leading-edge die. And you're disaggregating designs. Are you guys seeing any benefit from that at this point or even what's being done in cell phones?

Yes, Chris, would you like to take that one?

Not packaging, but the actual die.

Okay. I'll let Chris address the business. Go ahead, Chris.

Sure. Yes. So there's two pieces to that. One is the lithography needed to put together those integrated packages. We do see some road map emerging on, let's call it, packaging lithography. It's just the beginning of it; we are seeing that. The litho is getting a little more complex. So there's kind of an early nascent business in that. We are developing some technology in that area. The question you asked is, are we seeing an impact on more designs due to the way chips are being integrated? I think we are seeing that. I think it has come back pretty strong as a design tool. It really had been hollowed out significantly, at least it stopped growing due to FPGAs and other things due to power performance, cost reasons. FPGAs and all kinds of gate arrays are losing market share. It's actually the only device family to shrink in 2021 that's projected. So you are seeing a pivot back to ASICs and smaller form factor ASICs that go into these packages definitely is a trend. Even going down to things that you just call chiplets, very, very small, purpose-built, relatively inexpensive die where the value is through the integration of those together into a package; we see that trend. That kind of leads to a resurgence in design activity across the board, and this is one of the things pushing the mainstream market forward. As for heterogeneous, it's at the beginning phases, but definitely, that's a positive trend for design tapeouts, and we'll see the signs of it now.

Thank you, Chris. Gus, I want to add a point. When I understood your question, Chris clearly addressed it perfectly. When I started in this industry, ASICs were the dominant players. Over the last 15 years, they have diminished, which could be a major factor for the increasing trend we are seeing. It seems like we are returning to the past. As Chris mentioned, we are still in the early stages, but this is very promising for overall photomask demand.

Got it. That's very helpful. And then just in terms of packaging lithography and mature, what nodes are tied in your mature IC lines? And where is lithography and packaging these days? And where is it going over the next couple of years?

Yes. Again, Chris, why don't you take that, and I'll fill in whatever I think is missing. So go ahead, Chris.

Okay, sure. I mean we use a relatively broad definition of mainstream today, which is up to but not including the 28-nanometer node. So quite broad. But if you wanted to break that down and define our categories, you would have, let's say, mature legacy 90-nanometer, 110-nanometer, maybe even greater, and then kind of midrange nodes, like 40 and 55. There are steps in the masks technology between those that bring different sorts of value. So mainstream, for us, at least in the way we talk about it in this context, is quite broad. Our high-end at least today generally starts in 28 and goes down. As far as packaging lithography, there are two trends that have unfolded in the last, I would say, 3 to 5 years. One was the effort to try to do packaging lithography on larger substrates. This is so-called panel or package on panel, and we were starting to see that substrate scaling; midrange masks, 9, 14-inch masks, which is significantly larger than IC-size masks. We still see some of that. But what we're finding, the stronger trend, particularly with the leaders now, is wafer-level packaging. So going back to standard sized IC masks and kind of doing it at wafer-level scale. That trend is much stronger now, especially at the high end of packaging. The types of ground rules you see there in the very, very low-end case, 40, 50-micron types of via holes and things like that, down to a few microns at the mask level for wiring and that sort of thing. So in that context, we'd be a relatively mainstream mask technology. But there are some unique characteristics of those packaging masks that allow some technology injection into them and some differentiation. It has to do with the substrates. The substrates are very warped. The way you have to control the CDs on the masks, the way these masks are integrated into lithography is somewhat unique. The dimensions are large, but there are some packaging-specific technologies that need to be developed to serve that market, and we are working on them.

How significant is the packaging segment of your IC business in relation to mask demand and your IC revenue?

I don't think we would comment, but I would say it's relatively small. We don't break it out. That's one of the reasons to show you it's a relatively small percent of the total. But I don't want to give specific numbers.

We don't track it as a separate segment yet. So I really couldn't add much more than to say it's significantly less than 10% of our IC business presently.

One area that might be worth exploring for packaging on the LCD or display side involves many LED and micro LED trends. These are driving a different set of packaging or integration type masks that have many characteristics of IC packaging masks. The interconnection circuitry concerning how those LEDs are wired and how the micro LEDs will be wired also leads to an interesting range of lithography technologies, which in turn affects mask technologies. Therefore, we can expect to see some convergence between these lithography technologies as it relates to both FPD and IC.

Got it. Got it. But many micro LED, much like packaging in general still is a material portion of your business?

Yes, because it's still in development. To the extent that we have an active rather than a passive pack life, the MEF sets use standard LCD technology, with a complexity level approaching that of a rigid OLED display MEF set. If we utilize mini LED or micro LED and have an active pack life, those represent a solid opportunity for a mask maker. However, it requires display-making equipment instead of IC mask-making equipment.

We do have a follow-up question coming from the line of Tom Diffely with D.A. Davidson.

I had a quick question for John. When you look at the target model, what do you need to bridge the gap from the $700 million today to the $750 million in the high end of the target model in terms of capital spending or just additional capacity?

Yes, Tom, we've talked about what we're going to use for modeling CapEx going forward. We've assumed that it would be a $100 million spend. That's just a rough estimate without specific attribution to product lines or tools. Beyond this year, as we said in the comments, we don't have our specific budgeting done yet. That's actually going to be done in a few weeks. So I think if we just stay with the $100 million estimate for each year, that's as specific as we can get.

Okay. And then if you do that, is there a noticeable difference in depreciation that gets worked into the model? Or is there a pretty even split between spending going in and old tools coming out?

Yes. We've got a lot of old tools rolling off as we add the new ones. Our depreciation has stayed right in the range of $90 million. I think a few years ago, in 2018, I think it was when we did our first multiyear model, we assumed that the depreciation was going to increase to over $100 million. But with all the tools rolling off, we're staying right in the $90 million, and I think probably $100 million would be the highest level for depreciation.

If you're looking at that chart, Tom, you can see that we're approaching, right, on a run rate basis, the $700 million column at our margins, both gross and operating or approaching the mid-level of the chart, right, the $725 million. The reason for that is, as we described on the last call, we're seeing about a two margin point bump on both gross and operating margins due to the price increase in the mainstream. It shifts the scale in a very meaningfully positive way. If you look at that chart we put up at our Analyst Day, you'll see that we're basically shifted one column to the right on the profile of the income statement versus the revenue required to reach it.

Okay. Yes, that's great. And then when you consider the mix, how significant can the mix be in any one quarter on the EPS compared to the revenue line?

Yes, thanks for that question, Tom. It’s kind of a funny question because mix can be insignificant. For FPD this quarter, the mix tended toward higher-margin products. If that continues, then our margin will reflect that benefit. If it goes back to lower-margin products, it has a better effect on revenue, but margins will lower. Trying to predict mix, especially in this business where we've always said we have two to three weeks of backlog, is pretty difficult. Obviously, if the mix tends into higher-margin products, we'll reflect that in the earnings.

I want to emphasize that those closely following the company are aware that we recently completed the establishment and ramp-up of two facilities in China. This effort inevitably impacted our financial performance. In the current quarter, we are nearing an earnings per share of $1, a target we have aimed for a long time. It has been many years since we last achieved this milestone. We can see it is now within reach. The significant growth for Photronics this year is not just in revenue, which is decent at 10%, but more importantly, in earnings. We are currently on track for a run rate of $1 per share, with a remarkable 35% year-over-year earnings growth. This is a considerable achievement. Over my 13 years here, while our financial metrics have generally been strong, shareholder concerns have often centered on earnings. We are making progress in that area now. Our operations in China are performing on par with the rest of the company. The income statement from China aligns with our consolidated level. While we are not completely satisfied, China is now performing alongside our other operations.

Our next question comes from the line of Orin Hirschman with AIGH Investment Partners.

Congratulations on the progress. I just wanted to ask in terms of the overall industry dynamic; there's a huge lead time just in terms of getting tools. Obviously, there are only really three major guys left non-captive. Does there come a point where we're just the closer the lack of the ability to add capacity additions here and the dynamics that you described in the overall industry, where photomasks are becoming a gating factor on designs going into production? And if so, how does that affect you?

Yes. Well, right now, customers are experiencing lead times in the mainstream market that they've never seen. It is impacting them, and they're willing to pay more as a result. You are correct that the photomask industry, like the semiconductor industry, is served by a limited number of key suppliers with limited capacity. The industry is not to the point that you're describing. What it's forced us to do is plan for CapEx with longer cycles. So we're putting capital authorization in front of our Board six months in advance of when we would have done it historically, so that we can continue adding capacity. I can't say how others are managing it.

We're also more demanding on the projections for these investments. These investments have to meet our target hurdle rate in order for us to make the decision and even propose it to the Board. In the last couple of years, that's made a big difference in how we've approached this.

I assume part of that is what you described, where the tools basically sold out before the tool even goes into production, is possible?

Well, the way to make sure that happens is we have customers to make commitments to buy capacity before you install it. Historically, we haven't done that, but over the last four or five years, we have. We actually make it more difficult for ourselves to buy capital because we have to do a lot of work in advance of it. But the impact on the financials of the company, I think shows now clearly for itself. So yes, it's a good time to be adding capacity in our markets. Having said that, in the IC part of the business at the high end, qualifying new capacity and new nodes takes time. You can install a tool, and it could easily be six or nine months until it's fully utilized, not because demand isn't present, but because the customers require extensive qualification to ensure that it doesn't affect their wafer yields.

Okay. Just one follow-up question. It's nice to think you made it to $1 type of run rate. But the model is very sensitive, as you said. Can you see a path to get to $1.50, $1.80, $2 over time assuming that the dynamics in the industry stay somewhat similar, and how prominent of price increase factor into that?

I'm sorry, your line is not very clear, but I believe your question was about whether we can sustain the current run rate that has surpassed $1. I will let John provide an answer to that.

In the target model we presented in December, $1 was the minimum expected level at a $700 million revenue. We anticipate reaching and surpassing that $1 mark within the next year, and we believe our ongoing investments will positively contribute to the bottom line. In our upcoming target model, we aim to establish a new benchmark beyond $1.

Yes. If you look back at what we presented at the $750 million run rate, we had EPS of $1.25 to $1.35. And clearly, if revenues go up, and we have pricing power, we can do better than that.

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to Peter Kirlin for closing remarks.

Thank you for joining us this morning. We appreciate your time and interest. As we enter the fourth quarter, there's a reason to believe this year will be one of the best ever for Photronics. We are on track to achieve record revenue, and our earnings are improving each quarter. The strategy we are following is working. We are optimistic that our best days lie ahead. I look forward to updating you on our progress.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.