Photronics Inc Q4 FY2025 Earnings Call

Good day and thank you for standing by. And welcome to the Patronix 4th Quarter Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Ted Morrow, Head of Investillations.

please go ahead. Thank you, Operator. Good morning, everyone. Welcome to our review of Photronics' fiscal fourth quarter 2025 financial results. Joining me this morning are George Macracasas, Chairman and CEO, Eric Rivera, CFO, Frank Lee, Head of our Asia Operations, 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. This call will include forward-looking statements that involve risks and uncertainties that could cause Photronics results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained both in today's earnings release as well as our most recent SEC filings. During the quarter, we will be participating in the New York Summit next week and the Needham Growth Conference

in January. I will now turn the call over to George. Thank you, Ted, and good morning, everyone. We delivered strong financial results with sales of $216 million, exceeding expectations and increasing 3% sequentially. The major positive in the quarter was record high-end IC revenue led by the U.S. and Asia. Non-GAAP diluted EPS also surpassed guidance, coming in at 60 cents per share. During the quarter, we recognized a tax valuation allowance reversal reflecting an improvement in our U.S. execution and outlook, which Eric will elaborate on. As we look to 2026, we will continue to leverage our operational strengths and geographic footprint spanning 11 production facilities to continue to deliver high-quality photo masks. As previously communicated, we are currently executing strategic geographic expansions at existing facilities, reinforcing our position as a leading merchant provider of photo masks. These initiatives are expected to enhance the revenue contribution from these facilities, broadening and further diversifying our geographic revenue mix. Our investments are aligned with two industry trends. First, advanced node migration. Progression to more advanced nodes requires more mask layers per IC device and finer resolution mask features, driving increased mask demand and higher mask set ASPs. Our investments will increase our exposure to higher-end nodes in the U.S. and in Korea. Second, regionalization. Semiconductor manufacturing continues to diversify globally, including meaningful reshoring of production in the U.S. We are a market leader in the U.S. and will pursue numerous higher-end opportunities through our U.S. investment plans. More specifically, a year ago, we announced our capacity expansion and capability extension at our Allen, Texas facility. We expect to begin tool installation in the coming months with customer qualifications in the spring timeframe and initial revenue later in 2026. In Korea, our cleanroom expansion is underway with equipment installation beginning in 2026. Customer qualifications for 8nm are expected through fiscal 2027 with revenue contribution beginning in 2028. additional node migrations are expected as market demands develop together these initiatives will diversify our geographic revenue mix and increase our exposure to leading edge chip designs during the quarter we achieved several positive technical and commercial developments to highlight a few one we are recognizing more outsourced opportunities from captive mask makers including leading-edge DRAM and logic nodes. Two, in advanced IC packaging, we saw increased demand for our larger format masks that support AI-driven chip packaging applications. Three, we completed shipments of masks fabricated with our newest generation DRAM node mask process co-developed with a key memory customer. Four, demand tied to edge AI applications continues to rise across Asia, highlighting our exposure to this critical segment. And finally, our advanced multi-beam mask writer we installed in the U.S. earlier in 2025 is now in full production with over 20 customers qualified, including multiple EUV users. Our technology roadmap continues to advance through joint development with customers, collaborations with consortia such as IMEC and partnerships with critical suppliers. I will now review market conditions heading into fiscal 2026 before turning the call over to Eric. The high end of the market remains strong, supported by sustained investment in hyperscale data centers for AI rollouts. This momentum continues to drive demand for the highest-end photomasks. Many of our high-end customers are providing positive forecasts that reinforce favorable node migration trends and global manufacturing regionalization. While the high end of the market remains robust, the mainstream IC market remains soft, though it appears to be stabilized. Returning to our quarterly results, IC revenue was $157 million. We achieved a quarterly record in high-end IC, representing 42% of IC revenue, thanks to a strong technology portfolio and exceptional execution. Demand in the U.S. has been particularly strong, validating our expansion initiatives designed to bring additional advanced production capacity to the market. As a reminder, we are the only U.S. headquartered company that can produce trusted masks, and our Boise facility is the only commercial high-end U.S. trusted mask facility. In flat panel display, revenue of $58 million declined sequentially, reflecting order timing. Demand softened later in the quarter and into the early days of Q1, but has since rebounded. FPD mask demand is expected to remain strong throughout Q1. Earlier in 2025, we shipped our first two G8.6 AMOLED orders and anticipate additional G8.6 demand in fiscal Q1 as adoption of this technology expands in consumer and enterprise high-performance display segments. I will now turn the call over to Eric to review our fourth quarter results and provide first quarter guidance.

Thank you, George. Good morning, everyone. Fourth quarter revenue exceeded expectations at $216 million, increasing 3% sequentially, though declining 3% year-over-year. IC revenue of $157 million declined 4% year-over-year. However, we experienced a meaningful mixed shift towards high-end shipments, which reached record levels in both absolute dollars and as a percentage of total IC revenue at 42%. High-end IC strength reflects strong order patterns globally, including in the U.S., which now represent 20% of total revenue, where reshoring efforts continue to create a favorable demand environment. Meanwhile, our mainstream IC revenue declined 12% year-over-year due to several factors. The declines are broad-based geographically because of market conditions. However, the mainstream IC decline deepened by recent geopolitical impacts across mainstream customer segments, primarily in China. Additionally, we strategically redirected mainstream capacity, including capabilities obtained from end-of-life tool replacements towards higher-end opportunities. Turning to FPD, fiscal Q4 revenue of $58 million declined 1% year-over-year due to timing of order patterns. As we look to fiscal Q1, the temporary FPD slowdown that emerged later in Q4 persisted through much of November but has since abated with recovering order levels. gross margin improved to 35 percent exceeding expectations driven by a favorable product mix operating margin of 24 percent also exceeded our guidance range diluted gap eps attributable to photronic shareholders was one dollar and seven cents per share we experienced a favorable 16.8 million benefit related to the reversal of historical u.s tax loss valuation allowance We had recorded this tax valuation allowance as the benefit was previously deemed unrealizable. Given the improved performance and outlook of our U.S. business, U.S. GAAP required a reversal of this tax loss allowance, resulting in the positive $16.8 million result to GAAP net income. Excluding foreign exchange impacts and a deferred tax valuation allowance reversal, non-GAAP diluted EPS was $0.60 per share. Our earnings performance reflects a greater contribution from our U.S. operations. During the quarter, we generated $88 million in operating cash flow, equating to 41% of revenue. CapEx was $68 million, bringing full-year CapEx to $188 million. As discussed throughout the year, we have entered a period of elevated capital investments to drive future organic growth. Exemplifying this commitment, our initiatives in the U.S. and Korea will further strengthen our ability to capitalize growth trends including increased captive outsourcing, high-end node migrations, and geographic supply chain diversity. For fiscal 2026, total capex include typical annual spending, incremental end-of-life tool upgrades, and special project investments in the U.S. and Korea. Notably, end-of-life tool upgrades bring new capabilities, enhance production efficiency, and allows us to target higher-value opportunities. We expect fiscal 2026 capex to total approximately $330 million. All investments have been carefully vetted to meet our return thresholds and align with major industry demand drivers. Total cash and short-term investments increased $12 million sequentially to $588 million, which includes $422 million of cash held in our joint ventures. Our capital allocation strategy includes three priorities, reinvesting for organic growth, pursuing strategic opportunities, and returning cash to shareholders. After spending $97 million in fiscal 2025, we will remain opportunistic in repurchasing the remaining $28 million under our stock authorization. Before providing guidance, I'd like to remind you that demand for our products is inherently variable. Visibility is limited, with typical backlog of only one to three weeks. Additionally, high-end mass sets carry significantly higher ASPs, meaning even a small number of orders can materially influence revenue and earnings. Demand is also affected by IC and display design activity, and secondarily, by wafer and panel capacity dynamics. Given current market conditions and the industry outlook George discussed, we expect fiscal Q1 revenue to be in the range of $217 and $225 million. Based on those revenue expectations in our operating model, we estimate fiscal Q1 operating margin between 23% and 25% and non-GAAP diluted EPS between $0.51 and $0.59 per share. I will now turn the call over to the operator for your questions.

Thank you, Emily. So, gentlemen, as a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Please stand by for our first question. Our first question coming from the line of Tom Diffley with DA Davidson. You line is now open.

Hi. Good morning. This is Linda on for Tom Diffley. Thank you for letting us ask questions. My first question is on the market share. Now that your largest competitor just went public, what is your relative size and or trends in share? Any color? That will be very helpful.

Oh, can you hear me now? Yes, we can, but we didn't hear the question clearly enough.

Oh, okay. Yeah. So my first question was on market share. So with your largest competitor being public now I was wondering how you're viewing your relative size and trends in the market share versus your competitor market share thank you Linda

this is Eric so we see the market share being as we had perceived in the past the fact that Texan now is a public helps us get a little bit more detail but we see our market share being exactly what we thought before and I see they have a little bit more they have more market share than we do for sure when when you consider our our RFPT our FPD business you know that they don't they don't participate in we're about the same size when you combine them the same

size on FPD and different elsewhere so Texan doesn't participate in FPD

Fortronics does Texan is is larger has a larger market share that Fortronics does and I see and I can I see and I see however when you consider our FDD business we're around

the same size okay got it and then looking at of the overall competitive environment what is your view on the overall health of the environment yeah any comment there would be helpful a lot

no migration and especially in the States in the past we we have our major operation facilities in Asia but right now with the insuring of semiconductor industry in the United States our voice inside which has the high-end capability We are the only high-end merchant market supplier in the country, and with all the growing high-end demand in the country, we believe we are on the right track to capture more high-end shares. So this also answers your first question, that our market share with the growing U.S. demand, especially in the high-end and trusted product, we believe our market share will continue to increase.

And it will be supported by our investments in our Allen facility as well, which is supporting the reshoring efforts as well.

Thank you. That makes sense. And then I also wanted to touch on the mainstream business. You said that there's continued softness there, but you're seeing it stabilizing. Just curious if you're seeing any kind, basically what you're seeing on the supply and demand side of things and how that has impacted margins and maybe how that is impacting your capital spend for next year.

In the mainstream market, we are referring to many of our mainstream business in China. As most people are aware that in China, due to the geopolitical issue, they do have some met in China policy, so there are quite a few new local mass houses in China. However, for China, as a market and technology leader in China, we try to differentiate ourselves from our local competitors. We are focusing more on our anchor key customers. We build relationships with these key customers with better product quality, support, and so on. And also, we utilize our capacity better, mainly for a more higher value product mix. So I think there are some competition in the mainstream, especially the low end of the mainstream. But with our capability and also with our tool capacity and so on, we are moving ourselves to a higher value product mix.

Great. Thank you for your time this morning.

Thank you, Linda.

Thank you. Our next question coming from the line of Christian Swap with Greg.

Great. Thanks for taking my questions. Fantastic quarter. So just to follow up on the mainstream, is it fair to say that the new market entrance in China, on the less complicated note, is where you're seeing price pricing competition? And so, as we think about that business and your shift to higher MEG, should we think about that business potentially being under any gross margin pressure, or should we assume we're going to focus where quality and support?

Reported in China, right now, there are very strong demand for our high-end product, especially in a 22 and 28 nanometer technology. So for this technology, there are many, many layers in one set of device. So our capacity in our China facility, we are using most of the capacities for the high end, not necessary for the critical layers, but also for the semi and non-critical layers. So those critical and those non-critical and semi-critical layers, actually they have a much better ASP than the so-called typical mainstream. So in summary, our capacity need to be optimized and so higher value for higher growth margin and profit margin is the way we are doing business and the way we are working on the market.

Great. That's clear. Thank you for that. As GA adoption and flat panel display eventually begins to broaden out into more mainstream applications. You know, your ASPs there are, I believe they are anyway, materially higher. Is that something that happens in 26, fiscal year 26, or is that something that's in 27?

Yeah, so the G8.6 is at the early stage of production ramp. There's only a few fabs that are running that, but we're seeing additional fabs come online, actually in multiple regions for GA.6 display the application space is just as you said it's larger format OLED displays and IT automotive medical applications so the application space is fairly broad so we do expect that to be a strong opportunity for us because we have a leadership position there as far as when it will have material impact on revenues and things like that we don't really want to talk about that here. But I think 2026, you'll see gradual increases in the component of our display revenue driven by GA.6. I think that's all we'll probably say at the moment. Okay, that's great. And then, you

know, as we're adding, you know, new capacity and geographical expansion and and replacing end-of-life new capabilities and probably a different pricing structure. Is there any puts or takes to gross margin over a multi-year basis given those significant investments that we should be thinking about?

Christian Eric here. We invest in our tools. We do so understanding the market and where we see growth being And basically, we do expect to have, you know, increased revenue and as a result, you know, contributions to gross margin. Our CapEx also includes purchases of end-of-life tools, which provide also increased capabilities. So we do expect to see increased revenue, increased depreciation as well associated with it. We expect our gross margins to continue at the same rate and perhaps grow, you know, as we make these investments.

Fantastic. This is George. It's, you know, no different than the past. I mean, we've always had end-of-life tools, you know, in the past and replacing them, et cetera. I mean, the new tools have better throughput, better capabilities, et cetera. so it should not be anything material changes as far as the depreciation that

is associated with the new tools great fantastic and then my last question here sorry for asking so many is we ramp up the Allen Texas facility can you give us an idea, you know, of like revenue potential? I don't need to know exactly, you know, where you could give capacity, I could figure it out. But, you know, what should we assume the revenue capabilities, you know, of, you know, additional U.S. capacity over a multi-year time frame could

add to the comparison? So, let me address the question into what I can, I don't want to go to the level of granularity where we're disclosing how much revenue we're going to have you know by site uh so you know what i can say is that as a result of these investments we're going to go into the uh sort of the mid-range nodes or or the higher the higher end of the mainstream depending on how how we define that right uh and we're going to have more capabilities that is going to have incremental revenue and profitability to Fortronics in the U.S. We expect gross margins to improve. We expect revenue to start on these investments towards the second half of the fiscal year, 26. And we expect those to continue on to 27 when we're fully ramped.

And one other point, Christian, we might make there's kind of a knock-on effect to this Allen project in that it'll free up more capacity in our Boise site, which is our most leading-edge facility, because some of those mid-range masks we run there. So as Allen ramps, its revenue, of course, will go up, but the Boise will have more capacity to deploy for higher-end applications. So it's really a combination net

benefit of both sites as far as the opportunity great no other well let me sneak one more question in given the given the significant reshoring activities that are potentially going to be going on on a multi-year basis you know here in the United States there are certain manufacturers who are going to be adding additional from outside of the United States which to me that they might be cost prohibitive to get out of the way over here. Do you have any idea or aspirations that you're willing to share with us what you think the opportunity for captive guys going to the merchant market over a multi-year timeframe or is that am I just saying the obvious is where if there's any clarity on the movement from captive to merchant that you're anticipating other than just semiconductor unit growth question do we expect the captives to be

entering the merchant market effectively competing with us or did I

misunderstand no I'm saying giving up market you know giving market share looking to merchant market suppliers versus doing it internally do you think that they can't get it here I mean typically the cycle time is a big issue

they would want to have a more locally source for you know for cycle time reasons a more locally sourced mask shop so I think we have the you know the local advantage I think the issue could be if there was one would be under capabilities but I'll let some of the other folks from the team here chime in

And I think we can broadly answer the question that we've seen over the last year, maybe a little longer, the tendency of the captives overall as a group to look at more outsourcing opportunities. And that's not just in the U.S., that's in other regions as well. So generally, we're seeing an increase in interest and desire for the captives to outsource. This could be less critical layers of very advanced sets. It could be memory products that historically were done internally. But let's say broadly, there's more outsourcing opportunity, particularly related to Photronics. We're well positioned in regions that have some of the largest captives and also some of the largest fabs. So we do expect to capitalize on that increased outsourcing trend of captives. I think beyond that, we won't be more specific at this time. But we do see it as an opportunity. Fantastic.

That was extremely helpful.

I'll just add something quickly that, I guess stating the obvious, right, the regionalization trends, essentially there would be more fabs making more wafers. They'll need more photomass. So the trend, the regionalization trend is only positive for merchant photomass manufacturers like Photronics.

100%. Get it. No other questions.

Thank you. Our next question coming from the line of Gokshi Sriharan with Single Research Eulannis Malvin.

Thank you. Good morning, guys. Can you hear me?

Yes, we can, Gokshi. Good morning.

Good morning. Just on that, I'm glad you brought up that outsourcing issue. How do you guys think about the outsourcing increase in sales, about how you think about pricing and margins of those layers are relative relative to traditional mainstream I see sourcing

that comes out of the out of the captives would generally be on the on the high-end areas and

generally speaking the captives you know when they're outsourcing at least my experiences they pay I mean I don't want to say it you know huge premium but they're definitely you know not bottom fishing for the you know for what the merchants can give them typically it's you know they're they're outsourcing and they need it and they're paying a fair price so I don't see them you know being overly cost-conscious if I'm making sense

gotcha thank you the first question I was um you talked about a few quarters about how the customers were in holding patterns because of tariffs your politics setting aside q1 are you seeing any change in the mix of conversation You're having more long-term planning discussions that would tell you about the sentiment that is quietly improving under the surface.

To the export restrictions, I think that's what you're referring to, or the tariffs. I guess the tariffs are both of them. So we're seeing a little bit more easing of that. I think, as you said, customers have understood the landscape, and as a result, they're able to plan better in such order. Now, that is true for most areas. Perhaps in China, maybe it still remains the same, the issues that you've just described, but for the rest of the world, I think customers have a good plan of where they're going to do their orders, and as a result, we're there to benefit from that. Does anybody want to ask?

I guess we can also say the two projects we've announced, the one in the U.S. and the one in Korea, were based on longer-term, both short and longer-term conversations with customers on their future demands and the opportunities. So those projects came out of, I would say, a more robust longer-term opportunity dialogue with key customers. So we are seeing an increase in that, and we're acting on it appropriately by making the right investments in these projects. Yeah.

And the high-end IC grew nicely in Q4. How concentrated is that growth towards a handful of programs or customers, and what would you see in the pipeline that gives you confidence that this becomes a broader, more diversified high-end run rate for the rest of fiscal 26? I think the high-end growth

customer base there are a few new customers mostly our core customer base that expand expanded production and capacity as well so that was memory customers foundry logic probably being the strongest and recovery in in Asia so it's broad based it's a broad product mix coming out of foundry and memory and it's mostly our existing customer base but more robust order patterns that match up to their improving demand cycles as well. So we think it's sustainable. It's consistent with the market generally improving and we're well positioned with some of the stronger IC players. So we do think it's sustainable. And if anything, we see more opportunities

there in the high end for sure.

Gotcha. Thank you. And I'll just make this my last question. on Korea specifically with it with the capability extension and an increased exposure to the leading edge ships how does the commercial model in Korea compared to us other customers are inclined to sign longer term in agreements or is it a more transactional kind of quality quality work want to be

very specific on this one but as Chris just mentioned there's a logic customer they continue continue they are also same policy not necessary for a mature note but go into a high end and more higher end so I think even there are no long-term agreement but the trend and is continued so we do have a lot of conversation and communication with the customer about their low max and their outsourcing demand. And that's one of the reasons we are doing the career side capacity and capability expansion.

Thank you, guys. I'll take the rest offline.

Thank you, Garshi.

Thank you. And I'm showing down for the questions in the queue. I will now turn the call back over to Ted for any closing comments.

Well, thank you for joining us today. We really appreciate your interest in Infotronics. I look forward to catching up with everyone throughout the quarter. Have a great day.

Ladies and gentlemen, just conclude today's conference call. Thank you for your participation, and you may now disconnect.