Q3 2021 Photronics Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Photronics third quarter fiscal year 2021 earnings call.
At this time all participant lines are in a listen only mode. After.
So the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press Star then one of your telephone.
As a reminder, this conference is being recorded Wednesday August 25th 2021 I would now like to turn the conference 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 Kreidler, Our Chief Technology.
Officer.
The press release, we issued earlier this morning, along with the presentation materials, which accompanies our remarks are available on the Investor Relations section of our webpage.
Comments made by any participant 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.
Okay.
Thank you Julie and good morning, everyone.
We achieved record revenue in the third quarter as rootless designed environment led to growing prudently estimate that close to our markets.
This marked the second consecutive quarter of record revenue.
As you will have formally from John in a few minutes.
We expect another record quarter in Q4.
Therefore, our outlook for the semiconductor and display.
The industries, including your every company within the sectors continues to improve.
Among other things these indicators pointing to a boosting capital equipment spending by chip and panel makers.
Require further maths once installed.
All signs point to a prolonged period of market strength.
This.
It is truly a very positive trend for the industry profit on this demand and peripheral products.
Gross margin increased in the quarter.
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.
Well, that's really due to a onetime gain on the sale of fixed assets.
These results places 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.
Yeah.
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 significant 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 there.
Julie installed tools will ramp quickly.
The first reduces a headwind to gross margins that can arise from underutilized tools and.
An improved ROIC.
The shrunk down.
LNG, we have built and maintained positions us to sustain this investment approach.
Since 2017 annual revenue has grown 40%.
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.
10% per year.
Since repositioning the business in 2017.
Over that same time period high end IC revenue nearly doubled.
And high end SPD revenue increased fivefold.
This did not happen by accident.
As anticipated.
Clear deliberate strategy to invest in areas that would generate the highest growth.
We're also enabling improved return on capital.
From a market perspective, or an investment focus has been clear.
Geographic expansion into China for both IC and FB F P D and.
Technology inflections in SPD.
Particularly transition to ambulate and mobile displays.
In addition to these macro trends there are some drivers that are applicable to the photo mass sector.
Expanded use of E D like captain for high end IC.
And industry photo mask capacity being sold.
Sold out in mainstream IC.
You also cannot ignore growing nationalism.
The spring capacity buildup in multiple regions, including the U S and Europe.
All of these factors support our belief that we are in a prolonged period.
Growth and further enhance them.
A key element of our investment strategy is to align our operations with the fastest growing sectors in the markets we serve.
And SPD. 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 are fine.
Financial results.
To maintain this performance we continue to focus on.
On high value and high growth segments of the market.
This includes ambulate for mobile which is expanding beyond smartphones.
Into large form factors, such as tablets and laptops.
And what also enables diverse there.
Applications, including virtual reality headsets automotive displays and even foldable smartphones.
In addition to mobile displays the emergence of premium TV, such as <unk>, OLED and QD OLED drive innovation in.
It requires more complex set on that.
The <unk> technology.
Research and micro and mini Leds.
So drive enhanced demand as they move to high volume production.
Industry observers are expecting increase in installation of display equipment in the next few years.
If this happens then what naturally follows a period of demand growth with further masks in order for.
It will be used for manufacturing.
Most of these investments are occurring China, Korea and Taiwan.
Is no coincidence that these are the very same regions of our SPD manufacturing plants, allowing us to invest in localities that are most closely aligned with our customers' operations.
This.
The nuclear added three new SPD tools to our global operations. All three tools are now installed.
Two to three contributing meaningfully to revenue during our third quarter.
And all three are running at capacity and our fourth quarter ahead of plan.
The investments in these tools is supported by long term.
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 tools and ramped up to full production ahead of schedule.
And are now seeing the financial benefit as we generate revenue and.
This year with familiar commission tools.
And I see a driver of innovation demand has been node migrations.
This happens not only at the bleeding edge, but also for mainstream technology as customers move to smaller nodes to.
To take advantage of lower cost and better performance.
Profit letter has created a shortage of supply in the mainstream market.
It's 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 most of them kept this mask operations use easy easy to a greater extent and their IC fabs.
A larger percentage of their mass capacity is being dedicated to UV production.
This means they need to outsource more not EMEA to merchant suppliers.
We have put into 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 progression will be more easy 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 have.
To meet or possibly exceed these targets.
Semiconductor and display markets are strong.
Our revenue was 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.
And I really like where we are as well as the direction. We are going wed like to thank all our employees for your superb effort to.
To generate yet another record quarter for photronics at this time I will turn the call over to John.
Yeah.
[noise].
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%.
With a record set in Q2 and up 8% year over year.
Pending the positive trajectory, we established earlier in the year and we believe will continue into the fourth quarter.
We also completed a strategic capacity expansion in SPD ahead of schedule.
Enabling us to more quickly.
<unk>, Oh joy the larger production output.
I see 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.
Quickly and grow on strong demand and better pricing.
As we realize 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 ICT revenue.
We are encouraged by the macro trends driving robust design activity across the semiconductor industry. Additionally.
Additionally, the outlook for wafer fab equipment continues improving which means more tools and operations.
That will need photo masks to produce chips.
All of this contributes to our optimism that current trends will continue.
2022 and potentially beyond.
FPGA 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 enabled displays used in mobile applications was the largest contributing factor.
Sequentially G 10, five plus demand improved as our customers are bringing on new capacity and introducing new designs for <unk>.
For large screen Tvs.
Extreme that P. D also grew as our new tools expanded output.
MPD revenue into China was 53% of total MPD revenue in the quarter up 9% sequentially and 2% year over year.
Similar to IC, we expect.
Spec current demand trends to continue in SPD fueling continued growth from a full quarter of that new capacity.
Global demand should continue to be the growth factor as more smartphones tablets and laptops adopt high value AMOLED technology.
I'm sure there are signs that the LCD pricing move higher over the last several quarters is ending meaning the LCD boom is nearing an end.
That would be supportive of new design releases as panel makers moved to offer improved features and performance to maintain market share and revenue levels.
Okay.
Well, we're very optimistic on the demand outlook for display photo masks.
Margins improved in the quarter with the flow down from operating leverage gross margin improved to 26, 6%.
Supported by better pricing in mainstream IC and better product mix, particularly in FPGA.
B.
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 income tax provision increased due to increased earnings in.
The gain I mentioned earlier.
Net income to Noncontrolling interest increased with the strong performance of our joint ventures in China, and Taiwan and other income increased due to unrealized gains on foreign exchange.
Earnings per diluted share, including about <unk> <unk>.
A share from the gain on sale of the tool was 28 based on 61.5 million diluted shares outstanding.
Cash and equivalents increased to $283 million.
With $118 million of debt net cash use of $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 brings our year to date total for Capex to $87 million nearly net of nearly $6 million in subsidies received.
Yeah.
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 I see 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 P lab. 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 one to three 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 avaya daughters can have a significant impact on our quarterly revenue and earnings.
Government actions to address health concerns.
Our trade policy May also impact on 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 and market demand factors are favorable.
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 21%.
<unk> hundred 90 <unk> per diluted share.
In summary.
Third quarter results were a continuation of the trajectory began to earlier in the year and ahead of the outlook. We provided at the beginning of 2021.
The catalysts energizing that trajectory.
Constructing a market.
Violent for photo mask 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 will continue to strategically invest to grow revenues expand margins optimize cash flow.
<unk> and improve our return on capital.
I will now turn the call over to the operator for your questions.
Thank you.
As a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.
Please standby while.
We compile the Q&A roster.
Our first question comes from the line of Tom Diffley with D. A Davidson your line is now open.
Okay. Thank you. Good morning first I was wondering if you had seen any supply chain issues.
She is our COVID-19 related impacts of your quarter or if it needs an embedded in your outlook.
Our.
We continue to operate everywhere.
Around the world.
Right.
With Covid.
They've been aggressive in managing our <unk>.
Apply chain, so we do have.
Like our customers.
Some challenges with the tool suppliers in particular and their ability to service told.
That obviously shows up or within the quarter and it's been baked into our guidance moving forward. So overall quality and support has.
Somewhat.
We historically have done a lot of our own self maintenance.
So this internal capability that we have developed for years to drive cost out of our business I think has paid great benefits during COVID-19 and we.
Expect business to continue more or less.
An interrupted as it has.
Okay.
Okay, that's great to hear and then Peter obviously, you guys are it sounds like you're very encouraged by the flat panel display market and all of the drivers going forward.
But it seemed to us on a near term basis youre so much capacity limited.
Ramping revenues with new tools come online I was just curious you talked about not really.
An expanding investments with capital spending next year on the flat panel side, the focus will be out I see so just kind of curious how you reconcile the fact that that's a SaaS market and you seem to be not investing as heavily into it going forward.
Yeah, if you look at that market Tom.
Our IC business.
<unk>.
I think elaborated.
High end is strong the mainstream is sold out.
The SPD business is not that it's not the case, we are sold out because of our technology position, but to the best of all.
Ability to discern as many of our competitors.
So we're operating in a market where our tools are fully loaded.
Others are not.
And Uh huh.
Yes.
Some degree of.
The conservatism as we look at.
Investments were.
To make sure we continue to talk to customers.
So I'll just highlight again.
The neutrals, we just installed I've never seen in my career.
Here Alright, my career period.
New tools installed and ramped so.
Quickly.
And it's obvious why that happened we had commitment.
Commitments from customers.
To make it happen in advance of the tools.
Being installed.
So we're aspiring to create the same.
Are you in that market.
And in a situation where.
All.
You said the excess.
Capacity so to the extent we can continue.
To drive the strategic approach, we have used there will.
We will get more aggressive so we'll see how it goes there's a lot of it.
There's a lot of amyloid suddenly its capacity.
You know coming online not that I missed the analytics display capacity coming online in China. This year.
<unk>.
Basically the way we count it anyways.
Sure.
Almost doubling from the beginning of the year to the end of the calendar year. So there's a lot of the Emerald advance demand.
Sam.
The competitive market share is dropping.
Chinese market share is increasing.
<unk> business is growing.
Yet their market share is I think the way we see anyways.
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.
The 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.
Good tight supply right now are you seeing anybody add capacity.
Photo mask, making capacity at the mainstream side or is it still not economical to buy new tools to service this market.
And what we see our competitors doing as you know we are doing and that is trying to head.
And very tools wherever they can.
To eat.
Eat more output out of.
Out of the mainstream.
Our installed base.
And as you look quarter right and as the market continues to improve.
Find ways.
Two.
We as well as our competitors are finding ways, where it makes sense to.
You know again not headlines but.
AD tools and that's clearly part of.
Our focus in the yeah in the upcoming.
<unk> the other thing I would say is we.
We've made repeated.
Comments.
The mainstream markets oversold.
In Asia.
This trend is now.
Pretty prevalent in Europe, too so our European business is now over sold.
So this sets the stage if it continues.
To walk price is up in Europe.
We have.
In Asia.
Whether it reaches into the U S or not.
Time will tell but.
The market in the mainstream is.
Strengthening everywhere.
And when one comment that I made.
Kind of buried in the script.
Europe has historically.
Alright, what's driven our business has been no transitions.
And historically those transitions has always been at the bleeding edge.
And now we're seeing a significant and growing number of node transitions I mean, this has been going on for a while but it's now.
Yeah.
It's quite clear, we're seeing new transitions in the mainstream crown.
You know what.
10 to 90 or 90 to 65 or 65 to 55 or 40.
And these are re spins of products or product provisions.
The.
Historically would not have happened.
But because I think of a few things Moore's law slowing down or in fact really economic consequences will stopping at 28.
As well as the.
Growth in China and.
Yeah.
The impacts that are following that.
We're seeing a much larger greater.
The number of new transitions in the mainstream business.
And that is new growth.
Well, it's really never there before are not there in any kind of material way.
Okay No I appreciate the color. Thank you.
Thank you.
As a reminder to ask a question you will need to press Star then one on your telephone.
Our next question comes from the line of Gus Richard with Northland. Your line is now open.
Yes, thanks for taking the questions.
First of all on <unk>.
You mentioned the some of the captives are outsourcing is a.
Fill in more <unk> in their internal shops.
I was wondering if you could give us a sense of where.
Captive versus.
It 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.
A long story right.
Very long story.
<unk> Merck.
When I look back 35 years, when I started in the business Mark was about 15% merchant.
And if you look back 20 years it is extended to be about 65.
And what's happened is they are in the it space anyways.
Now it's pushed.
I'd like to know where the merchant market is about 35% and you know holding.
Yeah, It looks pretty right now pretty stable.
Look at our business and you look back to 2017.
When.
Bad outsourcing from you he really started.
Our captive business for business purposes about doubled over that period of time.
To the point, where it's now approaching almost $100 million.
We've seen you know.
That is a.
Growth.
Vector for us.
We expect that it's going to continue.
So that's kind of a.
Abroad.
Russia and as Moore's law comes to a halt.
When that happens, it's very hard to understand.
The purpose of captive has.
So I think in the very long term, we will see a shift back to a buy versus you know make but that's not within the horizon of a typical wall Street investors. So is that going to have the biggest effect in the next year or two no but.
And the five to 10 years.
It wasn't it's hard to see why.
It manufacture, we wont be making its own merits.
My my opinion anyways.
Yeah and actually in Europe.
Your answer leaves me to the next question you know because Moore's law slowing more.
Advanced processor companies are moving to heterogeneous.
Integration with <unk>.
Trailing edge die co package with leading edge die and you know you disaggregated designs.
It's early days in this transition is are you guys seeing any benefit from that at this point.
Or.
Or even what's being done in cell phones.
Yeah, Chris would you like it so we do it we do have an active oh packaging.
Packaging business and Chris wanted to take that one.
No.
The actual die.
Yeah Okay.
Sure.
Yeah.
Is there other just like Kristy answer the business go ahead, Chris.
Sure Yeah. Thanks.
So there's two pieces to that one is the lithography.
He has put together those.
Integrated packages.
You know.
We do see some roadmap of emerging on let's call it.
Packaging lithography.
And it's.
It's just the beginning of it. So you are seeing that in the litho will get a little more complex. So there's kind of an early nascent business in that and also we're developing some technology in that area.
The question you asked.
Are we seeing an impact on more designs.
Due to the wage chips are being integrated and I think we are seeing that SEC.
It's come back pretty strong as a design tool it really had been hollowed out significantly at least stopped growing due to FPGA is and other things.
Due to power performance cost reasons.
G as in all kinds.
Later raised are losing market share is actually the only device family to shrink.
In 2021, that's projected so you are seeing a pivot back to basics and smaller form factor basics that go into these package is definitely is a trend even going down with the things that you just called chip, what's very very small.
Perfect.
Relatively inexpensive di where.
Where the value is through the integration of those together into a package, but we do see that trend so 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.
So heterogeneous set the beginning phases, but definitely that's a positive trend.
For design tape outs, and we see the signs of it now.
Yeah. Thank you Christian just I guess it could.
At one point in Houston.
Incorporating your question with Chris.
We get it right.
Right on its head.
When I was a young boy initiatives basically dominated.
They absolutely dominated.
And over the years over the last 15 years.
Faded away.
I have to be a significant reason why that transpired.
But yeah.
It looks like it's back to the future where he is he's crystal we're in the early days of it but the shift.
It is really good for the overall firm estimates.
Got it.
Very helpful. And then just in terms of.
Hum.
You know packaging lithography and immature you know what what notes are tight and in your mature IC lines.
And you know where.
Is lithography in packaging these days and we're just going over the next couple of years.
You know again Chris.
Hugh.
I'll take that.
I'll fill in whatever I think.
Is missing so go ahead Chris.
Sure I mean, we.
He's apparel Tivoli broad definition of mainstream today, which is.
Up to but not including 28 nanometer node.
So quite broad, but if you wanted to break that down into a finer categories. You would have let's say mature legacy 90 nanometer 10 nanometer maybe in greater and then kind of midrange nose $40.55, there are steps in the mask technology between those that bring different.
Subs are value so mainstream for us in eastern way, we talk about it in this context. It is quite broad and then our high end at least today generally starts in 'twenty or even goes down.
As far as packaging lithography theres kind of two trends that are unfolding in the last I'd say three to five years, one was the effort to try.
Current sourcing packaging lithography on larger substrates. This is so called panel or package on panel.
And we're starting to see that substrate scaling.
Midrange masks 914 inch masks, which are significantly larger than IC size masks.
We still see some of that but what we're finding.
The stronger trend, particularly on the leaders now in wafer level packaging, so going back to standard size.
Masks.
And kind of doing it at the wafer level scale that that trend is much stronger than expected, especially at the high end deposit teams and the types of ground rules you see there.
Yeah.
Try to do it very very low end case, 40, 50 micron types of.
Via holes and things like that down to a few micron.
At mask level.
For wiring and that sort of thing so.
In that context, it would be a relatively mainstream mass technology, but there are some unique.
Characteristics of those packaging masks.
To allow some technology injection into them and some differentiation.
It has to do with the substrates and substrates are very worked.
The way you have to control the Cds on the math the way the master integrated into lithography is somewhat unique so the dimensions are large.
There are some packaging specific technologies that needs to be developed to serve that market and we are working on them.
And just roughly how big of the IC business is is packaging. These days in terms of mass demand.
Europe IC revenue.
Yes, I don't think we would comment but I would say, maybe Peter John Mike, but I would say it's relatively small.
Don't break it out so thats one reason.
Show you, it's a relatively small percent.
Of the total.
So yeah, I don't want to give.
Specific numbers.
But we don't we don't track it.
As a separate segment yet so.
Really quickly.
And much more into it than to say, it's significantly less than 10% of our IC business presently.
One area of it.
That might be glad to take that one.
<unk>.
Packaging for the LCD side, our display side mini led and micro led trends.
That's driving a different set of eyes.
For lack of a better word packaging or integration type of house that actually have a lot of the characteristics of IC packaging that.
Interconnection.
Connection circuitry on how those ltvs are wired up.
And how the micro Leds will be wired up also drives an interesting.
Set of lithography technologies.
Consequently mask technologies as well so we'll start to see it at some point some convergence between some.
Some of that technology from our lithography perspective, as well between SPD in IC.
Got it got it but but many micro OLED.
Much like packaging in general still is is it's an immaterial portion of your business.
Yeah, I would say yes.
Yes.
Yeah, because it's in development mode.
I could go back to I think Chris made a good transition to the extent that we have enacted rather than the package than in past due backlog.
It is an assets utilized.
Standard.
LCD.
Technology with a near SEC complex complexity.
Approaching a rigid OLED display NAND so.
We know many Leds.
Micro Leds.
And we have and act as a sacrifice.
That is a good that's good math.
That's good business for a nice maker.
Use it as display NAND maker.
Equipment, rather than seek making equipment.
Okay.
Got it got it very helpful. Thank you so much.
Okay.
Thank you.
We do have a follow up question coming from the line of Tom.
Tom <unk> with D. A Davidson your line is now open.
Yeah. Thank you and 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 and the high end of the target model in terms of capital spending or just additional capacity.
Yes, Tom we've we've talked about what we're going to use for <unk>.
<unk> capex going forward and we've assumed that it would be a $100 million spend and.
And that's just a rough estimate without specific.
Attributions has two product.
Lines or tools.
So beyond our beyond this year as we said in the comments.
We don't have a 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 free tier.
Is that sort of 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 an old tools coming out.
Yeah, you know we've got.
Got a lot of old tools rolling off as we add new ones. So our depreciation has stayed right in the range of $90 million.
I think a few years ago too.
2018, I think it was when we when.
When we did our first multi year model.
We're assuming that the depreciation was going to increase.
<unk> to over 100 million, but.
With all the tools rolling off we're staying right in the 90, and I think probably a $100 million.
At the highest level for depreciation.
Great.
That chart.
You can see that.
We're approaching.
On a.
A run rate basis to $700 million.
And our margins, both gross and operating or approaching the middle of the chart price of $7.25, and the reason for that is as we described on our last call. We're seeing about a two margin point bump on both gross and operating.
Margins due to price increase in the mainstream.
Is that a kind of shifts it's just the scale and at a meaningfully positive way.
If you look at that chart that we put up at our analyst day.
See that were.
51 column to the right.
On the pro.
Income statement versus.
The revenue required to reach it.
Okay, that's great.
Sure.
And then when you look at the the mix how big an impact to mix have in any one quarter on I.
I guess more on the E P S versus the revenue line.
Files.
Sure.
Thanks for that question, Tom it's kind of a funny question.
Uh huh.
This mix can be significant so an SPD this quarter.
The mix tended toward higher margin.
Products.
And if.
If that continues then our margin.
<unk>.
We'll reflect that benefit.
If it goes back to the lower margin products.
A better effect on revenue, but.
Margin levels so.
To predict mix, especially in this business, where we are we've always said we have two to three weeks of backlog is pretty difficult.
Obviously, if the mix tends toward the higher margin project products.
We would expect out of your earnings guidance, but I really again Big picture I would go back and say that I think everybody listening.
In closing a few fall into this bucket of being close to the company for a long time.
Notice that we.
<unk> had just gone through a period, where we built and ramp.
Two facilities in China.
And could do that you can't do that without draining putting a drain on your income statement.
You look at the current quarter right. We are approaching EPS of a dollar a share right.
Right, which has been.
So a very long term target for the leadership team I mean, we haven't been there as a company.
Turning to <unk>.
20 <unk> century.
A long time since anybody here has seen a dollar a share.
And you can see that it's right its right in front of us now.
So there's no real dramatic growth.
Tronox this year isn't the topline although yeah.
10% not bad right, it's the bottom line and Uh Huh.
So we are we are we are at the dollar share run rate right now right before we even exited.
That's for sure.
Calendar year at 35% earnings growth year over year, that's dramatic.
Great that is really dramatic and that has always been.
Since I've been here for 13 years to knock on the company.
Not.
Most of the financial metrics have been strong would have been most.
Most things.
The minor shareholders.
And where we're delivering on that now and if you look at our.
China operations, there just like one of the gang that profile of the income statement is no different than the profile of the income statement at a consolidated level. So you know in China.
They signed sealed and delivered.
As far as you know being a contributor.
Meeting upstanding member of our G of our geographic Ah fat.
Factory footprint, we're not happy or satisfied.
But on.
On one hand, but on the other yeah.
China as you know it's right there now right there with everybody else.
Okay, No that's great to see and I. Appreciate your time this morning.
Thank you.
Next question comes from the line of Orin Hirschman with AIG H investment partners.
Your line is now open.
Hey, good morning, congratulations on the progress.
I just wanted to ask just in terms of the overall industry dynamic.
If there was a huge lead time just in terms of getting tools. Obviously, there there are only really three main.
Major guys left non captive.
To the point, where and we're just.
The lack of the ability to add capacity additions here and the dynamics that you've described in the overall industry, where we're formats are becoming gating factor designs going into production.
And if so how does that affect you.
You know right now customers are experiencing lead times in the mainstream market.
They've never seen.
So it is impacting them and they're willing.
As a result of basically.
To pay more.
So and you are correct that.
So I didn't mean industry.
The semiconductor industry is served by even a fewer number of key suppliers with.
Limited capacity.
So the industry, it's not COVID-19.
To the point.
At.
Sure.
Describing.
What it forced us to do use plan.
For Capex.
With longer cycles, so, we're putting capital authorizations in front of our board.
Six months in advance of when we would've done it historically.
He can continue.
Having.
<unk>.
So I don't know what competition is doing but we believe we've changed our capital authorization.
Process.
To look forward farther in time.
So it has the lead kind of or equipment suppliers had stretched.
That's how we're managing it I can't see how others are.
We were also more demanding on the projections for those investments these investments have to meet our target.
Target hurdle rates.
Order for us to make the decision.
And do you have a proposal to the board.
Andrews.
That's made a big difference.
I assume that's in front of that.
And what you would describe pools basically sold out it was pool, even listen to production as possible.
Yeah.
Susan.
The way to make sure that happens as you get customers to make.
Commitments to buy capacity before you install it historically.
Historically, we haven't done that but over the last.
Four or five years, we have.
So we actually make it more difficult for ourselves.
Whereby capital because we have to do a lot of work in advance of it.
But the financing impact on the financial company.
Sure.
Now clearly for itself so.
Yes, it's a good time to be adding.
<unk> in our markets, having said that.
In the icy ports business at the high end.
Quality qualifying new capacity and new node.
Thanks Todd.
So you can install a tool and it could easily be sick.
Six or nine months until its fully utilized not because.
Immune distant present, but because our customers require extensive qualification to ensure that it doesn't affect their wafer yields.
Just one follow up question.
No.
Nice.
Well. Thank God you made it to the dollar type of run rate.
That is.
The model is very sensitive as you said and you see a path to get 2015.
All of them over time.
Sumit.
And within the industry.
Similarly.
Hum.
This increase through into that.
I'm sorry.
Your line is not very good but I think the questions you have.
This was we were having were beyond the dollar.
Run rate right now.
Can we sustain it so we actually deliver.
Deliver it so I'll, let John answer that.
Yes.
My first question is can you see can you see going out further can you see a path to get to $1.50 $82 and what would that be passenger based on besides some capacity additions with would it also include some minor price increases et cetera, if the dynamics stay somewhat similar to what we're seeing today out there.
Yeah.
In the target model that we presented in December I think a dollar was the lowest.
Where we expected to.
To get that $700 million.
Revenue levels. So our expectation is is to hit.
Hit the dollar.
Within the next year.
Isn't that exceeded and the investments that we continue to make or.
Obviously, we expect them to be additive accretive to the bottom line.
And our next target model, we should have another hurdle.
Beyond the dollar.
Okay.
And if you look back at what we presented at <unk>.
$15 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.
Okay, great. Thank you.
Thank you.
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 entered the fourth quarter. There was a reason to believe this year we wanted the.
Ever for Photronics, we are on track to achieve record revenue and earnings are improving each quarter, Australia. We were falling is working and we are optimistic that our best days lie ahead.
Updating you on our progress.
Ladies.
Gentlemen that concludes the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.
[music].
John.
[music].
Okay.
[music].
[music].
Yeah.
[music].
Ladies and gentlemen, thank you for standing by and welcome to Photronics third quarter fiscal year 2021 earnings call. At this time all participant lines are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask.
During the session you will need to press Star then one of your telephone as a reminder, this conference is being recorded Wednesday August 25th 2021 I would now like to turn the conference over to Troy Dewar, Vice President of Investor Relations.
Thank you Sarah good morning, everyone welcome.
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 Kreidler, Our Chief Technology Officer.
The press release issued earlier this morning, along with the presentation materials, which accompanies our remarks are available on the investor.
Investor Relations section of our webpage.
Comments made by any participant 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.
Material 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 Kelly and good morning, everyone.
We achieved record revenue in the third quarter as robust design environment led to growing demand across our markets.
This marked the second consecutive quarter of record revenue.
As you will have formally from John in a few minutes.
We expect another record quarter in Q4.
Our outlook for the semiconductor and display industry income.
Every company within these sectors continues to improve.
Among other things.
These indicators point to a boosting capital equipment spending by chip and panel makers that will require further maths once installed.
All signs point to a prolonged period of market strength.
This is truly a very positive thing for the industry profit on estimating and for photronics.
Gross margin improvement.
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 onetime gain on the sale of fixed assets.
These results placed 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 significant this cannot be overstated.
We've invested and we continue to invest in organic growth for our business.
These investments are targeted and align with our customers' technology roadmaps.
Morgan, probably long term purchase agreements that provide assurance.
<unk> the newly installed tools will ramp quickly.
Or this is a headwind to gross margins that can arise from underutilized tools.
And improve ROIC.
The strong balance sheet, we have built and maintained positions us to sustain this investment approach.
Since 2017 annual rent.
Revenue has grown 40%.
Trough to peak quarterly revenue was up 58%.
We are on track to achieve our fourth consecutive year of record revenue.
Growing at a content annual rate of 10% per year since.
Since repositioning the business in 2017.
Over that same time period.
High end IC revenue nearly doubled.
And high end SPD revenue increased fivefold.
This did not happen by accident.
The anticipated result of our clear deliberate strategy to invest in areas that would generate the highest growth.
We're also enabling proved return.
Capital.
From a market perspective, or an investment focus has been clear.
Geographic expansion into China for both IC, and FDP, SPD and technology inflections in SPD <unk>.
Particularly a transition to ambulate and mobile displays.
In addition to these.
On carrier trends there are some drivers that are applicable to the fund on that sector.
Expanded use of <unk> by captain for IC and.
And industry further enhanced capacity being sold out in mainstream IC.
You also cannot ignore growing nationalism.
This spring.
Maxie buildup in multiple regions.
Including the U S and Europe.
All of these factors support our belief that we are in a prolonged period.
Of growth and further enhance demand.
A key element of our investment strategies to align our operations with the fastest growing sectors in the markets we.
Eastern.
FTE. 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 ambulate for mobile.
Which is expanding beyond smartphones into large form factor such as tablets and laptops.
And what also enables diverse applications, including virtual reality headsets automotive displays and even foldable smartphone.
Uh huh.
In addition to mobile displays.
The emergence of premium TV, such as <unk>, OLED and QD OLED drive innovation.
It requires more complex sit on that.
The evolving technologies, such as micro and mini Leds.
So drive enhanced demand as they move to high volume production.
Industry observers are expecting increasing installation of display equipment in the next few years.
If this happens then went and actually follows a period of demand growth for photo mask order for the new tools to be used for manufacturing.
Most of these investments are occurring China, Korea and Taiwan.
It is no coincidence that these are the very same regions of our SPD manufacturing plants, allowing us to invest in localities that are most closely aligned with our customers' operations.
This year, we added three new SPD towards to our global operations.
All three tools are now installed.
Two to three contribute.
Meaningfully to revenue during our third quarter.
And all three are running at capacity and our fourth quarter ahead of plan.
The investments in these tools is supported by long term purchase agreements that incremental annual revenue in excess of $40 million.
This is a great example of our investments.
<unk> strategy in action, we secured the business through long term contracts installed tools and ramped up the full production ahead of schedule.
And are now seeing the financial benefit as we generate revenue and profit from newly commissioned tools.
And I see a driver of innovation demand has been noted.
Migrations.
This happens not only at the bleeding edge, but also for mainstream technologies.
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.
It 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 most of them the captive finance operations use EV, even to a greater extent in their IC fabs are.
A larger percentage of their mass capacity is being dedicated to EV production.
This means they need to outsource.
More not EMEA is to merchant suppliers.
We appointed this trend over the last few years and we expect that it will accelerate as the leading logic and memory manufacturers moved toward advanced nodes.
With progressively more easy lithography systems.
In December of last year.
We communicate 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.
Semiconductor and display markets are strong.
Our revenue was 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 as well as the direction, you're going wed like to thank all our employees for Europe.
For.
To generate yet another record quarter for photronics at this time I will turn the call over to John.
Yeah.
Okay.
Thank you Peter good morning, everyone.
Third quarter results benefited.
From <unk>.
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.
Positive trajectory, we established earlier in the year and we believe will continue into the fourth quarter.
We also completed a strategic capacity expansion in SPD ahead of the schedule.
Enabling us to more quickly and enjoy the larger production output.
I see revenue improved 5% core.
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 in strong demand at better pricing as we realize 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 of last year.
IC revenue into China represented 29% of total IC revenue.
We are.
We're 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 photo masks to produce chips.
All of this contributes to our optimism.
Isn't that current trends will continue into 2022 and potentially beyond.
F. P D 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 enabled displays used.
Blue applications was the largest contributing factor.
Sequentially G 10, five plus demand improved as our customers are bringing on new capacity and introducing new designs for ultra large screen Tvs.
<unk> seen that P. D also grew as our new tools expanded output.
F. P D revenue into China was 53% of total MPD revenue in the quarter up 9% sequentially and 2% year over year.
Similar to IC, we expect current demand trends to continue in SPD fueling continued growth from a full quarter of.
Capacity.
Global 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 meaning the LCD.
<unk> is nearing an end.
That would be supportive of new design releases as panel makers moved to offer improved features and performance to maintain market share and revenue levels.
Overall, we're very optimistic on the demand outlook for display photo masks.
Margins improved.
Boom quarter with the slowdown from operating leverage.
Gross margin improved to 26, 6% supported.
Supported by better pricing in mainstream IC and better product mix, particularly in SPD.
Operating margin was 16, 7%, including a $3.5 million gain.
<unk> and the sale of a lithography tool.
We're very pleased with the progress, resulting from our focus on margin expansion.
Below the line income tax provision increased due to increased earnings and the gain I mentioned earlier.
Net income to Noncontrolling interest increased with the strong performance of our joint.
On <unk> in China, and Taiwan, and other income increased due to unrealized gains on foreign exchange.
Earnings per diluted share, including about six cents a share from the gain on sale of the tool was 28 based on 61.5 million diluted shares.
<unk> outstanding.
Cash and equivalents increased to $283 million.
With $118 million in debt.
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 brings our year to date total for Capex to $87 million nearly 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 I see 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 P lab. So we intend to continue buying shares under this authorization.
Okay.
Before I provide fourth quarter guidance I'll remind you that our visibility is always limited as our backlog is typically only one to three weeks and demand for some of our products is inherently uneven and difficult to predict.
Additionally, the Asps for high end mask sets.
Sure Hi, and as this segment of the business grows a relatively low number of my daughters can have a significant impact on our quarterly revenue and earnings.
Government actions to address health concerns or trade policy may also impact on our results.
Given those.
We expect fourth quarter revenue to be in the range of $171 million to $179 million.
As we've discussed throughout our commentary and market demand factors are favorable and we expect them to stay that way at least through the fourth quarter. In addition, we expect.
Kathy a 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 21% to 29 per diluted share.
In summary, third quarter results were a continuation.
Further the trajectory began to earlier in the year and ahead of the outlook, we provided at the beginning of 2021.
The catalyst energizing that trajectory are constructing a market environment for photo mask that we anticipate will last for the next several quarters and potentially longer.
<unk>, we have invested to align our operations with these market trends and we will 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.
<unk>.
Thank you.
Reminder, to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
Our first question comes.
Fine of Tom definitely with D. A Davidson your line is now open.
Okay. Thank you. Good morning first I was wondering if you had seen any supply chain issues are COVID-19 related impacts of your quarter or if it needs an embedded in your outlook.
Our.
We continue to operate everywhere.
Around the world right.
Right.
Covid.
<unk> been aggressive at managing our <unk>.
Apply chain, so we do have.
Like our customers.
Some of them.
Yes, some challenges with the tool suppliers in particular and their ability to service told.
That obviously showed up or it was in the quarter and it's been baked into our guidance moving forward. So overall.
We're all quality and support has deteriorated somewhat.
We historically have.
I've done a lot of our own self maintenance.
So this internal capability that we have developed for years to drive cost out of our business. I think has paid you know great benefits.
During COVID-19 and we.
We expect business to continue more or less.
Uninterrupted as it has.
Okay, that's great to hear and then Peter obviously, you guys are it sounds like you're very encouraged by the flat panel display market and all the drivers going forward.
Got it.
On a near term basis, Youre somewhat capacity limited ramp.
Ramping revenues with new tools come online I was just curious you talked about not really expanding investments with capital spending next year on the flat panel side, the focus would be what I see so just kind of curious how you reconcile the fact that.
Seems as Australian market. Thank you.
Seem to be not investing as heavily into it going forward.
Yes, if you look at that market Tom.
It says we.
Oh I think elaborated.
High end is strong the mainstream is sold out.
The SPD business.
It's not that it's not the case, we are sold out.
Cause of our technology position, but to the best of our.
The ability to discern as none of our competitors are.
So we're operating in a market where our tools are fully loaded.
Others are not.
<unk>.
Uh huh.
This gives us.
Some degree.
Uh Huh conservatism as we look at it.
Investments were.
We're willing to make yeah, we continue to talk to customers.
You saw it again.
Neutrals, we just installed I've never.
In my career.
Here Alright in my career period.
A new tool installed and ramped so.
Quickly.
And it's obvious why that happened we had commitments.
Commitments from customers.
To make it happen in advance of the tools.
Being installed.
It seems that we're aspiring to create the same.
Scenario in that market.
Yeah.
In a situation where.
All the competitors have excess capacity so to the extent we can continue.
To drive the strategic approach we have used there.
We will get more aggressive so we'll see how it goes there's a lot of.
There's a lot of amyloid update I mean its capacity.
Coming online not that I missed the analytics display capacity coming online in China. This year.
Yeah.
Basically the way we count it anyways.
Sure.
The almost doubling from the beginning of the year to the end of the calendar year. So there's a lot of the Emerald advance demand.
Samsung's market share is dropping.
<unk> market share is increasing.
Lgs business is growing.
Yet their market share.
I think the way we see anyways.
Basically relatively consistent but because the market is so strong their businesses up.
So the market looks good.
As far as.
Downstream is concerned.
We're sold out.
The way to make money.
The conservatism it comes because.
None of our competitors are.
Okay, great that's encouraging.
And then finally, when you look at the mainstream market.
Very tight supply right now are you seeing anybody add capacity.
Photo mask, making capacity at the mainstream side or is it still.
<unk> not economical to buy new tools to service this market.
And what we see our competitors doing as you know we are doing.
That is trying to add point tools wherever they can.
Yeah.
More output out of.
Out of the mainstream.
Our installed base.
And as you look harder right and as the market continues to improve.
Find ways to Europe, we as well as our competitors are finding ways.
It makes sense too.
Uh huh.
Again, not headlines but add.
AD tools.
Clearly part of.
Our focus in the yeah in the upcoming.
<unk> year, the other thing I would say is we.
We've made repeated comments.
Constrained markets oversold.
In Asia.
And this trend is now.
Pretty prevalent in Europe.
In that school so our European business is now are sold.
So this sets the stage if it continues.
To walk price is up in Europe as we have.
In Asia.
Whether it reaches into the U S or not.
Time will tell but if the market and the.
Mainstream as.
Strengthening everywhere.
And one comment that I made.
Kind of buried in the script it historically.
Right, what's driven our business has been node transitions.
And historically those transitions have always been at the bleeding edge.
And now we're seeing a significant and growing number of node transitions I mean, this has been going on for a while but it's now.
It's quite clear.
Seeing no transitions in the mainstream.
You know what.
10% to 90% or 90 to 65 or 65.
55 or 40.
And these are re spins of products or product provisions that are.
Historically would not have happened.
But because I think of a few things Moore's law slowing down or in fact really economic.
Clinton and <unk>.
Stopping at 28.
As well as.
The growth of China.
The.
The impacts that are following that we're seeing a much larger greater.
The number of new transitions in the mainstream.
Business.
And that is new growth.
Well, it's really never there before are not there in any kind of material way.
Okay No I appreciate the color. Thank you.
Thank you.
As a reminder to ask a question.
You will need to press Star then one on your telephone.
Our next question comes from the line of Gus Richard with Northland. Your line is now open.
Yes, thanks for taking the questions.
First of all on <unk>.
You mentioned the some of the captives are outsourcing.
Fill in more <unk>.
And there are 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.
Yeah.
Yes so.
The captive versus merchant.
A long story right.
Yeah.
Very long story.
With me.
When I look back 35 years.
Started in the business market was about 15% merchant.
And if you look back 20 years.
It extended to be about 65.
And what's happened is they are in the IC space anyways.
Gets pushed back to now where the merchant market is about 35% and you know holding.
Yeah, it looks pretty.
Right now pretty stable.
If you look at our business and you look back to 2017.
When you eat outsourcing for me you even really started.
Our captive business Park business with Captisol has about doubled over that period of time.
To the point, where it's now approaching almost $100 million.
So we've.
We've seen you know.
That is a growth.
Sector for Us and.
We expect that it's going to continue.
So that's kind of a.
You know brush and as Moore's law comes to a halt.
When that happens, it's very hard to understand what purpose. It kept it has.
So I think in the very long term, we will see a shift back to <unk>.
Buy versus you know.
Abroad, that's not within the horizon of a typical wall Street investors. So is that going to have the biggest effect in the next year or two no but.
And the five to 10 year horizon, it's hard to see why.
Manufacture, we want to be making its own masks.
My opinion anyways.
Yeah and actually.
Make your answer leaves me to the next question.
You know because Moore's law slowing more.
Advanced processor companies are moving to heterogeneous integration with.
Trailing edge die co package with leading edge die.
And you know you're just aggregating designs.
Hum.
Early days in this transition is are you guys seeing any benefit from that at this point.
Or.
Even what's being done in cell phones.
Yeah, Chris would you like it so we do have we do have an active.
Our package.
Business and Chris why don't you take that one.
No exactly.
Actual die.
Yes, okay.
Uh huh.
Oh, it's just like Kristy answer the business go ahead, Chris.
Sure Yeah, Thanks somebody has to pay.
Pieces to that one is the lithography.
Marketing needs to put together those.
Integrated packages.
No.
We do see some roadmap emerging on let's call it packaging lithography.
And.
Just at the beginning of a smoker you are seeing that in the litho will get a little more complex. So there's kind of an early nascent business in that.
He also we're developing some technology in that area.
The question you asked.
Are we seeing an impact on more designs.
Due to the way chips are being integrated and I think we are seeing that you know you see it.
Come back pretty strong as a design tool it really had been hollowed out.
Significantly at least stopped growing due to FPGA is and other things.
The power performance cost reasons.
FPGA is in all kinds of Gatorade, So losing market share is actually the only device family to shrink.
<unk> thousand 21, that's projected so you are seeing a pivot back to adhesives.
And smaller form factor Asics that go into these packages definitely is a trend even going down to things that users called chip, what's very very small purpose built relatively inexpensive die.
Where the value is through the integration of those together into a package, but we do see that trend.
So that kind of leads to researchers in design activity.
Across the board and this is one of the things pushing the.
The mainstream.
Market forward.
So heterogeneous set the beginning phases, but definitely that's a positive trend.
For design tape outs.
We see the signs of it now.
Yeah. Thank you Christian.
Got it at one point.
Sure.
Quicker with Chris obviously hit it right.
Right on its head.
When I was a young boy initiatives basically dominated.
They absolutely dominated.
And over the years over the last 15 years, they faded away.
I have to be a significant reason why that transpired.
But it.
It looks like it's back to the future where he is he's crystal we're in the early days of it but.
It was really good for the overall market.
Yeah.
Got it that's very helpful. And then just in terms of.
You know packaging lithography and immature.
You know what what notes are tightening in your mature IC lines.
And you know where.
Is what.
Congress in packaging these days Where's it going over the next couple of years.
Yeah.
Yeah again, Chris why don't you.
Ill take that.
I'll fill in whatever I think.
As is missing so go ahead Chris.
Okay sure I mean, we.
He was apparel.
Really broad definition of mainstream today, which is.
<unk> been not including 28 nanometer node, so quite broad, but if you wanted to break that down into a finer categories.
You would have let's say mature legacy 90 nanometer 10 nanometer, maybe even greater than kind.
Midrange nose $40.55, there are steps in the mask technology between those that are.
Different sorts of value so it mainstream for us at least the way we talk about it in this context. It is quite broad and then our high end at least today generally starts in 2008 and goes down.
As far as packaging lithography theres kind of two trends that have unfolded in the last I'd say three to five years. One was the effort to try to do packaging lithography on larger substrates. This is so called panel or package on panel, we were starting to see that substrate scaling mid.
Midrange masks.
Line 14 inch masks, which are significantly larger than IC side, Matt.
We still see some of that but what we're finding the stronger trend, particularly on the leaders now in wafer level packaging, so going back to standard sized IC masks.
And kind of doing it at the wafer level scale that that trend.
And as much stronger now.
Mostly at the high end deposit team.
And the types of ground rules you see there.
And the very very low end case, 40, 50 micron types of.
The holes and things like that down to a few microns.
At mask level.
For wiring.
And that sort of thing so.
In that context, it would be a relatively mainstream mask technology, but there are some unique characteristics of those packaging masks.
To allow some technology injection into them and some differentiation.
As to do with the substrates for substrates are very warped.
The way.
Hey, you have to control the Cds on the math the way the master integrated into lithography is somewhat unique so the dimensions are large but there are some packaging specific technologies.
It needs to be developed to serve that market and we are working on them.
And just roughly how big of the.
The IC business is is packaging these days in terms of <unk>.
We estimate a beer.
Sure.
Revenue.
Yes, I don't think we would comment but I would say, maybe Peter John Mike, but I'd say, it's relatively small you know we don't break it out so that's one reason.
Show, you which are relatively.
Small percent.
Of the total.
So, yes, but I don't want to give specific numbers.
Yeah, we don't we don't track it.
As a separate segment yet so.
Really quickly.
And much more into it than to say it.
It's significantly less than 10% of our IC business presently.
One area of it.
There might be one thing.
<unk> packaging for the LCD side, our display side mini led and micro led trends.
That's driving a different.
For lack of a better word packaging or integration type maps that actually have a lot of the characteristics of IC packaging that so the interconnection circuitry on how those Leds Leds are.
Wired up.
And how the micro Leds will be wired up also drives an interesting.
Set of.
Lithography technologies.
Consequently mask technologies as well so we'll start to see it at some point some convergence between some of that technology from a photographer perspective as well between SPD in IC.
Got it got it but many microwave.
Sadly be much.
Much like packaging in general still is is an immaterial portion of your business.
Yeah, I would say yes.
Yeah, because it's in development mode.
I could go back to Chris.
Chris made a good transition to the extent that we have an active rather than the package than it Pat.
Backlight.
Uh huh.
As an assets utilized.
Standard.
LCD technology with a near perfect complex complexity.
Approaching of rigid OLED display NAND so.
We go mini Leds.
Our micro Leds and.
Can we have the connect is a satellite.
Those are good that's great Matt.
Good business for a matchmaker users displaying this making equipment rather than hiseq, making equipment.
Okay.
Got it.
Very helpful. Thank you so much.
Thank you.
We do have a follow up question coming from the line of Tom <unk> with D. A Davidson your line is now open.
Yeah. Thank you and a quick question for John when you look at the target model, what do you need to.
Got it the GAAP from the $700 million today to the 750 and the high end of the target model in terms of capital spending or just additional capacity.
Yes, Tom.
We've we've talked about what we're going to use for <unk>.
Modeling capex going forward as we've assumed that it would.
Bridge to the $1 billion spend.
And that's just a rough estimate without specific astral.
Attributions has two product lines or tools.
So beyond our beyond this year as we said of the covenants are.
We don't have a specific.
102, they've done yet that's actually going to be done in a few weeks. So I think if we just stay with the 100 billion estimate for pretty sure. That's as specific as we can get.
Okay and then if you do that is there a noticeable difference in depreciation.
So worked into the model or is there a pretty even split between spending joined in an old tools coming out.
Yeah, you know, we've got a lot of old tools rolling off as we add the door. So our depreciation has stayed right in the range of $90 million.
I think a few years ago.
And I guess to.
2018, as it was when we would.
When we did our first multi year model.
We're assuming that the depreciation was going to increase to over 100 million but.
With all the tools rolling off were to stay where it is at 90, and I think probably $100 million.
The highest.
Oh depreciation.
Great.
So that chart.
You can see that.
We're approaching.
On a run rate basis to $700 million column.
And our margins, both gross and operating or protein in the middle of the chart.
80% and 25 the reason for that is as we described on our 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.
So kind of shifts.
Just the scale.
In a very meaningfully positive way.
So if you look at that chart that we put up at our analyst day Youll see that were <unk> 50.
51 column to the right on the profile of the income statement versus.
The revenue required to reach it.
Okay, that's great.
<unk>.
And then when you look at the.
The mix, how big an impact mix have in any one quarter.
It's more on the EPS versus the revenue line.
Yes.
Thanks for that question, because it's kind of a funny question.
Uh huh.
It's.
Mix can be significant so that's P. D. This quarter.
The mix trended toward higher margin.
Products.
If that continues then our monitor goodwill.
We'll reflect that benefit.
It goes back to the lower margin products. It is a better effect on revenue.
But our margin rules, so trying to predict mix, especially in.
This business, where we are we've always said we have two to three weeks of backlog is pretty difficult, obviously, if the mix trends towards the higher margin products.
We would expect out of Europe.
But I really have no big picture, Tom I would go back and say that I think everybody listening or who's been closely you fall into this bucket of being close to the company for a long time.
Notice that we had just gone through a period, where we built and ramped two facilities in China.
And could do that you can't do that.
So training, putting a drain on your income statement.
If you look at the current quarter right. We are approaching EPS of a dollar a share.
Right, which has been.
A very long term targets for the leadership team right, we haven't been there as a company.
Since.
At the end of the 21st century.
It's been a long time since anybody here has seen a dollar a share.
And you can see that it's right its right in front of us now.
So there's a real dramatic growth for photronics. This year isn't the topline, although you know 10% not bad right. It's the bottom line.
Uh huh.
Yeah. So we are we are we are at a dollar a share run rate right now right before we even exited.
The calendar year at 35% earnings growth year over year, that's dramatic.
That is really dramatic.
<unk> always been.
Since I've been here for 13 years and knock on the company.
Not.
Most of the financial metrics have been strong would have been.
Most in the minor shareholders as you know earnings and where we are delivering on that now and if you look at our.
And then on China operations, there just like one of the gang that profile income statement is no different than the profile of the income statement, our consolidated level. So you know with China.
They signed sealed and delivered as far as being a.
Contributing upstanding member.
Of our G of our geographic Ah factory footprint, we're not happy or satisfied but on.
On one hand, but on the other yeah, China is it's right. There now it's right there with everybody else.
Okay No that's.
<unk> seen I appreciate your time this morning.
Thank you.
Our next question comes from the line of Orin Hirschman with AIG H investment partners. Your line is now open.
Hey, good morning, congratulations on the progress.
I just wanted to ask just.
It's great to the overall industry dynamics.
If there was a huge lead time just in terms of getting tools and obviously there are only really three.
Nature guys left non captive.
Does it come a point, where and you know were just because of the lack of the ability to add capacity additions here in.
The two dynamics that you described in the Oklahoma Street, where we are.
Photo maps are becoming a gating factor.
Designs going into production and if so how does that affect you.
Yeah, well right now customers are experiencing lead times in the mainstream market debt.
They've never seen.
So it is impacting them and theyre willing.
As a result of basically to pay more.
So and Europe correct.
So I didn't mean industry.
Like the semiconductor industry is served by even a fluor.
A number of key suppliers with limited capacity.
So the industry is not today.
To the point that.
At.
Sure.
Describing.
What it's forced us to do is plan.
For Capex.
Capex.
With longer cycles, so, we're putting capital authorizations in front of our board.
Six months in advance of when we would have done it historically.
We can continue.
King.
Capacity.
So.
I don't know what our competition is doing but we believe we've changed our capital authorization.
<unk>.
To look forward farther in time.
Hence the lead time of our equipment suppliers has stretched.
That's how we're managing it.
I can't say, how others are.
We're also more demanding on <unk>.
Projections for those investments these.
These investments have to meet our.
Target hurdle rates.
Order for us to make the decision and believe a proposal to the board.
There's a lot of ideas.
That's made a big.
Said.
I assume that's in front of that.
It's important to what you described would pools basically sold out before the tool even goes into production as possible.
Well it is the way to make sure that happens as you get customers to lake.
Commit.
Different to buy capacity before you install it to.
Historically, we haven't done that but over the last.
Four or five years, we had.
So 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 final.
In fact on a financial company.
Sure.
Now clearly for itself so.
Yes, it's a good time to be adding.
Capacity in our markets, having said that.
In the icy ports business at the high end.
Quality.
And they find new capacity and you know it takes time.
So you.
You can install a tool.
And it could easily be.
Six or nine months until its fully utilized not because the demand isn't present, but because our customers require extensive qualification.
Sure that it doesn't affect their wafer income.
Just one follow up question.
No.
It's nice to think that you made to the dollar type of run rate.
The bundle is very sensitive as he said it and you see a path to get to the policy.
[noise] towards peace.
Dominic overtime.
Assuming that.
Industry day.
Similarly.
Hum.
Price increase factor into that.
I'm sorry. Your line is not very good but I think the questions.
Alex It was we were at it.
We're beyond the dollar.
Run rate right now can we sustain it so we actually.
Deliberate so I'll, let John answer that.
Yes.
My first question is can you see can you see going out further can you see a path to get to $1.50 $82.
And what would that be pasty based on besides some capacity additions with would it also include some minor price increases et cetera, if the dynamics stay somewhat similar.
What we're seeing today out there.
Yeah.
The group model that we presented in December I think a dollar was the lowest.
So we expected to.
To get that $700 million.
Revenue levels. So our expectation is is too.
Just the dollar.
The next year and exceed it.
And the investments that we continue to make or.
So we expect them.
It would be additive accretive to the bottom line.
And our next target model, we shouldn't have.
Other hurdle.
Beyond the dollar.
If you look back at what we preach.
Go ahead Sir.
$15 million run rate, we had ETF.
He is the $1.25 to $1.35.
And clearly.
If revenues go up and we have pricing power, we can get better than that.
Yeah.
Okay, great. Thank you.
Thank you.
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 because we entered the fourth quarter. There's reason to believe this year, we wanted the best ever for Photronics.
We are on track to achieve record.
Revenue and earnings are improving each quarter. The strikes were falling is working we are optimistic that our best days lie ahead.
If we're 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.