Q2 2023 Photronics Inc. Earnings Call
Speaker 1: You.
Speaker 1: I.
Speaker 2: Good day and thank you for standing by. Welcome to Photronix second quarter 2023 earnings conference call. At this time, all participants are on a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.
Speaker 2: As a reminder, this conference is being recorded Wednesday, May 24, 2023. I would now like to turn the conference over to Rochelle Burr, Chief Administrative Officer. Please go ahead.
Speaker 3: Thank you Kevin. Good morning everyone. Welcome to our review of Botronics' fiscal 2023 second quarter results. Joining me this morning are frankly, our chief executive officer, John Jordan, our chief financial officer, Chris Progler, our chief technology officer, and Eric Rivera, our corporate controller and chief accounting officer.
Speaker 3: 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 web page. Comments made by any participants on today's call may include over looking statements.
Speaker 3: that include such words as anticipate, believe, estimate, expect, forecast, and 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.
Speaker 3: and we assume no obligation to update any forward-looking information. During the course of our discussion, we will refer to certain non-GAAP financial metrics. These numbers are useful for analysts, investors, and management to evaluate ongoing performance. A reconciliation of these metrics to GAAP financial results
Speaker 3: is provided in our presentation materials. At this time, I will turn the call over to Frank.
Speaker 4: Thank you, Rishia, and good morning, everyone. Second quarter results were strong as we achieved greater revenue and profit.
Speaker 4: The man for our product grew in both IC and APD with sequential revenue growth in all regions.
Speaker 4: Our position as the largest merchant photomark supplier provides us broad exposure to global markets and makes us less dependent on any single, any one sector or region.
Speaker 4: In addition, we have a talent and dedicated global team.
Speaker 4: Their performance has enabled Fortunes to deliver record results in Q2.
Speaker 4: I see the main washtron again in this quarter, especially for a measuring.
Speaker 4: This sector has been growing for the last several quarters. A man for the advanced portion of mentoring in the 14 to 55 nanometer bridge is a special rich term.
Speaker 4: has been growing for the last several quarters. The man for the advanced portion of mentoring in the 14 to 55 nanometer bridge is a special rich charm. On the other hand,
Speaker 4: We observed some softness in higher.
Speaker 4: However, we expect this to recover in the next one to two quarters and to reserve a growth trend.
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Speaker 4: Our customers are releasing new designs for mobile displays. And so they try to get market share in the next generations, our smartphones, templates, and PC.
Speaker 4: demand for LCD has stabilized with good sequential growth.
Speaker 4: We expect this preparer trend to continue.
Speaker 4: Growth and operation margin benefit again this quarter from strike pricing and tight cost management across the organizations.
Speaker 4: As a result, we add 65 cents per share on a care basis.
Speaker 4: and 45.54 cents per share on a long database after excluding 11 cents per share Get from Far East Church
Speaker 4: This was an afternoon quarter as we continue to bear to another record here.
Speaker 4: Photo mask demand is driven by new designs.
Speaker 4: Design activity often follows different given cycle and capital equipment or way to start.
Speaker 4: For example,
Speaker 4: Our customer opened really new designs when their demand is soft and utilization is low. And that could be a better time to introduce new products into their operations.
Speaker 4: The other condition that drives photomass demand is capacity expansion.
Speaker 4: Either so new facts or new tours is existence facts.
Speaker 4: This factor tend to make photo masks the main more sustainable and even countered.
Speaker 4: to make photo masks the man more sustainable and even counter-see quick.
Speaker 4: It's very beautiful.
Speaker 4: Since I was named CEO one year ago, I spent a lot of time with our employees across the organization.
Speaker 4: and have enhanced a driven a great team which has an incredible risk to win.
Speaker 4: In addition, we have strategically invest in technology and develop an advanced process know-how for our leading edge mass solutions.
Speaker 4: by working closely with our customers.
Speaker 4: We are able to fully support their technology and program romance.
Speaker 4: able to fully support their technology and program romance. Our differentiates.
Speaker 4: EUV product line continue to expand, achieving a number of important milestones.
Speaker 4: including our first EUVD Remastered shipments in Q2.
Speaker 4: cled to label the
Speaker 4: Based on data recently published by Tech Insights.
Speaker 4: we shipped approximately 30% of all photomass units globally.
Speaker 4: The meeting providers of semi-conductors and the different panels trust us to supply their photo mask.
Speaker 4: This confirm our leading position and is an indication of our bro and diverse marquee exposure.
Speaker 4: Finally, we have a great benefit of fun growth.
Speaker 5: through cash flow generation and financial discipline.
Speaker 6: We have here a strong and flexible balance sheet.
Speaker 7: Now providealla d&bitng to LIM
Speaker 8: while also providing support, shall we see a decline in demand.
Speaker 9: We are on track to deliver another record year in 2023.
Speaker 10: Later on, John will provide our two three guidance in more details.
Speaker 11: Photomast market demand is strong and our team is performing well.
Speaker 12: and very optimistic about our future.
Speaker 13: With that, I welcome the call over to chat.
Speaker 14: Thank you, Frank. Good morning, everyone.
Speaker 15: Second quarter revenue of $229 million was another record.
Speaker 16: A 9% sequential increase and 12% increase.
Speaker 17: over the last year's second quarter. That represented the ninth consecutive quarter of year over year revenue growth.
Speaker 18: Demand remained robust across both IC and FPD reflecting strong design activity from our customers, releasing new products and expanding production capacity. Shipments within and into China represented 51% of second quarter revenue.
Speaker 19: We are the global market leader in merchant photo masks and our customers partner with us.
Speaker 20: to achieve their product roadmap objectives.
Speaker 21: I see revenue of $167.1 million was up 7% sequentially, and 15% compared with last year. Demand was stronger across all regions, and mainstream growth more than I've said, some high end softness.
Speaker 22: Pricing remains favorable as demand growth continues to outpace some increases in supply.
Speaker 23: We are seeing the strongest demand within the higher end of the mainstream technologies.
Speaker 24: which aligns well with the investments we have made to increase IC capacity.
Speaker 25: Our winning commercial teams are doing a great job of bringing those orders in.
Speaker 26: And we believe new designs and increases in chip capacity driven by regionalization of the semiconductor supply chain will continue to drive long-term positive trends in the photo vascular sector. FPD revenue is also a record in the quarter, improving 14% quarter over quarter.
Speaker 27: and 6% year over year.
Speaker 28: AMOLED panels used in advanced mobile displays continue to fuel healthy demand for high-end masks.
Speaker 29: which represented 83% of the FPD revenue in the quarter.
Speaker 30: Mainstream revenue also boosts the crensely with increased white capacity and stable LCD demand.
Speaker 31: Gross and operating margins increased quarter over quarter by more than 260 and 270 basis points respectively to 38.6% and 29.2% which were 430 and 500 basis points more.
Speaker 32: Pricing power, favorable mix, and disciplined cost management. Operating expenses increased by 6%, but at 9.3% in a revenue were lower as a percentage of revenue. Second quarter operating income of $67 million.
is the most the company has ever recorded in a quarter. The non-operating gain in the quarter of $13.6 million resulted primarily from the unrealized gain from re-measurement of US dollar denominated balance sheet items.
into the local functional currencies of our foreign operations. This compares to the loss of 14.4 million in the first quarter, resulting in a $28 million sequential tailwind due to changing FX rates.
Similar to last quarter, we provided non-cap results that exclude the foreign exchange effect for better comparison of operating results.
Gap BTS was 65 cents a share.
After eliminating the effects of foreign exchange and the related income tax or minority interest, adjusted EPS was 54 cents for Q2 compared with adjusted EPS of 40 cents last quarter at 38 cents in the same quarter last year. The strong net income performance and tight working capital management.
$130 million, primarily for increased IC capacity.
Our cash balance was $367 million at the end of the quarter, and we held an additional $45 million in short-term investments.
We have $28 million of debt remaining consisting almost entirely of low-cost equipment leases.
Our cash and short term investments, combined with funds available under the credit agreement, provide ample liquidity for our growth investments and resilience against uncertainties we could face in the future. Before I provide guidance, I'll remind you that our visibility is always limited as our backlog is typically only one to three weeks.
demand for some of our products is inherently uneven and difficult to predict. Additionally, the ASPs for high-end mass sets are high, and as this segment of the business grows, a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. And that concludes our Melvin
we expect third quarter revenue to be in the range of $224 to $234 million. We believe photo mass demand will continue to do well in the current semiconductor environment.
and we will continue to strive to increase our market leading position.
Based on those revenue expectations in our current operating model, we estimate non-gap burnings per share for the third quarter to be in the range of 48 to 54 cents per diluted share.
Due to the day we have grown revenue 12% in expanded operating margins by 570 basis points. Demand remains strong and our team is performing well. Our confidence that we can achieve our long-term targets and continue creating shareholder value.
is supported by our level of execution, strong balancing, and positive outlook on continued strong design activity.
I will now turn the call over to the operator for your questions. Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered, or wish to remove yourself from the queue, please press star 1-1 again. It will pause for a moment while we compile our Q&A roster.
medical issues. We signed the positive days of Japan now tightening export controls on China. This coming after export restrictions by the US. And I think you I do as you mentioned, you had 21% shipments into China this quarter. So I'm wondering if you could quantify any headwinds that you've seen from China in terms of
Yeah, so with respect to the geopolitical tensions and our, to date we have not received, we have not had a material impact on our quarter because of the export control regulations and the geopolitical issues that are going on between.
China and the U.S. We are cognizant of the Japan tightening the controls, but again, we monitor the controls very carefully. We are working closely with our suppliers. We are working with our suppliers so that they can get licenses or we get licenses.
for the tools or the parts that we need to continue our operations in China.
Thanks, Michelle. That's helpful. And then I guess my second question in terms of the demand side of things. You noted strong demand in the quarter, but as memory demand remains sluggish and mature holding up well, what are you seeing on the memory funds for you guys and maybe discuss how this is impacting your pricing dynamics.
Yeah. So, you know, we have exposure to part of the memory market and those customers haven't been as strong as they were in previous quarters, but particularly our most advanced DRAM customers still doing fairly strong. Rotemab and development cycles preparing for recovery of the markets.
It looked like some of the memory pricing has started to stabilize. Maybe it's hit a bottom, maybe not, but the two or three primary customers we have on memory seem to be a bit more optimistic about what might unfold in the second half of 2023 calendar year.
And we're seeing pretty strong R&D cycles and pretty strong product development cycles still, so that hasn't changed. So it was not strong in the quarter, but it looks like at least customers we serve are getting a bit more optimistic about the latter half of 2023.
Thank you for the color. And then my last question is on capex. Maybe John , I might have missed it, but what are you thinking in terms of capex for this year? And maybe could you give us a split for this year for SPD and IC?
Most of the $130 million that we've got planned for this year, Linda, is in IC. It seems as though we've really targeted our CapEx well because the demand is in.
you know, the high end of that mainstream business, which is where we've invested significantly in the past year. And also some of our tools we call End of Life. So we are planning to replace certain old tools with the more become our raw, owning, Wyrxenture minister.
efficient and update tools. So some CADACs in IC spending on the end-of-life tool replacement.
Got it. Thank you for your time. Linda, I'd just like to add on the geopolitical situation, Rachele's comments are well placed and they relate only to IC because the FPD business is not impacted by... Yeah, FPD is not connected.
Thank you Linda.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone.
Our next question comes from Gus Richard with Northanger Line is open.
Yes, thanks for taking my question. Good morning. I appreciate it. Real quick, could you talk a little bit about expedites? Are you still seeing those in the mature side, or has that activity slowed? Yeah, expedite. Pretty much.
We still have some long-term agreements which we signed last year or early this year. And in those long-term agreements, the premium charge has been defined and will continue to continue through the period of the agreement. And certain agreements are for two years, some agreements are for three.
And I'm just wondering as you look across the industry on the IC side of things, is it just tight in certain regions like China or is it tight globally? Can you talk about
You know how you see that evolving over the next you know a couple years What a massive industry yeah in our industry We do see some expansion and Some new local man house in China and this new players
Some are in a very early stage, some start to get a customer qualification and enter the market. However, we believe that the impact of the market is very important.
we'll start on the lowering of the business and also for these new competitors to achieve certain economic scale, it will take several years. So our business in China, basically we are focused on...
the higher end of the mainstream. And so we will have some differentiation with the new competitors.
Outside of China, IC photomass capacity expansion actually is not significant. And as we just mentioned, the
We spent some caretakers. Part of those of course is for capacity expansion but some portions of those are for end-or-life imprisonment and this kind of end-or-life situation happened to
every merchant mashup, not only to us. So even with every mashup is doing Chatex, but some tour will be end of night. Overall capacity increase is a clear limit.
Got it. So basically, just to summarize, overall you see the capacity.
find a remaining tight and the incremental path access for replacement of all the tools that are no longer supported. All right. Thank you.
Got it. And then, you know, I've, you know, over the last 40 years, you know, I see photo mask margins rarely have gotten into the 30s. And I'm just kind of curious.
what gives you the confidence that that's a sustainable level, just given the history of the industry?
I think it's in the first years, as you mentioned, photomass is not a big player in the semi-industry.
a lot of companies are focusing on wafer-fib capacity expansion and pay little attention to photomark supply. So the supply demand, of course, was on the other side, more supply than demand. However, low then
because most much and much of us are not making enough money to make investment. So, gradually the trend has shift between the supply and demand. And especially in the past two years.
a lot of new IC applications and create a lot of new wafer fab expansion. So the combination of surprise side of photomass do not expand on the demand side. So we have a lot of new wafer fab and new product.
demand. So the supply and demand imbalance getting worse. And under such situations we believe we have some leverage in terms of pricing and also profit margin.
Got it, got it. And have, and just less one for me. Are you seeing an extension in the mature markets of lead times or ad-based stabilize at this point?
The equipment you ion lower for you guid your early co.
Oh, yeah. Our daytime was very long last year. And before the shortage, the daytime like 7-10 days, the longest. And last year, Sunday time was as long as 90 days.
And at this moment, the lead time has been improved, but still it is much, much longer than the normal lead time before. So we are still seeing some premium charge, but this lead time is different from the previous time.
node to node. Certain nodes, the daytime remains very long and certain nodes' daytime has improved.
Thank you so much. I think that's it for me. Thank you.
Thank you, Les. Thanks very much.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone.
And I'm not showing any further questions at this time. I'd like to turn the call back over to Frank. We are glad that you have chosen to join us this morning and appreciate your interest in photonics.
Our performance through the first half of 2023 has exceeded our expectations.
Market demand is strong and financial metrics are improving.
I'm proud of the way our team has performed to serve our customers and continue to contribute to our achievement.
We believe we are on our way to achieving our long-term target and look forward to updating you again our progress.
We believe we are on our way to achieving our long-term target and look forward to updating you again on our progress. And have a good day to everyone. Thank you.