Q2 2024 Photronics Inc Earnings Call

May 22, 2024

Operator: Good day, and thank you for standing by. Welcome to Kutronix's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automatic message device in your hand. As a reminder, this conference is being recorded on Wednesday, May 22, 2022. I would now like to turn the conference over to Richelle Burr, Chief Administrative Officer. Please go ahead.

Yeah.

Speaker Change: Good day, and thank you for standing by while constant Photonics second quarter 'twenty 'twenty four earnings conference call.

Speaker Change: At this time, all participants on a listen only mode. After the speaker's presentation, there will be a question and answer session.

Speaker Change: Sure.

Speaker Change: Got it.

Speaker Change: And automatic message and it's right after.

Speaker Change: A reminder, this conference is being recorded.

Speaker Change: May 22024.

Speaker Change: I'd now like to turn the Kaufmann over to Michelle for Chief Administrative Officer. Please go ahead.

Richelle E. Burr: Thank you, Livia. Good morning, everyone. Welcome to our review of Photronics' Fiscal 2024 second quarter results. Joining me this morning are Frank Lee, our Chief Executive Officer; Chris Progler, our Chief Technology Officer; and Eric Rivera, our Interim Chief Financial Officer and Chief Accounting Officer. The press release we issued earlier this morning, together with the presentation material that accompanies our remarks, are available in the Investor Relations section of our web page. Comments made by any participants on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast, and in our view.

Michelle: Thank you Sylvia and good morning, everyone welcome to our fourth.

Speaker Change: Tronic fiscal 'twenty 'twenty or second quarter results. Joining me. This morning are frankly, our chief Executive Officer, Chris Kreidler, Our Chief Technology Officer, Eric are there are interim Chief financial Officer, and Chief Accounting Officer.

Speaker Change: This release, we issued earlier this morning together with the presentation material that accompanies our remarks are available on the internet.

Speaker Change: The relations section of our web page.

Richelle E. Burr: These forward-looking statements are based on a number of risks, uncertainties, and other factors that are difficult to predict. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after the date of this presentation to conform these statements to actual results.

Speaker Change: Made by any participant on today's call May include forward looking statements that include such words as anticipate believe estimate expect forecast and in our view.

Speaker Change: Oh, we're looking statements are based upon a number of risks uncertainties and other factors that are difficult to predict.

Speaker Change: Although we believe the expectations reflected in the forward looking statements are reasonable we cannot guarantee future results.

Speaker Change: Most of activity performance or achievements, we're under no duty to update any of the forward looking statements. After the date of the presentation to conform. These statements to actual results. During the course of our discussion we will refer to certain non-GAAP financial metrics.

Richelle E. Burr: During the course of our discussion, we will refer to certain non-GAAP financial methods. These numbers are useful for analysts, investors, and management to evaluate ongoing performance. A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. At this time, I will turn the call over to Frank. Thank you, Richelle, and good morning, everyone.

These numbers are useful for analysts investors and management to evaluate ongoing performance and <unk>.

Speaker Change: Conciliation of these metrics to GAAP financial results is provided in our presentation materials.

Frank: At this time I will turn the call over to Frank Thank you Michelle and good morning, everyone.

KangJyh Lee: Second quarter sales increased slightly from the first quarter. As a positive, seasonality trends were mostly offset by temporary market soft risk following the Chinese New Year holiday and the impact of earthquakes in Taiwan. On April 3rd, a major earthquake hit Taiwan, where we have three manufacturing facilities. I am happy to report that our people are safe, and there was no significant damage to our sites or equipment. The Strength of the Earthquake and the Following Aftershocks impact our production through to downtown, as we must investigate to ensure there is no damage to our facilities and manufacturing equipment.

Second quarter sales increased slightly.

Speaker Change: Florida quota.

Speaker Change: It's a positive to see that non energy trends were mostly offset by having a really marquee yourself. Please.

Speaker Change: Finally into Chinese new year holiday and any impact from earthquake.

KangJyh Lee: In addition, we must repair or recheck masks that were in process at the time of the event. Our IC and FPD teams in Taiwan are experienced in dealing with this event, and nearly all tours were fully recovered within a few days. However, the loss of production time and in-process inventory resulted in a reduction in sales of approximately $3 million. However, all the rest at the beginning of Q2 was strong, continuing the positive trend we saw at the end of Q1, and consistent with the high order rates we typically see ahead of the Lunar New Year holidays.

Speaker Change: Yeah.

April.

Speaker Change: Major earthquake, she in Taiwan, where we have three manufacturing facilities.

Speaker Change: I'm happy to report that our people are safe and there was no significant damage.

Speaker Change: Our size or equivalent.

Speaker Change: The strength of the earthquake and following after shocks.

Pak our pedestrian through towards downtown.

Speaker Change: We must embrace took eight to ensure there's no damage to our facilities and manufacturing equipment.

In addition, we must prepare or recheck mask, that's where your process at that time I'll tell your friends.

Speaker Change: Oh, I see an M. P D teams in Taiwan.

Speaker Change: Experience.

Speaker Change: With these events.

Speaker Change: And nearly all towards well what do you recall that we did a few days.

Speaker Change: Oh, Hey, Brad.

Speaker Change: At Rosebel production time and in process inventory.

Speaker Change: That reduction is there.

Speaker Change: Approximate.

Speaker Change: Street in Paris.

Speaker Change: Okay.

Speaker Change: Oh no worries at the beginning of Q2 was strong.

Speaker Change: Continuing the positive trend we saw at the end of Q1.

Speaker Change: And it's kind of with a high order rates, we typically see.

Speaker Change: Oh got lunar new year holiday.

KangJyh Lee: Following the holiday, we usually see increasing bookings as customers return to work. This year, the rent in order rate was lower than our expectation. In addition, the timing of the earthquake following the holiday further reduced bookings. Caught in April, Germany to be sold

Speaker Change: Why do we even got holiday, we usually see crazy of bookings is coffee and everything to work.

Speaker Change: These here.

Speaker Change: And the order rates, Washington, all at.

Speaker Change: I'll, let your vacation.

Speaker Change: Innovation.

Speaker Change: I'll be quick following into a harder thing for that'd be juice book here.

Speaker Change: Cause in April.

KangJyh Lee: Since then, order rates have increased, and we are entering the third quarter with higher confidence. These factors contributed to sales of $270 million in the second quarter. IC Sales Improved Quarter-over-Quarter via FPG Dequip. Compared with the first quarter, growth margin was similar, and operation margin was slightly lower as we had higher R&D spend due to an increase in qualification activity. As a result, the reported EPS was 58,000; on an adjusted base, EPS was 46 cents.

Speaker Change: So.

Speaker Change: She is that order rates have increased and we are entering into the third quarter with higher covenants.

Speaker Change: These factors contributed to a SaaS up 270 of them either.

Speaker Change: Uh huh.

Speaker Change: I see.

Speaker Change: Cool.

Speaker Change: Why a P C.

Speaker Change: Okay.

Speaker Change: First quarter gross.

Speaker Change: Modular water treatment and operation, but you watch right.

Speaker Change: As we had higher R&D expense.

Speaker Change: I I increased qualification activity.

Speaker Change: S M resort reported EPS was 50 cents.

Speaker Change: On an adjusted basis it was 46 cents.

KangJyh Lee: Cash flow was good during the quarter, and we further strengthened our balance sheet to position us to invest in the multiple growth opportunities we have, especially in IC. I would like to recognize the dedication of the global photonics team this quarter to achieve this result, especially those in Taiwan that responded to the ADIF challenge by funding the market. Reversing the trend seen over the previous three quarters, our IC mainstream sales increased, mainly driven by Marquis Hill Games. Iron was found preliminarily due to lower U.S.

Speaker Change: Yeah.

Speaker Change: Cash flow was good fill you in a corner and we further strengthened our balance sheet to position us to invest in the multiple growth opportunities we have.

Speaker Change: Sure.

Speaker Change: Yeah.

Speaker Change: I would like to recognize the education of their global for Charlie's team this quarter.

Speaker Change: Sure.

Speaker Change: Yes.

Speaker Change: Especially in April is Taiwan.

Speaker Change: Respond to that.

Speaker Change: Okay.

Speaker Change: Turning to the market.

Speaker Change: Let's see in their trend seen over the previous three quarters.

Speaker Change: Well I see administrative sales increase.

Speaker Change: Mainly driven by market share gain.

Speaker Change: I didn't watch styles premium beauty.

Speaker Change: Due to lower U S demand.

KangJyh Lee: Consistent with most of the end users, we see the overall semiconductor environment gradually improving into our physical Q3 and Q4 across most IC segments and regions. However, high-end LPDWare software as AMOLED design demand has not yet ramped up ahead of new premium smartphones, that will swiftly give production ahead of full launch. Longer term, we remain optimistic regarding the positive demand trend for both IC and LPD. I see customers in Asia continue to migrate to smaller design loads, including 22 and 28 mm.

Speaker Change: Consistent with most of our bedroom and youth.

Speaker Change: We seem to always semiconductor environment wage already is proving it into our physical Q3 and Q4.

Speaker Change: Across most of the ICT segments and regions.

Speaker Change: Yeah.

Speaker Change: I N P D y filter as desired.

Speaker Change: Is that demand has not yet ramped up ahead on new premium smartphones.

Speaker Change: I wish I could give put Austrian I've had a floor lunches.

Speaker Change: Hum.

Speaker Change: We remain optimistic regarding positive debenture for both IC F N P D.

Speaker Change: I say Costco, mostly in Asia continue to migrate towards smaller design nodes, including 22 and 28 nanometers.

KangJyh Lee: We are well-positioned to capture this business. We also expect megatrends such as AI to drive chief design activities to handle AI workloads and edge processing. We expect a wide range of IC types to be developed in support of this AI ecosystem, from GPU, CPU, and ASIC to high-band memory and power electronics. We also continue to monitor trends in supply chain regionalization to drive market demand, and photo mass demand, in support of new trends. What is Greg?

Speaker Change: We are well positioned to capture this business.

Speaker Change: We also expect Mega trends, such as AI to withdraw a chip design activity to handle AI workloads and edge processes.

Speaker Change: We expect a wide range of I see it's hard to beat it but it is supportive.

Speaker Change: Our system Crown GPU CPU and SC.

Speaker Change: Hi, Ben memory and power electronics.

Speaker Change: We also continue to expect transients approach hadn't mutualization towards dry market event.

Speaker Change: Nice to be back in support of new fab.

Speaker Change: What is great.

KangJyh Lee: Despite near-term softness in demand, we remain optimistic long-term. Mobile devices continue to be introduced with new displays that contain advanced features, enabled by higher-value photons. In addition, panel makers continue development efforts to extend MLA technology into bigger displays, such as tablets and laptops. We will soon see AMOLED produce a G8.6 panel. Our FPDMAS solutions are relied upon for new design, for new display R&D cycles, and the most demanding mass production of advanced displays. Blah, blah, blah.

Speaker Change: Despite the near term softness is it bad what would be a bad mistake a long time.

Speaker Change: Mobile device continues to be introduced with new displays that content.

Speaker Change: <unk> features.

Speaker Change: Enabled by a higher value for the loss.

Speaker Change: In addition.

Speaker Change: Panel makers continue to bring them in as.

Speaker Change: Experts, who it is.

Speaker Change: Mrna technology into bigger displays such as tablets and desktops.

Speaker Change: With Westwood and see every day, but he was algae a poison pills.

Speaker Change: Our MTA demos et cetera, we shouldn't I rely on partners for new design, but you will get spread out of these cycles.

Speaker Change: Most event in mass production.

Chris Kreidler: This is Chris.

KangJyh Lee: We maintain an optimistic long-term outlook for mass demand and see many positive factors that support multinode growth trends across Asia, the U.S., and Europe. We believe our strong customer relations, including long-term purchase agreements, coupled with leading technology and high output capacity, should allow us to outgrow the photomath in the future. As we do, our proven ability and commitment to keep costs low should enable us to expand margins and generate strong cash, allowing us to continue investing in growth. At this time, I will turn the call over to Eric to review our second quarter results and provide third quarter data.

Chris Kreidler: Overall.

Chris Kreidler: We maintain an optimistic long term outlook well it must be met.

Chris Kreidler: We see many positive factors.

Chris Kreidler: That support my teeth and load growth trends.

Chris Kreidler: Sure.

Chris Kreidler: In Europe.

Chris Kreidler: We believe.

Chris Kreidler: Our strong customer relations, including long term purchase we've been copper.

Chris Kreidler: Cowboys Stadium technology and high output capacity sure.

Chris Kreidler: Allow us to outgrow the industry.

Chris Kreidler: As we do our proven ability and commitment to keep costs low short in April.

Chris Kreidler: To expand margins and generate strong cash flow.

Chris Kreidler: Allowing us to continue investing in growth.

Chris Kreidler: And at this time I will turn the call over to Eric to review, our second quarter results and provide third quarter guidance.

Chris Kreidler: Yeah.

Eric Rivera: Thank you, Frank, and good morning, everyone. Second quarter revenue of $217 million was slightly higher than the first quarter. There were headwinds that limited growth in a period that is typically up on seasonality, including the Taiwan earthquakes and soft demand following the Chinese New Year. However, I see revenue growth was mixed. Quarter over quarter, IC revenue was up as robust mainstream demand was an offset for high-end weakness primarily in the U.S. However, on a year-over-year comparison, IC was down, as strong high-end volumes shipped to foundries in Asia were more than offset by lower mainstream demand.

Chris Kreidler: Thank you Frank and good morning, everyone.

Eric: Second quarter revenue was $217 million was slightly higher than the first quarter.

Eric: There were headwinds that limited growth periods is typically up on seasonality, including the Taiwan earthquakes and soft demand following the Chinese new year.

Eric: IC revenue growth was mixed.

Quarter improved as robust mainstream demand more than offset weakness primarily in the U S.

Eric: On a year over year comparison I see it.

Eric: It was down a strong high end volumes shipped to foundries in Asia were more than offset by lower mainstream demand.

Eric Rivera: Order rates at the beginning of Q3 give us confidence for the upcoming quarter, and we remain confident on the long-term outlook for IC Photo Masterland. FPD revenue was lower sequentially and year-over-year, with softness in both high-end and mainstream. Seasonally soft high-end trends were heightened due to the earthquake at FX Headwinds.

Eric: Order rates at the beginning of Q3 give us confidence for the upcoming quarter and we remain confident on the long term outlook for IC portal Master plan.

Eric: S. P D revenue was lower sequentially and year over year.

Eric: <unk> in both high end and mainstream.

Eric: Seasonally soft high end trends or heightened due to the earthquake and FX headwinds.

Eric Rivera: Looking into the third quarter, demand for mobile display masks is expected to pick up on seasonality trends ahead of anticipated fall launches of new premium smartphones. Growth Margin was 36.5%, essentially the same as the first quarter and down from last year, primarily due to lower premium charges. The resulting operating margin was 25.8%, down from last quarter and last year.

Looking into the third quarter demand for mobile display masks is expected to pick up on seasonality trends ahead of anticipated all launches of new premium premium smartphones.

Eric: Gross margin was 36, 5% essentially the same as the first quarter and down from last year, primarily due to lower premium charges.

Eric: The resulting operating margin was 25, 8% down from last quarter and last year.

Eric Rivera: Operating expenses were higher this quarter due to increased R&D as we had a high level of qualification activity. However, this book is well positioned for future demand as most qualifications result in incremental revenues. On that note, on the IC side, we process qualification masks from EUV and sub-14nm through mid-range and mainstream nodes in logic and memory. We also plan to enter qualifications for our new Multi-B Mass Rider in Q3, representing Photronics' commitment to the highest end of IC mass making. On SPD, we saw increasing utilization of our advanced phase shift mask, indicating higher value lithography processes under development by our customers, as Frank highlighted.

Eric: Operating expenses were higher this quarter due to increased R&D as we had a high level of qualification activity.

Eric: This bodes well for future demand as most qualifications resulted in incremental revenues.

Eric: On that note on the IC side.

Eric: <unk> qualification of masks from UV, and some 14 nanometer through mid range for mainstream nodes in logic and memory.

Eric: We also plan to enterprise vacations over newmont to be much greater in Q3, representing 40 <unk> commitment to the highest end of IC mask, making.

Speaker Change: On S. P. D. We saw increasing utilization over advanced facial mask, indicating a higher value lithography processes under development by our customers as Frank highlighted.

Eric Rivera: Net income in the quarter was $36.3 million, or $0.58 per diluted share on a gap basis. After adjusting for non-operating FX gains, non-GAAP net income was $28.7 million, or $0.46 per diluted share. We generated $76.5 million in operating cash flow, and CAPEX was $20 million in the quarter. We still expect total capex of $140 million in 2024, primarily in both high-end and mainstream IC to address anticipated demand growth while ensuring we're increasing our return on invested capital.

Speaker Change: Net income in the quarter was $36 3 million or 58 cents per diluted share on a GAAP basis.

Speaker Change: After adjusting for a nonoperating FX gain non-GAAP net income was $28 7 million or 46 cents per diluted share.

Speaker Change: Regenerate and 76 5 million in operating cash flow and Capex was $20 million in the quarter.

Speaker Change: We still expect total capex of $140 million in 2024.

Speaker Change: Primarily in both high end and mainstream IC to address anticipated demand growth, while ensuring we are increasing our return on invested capital.

Eric Rivera: We ended the quarter with a cash balance of $539.2 million, short-term investments of $20.7 million, and debt of $21.8 million, allowing sufficient liquidity to fund investments in organic growth. Before I provide 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 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 revenues and earnings.

Speaker Change: Yes.

Speaker Change: We ended the quarter with a cash balance of $539 2 million short term investments of $20 7 million and debt of $21 8 million, allowing sufficient liquidity to fund investments in organic growth.

Speaker Change: Before I provide guidance I'll remind you that our visibility is always limited as our backlog is typically only one to three weeks.

Speaker Change: Demand for some of our products is inherently uneven and difficult to predict.

Speaker Change: Additionally, the Asps for high end mass, that's our high and that this segment of the business grows a relatively low number of high end orders can have a.

Speaker Change: A significant impact on our quarterly revenues and earnings.

Eric Rivera: Given those caveats, we expect the third quarter revenue to be in the range of $221 to $229 million. We expect the positive photo mastermind momentum that was interrupted by the Chinese New Year to resume and continue through the third quarter.

Speaker Change: Given those caveats, we expect third quarter revenue to be in the range of 221 to 229 million.

Speaker Change: Positive automatic minimal rental that was interrupted by the Chinese new year to resume and continuing through the third quarter.

Eric Rivera: Based on these revenue expectations in our current operating model, we estimate non-GAAP earnings per share for the third quarter to be in the range of $0.53 to $0.59 per diluted share. This assumes an operating margin of between 28 and 30% as we continue to keep costs under control and maximize profitability. We faced some unique challenges in the second quarter. Despite these, we achieved sales slightly above Q1 levels and were able to maintain good margins.

Speaker Change: Based on the revenue expectations in our current operating model, we estimate non-GAAP earnings per share for the third quarter to be in the range of 53 to 59 cents per diluted share.

Speaker Change: This assumes an operating margin of between 28, 3% as we continue to keep costs under control and maximize profitability.

Speaker Change: We faced some unique challenges in the second quarter. Despite this.

Speaker Change: <unk> sales slightly above Q1 levels and we're able to maintain good margins.

Eric Rivera: Positive voter rates as we exited the second quarter are encouraging for a third quarter of full year outlook. We continue to perform well and build on our solid financial foundation to properly grow and create shareholder values in 2024 and beyond. I'll now turn the call over to the operator for your question.

Speaker Change: Positive order rates as we exited the second quarter are encouraging for third quarter and full year outlook.

We continued to perform well and build on our solid financial foundation to profitably grow and create shareholder value in 2024 and beyond.

Speaker Change: I'll now turn the call over to the operator for your questions.

Operator: Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1-1 again. Please stand by while we compile the Q&A list. Now, the first question comes from the line of Tom Diffely with DA Davidson. Your line is open.

Speaker Change: Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question simply press Star One again please.

Speaker Change: Compile the Q&A roster.

Speaker Change: My first question is coming from the line of Tom <unk> with D. A Davidson your line is now open.

Linda Umwali: Hi, this is Linda Umwali on behalf of Tom Diffley. Thank you for letting us ask questions this morning. So to start, we're very sorry to hear about the impact of the earthquake, and we're glad to hear everyone there was safe. So it's a good thing to hear. So my first question will be on that. If I heard you correctly, the impact on the quarter from the earthquake was three million, or was that just on production and inventory? And maybe you could clarify and quantify how much the earthquake impact was and how much of it is embedded in your guidance for the July quarter. Thank you.

Linda: Hi, This is Linda.

Speaker Change: On behalf of <unk>. Thank you for letting us ask questions. This morning.

Speaker Change: So to start a very sorry to hear about the impact of the earthquake and we're glad to hear everyone's out there it was safe.

Speaker Change: So it's a good thing to hear.

Speaker Change: So my first question would be on that.

Speaker Change: If I heard you correctly the impact on the quarter from the earthquake was $3 billion or it was just that was that just on production and inventory and may be if you could.

Speaker Change: Clarify and quantify how much the earthquake impact was.

Speaker Change: Much of it is embedded in your guidance for the July quarter.

Speaker Change: No.

Eric Rivera: Hello Linda, thank you for asking the question. This is Eric.

Eric: Hello, and thank you for asking the question this is Eric.

Eric Rivera: So we had a $3 million impact, like we mentioned, related to the earthquake. Most of that was production loss time. In terms of materials or anything else that was not significant, the majority of it was production lost time.

Speaker Change: So we had a 3 million dollar impact like we mentioned them related to the earthquake. Most of that was the production last time.

Speaker Change: In terms of materials or or or anything else. It was not significant.

Speaker Change: The majority of it was production lost time.

Eric Rivera: Okay, and so not in part.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Well go ahead I'm sorry go ahead.

Eric Rivera: Yes, so with respect to Is that embedded in our forecast? That was a one-time event for us as the earthquake just impacted this quarter.

Speaker Change: Yes, so with respect to.

Eric Rivera: Okay, I see it. Thank you.

Speaker Change: Is that embedded in our forecast that was a onetime event for us as the Azure earthquake just impacted this quarter.

Linda Umwali: And still on the earthquake impact, I have, I might have missed it, but is there an impact on the CAPEX plans for this year? Or are you still thinking the $140 million that you had mentioned last quarter? Because I'm thinking, given the repairs that might have to take place as you're still investigating, would that have any change on that? We don't expect that to change our 140 million expected CapEx for the year. Okay, so could you remind me again what the split would be between SPD and IC?

Okay I see thank you.

Speaker Change: And still on the earthquake impact.

Speaker Change: I have missed it but are you.

Speaker Change: Is there an impact on the Capex plans for this year or are you still thinking the 140 million that you had mentioned last quarter.

Speaker Change: I'm thinking given their repairs that might have to take place.

Jill: Jill investigating how would that have any change on that.

Jill: And what could be obviously.

Speaker Change: We don't expect that to change our 140 <unk>.

Speaker Change: Millions of expected capex for the year.

Speaker Change: Okay. So could you remind me again, what the split would be or could be M. I C.

Eric Rivera: It's mostly IC. There is some FPD there, but it's mostly IC.

Speaker Change: It's mostly I see there are select PD, there, but it's supposed to be asking.

Linda Umwali: Got it. Thank you for the clarification. And going to overall revenue, it remains around 5% below your prior year levels. And you mentioned that the rent in order rate was lower than expectations following the Lunar New Year. Could you walk us through what is happening here? Why do we continue to see such low levels of growth? And are you seeing impacts primarily from end markets, weakness, share losses, given ramping Chinese competitors or delayed new programs?

Speaker Change: Got it thank you for the clarification.

Speaker Change: Great.

Speaker Change: The overall revenue.

Speaker Change: It remains around.

Speaker Change: Around 5% below it.

Speaker Change: Prior year levels.

Speaker Change: And you mentioned that the.

Speaker Change: Brent in order rates.

Speaker Change: Lower than expectations following the lunar new year could you walk us through what is happening here.

Speaker Change: I'd like to continue to see such a low level of growth and are you seeing impact primarily from end markets weakness sure Love says keeping Rob.

Speaker Change: Braskem Chinese competitors or delayed programs.

KangJyh Lee: Linda, thank you. In the past, a lot of customers, like the design house customers, they take off before the New Year holiday. So people can take off for the holiday. And we see very heavy bookings, both in the high-end and mainstream, before the holiday. And normally, after the holiday, the order recovers step-by-step, but this year, it seems to be slower than in the past, and so we still have very strong... First two months in a quarter, but many because they are older before the new year and in the month of April.

Speaker Change: Thank you.

Speaker Change: In the past a lot of our customers that do that most customers the tape out before that deal where your holiday. So people could take off for the holiday and we see a various heavy book in a post even higher net measure before the holidays.

Speaker Change: And normally after the holiday the auger well recovers.

Speaker Change: Step by step.

By this year.

Speaker Change: It seems to be slower than the past.

Speaker Change: So all we still have very strong.

Speaker Change: The first two months in the quarter.

Speaker Change: Hum menu because older people or do we have and in the months of April.

KangJyh Lee: The new order coming, the rate of new orders coming, kind of slow, especially in the high end. So it does impact the April output. The market seems to be very volatile; it's not quarter by quarter; it's month to month, especially the high-end. For the high-end orders, every single set is a much higher price, so the impact is bigger than the mainstream business. However, at the end of April and going into Q3, we do see orders start to recover, and based on the seasonality, Q3 typically is a good month, and is a good quarter for So we are expecting the high end orders, especially will reach a good level in this quarter.

Speaker Change: The new or the economy and the rate or do other communist Carlos at all especially in the high end. So it impacted the April outlook.

Speaker Change: And.

Speaker Change: The market seems to be very.

Speaker Change: Water told it's not quarter by quarter is that about two months.

Especially the higher because of the high on the OIBDA every single set.

Speaker Change: At much higher price so that impact is bigger than that's true visitors.

Speaker Change: However.

Speaker Change: At the end of April and going into Q3, we do see all of those tied to our <unk> and <unk>.

Speaker Change:

Speaker Change: And Tysabri.

Speaker Change: See that not antiques Q3, typically is a good mouse.

Speaker Change: <unk> is a good quarter for.

Speaker Change: So we.

Speaker Change: We expect in the high end specialty.

Speaker Change: Rich toward a quite favorable again this quarter.

Linda Umwali: Great, thank you for that color. It seems like high-end is expected to be doing well in the upcoming quarters. So if you think about mainstream, you mentioned a softer demand environment this quarter. Is that what you're expecting in the next quarter as well? And with the softness there, is it in certain segments or across the board? Maybe give us more color on how the demand environment looks there, maybe current lead times, and maybe touch on pricing as well.

Speaker Change: Great. Thank you for that color.

Speaker Change: So it seems like high end is expected to be doing well in the upcoming quarters. So if you think about mainstream.

Speaker Change: You mentioned, a softer demand environment. This quarter is that what you're expecting in the next quarter as well and.

Speaker Change: And.

Speaker Change: With the.

Speaker Change: Softness there is it in certain segments or across the board, maybe give us more color on how the demand environment looks like there may be current lead times and.

Speaker Change: And maybe touch on pricing as well.

KangJyh Lee: In the mainstream segment, because a lot of new facts, especially in China, they are ramping up in the mainstream business, so compared to the previous quarters, mainstream demand is actually very consistent and increasing quarter by quarter, and in the past several quarters, we have increased our capacity to support a mainstream business. In the previous two years, because of capacity limitation, our lead time for mainstream products was kind of relatively long, and so we did not take as many mainstream orders as we could. By starting this year, we do have some mainstream new capacity, and we have started to take more orders.

Speaker Change: In the mass segment.

Speaker Change: Because a lot of new fabs, especially in China.

Speaker Change: They are ramping up and I mentioned our business so.

Speaker Change: Compared to the previous quarters.

Speaker Change: Country event actuary.

Speaker Change: Very consistent and Uh huh.

Speaker Change: The increase in AR.

Speaker Change: Quarter by quarter.

Speaker Change: And in the past several quarters, we do increase our catastrophe.

Speaker Change: To support our best Shred business in previous two years, because our capacity to mutation al.

Speaker Change: Daytime for mainstream products are kind of on a relative low.

Manny: So we did not pick up as Manny mentioned all day as a weekend bye.

Speaker Change: I'll start in D.

Speaker Change: We do have some mastering new capacity.

Speaker Change: We start to pick up more order.

Speaker Change: The hybrid Frac and all of our growth in administrative IC business.

Speaker Change: Yeah.

Linda Umwali: Great, got it. And then maybe Eric, we're looking at gross margins, quite flat from the first quarter and down from last year. And I believe you mentioned it was due to some premium charges, lower premium charges. Could you touch on that? And then what are you thinking for next quarter?

Speaker Change: Okay got it.

Speaker Change: Then maybe Eric to looking at gross margins.

Speaker Change: Quite flat from first quarter and Don from last year and.

Speaker Change: I believe you mentioned there was due to some premium charges lower service charges could you touch on that and then.

Speaker Change: What are you thinking for next quarter.

Eric Rivera: Sure. As you mentioned, our premium charges are much lower this year than they were last year, and that explains the decrease in revenue and margin and our margin. With respect to our margin levels for the rest of the year, I don't expect them to be much different than what they are at the current level.

Speaker Change: Sure so yeah.

Speaker Change: As you mentioned.

Speaker Change: Our premium charges are.

Speaker Change: Much lower this year than they were last year and that explains the decrease in revenue and.

Speaker Change: And margin.

Speaker Change:

Speaker Change: With respect to our margin levels.

Speaker Change: For the rest of the year I don't expect them to be much different than that.

Speaker Change: And what they are.

Speaker Change: Higher level.

Linda Umwali: Okay, so even if the demand environment changes, are you still expecting the same levels?

Speaker Change: Okay.

Speaker Change: The demand environment changes are you still expecting some levels.

Eric Rivera: I'm sorry; say again, I'm sorry.

Linda Umwali: Even expecting an upturn on the horizon, are you thinking the same for next year? and the second half this year as well?

Speaker Change: I'm, sorry, say again I'm sorry.

Speaker Change: I've been.

Speaker Change: Expecting an upturn on the horizon are you thinking the same for next year.

Speaker Change: Second half this year as well.

KangJyh Lee: And the premium may not come back. However, because the better product means more high-end, especially in 22 and 28 nanometer products, our branded ASP does increase quarter by quarter. So if we compare with last year, even the premium disappeared, and our overall gross margin actually increased quarter by quarter. So it's nice to have the premium charge, but we know it is not a long-term event. So we put a lot of effort into improving our product needs such that the branded ASP can be higher. Well, thank you so much.

Speaker Change: The premium.

Speaker Change: Come back however.

Speaker Change: Because better product means a more high end, especially in the Atlantic hockey.

Speaker Change: And then it'll be the products are all.

Speaker Change: Blended ASP increase.

Speaker Change: Increase quarter by quarter, So we compare it with last year even the.

Speaker Change: Premium gets up here Oh overall gross margin actually increased.

Increased quarter.

Speaker Change: Quarter by quarter so.

Speaker Change: That.

Speaker Change: It's nice to have premium charge, but we know it is not a long term event. So we put out our efforts to improve all part of them is such that the blended ASP can be higher.

Linda Umwali: Awesome. Well, thank you so much for your time today.

Speaker Change: Awesome.

Speaker Change: Well. Thank you so much for your time today.

Elizabeth: Thank you Elizabeth.

Speaker Change: Yeah.

Elizabeth: Thank you.

Operator: And our next question comes from the line of Eric Reckwood, Portree Island Advisory. Your line is open.

Speaker Change: And our next question coming from the line of Greg with Poultry Island Advisory Your line is open.

Eric Reckwood: Thank you very much. Good to hear about the orders recovering at the end of April and looking good and going into May and the minimal impact despite the earthquake. And I guess the first question is about the earthquake. I'm not too familiar with how photo masks might fare in a disruptive earthquake like that. Do you expect that there was some damage to photo masks that were being used in the market at the time and that that should lead to, you know, some photo masks needing to be scrapped or serviced, and that could lead to a potential bump in, you know, future quarter revenues? Yes.

Speaker Change: Thank you very much.

Greg: Good to hear about.

Speaker Change: The orders recovering at the end of April and looking good and going into May and and.

Speaker Change: You know the minimal impact despite the.

Speaker Change: The earthquake and I guess the first question is on the earthquake.

Speaker Change: Not too familiar with.

Speaker Change: How photo masks might fare.

Speaker Change: A disruptive earthquake like that do you expect that there was some damage to photo mask because they were being used in the market at the time and that that should lead to.

Speaker Change: What I'm, asking you're going to be scrapped or serviced and that could lead to a potential bump in future.

Speaker Change: Future quarter revenues.

KangJyh Lee: Yes, during an earthquake, most of our equipment has a self-protection system. So if the earthquake is over a certain scale, the tour will shut down automatically to protect the tour.

Yes.

Speaker Change: Children earthquake, most of our equipment has a self protection system. So.

Speaker Change: The earthquake is all of a sudden scare the tour was shut down automatically to protect that tour.

KangJyh Lee: And at the same time, if there are any photomasks in the process, inside a tool, that photomask will be considered incomplete, so it cannot continue the process. It has to be rechecked. And certain photo masks, for example, if they're in a cleaning process, then we may have to check if there is any defect or contamination on the mask. And some can be repaired. Some cannot be repaired. We have to reject them. So none of the damage or impact masks will go to customers.

Speaker Change: And at the same time, if there are any football NAS end up process inside of towards that for them as well.

Speaker Change: You can see the complete so it cannot continue with our process. It has to be reached yet.

Speaker Change: So therefore the laws are for example, if it's in a premium process. Then we may have to check.

Speaker Change: Is any defect or combination on the mask and some can be repaired some cannot be repaired we have to reject so none of the damage or impact masked well go to customers.

Speaker Change: The there would be a green check or repair.

Speaker Change: Oh sure at night.

Speaker Change: Okay.

KangJyh Lee: Thank you. And ladies and gentlemen, there are no further questions at this time. I will now turn the call back over to Mr. Frankly for closing comments.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, there are no further questions at this time I will now turn the call back over to Mr. Frankly for closing comments.

KangJyh Lee: Okay, thank you for joining us this morning. We had a slower than expected start to 2024, and the earthquake in early April impacted our results. Yet, we remain optimistic that we can achieve another year of solid results. The team is performing well. The long-term outlook for our market is positive. We are supported by positive megatrends such as AI, and we are in a good position to benefit due to our global presence and advanced technology. I look forward to updating you on our progress. Thank you.

Mr. Frankly: Okay. Thank you for joining us this morning, we.

Mr. Frankly: We had a slower than expected start to 'twenty to 'twenty four and earthquake in early April impact our results.

Mr. Frankly: Yet we remain optimistic that we can achieve solid results.

Mr. Frankly: The team is performing with the long term outlook for our market is supported by positive Mega trends such as AI and we are in a good position to benefit due to our global presence and diverse technology.

I look forward to updating you on all the progress.

Mr. Frankly: Thank you.

Mr. Frankly: Yeah.

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

Speaker Change #101: Ladies and gentlemen that concludes the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line at this time.

Speaker Change #102: Thank you.

Speaker Change #102: Yes.