Q4 2024 Photronics Inc Earnings Call
1.
Good day and welcome to the photronics Q4 FY. 24 earnings call.
At this time, all participants are in a listen-only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
As a reminder, this conference is being recorded Wednesday, December 11th 2024, I would now like to turn the conference over to Ted Moreau vice president and investor relations.
Thank you, operator. Good morning.
Electronics fiscal 2024, fourth quarter results.
Joining me this morning are Frank Lee CEO Eric Rivera CFO and Chris progler CTO.
The press release. We issued earlier this morning together with the presentation material that accompanies. Our remarks are available on the investor relations section of our website.
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,
News forward looking statements are based upon a number of risks, uncertainties and other factors that are difficult to predict. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results. Level of activity, performance or achievements. We are under no duty to update any of the poor looking statements. After the date of the presentation to conform these statements to our actual results.
during the course of our discussion, we will refer to certain non-GAAP Financial metrics
A Reconciliation of these metrics to gaap. Financial results is provided in our presentation and materials.
During our fiscal first quarter, we will be participating in the New York, CEO Summit on December 17th, and the native growth conference in New York on January 14th.
I will now turn the call over to Frank.
Thank you and good morning everyone.
Before we begin, I would like to take a moment to welcome Ted Morrow, who join us during our fourth quarter as the head of investor relations.
10 has extensive experience in capital markets, and the technology industry.
Having previously worked on both the sales side and investor relations.
We are excited to have him as part of our team as we expand our engagement with investors.
We deliver a strong force quarter with sales above the high end of guidance.
there's of 223 million or driven by high-end icing and G, 10.5, Plus fpd,
4 years, there's of 867 million was down slightly from the record label. We established in 2023.
With 2024 coming in as the second highest sales in our history.
Regarding the IC and markets.
Demand turn positively this quarter primarily for high-end designs in Asia and the US.
Indian age. AI chips.
Directly is spending AI ecosystem.
This combined with government subsidized supply chain expansion of Isis into all corners of the digital economy.
We have pushed the must industry forward for the next several years.
As 1 of the largest Merchant, icy M producers with strong Global presence.
Leading market share process, expertise and Broad Martino technology. We have positioned ourself to benefit from this favorable long-term trends.
Coming to this prayer.
Similar to what I see mask.
Fpd, mask demand is driven by new designs.
Product road maps and panel manufacturing capacity.
Complex, high-end ASP masks are needed to support Emirates and ltps mobile display Manufacturing.
Larger display size.
Ted rose beer and G, 10.5 Plus panel. Nice.
Requires larger for 2 months which are difficult to manufacture and hence command higher. Asp.
As the largest global fpd M Supply.
Our broad set of epidemi solutions, allow panel makers to design new features in their products.
We are excited about a future opportunity in fpd and are well positioned to maintain and extend our leadership.
Q for a new income of 34 million.
Contribute to regular income of 131 million for the full year.
This results.
president once again into strong cash flow for both, the quarter and 4 year,
Further strengthening our balance sheet.
Over the past 12 months, we have increased cash and short-term Investments by 128 million up to 641 million dollars.
We have the financial flexibility to invest in strategic initiatives, such as Global footprint expansion.
Product development and MMA.
as we continue to evolve, our existing Network and capture growth opportunity,
In 2024, we spent 131 million on capex.
We are many deploying this Capital to expand IC capacity and capability in the growing us and Asia markets.
While also replacing Endo large equipments to improve Network, reliability and productivity.
In 2025, we plan to spend 200 million with a large focus on our Us multi, capacity and capability.
To capture Regional IC growth opportunities.
According to the China Market 8 years ago, we had digital presence in China as we did not have production in the country.
Since then, we have successfully installed and scale our operations in China.
From our IC facility Shaman and fpd facility in healthy.
China is 1 of the largest and farthest growing region for Semiconductor and display production.
We must demand projected to outgrow Supply.
We expect China to continue to be a profitable growth engine for the company.
To our sustainable competitive advantages.
Furthermore.
As evidence of our local customer support our long-term purchase agreement. Have secure our Market needing position.
As the largest USS Photo Market producer, we have positioned ourselves as a market leader, to benefit from long-term industry drivers, including regionalization trends.
We will continue to invest in profitable growth.
We will also leverage our competitive advantage, to maintain our status.
As a trusted source of automat.
And help our customers achieve their technology enrollment.
I will now turn the call to Eric to review our fourth quarter results and provide first quarter guidance.
Thank you, Frank.
Revenue in the fourth quarter was 223 million of 5% sequentially as we achieve growth across both IC and deputy
I see Revenue increase 5% quarter over quarter driven by a 21% surge in high-end sales that was partially upset, by a slight reduction in mainstream demand.
High-end Improvement was due primarily to increase sales to logic Founders in both Asia and the US.
Sequential growth in logic was partially upset by Soft memory demand.
By node, the strongest demand was for 22 to 28 nanometer, and for sub 14 nanometer, which is inclusive of our specialty euv business.
Mainstream was lower sequentially, due to slow, market demand mid-quarter that has since stabilized.
We were pleased to see strong high-end demand and remain focused on growing this sector of our IC business.
Fpd Revenue. Also improves, sequentially up 7% on strong, mainstream growth.
High-end was essentially flat with strong growth. In G. 10.5 plus offset by Soft demand for Advanced Mobile displays due to sluggish demand for premium smartphones.
Gross margin of 37% in Q4 was flat year-over-year even though we're no longer benefiting from premium. Pricing stemming from capacity, constraints experience postco,
Turning to operating expenses we recognize higher R&D costs as we experience increased qualification activity, which typically lasts from 6 to 18 months, in duration, depending on the technology and complexity.
Increased sgna costs were the result of higher outside services and other period expenses.
Going forward. We anticipate operating expenses returning to our Target of 10% of Revenue.
Property margins remain strong in Q4 at 25%. For the full year 2024, we realized that the second highest operating income in company history and the chief record, net income of 131 million.
We continue to deliver strong results, even under mixed economic conditions, demonstrating our ability to manage costs and improve operating efficiency.
Gaap EPS was 54 cents per share.
After removing the impact of the FX loss non-GAAP EPS was 59 cents per share compared with 51 cents in the previous quarter.
We generate a 68 million operating cash flow in the quarter. Bringing the total year to 261 million representing 30% of Revenue.
Cap backs with 43 million in the quarter and 131 million for the year as we invest in a multi-node IC capacity and capability to support market demand, and to strategically replace aging tools.
In 2025, we anticipate capex will grow to 200 million with most of the increase ear. Mark to expand our IC investment in the US
We expect this expansion plan to be completed by mid 2026 to support increasing customer requirements from growing demand. As customer regionalization strategies proliferate and semiconductor industry, production increases both in the US and globally.
We strengthen our balance sheet during the year putting us in a great position to support our investment growth strategy.
The combined total of cash and short-term Investments was 641 million increasing 25% over the year.
at the same time total debt which consists primarily of low rate equipment, leases decreased 27%
We have 18 million in debt remaining which will virtually all be paid off at maturity during our second fiscal quarter.
In addition to the ability to invest in growth initiatives, such as Geographic footprint, expansion and Business Development Ambitions, our balance sheet allows us to return cash to shareholders.
Last quarter, we announced that our board of directors authorized an increase of our Sherry purchase authorization from the 32 million remaining of to a total of $100 million.
Sherry purchases are 1 aspects of our Capital allocation strategy after reinvesting in our business, through capex and any potential business development initiatives that arise
Before providing guidance, I'll remind you that demand for our product is in Heavenly uneven and difficult to predict with limited visibility and typical backlog of 1 to 3 weeks.
In addition, ASP for high-end assets are high meaning a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings.
With those qualifications. We expect first quarter Revenue to be in the range of 208 to 216 million accounting. For typical seasonality that impacts our first quarter demand, including Chinese New Year, beginning in late January.
Based on those Revenue, expectations and our current operating model we estimate non-GAAP earnings per share for the first quarter to be in the range of 43 to 49 cents per diluted share.
This equates to an operating margin between 23 and 25% reflecting seasonally lower sales volumes. While maintaining discipline cost controls,
Beyond the first quarter. We are cautiously optimistic that we can grow our 2025 Revenue in line with photo mastic industry, Dynamics
And we believe due to our leading market and Technology position and strategic growth strategy. We should be able to grow along with the photomask market, growth trajectory
As we do, our operating leverage and financial discipline should allow us to expand more margins and deliver another year of vexing cash flow. Thereby positioning us to continue our investment growth strategy.
We deliver great results in the fourth quarter.
By leveraging, our core competencies being disciplined in managing cost and cash and prudently investing in high return projects. We are delivering profitable growth, improving roic, and creating value for our shareholders.
I will now turn the call over to the operator for your questions.
Thank you. If you would like to ask a question, please press star, 1 1 1 on your telephone, and wait for your name to be announced.
To withdraw your question, press star, 1 1 1 again.
1 moment while we compile the Q&A roster.
And our first question will come from the line of Tom diffley with da Davidson your line is open.
Yes. Uh good morning. Thank you for letting me ask a few questions. Maybe, first on the operating expenses, you know, they were up quite a bit year over year and maybe just a little more detail on what it was. Uh the 1 timers that impacted that
so, Tom
Good morning. Thanks for the question.
So our operating expenses were primarily increase, uh, increase sg&a, and R&D. Um, for R&D R&D purposes. Uh, I'll let Chris probably talk about that. Uh, from an sgna perspective, we have uh increased uh, increased labor and benefits as well as uh increased out. So um, outside services,
Um but we expect uh before moving it over to Chris to talk about R&D. I'll say that, we expect uh our Opex to return to about 10% of uh of Revenue.
Okay, well, this is real quickly on on the sgna side. Um, how much of it was Labor and benefits? That I assume are more recurring versus the outside Services, which tend to be more at 1 time in nature.
Oh sure. So we actually had some uh, uh, non-recurring labor benefits impact. But I would say, maybe about uh, half of the half of the increase was was
Was non-recurring versus recurring.
Okay, thank you.
You bet. And Chris would you like to articulate a little bit more about R&D? Yeah. Hi Tom I can make a couple comments on the R&D side. Um we had a pretty robust pipeline of new calls in 24.
Um, overall, and we see that often when the industry turns down a little bit, actually we often see mask activity increased, especially R&D and new product walls.
Um, we started another 7, nanometer node Optical qual that'll finish in in 2564 so that seems to be going well.
Uh, we installed a multi-beam tool mask rider in the US and that's driving some of our R&D spend. And then the other thing, I
I think I'd point out is we're seeing some kind of mid node, migration
You know, 65.
40 down to 22.
28, uh, particularly in the US less so in in Europe right now and, uh, there's some process customizations there that we're doing on the R&D side.
Overall those, you know it's a good pipeline of things. All have Revenue at the back end of them. And so um you know money well spent on these projects from our point of view, okay? And maybe Chris if I could um, you know, continue that conversation towards the 200 million of capex, uh, for 2025 obviously a little bit higher than its run historically. Um, and it sounds like a lot of it's going to go to reinvestment in the US. So I'm curious is that replacing older tools, is it new capacity, new capabilities. Maybe it's a little more color on what you're you're going to get from that 200 million.
Yeah. So so Tom Eric here, so most of that is for actually knew capacity and a lot of it is going to to the us as as as mentioned on the prepared remarks. Um, as we we see the opportunity and um and and we're going to invest where we see that that opportunity, right. Uh, and this is driven by regionalization uh, trends that that, that are in the market. And, and that's why we see this expansion in the US occurring at this time, but it's also to your point. It's also in that number, we have some amount for, uh, you know, for
For new for for replacing, um, some old tools that have gone on the black, but the the vast majority of that, though is for expanding capacity.
And is this expansion of capacity for to serve current Fabs, or is this to serve some of the newer Fabs that are in the process of being built right now?
Yeah, well it it's a mix. Um there are some of the fan projects around the world which there are a lot started as you know some of them have slowed down few of them canceled but there's still a strong pipeline of new Fabs coming online and many of them are in The Sweet Spot of commercial photo masks so some of that capex is preparing to support increased demand.
And that's in line with projections, we're getting from a lot of our larger customers, you know, that where they're showing what their phone masts needs are going to be over the next 3 years.
Um, and so they, these are the reliable customers that tend to know what they're doing and also project demand that we we believe in. So we're investing for some of those new projects as well.
Okay great. Uh, any brick-and-mortar or is this all just uh equipping the existing facilities that you have?
No. Uh
there are some, uh, expansions within facilities and and
And things like that going on, but no new green fields are in the backs right now.
All right. And then uh probably Chris. I I also had a question on the mainstream business. You talked about some node migration going on but
ask more curious about the health of,
No, over the last.
Year there was really tight Supply. We had nice price and increases that seems to have waned at this point. How do you view the mainstream business for? I see over the next, you know, call it 3 plus years.
I think, you know, like, I mean, my, my feeling is, it had a mainstream was strong continues to be healthy, particularly on a unit spaces. The growth trajectory is we saw over the last couple of years, certainly of level off and some of the supply demand and balances of kind of rationalized in the mainstream but you know, the
bulk of the units for mainstream are in our Asia divisions and I think it's appropriate for Frank
Main Street.
The Mansion Market in us and Europe, actually are pretty stable and growing and same in Taiwan Market. Of course, uh, in China, we do see a little bit of competition in the mainstream, but overall, the Mexican market continued to grow
Okay, great. Um, and Frank, um, let me just a broader industry question for you. What is your view of Industry? Growth photomask industry growth in 25 and um, you know, how do you view maybe the next few years beyond that?
Okay. Uh, I think, uh, as we focus on the main topic today is the regionalization. And as we mentioned, uh,
The Regeneration actually create a lot of, uh, new project, uh, in different countries, uh, including us. So, uh, if we look, uh, area with you by region, uh, we see Taiwan is a, a stable Market, uh, of course tsmc is uh uh, unique but and in China uh, as a market is still growing, uh, very fast, but uh, uh, we are
uh,
focusing on our product is in China, we want to, uh, catch you more high-end, uh, business. And, uh, uh, in US, uh, as Chris mentioned, uh, there are more and more project in us and that's the main reason. Uh, we are, uh, putting a lot of focus on our us side. Uh,
Capacity.
Capability, uh, upgrade and expansion. So basically the demand for Semiconductor and of course, the IC uh uh, photomask will grow in the next 3 years. Uh, because AI
so we we, we are working on, uh,
3 years.
uh, Outlook evaluation and we believe the the business will continue
to grow for photomask.
Okay, maybe just a final question. Uh free Frank. Um you talked about the AI ecosystem driving some demand for you. What products are you using photomask from photronics uh in the AI ecosystem? Just to get my hands around. What the opportunity is?
all right, I I Tom I I worked on this question to Chris Chris, Chris
Yes, yes, yes, thanks Tom. So, you know, as far as the main processors, like the gpus, they get most of the attention, you know, the big Nvidia chips and all that that supply chain is is everybody knows pretty well locked up by tsmc and they build their own mess.
But there's a lot of peripheral circuitry around the GPU. That's starting to drive some demand, and some of the edge chips, Edge Network chips, um, which are available to commercial mask makers that are driven by AI. Uh, some of the memory that are going into Data Centers, we have memory partners that are working on uh, tuning those ships for AI applications. So, I would put it as things around the main GPU, which is a substantial set of devices that support that. The other thing we're seeing a little bit is, you know, our businesses heavily attached to Asic.
Application specific integrated circuits and uh, there are a fair number of companies that are trying to deploy as6 especially for the inference part of AI. Not so much the model building, but the uh model running and um there's a quite a few projects we're involved in on the A6 side.
uh, that are
very high driven. So, so it's pretty Broad and it's part of just building out that ecosystem from the GPU on how to the edge of the network.
Great. Well thank you Chris uh Frank and Eric appreciate your time today.
I would now like to turn the call back over to Mr. Ted Moro for any closing remarks.
Uh, thank you, Sheree. Um, just wanted to thank everybody for joining our call today. We really appreciate it. If you're interested in photonics, hope you have a happy holidays and we will, uh, I will be available, uh, over the coming weeks and months to, to talk. Uh, periodically. Um, hope you guys have a great day. Thank you.
This concludes today's program. Thank you all for participating. You may now. Disconnect