PHOTRONICS INC Q1 FY2025 earnings call

• End markets: IC declined 2% year over year due to mainstream weakness in Asia and Europe; high-end IC had logic photomask node migration to 22 and 28 nanometer in Asia, and memory photomask demand was strong. FPD declined slightly year over year but saw brand demand from Chinese customers, with industry-leading technology winning business and application of ICMOS technology to FPD helping win market share. Recognized milestone with first orders for G8.6 AMOLED displays, which require more advanced and complex masks with higher ASPs.
• Semiconductor industry developments: AI is a longer-term growth driver, with potential to offer AI capability at lower cost driving new applications and photomask demand; semiconductor industry may face increased tariffs, but strategy to invest in regional capacity close to customer locations buffers against potential costs. Fiscal 2025 started as expected, with industry growth drivers in IC including node migration, regeneration, and custom design expansion, and key for FPD being product development and scale-up of display size. Leveraging competitive advantages in capability, cost, scale, and time to market, and expanding capacity in projected growth regions like the US.

For the first quarter, total revenue was $212 million. IC segment had sales of $154 million, declining 6% quarter over quarter. Within IC, mainstream declined 9%, but high-end business increased to 39% of ASPs, with particular strength in 14 to 22 nanometer geometry ranges and improved demand from memory customers. FPD segment had revenue of $58 million, stable sequentially and year over year. Photronics is the market leader in FPD photomasks due to technological superiority, maintaining revenues through increasing market share.

First quarter sales were $212 million, in line with expectation. Diluted EPS of $0.52 was above the high end of guidance. Second-quarter revenue is expected to be in the range of $208 to $216 million. Non-GAAP earnings per share for the second quarter is estimated to be in the range of $0.44 to $0.50 per diluted share, with an operating margin between 23% and 25%. Cautious about 2025 outlook and will continue to prudently manage costs.

Macro-economic uncertainties, geopolitical tensions, customer delays. Business demand is inherently uneven and difficult to predict, with limited visibility and a typical backlog of one to three weeks. ASPs for high-end assets are high, meaning a relatively low number of high-end orders can significantly impact quarterly revenue and earnings.

Q: How is the flat guidance behind and what's behind the weakness in mainstream?

A: Business at the very low end of mainstream, mainly from 6-inch wafer fab, has been weak with no signs of recovery in the near future, affecting revenue and outlook. Long-term outlook is positive, focusing on high end to improve blended ASP.

Q: How to characterize the mainstream business now, including pricing and competition?

A: Keep pricing firm, but mainstream business pie is smaller due to weakness in automotive and industrial applications. More competition from local Chinese suppliers in low end of mainstream, but focus is on middle and high end like 55nm, 40nm, and 28nm.

Q: Challenges to get to Gen 8.6 AMOLED screen and its size in flat panel business?

A: Challenges include scaling specs up to Gen 8.6 substrate size, uniformity, and integrating mask onto blank with advanced technology. It's been more than a single order for production applications but too early to put scale on it.

Q: Mindset on buybacks versus acquisitions with strong cash position?

A: Capital allocation strategy includes normal CapEx, M&A activities if accretive, or share repurchases. Have $100 million authorization for buybacks, being cautious but war chest available for accretive M&A.

Q: Capacity related to CHIPS Act and node migration trends?

A: Current CapEx investments in US not significantly linked to CHIPS Act funding. Node migration to 22-28nm has AI-driven business and memory demand connected to AI and cloud, but hard to quantify percentage of high-end revenue tied to AI infrastructure post-2026.

Q: Sign of inventory restocking or new design wins in auto and industrial sectors?

A: Auto and industrial sectors still weak, no significant uptick, some stabilization but no big turnaround yet.

Q: Impact of geopolitical landscape on regional pricing for H2 2025?

A: Increasingly cautious, no great visibility currently, expect better picture in Q2.

Q: R&D costs trend and top risks for 2025?

A: R&D costs likely stable. Top risks are macro-economic and geopolitical uncertainties