Chris Progler; Executive Vice President, Chief Technology Officer and Strategic Planning; Photronics Inc
Thomas Diffely; Analyst; D.A. Davidson & Co
Hello and welcome to Photronics fiscal first-quarter 2025 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Ted Monroe. You may begin.
Thank you, operator. Good morning, everyone. Welcome to our review of Protronic's fiscal first quarter 2025 financial results. Joining me this morning are Frank Lee, CEO Eric Rivera, CFO, and Chris Praler, CTO.
The press release reissued this 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 forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast, and in our view.
These forward-looking statements are subject to various risks and uncertainties and other factors that are difficult to predict. Although we believe that the expectations reflected in the forwardlooking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements.
We are under no duty to update any of the forward-looking statements after the date of the presentation to conform these statements to actual results.
Patronix has provided additional information.
In its most recent form, 10k and other subsequent reports filed with the SEC concerning factors that could cause actual results to differ materially.
During the course of our discussion, we will refer to certain non-gap financial measures.
These numbers may be useful for analysts, investors, and management to evaluate ongoing performance.
Reconciliation of these metrics to GAAP financial results is provided in our presentation materials. I will now turn the call over to Frank.
Thank you, Ted, and good morning everyone.
We achieved first quarter sales of 212 million.
In line with our expectation and normal seasonal trends.
Long GAAP dilute EPS of $0.52 was above the high end of guidance and we once again deliver strong cash flow.
Turning to our markets, I see declined 2% year over year due to mainstream weakness in Asia and Europe.
Particularly at the older notes we didn't mention.
For high-end IC we have seen continued evidence of logic photo mass, no migration to 22 and 28 nanometers in Asia.
Within IC, memory photo mass demand also shows trends.
APD declined slightly year over year due to industry softness, though we saw brand demand from customers in China.
Our industry leading technology in APD continues to win business.
And our strategy to apply IC mask technology to APD helps us with market share.
We recognize the milestone during Q1.
As we receive our first orders for G 8.6 MOA displays.
G 8.6 requires more advanced and complex masks that had higher SP.
Now I would like to discuss a few developments impacting the semiconductor industry.
First, as the AI landscape evolve, we believe it will be a longer term growth driver for the industry and fortronics.
New AI tools have the potential to offer AI capability at a lower cost.
These tools reduce the barrier of entry into AI.
Which drives new applications require new devices and designs.
Customer I see serving this application will drive for much demand.
Many add a more advanced notes that we service.
A more mature nodes, AI drives the need for fast interconnects, including silicon photonics and advanced packaging.
Second, the semiconductor industry may potentially incur increased costs from tariffs.
For photoronics, our strategy to invest in regional capacity close to customer locations should buffer us from this potential cost. Therefore, we import very few masks into the United States. And don't anticipate a meaningful impact on our business from tariffs.
Physical 2025 started off as expected in Q1.
And demonstrate our technology leadership.
Industry growth drivers in IC include no migration, regeneration, and custom design expansion.
While product development and scale up of display sites are key for APD.
Further, our markets are benefiting from AI adoption and regionalization trends.
Where we leverage our competitive advantages in Capability, cost, scale, and time to market.
By working with our customers, we are carefully expanding capacity and capability in projected growth regions such as the United States to meet demand.
These investments further strengthen our market leadership position.
Giving us confidence in our long term outlook.
I will now turn the call over to Eric to review our first quarter results and provide 2nd quarter guidance.
Eric Rivera
Thank you, Frank. Good morning, everyone.
As Frank stated, our first quarter results were in line with expectations with revenue of 212 million.
Total revenue declined 5% sequentially, led by IC, which declined 6% quarter over quarter to 154 million.
Within I see mainstream decline 9%, reflecting the overall softness of the broader semiconductor industry.
We did see pockets of strengths within high end.
Sales generated out of our European facilities were weaker than anticipated, and this situation is expected to continue.
Our IC business out of our facilities in Asia and the US also declined sequentially due to typical seasonality as expected. The USIC did exhibit strong year over year growth.
With the IC, we continue to drive towards a greater mix of higher end business with a focus on increasing our blended ASPs.
Demonstrating our execution in fiscal year 2023, our high-end business represents a 30% of total IC revenue, increasing to 36% in fiscal year 2024.
For the first quarter of fiscal year 2025, our high-end business increased further to 39%.
Within high end we saw a particular strength in 11 in the 14 to 22 nanometer geometry ranges.
For our leading edge IC mix, we recognize improved demand from memory customers.
FPD revenue was stable both sequentially and year over year at 58 million.
We are the market leader in FPD photo masks due to our technological superiority and manufacturing footprint.
As a result, despite market headwinds, we have been able to maintain our revenues due to increasing market share.
Our operating margin of 25% was at the high end of our guidance range.
Gross margins declined slightly to 36% because of lower sales volumes.
Continued prudent controls along with lower severance and legal related expenses and lower R&D reduced OpEx by 2.9 million sequentially.
Diluted GAAP EPS attributable to hotronic shareholders was $0.68 per share.
After removing the impact of FX gains, fully diluted, non-gap EPS attributable to Fortronic shareholders was $0.52 per share, which was above the high end of our guidance.
Our Fairfax gain was an unrealized benefit primarily related to the impact of the strengthened US dollars on intercompany balances, cash, and accounts receivables held by our foreign subsidiaries.
During the first quarter, we generated $78 million in operating cash flow which represented 37% of total revenue.
We continue to build on our strong cash balance, providing us with continued financial flexibility.
Halfbacks was $35 million in the quarter.
We remain committed to spending $200 million in cap backs in 2025 on a combination of capacity, capability, and end of life tool initiatives.
This run rate is higher than typical to accommodate US expansion initiative that's underway.
I want to emphasize that our capacity expansion plans are driven by specific customer opportunities and go through a rigorous investment vetting process.
These investments will strengthen our ability to support and win the most attractive photo mask opportunities.
Total cash at the end of the quarter was $642 million and remained relatively unchanged from the end of fiscal Q4, driven by CapEx, debt repayment, stock repurchases, and the effect of foreign currency exchange rate changes on our cash balances.
We have a modest 3 million of that remaining.
Before providing guidance, I'll remind you that demand for our products is inherently uneven and difficult to predict with limited visibility and typical backlog of 1 to 3 weeks.
In addition, ASPs for high-end mass sets are high, meaning a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings.
As we have highlighted previously, our business is influenced by IC and display design activity and to a lesser degree by wafer and panel capacity dynamics.
With those qualifications, we expect 2nd quarter revenue to be in the range of 208 to 216 million.
Based on those revenue expectations in our current operating model, we estimate non-gap earnings per share for the second quarter to be in the range of 44 to $0.50 per diluted share.
This equates to an operating margin between 23 and 25%.
Given current market conditions and our Q2 outlook, we're increasingly cautious about 2025.
In order to continue to drive cash flow, we will continue to prudently manage costs.
I will now turn the call over to the operator for your questions.
Operator
(Operator Instructions) Tom Diffley, D.A. Davison.
Thomas Diffely
Yes, good morning.
Thank you for letting me ask a few questions here. Maybe first one for you, Frank, the outlook, It's for basically flat corner to quarter and typically we see a roughly 5% increase in the first or the second fiscal quarter, first quarter of the year. So I'm curious, is it really just the mainstream in China that is the weakness?
Is it, just your ongoing lack of real visibility and conservatism or what's behind the flat guidance?
Frank Lee
Well, thank you, Tom.
Business of the very low end of mainstream, many from the 6 inch and 8 inch wave effect has been weak and we see no signs of recovery in the near future.
And this happened now.
Only in Asia but also in Europe.
Particularly So, I think this revenue is relatively small in our overall business.
But it still has some negative impact our revenue and revenue outlook.
So, I think.
At this moment, we are cautious.
However, the long term outlook we still believe it's a positive.
And we will continue to focus and leverage our competitive strengths on the high end to improve our branded ASP. So I believe Kyoto as at this moment, our focus is right.
But I think the overall economic picture remains kind of uncertain. So I believe by the end of Q2, we may have a much clearer picture of physical 2025.
Thomas Diffely
Okay, that makes sense. If I could just dig in a little deeper on the mainstream business, then, obviously over the last few years the demand levels and the supply demand equation in mainstream was very beneficial to you. You had nice margin expansion in that space. So just curious, how do you look at the supply demand equation today in mainstream? And what are you seeing from a pricing basis?
Is the pricing strength gone away? Are you seeing some weakness quarter over quarter? How would you characterize the mainstream business right now?
Frank Lee
Okay, we keep our pricing firm. We do not lower down our price in the mainstream.
However, the overall pie of the mainstream business at this moment seems to be smaller.
I believe it's due to the weakness in the automotive and maybe industrial applications.
As I highlight, most inch and 6 inch wafer utilization are relatively low. So it does have some impact on our lower mainstream business.
Thomas Diffely
Okay, maybe just one last question on the mainstream. Are you seeing increased competition from local Chinese suppliers?
Frank Lee
Yes, we do see increasing competition.
However, our focus in China is on the middle and high end of our in the middle and high side of our high-end business, such as 55 nanometer, 40, 28 and 22 nanometers. So we shift most of our business to this segments.
Such that our branded ASP in China still keep a good and stable high range, so.
The answer is yes. There are more competition from local Chinese mask makers in the low end of the mainstream, but that is not our focus, so we are getting to the more profitable and more high price segment of the business in China.
Thomas Diffely
Great, appreciate the extra color there, Frank. Maybe just a quick question for Chris then, congratulations on the new Gen.6 AMOLED screen. What were the challenges to, get to that larger screen size or panel size?
Chris Progler
Yeah, thanks Tom. I appreciate it.
The specs for the amyloid mass, which prior to this had been all Gen 6. 5, are the tightest among our FPD products, so we had to scale those specs up to the much larger substrate size, Gen 8.6. So it's kind of spec scaling, uniformity. All the mass parameters had to scale up to those larger substrates, which is quite difficult.
The second thing is the Integration of the mask onto the blank. We use some advanced, as we mentioned in the comments to the call, some IC-like technology in our FPD mask, things that people call phase shift and other other things that are common and I see we use that in our FPD technology scaling that up to Gen 8.6 also was a challenge. So we met those. We've been working on gen 8.6 scale up.
By now for almost a year, so we were kind of ready for this, and it's really in good coordination with the customer. We had lots of test masks and pilots ahead, so I would not say we're struggling with yield or execution or delivery from here. So as the business grows, we should be able to scale that product line up nicely.
Thomas Diffely
And how big do you expect that to be inside of your flat panel business over the next, few quarters?
Chris Progler
Yeah, I don't think we would prefer not to comment on that.
I think just suffice to say so far it's been more than a single order and it's connected with fab projects or projects that are Production level, so these were not just prototype masks or pilot masks. They were masks used for prudential production of amOLED for larger format displays, particularly things like laptops. So they are production applications and the fabs they're going into have the possibility to scale to serious panel production for volume products, but beyond that, I think it'd be a little too early to put a scale on it.
Thomas Diffely
Okay, appreciate it, Chris. And then Eric, looking at the balance sheet, obviously a really strong cash position. There is going to be $200 million of spending in CapEx this year, but it seems like there's still plenty of cash for a more aggressive buyback.
What is your mindset on buybacks versus, I know at one point a year or two ago you guys had talked about potentially keeping a war chest for acquisitions, but what is your thought process on the balance sheet right now?
Eric Rivera
Thanks Tom.
So with respect to the balance sheet, our capital allocation strategy really hasn't hasn't changed, which is the first it's like 3 bullet points. The first one being, just normal caps, and the 2nd and 3rd option toggles.
The second one being M&A activities or if they're in lack of them, we would do share repurchases. So during the quarter we certainly repurchase some shares. And in terms of, what do we see going forward, given the current macroeconomic conditions and the geopolitical environment at the moment we are being a little cautious, but we certainly do have a, we have the war chest as you describe it, to be able to act quickly if the right opportunity comes along with respect to an M&A transaction.
We're not going to just Go to do an M&A transaction to use up our cash or to purchase kind of buy revenues if you will. We'll only do that if it's accretive to the company. Likewise, we'll be aggressive with With sharing purchases if we see that the environment is is favorable to do so at the right time. So this is something that we do look at on a consistent basis. The board and management team, we are aware obviously of the cash balances that we that we have and we're consistently monitoring and looking for the best way to deploy that.
Thomas Diffely
Right, and what is your current authorization for buybacks?
Eric Rivera
We have $100 million authorization.
Thomas Diffely
Okay, great. And then final question overall, oh, go ahead.
So.
Eric Rivera
I'm sorry.
Thomas Diffely
Go ahead.
Well, I was going to say the final question overall is it looks like node migration getting more business of the 22, 28 nanometer node is going to be a big driver over the next year. I'm just kind of curious where anything you can say about your current capacity there and how much capacity you'll be adding with this $200 million of capital spending this year.
Eric Rivera
Yes, so the capital spending that we have this year would be, as I think we mentioned previously, it's normal cap backs that we have plus.
The increase from the normal to 200 million is essentially for the US.
So in the US we have, due to regionalization, we have some more opportunities for revenue and certainly provides some no migration within the within the mainstream area in the US and likewise, in Asia we have our part of our normal capacts we have we're putting point tools wherever we need to in order to enable us to. To be able to, be more effective and efficient in kicking out, more production, where we have some bottlenecks and that certainly, is aiding our node migration, strategy.
Chris Progler
Great.
Thomas Diffely
I appreciate the time for all three of you.
Chris Progler
Of course, Tom, thank you for asking the questions.
Thank.
You, Tom.
Operator
(Operator Instructions) Gauhy, Singular Research.
That we can okay, thanks. Thanks, Ted, for including us. Just on the first question is, how much of the US IC capacity coming online in mid 2026 is kind of on the long term purchase agreements, what was driving that strong demand? Is that strong demand on US based IAIH customers. And maybe you can quantify the percentage of customer customer commitments that's tied to the chip Act versus organic demand.
Chris Progler
So I'll I'll take, I'll take answering that question. Your question wasn't very clear from just to clear, but I think you're asking about what is it that we're seeing in the US that that's going to for which we're doing some cap backs. So I, I'll mention that our customers are certainly in the US have indicated that they would like us to provide, you know.
Service them here in the US market essentially and that is what's driving our increased cap backs in the US in terms of whether we have some some agreements with them that that'll secure that.
I wouldn't say we have like a Tapas because we don't, we generally do not have sacre pas here in the, in our business at all, but we do have customer commitments and indications of, that they would support us in the event that we do this. So that's typically the level of support that we can. That we can get from our customers in our industry and that's what we have and as such we feel comfortable investing the amount that we're planning to invest here in the United States. Does that address your question and I apologize.
I was kind of looking forward to see if there's any what was that what was that part of that expansion that's kind of tied to the TIP act versus kind of the organic demand.
Chris Progler
So that would be organic demand. So for the most part for with respect to the chick that, that's this is not necessarily contemplated this cap back at this time.
Okay.
Yeah, the question is how much of the capacity we're putting in particular in the US are linked to customers that are getting funding through the CHPS Act. It's not a significant bar. Most of the projects we're tracking in the states are projects that we believe would proceed with or without CHIPs funding, so we don't see a lot of, let's say risk in the ones that we're tracking that are connected to those customers getting CHIPs funding. We also, as we reported, applied for CHIP funding under the under the second Nofo, the small supplier Nofo. Our applications are still under consideration, but the current investments we're contemplating and talking about here are being done separately apart from what we'd invest additionally with the chips opportunity.
Got you. And in terms of the mode migration to 22, 28, how much of that demand do you think is going to, is that how is the 14 and and the EUV compatible mask trending? Are you see any increased traction or increase from the AI designs of peripheral chips, customers?
Chris Progler
Yeah, we see mostly, AI-driven business for us. We see mostly adjacent or second order effects from AI. So I would say we see some of that in different regions around the world. These are support chips for the AI ecosystem. A designs of new chips for edge devices and things like that that can take advantage of the AI ecosystem. I think we are definitely seeing some pull from those applications. We not really appropriate to quantify it, but it is a positive trend on the memory side, we mentioned that, memory is a relatively small part of our IT business, but. It was one of the stronger growing segments that is connected also to AI demand and cloud demand and that sort of thing, so we're definitely seeing a lift from that application driver and we expect that to continue to grow as we look ahead in future quarters and years.
So post 2026, as the full capacity of your CapEx comes into line, do you see, do you have an idea of what percentage of the high-end ISC revenue might be tied to supporting that AI infrastructure?
Chris Progler
Yeah, I don't think we would say, what percent of our high-end revenue at that time would be AI driven, so it's difficult to say. Yeah, I mean, I think it would be a significant part, but we probably would not be wise to put a specific percent on it at this point.
Okay.
In terms of auto industry, auto and industrial softeners, it's kind of persisted for multiple sector quarters now. Any sign of inventory restocking or new designers in these sectors for your mainstream.
Chris Progler
I mean, I can make another comment on that. Maybe Frank or Eric can follow up, but I would say still looks, fairly weak, in that market, the automotive market, there's.
Units are down and there is some ASP pressures because the end users are struggling, so it always drives some ASP pressures and I would say at the moment we don't see significant uptick, maybe we'd say some stabilization is not dropping significantly from where it is, but as far as a big turnaround in the automotive sector, I don't believe we're really seeing it at this point. In China, and Frank could probably comment further, there is more activity going on in automotive design. Some portion of that is government backed and government funded, but still, the supply demand situation is not really healthy also in China on the automotive side.
Yes, correct.
I see the design activity seems to decrease in these two segments at this moment. So I believe the end product business softness impact the new chip design.
Okay.
In terms of geographic mix for driving H2, how are you guys thinking about all the cars, the subsidies impacting regional pricing?
Frank Lee
I'm sorry, if you don't mind repeating the question, I'm not sure it came through.
In terms of how, as you think about H2 of 2025, and the geographic mix, how do you look at the geopolitical landscape and how does that impact the regional pricing?
Frank Lee
Oh, I see, I see. So thanks again for the question, for repeating the question actually. So, given the the current macro and geopolitical conditions, actually we, we're increasingly cautious, so we don't have a great visibility at the moment of how the second half is going to be. We expect to have a better picture in Q2, but, the question is a great one. It's just that the current environment doesn't allow us to see what that is at the.
Moment. Okay.
And well, as we model for fiscal '25 years, I'll be, I was looking at R&D costs declining as as the project qualifications kind of taper off.
Frank Lee
Well, I think I would best describe it as probably, I mean that's, we don't have a great picture as I mentioned right now as how the second half is going to be, but at the moment, if I just were to comment what we see in the moment, we definitely don't see it, increasing.
So I think if we take that position of at least stable, that would be the best thing I can give you a comment on.
And in the past, with respect to OpEx, we do expect OpEx to be about 10% of of revenue.
Going forward.
That's our target.
Right.
Chris Progler
And yeah, of course just generally on the qualification side just to, make a comment, the goal of course is as we complete one set of qualifications, start new ones after those. So I agree, just supporting and seconding Eric's comment, I think, steady state sort of picture is probably a pretty good way to look at the R&D.
Okay.
And in terms of outlook, what would you say were your top two risks for 2025? Is it the macro demand, the geopolitical tensions or customer delays if you want to quantify.
Frank Lee
Yeah, I would say I think you hit them all, but to answer your question, the top two, I would say the macroeconomic and the geopolitical.
Okay, that's all I have.
Thank you.
Thank you guys for taking my questions and good luck. Of course.
Thank you.
Operator
Thank you.
Ladies and gentlemen, I ain't showing no further questions in the queue. I would now like to turn the call back over to Ted for closing remarks.
Ted Moreau
Thank you, Jawada and thank you everyone for joining us today. We appreciate your interest in Fortronics. We look forward to catching up with everyone over the coming days and weeks. Have a great day.
Operator
Ladies and gentlemen, that concludes today's conference call.
Thank you for your participation. You may now disconnect.
Thank you. Bye bye bye.
