Eric Rivera; Chief Financial Officer; Photronics Inc
Frank Lee; President, Chief Executive Officer, Director; Photronics Inc
Christopher Progler; Executive Vice President, Chief Technology Officer and Strategic Planning; Photronics Inc
Tom Diffely; Analyst; D.A. Davidson & Co. (Research)
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Photronics Third Quarter Fiscal Year 2024 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded on Thursday, August 29, 2024.
I would like now to turn the conference over to Eric Rivera, Chief Financial Officer. Please go ahead.
Eric Rivera
Thank you, Michelle. Good morning, everyone. Welcome to our review of Photronics' fiscal 2024 third quarter results. Joining me this morning are Frank Lee, our Chief Executive Officer; and Chris Progler, our Chief Technology Officer. The press release we issued earlier this morning together with the presentation material that accompanies our remarks are available on the Investor Relations section of our web page.
Comments made by any participants on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast and in our view. These forward-looking statements are based upon a number of risks, uncertainties and other factors that are difficult to predict. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels 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. 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'll turn the call over to Frank.
Frank Lee
Thank you, Eric, and good morning, everyone. Third quarter sales came in lighter than we expected due to soft demand from actual foundry as the strong order rate at the beginning of the quarter lost momentum. Lingering macro uncertainty and customer concern on elevated inventory caused some to limit or defer releasing new designs. As a result, photomask demand slowed, resulting in lower sales for both IC and FPD.
High-end logic mask orders decreased while our memory business improved in the quarter. High-end FPD improved due to demand for AMOLED mask used for mobile displays as companies prepare for model release in a recovering smartphone market.
Compared with the second quarter, gross margin decreased due to the impact of lower revenue. Operational expenses were slightly lower than the second quarter. EPS was $0.55. After adjusting for an FX gain, non-GAAP EPS was $0.51, higher than last quarter and the same as last year.
We continue to generate strong operational cash, giving us added flexibility to invest in growth while also maintaining a strong balance sheet. As a result, we are announcing an increase of our existing share repurchase program to $100 million. Eric will share details in a few minutes, but we believe this is the right time to restart our share repurchase activity and enhance our capital allocation framework.
Based on our optimism in the long-range photomask market, we are also evaluating several growth options, including strategic expansion, partnerships and other possibility in US, Europe, and Asia. We are maintaining flexibility to act quickly in support of our global customer and partners while remaining disciplined to ensure our investment meet financial objectives.
I'm very proud -- I'm very pleased with the way our team has performed during the quarter. They have taken care of the customers while managing costs and maximizing cash to maintain financial strength. We have a great team at Photronics, and they are navigating the challenges well.
Turning to the market, I would like to comment on the trend we are seeing. Photomask demand is driven mostly by design activity. Several long-term trends such as AI, mobile computing, and increased IC content in automotive, energy and consumer applications drive new designs in both leading-edge and legacy technology nodes, all required in new photomask. As the global leader in IC mask units, we see a high level of new product qualification across the node spectrum, each with projected revenue opportunities. This all play well to our marginal strength and is a positive long-term trend for our business.
In addition to new designs, photomask demand is driven by an increase in wafer manufacturing capacity. New fabs are being built globally to meet the growth in applications such as data centers that are needed to support AI and to support an increase in supply chain regionalization. This is a positive long-term trend for photomask demand. Due to our broad geographical footprint capacity and suite of technologies, we are able to provide all of our customers' photomask needs. We supply nearly all leading logic fab with strong market share especially in Taiwan, China, and Korea. In US and Europe, we are seeing the initial signs of growing demand for regionalization.
Turning to display. Innovation is mostly due to new features in mobile displays and to a lesser degree, new TV technology that improve performance. On the mobile display, this trend was largely supported by new premium smartphones, higher screen resolution and the need to add additional functions such as fingerprint sensor and cameras, while reducing power require new advanced mask sets.
AMOLED continued to be introduced into larger-sized screens such as tablets and laptop. And the development is underway to produce AMOLED on G8.6 glass. These trends all require high-quality photomasks. As the technology leader in LCD mask, we are well positioned to benefit from these trends and grow.
While near-term demand is being challenged by dynamic market conditions, we remain optimistic regarding the long-term market outlook. Our competitive advantage, including strong customer relations, long-term purchase agreement, leading technology, and broad global capacity position us to continue to outgrow the photomask industry. Our ability to control costs and manage cash should allow us to continue to invest in profitable growth and deliver shareholder value.
At this moment, I will turn the call to Eric to review our third quarter results and provide fourth quarter guidance.
Eric Rivera
Thank you, Frank. Third quarter revenue of $211 million was down 3% sequentially, with market softness across both IC and FPD. IC revenue decreased 3% quarter-over-quarter.
High-end was lower as improved memory sales were not enough to offset lower demand from logic foundries in Asia. Compared with the third quarter of 2023, high-end improved on strong US sales. High-end growth continues to be a factor for us as we see customers migrating to smaller design nodes, including 22 and 28 nanometers, to take advantage of the cost and performance benefits.
At the leading edge, our specialty EUV business continues to grow. Year-to-date, high-end IC revenue is up 23%, demonstrating our success in growing this segment of our business.
Mainstream once again achieved sequential growth as demand improved, particularly in the US. This further validates our belief that Q1 of this year was the bottom of the mainstream downturn, and we anticipate additional growth going forward. FPD revenue was lower sequentially as well.
On a positive note, high-end resumed growth with improved demand for mobile AMOLED displays. Overall, display industry dynamics remain somewhat soft largely due to the same factors that are impacting semiconductor demand. As uncertainty abates, we anticipate achieving above-market growth due to our leading technology, scale, market share and strong customer relationships.
Overall, our gross margin was 35.6%, down slightly as we would expect, given the softer revenue and our level of operating leverage. Blended ASP held up well as price increases implemented in previous years hold firm.
Our long-term purchase agreements continue to provide protection against downside risk during times of market softness, helping us maintain market share and pricing. Delivery premiums, which were meaningful last year, were no longer material to our results as lead times have normalized.
Operating expenses were slightly lower quarter-over-quarter with operating margins compressing around 110 basis points to 24.7%. Despite softer revenues through the first nine months of 2024, we have maintained strong margins with the year-to-date operating margins of nearly 26%. Below the operating line and excluding the impact of FX gain, we achieved non-GAAP net income of $32 million or $0.51 per share, ahead of last quarter and the same as last year.
We generated $75.1 million in operating cash flow, and CapEx was $24.4 million in the quarter. Year-to-date CapEx is $87.7 million. We expect full year CapEx to be $130 million, $10 million lower than we previously estimated as some of the CapEx payments will not occur until next year. Our CapEx will support anticipated demand growth primarily in multi-node IC capacity and capability and to continue replacing aging tools, all while ensuring we are increasing our return on invested capital.
Looking ahead to 2025, we see opportunities to continue investing in growth, primarily in IT, to ensure we are well positioned to capitalize on the positive long-term mega trends that are driving photomask demand. We will provide specific 2025 CapEx guidance during our Q4 earnings call in December.
We further strengthened our balance sheet during the quarter, increasing the amount of cash, cash equivalents and short-term investments to $606.4 million. Total debt, primarily for equipment leases in the US, was reduced to $20.1 million.
With our strong balance sheet and demonstrated ability to generate cash, we are increasing the size of our share repurchase program to $100 million and plan to restart activity under the program soon. We believe this is a good use of cash and will add value to our shareholders.
Before providing guidance, I'll remind you that demand for products is inherently uneven and difficult to predict, with limited visibility and typical backlog of one to three weeks. In addition, ASPs for advanced mask 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 fourth quarter revenue to be in the range of $213 million to $221 million. While we are seeing good order rates at the beginning of the fourth quarter, lingering macro uncertainty is keeping us cautious.
Based on those revenue expectations and our current operating model, we estimate non-GAAP earnings per share for the fourth quarter to be in the range of $0.48 to $0.54 per diluted share. This equates to an operating margin between 25% and 27% as we continue to keep costs under control and maximize profitability.
We delivered sequentially higher adjusted EPS in the third quarter even as demand remains soft. This was achieved by keeping a tight control on cost. We also continue to generate strong cash flow, keeping our balance sheet strong and enabling us to invest in growth. As demand on our markets improve, we are in a great position to grow revenue and expand margins.
I'll now turn the call over to the operator for your questions.
Operator
(Operator Instructions) Tom Diffely, D.A. Davidson.
Tom Diffely
Eric, I was curious, when we go through the results and how earnings kind of held in there despite the weaker revenue, it looks like a combination of tax and the noncontrolling interest were the big drivers there. Maybe you can talk about each one. On tax, why did it fall as much as it did?
And then on noncontrolling, do the China percentage fall quite a bit? And if that's the case, is the profitability in China not where you want it to be quite yet?
Eric Rivera
Sure, Tom. Thanks for the question. So from a tax perspective, what affected tax was the jurisdictional mix of earnings. Similar to the noncontrolling interest, so our noncontrolling -- our joint ventures didn't perform as well as we would have liked them to perform. So as a result, there was less income attributed to them.
However, that was offset by some of our wholly owned subsidiaries. So as our wholly owned subsidiaries -- as the mix between earnings between our wholly owned subsidiaries and our joint ventures goes more towards our wholly owned subsidiaries, shareholders of Photronics, Inc. benefit from an additional EPS gain.
Tom Diffely
So maybe to summarize, when you do projects in North America or outside of Asia, the tax rates are better and the profitability is better?
Eric Rivera
So even within Asia, there are certain jurisdictions that just have different tax rates. So as that jurisdictional mix changes, as you have more income and lower tax jurisdiction, you benefit from a tax perspective.
Tom Diffely
Okay. Great. And a couple more here. So I noticed that SG&A was up quite a bit quarter-over-quarter despite the revenue dip, maybe a little color there?
Eric Rivera
Sure. So our SG&A was primarily increased due to professional services fees that were incurred during the quarter.
Tom Diffely
Okay. I guess that leads me to my next question. Any update on the General Counsel dismissal? And does that have any impact outside of the --
Eric Rivera
There was really no impact to our financial results, no significant impact, I should say. No update further than that, though, at this time.
Tom Diffely
Okay. And then just one broad question. When you look at the margin structure on the mature -- the mainstream business and how, over the last few years, it's run nicely. It kind of peaked maybe a year ago. Is the mainstream business still healthy from a price point of view? Or has the softness in the overall transaction run rate put it back into kind of sequentially declining on an annual basis?
Frank Lee
Tom, this is Frank. Our mainstream business actually is very stable because as we reported several times in the call, in the mainstream manufacturing side, there are many end-of-life tools. So with that, we have to replace the equipment to add capacity. But in general, the capacity for mainstream segment is not increasing. So that enabled us to keep a stable price.
Tom Diffely
Okay. Great. And then I don't know if Chris is on the call, but I do have a kind of a technology question.
Christopher Progler
Yes. Yes. I'm here, Tom.
Tom Diffely
So I guess two things. First, are you seeing any -- or what do you think the longer-term impact is, if any, of Apple canceling its micro display project? And then how do you see OLED ramping into flat panels of a larger size over time?
Christopher Progler
Yes. So the micro display, we don't really see much impact. Micro display, we didn't have it marked up as a big growth driver for photomask. So to the extent companies like Apple decide not to commit to micro display does not really change our outlook on the FPD market.
As far as the OLED, definitely, we see the Gen 8.6 form factor starting to go into production next year, we believe. One of the large panel makers already has that fab. We're talking to them about shipping initial masks into that. And we do think we'll be in a good POR position for that -- those high form factor masks. And the ASPs for those because they're tough masks to make AMOLED at Gen 8.6, much harder, much more complex than LCD, we'll see really good ASPs on those products.
Tom Diffely
Okay. And I assume that you have a bit of a technology advantage over some of your newer peers in that space as well?
Christopher Progler
Yes. For sure. In FPD, we think we have pretty strong technology lead. The other thing we see on AMOLED is a lot of take-up of so-called advanced masks, things that -- not to use jargon but phase-shifting masks and the types of technology that really helped IC evolves through Moore's Law, we're seeing the adoption rate on those for flat panel increase quarter-over-quarter. So really good take-up on our higher-end masks to get more performance on panel. So we think our tech leadership here is going to be a big advantage.
Operator
Okay. I show no further questions in the queue at this time. I would now like to turn the call back over to Frank Lee for closing comments.
Frank Lee
Thank you. Thank you for joining us this morning. While demand has been soft through the first nine months of 2024, we have done a good job of maintaining margins and generating strong cash. I'm proud of the way we have performed.
Looking longer term, there are several mega trends that should support market growth. As the leading photomask producers, we are well positioned to grow as demand improves, creating value for our customers, employees and shareholders. I look forward to updating you on our progress. Thank you.
Operator
Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.
