Photronics - Earnings Call - Q3 2025

Executive Summary

• PLAB delivered a solid quarter: revenue $210.4M (-0.3% y/y; -0.3% q/q) and non-GAAP EPS $0.51, both ahead of internal expectations and above S&P Global consensus, while GAAP EPS was $0.39 as FX impacts were excluded in non-GAAP adjustments. Q3 Street: revenue $204.3M*, EPS $0.385*; Actual: $210.4M and $0.51 non-GAAP (beat). Values retrieved from S&P Global.*
• Mix: IC revenue softened (-5% y/y/-5% q/q) amid Asia geopolitical/tariff uncertainty, offset by strong FPD (+14% y/y/+14% q/q) on Korea/China mobile and larger AMOLED panels; high-end recovery in the U.S. aided margins.
• Balance sheet and cash flow remained strong: cash & short-term investments $575.8M, operating cash flow $50.1M (24% of revenue), capex $24.8M; buybacks $20.7M and authorization increased by $25M.
• Q4 FY25 guide brackets Street: revenue $201–$209M vs $204.5M* and non-GAAP EPS $0.42–$0.48 vs $0.445*; operating margin guided to 20–22%. Two fewer selling days q/q and six fewer y/y temper near-term outlook. Values retrieved from S&P Global.*

What Went Well and What Went Wrong

What Went Well

• “Revenue, profitability and EPS ahead of expectations,” with non-GAAP EPS of $0.51 and better-than-expected gross/operating margins; U.S. high-end recovery and Korea/China FPD strength drove upside.
• Strong cash generation and disciplined allocation: $50.1M operating cash flow; $24.8M capex (on U.S. capacity, tool replacements); $20.7M buybacks; authorization +$25M.
• Strategic capability build: first U.S. merchant multi‑beam writer installed in Boise; unique U.S. merchant capability for advanced/EUV masks; 3–5 customers qualified, broader ramp over ~6 months.

What Went Wrong

• IC weakness persisted: mainstream IC -12% y/y (Q2) and continued Asia softness in Q3 due to geopolitical trade restrictions and tariff uncertainty affecting customer design releases.
• Margins compressed q/q from mix: gross margin 33.7% vs 36.9% in Q2; management cited mix effects primarily in Asia; rounded commentary referenced ~34%.
• Limited near-term visibility: inherently uneven demand with 1–3 week backlog; Q4 has two fewer selling days than Q3 and six fewer than Q4 last year; management remains cautious.

Transcript

Speaker 6

Thank you for standing by and welcome to the Photronics Fiscal Third Quarter 2025 Financial Results Conference Call. At this time, all participants are on 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 automated message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host, Ted Moreau, Vice President of Investor Relations. Please go ahead.

Speaker 5

Thank you, Operator. Good morning, everyone. Welcome to our review of Photronics Fiscal Third Quarter 2025 Financial Results. Joining me this morning are George Macricostas, Chairman and CEO, Eric Rivera, CFO, Frank Lee, Head of our Asia Operations, and Chris Progler, CTO. The press release we issued earlier this morning, together with the presentation material that accompanies our remarks, is available on the Investor Relations section of our website. This call will include forward-looking statements that involve risks and uncertainties that could cause Photronics' results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained both in today's earnings release as well as our most recent SEC filings. In the coming weeks, we will be participating in the Singular Research Investor Conference and will be meeting with investors at the Semicon West Trade Show, which will occur in Phoenix this year.

I will now turn the call over to George.

Speaker 4

Thank you, Ted, and good morning, everyone. We had another solid quarter with sales of $210 million ahead of expectations and flat both year-over-year and sequentially. Our flat panel display business continues to perform well to offset more challenging demand in IC. Non-GAAP diluted EPS was also well ahead of guidance at $0.51. At Photronics, we leverage our legacy as an efficient photomask provider, critical to the manufacture of semiconductors to drive profitability and cash flow. In fiscal 2025 to date, operating cash flow has been 25% of revenue, which has enabled a strong balance sheet with $576 million of consolidated cash and short-term investments. We also continue to return cash to shareholders by repurchasing $21 million of stock in the quarter, bringing the total year to date to $97 million.

After taking over as CEO three months ago, we have been evaluating opportunities, our positioning in the market, and our internal operational execution. With the market driving geographic diversity of semiconductor production, we have identified excellent opportunities that we are looking to capitalize on. We are leveraging our strong balance sheet to reinvest in our business, driving competitive advantages, revenue, and earnings growth in the future. As part of the strategy back in December, we communicated our initial step to geographically diversify our revenue with the announced U.S. expansion plans. We have been expanding our cleanroom facility in Texas for capacity and capability extensions to service increased demand for U.S. mid-range nodes. We're also elevating our leading edge production capabilities in Idaho with the installation of a new multibeam mask writer to enable the highest end of our product portfolio. These U.S.

projects coincide with a significant number of semiconductor industry announcements over the past year regarding major manufacturing reshoring of semiconductor production to the United States. As a merchant market leader in the U.S., we are further strengthening our position to benefit from this reshoring of semiconductor production. Expanding our geographic revenue diversification strategy within our existing footprint for the past several quarters, we have been assessing and closely collaborating with customers in various geographic regions to further strengthen our existing manufacturing capabilities. More specifically, we are evaluating capability extensions at Photronics' facility in Asia to extend from 14 down to 6 and 8 nanometer production. We would expect these new capabilities to contribute to revenue in the latter half of 2027 or 2028. We also continue to invest prudently in great opportunities and evaluate our optimal geographic footprint by collaborating with our customers to support their growth initiatives.

Over time, our internal investments are expected to deliver a more diversified and robust geographic revenue base than we recognize today, which we expect to offset the growing competitive environment in the China IC market. Regarding China, since Frank Lee led the establishment of our operation there over five years ago, we have achieved many close customer relationships that have contributed to meaningful revenue growth and cash flow for the company. We will continue to optimize our product mix there to maintain our business performance. As we expand our global capabilities, it becomes more critical than ever that we execute a fully integrated and world-class global sales program. Toward that, we have recently hired a new Head of Global Sales who will drive a coordinated global sales strategy designed to capture market share in this continuously evolving global semiconductor landscape.

Further, as we prepare for the next stage of Photronics' growth and continue to invest for the future, we will leverage our unparalleled operational leadership that forms the basis of our 56-year legacy. We remain relentless in our efforts to improve efficiencies across the organization, further optimizing our cost structure and maximizing profit potential. This is an area that we have closely evaluated over the past three months. We're not making, nor do we anticipate making, drastic wholesale changes. Rather, we periodically make strategic and targeted organizational improvements within information technology, operations, and sales to best deliver business performance within our expanding network. Returning to our results for the third quarter, in our integrated circuits end market, revenue of $148 million reflects the continued headwinds experienced through 2025, including the uncertainty associated with geopolitical trade restrictions, particularly in the Asia region that are muting demand.

Similarly, unresolved tariff negotiations have temporarily influenced design release from our customers in Asia. Turning to our flat panel display market, revenue of $63 million was the result of strong demand from our customers in Korea and China, driven by the timing of major smartphone, tablet, and laptop design releases. The display market continues to prioritize the development of panel products with enhanced capabilities, such as faster refresh rates and enhanced energy efficiency of mobile devices that must have thinner, lighter, and more flexible displays. As a result, flat panel makers are actively developing new technologies for advanced backplanes and touch panels that require more high-end mask layers. Utilization of these higher-value masks, along with the increasing adoption of foldable consumer electronics and scaling to larger form factors, are favorable demand drivers that we expect to capitalize on over the next several years.

I now turn the call over to Eric to review our third quarter results and provide fourth quarter guidance.

Speaker 3

Thank you, George. Good morning, everyone. Third quarter revenue was above expectations at $210 million, which was relatively flat both sequentially and year-over-year. IC revenue of $148 million declined 5% year-over-year. High-end IC revenue represented 36% of total IC revenue and increased 8% year-over-year. We recognize a recovery in our high-end business resulting from strong order patterns in the United States. Our mainstream IC revenue declined 12% year-over-year, with the majority of the decline having occurred in Asia, while mainstream in the U.S. and Europe were stable. Turning to FPD, revenue of $63 million increased 14% year-over-year, led by strength in Korea. FPD continued to benefit from the uplift in seasonal demand, particularly for higher-end applications utilizing our advanced AMOLED technologies. Geographically, during the quarter, our Taiwan facilities generated 33% of total revenue with China at 24% and Korea at 21%. The U.S.

and Europe together accounted for 22% of total revenue. Keep in mind, the IC market is only a portion of our China revenue. We have built a strong and stable FPD business in China, and our IC operations there are generated out of our 50% joint venture in Xiamen. We reported a gross margin of 34%, which was higher than expectations, and our operating margin of 23% was above our guidance range. Diluted GAAP EPS attributable to Photronics shareholders was $0.39 per share. After removing the impact of foreign exchange, fully diluted non-GAAP EPS attributable to Photronics shareholders was $0.51 per share. Our overall profitability reflects the greater contributions from our operations in the U.S. and Korea. During the third quarter, we generated $50 million in operating cash flow, which represented 24% of total revenue. CapEx was $25 million in the quarter.

We remain on track to spend $200 million in CapEx in fiscal 2025 on a combination of capacity, expansion, capability improvements, and end-of-life tool replacements. Total cash and short-term investments increased by $17 million in the quarter to $576 million, which includes $397 million of cash in the joint ventures. We have three elements to our capital allocation strategy, including organic growth, strategic investments, and returning cash to shareholders. During the quarter, we repurchased 1.2 million shares for $21 million and received approval from our board to increase the repurchase authorization by an additional $25 million. We now have $28 million available under a share repurchase authorization. As communicated throughout our premier remarks, our fiscal 2026 capital allocation priority will lean towards investing in our existing business to deliver geographic revenue diversification in the future, while we remain strategic with respect to future stock repurchases.

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 one to three weeks. In addition, ASPs for high-end mask sets are high, meaning a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Additionally, 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. Given current market conditions and continued geopolitical uncertainty, we remain cautious about the near-term demand environment. We expect fourth quarter revenue to be in the range of $201 million and $209 million. Keep in mind, we have two fewer days in Q4 than last quarter and six fewer days than Q4 last year.

Based on those revenue expectations and our current operating model, we estimate our fiscal Q4 operating margin to be between 20% and 22%. Our non-GAAP earnings per share for the fourth quarter are expected to be in the range of $0.42 to $0.48 per diluted share. I'll now turn the call over to the Operator for your questions.

Speaker 6

Thank you. To ask a question at this time, you will need to press star 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question coming from the lineup, Tom Diffly with DA Davidson and Yolanda Smelvin.

Speaker 7

Yeah, good morning. Appreciate the chance to ask a couple of questions. First, I just wanted to ask a quick question about the fourth quarter. Do you see the mix being very similar to the third quarter? Are there any changes in what's driving the revenue?

Speaker 2

Hello, Tom. Eric here. Yeah, we see the mix in the fourth quarter to be similar to that of the third quarter. Correct.

Speaker 7

Okay. You made some comments about tariffs and trade restrictions. I assume those don't impact you directly, but it impacts your customers, which impacts just your revenue as opposed to a direct restriction on what you can and can't do?

Speaker 2

That is correct to some extent. The trade restrictions, as you know, we have manufacturing facilities at different locations throughout the world. It doesn't impact us directly. It does impact our customers, as you suggested. To a lesser extent, it does impact perhaps our material purchases and any equipment purchases we may have. To date, those impacts haven't been material.

Speaker 7

Okay. You are fairly regionalized, where you take most of your equipment and most of your, I guess, most of your materials from the region that you're serving?

Speaker 2

From a material perspective, as I mentioned, that does impact us. We have a lot of material purchases from Japan, for example, and those would incur some tariffs if we bring them to the United States.

Speaker 7

Okay. Maybe just a quick question on the investments you're about to make. When you look at the multibeams to go to the higher end, is that for essentially serving Samsung and TSMC at the higher-end nodes, or is that for your other independent customers that are actually moving to those nodes?

Speaker 2

It would be for the higher-end nodes, or the higher-end nodes for customers similar to what you mentioned there, including Samsung, which we've talked about in the past. I won't go into more detail as to what the other customers are, but they are for that level of customer.

Speaker 7

Okay. Excuse me, last question. When you look at the potential to move down to the 6-8 nanometer node in Asia, is there anything that has to happen as far as getting the okay or the permission to have that level of technology, or is that already clear and it's really just a pure investment thesis at this point?

Speaker 2

All right. Our restrictions for those types of nodes would be in China. If we were to invest in Asia, it would be in a non-China location. We would be looking at anywhere else. As you know, we have Taiwan and Korea footprints there. It could be at any of those sites.

Speaker 7

Okay, I appreciate the time.

Speaker 6

Thank you. Our next question coming from the lineup, Christian Schwab with Craig-Hallum Capital. Yolanda Smelvin.

Speaker 1

Thanks for taking my questions. Congrats on the great quarter and guide. Just to follow up on the 6-8 nanometer product expansion, can you give us an idea of what end market products that those chips would be going into? I assume you're working with your customers. If you could give any clarity regarding that, that would be great.

Speaker 2

I don't know. Chris, you can perhaps take that call. Frank or Chris, either.

Speaker 7

Hi, Christian. This is Chris. It's mostly high-end processors. We're starting to see edge AI devices that are driving some things, EVs and AI embedded into cars, these sorts of things. Higher-end processors, mobile communications, a little bit of memory as well, DRAM in particular. It's fairly broad, most of the higher-end use cases the industry has for these nodes.

Speaker 1

Fantastic. Thank you.

Speaker 7

Regarding your capex, which, go ahead.

Speaker 0

Yeah, this is Frank. I'd like to add a few more comments. For this high-end technology, very often we are working with our customer. Most of them have their own captive market share. It is customer-oriented. It depends on the customer demand. I think our investment will be combined with customer captive outsourcing future demand. I think the product needs are very complicated, and it's a mix with different kinds of products, including logic and memory.

Speaker 7

Great. Following up on that, do you see your move to smaller IC nodes, which is, you know, smaller than you historically have operated in? Does that represent a potential market share gain opportunity for you over a multi-year timeframe? Is that the way we should be thinking about it?

Speaker 0

Yeah. Hi, this is Chris Progler. We do see that opportunity for market share gain. Right now, those nodes, say 6-8 nanometer, the commercial mask makers, merchant mask makers, are fairly recent entries into those nodes. To some degree, it's still kind of a jump ball because those nodes are ramping in the commercial space. By making these investments, and also what we should point out in our site in Idaho, we are already capable of servicing nodes to the 6-8 nanometer level. We do believe we'll have a good multi-region solution to take advantage of merchant growth for these sorts of IC nodes.

Speaker 7

Fantastic. Regarding your CapEx at $200 million, elevated above your historical % range of aggregate revenue, if you will, these investments not only in Asia, as you highlighted, but also in Texas and Idaho. When would you anticipate CapEx to potentially normalize back to your historical level? Is that as we exit next calendar year, or do you think CapEx investments, given the growth opportunities, will be elevated at current levels for multiple years past this?

Speaker 2

Yes, this is George. Basically, we're looking at about a three-year higher-than-normal capex. Part of it is end-of-life tools, which also give us more capability. We've been able to extend the life of many tools for much longer than normal. Part of it is end-of-life tool replacement, which again gives us extra capability. Also, it's strategic investments in Asia for increased technology ability, more advanced nodes. Those are probably the two big categories. Of course, you know about the expansion in the U.S., in Allen, Texas. That's already in the budget. Basically, what we're looking at is future higher nodes and end-of-life tool replacement, also giving us some more capability with those replacement tools.

Speaker 7

Great. As far as capital intensity at end-of-life tools, I would think that maybe by the end of next calendar year, your end-of-life tool replacement work should be finalized, and the additional slightly higher capex ranges would be more due to advanced technology spending. Am I thinking about that right, or will end-of-life tools linger a little bit longer than that?

Speaker 2

No, it'll linger a little bit longer than that. We're basically not trying to do it all in one year. We're obviously trying to balance investing in future advanced technology nodes, like we mentioned in Asia and here in Allen. That's more mid-range investment because we have Boise for the high end. It's more of a combined end-of-life and future investment for the next few years. I think after three years, it will be more normalized because that end-of-life tool cycle will be behind us. It's not something we would want to do in one year anyway because it can be disruptive to some degree.

Speaker 7

Correct. Thank you. As we think about the flat panel display business, there's pretty optimistic third-party research talking about the migration to G8.6 for obvious reasons of thinner, lighter, flexible, etc., of around a 15% CAGR for many years to come. Is that a market that, as far as a growth rate, you think that you are extremely well positioned to capitalize on and actually maybe outperform the aggregate growth rate of the industry?

Speaker 0

Yes, you are correct. We have the technology for G8.6 AMOLED, and our customer in Korea has been working with us. We are working closely with two important customers in China. Our growth in FPD in the coming years will grow with the tremendous contribution from G8.6 AMOLED.

Speaker 7

Right. Our work is directionally probably accurate, but probably not an exact percentage. Our work suggests that the ASP, given the increased layer count for photomasks at that strong growth market, are probably as much as 50% higher. Would you agree that that's directionally accurate, or how should we be thinking about, not only is the growth rate great, but the prices are materially higher? I understand you can't make a comment regarding competitive reasons, but directionally, is that the way we should be thinking about it?

Speaker 0

Yeah, we don't usually comment directly on ASPs for this. I assume you're talking about the kind of blended ASP for an AMOLED G6 set, which is the current high-volume manufacturing versus the same kind of mass set built at G8.6. Yeah, for sure, we expect to see ASP lift between those two products. Also, frankly speaking, the materials cost also will go up because the substrates are larger. Generally, we do expect ASP to be higher, and we expect margins to be better. We really don't think we should comment on specific numbers and % at this point.

Speaker 7

Great. My very last question here has to do with capital allocation. Congratulations on taking advantage of your stock being mispriced and stepping up and buying a material amount. Have you guys, unlike many of your peers focused in this market or call it mainstream semiconductors as a meaningful % of revenue, your profitability and cash flow profile consistency is materially different. Have you guys ever considered beginning to introduce, say, a modest dividend to return more cash to shareholders as another metric?

Speaker 2

We've evaluated ways to give cash back to our shareholders. At the moment, we still believe that share repurchases is the best tool for us. We've evaluated that internally and externally as well with some advisors. Having said that, as mentioned in the prepared remarks, over the next few years, we're going to be focusing more on internal investments. We're going to focus more of our attention and prioritize that than share repurchases necessarily. Although, as mentioned, of course, we will be opportunistic, or I should say rather continue to be opportunistic in doing so. That is why we have the authorization expanded by the board. We will continue to be opportunistic. We have evaluated dividends. We still believe that share repurchases is our best tool at the moment. Does that answer your question?

Speaker 7

That does. No other questions. Thank you, guys.

Speaker 2

Fantastic.

Speaker 0

Thank you.

Speaker 7

Thank you.

Speaker 6

Our next question coming from the line of Goshi3 with Singular Research with Yolanda Smelvin.

Speaker 2

Good morning. Can you hear me?

Speaker 0

We can.

Speaker 2

Thank you. My first question is, looking at the sequential change in gross margins between Q2 and Q3, is that entirely due to mix shift within the IC segment, or is there some ongoing cost inefficiencies associated with the recent buildout? It'll be a combination of everything, but the biggest factors would be just a mixed overall business mix, primarily in Asia, that's causing that. Okay. On the new technology lab with the multibeam mask writer in Idaho, can you give us any update on customer adaptation, qualification timelines, whether this new capacity is translating to tangible audit visibility for customers?

Speaker 0

Sure. I can make a couple of comments. The qualifications are well underway there. We have, let's say, three to five customers already qualified on it. We're ramping the utilization of that. It's a nice mix of customers on that tool. Some are very, very leading-edge products, EUV, that sort of thing. Others are customers we have qualified on our single-beam tools, and we're providing additional capacity to them and capability to them with the multibeam, particularly in write speed and cycle time. The adoption has been good. We're continuing to work on it. I think we have probably another six months or so to get all of our first pass of customers qualified, but progress is good and the customer reaction has been positive. We should point out it's the only multibeam in commercial mask maker hands in the U.S. The mix in the U.S. is going higher end.

We're getting a lot of interest in the use of this tool, particularly from U.S. customers.

Speaker 2

Gotcha. Given your comments on elevated capex for the next couple of years, a significant portion of your cash is tied up in JVs. How much flexibility do you have to allocate or redeploy those funds for strategic needs or buybacks in the U.S.?

Speaker 0

We control the cash for sure. That's why we consolidated in accordance with U.S. GAAP. We can certainly use that at the joint venture regions, and if needed, we can certainly dividend it out to the U.S., to the corporate office here in the U.S. Of course, if we were to dividend that out, we'd have to give our share to our minority share partner there. We do control the cash. We control when and if we do dividends, and when we do so, we get our share.

Speaker 2

Awesome. Just my last question. With the U.S. government involvement with Intel, does that affect or have any effect on your business or potential in the U.S. market?

Speaker 0

I think maybe you want to talk about that. I'll make a few comments and then I'll share it. I'll pass it over to Chris for his comments. I think, you know, if the government helps Intel, that strengthens Intel. Intel is a customer of ours. If our customer of ours is stronger, that can only be better for merchants like Photronics. I'll pass it on to Chris for additional comments. Yeah, I mean, we have a pretty strong product portfolio in the U.S. that's used by U.S. government entities, so-called full trusted products in both Allen and Boise. To the extent, you know, the government investment pushes Intel in the direction of supplying more government-related ICs and things like that, that's helpful for us because we're qualified to build those. It could lead to some more outsourcing. Generally, I just echo Eric's comments.

Anything that helps Intel to be stronger and also more committed to designs in the U.S. region is going to be beneficial for us because we're the only high-end commercial mask maker in the U.S. today. That will be generally beneficial for us.

Speaker 2

Awesome. That's all I had. I'll take the rest offline. Thank you, guys.

Speaker 0

Thank you, Goshi. Good talking to you.

Speaker 6

Thank you. I'm showing there are no further questions in here at this time. I will now turn the call back over to Ted Moreau for any closing remarks.

Speaker 5

Thank you, Livia. Really appreciate everybody joining the call today. We appreciate your interest in Photronics. I look forward to connecting with everybody throughout the quarter. Have a great afternoon. Thank you.

Speaker 2

Thank you, everyone. Thank you.

Speaker 6

This concludes today's conference. Thank you for your participation, and you may now disconnect.