Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Photronics Inc (PLAB, Financial) reported a non-GAAP EPS of $0.51, higher than last quarter and the same as last year.
- The company continues to generate strong operational cash flow, providing flexibility for growth investments and maintaining a strong balance sheet.
- Photronics Inc (PLAB) announced an increase in its share repurchase program to $100 million, indicating confidence in its financial health.
- The company is exploring several growth options, including strategic expansion and partnerships in the US, Europe, and Asia.
- Photronics Inc (PLAB) has a strong market position in high-end IC and FPD segments, with significant market share in Taiwan, China, and Korea.
Negative Points
- Third quarter sales were lower than expected due to soft demand from foundries and customer concerns about elevated inventory.
- Gross margin decreased compared to the second quarter due to lower revenue.
- Operating expenses were slightly lower, but the overall operating margin compressed by 110 basis points to 24.7%.
- The company experienced a decrease in high-end logic mask orders, impacting overall sales.
- Market softness across both IC and FPD segments led to a 3% sequential decline in third-quarter revenue.
Q & A Highlights
Q: 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?
A: 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.
Q: 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?
A: 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.
Q: 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?
A: Sure. So our SG&A was primarily increased due to professional services fees that were incurred during the quarter.
Q: Any update on the General Counsel dismissal? And does that have any impact outside of the -- (multiple speakers)
A: No, no, there was really no impact to our financial results. No significant impact, I should say. No update further than that, though, at this time.
Q: 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?
A: 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.
Q: 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?
A: 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 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.
Q: I assume that you have a bit of a technology advantage over some of your newer peers in that space as well?
A: 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.
Q: What are the key factors driving the sequential decline in revenue, and how do you see the demand environment evolving in the near term?
A: 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.
Q: Can you provide more details on the share repurchase program and the rationale behind increasing it to $100 million?
A: 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. We believe this is the right time to restart our share repurchase activity and enhance our capital allocation framework.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
