Photronics, Inc. (PLAB) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen, and welcome to the Photronics First Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded, Wednesday, February 24, 2021. I would now like to turn the conference over to Troy Dewar, Vice President of Investor Relations. Please go ahead. Troy Dewar: Thank you, Joan. Good morning, everyone. Welcome to our review of Photronics 2021 first quarter financial results. Joining me this morning are Peter Kirlin, our Chief Executive Officer; John Jordan, our Chief Financial Officer; and Chris Progler, our Chief Technology Officer. The press release we issued earlier this morning, along with the presentation material which accompanies our remarks, are available on the Investors section of our web page. I would like to note, the press release had inadvertently omitted the bottom half of the balance sheet. The version on the page is correct, and we will be correcting the press release. Peter Kirlin: Thank you, Troy, and good morning, everyone. We achieved sequential growth in the first quarter, defying seasonal trends as demand improved across many sectors. The most notable improvement was observed in the high end FPD, with strong AMOLED demand for new mobile displays led the increase. High end IC was modestly lower, with slight improvements in mainstream IC and FPD. Typical seasonality indicates that Q1 revenue would decline sequentially. So an increase of 2% demonstrates solid performance by our global team. John will offer more insights into the details shortly, but I’d like to make some general observations on what we’re seeing in our markets. Over the last 18 to 24 months, there have been tremendous supply chain disruptions, driven by a combination of trade policies and economic lockdowns resulting from COVID-19. In our view, these government mandates moved the market in ways that were not easily anticipated. In some cases, the impact has been positive for industry, such as the trend to do more of what we do every day remotely, spurring demand for work from home electronics. Conversely, many automotive manufacturers suspended or severely curtailed vehicle production last spring. When automobile manufacturing recently returned to normal levels, some of the capacity had shifted to work from home applications, with then in effect being chip shortages. The semiconductor industry is quickly reacting to these demand dynamics, creating what we believe to be an inventory-driven semiconductor upcycle. Pending the installation of additional capacity, particularly at the high end logic nodes, semiconductor manufacturers are focusing their resources on increasing output of needed chips, and not on releasing new products. Therefore, new design activity has been constrained and would to us, resemble the semiconductor industry cycle of old, where the upturn in our business lags the capital equipment suppliers by one to two quarters. Once the new tools are installed with the resulting capacity online, as inventory levels are replenished, the dam breaks and a wave of new design flows. John Jordan: Thank you, Peter. Good morning, everyone. Revenue improved 2% compared with the fourth quarter, as growth in FPD was partially offset by a decline in IC. FPD growth was driven primarily by AMOLED displays for advanced smartphones. We've communicated over the last few quarters that the US ban on Huawei had an impact on our display supply chain, as design activity stopped while they reacted to the new restrictions. This affected our fourth quarter FPD results, as panel suppliers had not required new masks for Huawei phones. During the first quarter, we saw this disruption ease and AMOLED demand return, as new phones produced by other manufacturers made their way to the consumer. I also want to note, FPD demand for LCD masks, including G10.5 plus, remained depressed as panel producers took advantage of favorable markets and the dynamics by maximizing output of colored product and not releasing new panels. IC revenue was down slightly compared with the previous quarter, as an increase in mainstream and memory growth was offset by reduced high end logic demand, partially due to the industry dynamics Peter mentioned earlier. In addition, one of our high-end writing tools in Taiwan was down for an extended period, as travel restrictions delayed the repair and return to production. On a year-over-year basis, many of the trends we saw were similar to the sequential trends for the larger decline in high-end logic, and a smaller increase in smartphone displays. Looking forward, there's a plethora of positive data points for our industries that suggest photomask demand should increase in 2021. That, combined with the additional capacity we plan to bring online during the second half of the year, gives us confidence in our outlook for 2021 of high single digit percentage revenue growth and operating profit growth, similar to the 23% growth we achieved in 2020. Gross profit for Q1 was 20% lower than the previous quarter in previous year, driven primarily by unfavorable product mix, which we expect to improve as high end logic demand returns. Operating expenses were higher sequentially, which is not unusual for the first quarter and within our expectations as a percentage of revenue. Below the operating income line, net effects of other income, tax provision, and non-controlling interest, were more favorable than comparable periods, resulting in earnings per diluted share of $0.13 for the period. Our cash balance at the end of the first quarter was $279 million, essentially unchanged from the beginning of the quarter. Operating cash flow was $26 million, and we spent $18 million on CapEx. For full fiscal year 2021, we're still forecasting approximately $100 million in CapEx, as we execute on the next phase of FPD capital investments. We repurchased 1.2 million shares of our common stock for $13 million during the quarter, leaving approximately $69 million remaining under our current share repurchase authorization. On the balance sheet, total debt increased by a net of $33 million, which includes a new equipment lease. Operator: Your first question comes from the line of Tom Diffely with D.A. Davidson. You may now ask your question. Tom Diffely: Yes. Good morning. I guess I first wanted just to look into the mainstream market for you. Obviously it's still a big part of your revenue. What are you seeing as far as industry capacity, and what are the pricing trends and growth trends you see there? Peter Kirlin: Yes. Our mainstream - the mainstream market right now, particularly in Asia for us, is very strong. So our capacity in Korea, Taiwan, and China, it was sold out in the current quarter, US and Europe not. But throughout Asia, we're in an oversold situation. And if you look relative to historical behavior, probably the first time in my 35 years anyways, where I see, or we see, significant investment being made in legacy nodes. Never seen that before. So the market is oversold for photomasks, and there's more capacity coming online. Tom Diffely: Okay, great. That’s … Peter Kirlin: Yes. Obviously we like that trend, right? We really like that trend. Yes, we like that trend. Yes. Tom Diffely: Okay, great. Thanks, Peter. And then maybe as a follow-up, you talked about $40 million of annual contracts right now with a few large flat panel customers. When you look at phase two, do you typically get into those contracts ahead of time? And so they're kind of in place for when you spend the money to put in another line or what are the dynamics there for a new line going in? Peter Kirlin: Yes. It's a mix of the two. As far as our FPD business is concerned, just remind you that for a couple of years running, we were sold out in our FPD business. Q4 - on the Q3 call, we said we expected Q4 not to be sold out, which was for us a dislocation. And indeed it happened as we expected it would. Then when we got on the Q4 call and then our Analysts Day a day or two later, what we said was, November was a month of - still a month of grim market, and that December, by the time we had those calls, we were able to sell our capacity. And that obviously continued through the quarter. So our FPD revenues this quarter reflect one month of kind of crappy market and two months, not a - what I would describe as a strong market, but strong for us because of our position, particularly in AMOLED. So if we project forward, as I said, we expect a lot of AMOLED capacity to come online, particularly in China, right? We estimate for our customers a doubling more or less from the beginning of the year to the end. And we're bringing this capacity online right into the midst of the capacity ramp, which the service, I think very well. So what we - the tools are - so if you look at our AMOLED, there's three lento tools. Two are slated to be delivered in the current quarter. Because of the short qualification cycles, we expect to ramp both of those tools in the third quarter. By the fourth quarter, they should be fully sold out. We’ll sit with - basically, we think as soon as we can get them online, they're going to be sold out. The third tool is being installed in the third quarter. So by - it should be ramping into the fourth quarter. So anyways, the AMOLED capacity we're installing this year, as soon as it comes online, we believe we should be able to fill it. And the entire factory for the rest of the year, we believe should be fully sold. So we're feeling good about AMOLED and what should constrain our revenues is our ability to install and ramp those new tools, right. So, yes, and unlike - John made some remarks. If you look at our global cost structure, right, the capacity additions we're making this year, were more or less point tools, not lines. So point to installations have more financial leverage than when we have to do what we just did in China, right, which is build factories and install lines that where the lion's share of the CapEx there is not fully utilized. So the second way then interface should help us effectively grow into and fully leverage our cost structure there. Yes. Tom Diffely: Okay, great. Maybe if I just squeeze one more in for John. When you look at the single digit revenue growth, but the 23% or so operating leverage, is that just kind of normal operating leverage for you? Or is it some special things going on this year that creates a little bit higher leverage than you would normally see? John Jordan: No. Tom, we should see OpEx improve as a percentage of revenue through the year. First quarter is generally kind of tough one with OpEx, with employer taxes, et cetera, reinstating. And then with our regular - our normal operating leverage through the rest of the year, we should be pretty comfortably within the range that we discussed, the 20 - mid - low to mid 20%. Tom Diffely: So the increase of these new tools doesn't ramped up your COGS meaningfully? John Jordan: We only start depreciation as we qualify and start generating revenue from those tools. So we have a fairly close match of depreciation with revenue and it's a smaller portion of the depreciation coming on. So our operating leverage will still be 50% or better. Tom Diffely: Great. Okay. Well, thanks for your time today. Operator: Thank you. Your next question comes from the line of Patrick Ho with Stifel. You may now ask your question. Patrick Ho: Thank you very much. Peter, maybe first off in terms of the high end main - excuse me, high-end IC business that you talk about recovering, are you seeing it - where are you seeing in specific markets of this potential recovery? And could it be a steep ramp when it does finally recover? Peter Kirlin: Yes. So, Patrick, great. I see, we have a really strong global team that reacts - that has reacted and does historically, and continues to react very quickly to shifts in the markets. And likewise, it's a very seasoned team. So if we look in our memory business, for example, John commented on it, it snapped back just like you would expect in a normal upturn. So boom, memory business full on, so traditional. Logic business, different story, right? We've talked about the mainstream where over the last two to three years and over the next, certainly one to two years, we see new capacity coming online. So the mainstream market is oversold like I've never seen in 35 years, oversold, and likely stay that way. On the other hand, if you look at the high end logic, I think it’s - you know well, right, there's a problem there, not for our customers, but for their customers, because there's a shortage of high end logic capacity I think that now is well understood. So the capital equipment guys, right, are selling a fistful of tools, right? I think we have bookings of $3 billion, right, in a month in January. I don't think that's ever happened before. And those tools are largely - many of them being installed in the Asian foundries, which right now are running the current designs in general quite hard, trying to keep their customers happy. So yes, if you look at how the high end logic market is behaving, it looks like to me, it kind of cycles I saw 15 years ago where the business would turn up, right? The customers would react to the upturn in business by building current products. And then as they added capacity, we would see a significant uplift in our business, because now inventory is starting to build a little. People are more comfortable. The new designs that they kept on the shelf for a quarter or so, break out. That's what - the whole business, when it was more diversified with many more manufacturers, looked like. 15 years ago, that was a classic cycle for the entirety of our business. We see that classic cycle now. We haven't seen it for at least 10 years, but we see it now in the high end logic sector. The designs, they're sitting there. They’re going to get released, and they're going to get released when our customers are doing a better job at keeping their customers happy. So yes, that will be likely a steeper step up, and it'll be reminiscent of the days of old. So what we see this year is every quarter successively being a better quarter. That's what we see both in our FTD and our IC businesses. That's what we said during our Analyst Day. That’s what we said on the last call. And the only thing that's happened really to change our view between then and now, is the information flow is incrementally more positive. So yes, it's an interesting time, right, with markets doing and behaving in different ways. But if you look back over many years, each warranty you look at, you can see the reasons for why what is happening is happening. So it's an interesting fluid time, but there's lots of opportunity there I think for us quarter-by-quarter. And the capacity we have coming online when we bought it - when we made the purchase decisions, it wasn't completely clear what was going to happen, but generally I think we have the right pieces on the board, in the right places to maximize the financial outcome of the current trends in the various markets we participate in. So we're feeling pretty good about the business and about the markets this year, for sure. Yes. Patrick Ho: Great. That's helpful. Peter. And maybe as a follow up question, you talked about the strength in the mainstream IC business, which again, is not a major surprise, given the market environment we're in today. Maybe relating to some of the comments you made about high-end ICs and how historically it's been driven by new design and wins, aside from the strong demand and the need for new masks to keep up with the main trends out there, are you seeing any new designs on the mainstream IC? And what I'm trying to get at that is, we're seeing more Silicon content in markets like automotive. There are also other types of, again, Silicon content increases in different marketplaces. Are you seeing any design wins on the mainstream IC side? Peter Kirlin: Yes. That - the answer is yes, right? So I think most - nearly all the automotive applications are not high end, or at least the way we define high end is 28 nanometer and below. The automotive applications, the high end of automotive might touch, right, the 28 nanometer node, but in general, it's older, what we would call older nodes. So this is a market where historically, when you saw an upturn, the business would get better, but there wouldn't be new capacity coming online. I think it's very clear, right, that now and for the last year or two, there's been - there are investments being made in new mainstream sets. And those investments are being driven by increased demand at those nodes, just for the existing products, but for new ones. And I think the point you made, right, a new car I think today has $800 of Silicon content in it on average. And if you go to a high-end car, it's much more. And as we go - shift from the internal combustion engine to the hybrid and electrification model, there's going to be a boatload. Power electronics, that's all mainstream. all. I mean, some of the chips are a couple of inches in diameter, right, for the switching electronics. So this - what's going on in the automobile industry is going to create dislocations in our industry that we don't think any of us have ever seen. So - and you could see the CapEx being adjusted to - in advance of it. So yes, this is - it’s interesting times Operator: All right, your next question - all right. Your next question comes from the line of Gus Richard with Northland. You may now ask your question. Gus Richard: Yes, thanks for taking the question. Just in terms of the gross margin in the first quarter was down to 130 bps sequentially, and you had some tools down. I know it was a weaker mix. Could you parse those out and just give us a little bit of guidance as to which was the bigger impact or the mix between those impacts? John Jordan: Yes. I don't know that we would say one is bigger than the other. We had the decline in the high end IC, which - and we have a slide, kind of lower geometry product up to a higher level machine. And then in FPD, we had some unabsorbed overhead. So I don't know that I'd weigh one effect on the margin more than the other. Gus Richard: Okay. And then in terms of - it sounded like some of your competitors are adding capacity for mature markets. Given most of the equipment in the market is fully depreciated, can those new assets be competitive at current prices and be profitable? Peter Kirlin: No. I mean, I think what - so, to just go back and clarify one of John's comments. So we saw high-end logic demand leap. So what we did is we - and mainstream demand very strong. So what we did was we split - we basically split our capacity where we took basically - we kind of moved everything to tool up to heat - to do our best to try to maximize our market share. As the high end demand resumes, we'll push that all back down. You can see the effect on our margins, right? And anyone who tries to do the same thing is going to have the same outcomes, right? To the extent we use a more expensive tool to bring - build lower ASP product, your margins are going to get compressed. And today, it's not feasible to buy a new mainstream line and have it make money at current pricing. It’s not feasible. But what the industry will do is what we are doing and what we planned for last year. And that is, if you look at our maintenance CapEx, it’s largely targeted at the mainstream market, and it's there to debottleneck the lines that we - existing lines that we have. So we can get a little financially viable capacity uplift in the mainstream by putting the right tools in the right location. But what can we squeeze out? I don't know, another 10%, maybe 15% about, and then we're done. And I think our competitors are in a very similar situation. They can do what we're doing at a point tool to align, gain incrementally more capacity, but then they're going to be done. So - and the consequences of that pricing, which I think you've highlighted is, prices have to go up, and they'll go up until you can add new capacity and make money, right? How much that is, I don't think we’ve run models, but it's not small. Gus Richard: Got it. So what you're painting a picture of is, as the high-end fills up in the back half and designs are released, you're going to see a significant uplift in utilization in both mature and high-end and prices should go up, and this should be a very fair bull trend for margins walking through the year. Peter Kirlin: Yes. Basically, we'll be - we'll fly the mainstream business down off the high-end tools and refill those tools with the high-end logic in Asia. That’s one trend. Another trend is, it's undeniable that prices will start to - are starting. In fact, we started after Chinese new year with select customers where there - to start to raise mainstream pricing. I've been doing this for 35 years. I've never been able to do that before. So, but - and I - we can do it. We can do that because everybody is sold out. Everybody, not just Photronics, everybody. Gus Richard: Got it. And then last question, climate change. There was this cold snap in Texas, a lot of water damage, power out, et cetera, et cetera. I think you have a plant in Round Rock. And I was just wondering, was that plant impacted? Is it back up and running? Just any color there? Peter Kirlin: Yes. So yes, both we and our largest competitor have factories in Texas, and we were both impacted. Their factory was down for a week. Our factory was down. We were all flying based on loss of power for about a day, and the impact of that loss of power, more or less depressed output for the best part of a week. So we lost about half of our output as a result of the dislocation in the power grid. So on one hand we're happy we outperformed our competitor, who was down hard the entire period. On the other end, it did have an impact on our revenues, and that's already been baked into the guidance. So there's nothing that we yet know of beyond that that you don't already see the financial consequences of. So, yes, it wasn't a good - wasn't good for us. It was worse for our competitor. Of course, we have several significant customers in Texas, in particular NXP, which was the old pre-scale, which was the old Motorola and Samsung, both - and also Infineon. All three offline for - basically for a solid week, and now trying to recover production. Gus Richard: Got it. And then the last one … Peter Kirlin: We did better. We did better than all, but we were still affected. Yes. Gus Richard: Yes. And then just last one for me. You’ve had some issues getting things installed, repaired because of quarantine and COVID. Are those issues behind you at this point, or are you still struggling to get vendors in to do stuff? Peter Kirlin: Yes. So the problems with installations, we hope are behind us. Different - but we think the installation issues are behind us, because there's kind of one category of vendor that has struggled more than others regarding COVID. We’re still going to have I think some issues related to the inability - the travel constraints imposed by COVID, because not every vendor for the photomask industry has fully capable people in all the regions where we operate. So, this is going to be kind of a nagging headache for another quarter or two, but as we're already seeing with infection rates dropping, as the vaccination cross section of the countries we do business in increases, the problems we've been fighting for us, right. It started in, I’ll say more than a year ago. We’ve been fighting with these struggles for a year. I think we've done a very good job at mitigating the impact, but we kind of see a tail that'll last another quarter or two. So, and the good news is, is that that high end, it's a 9K in Xiamen. That's a very high end e-beam, right? That was delayed. The installation, the final acceptance of that tool was at the end of - or was beginning - was the end of October, the last day of October. So we've been working to qualify that tool. And as the qualification period is completed, it should ramp right into what we think is the ramp in the high end logic market. Now, that might be lucky. I don't know, but the tool was always intended for Xiamen, and the rest of the costs that are needed to support that tool is already dragging our income statement. And once that tool is installed, the leverage of it financially should be high, right? So anyways, the fact that it was delayed isn't the worst thing in the world, given the softness in the high end logic market we're presently seeing. So maybe we got lucky on that one. Yes. Gus Richard: Yes. Got it. Okay. Thanks so much. Operator: Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to Peter Kirlin for closing comments. Peter Kirlin: Thank you for taking the time to join us this morning. We truly appreciate your interest. Photronics is well positioned to grow revenue, earnings, and cash flow this year, extending our marketing and technology leadership positions, and moving us towards our long-term financial targets. Look forward to updating you on our success as the year progresses. Operator: All right. Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.PLAB Ratings Summary
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Photronics, Inc. Q2 Fiscal Year 2024 Earnings Report Highlights
- Photronics, Inc. reported EPS of $0.46 and revenue of $217 million, missing analysts' expectations.
- The company faced challenges including soft demand post-Chinese New Year and impacts from earthquakes in Taiwan, leading to a revenue impact of approximately $3 million.
- Despite these challenges, Photronics maintained its gross margin and demonstrated financial resilience with a P/E ratio of 12.13, a P/S ratio of 1.88, and a strong liquidity position with a current ratio of 4.32.
Photronics, Inc. (NASDAQ:PLAB), a key player in the photomask technology sector, reported its earnings for the second quarter of the fiscal year 2024 on May 22, 2024, before the market opened. The company announced earnings per share (EPS) of $0.46, which did not meet the anticipated $0.55. Additionally, its revenue for the period was $217 million, which was below the expected $231 million. This performance indicates a shortfall in meeting analysts' expectations for the quarter.
During the earnings conference call, Photronics' leadership, including CEO Frank Lee and other top executives, discussed the company's financial performance and future outlook. The call revealed that the company faced challenges such as a temporary soft demand post-Chinese New Year and significant impacts from earthquakes in Taiwan. These events led to a production loss in both the IC and FPD sectors, causing a revenue impact of approximately $3 million. Despite these challenges, the company managed to maintain its gross margin, demonstrating resilience and efficient global team response under difficult circumstances.
Photronics' financial metrics provide a deeper insight into its valuation and financial health. With a price-to-earnings (P/E) ratio of approximately 12.13, the company appears potentially undervalued relative to its earnings. The price-to-sales (P/S) ratio of about 1.88 suggests a reasonable valuation of the company's shares in relation to its sales. Additionally, the enterprise value to sales (EV/Sales) ratio of around 1.30 and the enterprise value to operating cash flow (EV/OCF) ratio of approximately 3.70 highlight an attractive valuation and efficiency in generating operating cash flow.
The company's debt-to-equity (D/E) ratio is notably low at about 0.02, indicating minimal reliance on debt for financing, which is a positive sign for investors concerned about financial leverage. Furthermore, with a current ratio of approximately 4.32, Photronics showcases strong liquidity, ensuring it can meet its short-term obligations. This financial stability, combined with the company's ability to maintain gross margins despite facing significant challenges, positions Photronics as a resilient player in the photomask technology sector.
