Good day, and thank you for standing by, and welcome to Photronics Fiscal Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] 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.

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 are 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 we'll 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.

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 leveraged our legacy as an efficient photomask provider, critical to the manufacturer 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 continued 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 3 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're 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 cleaning facility in Texas for capacity and capability extensions to service increased demand for U.S. midrange nodes. We're also elevating our leading edge production capabilities in Idaho with the installation of a new multi-beam 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…

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 recognized 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 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 a greater contributions from our operations in the U.S. and Korea. During the third quarter, we generated $15 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…

[Operator Instructions] And our first question coming from the line of Tom Diffely with D.A. Davidson.

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?

Tom, Eric here. Yes, we see the mix in the fourth quarter to be similar to that of the third quarter, correct.

Okay. And then you've 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?

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

Okay. And 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?

Well, no. So 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 United States.

Okay. And maybe just a quick question on the investments you're about to make. When you look at the multi-beam 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?

So it would be for the higher end nodes or the -- yes, the higher end nodes for customers similar to what you mentioned there, including Samsung, which we've talked about that 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.

Okay. And then last question. When you look at the potential to move down to the 6-nanometer, 8-nanometer node in Asia. Does there -- is anything 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?

Alright. So our restrictions for those type of nodes would be in China. And these are -- 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, we have Korea footprints there. So it could be at any of those sites.

Our next question is coming from the line of Christian Schwab with Craig-Hallum Capital.

Congrats on the great quarter and guide. Just a follow-up on the 6-nanometer to 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. Can you give any clarity regarding that, that would be great?

Chris, Chris, you can take -- perhaps take that Frank or Chris, either?

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

Fantastic. And then regarding your CapEx, which -- go ahead.

Yes. 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 [indiscernible]. So it's a customer-oriented. It depends on the customer demand. And I think our investment will be -- in combined with customer captive outsourcing future demand. So I think the product/mix is very complicated. And it's a mix with different kind of products, including logic and memory.

Great. And following up on that, do you see your move smaller IC nodes, which is smaller than you historically have operated in? Does that represent a potential market share gain opportunity for you over a multiyear time frame? Is that the way we should be thinking about it?

Yes. This is Chris. We do see that opportunity for market share gain. Right now, those nodes, say, 6-nanometer, 8-nanometer, the commercial mask makers, merchant mask makers, are fairly recent entries into those nodes. So 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're already capable of servicing nodes to the 6-nanometer, 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.

Fantastic. And then regarding your CapEx at $200 million elevated above your historical percentage range of aggregate revenue, if you will. And these investments, not only in Asia, as you highlighted, but also in Texas and Idaho is -- 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?

Yes. This is George. Basically, we're looking at about a 3-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. So part of it is end of life tool replacement, which again gives us extra capability, but also its investments, 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. But basically, that's the -- what we're looking at is future higher nodes and the life tool replacement, but also giving us some more capability with those replacement tools.

Great. And then 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 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?

It will linger a little bit longer than that. We're basically not trying to do it all in 1 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 midrange investment because we have Boise for the high end, but it's more of a combined end of life and future investment for the next few years. I think after 3 years, we'll be more normalized because that end of life tool cycle will be behind us. It's not something we would want to do in 1 year anyway because it is -- it can be disruptive to some degree.

Correct. I understand. All right. And then as we think about the flat panel display business. There's pretty optimistic third-party research, talking about the migration to Gen 8.6 for obvious reasons of thinner, lighter, flexible, et cetera, of around a 15% CAGR for many years to come. Is that a market that as far as a growth rate where you think that you are extremely well positioned to capitalize on, and actually maybe outperform the aggregate growth rate of the industry?

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

Right. And then our work in directionally, probably accurate, but probably not an exact percentage. But 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?

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 asset build the G8.6. Yes, 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. But generally, we do expect ASP to be higher. We expect margins to be better. But we really don't think we should comment on specific numbers and percents at this point.

Great. And then 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 percentage 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?

We've evaluated ways to give back -- 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 advisers. Having said that, I would say that over the -- 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 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 and doing so, and that's why we have the authorization expanded by the Board. But 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?

That it does. No other questions.

Our next question coming from the line of Gowshi Sri with Singular Research.

Can you hear me?

We can.

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 IT segment? Or is there some ongoing cost inefficiencies associated with the recent build-out?

It will be a combination of everything, but the biggest factors would be just a mix -- mix -- overall business mix, primarily in Asia that's causing that.

Okay. And on the on the new technology ramp, with the multi-beam mask writer in Boise, can you give us any update on customer adaptation, qualification time lines, whether this new capacity is translating to tangible order visibility for customers?

Sure. I can make a couple of comments. Yes, Gowshi, the qualifications are well underway there. We have, let's say, 3 to 5 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 multi-beam, particularly in right speed and cycle time. So the adoption has been good. We're continuing to work on it. I think we have probably another 6 months or so to get all of our first passive customers qualified, but progress is good and the customer reaction has been positive. We should point out, it's the only multi-beam and commercial mask maker hands in the U.S. So the mix in the U.S. is going higher end. So we're getting a lot of interest in the use of this tool particularly from U.S. customers.

And given that 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.?

So we have -- we control the cash for sure. That's why we -- 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 the -- to our minority share partner there. But we do control the cash we control when we -- when and if we do dividends. And when we do so, we get our share.

Awesome. And then 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?

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 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. But I'll pass it on to Chris for additional comments.

Yes. And 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 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. So it could lead to some more outsourcing. But 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. So that will be generally beneficial for us.

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

Thank you, Olivia. Really appreciate everybody joining the call today. And we appreciate your interest in Photronics. I look forward to connecting with everybody throughout the quarter, and have a great afternoon. Thank you.

Thank you, everyone. Thank you.

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