Photronics, Inc. (PLAB) Q3 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Photronics Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, 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 2026 Financial Results. Joining me this morning are George Macricostas, Chairman and Chief Executive Officer; Eric Rivera, President and Chief Financial Officer; and Frank Lee, Senior Executive, Asia. The press release issued earlier this morning, along with the presentation materials accompanying our remarks is available on the Investor Relations section of our website and in the Form 8-K filed with the SEC this morning. This call includes forward-looking statements that involve risks and uncertainties, which could cause Photronics results to differ materially from management's current expectations. We encourage you to review the forward-looking statements disclosure included in our earnings release and in our most recent 10-K and subsequent filings. In the coming months, we will be participating in the following investor conferences: Three Part Advisors in Chicago, Lake Street Capital in New York and the CEO Summit at SEMICON West in San Francisco and SEMICON Europe in Munich. With that, I will now turn the call over to George.

Thank you, Ted, and good morning, everyone. Total fiscal Q3 revenue of $216 million increased 3% year-over-year and was above the high end of our guidance range. Our fiscal third quarter results reflect the recovery of some of the semiconductor design releases that were delayed and pushed out of our fiscal second quarter. We began to recognize some of this recovery during the month of May as we had previously communicated during our Q2 earnings call. This gradual recovery continued through the remainder of fiscal Q3. As discussed during our prior earnings call, we indicated that delays in new semiconductor design releases were driven by several factors, including elevated fab utilization rates, memory constraints and geopolitical uncertainty. While these factors continue to affect the photomask industry, some design releases have moved into production. With semiconductor wafer utilization rates remaining high, fabs are prioritizing higher profitability projects and expanding capacity at higher technology nodes. These node migration actions, especially at 28-nanometer, 22-nanometer and 14-nanometer, are occurring across a broad set of customers in different geographic locations. Node migration and a sequential improvement in high-end business conditions benefited our high-end IC business, which recorded a record 44% of IC's $155 million in revenue. Our ongoing regionalized investments in the U.S. and Korea remain on track. At our Allen facility, we continue to target initial revenue late this fiscal quarter with its geographical diversification contribution reflected in fiscal 2027 revenue and beyond. In Korea, clean room preparation for the expansion project to 8-nanometer has been substantially completed. Having received some of the initial tools, the timetable for planned installations remain on schedule. These investments are expected to position Photronics to benefit from node migration and regionalization trends as we diversify geographically. Increasing our capabilities and capacity at the faster-growing high-end portion of the market also expands our potential to capture opportunities from a variety of customers, including captives as they look to increase outsourcing. As we remain on track to deliver more advanced 8-nanometer capabilities in Korea over the next 1.5 years, we are further advancing our global technology capabilities beyond 8-nanometer with a focus on EUV, customer partnerships and other mask technologies. Over the past several years, we have been leveraging partnerships with industry leaders to supply EUV R&D masks and solutions to customers while the full turnkey EUV merchant market develops. We have also supplied EUV-related masks to the semiconductor equipment supply chain. Through focused internal R&D programs and capital investments and the expansion of business partnerships, we intend to gradually introduce new EUV capabilities. This pragmatic EUV strategy should expand our addressable market at the high end. Our intentions are to manage the EUV investment cycle by expanding our EUV capabilities as the associated business opportunities emerge. Turning to FPD. Revenue of $61 million remains near all-time highs, reflecting our strength in producing more complex masks. Strong OLED demand was driven by consumer electronics such as flagship and high-end smartphones scheduled for launch in developed markets in the coming months. This high-end FPD demand is expected to continue through fiscal Q4 and beyond. We received additional G8.6 AMOLED orders from a growing customer base, an indication that the G8.6 market is broadening. Combined, these high-end projects are expected to be offset by consumer electronics for the emerging markets where the tight memory conditions have disrupted some product launches. Our most advanced FPD writer, which was installed earlier this year entered mass production during the quarter. It has received strong market traction as it aligns well with our customers' technology road maps. We expect this writer to remain a pivotal tool in strengthening our market-leading position in the high end of FPD mask market. I now turn the call over to Eric to review our third quarter results and provide fourth quarter guidance.

Thank you, George. Good morning, everyone. Fiscal third quarter revenue came in at $216 million, an increase of 3%, both year-over-year and sequentially as we recognized some recovery from the semiconductor design release delays that had occurred during our fiscal second quarter. Overall, we experienced improved demand conditions in Taiwan, along with the U.S. and Korea, particularly at the high end. IC revenue of $155 million increased nearly 5%, both year-over-year and sequentially and represented 72% of total revenue. The high-end portion of IC represented 44% of IC revenue, recovering as business conditions improved and wafer fabs prioritized more profitable chip designs, accelerating node migration trends. Our mainstream business declined to $86 million due in part to node migration trends. Node migration from mainstream to high end is an overall positive to the company as it is a natural evolution to higher ASPs per chip design. We are expecting mainstream to increase in the U.S. in fiscal 2027 as we expect to capture market share at higher-end nodes once the Allen expansion is complete. Turning to FPD. Fiscal Q3 revenue of $61 million declined modestly in the quarter, though remains near all-time highs. Customer activity in Korea for high-end consumer electronics remains strong, while China demand was influenced by the timing of certain consumer electronic releases for emerging markets that are being impacted by the industry's tight memory conditions. Overall, gross margin of 33% improved sequentially on product mix and increased revenue and the associated operational leverage in our financial model. Operating margin was 21% and diluted GAAP EPS attributable to Photronics shareholders was $0.49 per share. Excluding foreign exchange impacts, non-GAAP diluted EPS was $0.50 per share. The improved performance of our IC business, along with our display operations remaining near all-time highs contributed to our earnings during the quarter. Operating cash flow of $76 million represented 35% of revenue. CapEx was $37 million. Fiscal year-to-date CapEx of $130 million reflects the timing of outlays associated with $330 million of CapEx we have been guiding to for fiscal 2026. We are updating our fiscal 2026 CapEx guidance to a range of between $255 million and $305 million. We remain committed to the projects and time lines driving our original $330 million CapEx guidance. However, the cadence of orders and vendor delivery of certain high-value tools to our fabs can vary, causing the timing of our capital expenditures to fluctuate. To the extent any planned spending shifts beyond this fiscal year, we would expect it to carry over into fiscal 2027. I will provide fiscal 2027 CapEx guidance during our fiscal Q4 earnings release in December. Total cash and short-term investments increased by $35 million in the quarter to $673 million, including $504 million held within our joint ventures in which we hold a 50.01% ownership interest. As we consider the cash needs associated with our planned investments, we are starting from a position of significant financial strength with a strong balance sheet and a business that generates substantial cash from operations. With customers demonstrating a willingness to partner with us, we believe we are well positioned to make these investments while maintaining a disciplined approach to achieving attractive returns. To support these investments, which also include our EUV investment strategies George discussed earlier, we may supplement our existing liquidity through borrowing. As a reminder, our capital allocation strategy remains focused on 3 priorities: reinvesting in the business to support organic growth, pursuing strategic opportunities and returning capital to shareholders. We will continue to evaluate the most effective use of our cash and remain disciplined and opportunistic in our capital allocation decisions, prioritizing investments that offer the highest expected returns. Before providing guidance, I'd like to remind you that demand for our product is inherently variable. High-end mask sets carry significantly higher ASPs, meaning even a small number of orders can materially impact revenue and earnings. Because of the tight fab capacity, memory and geopolitical conditions, visibility into the time line of design releases has become even more uncertain as we have recognized over the past 2 quarters. Meanwhile, the order delivery time remains in the days or weeks, requiring rapid response times for our operations. As a result, we are widening our revenue guidance range for fiscal Q4. As of today, we expect fiscal Q4 revenue to be in the range of $207 million to $227 million. Based on those revenue expectations and our operating model, we estimate fiscal Q4 operating margin between 19% and 24% and non-GAAP diluted EPS between $0.40 and $0.56 per share. I will now turn the call over to the operator for your questions.

[Operator Instructions] Our first question comes from the line of Christian Schwab with Craig-Hallum.

Congrats on the solid execution in the quarter. I'm wondering, as we transition to higher node applications, I know you guys talked -- mentioned partnership a little bit more than I remember in previous calls. I'm just wondering if you could elaborate on what type of partnerships that you kind of expect that might help drive future success in more competitive lower node applications, in particular, if that's what you were trying to hit or suggest. I guess it wasn't clear to me.

Yes. The partnership that we're -- or partnerships that we're referring to are specific to EUV.

And then as far as the EUV partnerships, can you just remind me when you would expect to be fully ramped on that technology? I guess -- I'm sorry, I don't know if that was clear to me either.

Sure. Yes. So we are monitoring the merchant market and seeing how it is developing, so that it's effectively economically viable for us to enter it or at least makes sense for us to catch the wave, so to speak, and enter at the right time. That takes a long time to ramp. So we are monitoring that and currently using our partnerships with folks in the industry. And that will -- hopefully, we'll be able to report more on that in quarters to come.

And then as far as the Allen, Texas facility, I think last time you talked about entering qualification mass production and I think initial revenue targets late this year, which seems to be on track. But can you give us an idea or remind us, if you will, of what the potential revenue capacity of that facility fully utilized would be?

Christian, Eric here. So we're not going to get into details as to how much revenue capacity we have there other than to say that we are expanding our capacity beyond what we historically have had, particularly in the higher end of the mainstream. And that additional capacity is helping us in essentially 2 ways. First, it will help us increase the mainstream at the high end for areas that we haven't been servicing up until now. And furthermore, that's also going to help us expand the -- expand Boise's ability to focus on the high end. So it's going to help us in 2 ways, more expansion at the high end of the mainstream and also help us grow our high-end revenues with Boise focusing on that.

So to be clear, we have been servicing the high end out of Boise, and it will be serviced out of Allen is where we're capturing more of the higher end by bringing it out of Boise, sort of the mid -- how I would call, the midrange nodes, like the less critical part of the high end, if you will. We're not talking 14-nanometer. We're talking the midrange nodes, 65-nanometer, et cetera.

Our next question comes from the line of Max Michaelis with Lake Street Capital.

Congrats on the quarter. First one for me, just on the quarter. I know in Q2, you guys had some issues related to design releases being delayed. I know that kind of was what drove the growth in Q3 for high-end IC. I mean, are we fully caught up? Or is there still more to do on that front?

So a lot of the design releases that were supposed to occur in Q2, but didn't. It did, in fact, come across in Q3. So that was particularly helpful for Q3. Having said that, the conditions that were present in Q2 still largely remain, which are high fab utilization rate, high cost of memory and of course, the geopolitical conditions.

Sounds good. And then still relatively new to the story, but just given the focus on EUV, can you help me kind of frame why the focus on EUV now and kind of how much incremental capital spending you guys expect on top of sort of this $255 million to $305 million of CapEx maybe into next year as well, too?

Sure. So with respect to EUV, as George mentioned, on the prepared remarks and -- as well as just on the previous question. We're waiting for the merchant market to develop on EUV before we make significant investments for a full turnkey, we call it internally, which means we'll be able to process every aspect of an EUV mask internally. In the meantime, we have -- we are able to provide those services to our customers via partnerships. But again, it's while we wait for the market to develop. The reason for that is because those are significant levels of CapEx. So we want to make sure that we have the appropriate internal rate of return on those investments before we dive in.

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

Congrats on the high-end recovery. Can you all hear me, though?

Yes, we can, Gowshi.

On the -- on the Allen, when that starts generating revenue in Q4, is that work from new customers, midrange moving from -- moving over from Boise? Or is that -- how much of it is incremental to the company?

So we're not going to necessarily get into much detail, but we currently do service of these customers. So the customers are largely the same with a few exceptions here and there, but they're largely the same. We have provided the services between both sites, Allen and Boise. This will be incremental to Allen, more capacity, as I mentioned in the previous questions. And more importantly, that will also help us grow Boise on the high end.

So on the China side, I know you guys have pointed before that that's now kind of gearing towards the 22-nanometer, 28-nanometer. So was the decline mainly mainstream? Or is there a competition on the high-end business as well?

So China market is competitive as we've discussed before in previous calls, primarily on the -- primarily on the mainstream. We have some local mask houses as competitors, and they're focused on the mainstream. And as a result of the last 1.5 years, 2 years, we have been focusing our efforts on the high end where we have our competitive advantage and technology leadership.

So on the mainstream designs that are still coming through, are the customers complete market set? Or are you seeing more partial -- where they only kind of replace a few layers?

Gowshi, I'm going to need you to repeat that question because you broke up midstream.

Okay. On the mainstream designs that are still coming through, are the customers ordering complete market sets? Or is that partial restrings?

Usually it's complete market sets, complete mask sets rather.

Okay. And on the gross margin side, I know Q4 was around the same revenue number, but gross margins kind of contracted about 180 basis points even with a better mix. What are we looking at in terms of that margin compression versus Q4?

So you're referring to what are we expecting for Q4 versus Q3?

No, no. Q4 last year did around the same number of top line, but -- and Q3 had a better mix, but we saw margin compression. Just kind of trying to figure out what's in the cost of goods here.

Sure. So a number of things, primarily is driven by volumes and market -- and mix, not just product mix, but also geographical mix of where the earnings and where the revenue occurs. So it's a combination of those items.

Our next question comes from the line of Danial Yermakhan with Freedom Broker.

Congrats on a great quarter. Just a quick question. The Q4 revenue guidance range is around $20 million. And I mean, what's driving this wider band? Is it mainly timing? Or what does -- why the visibility is lower than the previous quarter?

Sure. Thanks for the question. So as mentioned on the prepared remarks, it's because the conditions in the market that were existent in Q2 remain in Q3, and we expect it to remain in Q4 and beyond for some time, which are, #1, high fab utilization rates; #2, high memory costs; and #3, geopolitical conditions. Because of those 3 factors, our visibility is even more limited than it has been in the past.

And I think just to add to that, this is George, Danial, is that as we've stated in the past, 1 mask set on the high end is a big dollar amount that can swing quite a bit of -- a couple of million plus dollars in a quarter easily with 1 mask set. So you combine that with all the regions that we're in and what Eric just said, basically, it could get a bit choppier, less predictable results until things maybe come back to where they were before. So hopefully, that helps.

Yes. And just quickly on the end-of-life tool upgrades. Last quarter, you mentioned that it's expected to peak in 2026. Could you provide any color? Is there any shift to next year?

Yes. sure. There's some of our CapEx is expected to shift on to fiscal year 2027 as a result of ordering pattern as well as delivery from our vendors. So as a result, the peak may be in '27 as opposed to '26.

And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Ted Moreau for closing remarks.

Thank you, Shannon, and thanks, everybody, for joining us today. We really appreciate your time. I look forward to connecting with everybody throughout the quarter. Have a great day.

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