Photronics Inc (PLAB) 2002 Q2 法說會逐字稿

Good morning. I'm Dixie. I will be your conference facilitator. I would like to welcome everyone to the Photronic second quarter earnings conference call. All lines are on mute. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question in this time, simply press star then the number 1 on the telephone key pad. If you would like to withdraw the question, press the pound key. Thank you. I would like to introduce Daniel Del Rosario, Chief Executive Officer.

Good morning, everyone. This is Mike McCarthy, Vice President of Investor Relations. Thank you for participating in the second quarter conference call. Before we begin, like to remind everyone about the safe harbor statement provision under the litigation reform act. Thus, except for historical events, the information we'll cover in the call maybe forward looking and subject to certain risks and uncertainties to cause results to differ materially from those projected including the market, pricing, competition, procurement and manufacturing efficiencies and other risks from time to time in the SEC reports. Additionally, like to inform everyone the call is archived. Sean Smith, the Chief Financial Officer will begin with the details and review of the financial performance. Then Daniel Del Rosario, CEO, will share brief insights into the events shaping the results before opening the call to your questions. Joining Dan and Sean in the q and call is Paul Fego, Steven Carlson, and Greg Hickey, Vice President Treasurer. As well as other memberships of the the senior management team. Sean?

Thanks, Mike. Good morning, everyone. I'll provide brief analysis of the financial results of second quarter, first half of fiscal 2002. I will also review changes in our financial position and cash flow in the period as well as review our outlook going forward. In August of 2001, acquired controlling interest in PKL based in Korea. And began consolidating PKL at that time. During the second quarter of 2002, we acquired an additional 28% interest in PKL from the shareholders in exchange for roughly 1.2 million shares of common stock. As a result, we now own 78.8% in PKL. As we disclosed in the second quarter 2001, we recorded 26.1 million or 75 cents per diluted share charge related to consolidation of the California and Germany. For the purposes of our discussion on commissary son of operations for the first quarter, I will excluding the consolidation charge. Net sales in second quarter amounted to 131.1 million up from the 105 million in the second quarter of last year. Total sales outside the United States was 50% of second quarter 2002 revenue compared to 40% in the second quarter of the prior year and 44% sequentially. Our capital investments in Europe and Asia enable us to gain share in the growing international markets. Sequentially, increased 7.7% resulted from improved Asian and European volume coupled with increase in activity for high end technology. Shipments of photomask utilizing .018 accounted for 24% of second quarter sales up from 22% in the first quarter of 2002. Representing an increase of 17 1/2% in total high end revenue. Second quarter gross margins 30.8% decreased approximately 530 basis points from last year's second quarter levels of 31.6% from lower utilization of the global fixed equipment base. Sequentially, the second quarter growth margins increased to 30.8%. The increase revenue attributable to high end photomask for the quarter mitigated by the investment in manufacturing net work to service increasing high end demand. Depreciation and amortization increased to 20.4 million for the second quarter of 2002 as compared to 18 million the second quarter 2001 and 20.1 million sequentially. The increase in second quarter of 2001 resulted primarily from the inclusion of PKL sales in this field. Selling, general and administrative expenses of 14.7 million for the second quarter increased 11.6% year over year primarily as a result of the inclusion of new investment in Korea. SA and G as a percent of sales increased to 14.2% in the second quarter of 2002 compared to 13.1% in 2001. Sequentially SA and G as a percent of sales decreased 30 basis points. R and D expenses of 17.5 million of the second quarter higher than last year by 22%. (inaudible) continued work on advanced self wave length (inaudible) and ramping the technology line to (inaudible) technology. R and D represented 7.2% of sales in second quarter 2002 compared 206.1% last year, 7 1/2% of sales in the first quarter of this year. Operating margins decreased to 9 preponderate 4% of sales compared to 17% runs in the prior year. Sequentially operating margins improved by 202 basis points. Other increases of expenses from the prior quarter primarily from higher interest costs associated with issue answer with the PKL acquisition, increased interest costs mitigated by investing in the strong cash position. The second quarter tax rate was 21.4% compared to the comparable quarter last year. Decrease (inaudible) higher portion from jurisdictions with favorable tax attributes and [taxology]. Sequentially the rate increased slightly. Net income of 2 1/2 million dollars amounted to 2.4% of sales compared to 9.8% of sales in the second quarter last year. Sequentially net income as a percent of sales for the second quarter up 60 basis points. Diluted earnings per share decreased to 8 cents compared to 32 cents 2001 second quarter compared sequentially, increased 2 shares per diluted share. Had an average of 17 (inaudible) equating to sales of 240,000 per employee on an analyzed basis. Now, taking a look at the (inaudible) operating results. First half 2002 sales amounted to 198.7348 which was essentially flat with the 199.1 million of sales for the first half of 2001. Gross margins in 2002 amounted to 30% as compared to 36% for the first six months of 2001. The decrease attributable to the low utilization of the larger fixed equipment base. Selling, general administrative expenses increased 7.1% to 14.3% of net sales. SA and G last year totaled 26.6 million or 13.4% of net sales. Research and development costs 14 1/2 million dollars or 22% higher than last year. R and D 7.3% of sales in the first half of 2002, versus 6% of sales in the prior year. Operating margins decreased to 8.3% of sales, 15.6% of sales last year. Net other expenses (inaudible) 7.2 million 2002, compared to 4.6 million in 2001. Net income amounted to 4.3 million or 14 cents per diluted share compared with 18.3 million or 60 cents per diluted share last year. Now turning to the balance sheet. In December issued 200 million of convertible notes with an interest rate of 4.75% and mature in 2006. The portion of the proceeds used approximately $58 million - (inaudible). We continue to be liquid at the end of the quarter with cash and cash equivalent (inaudible) compared to 35 million at October 31, 2001. The company current ratio at the end of the second quarter 2.35 compared to 1.471 at the end of 2001. Primarily as a result of increased cash associated with convertible note issue. Continued (inaudible) $29 million as a result of increased investment in PKL during the second quarter. Total debt increased 137 million during the first six months of 2002 to 359 million. The increase is primarily attributable to the 200 million convertible note issue net repayment credit line. The minority notice amounted to 39 million at the end of the quarter and shareholders' equity was 336 million. Cash flow if operations for the first half of 2002 $44 million. Cash flow used in activities amounted to 68.5 million of which 68.7 million represented capital expenditures in the first half of 2002. Cash divided by financing activities amounted to 132 million which primarily represents a net proceeds from the convertible note issue offset by the repayment of credit agreement. Taking a look ahead, the short term visibility is limited but the lack of visibility on the part of the customers made it particularly difficult to project out over the next several quarters. Based on customer input today, we believe we'll see continued new design activity, especially for products utilizing the sub wave length technology and our newly installed technology wave. However, with the limited visibility, and current market described as cautiously optimistic, we have to take a conservative view. Based upon the current model, the outlook for revenue in third quarter of 2002 expected to be approximately 110 to 116 million dollars. Capital expenditures in fiscal 2002 are projected to be approximately 125 million as we invest in equipment the support the customers with capability at the .19 microns. Although 2002 cap ex and PKL increased the fixed cost, the impact will be mitigated by the continued and constant focus on controlling costs as well as increasing high end revenue mix. We do expect to see modest sequential improvements in growth and revenues. Based on the current model, estimate earnings in the 11 to 16 cents a share range for the third quarter. That wraps up the overview of the financial performance and the short term outlook. Now like to turn over to Dan for an update on the business. Dan?

Thanks, Sean. Good morning, everyone, and thank you for your interest in Photronic. One of the key competitive strengths is discipline and ability to execute at a very high level. Even under the most adverse of circumstances. Generally speaking, the team is pleased with the company's ability to generate year over year and sequential growth in a very sluggish environment but knows the low end of the range performance can do better. Strategic acquisitions and integration into the global manufacturing net work certainly played a role in Photronic but the technology line investment and propriority sub wave length radical solution focused on (inaudible) migration into the 130 and 90 nanometer enhanced the ability to generate superior growth opportunities in the years ahead. Today, under the technology devices are just beginning to gain momentum and still relatively small number of total devices released from foundries around the world. In months to come, it is our expectations that this technology will fully emerge from the development phase and become a meaningful part of earnings growth for our company. Early on, this will be driven on largely by the world class technology available at foundry suppliers like TSMC and UMC. We're further encouraged by these reporting data put into the market by the leading equipment companies over the last month. Advanced tool sets placed bode well for radical demand in the quarters ahead. Running almost simultaneous to this ramp in that no meters production is semiconductor industry set introduction of 90 nanometer technology. Our roll out of 90 nanometer capabilities is a major milestone and for the first time, the company truly ahead of the process development volume ramp curve. This capability is creating exciting new opportunities for growth, the company at the previously not qualified Photronic when lacked the critical mass and technology it has today. Such technology when combined with a strong execution and supplier reliability drawn consideration recognition. Their road map and requirements for supply dependability has them diligently surging for highly motivated customer companies like Photronic to be a source of sub wave length radical solutions for today. With the 130 nanometer volumes requirement and the push to the process (inaudible). While Photronic is progressing in the critical mass and leading technology position has got the industry's attention, it's been the company's reputation for service that has helped such relations since beginning to blossom into partnerships. Improved competitive positioning always been our - about service. Been just that today. You cannot be a service leader without being a technology leader. Vision turned Photronic into a competitor. As many companies in the photomask industry come to learn one way or another and much to the benefit of our customers. As the company's new CEO, I have the responsibility for all issues. My attention centered on advancing the technology, globalization of the industry, the identification of new markets that enable Photronic to bring increased value to the space and communications with our customers, investors and employees. Simply stated, this team's mission is to further oversee Photronic's evolution into a leading edge technology solution company that delivers value added services to global semiconductor industry. One such example is a strategy to support the emerging semiconductor industry in China. We have invested time to cultivate relationships and building out the semiconductor infastructure in this region. In return, we have established a competitive position that will enable us to participate in what we believe will be an influence on the photomask industry similar to the move to reduction (inaudible) technology. The Chinese market promises to be a very large with dynamics different from Japan and the four Asians. This is because the fast growing up service local demand. The target markets are not Europe or North America, but instead, the local markets of one of the world east largest and fastest growing economies. Located directly in [Shanghei], Photronic is once again at the center of activity and the competition looking in from the outside. Our success will be measured in many ways. For our investors, we believe the most important measure will be return on asset. During the consolidation period that spans the 1990s, returns sacrificed in an effort to acquire the most productive assets and build out global critical mass. Today, with fewer competitors, there is no reason to not see returns improve. As our investors (inaudible) improved returns, we expect the competitors come under similarly intense pressure. However, we believe we have the capability to advance to what our goals for superior performance and execution. Such is the nature of our culture. One base in identifying manufacturing efficiencies, implementing a cost reduction program and innovative services. Driven by superior revenue, margin, and earnings growth, the entire Photronic team is focused on positioning the company to generate returns that rank among the top quartile of our industry. Not only because it is the right thing to do for our investor, but because of considerable portion of the compensation is determined by success and realizing this goal. This program which began the full rollout in the quarter is expected to play an important role in the achieving our targets in fiscal 2003. As we look forward, the stabilization that we have seen take place across the semiconductor industry has been encouraging. Many of the up cycles expected have been pleased from the global semiconductor infastructures. Companies like Photronic that run lean and mean and have improved the competitive position for both acquisition and investment and outperform the competition in the downturn will surely outperform in the upturn. This is the focus that I have directed our team of the global manufacturing operations, R and D, and finance. And so, while the underlying fundamentals of photomask industry remaining healthy, we are cautious, focused (inaudible) industry in the near future. Our expectation for continued growth is very positive. Under 30 nanometer technology is very early in the ramping demand for high end radical solutions. The enabling technology for all wave length patterns at the very deep micron levels, competitively speaking, Photronic is the strongest in the industry today and determined to be even stronger. This will be a very tough organization to compete with, especially when you consider we expect to see improvements for how efficiently we're running the global operations today. There should be little question that we are excited about capitalizing on the many strategic opportunities ahead of us. As a team, we remain deeply committed across every level of our organization to expand our market share, increase our deep sub micron revenue mix, produce significantly better profit margins, and improve the returns on our assets, capital, and equity. Thank you for your attention and following brief instructions from the conference call operator, we'll be happy to address your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on the telephone key pad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Rish Balaromin.

Yeah, good morning, guys. Just a clarification on the EPS guidance. I think you guys said 11 to 16 cents.

Yes.

And can you give us color on how we should look at the margins going forward? Is it like some kind of a stabilization in the next quarter and ramping from there on or - and also can you give us color on the pricing and how much you see?

On the margins, we would expect to continue to see sequential growth. We've been able to bump it up over the last couple of quarters at a minimum of 150 basis points, 250 basis points. After the third quarter, we would expect to see sequential growth but with many variables in that.

The margins up sequentially next quarter.

Growth in operating margins up sequentially next quarter as they have been from the first to the second quarter.

Okay. And, in terms of expenses, should that be up or pretty much go very gradually?

We would not expect to see a build in the SA and G expenses as a percent of sales going forward. That number should drop and absolute dollars pick up a little bit.

Okay. And, can you just give us more color on what is driving demand in Europe and Asia? We saw (inaudible) like a huge surge in foundry orders, and so can you give us some color on what is going on in each regions?

Yes. As part of the improving economic picture by the semiconductor industry, one would expect with the investments that were made in the foundries in the leading edge technology that you would see movement initially into the foundries, especially TSMC and UMC and we being active in Asia, in Taiwan, Singapore, and Korea have certainly benefited from the up tick in business at the foundries. And, I think most recent news we saw from the foundries from first quarter calendar year reported utilization in the 50% range moving to 70% plus in the second quarter, and I think a recent announcement in the last few years from Morris (inaudible) indicated that they expected to have utilization rates over 80% by the end of the quarter. So, that bodes well for us because on our strategic position and so, while we're cautiously optimistic, we have definitely seen some - Sean reported early seen an up tick in business in Asia.

Back to the first question, do you think the pricing environment is improving? Not just a mix, but the pricing on an apples to apples basis?

I think, certainly, at the advance technologies at the .18 micron and the low that we felt, we have felt that the pricing has been stable, and certainly, as we transition down to .15 and see more movement to the .13 and the early rollout of 90 that no meters later this year, that pricing will be very stable, and overall as we transition to that, we obviously will see strength in our revenues, and our gross margins. However, the trailing or mature technology, there are certain price pressures at selective companies where our competitors are not as strong as we are. And, we're addressing that by selling - as always, our value-added service as the differentiation point.

Thank you very much.

Your next question comes from Jerry swimming.

Yes. Thanks. Sean, did you give us your estimate on depreciation on the year? You gave us the capital spending number.

Depreciation should pick up a couple of hundred thousand each quarter, Jerry.

Okay. And, with depreciation now approaching 20% of revenues, how does that percentage vary between, say, over technology products and the 24% of the business that you mentioned was .18 microns and below.

Jerry, we don't typically break out the revenue cost due to the mix.

Any sort of qualitative comment on it?

It does range because we haven't really looked at it in regard but the answer is 20% of sales obviously depreciation is bigger. We expect top lines to push that up and move that metric down as we move forward.

Okay. One other question and that is, at what point earnings-wise do the fully diluted numbers kick in and what's the share count on a fully diluted basis?

Jerry, can you repeat the first part of the question.

When do - at what level of earnings do you start - do we have to start including the shares from the converts in the earnings calculation?

It's a good question. Because we do, as you know, we have two converts outstanding. But I think it would be fair to say that based upon our model and revenue stream bottom line that you would start seeing some dilution at the 10 million, 8 to $10 million range, bottom line. But we get pick up from the reduced interest costs so it's kind of think - there's a number of ways to go through that.

Okay. Well, we can talk about that offline. I guess that's it. Thanks.

Your next question comes from Steven Pilum, Morgan Stanley.

Hi. This is Gary Sweet for Steven Pilum. I have two questions. One is now that you're seeing a lot of growth and industry being driven from Asia, do you see d and p getting more aggressive outside of the Japan region?

I think in our discussions in Europe and Asia, while we continue to focus on our individual performance, we do track what our competitors are doing. And, from the d and p slide, certainly, there is an interest on DNP's on moving outside of Japan as more and more of the revenues are being derived outside of Japan as we see the Japanese business declining about 40% over the next four or five years. However, unlike some of the other Japanese competitors, they do not have a read for expansion outside of Japan, so I think they're cautious at the present time. And that's primarily we've seen in the past, tremendous interest in points of Taiwan and they've hesitated on that and now looking at going into China and what they've done is taken preliminary steps, and going with a training company in China, and from our perspective, that certainly not the strategy that we have taken. We've been certainly more aggressive.

Okay. Thanks. One more question. Could you characterize the state of .13 micron mass business? Are you still seeing prototyping activity or starting to see some production mass being cut? And, are you seeing it a lot of reiterations of existing designs? Seeing yield limitations on the design side or more of the demand or away from (inaudible).

I think what primarily we have seen is last year as primarily at the foundries where they were doing multi-project wafers or prototypes or test chip, that certainly was the case, but as reported by tcmc and UMC recently that those devices have proven out and they're starting to now move into the production stage, and we're doing so at the - in the second calendar quarter here with the emphasis rolls out in the third quarter and fourth quarter. All the - anything to add there?

No. Dan is right. The yields reflected. The yields stabilize at 130 in the foundries for sure. They're turning the devices quite successfully right now for the customers.

Okay, great. Thanks a lot, you guys.

Your next question comes from Jeff Perry, SFAC Capital.

Hi. I'm just wondering the tax rate implied there with the third quarter guidance.

Our tax rate is somewhat similar to what we're reporting in the first two quarters of this year. It's dependent upon the mix of revenue.

Something in the mid teens?

No. We believe that we've been trending along the mid 20s, low to mid 20s in the tax rate and that's what we expect our effective tax rate to be for the year.

Okay. And I notice you give one quarter ahead guidance. You didn't give it this quarter. Is there a reason for that?

To be honest with you, believe it's to be prudent. The fourth quarter is summertime, and at this point in time, our visibility is limited. We have very short backlog. But we would expect in the fourth quarter to see continued growth somewhere in the high to mid single digit.

Got it. Thanks very much.

Your next question comes from Ebnash Cowan.

Yes, the question I had was there's additional thing you have on PKL right now. When do you think that's going to start to contribute to the bottom and top line?

We haven't typically disclosed on an entity to entity basis the contribution level, but we will say that we are as each quarter has passed, happy with the investment in PKL and been very successful for us.

Okay. In terms of the capacity utilization, what kind of utilization with you seeing?

(Inaudible) different mix that we see but overall, the high 60s right now and we've seen a progressive increase in quarter over quarter and we're happy with where we're at on 130 and volumes in production and timed it right for the ramp.

So, on the higher end, maybe .13 micron, at a higher utilization rate?

Some tools, that's correct. Some still in the ramping mode of qualifications cycle.

Okay. Thank you very much.

Your next question comes from Byron Walker, UBS Warberg.

Good morning. Can you comment on new customer qualifications during the quarter? My channel checks indicate that you may have picked up AMD as well as a Japanese company. These are companies that historically had a low profile in.

This is Paul. (inaudible) we cannot - we don't disclose the customers but, yes, the indication would be that we're very pleased with where we're had with the nanometer progress. We have critical qualifications in final stages or actually been released to us and going to production. Just across all regions of the world for us and as you saw earlier on the process development with applied materials and the Japanese lab, going very well, and as Dan mentioned, we should be in a great mode to start that chip (inaudible) when the customers ready to go. And I think why people opening the doors to us because they have seen the technology we have to offer around the world to them.

In addition, Byron, our strategy with the Japanese customers while we have an office in Japan, our strategy with the top line on the outsourcing of the major Japanese semiconductor companies through the foundries in southeast Asia as well as Korea, much has happened with the U.S. IDM in the last couple of years. And so, during the downturn, we concentrated on qualifying our process technologies at these companies, and as you mentioned, we have qualified a number of these companies, and we're starting to see early business as they start to outsource to southeast Asia.

Great. Thanks.

Your next question comes from Mike o Brian, sound views technology.

Yeah, hi. Good morning. If you can go through the guidance to me seems a little bit lackluster given the other parts of semiconductor industry. Maybe just go through with me when do you think you could have that big upside leverage to the model or is pricing causing you not to have that?

I believe that, Mike, what you're referring to is from the point of the view of the equipment companies. The order rates up substantially but that's reflected in capacity that will go into place in the next six to 12 months, especially at the .13 and above, and we're starting to see the rollout of the 193 steppers. And so, that's totally in line with our expectations and the development of our 130 nanometer and 90 nanometer modes with the JDP referred to in the earlier call. So that's why we're cautiously optimistic because as I stated earlier, 130 nanometers ramping to production, late third quarter on actual devices and getting stronger in the fourth quarter, and then we expect in the end of the fourth quarter, first quarter of next year that the test chips for 90 that no meters would be rolling out so while there's optimism on the equipment side, and we certainly share in that, we remain cautiously optimistic because we trail the equipment side as far as when that capacity rolls out.

Shouldn't you be getting some leverage, also, from design act from the design activity in getting the 130 nanometer where we should see significantly higher asp's, shouldn't you get some of that leverage to potentially get a little bit of a more of a pop here before you get your - the big pop as you get the 130 nanometer production? Just trying to get disconnect. The design activity I would think should start to contribute a bit more.

Really not a disconnect because as we said, one of the things that were different in this downturn than in previous downturns that we typically saw increase activity at the design level to get product out of market, but at this time, there's a substantial use of the foundries and the multi-project wafers, and so, there were some as many designs available even though the designs were there, you had four to as many as eight designs or prototypes put on one wafer run. And those designs as I said, have been proven out and so that's moving more and more to the production side, and we're expecting that as indicated by most of the two leading foundries that that will occur in the third and fourth quarter. Paul, you have additional comments?

We grew about 78% this quarter. Looking at about 12%. That's on the optimistic side for us right now. The 130 tool set in the fabs ramped up quickly certainly reap the benefits of that because your infastructures in place already to support the ramp up. Really a question of how fast as Dan mentioned to get things in place. As far as the pricing front, actually, the high end product have a better margin. We have positioned ourselves on the mature end because we know the competitors have to make a move to get back market share. And our margins reflect that to improve and getting better each step of the way.

Okay. Thanks.

Your next question comes from Brent what debt, Merrill lynch.

Just two questions. First, just another clarification on the tax rate, Sean. You said in the low to mid 20s. Looks like the first couple quarters in the low to mid teens.

On the tax rate, the effective tax rate was actually in the low to mid 20s. You have to calculate that and I can talk to you offline on this with the impact of the minority interest.

Okay. And secondly, sort of back on the design activity front, the high end photomask growth that you and your competitors has been quite strong the last even this quarter year on the high teens and whatnot. When you're looking at it now, you're really - try to summarize this and get your feeling. What you're looking at is the customers haven't moved the full production mode, the 130 that no meters and still seeing the test and pilot and initial runs S. That how you characterize it and getting ready to move to the volume towards year end as you said as the equipment is installed?

That's correct. Most of the volume production is still at the .18 node. Some moving into 150 nanometer. As I said, they will be moving these devices out to the 130 nanometer node in the third and fourth quarter, especially as more capacity is put in place.

Great. Thank you.

Your next question comes from Mark Fitsgerald, Bank of America Securities.

Thank you. A couple of questions. Can you tell us what percent of your revenues this point going to the foundries? From the foundries?

Mark, this is Sean. We don't break that out, but I did mention earlier that the second quarter, 50% of the sales were from our internationals operations.

Are you insinuating that 50% is foundry?

No, no, no. Certainly not. We have - certainly, Asia is primarily foundry, but we haven't disclosed on a quarterly basis (inaudible) to date.

Talking in the 10% range? Dialing me into a number, can you give us a sense of it?

Well, I can say that at the end of the year, last year's sales, Europe and Asia basically even, and Asia continues to increase at a faster rate.

Okay.

Just to add more to that. The foundry business certainly important to us, but we also have very large IDM customers in Asia and that's reflected in if fact that PKL come on to our global network, and they have substantial amount of business from the Korean market which is not foundry.

Sure. And curious how this how shuttle program ran. I understood you to say four to eight designs on one shuttle run here. And what happens afterwards once they prove out the designs, do you guys actually get those masks to make for those customers once they've proven the designs at the foundries?

Absolutely. What happens with that, typically the - what we have seen in the past on the prototype hit rate is about 25% to 20%, and so, as that rolls out and into single buy radicals, and moves into production, we benefit from that.

So, does the foundry make the radical for the shuttle run and then what you're saying, they prove the designs for the individual chips on that shuttle run, and then those individual chip guys go off and make a mask for you? GREG HICKEY no. We have participated in that market and produced the masks for the multi-project wafers. In fact, it's technically, a lot more difficult because of the difference or so many different geometries on the multi-project wafer, and so, the CD and many area demands been extremely tight on that. But it also enhances our technology or our products technology at the 139 nanometer node and makes the single dye radicals much easier to build.

Okay. And how do you guys pull together the different customers who will run on one of those shuttles? Or does the foundry -

That determination is made by the foundries in the case of UMC and TSMC, probably did more shuttle runs or multi-project wafers than anyone else. And so, they determined that and then we just get the data that's output to us. From that point, we build a mask. Additionally, I would like to say that as far as the internal masks capability, the only one with that capability is TSMC at the present time. The other foundries go outside for their mask demand.

Okay. And, can you kind of address a bigger issue. In terms of the industry's attempt to get cost down, how does it change the way you work with designers? If a designer is thinking manufacturability at this point and particularly the implications for the designs are on the mask making operations, are you guys in conversations more at this point because the rising prices?

This is Paul. Absolutely. We have a program, actually a service added to the customers. A value added which, again, another step taken globally where we go and make presentations to design teams at the customers showing them layout rules and what will be the impact on right times. We have positive results around the world from all the presentations. And, to be honest with you, done tremendously with getting product out faster. Helps us in utilizing the assets better and improving cycle time to the customer. It is a win-win on both sides. You're right. The evolution has come and we've been in the process for probably over a year now.

Okay. How does that same sort of thought process work with the guy running the litho tube at this point? Is there a similar type program?

Talking about ASML type people?

No. The guy that's running the litho tool on the factory floor and where the budget is shared. Whether it's the litho tool guy or how is that referred?

Give, an update. That's a good question. The technology is more complex, put more pressure on the wave lithography. That pressure is also being shared by the radical solutions, so at 130 and moving into 90, what you're going to see and what we've begun to work on with quite a bit of energy is integrating the entire lithographic process and you can't really look at the wafer process alone so there's a lot of activity with the lithographic communities with the modeling and simulations and see more at the mass plane with the modeling and simulation of the wafer capabilities and results. And, dramatic increase in the demand for that type of capabilities from us and one of the areas that's going to lead that is Asia and that's primarily because many of the foundries focusing on manufacturing and are looking to offset some of the integration aspects of producing the mass solution to the mask provider which is us.

And, I mean, does this enable you guys to back off on inspections and that type of thing? Is that where you get cost savings?

You have to look at it comprehensivibly bring. Almost every point in the manufacturing and design processes, there are opportunities. Talk about automating the data side. Automating the process of taking the customer data and modifying it or adapting it to work in aly though tools and the radical fab. Understanding the impact of how defects work with lithography process. There are a lot of opportunities and while incredibly active, the infastructure with the I.T. network, the modeling and simulating technology just beginning to scratch the surface of the opportunities but the whole idea to look across the entire process chain and take real costs out of the system and that can come in many different forms.

And since you said that, can you give us a sense of where we're going to terms of pricing here as we go to the .1, the 70, the 90 nanometer mask?

Let me wrap up a comment on that and throw it back to Paul for some more details on the pricing, but in general, one of the things that's becoming more and more true is that 130 nanometer node mask for one customer is not necessarily the same technology requirements and integration and complexity for another. It comes down to the picture laid out and the integrated and so forth. There are opportunities across the board the impact of which varies depending on the design that Dan mentioned tan shuttle designs are very, very complex. Earlier in the cycle and because of the that variability, sometimes the kind of costs that you can take out of the system manifests itself later as the designs go to volume. If you look at one segment that's particularly sensitive and focus on SDAC market and these types of designs typically do lend themselves usually multidye and do at love things in the automation side and analysis side to look at opportunities to take real costs out of system. Paul?

This is Dan. At the 90 over 100 nanometer node, I believe that knee knowledge from TSMC shocked everybody announcing the mask sets approaching $2 million. While that would be nice to be getting $2 million for mask set, we don't believe that's reality. Our objective is provide the most value in our product and in our service, and therefore, we as being referred to on the design side, we've been active with modeling and simulation, but Paul and his global manufacturing organization continues to focus on cost reduction, cost controls. Yields are still a very large part of the cost advantages and so we continue to focus on our yield improvement. And then, another big part is the write times involved and the cost of these machines and so we've migrated to just new process platforms and moved from the typical resist to chemically amplified resist and we've seen substantial reduction in write times and continuing to explore other resist and other areas looking at is the automation on the data side. And, so on and so forth. As Steve said, looking across the spectrum to provide the best value.

So, basically, what you're saying is 2 million, 90 nanometer mask is not your thought process at this point?

Not our thought process. If it were the case, some of the customers would have to look at other options. And, it's certainly not our thought process and we believe we can come in at a much more competitive pricing.

Is it possible to cut that in half or is it just too early to say at this point?

Too early to say because we're in the process development stage.

Okay. Thank you very much.

Your next question comes from Mitch O'Brian, CIBC World Market.

Hi. Can you elaborate on the trend through the quarter and anything you've been seeing in May?

Certainly the second quarter goes March was slower for us. Saw a pickup in April. And, at this point in time, we're not going to be commenting on May but we did see an up tick in April.

And, February was - March was up from February?

This is Paul. We have seen an increase in the last two quarters. Nothing explosive. Different regions have different levels of growth and seeing the growth across all regions. Quarter on quarter.

Talking month by month though. Through the quarter how was it February to March, March to April?

We saw in March primarily in the Asia area because Chinese new year fell in the February time frame, so February was down for everyone.

Okay. So trending up from February through the quarter? I had a question on the pricing environment. Your most well-known competitor said it's not them. It's not you. Is it DMV going after the trailing edge. Can you comment?

We feel that things on the high end very stable. We've made some movement by our competitors. This is the nature of the beast. We've positioned ourselves well. We feel fine where we are but this is something that's been in this industry for 30 years been in it and we continue to be the same way going forward.

And last question's on gross margins. Trying to clarify, are you standing firm on the 150 to 250 basis points per quarter? And if so, what can that really peak out when things are running full bore?

Certainly, we're standing pat on the 150 to 250 range. And, what can it (inaudible) we mentioned before we anticipate the goal - internal goal is to get gross margins to the low to mid 40 range. When that happens is contingent upon a lot of different factor that is are down the road.

And, maybe you can help us out on a little color on - it seems to me you're the most profitable right now versus your other public competitor here in the states. Do you have any idea on how profitable DNP really is, just so we have an idea of how far ahead you are of everybody and to get a feel for that?

We don't believe that DNP breaks out their numbers as far as their profitability by their microproducts division. However, we do know that from what we have seen that their microproducts division contributes substantially to the total organization. One thing on the DNP front as to your previous question with price reductions, we don't believe that's the case with DNP because DNP focuses primarily on the high end part of the market and as we stated several times previously that the high end has been stable in pricing.

That note, are there any Japanese competitors besides DNP due to the weakness of the yen?

Not that we know of.

Okay. All points to one company in particular then. Regardless, okay. That's all I needed to know. Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Are there any closing remarks?

Yes, at this time, in closing, I'd like to thank the entire Photronic organization for continuing their focus in a very difficult market. Although we were at the lower end of the guidance, as we stated earlier, we believe there's room for improvement, and our team is focused on that. On return on assets and we'll continue going forward and we're confident as the market strengthens that we'll also improve in all of those areas. Additionally, I'd like to thank everyone for their continued interest in Photronic and for joining us this morning. Thank you very much.