Photronics Inc (PLAB) 2004 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Photronics first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). Mr. McCarthy, you may begin your conference.

Good morning, everyone. My name is Mike McCarthy, Vice President of Investor Relations and Corporate Communications for Photronics. I would like to thank everyone for participating in this morning's conference call, during which we will discuss results for our fiscal first quarter of 2004, which were reported last night.

Before we begin, I would like to remind our all participants about the Safe Harbor statement provision under the Private Securities Litigation Reform Act of 1995. And thus, except for historical events, the information we will cover during this call may be considered forward-looking and may be subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including uncertainties in the market, pricing, competition, procurement and manufacturing efficiencies, and other risks detailed from time to time in the Company's SEC reports. This call will remain archived on our website until we report our fiscal 2004 second-quarter results during the week of May 17.

I would also like to remind everyone we have secured a date and location for our analyst's meeting in March. Once again, we will host a breakfast in New York at the Hotel Intercontinental on March 24 at 8:30 AM. If you would like to join us, please feel free to give me a call or send me an e-mail. Reminders will be sent out early in March.

Our call this morning will begin with Sean Smith, our CFO, providing a detailed review of our income statement and balance sheet, after which Dan Del Rosario, our CEO, will share some brief comments and then moderate the Q&A session. Joining Dan and Sean in the Q&A will be Paul Fego, President and Chief Operating Officer, as well as other members of the management team for Photronics.

Thanks, Mike, and good morning, everyone. I will provide a brief analysis of our financial results for the first quarter of fiscal 2004. I will also review our balance sheet and cash flows during the period as well as review our outlook going forward. Before we begin, I would like to congratulate the entire Photronics organization for their continued teamwork, dedication and focus in servicing our global customers, which has been an essential ingredient in the Company's ability to achieve positive results for the last three quarters.

Net sales in our first quarter amounted to 90.5 million compared with 81.4 million in the first quarter last year. Total sales outside North America, including export, accounted for approximately 64 percent of first-quarter 2004 revenues compared with 61 percent last year and 63 (ph) percent sequentially. As a percent of total sales for the first quarter, sales were approximately 44 percent in Asia, 39 percent in North America and 17 percent in Europe. Sequentially, sales decreased by 1.1 percent as a result of the typical seasonality associated with our first quarter. Shipments of photomask for devices utilizing 0.18 micron design levels (ph) and below were approximately 31 percent of total first-quarter revenues. The first-quarter gross margin was 31.6 percent as compared to last year's first-quarter margin of 21.7 percent. The year-over-year gross margin improvement is a combination of our increased revenue coupled with improved utilization of our SpuMine (ph) consolidated manufacturing network. Sequentially, first quarter gross margins decreased 50 basis points. The sequential decline, although forecasted, was mitigated by an improved mix shift which generated higher ASPs. Depreciation and amortization for the first quarter was 21.1 million as compared to 22.6 million for the first quarter of 2003 and 21 million sequentially. Selling, general and administrative expenses for the first quarter was 13.5 million as compared to 14.4 million last year. Sequentially, SG&A was flat. SG&A as a percent of sales was 15 percent in the first quarter of '04 as compared to 17.7 percent in 2003 and 14.8 percent sequentially.

R&D expenses, which consist principally of continued development for 90 and 65 nanometer process technologies, were 7.4 million in the first quarter as compared to 7.6 million last year. Sequentially, R&D expenses were flat. R&D represented 8.2 percent of sales in the first quarter of '02 -- '04 -- compared with 9.4 percent last year and 8.2 percent of sales sequentially.

During the first quarter, we generated operating income of 7.7 million, a $12 million improvement over last year's first quarter on increased sales of 9.1 million. Sequentially, net sales and operating income decreased by 1,700,000, respectively. Our operating model continues to provide significant leverage once revenues reach our breakeven of approximately 88 to 89 million. As our revenues continue to grow, including our high-end mix, we believe that the long-term goal of achieving operating margins of 20 percent or greater are achievable as long as we continue to aggressively manage our cost structure. Our global team has done an outstanding job and has risen to the challenges of swiftly streamlining our cost structure through the changes in the global market environment.

Net other expense for the first quarter was 2.7 million as compared to 3 million in 2003. During the first quarter, we recorded a tax provision of 1.3 million, which amounted to an effective tax rate of 37.6 percent for the quarter. The provision was higher than previously forecasted as a result of increased income flowing in from taxable jurisdictions for which we are currently taxpayers.

Net income was 2.1 million for the first quarter of 2004 as compared to a net loss of 8.5 million for the first quarter last year. Sequentially, net income decreased by $1 million. Net income per share was 7 cents for the first quarter of 2004 as compared to a 26 cent net loss per share in the first quarter of 2003. Sequentially, net income decreased by 3 cents per share. As we exit the first quarter, we had approximately 1450 employees equating to sales of 250,000 per employee on an annualized basis.

Now turning to the balance sheet, from a liquidity position, our balance sheet year-over-year has improved significantly. Cash and short-term investments were 236 million as of February 1, 2004 as compared to 107 million at the end of the first quarter of 2003. The Company's current ratio at the end of the first quarter improved to 4.9 to 1 as compared to 2.8 to 1 at the end of the first quarter, 2003.

Sequentially, the Company's working capital increased during the first quarter by 17.6 million to 276 million, a new record, due in part to our continued disciplined approach to asset management in such a way as to maximize our liquidity. Sequentially, accounts payable and accruals decreased by $10.5 million, primarily the result of the timing of progress payments on equipment and other expenses accrued for at the end of 2003. Total debt during the first quarter decreased by approximately 1 million to 373 million. The principal components of debt -- outstanding debt -- at February 1, '04 include a 200 million, 4.75 convert due in December of '06; 150 million, 2.25 convert due in 2008; and approximately 23 million of foreign term loans. We had no outstanding borrowings during the quarter on our $100 million global revolving credit facility. Shareholders' equity aggregated 320 million, which amounts to a book value per share of $9.85.

Taking a look at our cash flows for the first quarter of the year, cash flow from operations was approximately 15.3 million. Cash flow used in investing activities amounted to 101 million, which includes increased short-term investments of 91.2 million and CAPEX of 10.7 million. Free cash flow from operations, net of our CAPEX, was approximately 4.6 million for the first quarter.

Taking a look ahead, our short-term visibility continues to be somewhat limited. However, we are encouraged by an improving mix shift, a reduced operating costs and our current booking levels. Our guidance for revenue for the second quarter is projected to be in the range of 92 to $97 million. Capital expenditures in fiscal '04 continue to track in the range of 75 to 85 million. We are projecting our effective tax rate for 2004, which is dependent upon the flow of income from each country in which we operate, to be in the range of 20 to 30 percent. This amounts to an estimated tax expense in the second quarter of 1.2 million to 1.6 million. Accordingly, based upon our current operating model, we estimate that the earnings per share for the second quarter to be in the range of 10 cents to 16 cents. That wraps up the overview of our financial performance and our short-term outlook. Now I would like to turn the call over to Dan for a brief comment before we open up the call for questions.

Good morning, everyone. Yields and utilization, these are the keys to strong financial performance for both semiconductor and mask companies. Photronics, through its disciplined investment strategies and aggressive asset management program, has consistently executed in such a way as to maximize its performance in both of these key areas. Our success during difficult times has forged our global organization into the industry's strongest and most well-rounded competitor. Our team knows what needs to be done to accelerate our growth during an upturn and is prepared to follow through on every opportunity that arises. But more importantly, our record has increased Photronics' credibility among global semiconductor industry leaders that value stability and innovation in the companies that they select as their strategic partners. For they want partners that can not only withstand cyclical downturns, but advantageously position both parties for superior gains in the upturns.

Such recent accomplishments in this area include our Most Improved Supplier award from Chartered Semiconductor, the first time a mask supplier has earned this award. Our designation by Philips Semiconductor to be one of six strategic suppliers and the only mask supplier in this category. And then, Samsung bestowed a Best Supplier Award to Photronics, which was the only award given to a semiconductor-related company.

Since our first quarter report to you last February, the Photronics team has been very hard at work to identify any and every way to streamline our operations, while at the same time, strengthening our technology service leadership position. Tough decisions needed to be and were made. The result of their hard work on behalf of both customers and shareholders has positively shaped the Company's future by directing resources to areas critical to expanding upon a strong competitive position. As many of the data points have begun to show, the global semiconductor industry, along with the equipment and materials companies that support them, is behaving in a way that typically characterizes a cyclical upturn. Node transitions go slower than expected at 130 nanometers, continue to take place among customers seeking out performance and functionality differentiation. Initial focus by the IBMs and fabless customers have been on products known as long runners, such as microprocessors, memory, graphics accelerators, programmable logic and certain digital signal processors. These long runners, as we call them, account for the vast majority of 130 nanometer wafer fab utilization that is being reported, though in general, yields have languished below what the industry has considered robust 90 percent plus levels. As yields continue to improve, and end-markets, particularly for corporate IT, begin to flourish, we believe that the demand for 130 nanometer mask sets will accelerate.

It has been interesting to reach (ph) for the variety of analyses and opinions being published on the status of the current cycle, as well as having the chance to discuss them with a number of you. Once the conversation moves beyond equipment bookings, growth rates and onto the subject of mask demand drivers, such discussions consistently return to several recurring themes. The competitive landscape, technology and pricing. From the customer's vantage point, we believe that each of these elements are wrapped tightly into a suppliers surface (ph) capability, which continues to be Photronics' most competitive advantage. When the semiconductor industry sprinted into the sub wavelength era, technology moved away from the R&D lab and quickly became a strategic component of service for mask suppliers with the vision to efficiently integrate it into their offerings. And Photronics continues to make great strides in further developing its capabilities. Open ended strategic alliances with research groups like IMEC, customers and litho tool companies have contributed to our early and successful work in areas such as NGL mask development and promless (ph) face ship mask technology. Some of these areas will take time to fully, if ever, develop. While others hold the potential of a more immediate return. As the quarter closed, our early (technical difficulty) -- working on emerging lithography mask solutions was rewarded with great results that led to the patterning of dense 45 nanometer lines and spacing -- spaces -- using a 193 nanometer emerging lithography tool at the Rochester Institute of Technology.

The metric of lines and spaces is particularly informative in gauging the success of resolving features of a wafer with the smallest possible critical dimension. Since its initial reference in trade media interview at the beginning of the month, our IT has gone on to image 38 nanometer lines and spaces. A more in-depth discussion of this research will be presented at the SPI (ph) conference in California next week. And we look forward to examining the ways that Photronics can support the accelerated implementation of this technology.

Pricing, while always competitive, has shown great improvement. Photronics' decisive actions to consolidate capacity and therefore, reduce supply, have certainly helped. Furthermore, we are pleased to note that increases in demand have also played a role. To the extent that demand further strengthens during the course of the current upturn, we expect that the pricing environment will improve in all nodes and across all regions. The competitive dynamics and service orientation of the photomask industry have always set this space apart and challenged the use of traditional analytical thinking. The characteristics that have made Photronics successful in the past, speed, technology, flexibility and cost, are the cornerstones of customer satisfaction and shareholder value upon which we are building a global organization which will ensure Photronics' success in the years to come.

So in summary, we are confident that our strong competitive position, technology-based, and service-driven, will enable us to meet our revenue growth and earning goals. Photronics' near-term success will be closely aligned with consistent performance from our strong operations and service teams. Manufacturing efficiency and aggressive asset management serve as a strong point of contrast for Photronics as the global semiconductor industry reaps the benefits of a cyclical recovery. Thank you for your attention. Following some brief instructions, from the conference call operator, we will be happy to address your questions.

(OPERATOR INSTRUCTIONS). Suresh Balaraman, ThinkEquity.

Can you give us a breakdown of what 130 nanometer was as a percent of mix? Then I have a follow-up after that.

I am going to have Sean Smith answer that question.

Approximately 11 percent of our revenue in the quarter was attributable to 130 nanometers and below.

Also in terms of the next-quarter guidance, how much of arro (ph) does better pricing play? Is it merely unit improvement, or do you expect any more improving implemented pricing scenario?

I think we are going to see better (inaudible) in unit demand and in the pricing environment, for sure. We were encouraged by what we saw in the first quarter, and so we look for the momentum to carry us in the second quarter.

Are we at the stage where you guys -- the mask industry has to leverage to raise prices? Or is it simply price -- (indiscernible) being stocked? Can you give us more color on that?

I believe as demand increases that we have already seen the pricing environment improve to the point, as we mentioned last quarter, that we are able to raise prices selectively. But I think it's becoming more prolific. I want to add that this is at all nodes.

Mark Fitzgerald, Banc of America Securities.

If you look back in your history, this April quarter is typically a really strong quarter for you. And in an economic cycle, double-digit type of growth rates, sequentially, is more the norm, as some of the quarters have been as high as 20 percent. Why such a modest guidance for this quarter, given your view that we are in an economic recovery, industry recovery?

The reason that the guidance is as such is that our visibility being what it is two weeks to four weeks is very limited. We were encouraged, as we said, by the first quarter because we were able to see -- or the last quarter of the year, the calendar quarter -- because we had the first pull-through since 9/11, Christmas pull through. However, that pull-through driven by Wi-Fi and PCs was primarily consumer driven. And so as we move into the first calendar quarter of the year and then our second fiscal quarter, while we are encouraged that the demand is coming, we do not see signs that the IT corporate demand, even though it's encouraging, will occur in the second or third or fourth quarter. It seems it's more tied to the second half of the year, and we really need this corporate IT to be very bullish about our forecast coming up. So we are encouraged. Is it coming in the second, the third or fourth quarter? We can't say for sure. We will have more visibility in the second quarter. But we strongly believe it will happen in the second half.

You are saying for your guys' business, it's going to be more of a typical seasonal pattern for you, that it's going to be a more back-ended year for you?

We believe the consumer demand cannot drive the industry. We typically need to have the corporate IT buy (ph) it (ph), and more or less -- the economy -- firing on all cylinders in the semiconductor space before we can be fully bullish on it.

One other quick question here. You rattled off kind of the chip segments driving the 130 nanometer investments at this point. If you look at lot of those chips that the high-margin businesses, microprocessors and PLCs (ph) and DSPs (ph) being some of the highest margin -- if those guys are having yield problems, how can you expect some of the lower-margin chips to charge ahead into the 130 nanometer if there are still yield problems out there?

We believe that, although the 130 nanometer yields are not at the robust levels -- and there's two things contributing to that. We believe the yields are higher at the 200 nanometer level. At 300 mm, you add another level of complexity. So the yields are lower when you go from 130 to 300 mm. But as more and more product runs through, as a matter of cycles of (indiscernible), we believe the yields will improve in sequential quarters. And as yields improve, yields and utilization -- utilization is up, but you can't have just utilization. As yields improve, it becomes a huge economic leverage on the chip side. And that's what we need -- the chip side to be healthy to drive other designs there.

Have you seen any evidence of those other designs at this point? In terms of at least going through the motion of designing the chips to take out at some point?

In our discussions with customers as well as EDA companies, we are encouraged that more people are doing designs. It's just a matter of the tape-outs aren't occurring because you need end-market demand.

Peter Wright, CIBC World Markets.

Congratulations on a strong quarter. The first question, Dan, is on yields to follow-up on Mark's questioning -- if you would be able to provide us some numbers of where, or at least a relative basis of where yields are at 130 compared to maybe 180 and some of the more mature nodes?

The more mature nodes, as I mentioned earlier, the traditional expectation for robust yields are in the 90 percent plus range. And so, 180 nanometer is really a mature process having been around for four years or more. And so it certainly is yielding at very, very high numbers. However, with the 130 nanometer yields, it's not really clear where the yields are. We have seen very, very low yields. We have seen yields for particular devices in the high 70 percent range. So when it comes down to the devices that are being tooled at 130 nanometers, it's really devise-driven based on complexities. Steve Carlson, our VP of Technology, can probably add some color to that.

I think the 130 nanometer node was the first time where you saw the level of complexity driving a very wide divergence in the yield ramp. That will continue as we move down into the 90 and 65. So it's important that we have the opportunity in the core competencies to help the customer get to the right answer more quickly. One of the ways that we do that is through integrating more of the components from the design side all the way through the wafer side. We put programs together that address cost, yield time to market, those drive utilization and eventually help drive the profit. One of the key elements in that is to test how the mask maker can add value to the process. I think we have talked about some of these programs with ASML and CPL technology, and ways to address some of these complexities and get the cost yields and time-to-the-market equation more favorable.

I was hoping you could comment as these yields are improving, as your mix shift is becoming more favorable and gross margins is obviously seeing some leverage into the cycle -- Dan, you also commented that the pricing environment is also improving. What would that mean for the target gross margins, as we look for the balance of '04?

Our target gross margins, our internal goal, is to get to a gross margin of 40 percent and operating margin of 20 percent. We expect to see sequential improvement in both those metrics coming into this quarter. For us to achieve our long-term target of 40 and 20 percent, we naturally would need to see an improved mix shift, and generate revenues somewhere in a range of approximately 110 million or so. We are a ways away, but we are making good progress towards our goals.

To further what Paul said, again, as for the semiconductors as for ourselves, we are driven by yields and utilization. And we're working very hard to get the yields up. On the utilization side, we have done something different and we have been very decisive in our actions this year when we took out our Phoenix facility and some other global facilities to reduce our capacity. So we are working to that goal. But to show that -- or as evidence that that is working, on a microlevel, if we look at one of our sites that is a high-end site and the utilization is high and the yields are high, the gross margins are in the 40 percent range. But interestingly enough, we also have one mature-end site that is doing extremely well and has been fully loaded since the closure of Phoenix and that site is also running at a 40 percent gross margin. So if we look at recovery in the industry and we get the utilization up across the board around the world, we are very, very encouraged about the model working. And there is tremendous leverage in the financial model that we have.

One last question, housekeeping. When providing the guidance you did for the next quarter, is that accounting for the share count increase, the dilution from the convertible?

Yes, it is, Peter. When we achieve approximately $3.8 million in net income, there will be some additional dilution from the 2.25 shares coming in. That is taken into account.

Ben Pang, J. P. Morgan.

Can you talk more about the mix shift? It seems like your 0.18 and 0.13 are kind of staying the same, that they are not really increasing that much. Or maybe I got the numbers wrong. It seems like over the last two or three quarters, it's not changing that much. As a follow-up onto that, it seems like there were a lot of steppers being shipped in this first half of the year that are 4.13 or below. And shouldn't we see more of an increase there in terms of masks required to support these steppers? The follow-up here is in terms of the pricing increases you talked about, what kind of magnitudes are you talking about here across the different nodes?

First of all, as far as the growth in the 0.18 and 0.13, we are seeing a recovery across all technology nodes, as we mentioned, from mature to the high-end. And so I think that's one reason that it's been that way. But when we look at the 0.13, though modest, we saw a growth from 9 percent to 11 percent. I think that will grow, as you said, as more capacity is put in place and more importantly, as tape-outs increase as there is competence in the yields. When we look at the increase in pricing, we saw -- and it's from last quarter that we had ASPs -- were up about 4.5 percent.

Is that primarily driven by the tightness of the capacity across all the nodes? Or is that due to, again, more to mix shift?

It's a combination of things.

It's a combination of things. Naturally, we saw improvement in ASPs, and it does help by the 11 percent (technical difficulty) -- was the primary driver.

Brett Hodess, Merrill Lynch.

Two questions, first just back on the share count issue. Can you give us what you think the fully diluted is with the 150 convert factored in? The second question is, continuing on the pricing, can you give us a feel -- I know you don't like to talk about specific mask pricing and whatnot. But approximately if you look at 0.13 and below, what sort of the increase in terms of a multiple of say 0.18, on average, we might be seeing at this point in time? Is it 2 or 3X higher? Or can you categorize it someway like that?

I was able to hear the first part of the question, so I will answer it. It's about 40 million shares all in, it would be 1.25 at 3.7 -- 2.25 at $3.7 million of income. And the second part of your question, we could not here it that while. Would you mind repeating that?

The second part of the question was, can you somehow quantify for us what the ASP differential is sort of on average? I know it's tough because every product is different -- for 0.13 and below now versus say around 0.18? Is it a 2X higher price, a 1.5, 3? Some kind of a ballpark?

You were talking about the price we set for -- the difference between 0.18 and 0.13?

Right.

I think if you look at 0.18, the typical decline in pricing as technology node matures, it's at that part for 0.18. So if you compare it to point 0.13 at this point, it's probably 3X.

Gerry Fleming, Oppenheimer & Co.

Can, could you give us an idea as to what you expect pricing wise at the high-end, as your major domestic competitor been reasonably passive in terms of pushing on prices?

As far as pricing goes on the high-end 130, actually, our global competitors around the industry -- and we have all been very I guess you could say disciplined in the behavior patterns. Capacity is getting a little tighter as things start to pick up, and the issues are starting to turn around here, as we look forward. So we don't see any reason why pricing would go down. Actually, just to be (indiscernible), we should see continued price increases, as things start to tighten up during the (indiscernible) half of our year.

What about 0.25 micron and above?

My story about this that we have said before in many of our calls that the mature pricing environment has been very stable. We have seen some increases at the 0.25 micron and 0.35 nodes, and they have stuck. And demands continue to be good as the environment is helping us do some things. We are encouraged by that. And again, we will continue to maintain our theme (ph). The bottom-line for us is that we will continue to work on improving our efficiencies and executing our market share gains and new customer actions that we have going on. As Dan mentioned, we have been recognized by a few of our customers. But we continue to focus on generating cash and sustaining profitability no matter what the environment is for us.

Geographically, is Europe still the weakest market area in terms of demand and profitability?

We don't see it that way. In our situation in Europe, we are lined up with some pretty good people. Obviously, it's one of our strategic locations. We have our Vice President, John Smith here from Europe. John, do you want to add something?

From the Europe position, it is the smallest sector in our company, as everybody knows. But in terms of penetration of the high-end, we have been operating now for the last six months at 120, 130 nodes. And we are actively engaged with all of the European customers in this particular sector. What I am seeing now is penetration of that high-end sector for us. So I am pretty confident for this year in the second half.

Byron Walker, UBS.

Good morning, several questions. On gross margins, Sean, what should we be looking for in the current quarter -- I am sorry, April quarter? I am trying to get the incremental gross margins.

There are certainly incremental gross margins in the guidance that we just laid out. There is a range. We will finish the quarter at 31.6 percent. But based upon our current operating model, if we hit the high-end of our range, we should be in the mid-30s or so -- 34 or 35 percent depending on the mix shift.

The R&D on an absolute dollar business has been flattish. Does it have anything to do with slow growth at 0.13 and below? Or are there other issues as well?

It has nothing to do with slow growth. What we're doing is we are making better use of our resources on a global basis around the world. Because our R&D is just not centralized in the U.S. We have R&D operations going on in Europe, as well as Korea and Taiwan. But this is all coordinated by Steve Carlson and his group here in the U.S. Steve, maybe you would like to add color to that?

Our open model approach and our ability to involve many partners is showing continued benefits across many products. And we have activities with industry consortia like IMEC, equipment suppliers such ASML; of course many of our wafer partners and also include in universities, as was mentioned earlier with some of the emerging work. That allows us to do quite a number of things. One of them is it gives us advanced visibility into the broad spectrum of the device complexity that we need to service. We are not narrowly focused in one particular customer's requirements. And as we move from 130 down into the 90 and 65, it's an absolute requirement that you are able to cover the broad space of applications that will allow these companies to move at a cost effective, high yield, quick time to market type of program.

My last question is what advantages have you -- I'm sorry, what advances have you made on the advanced lithography plane?

I guess you are talking about our initiative on the ILP (ph) or integrating the lithography plane?

Yes.

We have been working very hard in that space since I gave my keynote address at ARS, highlighting the issues facing the industry technologically at 130 nm and below; and the need for this integration to improve the yields. Because as Steve said earlier, this is very, very important from the standpoint of cost, time to market and yields. And again, the yields are the financial leverage because it produces utilization, and of course, the most important thing, profits, on the chip side. And so we feel that if we can energize this in some way, we could increase the tape-outs and control the cost as well. We have talked to a number of partners in this space, trying to evaluate where we are going. The most important thing, however, in our due diligence, in talking to some key semiconductor companies around the world, they have confirmed that we are doing the right thing and we are thinking strategically along this line. And so we have some things that we will announce in a very short period of time. But ,Steve maybe you would like to add something.

I would just like to add that during the due diligence process, we also kicked off several programs to validate the impact that could be made by more further integration from the different components and across the lithography plane. Some of those programs are now complete and we're very pleased with the results and the impact to our customers and their ability to optimize the solution. We have announced some of these programs. One of them in the form of CPL chromeless phase lithography, is a program that combines the necessary elements. Obviously, one of the necessary elements is the IDM and the wafer manufacturer. But in order to get the complete solution, you also have to involve the other element across the space -- the equipment suppliers and the design companies. In this particular example, all three or all four of those components were able to work together to optimize the final picture to a level that would not have been possible with a more narrow focus. We also have other programs that we will be announcing, as we move through the year.

Gus Richard, First Albany Capital.

Real quick on demand for ASICs -- can you talk about how your ASICs customers are coming back, and particularly the ones that are driven by communications and IT?

I think as far as -- the big driver for us in the past has been the ASICs, if we go back through the 180 nm node. But there has been some changes with the efficiencies of the PLDs. What we look to is, although we're driven by design, we are much broader-based than we were a few years ago when we were just working in the logic space. Today, we are working in the DRAM, the flash; we are working in DSPs (ph), again, the microprocessors. So our focus is broader-based. We don't look at it strictly from the ASICs business. And until the turnaround is completed, we are battling on the front for every single design win regardless of what device space it's coming from.

Earlier, you talked about strength in the second half of the year really requiring IT spending to come back. If not ASICs, can you shed a little more light on what devices you would expect to start taping (ph) out that would drive a continued second-half ramp?

I think when you looking at that space, what you are talking about -- what you need is you need DSPs, flash, obviously, is very, very big; microprocessors, memory and advanced logic such as the PLDs and the graphic accelerators.

Gus Richard Except for PLDs, most of that stuff is consumer driven.

It is consumer driven at the present time. But those products will be used -- a lot of it is computing driven. And so as we get into the corporate IT, that will make a big difference. Because right now on the consumer side, what you're seeing is PCs, digital cameras, DVDs, auto navigation systems and cell-phones. What we need is a corporate IT buy, because that's where you get to the more advanced PCs and the more advanced uses as far as communications.

Cristina Osmena, Needham & Co.

I just wanted to re-visit what your mix issue is here at the leading-edge. First of all, maybe you could tell us what you think your mix might be in the April quarter for 0.18 and 0.13?

We typically have not given a range. But we would expect to see some sequential improvement, which will drive our guidance, our steady guidance.

If I could just re-visit then what you guys saw in terms of mix for 0.13 over the last couple of quarters. The improvement was healthy. I think your calculation was 8.8 percent increase in 0.13 revenues. But that seems to me like that would need to be driven entirely by ASP increases and no increase in unit demand? Would that be correct?

I think, Cristina, if you look at it, what drove the 0.13 early on as we enter recovery, are long runners. And as we proceed through the recovery, then you will see some other devices move there. And that's where we need to have that drive, is other devices aside from the long runners. The other thing is what you have to look at in the first quarter, we were affected by the seasonality. And that's why it was referred to by another question earlier, the expectation, because of our first historical performance has always been for a very strong second quarter.

That would be an interesting -- in the sense that if your 0.13 -- if your 0.13 prices increase, I understand that there are other segments of the market, let's say for example, captive shops, that are willing to reduce 0.13 prices. So do you think that you are going to have maybe a migration of shares shift away from you if you do increase your 0.13 prices? Or are we talking about price increases in terms of price per write (ph) hour, in which case, efficiencies would allow you to compete more effectively in the market?

Typically, Cristina, when you look at the captive side versus the merchant side, if the captive side looks at their mask operation as a cost center, typically their prices for masks will be very high. And that's why we saw the rapid disintegration of the captives in the early '90s going through the late '90s. There certainly is one case out there where it really makes sense for them to have a captive mask operation because our product focus is a very, very narrow, and it's highly proprietary. But when you have a broad base of products, you need to have a supplier that has a broad capability. Secondly, for us, because of the way we are service-oriented, technology driven and cost conscious, we offer three things. We can have faster turnaround time and better cost of ownership on the products that we produce. Paul, you want to add something?

(Indiscernible) Cristina, clearly, just on the overall pricing improvement, it's very healthy; it's (indiscernible); we don't see any reason for anybody to want to offer a little bit less. As far as capital environment, (indiscernible) R&D shops working on advanced nodes. They are not known for their service quick-turn time for (indiscernible) of our customers to meet their needs. Most of our customers are global, and we have global arrangements with them. And we are not about to go jump on a one-stop shop and one captive (ph) shop to get some business.

If I could be more specific then, I understand that TSMC is very willing to reduce 0.13 mask prices. They do have a very good advanced capability in order to win the silicon business. And I wanted to know how does this fit into your comments about saying that pricing could actually become healthier, given they are actually willing to do this?

In the case of TSMC, at times it gets a little bit fuzzy as to the pricing because they have the black box approach. And so while they -- this is nothing new with TSMC. In the past, they have always said their pricing is more advantageous. But what you really have to look at is their NREs. Because it is part of their NREs, and it all depends on how they break up their NREs costs. So you may have, say the price of the mask (indiscernible) is smaller, but other components would be higher. And when it was with the fabless companies going into the foundries, such as TSMC, because they did not have the expertise of running a fab before, they were more susceptible to this black box approach. But as more and more IDMs go into the -- make up the bulk of the business of the foundries, such as TSMC, these IDMs are more aware, and they want control of all components.

Is this increased IDM outsourcing trend benefiting you?

Yes, it is. It is benefiting us around the world. Further to your comments about the captives, if you look at some of the captives as is our largest customer, primarily, that captive capability is for research and development. And once they go and wrap a product, then they go out to outsource to people like ourselves.

Byron, I think, touched on the R&D costs and how you have held them nicely flattish. I wanted to know if maybe you could comment on SG&A as well? I think it's part of the reason that you're getting such nice leverage. Do you think you can hold SG&A expenses at the same level here?

We certainly have not lost our focus in maintaining our cost control. We do have continued cost containment, cost avoidance plans in place. We have been able to demonstrate over the last couple of quarters restraint, if you will, in keeping our structure in place. We will continue to do that as we move forward. We obviously will have some increased expenses as time goes on. But we are going to attempt to mitigate those expenses as we have done in the past with other measures.

Ted Berg, Lehman Brothers.

I have a follow-up question to the question earlier on ASIC demand versus non-ASIC demand. You mentioned over the past few years, you have been broadening your exposure to other types of semiconductor devices. I was wondering if you could quantify what the product mix today for ASIC is versus what it was in the relevant period a few years ago that you are comparing to?

I think what you are looking at, there is a big question about where the ASIC number of designs that are out there. I think if you go back to 1998, they are probably somewhere in the range of 10,000 designs. There's questions now whether it's 2,000 or 2500 designs out there. But I think you have to look at -- we have to be flexible in the market. We have to react to the changing realities in the market, as far as the demands for ICs as well as the technologies that drive that. And that's why we have been very, very proactive of moving into different areas around the world. We look very, very closely at end markets and to look at what drives these end markets, and hence, our diversity. We are able to play in these areas because of the technology that we have developed over the last few years. We have really increased our focus on technology. I think the real proof in the pudding, if you look four or five years ago, we were not a major supplier to most of the top ten semiconductor companies in the world. Today, if you look at our top three customers, they are in the top five semiconductor companies in the world. And then if you look on the regional basis, whether it be North America, Europe, Asia or the rest of the world, our top two customers are within the top three. And I think that speaks highly for what we have done as far as diversification, continuing to focus on our service and our costs, and then, adding -- the added dimension of being a technology leader.

You mentioned ASPs increased 4.5 percent. Was that in the January quarter, or were you talking about another period?

That was in the January quarter.

You are projecting units and ASPs to increase in the April quarter, as well, both contributing to the mid-single-digit type growth?

Yes, we are.

Finally, you mentioned -- I might have missed part of this -- two sites running at 40 percent gross margins. Were those both the mature sites? The last quarter, you mentioned there were two above 0.18 micron sites, I think at 40 percent or higher gross margin. There was one high-end site of 0.18 micron and below at 40 percent. Is it the same count this quarter as last quarter?

It is the same account. It is one site at the high-end and one site at the mature end. But we see improving margins at some of our other sites as utilization increases.

Bill, Ong, American Technology.

What is your (indiscernible) of sequential sales growth pattern? And how much revenue can you deliver before you need to add capacity?

Can you repeat the first part of that question?

What is your historical sequential growth rate over the four quarters? And how much revenue can you deliver before you need to add further capacity?

Certainly, in our current operating model, we stated that we can do, depending on the mix of our demand, upwards to $110 million of revenue before we have to start adding significant capacity volume.

As Sean mentioned, we have pretty good balance sheet flexibility to move as quick as we have to. But we continue to focus on our yield and basically, our right strategies and our data preparations and utilize the current assets to get more through-put on a daily basis. This is an ongoing program. Just as of yesterday, our worldwide team met with one of our key litho. suppliers on strategic day plans for capacity going forward for our future. So we feel very comfortable that we are ready to react very quickly when the time comes.

Matt Petkun, D.A. Davidson.

A couple of quick questions -- Sean, what did you state again for your anticipation for the tax provision in Q2?

Tax provision for the year, Matt, is going to be between 20 and 30 percent. The way we have to calculate our estimated effective rate, we have to do an SILO approach by each geographic region. And when you pull it all together, you get your effective tax rate. We are subject, on a quarterly basis, to that fluctuations in income from taxpaying countries versus income from non-taxpaying countries. So we do expect it to be 20 to 30 percent for this quarter. And I believe I mentioned earlier, we also expect it will equate to an actual tax expense in absolute dollars of 1.2 to $1.6 million.

That seems a little bit low to me, the 1.2 to $1.6 million, to come up with the bottom-line number that you are looking for there.

Bear in mind in the United States, from the 10-K that we just published, we have a significant amount of NOLs in place. And we are not currently in a position to continue to record deferred tax benefits. To the extent that we have an income shift and make some profits in other parts of the world that we have not in the last year say year and a half, that will reduce the overall tax expense number.

On the minority interest line, clearly the business in Asia is running well. How would you expect that to track next quarter?

We expect that to continue to be very strong.

Final question, Dan, you're talking about the importance of yields in the industry. What do yields look like for you at the leading-edge right now? And might you be looking at adding some tools to help improve your yields within the existing capacity?

As Paul mentioned earlier, we are always looking at the leverages and looking at more throughput. And obviously with yields improving, you get more throughput. We've had, as far as the advanced lines, the nanotechnology lines in place for the last two years with our 130 nm capability, we certainly made the investment when we believed the industry was going to shift to the 130 nm. It hurt us last year because of depreciation. But on the other side of the coin, we have been able to focus on our processes and our yields. And so our yields are where we need them to be because we have to compete, again, on costs and turnaround time. We will continue to improve that.

I support Dan's comments in the sense that we have made pretty good strides of progress on our yields on our 130 line and below. And it was showing in our ability to deliver product faster than our competitors around the world. But this is an ongoing process. We have to continue to move forward. We need to get better because, obviously, as the yields improve, we can get more throughput to our current asset base, which means we can handle more demand when it comes to us.

Would you be willing just to quantify those yields? It's hard to say, the unit number is not exactly large, but.

It really ranges quite a bit from the product types; it wouldn't really be much (indiscernible) at this point.

Mark Fitzgerald, Banc of America Securities.

On handling this convertible, do we take interest expense out if we convert to the share count here?

Yes, you do. You add that back in. Let me just clarify what I mentioned a little while ago. The absolute number of shares that would be added back in at about $3.7 million of income would be 9.4 million. We are getting an all-in share count of about 42 million.

Can you tell us how much interest expense comes out of that?

It would be the interest on the 150 million, 2.25 debt.

At this time, there are no further questions. Mr. McCarthy, do you have any closing remarks?

I would like to thank everyone for attending our conference call today. And I again urge you to attend our annual shareholders meeting on March 24 at the Intercontinental Hotel in New York. For further information, if you need, please contact Michael McCarthy by phone or through e-mail. Thank you, very much.

This concludes Photronics first-quarter earnings call. You may now disconnect.