Photronics Inc (PLAB) 2004 Q2 法說會逐字稿

Good morning. My name is Jody and I will be your conference facilitator today. At this time I would like to welcome everyone to the Photronics Second Quarter Earnings Release Conference Call. [Operator Instructions].

Mr. McCarthy, you may begin your conference.

Thanks Jody and good morning everyone. My name's Mike McCarthy, Vice President of Investor Relations and Corporate Communications for Photronics. I'd like to thank you all for joining us for this morning's conference call, during which we'll discuss the results of our fiscal second quarter earnings, which were reported last night.

Before we begin, I'd like to remind all participants about the Safe Harbor statement provision under the Private Securities Litigation Reform Act of 1995. Except for historical events, the information that we'll 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 third quarter results, the week of August 16.

Our call this morning will begin with Sean Smith, our Chief Financial Officer, providing a detailed review of our income statement and balance sheet. After which Paul Fego, President and Chief Operating Officer, will share some brief comments and then moderate the Q&A session. Joining Paul and Sean in the Q&A will be Deno Macricostas, Chairman and CEO, and other members of the senior management team.

Sean?

Thanks Mike and good morning everyone. I'll provide a brief analysis of our financial results for the second 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 enabled the Company to achieve its best bottom line in the last 12 quarters.

For purposes of our discussion of the results of operations for this year and last year, I will be referring to our comparative operating results excluding the impact of last year's second quarter North American consolidation charge of $39.9m, or $1.24 per share.

Net sales in our second quarter amounted to $97.2m, an increase of $11.6m or 13.6% as compared with the second quarter of last year. Total sales outside North America including exports accounted for approximately 65% of second quarter '04 revenues compared with 61% in the second quarter of the prior year and 64% sequentially. As a percent of total sales for the second quarter, sales were approximately 44% in Asia, 37% in North America, and 19% in Europe.

Sequentially, sales increased by 7.4% as a result of the increased global photomask demand across all tech nodes, primarily in Asia and in Europe. Sequentially, shipments for photomasks, the devices utilizing 0.18 micron design rules and below increased by 15% and represented approximately 33% of our total second quarter revenues.

Gross margin for the second quarter was 34%, which amounts to a 740 basis point improvement as compared to the second quarter of 2003. The year-over-year gross margin improvement is a combination of our increased revenue coupled with improved utilization of our streamlined consolidated manufacturing network.

Sequentially, second quarter gross margins increased by 240 basis points, due in part to improved utilization across all tech nodes, particularly at and below 180 nanometers.

Selling, general and administrative expenses for the second quarter were $13.3m, as compared to $14.6m last year. Sequentially, SG&A was down approximately 1.8%. SG&A as a percent of sales was 13.7% during the second quarter of 2004, as compared to 17.1% in 2003, and 15% sequentially.

Research and development expenses, which consist principally of continued development for 65 and below nanometer process technology, was $7.5m in the second quarter. R&D represented 7.7% of sales in the second quarter of 2004, compared with 8.8% last year and 8.2% of sales sequentially.

Research and development expenses for the third quarter are expected to increase approximately 4 to 7%, as we continue to expand on the development of our 65 and below nanometer process technology.

During the second quarter, we generated operating income of $12.2m, which is an $11.6m improvement over last year's second quarter. Sequentially, net sales and operating income increased by $6.7m and $4.6m respectively.

Our operating model continues to provide significant leverage once our revenues reach breakeven, which continues to be under $90m. As our revenues continue to grow, including our high-end mix, we believe that the long-term goal of achieving operating margins of 20% or greater are achievable. Our global team continues to do an outstanding job in matching our cost structure to the changing demand and opportunities in the global market environment.

Net other expense for the second quarter was $2.7m, as compared to $3.3m in 2003. During the second quarter, we recorded a tax provision of $1.2m, which was within the stated range of our second quarter guidance.

Net income for the second quarter was $6m, as compared to a net loss of $4.2m in the second quarter last year. Sequentially, net income increased 179%, or $3.8m.

Net income per share was 17c for the second quarter of 2004, as compared with a 13c net loss per share in the second quarter of 2003. Sequentially, net income improved by 10c a share.

As we exited the second quarter, we had approximately 1,455 employees, which equates to sales of $267,000 per employee on an annualized basis.

Now taking a look at our six-month year-to-date operating results before the impact of our consolidation charge, net sales for the first six months of 2004 were $187.7m, up approximately $20.7m or 12.4% from the first six months of last year. The increase is the result of increased design leases associated with the improved semiconductor market and improved mix during 2004.

As a result of the increased volume, our gross margins for the first six months of 2004 increased to 32.9% as compared to 24.2% for 2003. The improvement is related to increased volume, coupled with improved utilization of our reduced operating infrastructure, and mix.

Selling, general and administrative expenses decreased 7.4% to $26.8m, or 14.3% of sales. SG&A last year totaled $29m, or 17.4% of net sales.

Research and development costs were $14.9m for the first six months of 2004, as compared to $15.2m last year. R&D was 8% of sales for fiscal '04, versus 9.1% of sales in the prior year. Our investments in this area are viewed as strategically important to the Company's future growth and ability to provide the innovative lithography solutions required by our customers.

Operating income for the first six months of 2004 was $19.9m, which represents 96% of the incremental sales in 2004.

Net other expense decreased to $5.4m in 2004 compared with $6.3m in 2003, as a result of reduced year-over-year interest expense.

For the first six months of 2004, we recorded a tax provision of $2.5m, which amounts to an effective tax rate of 23.7%.

For the first six months of 2004 our net income amounted to $8.1m, or 24c per diluted share, compared with a net loss of $12.7m, or 40c per share, last year.

Now turning to the balance sheet. From a liquidity position, our balance sheet continues to improve. Cash and short-term investments of $242m as of May 2, 2004 have increased $10m since year-end. And our current ratio at the end of the second quarter improved to 5.1 to 1, as compared to 4.2 to 1 at the end of 2003.

Sequentially, the Company's working capital increased during the second quarter by $10m to $286m - a new record. We continue to place significant emphasis on managing our balance sheet to preserve and improve our liquidity.

Total debt during the second quarter decreased by $4m to $369m. The principle component of outstanding debt on May 2, 2004 includes a $200m four-and-three-quarter convert due December '06, a $150m two-and-a-quarter convert due April of '08, and approximately $19m of foreign term loans. We had no outstanding borrowings during the quarter on our $100m global revolving credit facility.

Shareholders' equity aggregated $324m, which amounts to a book value per share of approximately $9.96.

Taking a look at our cash flows. For the first six months of the year, cash flow from operations was $41m. And cash flow used in investing activities amounted to $122m, which includes increased short-term investments of $91m and capital expenditures of approximately $31m.

Year to date, free cash flows from operations, net of capital expenditures, was approximately $10m.

Taking a look ahead, our short-term visibility continues to be somewhat limited, however we are very encouraged by our improving mix, our stable operating environment, and our current booking levels. Our guidance for the revenue for the third quarter is projected to be in the range of $99m-$104m.

Capital expenditures in fiscal 2004 continue to track in the range of $75m-$85m, as we invest in our 65 nanometers development programs to capitalize on strategic alliances and opportunities with key customers. As a result of these opportunities and our increasing revenue base, we are projecting our operating expenses to increase modestly during the third quarter.

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 20-25%. This amounts to an estimated tax expense for the third quarter to be in the range of $1.1m-$1.5m.

Accordingly, based upon our current operating model, we estimate that the earnings per share for the third quarter to be in the range of 18c-24c per diluted share.

That wraps up the overview of our financial performance and our short-term outlook. I'd now like to turn the call over to Paul for a brief comment before we open up the call for questions. Paul?

Thanks Sean and good morning everyone. As Sean's review of our financial performance highlights, the global manufacturing and service network of Photronics has now almost fully returned to the historical levels of operating efficiencies.

The Company's core values - speed, technology, flexibility in cost - reminds each person to maintain a sharp focus on the needs of our customers, and to deliver the results that our shareholders expect from us each and every day. We are driven by the need to continuously improve, and to work to achieve our goal of being the photomask industry service, technology, and financial performance leader.

Global semiconductor industry's tape-out activity is healthy and holds the promise of further improvements throughout this year and into next. Demand at both 180 nanometer and the 130 nanometer nodes showed good improvement, which we had expected and discussed with all of you at our analysts' meeting back in March.

We are particularly pleased with the growth in our 180 nanometer mix, as this provides further evidence that the global customer base is looking for high yielding process solutions for their next-generation products. Our 130 nanometer mix also showed healthy sequential growth in absolute dollars.

Our global manufacturing network's ability to support their nodes directly in Asia, Europe and North America has allowed us to grow with our customers, as well as earn larger market share, as they continue to implement next-generation process solutions.

Our corporate technology group today has prepared operation teams for the 90 nanometer rollout. And as a result, they're shipping their focus to the 65 nanometer and below.

Certainly, technology has been a valued proposition driver over the years. That is how Photronics has integrated it into our service culture that enables our team to fully leverage its benefits, while distinguishing itself as the benchmark against which all other mask technology suppliers are measured in a production setting.

As pressures from increasing mask level volumes at the high end and demands for rapid delivery times have grown, our performance to schedules has not suffered. In fact, it has improved.

Our focus on the customer and their needs, accompanied by Photronics' dependability, is a time-proven strategy we have used for producing customer satisfaction. Our strategy continues to receive validation, not only through our improving financial results, but also through the formal notification of regarding supplier service awards we have received from customers, recognizing these very key characteristics.

The competitive landscape, while always intense, has been remarkably stable. We expect this tone will carry through well into next year, as an increasing number of semiconductor companies transition to nodes at and below 180 nanometer, begin to insert 90 nanometer products into production, and shift their R&D resources to the 65 nanometer node.

Increasing high-end demand, which has been accompanied by rational capital investment on the part of the leading global mask suppliers, continues to support a firm pricing environment. Additionally, Photronics has been able to identify areas where the Company can increase prices selectively.

As many of you know, Photronics instituted several changes to the senior management structure during the quarter. Some had expressed concern that this might serve as a distraction during the most critical cycle of the upturn. We believed that this would not, assured by the fact that the core of the management team remained intact and aware of the importance of delivering results that meet your expectations. We believe that goal has largely been achieved today.

Photronics initiated activities to further leverage the assets that were put in place over two years ago. Dr. Chris Progler was promoted from Chief Scientist to the newly-created position of Chief Technology Officer. His extensive and world-class background in lithography and simulation make him the ideal executive to lead the Photronics corporate technology group as we shift our efforts to the challenges of 65 nanometer and below, and incorporate the Integrating Lithography Plane into our service infrastructure.

Since taking on these responsibilities, Chris has re-tasked his team to meet if not exceed the aggressive goals we have set for him, in order to capture the maximum benefit of future technology node shifts.

S.H. Jeong, the founder of PKL in Korea, was made the President of Asia. His extensive customer contacts and regional culture savvy will help him position Photronics in the Asia marketplace, where there are tremendous opportunities for us. S.H. and the team continue to execute very well in Korea, and we are very pleased that his leadership will help all of our Asian operations perform at a much higher level in the future.

At the Board level, we consider ourselves fortunate to have added the renowned semiconductor industry veteran, Mitch Tyson. His extensive experience as a CEO of the rapidly growing global supplier to the semiconductor industry brings Photronics a seasoned executive who understands the dual challenge of meeting both customer and investor expectations.

Our CEO search is being orchestrated by several independent members of our Board, and is ongoing.

In summary, I would like to reiterate to those of you participating on our call today that we believe the global demand for advanced photomask technology and service continues to grow at a very healthy pace. The industry's ability to supply advanced mask technology has not suffered from over-optimistic capital investments, as suppliers are bringing increased attention to their bottom line results.

While some will remain challenged, Photronics faces the future with excitement. Our competitive position is strong and our disciplined investment and infrastructure management programs are enabling us to meet our revenue growth, our earning goals, as the global semiconductor industry reaps the benefits of this current recovery cycle.

Thank you for your attention. Following some brief instructions from the conference call operator, we will be happy to address your questions.

[Operator Instructions].

Your first question comes from Brett Hodess from Merrill Lynch.

Good morning gentlemen. Couple of questions. First, given the mix shift at the leading edge, can you talk about how much of your growth is coming from unit volume versus pricing at this point? And what the utilization rates are like at the leading edge, how much room you have to continue to expand there?

Yes, Brett, hi. It's Paul. On the unit and the pricing side, we have seen obviously an increase in our percentage of unit demand output, and there has been some pricing input to that. As far as a breakdown, we couldn't give that to you. But as far as utilization rates, we have definitely seen a step up of about 10%. We are in the low 70% range right now. And high-end we did see an increase somewhere in the 15% and above range.

Okay. And the second question I had was - when you look at the leading edge development work now on the 65 nanometer, I know the first installation's in the US, when do you need to have that 65 nanometer installation up and generating revenues?

From a technology perspective (this is Chris Progler), prototyping 65 nanometer node masks will start this year in earnest. We've already had engagements with customers at 65 the past year or two, but I think this year the program's formalized and those earning cycles will begin in earnest. And the ability to deliver masks to specification will happen next year.

As far as putting the manufacturing capacity on line, I think I'll pass that one to Paul.

Yes. Brett, on that side as you know we're very engaged with several of our strategic customers, not only in what their needs are but some of the tool selection process also. And we feel very comfortable what the timing is for their needs.

And the final quick question for Sean, just to be very clear on the tax rate. The tax rate stays in that stable range because you're only paying taxes on the foreign business at this point?

That's correct Brett. The taxes continue to be a bone of contention with a lot of people and I'll try to explain this the best I can. We are paying, we are a taxpayer in certain jurisdictions, such as Korea. And we are a taxpayer in the United States, but we have NOL so we wouldn't be paying taxes in the near term. So to the extent income flows from different regions, that causes some fluctuations in the overall effective rate on a quarter-by-quarter basis.

In the last quarter's conference call I gave a range of 20-30% for the entire year, which we have an effective rate of 24% or so for the first six months. And what the attempt is, that we give the guidance on absolute dollars, that will probably be a better measure for people to utilize between $1.1m and $1.5m for this quarter.

Very good. Thank you.

Your next question comes from Byron Walker from UBS.

Hi. Paul, I wondered what your mix is, percentage mix, at 130 nanometers?

It's right now, Byron, it's at 11% for this quarter, approximately.

Yes. I believe one of your major competitors is at about 30% mix level, at 130 and below. But they're at low double-digit margins. What do you think your model might look like in terms of margins as you cross, say, 20% plus mix level at 130 nanometer?

I would say that at that mix level, which we will get to, we would exceed on the gross margin, we'd be at about 40% and the operating margin is 25%. There's no way at those kind of technology nodes that we wouldn't be seeing that kind of fall through.

Any idea when you might get there?

Good question Byron, but as we go forward we believe that if you look-- I guess the good point is [anything] to bring us up in the sense that if you look at what we told you back, a while back, we told you when we'd be profitable. And we hit that and we've been four to second quarters of profitability. We told you that we believed back in March the 180 nanometer was going to drive this recovery and we have validated that also. We will tell you that 130 nanometer mix will continue to grow quarter-on-quarter as we move forward, and we believe that financially as that grows you'll see the drop through also.

Now, looking at the other end of the spectrum, at 180 nanometers. What are your margins there? And do you think you're gaining share?

On the margin side, Sean?

Byron, we don't typically break out margins by tech node. What we are concentrated on is improving our overall growth in operating margins as an all in basis. And we want all of our toolsets to be fully utilized or reach capacity with respect to utilization. Paul?

Yes. We talked about the utilization rates with [indiscernible]. Right now, from that side we definitely on the 180 side that you asked, we definitely have gained market share, not only from the domestic supply but we have also gained market share from the Japanese supply. And I think for us right now we believe that we're not hitting on all cylinders, so we're excited about that because with the activity we have going on and the momentum we have right now, we think the future for us is even stronger. And we think that market share gains will continue to be seen in the coming quarters with the activities that we have going around the world right now.

Great. Thanks.

Your next question comes from Jay Deahna from JP Morgan.

Thank you. Congratulations on a nice quarter. Two questions. The first one is - can you characterize the pace of tape-outs at 180 and 130? Clearly they improved in the last quarter, are they continuing to improve? In other words, are they accelerating, or are they flat at a high level, or decelerating?

Okay, Jay. On the 180 tape-outs the increased outs has been increasing quarter-on-quarter, we continue growing hopefully in this quarter, we're seeing the same momentum. There's a lot more people that are, they take a little bit more risk at 130, and a little bit broader base, customer base, starting to engage in this activity. It's our best [indiscernible]. Chris, do you have anything to add to that?

Yes. I would agree. The 130 design productivity and the yields are sufficient now, where you're seeing a lot more design releases and a lot more risk taking in that regard. So I think that the trend is positive for tape-outs at 130.

So in other words the number of 130 nanometer tape-outs that occur as this year progresses should be an accelerating phenomenon - is that what you're saying?

This is Deno, Jay. Definitely we believe going forward the 130 is going to be a sweet spot going forward. Because now that we have the equipment, the processes is better, so they're going to really [indiscernible] more 130 nanometer. So definitely we'll see the 130 nanometer [indiscernible]. Margins better.

Following on from that, do you think that following on to Byron's question there, do you think that your margins as you execute the 130 nanometer rollout can be as good as your 180? And do you think you can gain share given your global manufacturing network in the move to 130?

Hi Jay, this is Sean. On the margins side, certainly we'd expect to significantly have leverage on the 130 with five toolsets in place. And as we migrate down, being about 11% of our overall mix, you can run the math, those tools aren't fully utilized as of yet. So we have a significant opportunity to grow and those costs are essentially fixed. And Paul - would you like to follow up?

Jay, on the market share side, as we've mentioned in prior quarters about the 130, we were going to be having some head-on collisions in some parts of the world. We are very comfortable where we are and are continuing to gain our business in those regions because of our performance.

Great. Thank you.

Your next question comes from Suresh Balaraman from Think Equity.

In terms of after you spend about $80m in CAPEX for this year, where would that leave you in terms of 130 nanometer capacity as a percent of overall capacity? And then I have a follow up after that.

Suresh, this is Sean. We don't typically break out our capacity.

But did I hear you right in saying that you said the utilization rate at 130 nanometer was about [50%]?

No. We did not give, quote, a specific utilization rate at 130 nanometer. Let me just clarify one point. Our CAPEX for 2004 is not related to 130 nanometer development. We have the toolsets in place. The primary purpose of our CAPEX in 2004 is for 65 nanometer and below process technology.

Okay, great. And what would the share count be for the next quarter? And I [remembered] how much the [indiscernible] at what level of EPS it would kick in?

Okay. The share count next quarter would probably tick up from a basic base of a couple of hundred, two to three hundred thousand. And the convert which, the $150m convert that became dilutive this quarter, added about 9,441,000 shares to the equation.

And in terms of the interest that you add back, how much would that be?

Well, that's 2.25 stated rate but you have to add in the financing fees. So the effective rate is probably about 2.8-2.9%.

Okay, great. And just, can you please tell us again what the geographical distribution of revenues was? I missed that part of the-

Geographically, revenues outside North America were 65%. In Asia they were 44%, in North America 37% including exports, and 19% in Europe.

Thanks.

Your next question comes from Gerry Fleming from [WR Hembreck].

A follow on to Suresh's question about utilization. Paul in his comments said that high-end utilization was around 50. What's the definition of high-end?

Gerry, this is Sean. High-end, we define high-end as 180 nanometers and below.

Okay. So then you're running at a higher utilization rate, I would assume, at 180 than you are at 130. So that puts your 130 utilization at a pretty low rate.

Well, as I stated earlier, we have five 130 nanometer sets and our business has been growing on that. We expect it to continue to pick up.

Yes, this is Paul. I did not state 50%. There was a 15% quarter-over-quarter improvement on our utilization at the high-end.

Our overall utilization is in the low 70s worldwide, but we do not break out high-end. So hopefully that clarifies [INAUDIBLE].

Okay, thanks. And one follow up. What's the situation on pricing at older nodes?

Well, Zafar Ahmad, our North American [VP] will answer on that.

Yes, the pricing seems pretty stable for this period and actually we have seen some opportunities for some increases at some of the technology nodes.

Thank you.

Your next question comes from Bill Ong from American Technology.

Yes, can you offer some more guidance on how to model the non-operating portion for the business, concerning the interest income and minority interest? Because it does have some considerable variance from quarter to quarter. Thanks.

Bill, this is Sean. Our non-operating income, our other income, other expense, does fluctuate depending upon changes in foreign currency or interest income and interest expense should be relatively flat from quarter to quarter. So $2.7m, well if you're looking to model you may want to use about the $3m amount. And the minority interest for the quarter, which represents the income in our two majority held subsidiaries in Taiwan and Korea, we'd project continue to increase as we move forward. We expect those entities to continue to grow our profits.

Okay, thanks.

Your next question comes from Gus Richards from First Albany Capital.

Morning guys. Could you talk a little bit about end demand? And if you could cut it a couple of different ways - ASICS, analog, memory, logic. And then, if you could look at it by ultimate end market - communications, PC consumer, cell phone, that way - that would be very helpful.

This is Chris Progler. I think as far as the end user demand, wireless and consumer things still seem to be driving most of the applications. Breaking it down into the level of detail you request, I don't think we can do right now. But it seems to be wireless and consumer driving a lot of the activities right now.

And then, can you talk a little bit about competition from Dainippon Screen and Toppan outside of Japan? Has the level of activity from those competitors picked up? Are you seeing them more frequently in accounts? Any comments there?

Yes, Gus. This is Paul. As we stated earlier, that we have had basically some collisions with the Japanese suppliers and we had basically won some of the awards. And this is what's driven our market share gain to come over this quarter. We expect to continue the battle. We don't see any reason why we cannot win the battles, based on our performance worldwide. And that's just our attitude right now.

In which region are they becoming more aggressive? Or where are you seeing them most frequently?

We see them in all of our regions. And so either the domestic or the Japanese. So we meet them everywhere and we compete with them everywhere.

Gus, this is Deno. What we try to do really is we're closing the technology gap. It is easy to gain market share away from the Japanese. Statistically, the US [prefers to buy] from US companies. The European [indiscernible] continue with the European. The Koreans with the Koreans -- so on. So you close the technology gap. Our game plan is basically to take basically all we can away from the Japanese. So [indiscernible] will grow every operation in the world's markets. Wherever, in every pocket. So we feel very good about that.

Okay. And then just one quick one. I missed the top line revenue guidance. Sean, could you just repeat that for me, please?

Sure, Gus. The top line revenue guidance is at $99m-$104m.

Got it. All right. Thanks a lot.

You're welcome.

Your next question comes from Mark Fitzgerald from Banc of America Securities.

Thank you. On the tax rate here, if we didn't have the NOLs, what kind of normalized tax rate would we be looking at for the Company?

Well Mark, on a normalized basis it should be between 25% and 35%. But unfortunately it's going to take us a while to get back to a normalized tax rate because of our significant NOL position in the US.

Okay. And can you give us a dollar value on that NOL?

I think as disclosed it's in excess of $50m in our 10-K. I don't have the exact number on the top of my head.

Okay and then just on the utilization rates here, can you give us some sense where you'll be towards the end of this current quarter that we're in?

We probably cannot at this moment, Mark. We'd have to look. Maybe, Sean, you want to?

I just want to clarify one thing, Mark. Our NOL is $58.8m.

Okay. And no comment on the utilization?

No, Mark. The problem with that is the mix. It can depend on the right time and things of that nature, so it's very difficult to project a number out there.

Can we assume though, with the trend higher given your positive outlook for the business?

That's a good idea.

Okay. And then can you, just on a more global issue here, can you give us some sense what's happened to the basic mix here in your business over the last couple of years here?

Basically - Chris, do you want to take it?

I think during early parts of the node there's been a fair emphasis on programmable devices and these types of applications. High runners, so to speak, and the ASICS tape-outs have lagged as far as the nodes go. But the ASICS advantages still hold, in terms of products performance and cycle time and other things are still advantageous for ASICS. And furthermore, for the programmable devices, a lot of the physical effects that challenge ASICS design are starting to creep in, in FPGAs. So some of the design activity, design concerns, that folks have had historically for ASICS are starting to creep up in FPGAs as well.

So we're still confident ASICS is an application that has many uses, and we'll see that evidence in stronger tape-out activity once yield and design productivity is enabled.

And does it still represent the mix that it's historically been in your business?

I think yes, yes. ASICS tend to drive tape-outs. Tape-outs tend to drive mask volumes, so that's correct. I think it's true.

Okay. Thank you.

We have a follow-up question from Byron Walker from UBS.

Yes. Sean, help me out a little bit with the diluted EPS. I'm trying to divide net income by shares. I'm not getting the same number. Am I missing some of the math here?

Where are you, Byron?

I got net, 5.985.

Right.

And shares 42.66.

Right. You need to add back the interest on that debt, those convertible shares.

Okay.

Which is about $1.1m.

Right.

And you should be able to get to EPS.

Okay. [Indiscernible] any tax adjustment on that, Sean?

No, because it's a US-based convertible bond.

Okay.

And we're not a US taxpayer.

Got it.

Your next question comes from Matt Petkun from DA Davidson and Company.

Hi, good morning. Can you break out - and I'm not sure if this is meaningful yet, it's part of your business or material - but the photomask for an LCD display business in the quarter?

Hi, Matt. This is Sean. We're not in a position to break that out just yet. It's not been a significant portion of our business, but we feel it's a tremendous opportunity for our future growth in Korea and it's one of the opportunities that we're very excited about.

Can you quantify maybe what the ASPs are relative to some of your other business for masks out there?

This is Paul. At this time, no, we would probably not be able to disclose some of the ASP numbers right now.

Okay. And then just finally, you're a little bit cautious, Sean, in saying that visibility still isn't super strong but you're able to give relatively positive top line guidance. What are the lead times looking like right now? Are they improving? And what gives you confidence that you can even see an increase at this point in the cycle?

Well Matt, there's virtually no change in our backlog. So our visibility will always and continue to be limited for the future, although we are excited about where we sit. And we are seeing some things that present some opportunities for us that we need to capitalize on.

But no specific change in lead times from customers [indiscernible]?

No, Matt. This is Paul. No, not at this time. I would say one thing that was mentioned earlier by Deno was that clearly, as we've said before, leveraging our global infrastructure [is definitely] playing into this cycle's recovery for sure.

Okay, thanks.

[Operator Instructions].

Your next question comes from Cristina Osmena from Jeffries and Company.

Hi. A follow-up question on something that Gus had asked earlier. With activity in Japan coming back up, why wouldn't it be pulling in some of the resources of your Japanese competitors back towards their domestic market? Are you seeing that kind of dynamic going on?

Could you repeat the question, please, for us?

With Japan turning back on and presumably mass demand in Japan probably turning back on, why wouldn't it pull some of the resources of Dainippon and Toppan back towards Japan and leave the environment less competitive in the rest of the geographic region?

Cristina, this is Deno. Your logic is excellent really. I've got to give you a lot of credit, young lady. I agree with you. They're getting very busy in Japan. They may be able to --- not be able to service the remaining regions as well. I agree with you, really. We haven't seen it as yet --- maybe starting, maybe. But we haven't seen it there yet.

Okay. And secondly, I was just wondering if you might give us a feel of whether or not there has been a change in the timing of the 65 nanometer node. You're obviously in development mode, but what are the shift makers thinking? Is there any potential delay in the [wrap] in 65 nanometer?

Cristina, we'll let Chris Progler address that for you.

I think the 180, the 130, transition was a tough one for the industry in general. Right now, it looks like 130 to 90 will be somewhat more efficient, a little more straightforward. I have a feeling that 90 to 65 is going to look a little bit more like the 130 transition in terms of some of the challenges with yield and complexity. So right now, while the road maps are intact in the leading edge companies that are committed to the current dates as far as that overall node, there is indication that there could be some delays as far as broad industry acceptance of those kinds of ground rules. There's a lot of remaining issues at 65.

Any sense of from when to when? I guess it's too soon to tell.

It's really too soon to tell.

Okay. Thank you.

[Operator Instructions].

There are no further questions, sir, at this time.

This is Deno. I'd like to thank everyone for participating today at our conference. Definitely [indiscernible] things are excited and enthused and very optimistic about our next quarter. [Masks I will believe] in a sweet spot. So we hope and we believe that when we have a very nice incremental growth, top and bottom line, for the next few quarters. Very excited about the opportunities. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.