Photronics Inc (PLAB) 2004 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to Photronics' third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Mr. McCarthy, you may begin your conference.

Thank you. 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 the results of our fiscal third quarter for 2004, which were reported last night. Before we begin I would like to remind 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 the 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 fourth results the week of December 6th. Our call this morning will begin with Sean Smith, our CFO, 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 on the Q&A will be Deno Macricostas, Chairman and CEO, and Chris Progler, Chief Technical Officer, as well as other members of the senior management team. Sean.

Thanks Mike and good morning everyone. 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 a record topline. Net sales for the third-quarter increased 13.3 million or 15 percent to 103.7 million, a new record, as a result of an improved high-end mix and increased market share gains, particularly in Asia. Total sales outside North America, including exports, accounted for approximately 69 percent of third quarter 2004 revenues compared with 61 percent in the third quarter of the prior year, and 65 percent sequentially.

As a percent of total sales for the third quarter, sales were approximately 49 percent in Asia, 34 percent in North America, and 17 percent in Europe. Sequentially, sales increased by 6.8 percent as a result of increased global photomask high-end demand, principally in Asia and in North America. Sequentially, shipments of photomasks for devices utilizing 0.18-micron design rules and below, increased to 38 percent as compared to 33 percent for the second quarter. Gross margin for the third quarter was 35.9 percent, which amounts to a 450 basis point improvement as compared to the third quarter of 2003. The year-over-year gross margin improvement is a combination of our increased high-end revenue coupled with improved utilization of our manufacturing network.

Sequentially, third quarter gross margin increased 190 basis points due in part to improved utilization across all technodes particularly at and below 180 nanometers. Selling, general and administrate expenses of 13.5 million for the third quarter were essentially flat with last year. Sequentially, SG&A increased modestly by approximately 1.7 percent. SG&A as a percent of sales was 13 percent during the third quarter of 2004, as compared to 15.1 percent in '03, and 13.7 percent sequentially. R&D expenses, which consist principally of continued development for 65 and 45-nanometer process technology, were 7.6 million in the third-quarter. R&D represented 7.3 percent of sales in the third quarter of '04, compared with 8.1 percent last year and 7.7 percent of sales sequentially.

During the third quarter, we generated operating income of $16.1 million, an $8.6 million improvement over last year's third quarter on increased sales of 13.3 million. Sequentially, our operating margin improved to 15.5 percent of total revenue as compared to 12.6 percent in the second quarter. 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.

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 third quarter was 2.6 million as compared to 3.0 million in 2003. During the third quarter we recorded a tax provision of $1.5 million, which was within the stated range of our third quarter guidance. Minority interest charges which represent the minority interest in earnings of our nonwholly-owned subsidiaries in Korea and Taiwan for the third quarter of 2004 increased to 3.6 million as compared to 2.4 million in the second quarter.

Net income was 8.4 million for the third quarter of 2004 as compared to 1.3 million in the third quarter last year. Sequentially, net income increased 41 percent or $2.5 million. Net income per share was 23 cents for the third quarter of '04 as compared to 4 cents net income per share in the third quarter of '03. Sequentially, net income improved by 6 cents per share. As we exited the third quarter we had approximately 1,470 employees, equating to sales of 282,000 per employee on an annualized basis. Taking a look at our nine months year-to-date operating results, for the purposes of this discussion 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 after tax consolidation charge of 39.9 million, or $1.24 per share.

Net sales for the first nine months of 2004 were $291 million, up approximately $34 million or 13.2 percent from the first nine months of last year. The increase is the result of increased design releases associated with the improved semiconductor market and improved high-end mix during 2004. As a result of the increased volume, our gross margins for the first nine months of 2004 increased to 33.9 percent as compared to 26.7 percent for 2003. The improvement is related to increased volume coupled with the improved utilization of our reduced operating infrastructure and improved mix. Selling, general and administrative expenses decreased 5.3 percent to 40.4 million or 13.8 percent of sales.

SG&A last year totaled 42.6 million or 16.6 percent of net sales. Research and development costs were 22.6 million for the first nine months of '04, as compared to 22.5 million last year. R&D was 7.7 percent of sales for fiscal '04 versus 8.7 percent of sales in the prior-year. Our investments in this area are viewed as strategically important to the company's future growth and its ability to provide the innovative lithography solutions required by our customers. Operating income for the first nine months of 2004 improved by 32.3 million to $36 million which represents 95 percent of the incremental sales in 2004. Our operating margin year-to-date, has improved to 12.4 percent in 2004 as compared to 1.4 percent in 2003. Net other expense decreased to 8 million in 2004 compared with 9.3 million in 2003, as a result of reduced year-over-year interest expense.

For the first nine months of 2004, we recorded a tax provision of $4.0 million which represents an effective tax rate of approximately 20 percent. The minority interest charge for the first nine months of '04 increased to 7.4 million as compared to $4.5 million last year. For the first nine months of 2004 our net income amounted to 16.6 million or 47 cents per diluted share compared with a net loss of 11.4 million or 35 cents per diluted share last year. Turning to the balance sheet, from a liquidity position our balance sheet continues to improve. Cash and short-term investments of 250 million as of August 1, 2004, have increased 18 million since year end, and our current ratio at the end of the third quarter improved to 4.6 to 1 as compared to 4.2 to 1 at the end of 2003. The Company's working capital during the third quarter improved by $2 million to 288 million.

We continue to place significant emphasis on managing our balance sheet to preserve and improve our liquidity. Total debt during the third quarter decreased by 10 million to 359 million. The principal components of outstanding debt at quarter end include $191.5 million 4 3/4 convert due December of 2006, $150 million 2 1/4 convert due April 2008, and approximately $17 million of foreign term loans. We had no outstanding borrowings during the quarter on our $100 million global revolving credit facility.

Shareholder's equity aggregated 331 million which amounts to a book value per share of $10.15. Taking a look at our cash flows, cash provided by operations during the third quarter was $40 million and $81 million year-to-date. Year-to-date cash flow used in investing activities amounted to 144 million of which $91 million represented short-term investments and 53 million related to capital expenditures. Year-to-date, free cash flows from operations, which are net of capital expenditures, was $29 million, and cash used in financing activities amounted to $13 million which includes $14 million of prepayments of debt year-to-date.

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 revenue for the first fourth quarter of '04 is projected to be in the range of $104 million to $108 million. Capital expenditures in fiscal 2004 continue to track in the range of 75 million to 85 million, as we invest in our 65 nanometer developmental 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 fourth quarter. We are projecting our effective tax rate for '04, which is dependent upon the flow of income from each country in which we operate in, to be in the range of approximately 15 to 25 percent. This amounts to an estimated tax expense for the fourth quarter to be in the range of $1.6 million to $2.1 million. Accordingly, based upon our current operating model, we estimate earnings per share for the fourth quarter to be in the range of 22 cents to 27 cents per diluted share. That wraps up an overview of our financial performance and our short-term outlook. Now I would like to turn the call over to Paul for a brief comment before we open up the call for questions. Paul.

Thanks John. Good morning everyone. Our company's performance, financial, operational and technology teams, during the quarter was solid. I'm very pleased with the accomplishments across the global enterprise, several of which I will briefly comment on before moving to your questions. As Sean's review highlights, the way that we have structured and managed our global manufacturing and service network enables us to continually improve our performance as measured by several key benchmarks. Our levels of operating profitability are growing at a faster rate than our sales thanks in large to the focus of every Photronics' employee has on making investments and managing costs globally.

The Company continues to generate free cash flow enabling us to strengthen our balance sheet in a number of ways, including increased liquidity which we believe provides us with great flexibility as we pursue a number of strategic objectives in the year ahead. Operationally, each of the three regions performed strongly, not only in supporting the customer, but in supporting each other. Our manufacturing and customer service teams continue capitalizing on opportunities which has enabled Photronics to increase its overall market share. Their efforts have not gone unnoticed or unappreciated. Their ability to earn daily recognition grows out of their commitment to quality, performance to schedule, and most importantly, service. It is the service culture in our organization that is truly unique. We believe this is the one true compelling advantage in the industry that has largely completed its long cycle of consolidation.

In many cases, customer appreciation is shown through sustained market share positions in the face of competition pressure. In others, we have been able to leverage our performance in increased marketshares. When evaluating the contribution of technology to the success of Photronics during the quarter, it is important to note that we were able to reap the benefit of investments made over the past several years. At the same time our strong competitive and financial position is enabling the Company to make strategic and tactical investments that we believe will enhance our competitive position, not just over the next quarter or two, but also in the years to come.

Recently, Photronics was selected by a major U.S.-based IDM to be their joint process development partner for their 65 nanometer designed node. While Photronics has made major strides in closing the technology gap over the last several years, driven largely through our manufacturing efficiencies and customer service excellence, this marks the first opportunity that the Company will have to set the pace based on technology capability alone. We believe that the accelerated learning cycles of the position (indiscernible) to our most advanced mask tabs (ph) when combined with our global service infrastructure, will give Photronics the momentum it requires to generate a competitive advantage.

During the quarter, we announced the installation of the company's first 65 nanometer photomask production line in Austin. These investments positions Photronics as the first merchant mass supplier in North America to make such a commitment. Based on the initial reception from our largest global customers, we are excited about the opportunities and we believe we are now positioned for, when our second 65 nanometer line is installed in Korea in 2005. In summary, I want to emphasize that the global demand for the full range of photomask technology and services continues to grow at a healthy pace.

Our competitive position is strong and our global team is energized. While it is difficult to anticipate how the equity markets will react from day-to-day based on a variety of data points in circulation, we believe that ultimately our strong performance and consistent execution through cycles or pauses will turn into tangible increases in shareholder value for all of our investors, be they individuals, institutions or our own employees. Thank you for your attention. Following some brief instructions from the conference call operator, we will be happy to address your questions.

Operator, would you please go through the queue and take questions please?

Jay Deahna of JP Morgan.

Nice quarter. Two questions. First of all you talked a lot about market share gains. Can you quantify where you have gained market share, and by how much, if possible? And the second question is, you characterized leading-edge mask demand at this point. What has happened to 0.13 and what do you see at 90? Do you see any yield issues out there that could keep design activity at 0.13 or 0.11 a little bit longer? Thank you.

I will take the market share gain, and Deno may want to add something to that. Then, Chris can take on the 90 nanometer yield issues that we have been having. We've talked about before that we have been seeing through all regions the strategic qualifications and things that have been going on, and we are starting to secure what we believe are true inroads at some of the leading IDMs. Basically as you saw, quarter-over-quarter, were are 30 percent high-end increase of 130 and below. We see ourselves and continue to position ourselves because of some strategic investments we are making that are allowing us to service the customers at the requirements of their need based on our positioning and leveraging of our infrastructure around the world. Anything you want to add to that?

Talking about the 130 nanometer today could come, almost all the IDMs, if not all at least the big IDMs, first and second tier IDM definitely, they manufacturing 130 nanometer. (indiscernible) companies the 230, so 130 basically is of course high-end, but definitely most of the companies now are trying to get to 130. The 90 (indiscernible). I will let Chris talk a little bit more about what is going on down the 65 and even below, and maybe Chris you could give (indiscernible) of the company.

Thank you Deno. I think 90 nanometer yields right now are not really typical for this point in the cycle. Most of the devices people are looking at are high-performance logic for microprocessors, programmable devices, DRAMs, bit cells (technical difficulty). I think the real learning (technical difficulty) will happen on those devices and I don't think it is atypical. With that said, if you follow the road maps to go to a three-year cycle per node is looking like it is fairly well supported in the industry. So your comment that will existing notes be leveraged and used for longer periods of time, I think is correct for a variety of reasons. I think most of the ASIC like design activity is still centered between 180 and 130, and I expect as the yields continue to improve at 130, you'll see more ASIC (indiscernible) of that node as well. So I hope that helps.

Alright. Just a quick follow-up on the market share question. What do you think your market share was in calendar '03 and where do you think it will be in calendar '04 on a global basis?

It is very difficult to identify our market share because (indiscernible) data is not really correct. We deal with (indiscernible) Dai Nippon, (indiscernible) extract data (indiscernible) because a public company. It is very difficult. We only say we are gaining market share because we know we grow quicker than a photomask industry grows. So we grow quicker than the industry, I'm talking about the photomask industry. So we feel we are gaining market share and we know from our customers they have a dual supplier, who will only gain market share from those dual supplies. We were able to benefit a couple accounts that were basically (indiscernible) short their competition.

Thank you.

You're welcome.

Byron Walker of UBS.

Good morning. You made reference to improved high-end mix. Can you quantify that for us?

Basically if you look at our quarter-over-quarter at 130 and below we were at a 30 percent increase in our revenue side (indiscernible) up to about 40 percent overall.

30 percent sequential?

Yes. We have seen (indiscernible) seen from the data from Sean. Sean, you may want --.

0.18 and below, Byron, again just to reiterate was 38 percent, up from 33 percent sequentially.

I know you answered the share question, but do you think you're taking share at that node?

I think it is difficult to say, Byron, because most of our customers are migrating down from 100 -- from a quarter to 180, 130. So very difficult to say are they taking share from our competition or just the industry -- one clearly is getting bigger now. Very difficult to identify.

So do you think the log jam on 130 and below has kind of been broken now, people are moving ahead pretty forcefully with new designs?

I would like Chris to answer that question, he is the technologist.

I think so. I think there is much more tendency to take on now. We're seeing more activity at 130 and also we, right now, have eight engagements at 90 nanometer, meaningful engagements. So I think it just shows that more companies are getting engaged at this point on (indiscernible) the ground rules.

Second question, if I might. Can you give us an update on the large area masks?

Large masks, we're very excited. We are seeing tremendous opportunities. Right now we have now broken down, broken because it's still not material. But, hopefully next few quarters we'll be able to (indiscernible) and give you a better breakdown. With this (indiscernible) the LCD market has grown, as you know, 150 billion televisions are going to be replaced with LCDs, and (indiscernible) we're very excited. (indiscernible) has done a great job, but right now it's not material, but next year quarters we update you what is going on with more detail.

Does that answer your question Byron?

Yes, thank you.

Suresh Balaraman of ThinkEquity.

Can you guys talk about the pricing element in different geographies and also at different nodes, especially 130 and 90?

Pricing across the nodes has been very stable. I think we reiterated this on some of our conference calls. 90 and 130 continue to be -- 90 is really early. A lot of it is in the early costs cycles, but across all regions we have seen stability in all nodes actually, not just 90 and 130, 180, (indiscernible). So we are encouraged right now (indiscernible).

Did you mention what 130 was as a percent of revenues? I must have missed it.

It was roughly at 14 percent for the quarter for us.

Any thoughts on the utilization rates in the industry for 130 and also just (indiscernible) technology nodes?

We can comment on our position here. With that percentage of revenue for the third quarter and with five installed 130 nanometer lines, we have -- our utilization has improved but we still have a ways to go before we are at full capacity. We have a lot of opportunity.

Okay. Great. Thank you.

Matt Petkun of D.A. Davidson & Co.

Good morning. I noticed a little bit earlier, a couple of weeks ago, (indiscernible) Printing placing an order for a laser-based tool. Are you seeing your customers encourage you to go after any laser-based tools? Are you interested in that yourselves and how do you view your CapEx plans as fiscal '05 approaches?

On the laser tools, I think we been following it closely for some period of time. We do actively deploy laser tools already for various applications and we are looking at the next generation tools. Most of our high-end focus up until now has been on the 50-keV platforms. This is where our customers have wanted us to go. We worked very hard on the efficiencies of these 50-keV platforms and the cycle times are not that different than what we find on some of the laser tools.

We also noticed that for some of the advanced laser tools there are process development activities that need to go on to bring them on line. So I would say we're looking at them. We see a need as utilization continues to improve to bring those into the network and we are actively engaged with the suppliers of those tools.

As far as capital expenditure plans for 2005, we are in the process of putting together our 2005 plan. We are very excited about a number of opportunities in front of us and we will be able to provide additional color and guidance when we close the quarter.

Thanks a lot. Good quarter.

Gerry Fleming with WR Hambrecht.

A couple of questions. Sean, you mentioned in the past that I think at 120 million a quarter you expect to be at 40 percent gross margins. Are you still on track for that?

Gerry, actually what we're focused on is the gross and operating margins at the 40 and 20 percent level and especially at the operating margin level. Based upon our current operating structure today, to get to about a 20 percent operating margin we would have to do about $113 million or $114 million in revenue depending on the mix. So I would say we are tracking to where we thought we would be.

Okay. I'm not sure if you gave this number before, how much business do you have at 90 nanometers?

We have not to date broken that out.

I think I mentioned it prior, we have roughly eight engagements at 90 nanometers. Now these are customers that have already been qualified or in the process of qualifying. So I think there is a lot of interest and we are engaged with a fairly broad spectrum of top tier IDMs at this node.

But no significant revenues?

We don't break them down, so I cannot be specific how much from 90. We are engaged and we have done some work, we do some work with those guys.

Thank you.

You're welcome.

Peter Wright of CIBC World Markets.

Congratulations on a good quarter. Deno, I was hoping you could share with us what you are seeing in the end markets as far as design activity, what specific end markets are contributing to the pickup? Then Sean a couple of questions. First on CapEx in '05, if you could share with us your current estimate and quantify how much of that is going to be dedicated to your Korean 65 nanometer line? Secondly, quick math on the 113 to 114 million of revenues, a bit ahead of schedule. The 20 percent operating margin on that, it seems that you guys are modeling about a 65 percent incremental operating margin. Is that still true at these levels?

(indiscernible)

We will work backwards. With respect to capital expenditures for 2005, we are, as I stated a little bit earlier, we are in the process of finalizing our plans for 64, our total capital spend for next year. As I mentioned we have a number of opportunities that we're excited about. We will be able to provide additional color when we close the fourth quarter, is what our firm plans are. With respect to our operating model, this past quarter we had for the incremental revenue, about 64 percent or so drop down to the operating income line and we still expect that to trade at, as we move forward, 60 percent to 65 percent of incremental income. As we bring additional costs within the system, the entire management team and employee base, works very diligently to reduce and avoid other costs so we can keep our infrastructure in place. With respect to, I'm sorry, 65 nanometers?

Or more broadly, the pickup in revenues that you're seeing, what end markets are contributing to the pickup and design activity?

I cannot be specific in the endmarkets but overall our customers are much busier, especially design activities is (indiscernible) especially 130 nanometer is being, I guess, fine-tuned process to get better yields. From a capacity (indiscernible) designs and even they have a lot inventory, that does not fit the design activity. Regardless, the old product are selling so that will force them to come up with new designs, and to stimulate sales or to improve the designs. So overall from our point of view, from our side, we like are we are basically.

Thank you very much.

Timothy Arcuri (ph) of Smith Barney.

This is Dan Bierenbaum (ph) for Tim. Quick question on the gross margins, you talked about getting to 40 percent. How much of that is going to come just from improved utilization and how much of that is going to come from mix shift?

It's a combination of both. We do expect to continue to see sequential growth at the high-end, but as we do that we continue to work on our processes and improve our yields. It's a combination of both of those factors.

How much can you maybe quantify what you're counting on in terms of a mix shift?

We are counting on improvement, but what we're really focused on is improving our sequential growth in our revenues and our bottom-line which includes the mature side of the business as well.

Fair enough. A quick question for Paul. Paul, you talked about an industry that has completed a long cycle of consolidation. What do you see happening on that front over the next year or two? Do you still see the merchant mask shops, the four big players remaining roughly as they are? Do you see any changing dynamics there?

We believe that based on the situation of what has been going on in our industry over the last couple of years, some of the moves that we have made in trying to gain global positioning which we have now and the opportunities we have with our customer base today, it's pressuring a lot of the competitors to rethink some things and putting them in a tough way. Probably the guy that can give you the outlook on the industry consolidation is the guy that has probably been involved with it most of the time. I'll Deno give a little bit of light on that.

(indiscernible) too many mask makers (indiscernible) industry, three in Japan, two in the United States, one in Taiwan, with six players (indiscernible). So when I say $2.5 billion, only 70 percent of the 2.5 billion is merchant. We have 80 percent doing NEC, TSMC, Samsung, IBM, Intel and (indiscernible) to some extent. So altogether really it's too many players and I believe there are two companies (indiscernible) Photronics is global at the present time. The Japanese, they're in Japan. The Japanese market is changing, so the U.S. market is changing overall. Our employees were Najia (ph), we're in Taiwan, we're in Korea, in Singapore, and we break ground this year in Shanghai, China. So basically (indiscernible) very important and our growth is mostly coming, a lot of our growth is coming through Asia. But definitely it would be a consolidation. I don't want to be the -- who is going to be or who is going to survive, but definitely it has to be a consolidation.

Okay. Thank you.

You're welcome.

Brett Hodess of Merrill Lynch.

Good morning, this is Mike Lug (ph) for Brett Hodess. Just a quick question. On the revenue growth in the third quarter, was that attributed solely to higher ASPs from the mix shift towards more high-end masks or were there also some unit increases in that? On the outlook for the fourth quarter topline, could you comment on where you think the mix is going to go? Is it going to continue to increase at the high-end and is that what is driving the high-end of the range there on your guidance?

We believe, for the prior quarter third quarter, we had a very nice mix of ASP and unit demand across our regions. We see the same broadbase behavior pattern in talking to our customers, going into the fourth quarter. That is probably the best news, and one, it's not a single application or a customer that is driving it, a nice broadbase across our global team.

Thank you.

Tim Najay (ph) of Ballacy (ph) Asset Management.

I unfortunately jumped on the call a little late. Can you just review your outlook for the next quarter and sort of how you get comfortable with that? Thank you.

Our outlook for the next quarter is revenues to be in the range of $104 million to $108 million, and our EPS is projected to be in a range of 22 cents to 27 cents.

Thank you.

Robert Maire of Needham.

A couple of questions, in terms of the ongoing business model, given that we have seen a fairly rapid rise in the cost of manufacturing equipment associated with photomasks, other than an ongoing realignment of your business model as the costs and the dynamics change, maybe you could describe, or is there a -- what is the model that you are currently using in terms of useful life of equipment in terms of what you are sort of programming into your model in terms of future equipment costs and things like that. I'm trying to get my hands around the impact on the photomask industry of the changes in equipment costs I have seen recently?

That is pretty -- I will turn to answer that. It is a pretty broadbased question, but I will tell you that we have, over the last couple of years, spent quite a bit on capital expenditures and we have been able to generate improved return sequentially. As we go into '05, we are focused on, as we develop our plans for '05, to ensure that as we bring additional capital in, we maintain our sequential growth both at the topline and the bottom-line, that is what we continuously work on. Paul, if you want to add a little color to that?

The other side of that, regardless of when you by the equipment, improving through-puts through your process developments and capability of your process and cleanliness and things of this, could enhance the output of that tool into a much better situation to get more revenue off the tool. I mean, even from the advanced technologies that are coming down the road, maybe Chris would like to talk a little bit about an example, 193 in motion?

Sure. I think the cost of equipment is an issue to be concerned about, not just from mask companies, for chip makers and anybody really in this space and the productivity has to be there and utilization has to be there to return on that investment and I think that is in our plan. One positive trend for the mask companies and Photronics in particular, because we've been working on this for awhile, is the extension of 193 certainly to 65 nanometer and now with immersion lithography gaining a lot of momentum, a lot of positive signs, even to 45 nanometer node. So that reduces the number of tools one needs to replace in a mask facility to take on business at those nodes.

So, I think while individual tools are of course getting more expensive, as long as productivity continues to improve, it holds together and we also have opportunity to not replace as many tools by extending 193 with some of our mask technology.

So you haven't done anything like changing your depreciation schedules or the way you look at useful life of equipment or costs based on that?

Absolutely, we have not. We maintain our accounting policies consistently.

(indiscernible) really because starts at the high end and goes to the low end because the equipment is used, more than five years.

Okay. A follow-up question unrelated to that. In visiting foundries in Asia, it seems that there is a trend for the foundries to obviously push customers to use their own integral photomask shops, and that seems to be if anything an increasing trend. What are you doing to sort of combat that trend of the foundries trying to suck in the photomask business as well?

Usually, where work becomes (indiscernible) TSMC, the only (indiscernible) fairly extensive mask facility, definitely be able to (indiscernible) the customers and to buy (indiscernible) service. Photomask and, of course, chips is the only foundries we know. There's other foundries like Chartered Semiconductor, the UMC, (indiscernible); in Malaysia there's a couple, (indiscernible) semiconductor in Israel. I could go on and on, even some (indiscernible).

So there is nothing specific you are doing, or you think it is very limited?

No, what we do (indiscernible) except TSMC where the other foundries are supplying photomask to the established company or to the (indiscernible) and they provide the mask to the foundry.

We also currently service product going into a TSMC program that is going on in Singapore. We are the primary into that group. We do have established strategy which does attack globally around the world, different customer bases that feed in, showing them the value that Photronics can bring to them from the service side, a technology side, and cost structure. And we can say, to some degree, we have been very successful to a point where we believe we have several of the players starting to want to have some more meaningful meetings about the future for them at definitely 130 and 90, where we think the next wave of concern is showing up.

Okay. Thank you.

Chris Buniss (ph) SFM Global (ph).

It's Chip Bunit (ph). A question on utilization. I wanted to circle back there for a second. You had a nice increase in the high end mask this quarter and given the longer write (ph) times I would think that would have given you a nice uptick in utilization. Can you quantify that change for us at all? Also, you talked in the past about not needing to add capacity up to the $110 million level for quarter. I was wondering if that still holds or has that changed in any way?

On the situation of our high-end capacity utilization we saw basically a 10 percent increase quarter-over-quarter, in that range. It's hard to break it down on some things. But I think it is important to realize that when people are quoting utilization rates and things of that, it can be an inflated number that can be misleading because if your process development does not go hand in hand with your capacity installed, someone can be producing two to three plates a day, where your competitor is doing it five plates a day, six plates a day. So I think the key is to watch the topline, see what drops to the bottom. That will tell you the effectiveness of their yield programs and how well they are servicing the customer. From our side, we think our plan is, as Sean has mentioned, with Chris in development on the process front and the execution of our operational teams around the world, we believe that we have a very good structure in place and planned, are yield programs, right strategies that provide the product to the customer at the time they need it.

(indiscernible) capacity on the 65 nanometer. That will come in sometime online by the end of the year.

Okay, and then --.

(indiscernible) by nanometer capacity, but even technology mostly.

Two follow-ups, if I could. Can you just give us the sequential growth by geographies, and the sequential growth in high-end masks?

We said we stated our 0.18 and below was --.

0.18 and below was 38 percent, up from 33 percent. Sales in Asia were 49 percent. I believe they were up 44, 45 percent in the prior quarter. U.S. was 34 percent, down from about 37, 38 percent to prior quarter, and Europe was essentially flat as part of the overall mix. We did see growth in Asia during the quarter.

Okay. Thank you.

Cristina Osmena of Jefferies.

Good quarter. First of all, just a couple of questions here. If you might be willing to speak more specifically about your PSM facility and whether or not you are serving multiple customers out of that facility and if you're getting any mainstream mask revenue out of the Taiwan based TSMC (indiscernible)? Then I have a couple of other questions.

Were you referring to PSMC?

Yes.

Let's take it back. I think on PSMC, we pick up revenues on the qualified productlines that we are with them as of right now. We are working obviously with them and seeing, trying to help them out if there is any need on the higher end. As far as servicing, your question on servicing other customers -- I am sorry.

How many customers is PSMC servicing now in the (indiscernible)?

Several. Several.

They have a number of customers. We haven't broken them out, Cristina, but there are quite a few.

Predominantly our revenues are based from Taiwan.

A question here in terms of the design cycle for 130 nanometers. This node is becoming much more mature and has been often argued that the design costs for 130 and below are quite expensive. Have they tightened up the process at all? Are you seeing design costs come down at all for 130 nanometer?

This is Chris. I think, yes, the design productivity has improved at 130. A lot of the issues that were impacting early yield related to design topics have improved significantly, and I think the EDA companies have stepped up their offering tools that have improved the design process at 130. With that said, it is still taking a bigger and bigger piece of the cost issue for new tapeouts, in many cases overwhelming the cost of the masks actually. It is still something we focus on and some of our mask integration programs are geared towards exactly that, trying to do what we can to improve the productivity of the design cycle where there are photomasks involved. This is what we are calling our IOP initiative and it is very tightly linked it with multiple EDA companies to specifically address this topic.

Thank you.

Timothy Acury of Smith Barney.

This is Dan Bierenbaum again. Following up a little bit on 65 nanometer on the CapEx, you talked about there is opportunity for maybe more reuse of tools due to (indiscernible) 193 nanometer litho. How much of your 65 nanometer spend is done already and how much is left? And then also, how much of that extension will flow through to maybe a reduction in the R&D line?

In our fiscal 2004 plan, in the 52 million year-to-date and in our 75 million to 80 million, 85 million projected for fiscal '04, include the 65 nanometer line. We also plan to add another line next year that Paul may want to highlight a little bit. But that has been part of our process.

On the 65 nanometer we are referring to, the second line will be going in 2005 into our Korea operation following a footprint of our Austin design plan that Chris has laid out for us.

How much more -- is there a way to think about how much more incremental CapEx you will ultimately have to spend on 65 nanometer, just sort of pie-in-the-sky type numbers?

As I mentioned earlier, we're not in a position today to discuss what our full CapEx plans are for next year. However the 65 nanometer line, we have started putting in some of the -- getting the facility ready in Korea, and we put a litho tool and we put an inspection tool which will come into next year.

Since there will be a lot extension of known technologies down at 65 nanometer, 45 nanometer, do you see some kind of reduction in your R&D moving forward?

I don't think they are expecting to have reductions in R&D. Right now, since last quarter, in fact when we spoke, we have signed up two partners for 45 nanometer early prototyping and learning. So we expect to keep the pace pretty strong in the R&D area. And on 65, we'll be qualification ready, our current plan is middle of next year to start working with customers. We have already been prototyping for about a year on 65. Maybe that gives you some feel for the timing of revenue potential for 65.

Okay. Great. Thank you.

Byron Walker of UBS.

A couple of them. I was interested in your comment that 65 nanometer node will be centered in Korea. I guess that was next year. I guess that infers that the advanced technologies are all moving to Asia?

Actually, Byron, this year we're starting in the United States. This summer we're going to install and be ready in operations sometime early part of next year to do prototypes on the 65 nanometer. Also (indiscernible) of course (indiscernible) 90 jumps up to production. The 65 can do the 90 nanometer production too, but the 65 is (indiscernible) generation for efficiency there.

Right now the timing of our Austin 65 line is ahead of our Korea facility. So that may have just been a misunderstanding. But, we are installing tools currently in Austin to service the 65 nanometer needs and Korea is on the plan and will come on slightly later than that.

The other question I had is back to the 130 nanometer and below revenue share, I believe you said something like 14 percent of sales. Can we assume that as things look right now that that number will come up when you report again the following quarter?

I think Paul can answer your question.

Byron I would say that is a very fair statement. We anticipate growing on that node and continue to grow at a healthy rate, let's say that.

Want to try to dial us in quantitatively, 20 plus percent?

No, I wouldn't do that.

I had to ask. Thank you.

Gerry Fleming of WR Hambrecht.

You had a big gain in your Asian business in the quarter, and along with it your minority interests that you reported went up quite a bit. Are they linked together? And as we look to the fourth quarter, what happens if Asia-Pacific gets to about 50 percent and what happens in terms of both the minority interest and do the taxes go to the high end of the range?

You are pretty much right on the mark. The growth in Asia in the topline, we saw our minority interest go up quite a bit. We would expect, I think we are at $3.6 million for this quarter. We expect to be somewhat in the similar range, plus or minus a couple hundred thousand, next quarter. On taxes, if that is the case, it would potentially get to the higher end of the range because we are a taxpayer, just to remind people in Korea.

Thank you.

Cristina Osmena of Jefferies.

Just a quick question. Could you give us your sense of the size of the 90 nanometer business worldwide in terms of the number of masks that are produced per quarter?

This number varies obviously, but right now our belief is there are probably a few tapeouts worldwide, real 90 nanometer tapeouts in the system -- designs in-process. I should not have used tapeouts, about a few hundred designs in-process in 90 nanometer.

Each quarter?

No, total. So, right now if you look at the activity at 90 nanometer designs, designs where they are expected to go to tapeout, it's a few hundred.

Okay.

So there won't be another 200 next quarter. It will gradually increase as yields and applications grow.

Do we have some sort of a bubble of 90 nanometer tapeouts that took place in the June-July quarter?

I don't think there was a bubble, I think it's been a fairly typical transition between nodes where the microprocessors, etc., were leading the charge and now you are seeing highly integrated wireless applications, and things like that, start to move to 90 and then the more application-specific uses will come back. So I don't think there has always been a bubble, I think it has been a fairly metered transition to 90.

Thank you.

Mark Fitzgerald of Bank of America Securities.

I was curious, as you go to 90 nanometer and 65 here, is there any evidence that your customers, designers and litho guys are sharing the error (ph) budget with you here? Is there any advantages if they are in terms of your own cost structure?

I think also, this is one of our things we focus on in our IOP program. There is definitely more openness to talk budget sharing and those kinds of topics. So we have in most of our engagements at 90, and I say all of them at 65 and 45, tolerancing, budgeting between the design piece, the lithography piece and the mask pieces, upfront discussion. People are sharing new concepts towards doing that and I think it's a lot of very good dialogue between the three communities. So I think it is quite a positive trend, particularly at 90, 65 and of course at 45 it becomes essential to think this way. So we have a very strong program in this area, and we have a lot of good progress.

Will this slow the dollars that are spent in terms of your CapEx budget on inspection equipment going forward?

I don't think it will slow. The base tools will still be needed, however, the productivity and utilization of those tools I think will improve, but still the fundamental capability will be needed to deliver these nodes, but we expect better yield and utilization out of these tools as a result of these efforts.

I think the way to look at it is that with the programs that are in place with these customers we are counting on those things to achieve the productivity and output goals we have said in our CapEx plan.

And can you just give us what the percentage of inspection is of your CapEx budget this year?

We haven't really broken down our CapEx, and at this point, I don't have that information at the tip of my fingers.

Okay. Thank you,

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

Deno or Paul?

I would like to thank everybody for participating on the conference. We definitely feel very excited about the next quarter (indiscernible) the next few quarters (indiscernible) well. I would like to thank you again for participating with us today.

I echo, I want to congratulate the Photronics' team worldwide in their focus and execution and I would like to thank everybody who continues to support our company in the investment community. We hope to continue to provide and deliver what we say each and every quarter to you. Thank you very much.

This now concludes Photronics' third quarter earnings conference call. You may now disconnect.