Photronics Inc (PLAB) 2004 Q4 法說會逐字稿

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

Thank you, Cynthia. Good morning, everyone. My name is Mike McCarthy, Vice President of Investor Relations and Corporate Communications for Photronics, and I would like to thank everyone for participating in this morning's conference call during which we will discuss the results of our fiscal 2004 fourth quarter, 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 '95. 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 2005 first-quarter results the week of February 21st. Our call this morning will begin with Sean Smith, our CFO, providing a detailed review of our income statement and balance sheet. Please bear with Sean this morning, as he is just recovering from a severe chest cold.

After his comments Paul Fego, President and COO, will share some brief comments and then moderate the Q&A session. Joining Paul and Sean in the Q&A this morning will be Deno Macricostas, our Chairman and CEO, and Dr. Chris Progler, our Chief Technical Officer, as well as other members of the senior management team. Sean?

Thanks, Mike, and good morning, everyone. I will provide a brief analysis of our financial results for the fourth quarter and fiscal year. 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 global organization for their outstanding efforts during 2004.

For purposes of our discussion of operations for the quarter, I will be primarily referring to our operating results excluding the impact of the following items. During the fourth quarter of 2004, we repurchased $40 million of our outstanding 191.5 million, 4 3/4 convertible notes. The redemption resulted in an early extinguishment loss during the fourth quarter of approximately 1.1 million or 3 cents per share.

Net sales for the fourth quarter increased 12.7 million or 14 percent to 104.2 million, a new record as compared to the fourth quarter of 2003. The increase is a result of an improved high-end mix and increased market share gains.

Geographically as a percent of net sales for the fourth quarter, sales were approximately 50 percent in Asia, 33 percent in North America, and 17 percent in Europe. Total sales outside North America including export accounted for approximately 71 percent of fourth-quarter revenues compared with 63 percent in the fourth quarter of the prior year, and 69 percent sequentially.

Net sales on a sequential basis were essentially flat in all geographic regions. Shipments of photomasks or devices utilizing 0.13 micron design rules and below increased to 15 percent during the fourth quarter.

Gross margin for the fourth quarter was 34.9 percent, which amounts to a 280 basis point improvement as compared to the fourth quarter of 2003. The year-over-year gross margin improvement is a combination of our increased high-end revenue coupled with the improved utilization of our manufacturing network. Sequentially, fourth-quarter gross margin decreased 100 basis points as a result of increased material costs associated with customer qualifications and higher equipment costs.

Selling, general, and administrative expenses of 13.1 million for the fourth quarter decreased by 400,000. Sequentially, SG&A decreased modestly by 2.8 percent. SG&A as a percent of sales was 12.6 percent during the fourth quarter of 2004, as compared to 14.8 percent in 2003 and 13 percent sequentially.

Research and development expenses, which consist principally of continued development for 65 and 45 nanometer process technologies, were $8 million for the fourth quarter. R&D represented 7.6 percent of sales in the fourth quarter of '04, compared with 8.2 percent last year and 7.3 percent of sales sequentially.

During the fourth quarter we generated operating income of 15.3 million, a $6.9 million improvement over last year's fourth quarter on increased sales of 12.7 million. Our operating margin for the quarter improved to 14.7 percent of total revenue as compared to 9.1 percent last year. 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 are within our reach.

Our global team continues to do an outstanding job in matching our cost structure to the challenging demands and opportunities in the global marketplace.

Net other expense for the fourth quarter was $2.3 million. Excluding the $1.1 million one-time expense related to the repurchase of the $40 million, 4 3/4 bonds, net other expense decreased by $1.3 million sequentially as a result of increased investment returns and reduced interest expense.

During the fourth quarter we recorded a tax provision of 1.7 million which was within the stated range of our guidance. Minority interest charges, which represent the minority interest in earnings of our non-wholly-owned subsidiaries in Korea and Taiwan for the fourth quarter of '04, were 3.4 million as compared to 1.1 million last year and 3.6 million sequentially.

Net income for the fourth quarter exclusive of the $1.1 million bond redemption charge was $9 million as compared to 3.1 million in the fourth quarter last year. Sequentially net income improved by $600,000.

Diluted earnings per share for the fourth quarter excluding the bond charge was 24 cents per share, as compared to 10 cents per share in the fourth quarter of 2003. Sequentially EPS improved by a penny per share.

As we exited the fourth quarter had approximately 1,470 employees equating to sales of 283,000 per employee on an annualized basis.

Taking a look at our fiscal 2004 results, 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 the following charges. An aggregate 1.2 million or 3 cents per share bond redemption charge in fiscal 2004; a 39.9 million or $1.24 per share consolidation charge in 2003; and a 900,000 or 3 cents per share charge incurred with the redemption of our $52.1 million, 6 percent notes in 2003.

Net sales during 2004 were 396 million, up approximately 47 million or 13.4 percent as compared to 2003. The increase is a result of increased design releases associated with the improved semiconductor market and improved high-end mix during '04.

As a result of the increased volume our gross margins during '04 increased 610 basis points to 34.2 percent as compared to 28.1 percent for 2003. The improvement is related (technical difficulty) improved utilization of our reduced operating infrastructure and improved mix.

Selling, general, and administrative expenses decreased 4.7 percent to 53.5 million or 13.5 percent of net sales. SG&A last year totaled 56.2 million or 16.1 percent of net sales.

Research and development costs were 30.5 million during 2004 as compared to $30 million last year. R&D was 7.7 percent of sales for fiscal '04, versus 8.6 percent of sales in the prior year. Our investments in this area are viewed as strategically important to the Company's future growth and our ability to provide the innovative lithography solutions required by our customers.

Operating income during 2004 improved to 51.3 million or 13 percent of sales as compared to 12.1 million or 3.5 percent in 2003. The year-over-year improvement in operating income of $39 million represented approximately 84 percent of the increased sales during fiscal 2004.

Net other expense decreased to 9.1 million in 2004 compared with 10.8 million in 2003, as a result of year-over-year reduced interest expense and increased investment income. During 2004, we recorded a tax provision of approximately $5.8 million.

The minority interest charge for 2004 increased to 10.8 million as compared to $5.6 million last year, as a result of the improved profitability from our two majority held investments in Korea and in Taiwan.

Net income for 2004 excluding the impact of the costs associated with the bond redemption amounted to 25.7 million or 71 cents per diluted share compared with a net loss of 7.4 million 23 cents per share last year.

Now turning to the balance sheet. The balance sheet during the past year has shown continuous improvement. During the past year, we placed increased emphasis on improving our balance sheet fundamentals while maintaining our strong liquidity. Cash and short-term investments of 227 million at the end of 2004 compared favorably to cash and investments of 232 million at the end of last year.

During 2004, our net debt, which is our cash less our long-term debt, improved by $50 million to 92 million. Working capital at year-end remained strong at 255 million as compared to 259 million at the end of last year.

During 2004, our long-term debt increased by $55 million, which includes the redemption of an aggregate 48.5 million of the Company's 4 3/4 convertible debentures. At the end of the year total debt was 318.9 million. The principal components of outstanding debt include 151.5 million, 4 3/4 convert which is due in December of '06; $150 million, 2 1/4 convert which is due in April of '08; and approximately 17.4 million of foreign and other term loans. We had no outstanding borrowings during the quarter on our $100 million revolving credit facility.

Subsequent to year-end, the Company repurchased an additional $41.4 million of the Company's 4 3/4 bonds at a loss of $1.2 million. Shareholders equity aggregated 349 million which amounts to a book value per share of $10.69.

Now turning to our cash flows. Cash provided by operations for the fourth quarter was approximately $45 million. For the year, cash flow from operations was $126 million. Cash flow used in investing activities for 2004 amounted to $148 million, of which 80 million represented capital expenditures and 68 million representing increased short-term investments.

Free cash flows from operations which are net of capital expenditures was $46 million for the year, a new Company record. Cash used by financing activities in 2004 amounted to $53 million which primarily relates to repayment of long-term debt of 55 million during the year.

Now taking a look ahead, our short-term visibility continues to be limited. We believe during 2005 we will continue to see new design activity especially at and below 180 nanometers. We're also encouraged by a number of strategic opportunities that should enable us to increase our revenues through organic growth and market share gains from our competitors.

However, the recent softness in the semiconductor market has resulted in a customer environment of cautious optimism. We typically encounter normal seasonal shutdowns associated with the holiday periods during our first quarter. This year, we anticipate an increase in the number and duration of customer shutdowns as compared to last year. Expect to see the Asian foundries matching their production schedules to the U.S. and European holiday period.

As a result, we believe it is prudent to take a conservative view in forecasting revenues and earnings for the first quarter of 2005. Based upon our current operating model, the outlook for first-quarter revenue of 2005 is in the range of 94 to $99 million.

During the latter part of 2004, we began to increase our operating infrastructure to capitalize on strategic alliances and opportunities with key customers. As a result, our operating expenses are projected to increase modestly during the first quarter of 2005. Capital expenditures in 2005 are forecasted to be in the range of 105 to 125 million as we invest in capability and customer relationships to enable us to achieve additional growth and market share gains.

One of our team's key priorities is to maintain our financial flexibility and continue to match capital outlays to meet the anticipated demand and opportunities. While we are not providing guidance for the full year at this time, we do expect to fund our 2005 CapEx from our operating cash flows.

Included in 2005's planned CapEx are commitments made during the latter part of 2004; toolsets and process technology for 65 nanometers and below development; and a facility and tools associated with our greenfield site in China. Our Company's willingness to increase capital expenditures is a reflection of our confidence in being able to fully leverage our global leadership in changes in the competitive environment as well as responding to market opportunities that represent themselves.

During 2005, our tax rate will be impacted by the flow of income from jurisdictions for which we may have tax holidays or credits and upon our limited ability to recognize tax benefits in areas in which we are taxable. Accordingly, we are estimating an effective tax rate for 2005 to be in the range of 20 to 25 percent. For the first quarter, this will equate to a range of 1.1 to 1.6 million and whole dollars.

As a result, based upon our current operating model, we estimate earnings per share for the first quarter of fiscal 2005, excluding the impact of the November 2005 bond redemption of 1.2 million, to be in the range of 7 cents to 14 cents per 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 who will provide some brief comments before we go into Q&A. Paul?

Thanks, Sean, and good morning, everyone. During the fiscal 2004, several major milestones were achieved. I would like to extend my thanks to each and every Photronics employee for their hard work, and congratulate them on their success.

Our team executed well in a challenging environment, delivering advanced and mainstream technologies with the highest levels of customer satisfaction and meeting our major financial goals. The fourth quarter represented our second sequential quarter of record revenue, and we are pleased to report that the total revenue for the fiscal year established a new record. Well done.

Perhaps more important than our solid top-line growth was our ability to convert these revenues into quality earnings and free cash flow. As President and COO, my day-to-day focus is on sales and operations. But I can certainly tell you that financial flexibility and strength have a way of fueling our global competitive advantage in ways that sheer size cannot.

Photronics always has and always will seek out every way to maximize utilization of our resources to our customers' fullest benefit. While we expect that the year ahead will open many new opportunities for us, our experience indicates that successful companies will be flexible and move quickly to realize the full benefit of these opportunities.

Our financial position when combined with our intense focus on execution continues to afford us levels of flexibility and agility that enable Photronics to strengthen strategic relationships with customers by delivering performance which builds trust.

Just as in 2004, we believe that sequential quarter-to-quarter performance in fiscal 2005 will be positive, driven largely by the increasing number of customers transitioning to more advanced process technologies. The main growth should come from the 180 and 130-nanometer nodes. This will definitely be the sweet spot.

Now we believe that 90 nanometer will begin to ramp up at the end of 2005. This will be most pronounced in Asia, where semiconductor fabrication capacity is coming online the fastest. Certainly we will be affected by the holidays in our January quarter, as you have noted from Sean's earlier guidance; but this is not unusual.

Our regional investment in technology rollout strategies are generating success in large part because of the strong execution we are seeing from our global sales, manufacturing, and corporate technology teams.

The degree of cooperation among operating divisions and functional departments inside Photronics has enabled this Company to smoothly adapt to a shifting market dynamic, such as the movement of a large portion of our business to Asia, but also in how to most effectively manage strategically important relationships in Europe such as in Krolls (ph), and in North America as a joint development supplier on 65 nanometer.

As a result, we have been able to earn numerous awards from our customers and also accelerate learning cycles through technology development partnerships that are adding to our momentum and the ability to increase market share by providing superior customer service.

Effective service today often requires effective integration of new and advanced manufacturing processes and technologies. At Photronics, our team believes that the value-added service is more about anticipating the customers' needs. It is all about making it easy for them to do business with you.

As the management team evaluates the contribution of technology to the success of Photronics during any period, it is important to remember the Company has taken a disciplined and measured approach to building its capability, then bringing it to bear in the marketplace so as to maximize the return on investment.

With the future growth of business in mind, Photronics made its initial 65-nanometer investment this year. After an exhaustive evaluation process the Company was selected by a major U.S.-based IDM to be their joint process development partner for the 65-nanometer design node.

Momentum off of this inflection point is growing. During the year, a second 65-nanometer line will be installed in Asia, where within fast-growing regions (ph) we will leverage learning cycles from our U.S.-based line to give Photronics momentum it requires to generate a substantial competitive advantage among those customers that are first adopters of advanced wafer technologies.

We're also engaged in developing solutions for processes at and below the 45-nanometer technology node.

In summary, I want to emphasize that our visibility is short. Customer sentiment remains generally positive. There are clearly some seasonal frustrations, but they have not reached down so deeply as to affect design activity at this point.

Our core values, speed, technology, flexibility, and cost will be the cornerstone of our success in the year ahead. Finally, the global demand for full range of photomask technology and services should continue to grow, as should Photronics's ability to service a larger share of the worldwide market.

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

(OPERATOR INSTRUCTIONS) Robert Maire with Needham & Company.

A couple questions. You mentioned you are expecting a deeper slowdown in the normal seasonal shutdown. Is that because customers have advised you of that? Or is that your assumption? Or can you give us a little more flavor as to is it 20 percent more shutdowns, or give us a little detail on that, please?

This is Paul. What we have done, as we do every year, we survey our customers' plans for the holidays. What we have seen this year is an increase of our customers -- percentage we will not give -- but an increase in our customer base that are taking a shutdown this year compared to last year. What we have also noticed is that we've seen an extension of the days that were shutdown last year. Such as some people were taking 3 days last year; they now stretch it out to 5 or 7.

Is that across the board by geography?

It is. We have seen Europe, U.S., seen this; Asia, less we have seen. But mainly we see it in the U.S., Europe, predominately.

Another question, given the recent acquisition of your competitor here in the U.S., DuPont Photomasks, any significant changes or indication of changes in the customer base? Obviously there is some opportunities there. What are you seeing initially?

I will let Deno answer that for you.

This is Deno. (indiscernible) good, especially when the photomask industry is so small, manufacturing about 1.8 million, if you take out the captives. So I believe all (indiscernible) benefit especially Photronics because we have the same footprint as DPMI. Additional opportunities and we are going to capitalize on the opportunities going forward really, and we hope to gain market share from that (ph).

Any indication so far from that? Or what have you seen so far?

Indication is some customers, they like to deal with U.S. companies; some they have a lot of concerns. Some they -- but we see some -- basically they have DPMI and Toppan as a first and second choice. So we have the opportunity to qualify us as a -- as a (indiscernible) as a second choice. So we do see opportunities. We are ready, look to educate (ph) and capitalize the opportunities.

Okay.

Suresh Balaraman, ThinkEquity.

When we look at the revenue levels for the next quarter, they are pretty much in the same ballpark as in the July quarter. But when you look at the EPS it is much lower. I am wondering how the margins play out as your advanced mask set plans? Also, give us your thoughts on the utilization levels in the industry for 130 nanometers and below. Thanks.

The cost structure of the Company is slightly different from what it was in the third quarter of this year or second quarter this year. We did invest $80 million in capital expenditures for this year, and we have built up our infrastructure to capitalize on some opportunities that may not be apparent with our guidance for the first quarter, but we feel very confident that they will be apparent in fiscal 2005; and we will realize from those benefits.

So we continue to closely monitor our cost structure. We have not lost our focus on that. That is a day in and day out job from all of our 1,470 employees. But we feel comfortable with where we are and our infrastructure.

Any comment on the utilization levels at 130 nanometer and below?

Could you speak up a little bit? We couldn't really hear that.

Can you talk about the utilization levels in the industry for 130 nanometer masks to the e-beam writing (ph) tools or laser writing tools?

Our utilization rates basically from Q3 to Q4 have been pretty much flat. The same rate. We overall were in the low 70 overall. And on the high end, I don't have that data in front of me right now, the high-end beam (ph) breakout. Sorry.

One last question. Can you give us what kind of revenue levels -- can you be seeing margins in the high 30s?

Let me answer that a little differently. The focus of our Company is to attain a long-term goal of an operating margin of 20 percent. To do that under our current infrastructure in the first quarter we would need to attain a revenue level of about $116 million.

Ali Irani of CIBC World Markets.

Could you talk a little bit about the gross margins during the quarter you just reported? On flat revenues they were down. Were there mix factors in that, or are you generally seeing some costs, either currency related or from your material space?

The primary reason for the decline related to some increase in material costs associated with some qualification, and additional equipment cost that we brought online through depreciation and maintenance during the quarter. (indiscernible)

But the depreciation in the quarter was flat. So are these costs then installing the equipment and bringing them off (ph), up, in terms of the factory (inaudible) spent on that?

Let me just add a little caller to the comment on depreciation. Our depreciation with respect to our cost of goods sold did increase. On the cash-flow statement it appears that is flat or just up slightly because there's other factors in there, with amortization and some non cost of goods sold depreciation that came off during the quarter.

Sean, if you will humor me a little bit, your guidance is significantly worse than the Street was expecting. Obviously the environment is different and there is some seasonality involved. You're asking us to take a leap of faith in terms of the business outlook and some of the opportunities.

Could you just add a little bit of color? Obviously there is a little bit of a mismatch between your costs and your revenues in the short term. Just to give us some comfort, is there some market share opportunity that you are pursuing? Is it specific customers? Is it a specific segment? Thank you.

The light we would shed on there is that, basically as Sean as mentioned, we have seen an increase in some costs in related to qualifications. I think that is good news.

So I would say yes, some of this is opportune costs we now are engaged (ph) in spending, with some opportunities coming with the recent news out there in the market and stuff.

So Paul, what you are effectively saying is given some of the change of landscape competitively speaking you are spending more to qualify at customers where your position was weaker; and that is why your costs are higher in the January quarter.

That is a very good way to look at it. Absolutely.

Okay. Thank you.

Mark Fitzgerald, Banc of America.

When you look out for the second quarter of this year, would you expect, given that you have an artificially low January quarter, that you're going to get a really sharp snap back in the April quarter?

Yes, we do hope that the second quarter will be back to normal, yes. Definitely. Always the first quarter is kind of soft by 5 or 10 (ph) percent compared to the third quarter. But the second quarter get back to normal, (indiscernible) incremental growth again. (multiple speakers) growth.

When you look out in '05, given your cash-flow projections here, are you forecasting a quarter where you hit your 116 million magic mark and deliver 20 percent operating margins? Do you think you can exercise the business model for the peak performance in this year?

We have always stated that we intend to exercise our operating model to achieve our peak performance in the operating margin. We are not providing guidance out into the letter part of '05, but that is the target that we're striving to achieve.

I guess the issue I'm struggling with is we are well into this economic cycle in the silicon cycle at this point; and you have not delivered a quarter yet close to that. So inasmuch as most people are forecasting slower kind of economic growth and a slower chip industry into '05, is it reasonable to assume that?

I feel it is. If you take a look at our operating margin over the last 6 quarters, it took a slight step back this quarter, but it has improved sequentially each and every quarter. So we are positioned to react to opportunities that present themselves and capitalize on our infrastructure.

Do you think design activity will pick up to the level that is needed to get to those revenue numbers, though? Given that what is going on with the chip industry in terms of slower growth rates some people are now forecasting down growth rates for the industry in '05.

I think the way to look at it is that we believe that there's going to be a huge transition going on, with people coming from the quarter micron to 180, and then a big push in 180 to 130. When you go 180 to 130, you are obviously dealing with the more complex mask set. Higher ASP for the product.

So we think that the dynamics of the industry right now, what is going on, providing us some opportunities there, we think that the goals we have set are very achievable. Yes. And the design cycle life is there, absolutely.

Is there any reason that has been delayed in this silicon cycle versus prior silicon cycles?

Well, I guess (indiscernible). I think when you look back, we have seen that inventories were up. We saw some reflection of that. People readjusting, looking where there were at. We think that things, we were about mid-August and mid-September, were that window of evaluation.

We have seen things start to come around towards the end of September; strong in October. So we think people have got themselves realigned in what they are trying to shoot for.

Okay, thank you.

Brett Hodess with Merrill Lynch.

A couple questions. First, Sean, what do you think the depreciation is going to be for the coming year?

Pure depreciation for this year was about $83 million, if you excluded the amortization. We expect that to go up 1 million or 2, or 500,000 per quarter. It should by the end of the quarter get up to closer to 90 -- end of the year I should say.

It is all contingent, Brett, upon when these tools come on line. So it is a little bit of a moving target. Perhaps I can give an updated guidance at the end of the first quarter.

Second, following on that, do you think that the second 65-nanometer line will be up and running during the fiscal year? Fiscal '05?

Yes, definitely we plan to install the tools late spring of next year. So we should get some impact on at least the fourth quarter, yes. Some benefit in the fourth quarter of next year.

You mentioned already that 1 customer is in the U.S., working with on an IDM basis. Do you have a lead customer that you are working with in Asia yet for that?

We do have a lead customer in Asia that is a technology driver for that region; and we are engaged with them. Our engagement at 65 is slightly behind our U.S. customer. We are designed in for process of record right now with the U.S. customer. But we do have a technology driver in Asia as well we work very close with at that node.

That's great. Next question I had was, when we look at the CapEx and depreciation coming on line this year; and I know you mentioned, Sean, that the 20 percent operating margin level and the 115 or 16 million revenue level. But is that a moving target as you bring on the extra equipment? Does that move up some through the year as well?

The $116 million relates to our infrastructure as we stand today. It will move up as we bring tools on. But I will tell you that we are tasked here that -- as we bring additional capital on -- is to reduce other costs, and to be as efficient as we can. We continue to work on that.

So hopefully that metric will not move up a great deal. But we closely monitor that and want to keep that to a sustainable level.

That leads me be to my very last question, was -- this year, with the revenue growth that you had, you really had tremendous operating expense control, with a slight decrease in operating expenses year-over-year.

As we look into the next quarter given the modest rise that we're going to see, is your expectation that operating expense growth is going to stay sort of -- like this year it looked like it was much more sort of project driven and whatnot, rather than revenue driven. Is that how we need to think about it going forward, rather than leveraging it at a slower rate than sales but along with sales?

I think one way to look at it, the way we look at it internally, it is opportunity driven. The core cost that we have, each department is tasked with continuing to reduce, maintain their cost structure. When we see an opportunity we will allocate resources to that, ensure we get a quick return on that.

So I think if you look at it as an opportunity based spending pattern, we will not fall away from our fundamentals of cost control, maintaining our speed, flexibility, and our infrastructure.

I have 1 more question. In the beginning you gave us the breakdown for 0.13 micron at about 15 percent. So up a bit sequentially. Can you give us the breakdown for 0.18 and below, given that that is the driver range of the business now?

I believe 0.18 was 38 percent in the third quarter. It was up to about 40, 41 percent for the fourth quarter.

Excellent. Thank you.

Matt Petkun, D.A. Davidson & Co.

Quick question for you. One thing we like to always keep an eye on is pricing. Any changes in the pricing environment over the course of this last quarter?

We have not seen any. We have seen pretty stable behavior patterns; and just some spot buying that goes on, on a regular basis. But in general things have been pretty good.

Before I believe you guys have commented that you felt like your existing infrastructure could enable quarterly sales -- and I cannot remember the exact number -- either 115 or $120 million on a quarterly run rate. With this new capacity coming on line, where do you believe you can move towards the high end of sales on a quarterly basis?

It is a moving target as we bring capital on. Certainly we can handle in excess of 115 to 120 million right now. But I think what I will do is at the end of the first quarter, as we see our spending patterns, I will give you additional color to that. But it is a moving target because as we increase our capability our opportunities go up as well, and that will drive our revenue.

You commented that your intent is to fund CapEx next year through operating cash flows. But especially given Deno's comment that you would like to have this line up towards the later end of spring next year, it is hard to make these costs that are linear across all of next year. Would you expect that the expenses will be front-half loaded?

Not necessarily. Not necessarily. We do manage that as we bring tools in, each and every week, quarterly. So I do feel that they won't be front loaded. If they do become front loaded because we are reacting to an event or an opportunity, we will let you know.

But the plans that we have in place, some of which we talked about today, on capital expenditures were decisions that we have made in the summertime based upon our confidence level with our existing customer base and other opportunities that are out there.

1 final question. Just kind of looking at your customer base and where you're aligned in terms of your U.S. IDM that you are working with, when I take them and compare them to especially the Japanese in the investment that they have made in their fabs for 90 and 65 nanometer technology, should I be concerned about the fact that your 2 now largest competitors will have access and experience with 90 nanometer likely before, or at least in greater amounts, compared to your U.S. partner?

I think if this had happened a few years ago, the concern would be much greater. But right now we have a lot of traction in technology programs. We are generating revenue today already in 90 and 65 nodes. We have interactions with 3 top-10 IDM makers at 45 nanometer. So we feel strongly we have enough traction and momentum now where that won't be a concern.

Any call on an inflection point, when maybe we can see 0.13 greater than 20 percent?

As anything else, it is very tough to call visibility there, because it's cyclical. You know, these designs can break in the Q (ph). We can see the Qs, but they move around quite a bit on us.

Thanks so much.

Jay Deahna with J.P. Morgan.

You talk a lot about the speed and flexibility of your operating model. Yet the decline in the earnings guidance, 50 percent plus versus an 8 percent decline in revenues in the next quarter, suggests there's some sort of an issue associated with that.

Should we be (technical difficulty) in terms of this speed and flexibility in a normal environment; but if you have to all of a sudden press the gas a little bit for qualifications, or bring some tools on line for some potential share gain or something, that you use the control in your speed and flexibility model? Because there something that is not quite adding up here. That is part 1.

Part 2, assuming that you're kind of going out of your way to do qualifications for new customers, that you plan on gaining share, that you're putting capacity in place to do that, which quarters in fiscal '05 should we expect greater growth (ph)?

I will try to answer part of it and Sean wants to come back on the model front. As far as the speed and flexibility, the opportunity to move as we said earlier on opportunities that have been occurring over the last 2 to 3 months here of quals, we would expect to see ourselves in maybe the late second quarter, because of the cycle of the wafer runs and the time to get the vestral (ph) date they need in order to validate everything is good. So that will be the window of opportunity. That would be our mid early summer, okay? As far as the model, (multiple speakers), Sean?

I think it's a little bit of a temporary pullback as a result of the increased customer shutdowns and related to our infrastructure that we have in place. So it's a little bit of an anomaly? I think the integrity of our model is still there. I think our results will prove that out. But I don't think it is anything that would cause great concern.

I am concerned when your revenue guidance is down 8 percent and your earnings guidance is down 58 percent. That means a slight hiccup creates a major schism in your financial progression; and that reduces confidence in the integrity of your business model. So what happens if we have a real downturn? So it is definitely concerning. So I don't think that --

I certainly understand your point of view, and just reiterate that we operate in a high fixed-cost business. Yes, if there is a significant decline that will impact our operating model. We don't have the opportunity to pull those costs out quick enough if there's a 40 percent decline, which we don't anticipate.

We do expect 2005 to be a good year for us. We do view the first quarter as a seasonality issue that we face; and we will address it as the quarter rolls out.

The last question is the confidence level on your account penetration at leading-edge devices. It sounds like it is pretty high. Are you seeing sort of a historic opportunity here in terms of the number of new accounts that are looking to qualify you at the leading-edge, which is kind of the key to your confidence to put this capacity in place?

I think that is probably a very good read from that side. Yes, our confidence level is quite good by the engagements that we are having worldwide right now. Absolutely.

Great, thanks.

Cristina Osmena with Jefferies.

I just wanted to go back to your comments earlier about customer shutdowns. You compared it last year. But if you could compare it to the last time we started to see a softer semiconductor market -- maybe when you were transitioning from ending fiscal '02 going into fiscal '03 -- is the magnitude of the shutdowns larger or smaller or the same?

As we look at the comparison to '02, it is not as dramatic as '02.

If it's not as dramatic as '02, and your revenue guidance is down 8 percent, it captures (ph) the decline that is on the downside of down 10 percent. So it is almost down as sharply is it was in '02. What is happening? What is the difference there? Why is it going down almost as much?

From our side it depends on the customer base you're servicing. And at the point of length of shutdowns they have involved, if we go back, look at our '02, we've had some different customers involved now in the '04 cycle. So you're going to see maybe an additional couple people that we did not have back then. They may be a major player to us today.

Okay.

Basically I am saying our customer base has changed since '02. Those players that we're involved in heavily now are in a much deeper shutdown than when we were involved in (technical difficulty).

So the customer shutdowns that you're experiencing are probably just as much as you had experienced in '02, in terms of number of customers and the number of shutdown days?

I don't know that the amount of customers, but basically (ph) the mix is definitely (inaudible).

Okay. Also, could you give us a sense maybe of how you expect your CapEx next year to ramp up by quarter?

It's a little bit of a difficult question in that it's all contingent upon the delivery of certain tools. We have commitments in place right now of about $40 million. Our projection is 105 to 125. So I would say for modeling purposes you probably do that out equally or each quarter. But it is difficult to determine.

Okay. Generally, depreciation comes on about, what, 1 quarter after you spend the CapEx?

It depends on the type of tool and the length of delivery time, the qualification that it takes to get it up and running. A high-end litho tool would take a little bit longer. But generally a quarter or 2. There's a quarter or 2 lag that on that.

Also, what percentage of your CapEx are you spending on the China facility? Are you engaged with any fabless customers over there or any customers that are planning to use that facility yet?

What I will say is on our total range of CapEx for fiscal '05, about 75 percent is related to tooling and about 24 percent is related to brick and mortar.

I am sorry, the second part of your question, Christina, if you don't mind repeating it?

I was asking about China specifically. What percentage of the CapEx next year is going to go to China?

I'm not in a position to detail that out, for competitive purposes. But 25 percent of our total spend will be for bricks and mortar.

All right. I can read into that. Thank you. That was it. Thank you.

Thank you Christina.

Ted Berg with Lehman Brothers.

On the revenue that came in for the October quarter, it was at the low end of guidance. What was required to get you to the midpoint of guidance? Was there 1 or 2 more 130-nanometer sales you had expected to occur in October to make that? If so, were those permanently delayed? Or what was the reason for that?

What we saw basically, if you looked at our other former global competitor that is basically going to be removed, their down-cline (ph) of about 3 percent quarter-over-quarter was probably the same as what we saw. Which was basically in August things got a little soft for us. We saw it in August, mid-August till about early September as we talked.

Some of the IST guys were reevaluating the situation of the inventories. We saw things pick up. So really that is really what it was. Not so much anybody pushing anything out. I think it was just really a general re-evaluation of things, were they were.

With the inventory in the quarter, that increased 23 percent sequentially heading into your seasonally softer quarter that we are in now. What is the situation with inventory there? Have we built up too much? Are there write-offs that are required? Why did that increase so much?

I think what we have seen, just in the deator (ph) count, we have seen the September and the October were quite strong. So we think that people have got themselves realigned in what they are trying to shoot for, for themselves.

The inventory that we built, Ted, during the quarter primarily related to a timing issue. We had an opportunity to increase certain inventory levels with some favorable pricing. We reacted on that opportunity. So that should turn -- our inventory turned at about 17 times during fiscal '04. We do not have any obsolescence issues. So we are pretty confident that that will continue to turn at a high rate.

Okay. On the guidance that you gave for the January quarter, is it mostly all coming out of the gross margin that is being lowered? Or what are the operating expenses or the other expense lines? Are those all flat with the October quarter?

We will see some modest increases in R&D and in cost of sales. Our SG&A should remain essentially the same. We should have some interest savings as a result of our reduction in our debt.

So the other expense line will come down from the $1.2 million?

There's a number of factors that go into the other expense line, Ted, including investment income. Our cash will be down as a result of the bond buyback. Then you also have the impact of foreign currency exchange rate gains or losses on balance sheet items as you revalue them to U.S. dollars. So I would not necessarily agree that it would come down from 1.2 million.

How much was redeemed in the January quarter so far?

$41.4 million.

That resulted in a -- what was the charge that is excluded from earnings?

$1.2 million. That would be related to a slight premium and the write-off of some issuance costs.

Okay. Thanks.

Timothy Arcuri with Smith Barney.

This is Gary for Tim, actually. I don't want to make a mountain out of a mole hill, but revenue coming in at the low end and you said pricing was stable, what did you see on the unit side that drove results kind of to the low end?

Gary, this is Paul. Same thing we said earlier basically, that the unit demand was basically flat. We saw maybe a little bit down and a little bit of mix (indiscernible) and stuff, but in general, it was pretty flat.

So there is no discernible trend?

No, not at all. Like we said earlier, we saw just the mid August, the early September window. It just seemed like university across the board, everybody put the brakes on to take a look at where they were. We saw things come back to a normal rate at the end of September and October.

I was wondering, Sean, if you could help us kind of link together the increased material cost impacting gross margin and the increase in inventory. Is there a point where we can see inventories working down and gross margins kind of hopping back up, running ahead of revenue progressions?

Yes, absolutely.

When do you think that will happen?

As we get into the second quarter, we will see that pick back up. Now, the inventory build, as I mentioned previously, is just a timing issue in the fourth quarter that will work its way through.

So there is no structural change here in terms of material cost related to customer qual side when you try to model on a go-forward basis?

No.

Okay, great. Thanks, you guys.

Auguste Richard with First Albany Capital.

Good morning. Could you just talk about utilizations across 3 buckets of your capacity across your network -- mature, mainstream and leading-edge; sort of how has that trended in the last quarter?

This is Paul. We pretty much have stated that Q4 was basically almost the same footprint as our Q3. We did not see a lot of a mix swing change on any of our nodes in any way. Chris, do you want to --?

I think we've seen more intensity on the 90 nanometer qualification. That is one area that has taken us a step up. We have 2 complete and we're probably close to finishing 2 more. So I'd say on the qual side, we have not seen any slowdown to push for that kind of capability.

Sean, on your commentary you made a comment about the sequential downtick in margins being in part related to a higher cost of equipment. Could you flesh that out? Is that some of the lithography tools being -- pricing in and costing more with the weak dollar? Is that the effect? Or is there something else?

It is a combination of some additional depreciation for tools that we took on line; and it is also an impact of increased maintenance costs. A combination of both of them. They are up about 400,000 for the quarter.

Okay. Just on a go-forward basis, it looks like you are prepping to have capacity in place for your customers for 90 and 65; and as your (technical difficulty) you're going to get that out in front of actual demand. I would expect that that would put some pressure on your utilization rates at the higher-end nodes, and pressure on gross margins going forward. Is that an accurate way of looking at it?

Yes. I think, yes. Obviously we have got a lot of other things going on besides looking at the write times, reducing write times through our data preparation, our yields, our repair capability. We have got hundreds of programs there. We continue to increase and squeeze everything we can out of our tools.

I got it. Thanks a lot.

Tim Matega (ph) with Zelazny (ph).

My question was answered, thank you.

Gerald Fleming with WR Hambrecht.

Sean, could you give us a little bit of an idea on what this weakening dollar is doing to your revenues and to your gross margins?

Sure. We typically sell in local currency and try to match our revenues with our costs, so the impact on FX changes would be down. We do have certain instances where we have customers that we sell on a global basis in U.S. dollars that we could have an impact on during this quarter.

But to date we have not had a significant foreign currency impact running through our operating statement. But it is obviously an area we keep a great deal of focus on.

Okay. Just a housekeeping question; it might have been answered earlier. How much of the revenues in the quarter were 90 nanometer?

We did not disclose that, Gerry.

Okay, thanks.

At this time there are no further questions.

Each of us here at Photronics want to thank you for participating in the call this morning. We will be in the office and available for questions. Please feel free to follow up.

We would also like to extend everybody a happy and healthy holiday wish, and also ask that you drop a note on your calendars; we will be hosting our analyst meeting on March 22 this year out in San Francisco. Stay tuned to your e-mails and we will send you some more details on that in the new year.

(technical difficulty) forwards with consolidation; definitely we see a lot of opportunity. Thank you.

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