Photronics Inc (PLAB) 2006 Q1 法說會逐字稿

Welcome to the Photronics first-quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded Wednesday, February 15, 2006. I would now like to turn the conference over to Michael McCarthy, Vice President, Investor Relations.

Thanks, Pam, and good morning, everyone. My name is Mike McCarthy, Vice President of Investor Relations and Corporate Communications for Photronics. I would like to thank you for joining this morning's conference call, during which we will discuss fiscal 2006 first-quarter results.

Before we begin, I'd like to remind all participants about the Safe Harbor statement provision under the Private Securities Litigation Reform Act of '95, and thus, except for historical events, the information we will cover during this call may be considered forward-looking and may be subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including uncertainties in the market, pricing, competition, procurement and manufacturing efficiencies, and other risks detailed from time to time in the Company's SEC reports.

This call will remain archived on our Website until we report our fiscal 2006 second quarter after the market closes on Tuesday, May 16. I would also like to take this opportunity to remind this morning's participants that Photronics will be hosting its eighth annual analysts meeting in New York at the Intercontinental Hotel on Thursday, April 6. The meeting will begin at 8:30 AM and will include presentations and Q&A with the Photronics management team. You can register to attend this meeting by calling my office or sending me an e-mail or by visiting our Website at photronics.com. These presentations and audio will also be archived on the Website.

The call will begin this morning with Sean Smith, our CFO, providing a detailed review of our financial results, after which Michael Luttati, our CEO, will share some brief comments and then moderate the Q&A session. Sean?

Thanks, Mike, and good morning, everyone. I will provide a brief analysis of our financial results for the first quarter of fiscal year 2006. I will also review our balance sheet and cash flows during the period and discuss our outlook going forward.

Net sales in our first quarter amounted to 111.9 million, an increase of 10.8 million or 10.6% as compared with the first quarter of last year. The year-over-year increase is primarily related to improved [tapeout] activity for high-end applications in both IC and FPD photomasks.

During the first quarter, we did not experience the typical sequential seasonal decline associated with the holidays, driven largely by the increased demand for high-end masks. Sales of advanced photomasks increased to 36% of total sales during the first quarter, as compared to 28% with the fourth quarter. Included in this percentage would be mask sets for semiconductor designs at and below 130 nanometers and for FPD sets used to fabricate flat-panel products using G6, G7, and higher technology.

As a percent of total sales for the first quarter, sales were approximately 55% in Asia, 28% in North America, and 17% in Europe. Sequentially, sales of IC photomasks improved slightly, while FPD photomasks were essentially flat.

Gross margin for the first quarter was 32.3%, as compared to 31.6% in 2005. Sequentially, gross margin improved 90 basis points, primarily as a result of improved high-end mix, which typically has higher ASPs.

Selling, general and administrative expenses for the first quarter were 15.2 million, as compared to 12.7 million last year, with the increase primarily related to our Asian expansion, specifically startup costs for our two new facilities in Taiwan and China. Sequentially, SG&A increased 900,000, primarily from the increased cost related to the Asian startup operations and, to a lesser extent, costs related to the implementation of FAS 123R and additional costs related to the disposition of previously closed facilities. SG&A as a percent of sales was 13.6% during the first quarter of '06, as compared to 12.6% in 2005 and 12.8% sequentially.

Research and Development expenses, which consist principally of continued development for advanced process technologies, were 8.3 million in the first quarter. R&D represented 7.4% of sales in the first quarter of '06, compared with 7.7% last year.

During the first quarter, we generated operating income of $12.7 million, or 11.4% of sales, as compared to operating income of 11.5 million, or 11.4%, on the first quarter of '05. Sequentially, our operating margin improved slightly by 20 basis points as a result of our improved high-end mix and cost containment programs.

Integrity of our operating model continues to remain intact. We will continue to match our cost structure to the changing nature of demand and new opportunities in the global market environment, and remain committed to improving our operating margins and achieving our long-term goals.

As we have stated on previous calls, the next few quarters will experience some moderate fluctuations on the operating margin line as we continue expansion and look to monetize our greenfield facilities in China and Taiwan in 2006. These fluctuations will be short term and are not expected to reflect a negative change in the overall fundamental operating model of Photronics.

Net Other income expense for the first quarter was income of 1.8 million as compared to expense of 3 million in the first quarter of 2005. Included in last year's amount was a 1.2 million early extinguishment charge on a 41.4 million redemption of our 4 3/4 convertible bonds.

The year-over-year improvement is also related to increased investment income, increased foreign currency gains, which were approximately 1.6 to 2 million higher than we typically experience. This amounted to income of approximately $0.03 per diluted share after-tax, and decreased interest expense associated with reduced debt.

During the first quarter, we recorded a tax provision of 3.8 million, which amounts to a 26.3% effective tax rate. The tax provision was higher than our stated range and up sequentially as a result of higher than anticipated income above our reported guidance and increased income from jurisdictions in which we are taxpayers, coupled with our limited abilities to recognize tax benefits in areas which we are taxable and have losses, primarily the United States.

Net income was 9.7 million, or 8.7% of sales, for the first quarter of '06, as compared to net income of 4.5 million, or 4.5% of net sales, in the first quarter last year. Sequentially, net income improved by $1 million. Net income per diluted share was $0.21 for the first quarter of '06 as compared to $0.13 per share in the first quarter of '05.

As we exited the first quarter, we had approximately 1500 employees, equating to sales of 298,000 per employee on an annualized basis.

Now taking a look at our balance sheet. Photronics' balance sheet has experienced a positive transformation over the past couple of years. The strength of the balance sheet and improved liquidity has enabled us to strategically invest in market opportunities.

Cash and short-term investments at the end of the first quarter amounted to 263 million and working capital amounted to 204 million. At the end of the quarter, current liabilities include $86 million of debt, which relates to the 4 3/4 convert which is due in December of '06.

At the end of the first quarter of '06, our net cash, which is cash less debt, amounted to approximately $19 million. Accounts receivable increased $8.9 million during the quarter, as compared to the end of Q4, which primarily relates to timing, as we experienced a strong January for FPD sales.

Inventory increased $2.6 million since the end of Q4 as a result of the strategic decision to increase blank inventory for flat panel display masks. Goodwill and other intangibles increased by approximately $3 million since the end of Q4 as a result of increasing our stake in PKL early in the quarter to approximately 99.7%.

Total debt at January 29 was $244 million. The principal components include the 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 7.8 million of foreign and other term loans.

During our prior calls, we've discussed the possibility of calling the remaining 4 3/4 bonds on or after December 15, 2005, when the premium was reduced. Since that time, yields on our investments have increased and to date we have not issued a call notice. We will continue to monitor the market and be opportunistic as conditions dictate.

Minority interest at the end of the first quarter amounted to 43.5 million, the majority of which relates to the minority interest in the equity of our 58% owned majority subsidiary, PSMC. Shareholders' equity aggregated 588 million, which amounts to a book value per share of $14.22.

Taking a look at our cash flows. Cash provided by operations for the first quarter of 2006 was approximately $11 million. Cash flow used in investing activities during the first quarter '06 accounted to approximately 36 million, of which 29 million represented cash payments for capital expenditures. Total capital expenditures for the quarter was approximately $41 million and it primarily relates to our greenfield facilities in Asia. While we did not generate free cash flow during the quarter, primarily due to the timing of tool payments, we remain confident that we will generate free cash flow for the year.

Taking a look ahead, our short-term visibility, as always, continues to be limited, as our backlog is one to two weeks. We believe, however, that during 2006 we will continue to see increased design activity, especially at the advanced nodes. We are also encouraged by a number of strategic opportunities that should enable us to increase our revenue through organic growth and market share gains from our competitors, including our expanded presence in FPD masks and an increased ability to support 65 nanometer development.

Based upon our current operating models, the projected outlook for revenue for the second quarter of '06 is in the range of 112 to $117 million. During the latter part of '05, we began to broaden the scope of our strategic investments into 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 second quarter of '06.

Capital expenditures in 2006 are forecasted to be approximately 90 million to 120 million, as we selectively invest in capability and customer relationships that enable us to achieve profitable technology leadership and consolidate market share gains.

One of the 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 cash flow guidance for the full year at this time, we do expect, as I said earlier, to fund our 2006 capital expenditures from operating cash flow.

Included in 2006 planned CapEx are the completion of our greenfield sites in China and Taiwan, and selective, advanced high-end IC capability to support penetration into new markets and take market share.

Implementing a capital expenditure budget of this size reflects the management team's confidence in being able to fully leverage our global leadership and changes in the competitive environment. We are continually evaluating market opportunities available to Photronics, and in doing so, then determine the most effective investment strategy that will enable us to realize our longer-term goals.

During 2006, our tax rate will continue to 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 which we are taxable. Accordingly, we are estimating our effective tax rate for 2006 to be in the range of 20 to 25%. For the second quarter, this will equate to a range of 3.3 million to $4 million in whole dollar terms. As a result, based upon our current operating model, we estimate earnings per share for the second quarter of fiscal '06 to be in the range of $0.17 to $0.23 per share.

In summary, I again want to emphasize that though our visibility is short, customer sentiment remains positive. The global demand for the full range of photomask technology, services, and products should continue to grow, as should Photronics' ability to service a larger share of the worldwide market.

That concludes my prepared remarks. Now I would like to turn the call over to Mike. Mike?

Thanks, Sean, and thank you all for joining our call this morning. Each of us at Photronics is very pleased about positive results that we achieved in our first quarter. The demand for photomask technologies and service was strong, driven by increased [tapeout] activity at the high end, which largely mitigated the seasonal slowdown that we typically experience during this period.

Globally, the Photronics organization executed well to support this strong demand for both semiconductor and flat panel display photomasks.

Business was broadbased by region, technology node, and across a wide variety of end markets. This is a great start to a year which we believe will be a strong one on a number of fronts for Photronics. The challenge ahead of us is one of execution.

Sean has covered the recent quarter results and next quarter's outlook, but before we move into the Q&A portion of the call, I would like to reconfirm the three strategic areas that I have committed the Company to focus on. I believe that our execution of these priorities will provide the growth and the prosperity that our customers, employees, and investors expect and deserve. Furthermore, they will guide the management team's long-term investment decisions.

First on our list is profitable technology leadership. The advanced or high-end imaging technologies are the fastest-growing segment, both for the industry and for Photronics. High-end business in Q1 represented 36% of revenues, or a 29% sequential increase in absolute dollars, the Company's single best quarter improvement. This is demonstrating that our investments are beginning to pay off.

One challenge is that there are fewer semiconductor companies participating in these advanced technology nodes, which means that there is a greater imperative to become the process of record partner with these leading-edge companies. To compete successfully in the high end requires extensive investments and achieving real technology leadership will challenge the conventional fast follower strategy that Photronics has used so effectively in the past. I will be working closely with customers, suppliers, and our employees to ensure that Photronics' capabilities are aligned to take advantage of the best opportunities available in the marketplace.

Our second focus area will be in realizing market share leadership in each of our served markets, whether it is semiconductor or flat-panel, advanced or mainstream. Photronics' ability to capture and retain market share will be determined based on our ability to meet and exceed our customers' critical success criteria and through the efficiency with which we manage our global manufacturing network.

Clearly, technology is an increasingly large component of the market share equation. However, customer service, an area where Photronics has excelled, will continue to be a predominant factor, as each node transitions into volume production. Once technological capability is established, our consistent and reliable performance to schedule will enable Photronics to present a compelling reason to be our customers’ primary supplier, even when there might be a slight premium in the services provided.

The startup of our two new Asian facilities in 2006 represents tremendous market share growth potential. Our new large area mask facility in Taichung, Taiwan will enable us to expand our customer base as we establish a local presence among the world's fastest-growing flat-panel producers, while our facility in Shanghai will open one of the industry's most exciting high-growth markets to us, as the domestic design activity and demand for ICs in China expands along with the rest of their economy.

Finally, I will be directing a more comprehensive integration of Photronics' global operations. Photronics' worldwide footprint of manufacturing and service centers has stretched across three continents for just over 10 years. A number of these facilities were greenfield sites, while others helped expand the network through acquisition. We have worked diligently to cross qualify customers and drive the organization to common manufacturing systems.

However, there is still much more to be done. Creating a tightly integrated global organization is critical to achieving our first two goals. These are not easy tasks; however, the management team and all of the global organization have embraced the challenge and the responsibility for delivering these results. We are determined to place Photronics in a position and maximize its growth potential with dependable financial performance so that our customers and our investors value our organization with a premium relative to our peers.

Progress is being made and I remain confident that achievement of these strategic goals is well within our reach. They play an important part if 2006 is to be another record year for Photronics.

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, Needham.

Yes, could you give us a little bit more detail in terms of linearity of the quarter? Was the strength in the quarter throughout the quarter? Did it trail off, as it typically does on a seasonal basis, towards the end of the quarter? And going into the current quarter so far, could you give us a sense of tone of business?

Sure, Robert. This is Mike. As I mentioned in the December call we did, we saw a relatively strong early part of the quarter, and at the time commented that we were not sure what was going to happen going into the holiday season.

We are actually quite pleased that normally during both the Christmas and Thanksgiving shutdowns we see a softening. There was certainly a softening, but it continued to be relatively strong. January was a good month. And entering into the second quarter, as indicated by our guidance, we feel pretty good about the market conditions.

Okay. You mentioned or Sean mentioned that high-end demand was a little bit better. I didn't quite hear a breakout, but could you give us some perhaps anecdotal evidence about that, where the higher end or more smaller dimension mask demand was coming from and is that continuing currently?

Robert, this is Sean. We saw high end increase both in IC and FPD photomasks for the quarter as compared to the previous quarter. They were both up sequentially.

Was the percentage of FPD and semiconductor the same in the reported quarter as the previous quarter?

We don't typically provide that breakout for competitive purposes, but we can say that we did see significant increases in both for high-end business.

Okay. Any particular sector that you saw more growth in, in terms of end-user products, communications or consumer or PC-related?

No, it was great quite broad-based actually.

Okay, great. Thank you.

Jay Deahna, JPMorgan.

I was wondering why do think that demand was better than seasonal in the quarter? What technology node was most noticeably better than expected? Do you see, let's say, an enhanced pace of tapeouts continuing into most of the first half of this year or was that sort of a short-term phenomenon?

This is Mike. We did see an increase in 90-nanometer tapeouts in the quarter, had some very good progress in that area. Also, the 180-node and above, we saw capacity increases from the equipment suppliers, and that did increase some of our tapeout activity. But primarily high-end activity, 130, 90, transition into 90, was very strong.

In the LAM area, we saw high-end LAM business increase over what it had been previously, so I think those two areas. And again, in terms of market segment or region, it was pretty balanced and pretty active across the base.

How sustainable do you think this enhanced tapeout activity is as you roll into the spring and summer of this year, and why do you think it is happening? Is it because the chip makers finished 4Q with lean inventories and they are moving to new products or what?

It's a combination. We saw in some cases an increase in new designs and also in design iterations that have been occurring. I believe that yields at 90 nanometer are improving, and so we're going to hopefully see some additional new designs there. In the memory area, as you know, the NaN Flash business has been ticking up, so we expect to see some opportunities there as well.

Thanks.

I don't know, Chris, if you have any other color to add to that.

Not too much. I think Mike hit on the right points. I think 90 nanometer generally is getting a bit more routine for the design groups. Design productivity is increasing and there is definitely more interest in migrating to this node for a broader range of products. So I think that's all positive for our 90-nanometer picture.

What will drive the end-user demand in that volume of tapeouts, that's a little hard to say right now. I think some of the memory applications have been driving more tapeout activity than have been historical. Variety of memory products is a little stronger player too now in terms of mask volume.

But I also think your comment on lean inventories has an impact here, particularly as we look forward going into the second and third quarters.

Great. Thank you.

Timothy Arcuri, Citigroup.

A couple things. If I take the midpoint of the guidance, it looks like you are inherently guiding gross margin about flat on up revenue. Is that the right way to think about it?

Tim, we haven't provided guidance at the midpoint of the range, specific margin guidance. I would say if we do expect to hit the high end of our range, our gross and operating margins should continue to increase.

Okay. Also, with respect to the guidance for revenue, it looks like -- if I look back the last five years, it looks like usually the second quarter is up somewhere 6%, and it has been up 5% or above 5%, I think, for the last five years. So I am wondering is the guidance conservative or are we just coming off of a particularly strong January quarter?

This is Mike, and maybe I will let Sean add to this. But one of the things that we are experiencing as we particularly increase our high-end business, the ASPs certainly are higher. The LAM ASPs are certainly higher. And during our road show and on several conference calls, I've made this point. I would like to make it one more time.

And that is, given the cycle time of our orders to shipment and the increasing mix of high-end, it becomes very difficult in any quarter to predict a swing of one or two or three mask sets coming in at the end of the quarter or going out at the end of the quarter. And while we are very excited and pleased about the upside here, we also recognize that on a given quarter, a week or two delay could in fact move a product into the next quarter.

So we are very optimistic about the fact we are executing to our strategy -- profitable technology leadership, global integration, market share gains -- and we are showing measurable progress there. The guidance that we are providing is our best assessment based on what we seem. And certainly there is upside to that, given the things that the market has, but there's also the potential that stuff could slip out. So we're trying to be rational in the way we guide, but optimistic about the fact that we believe we are executing and gaining share on the segments that we're targeting.

Great, Mike, thanks. One more quick thing from me. It just kind of feels like there's going to be a longer tail with respect to 130 and also 90 nanometer demand. I am wondering does that change your thoughts about how aggressively you're going to invest in leading-edge IC manufacturing capacity? Would you divert more investments through the Micron joint venture, for example?

Let's see. We believe the our capacity blend right now, based on what we have in our toolsets and our sites, is suitable, as we've said in the past, to capture share at each of the nodes. Certainly we have more capacity at the high end than we do in the mainstream. But we still every quarter ring out new productivity improvements.

We think that -- I agree with you -- in fact, talking to some of the equipment suppliers, a lot of the capacity being put in place right now is for 180 and above. So we think we can still see the 180 node tapeouts still being a higher percentage of the total, at least through the balance of this year.

But 90 is coming on pretty strong, and we are working with our strategic customers at the advanced nodes and we need to be positioned there. Because as you saw, the transition from 130 to 90 was much more rapid than people had anticipated and so we need to do both.

In terms of the Micron talks that we announced, we're not in a position really to say much more about that at this point.

Okay, guys. Thanks.

Suresh Balaraman, ThinkEquity.

We are hearing of price increases in the mask segment. Is this isolated at certain nodes or some specific regions, or is this some kind of strengthening in pricing across the board?

This is Sean. We have not seen any significant sea changes in pricing since we talked in December conference call. It has been pretty stable. There are certainly opportunities to increase price and at times we do get some pricing pressure. But it is basically no sea changes from what we discussed in December.

Also on your guidance, for slightly flat to up guidance, do you anticipate flat-panel continuing to grow at relatively strong levels in the next quarter?

We are hopeful that we will see growth in both IC and -- both segments, IC and flat-panel photomasks.

I am wondering -- to follow up on Tim's question earlier, actually, when you look at the past 10 years or so, your average growth in April has been, I think, 10.7%. And I'm surprised that the 2% median growth rate you're predicting is -- either it's super conservative or there may be some clouds that you're seeing on the horizon that is causing you this conservatism. How should we read that?

I will try to answer that and perhaps Mike can jump in. If you look back the last couple of years, because if you go back 10 years, the business has completely changed in our view. But the last couple of years, we've averaged between 4 and 10%, 10% last year, which was a breakout quarter with respect to the significant expansion of flat-panel sales.

So we are looking at what we have, our installed tool base, our customer checks. As Mike alluded to, there's opportunities that we could be higher. There's opportunities that a mask set or two at these higher ASPs could slip out. So we're trying to be practical and prudent as we give guidance.

And we are essentially managing the business for the long-term. We have our goals set on full fiscal year 2006 and 2007, where we want to be, what we want to execute on. So as Mike said, we are excited or happy with the performance, but we are not getting too elated because we have work to do and it's business that we have with a short turnaround time and limited backlog. It is a daily execution. It is a focus each and every day. We cannot afford to take our foot off the pedal on any of our initiatives.

And the only other comment I would add is we are coming off a strong Q1 base, much different than we did last year on a lower base from Q1 into Q2. So that have some effect in terms of the percentage increase quarter-over-quarter.

Fair enough. Thanks, guys.

Timm Schulze-Melander, Morgan Stanley.

Congratulations on a very solid quarter. Two quick questions, if I may. The first, I think Mike, you used the term premium pricing, I think, obviously in relation to your competitors. Could you maybe give us as a little bit more detail on that, kind of under what circumstances you are able to attract premium pricing, if I heard that correctly? How durable do you think that is? And then I have quick follow-up.

The comment I was referring to in the prepared remarks was that service is a critical issue that we are seeing. Cycle time from our key customers is becoming another -- what I'll call differentiating value to our customers. And so what I am suggesting is that not only now, but going forward, the ability of their mask supplier to be able to repeatably, confidently, with high yield meet the cycle time requirements performance to schedule will be a differentiator that I believe will warrant a premium, and the customers will be willing to pay a premium for it.

Now, how much that premium is from node to node is going to be very dependent. But service, fab uptime, those are critical issues. And certainly for the high end, I think we will see a better opportunity to generate premiums in that service than we will for the mainstream. But again, it is something we believe we will be able to do based on our agility and it is one of the strengths that we think the Photronics organization has against our other competitors.

Okay. So essentially, it is going to be something that you guys are aspiring to [attract] to. It's not something that you specifically saw in the last quarter.

That's correct.

Okay, great. Maybe just a quick question for Sean. One quick housekeeping one. My line was a little bad. I just wanted to make sure. You talked about CapEx, I think, of 90 to 120 for the full fiscal year. I am just curious if that's correct, that there's sort of 30 million variance between the bottom in a top. What would be driving that? Is that mainly FPD or is a blend of both?

And then the second part of my question, on tax rate, you talked on the last few calls about the fact that the revenue is being accrued in places where you can't utilize your tax loss carryforwards. Given where you are investing and expanding your business, would it not be reasonable to expect actually kind of a mid-20s tax rate is really the sort of long-term rate we should be thinking about? Thanks very much.

I will answer the latter portion first. The tax rate would project to be 20 to 25%. 25% would be our longer-term tax rate. But once we get our new greenfield facilities up and running and fully monetized, we do have tax holidays in those jurisdictions which could pull the rate down. But for '06, I would say 20 to 25%.

With respect to our capital expenditures, there is not -- it essentially relates to the completion of our facilities in Taiwan, in China, and selected IC investments. It will probably be front-end loaded more to the early part of fiscal '06 than to the latter part. That is why there's a $30 million range, is if we see some opportunities to increase or push out anything that we are bringing in.

If you're looking at a lithography tool, it's 10 to $15 million, or an inspection tool, so that's why one or two of those tools being moved or a delivery not occurring could cause that range to increase.

Okay. But the variance is then mainly embedded in the IC part of your business?

I would say it's in both.

Okay, great. Thanks very much.

Brett Hodess, Merrill Lynch.

Just on the mature side, which had been a little weak in the prior quarter, based on your comments, sounds like that weakness has dissipated at this point or gone back to normal level.

Brett, this is Sean. I think -- because of the increase in the high end and the revenues being up slightly, we did see some seasonal impact with respect to the mature business sequential decline.

Then just to be clear, on the tax rate this year, the major difference is the regional expectations of sales this year or is it the higher earnings that the tax rate bumps up from where the previous guidance had been?

It's a combination of both. It's our ability to capitalize on our U.S. operations and generate income, which will bring down the tax rate. It is also our ability to monetize the expenditures we have in our two new areas in Asia, for which we have tax holidays and we are incurring expenses with no commensurate revenue, which drives up the rate, because we don't get a benefit of that.

Okay. Final question, when you look the flat-panel side, the new factories ramping up, the new customer factories ramping up in Taiwan, the success you have had in Korea, have you been constrained at all with having only the one plant? And could we see over the next several quarters, as the Taiwan plant ramps up, a faster growth in your flat-panel market from increased share gain simply because maybe you couldn't meet as much of the customer demand with one factory?

This is Mike. I think you hit the nail on the head. To some extent, the issue is really proximity. These masks are one-to-one, so they are very large masks; being close to the customer is significant. We have said all along that this facility in Taiwan will be a copy exact process from our facility in Korea, so we expect the ramp-up to be smooth and flawless. We will be there on March 24 to have the grand opening.

Sean and I visited the facility in January when we were in Taiwan and we are very excited about the way that things have turned out. Our proximity to the large flat-panel makers there is going to really open up some opportunities for us.

So we expect that to ramp up relatively quickly. I'm not sure that we will see any revenue in Q2. We're still looking at what we might be able to do there. But certainly into Q3 we will start to monetize the facility.

Great, thank you.

This is S.H. Our Taiwan operation is actually a copy of Korea, so either country has more strong (indiscernible) back up each site. So in other words, we have a big quarter from Korea; maybe our Taiwan operation also will [be big]. Does this help for your question?

Yes, it does. Yes. Thank you.

Gus Richard, First Albany Capital.

(technical difficulty) question. Could you guys give me a range of the price on 90-nanometer masks these days?

Are you talking about generally ASPs in the range of probably anywhere from [650] to $1 million dollars?

Got it. And then the last two Q1s have been stronger than normal seasonality relative to historics. Is that a change? Do you think this is a change, A, and if you are seeing a change in the pattern, is it more driven by flat-panel demand being a little different seasonally than semiconductors or a slightly different shift in semiconductors relative to years gone by?

Gus, this is Sean. If look back at last year, that would be -- if we look at Q1 of '05 versus Q4 of '04, we would attribute that to the flat-panel business. But interestingly enough this year, our IC business quarter-over-quarter did grow and flat-panel was essentially flat. So it is an interesting dynamic that was occurring during first quarter.

So in the data for -- the two data points that you have for January sort of being a little seasonally stronger, there's no correlation between one market and the other as far as what's driving it?

Not to speak of, no.

Finally, was your mix of foundry business a bit stronger than you would have modeled going into the quarter? Was that a little ahead of plan?

We did well in the foundry business, but I would say again that our business was pretty broadbased. We saw the IDMS with some good ordering, the foundries that we participate with, obviously, we saw increased business and relatively good forecasts going into next quarter as well. So I would not [single] out any one segment as being stronger than the other. I will say that we had very strong business in our European region for the quarter.

Got it. Okay, great. Was that a bit of a catch-up from -- because I know a couple quarters ago there was some weakness there due to timing of shipments and whatnot?

No. As we said in that quarter, once that business is gone, it's gone and you move on.

Okay, I appreciate it. Thanks a lot.

Johan Eliason, Cheuvreux.

Coming back to your CapEx guidance for the year, 90 to 120 million, is there anything on that that we will go to this new state-of-the-art plant in Korea you announced in January?

The CapEx guidance that we had announced in December prior to announcement of the Korean facility in January has not changed. We are in the process of determining what impact that will have, if any, on the fiscal '06. But as we reaffirmed today, our CapEx will be $90 to $120 million, and we will be making some strategic decisions whether we want to redirect certain tools or applications during the course of '06.

Okay. That implies you don't know exactly how much of this 150 to 300 you talked about for that one that will actually go into tools and what will go into the plant itself?

We have a general idea, but I do believe when we discussed it in the press release we also indicated that we have the ability to redeploy certain assets within our network.

Just for clarity, I would expect little CapEx to be allocated in 2006 to the Korean project.

Okay. Thank you very much.

Jagadesh (indiscernible), UBS.

One housekeeping question. I would like to find out how should we model for advanced technology for second quarter and going forward for 2006?

The second part of a question is that will you see some sort of a progressive increase in ASP as we move towards the end of the year because the larger portion of high-end masks going into 2006?

We don't provide specific guidance as to what percentage of high-end business we would have. We're hopeful that our high-end business will continue to grow, as Mike alluded to in his prepared text, as we capitalize on our strategic investments. We have had, I believe, over the last six to seven quarters increasing high-end mix, and that is what we are striving for.

Just on your last question, I would say that that would naturally tend to have a positive impact on ASPs.

The second part of -- second question I was wondering is how much exposure do you have with regard to flash memory going into the 2006?

I think very little. We have -- we are participating there. There is an upside, we think, for us there, but I would suggest that we're not exposed in any way.

[Chip Bonnet], FM Global.

A couple questions if I could. I just wanted to flesh out a little bit more what you're seeing at the mature notes. Last quarter you came up shy of revenue expectations, and the explanation was that some of your customers were running at very high utilization rates and so that they were not starting new designs, and your mature business really fell off. So can you talk about that phenomenon a little bit, and then I will come back with my other questions?

Well, we did see an increase in the November timeframe. I think in December, I reported that we saw some of the business we had anticipated. How much of that was carryover, how much of it was new designs, it's very hard to tell, but we did see a pickup. And as Sean mentioned, the market has shifted at least for a period of time and we are seeing an increasing blend of high-end. We believe that on the main -- what we'll call the mainstream, 180 and above, that there's still some opportunity for growth, that tapeouts will sort of peak here over the next, say, six months, and that we are in a position to take advantage of that. We have a very high share of that business. I think we compete very effectively there. So we've got a pretty good visibility and good opportunity in that segment.

But as I mentioned in my prepared remarks, we are not confused that the growth opportunity for us strategically is in the high end, and we need to be positioned there to be able to compete effectively.

Okay. Do you think after a couple quarters of pretty decent sequential declines that the mature business is stabilized at these levels, or would you expect to see a continued decline?

I think the decline if any will be slow, not anything dramatic. We may even see some increases in a particular period. It is going to be pretty flat for a while, I would suspect.

Okay. My next question was on the timing of expenses and revenues as you ramp some of these new facilities, so I guess the Taiwan facility is the first one coming online, I think you mentioned the end of March. Can you talk about the expenses that you are incurring this quarter because of that? And then you mentioned that you likely won't see revenue this quarter, but what would be the quarterly revenue potential of that facility going forward, so we get a little better handle on margins?

The expenses, Chip -- this is Sean -- they are embedded into our guidance do relate to the ramp-up of the Taiwan and the China facility and have been in our models or in our guidance, and we have incurred them over the last few quarters. To the extent the facility ramps up and the revenue expectation, I think we will be in a better position probably in our analysts' meeting in April to discuss that once we visit there, review the market opportunities, but we are looking to monetize those assets as quickly as possible.

As Mike said, we are taking a look as we speak. Should there be any impact the latter part of the quarter or into the third quarter, we will have to get back to you on that.

Okay. Is it at least fair to say that at least in the short-term here or in the current quarter that your margins are being slightly depressed because of these facilities, just as you're not able to reap the revenue opportunity in that going out the next quarter as the facility comes online and ramps and you do get revenue, you should see margins start to climb?

As we have done throughout the course of a last two quarters and in Photronics' recent history, as we have put additional costs into the system, we look for ways to identify other areas to pull costs out. That's why we do not see a sequential decline in our margins -- our operating margin quarter-over-quarter.

We are aggressively looking at ways to pull additional costs out of our infrastructure, as we build up our presence in Asia. And we do not want to compromise our operating margins, but I did say we may see a slight perturbation here and there, but we feel pretty confident that we will be able to maintain our model and be successful moving forward.

Okay, one last housekeeping was on the tax rate. I just wanted to make sure I had that right. I had in my notes that -- last quarter, did you guide 2006 tax rate to be in the 16 to 20% area, and so now it is increasing to the 20 to 25% area. Is that right?

That would be correct, Chip. The effective tax rate, unfortunately, does wreak havoc with models because we operate in a number of different jurisdictions, some of which we are taxpayers, some of which we have tax holidays, some of which we are incurring losses that we do not get a benefit on. That's why we give quarterly guidance with respect to the absolute dollar range of potential taxes.

What was that again for the next quarter -- or the current quarter?

Q2, I stated that it would be between $3.3 million and $4 million.

Thanks very much. Congratulations on the good quarter.

(OPERATOR INSTRUCTIONS) Matt Petkun, D.A. Davidson & Co.

A couple questions for you guys real quick. First, just to touch again on the low-end business, Mike, you're talking about thinking that it's stabilized here. If I did my math right, this 72ish million that you guys did from non-leading edge business is lower than it has been in any quarter over the last two years.

And I am just wondering how you see that ramping, but also maybe what that means from a capacity standpoint, maybe a need to shift away from lower-end capacity and move tools towards new applications.

I think it's two things. One is, if you track unit volumes, unit volumes have been pretty stable. So the erosion in the mainstream segment has been primarily driven by pricing declines that have been not aggressive. As I said, the pricing environment has actually been quite stable. But that is a market segment that continues to decline from an ASP point of view at a reasonable rate, not at too aggressive a rate.

But again, doing our source checks with both customers, equipment suppliers, and the like indicate that there is capacity being put in place and we expect there will be some design activity there. I don't expect it to grow significantly, but unit volume has remained pretty robust in that segment and we compete very well there.

And Matt, Sean. Maybe just to highlight a couple other points. We did see a sequential decline, which we attribute to typical seasonality, in the mature business. But with respect to moving tools, most of our mainstream facilities have tools installed that have been in place for an extended period of time. They generate a significant amount of cash. Depreciation is very low and those facilities operate very efficiently. A good employee base, and they continue to improve. As we have some price erosion year-over-year, typically, they continue to maintain pretty healthy margins. So we have not seen the impact in our overall operating model as a result of that.

The other thing is that this is an area where cost controls are strongest, and as we look at automation and those kinds of opportunities, we think we can wring even further costs out of that.

Okay. Mike, you had also mentioned in some of your earlier comments consolidation going on in the industry. I wondering what that is doing for your customer concentration, whether or not you had any 10% customers in Q1 and what long-term industry consolidation might mean for SG&A for your business.

When I talk about consolidation, I'm talking mostly about our internal consolidation and how we get the global sites to be much more tightly integrated. That will drive not only efficiency, but better capacity utilization, sharing of best practices and the like. Nirvana to me is sort of a customer places an order with Photronics and we can source that from almost any facility we want in the world that has that capability and be able to meet their specification requirements, cost objectives, etc.

Today, we have some of that capability that exists with some of our customers. We don't have that on a universal basis. Will we be able to get to Nirvana? Probably not, but that's certainly an objective that the organization is driving to, and I think that will allow us to -- and again, it gets back to what I said earlier about our ability to compete with our two major Japanese competitors. I believe very confidently that we will outexecute them and we will be faster, more nimble, and we will win in the long run. We have proven that certainly on the mainstream business. Now we have to prove it on the high end.

I think more specifically, though, and quite accurately, you mentioned that at the leading edge, there's fewer manufacturers moving down the technology curve, and so that would limit the number of customers out there. I'm wondering again what that does in terms of how you leverage your SG&A structure and then also if you had any 10% customers in Q1.

Matt, we typically disclose our 10% customers annually. I can tell you there's been no significant changes in what we disclosed in our 10-K a couple of weeks ago.

Okay, thanks.

Phillip Lee, JPMorgan.

This question is for Sean. What do you expect your incremental gross margin leverage to be for the rest of calendar '06, given that your depreciation should be coming up a bit on the new facilities?

You know, we haven't provided guidance on specific gross margin leverage. We do want to maintain the integrity of our operating model. As we grow our revenues and we bring facilities online and depreciation increases, we're going to look to continue to improve. We've only provided guidance for the second quarter with respect to the top line and taxes and EPS range.

Do you have an idea where the dollars of depreciation should be by the end of, say, fiscal '06?

Well, I think in the past we've said depreciation would go up anywhere from $300,000 to $500,000 per quarter, depending on when tools come online. Our depreciation I believe for the first quarter was a little bit over 22, 22.3 million. I would expect that to continue to increase, as we stated in the past, anywhere from $200,000 to $500,000 per quarter, depending on when the tools come in online.

One quick question on stock compensation. What was that for the quarter and what would you expect it to be in fiscal '06?

It was approximately $300,000 for the quarter, and fiscal '06 is difficult to determine because of -- actually, we stated in our 10-K what the impact would be when we adopted FAS 123. We do not believe there will be any significant impact on '06 in our results. We did state that stock compensation would be approximately $700,000. Since we front-end loaded in our 10-K, to the extent there's new awards issued, that could change that.

Okay. Thanks, Sean.

Bill Ong, [American] Technologies Research.

Most of my question have been answered, but maybe on gross margins, if you X out the start-up expenses on Taiwan China, what type of gross margins can we expect? I would like to get a sense of where it could trend up to.

Bill, can you repeat that question? I didn't catch the front part of it.

I just want to get a sense on if you were to exclude out the startup expenses on Taiwan and China, what type of gross margins could you have gotten? Obviously, that is sort of dragging down your gross margins in the interim term.

To be honest with you, I am not at liberty to answer that question. We look at our business with all our costs embedded in there, and we look to monetize those assets as quickly as possible.

All right, thanks.

Timothy Arcuri, Citigroup.

This is probably tough to do, but can you somehow give us what the gross margin would have been on a more normalized mix?

I don't think we can.

We have -- operate in a high fixed cost business with mature and high-end facilities and we look to move our work around the network and utilize the tools most efficiently. To look at what a "normalized business" would be in a period of growth and market penetration is very hard to do.

All right. I guess lastly, should we expect these higher OpEx levels to persist throughout the rest of the year?

As we increase our operating expenses related to new facilities, we look to pull out costs in other areas. Certainly I would not expect to see the SG&A line and the R&D -- let's just speak to the SG&A line -- SG&A line increase significantly throughout the year.

So you think that it will be pretty flat at this kind of 15.5 level that you're guiding to for April?

I am looking at Mike as I speak, and I think he wants me to get that number down.

We are very focused on maintaining good financial discipline and good financial performance in spite of the fact that we know we have to make critical and timely investments to grow. We're going to do that, but where we add, we're going to take out.

Okay, thanks.

Less is more.

Krish Shankar, Banc of America Securities.

Just a couple of quick questions. You talked about your operating margin target to be about [20%] at a 120 million run rate. I'm sure that number has changed. Can you just tell what your current model calls for?

The 120 million, I think, refers back to, I believe, the end of the second quarter or third quarter of last year. At this point in time, since we are adding in two new facilities and we are determining when we're going to be able to monetize them, we have not given updated guidance with respect to that number and I am not at liberty at this point in time to do that.

Okay. Second question is, is there a trend in FPD, like IC, where the captives get a higher market share as they go into next generation, like going back to Gen 7.5, Gen 8?

The captive mask shops?

Yes.

Well, there's only one, which is LG, and they outsource. So we don't expect to see any [outspring] of flat-panel masks. I think will be heavily reliant on the merchant suppliers, which is why we are very excited about the opportunity.

Okay. One last question. I remember like six months ago you said your FPD market share was about 10%. Has it changed right now?

It has increased and we're still in very strong double-digit territory.

Okay, thank you.

There are further questions at this time. I'll turn the call back to you.

We would like to thank you all for your attention and participation in the call. We are very optimistic, as we indicated, about Photronics' future. We look forward to seeing some of you at the upcoming conferences. If not, we will see you on the next call. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.