Photronics Inc (PLAB) 2006 Q4 法說會逐字稿

Welcome to the Photronics fourth quarter 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, Decembers 6, 2006. I would now like to turn the conference over to Michael McCarthy, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Chris, and good morning everyone. I would like to thank you for joining our fiscal 2006 fourth quarter earnings conference call. Before we begin I would like to remind all participants about the Safe Harbor statement provision under the Private Securities Litigation Reform Act of 1995. And 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 2007 first quarter results after the market closes on Tuesday, February 13th.

Mike Luttati our CEO will open the call with some brief comments about the company's performance and strategic positioning. He will be followed by Sean Smith, our CFO who will provide a comprehensive overview of our fourth quarter and fiscal 2006 results. After Sean provides an update on our first quarter guidance Mike Luttati will moderate the Q&A session. Joining Mike and Sean during the Q&A will be Dr. Chris Progler, our CTO.

Thanks, Mike, and good morning everyone. During fiscal 2006 Photronics initiated a biostrategic transformation of the company designed to redefine our competitive positioning in the high-growth advanced semiconductor mask market. We are pleased to have completed the year with several accomplishments under our belt.

First is that for the ninth time in the past ten years Photronics generated revenue growth. This is a noteworthy achievement considering the strategic initiatives we have underway coupled with the inherent challenges of developing new technology while navigating through the cyclical nature of our industry. It also highlights the valuable competitive advantage that service excellence has played in maintaining customer loyalty in our mainstream business.

Revenues in fiscal 2006 set a new record, as a result of consistent performance in our semiconductor business and strong growth in flat-panel display business. High-end revenues were 35% of total sales while FPD masks represented 22% of total sales. FPD mask growth was largely a result of our strong position in Korea and the early ramp up of our presence in Taiwan. Combined we estimate these two markets will represent a total worldwide market in 2007 in excess of $3.5 billion.

Semiconductor sales while essentially flat year-over-year were well in line with our expectations. The Company generated free cash of $22 million after capital investments of $114 million which as we guided were self-funded through operating cash flows. And this is an objective we remain committed to going forward.

The closure of Austin was accomplished with minimal disruption for our customers. As the final set of tools come back online and ready for production in our second quarter we will regain the capacity that was unavailable for most of fiscal 2006. We are confident that this will help us capture the increasing demand for 130 and 90 nanometer mask sets throughout 2007.

In 2006 we also celebrated the grand opening of our two new facilities in China for semiconductor masks and Taiwan for FPD masks. These new sites expand our market reach, and we plan for both facilities to achieve profitable growth this year. Taiwan's ramp is underway, and China will begin volume production in our fiscal Q2.

The formation of the MP Mask technology center established a new paradigm and global business model for Photronics. Our partnership with Micron had an immediate effect on our technology development and deployment processes. This model is the cornerstone of our strategy for profitable technology leadership. Two terms which we do not consider to be mutually exclusive. MP Mask technology development along with the NanoFab manufacturing support strategy will enable Photronics to accelerate our time to market for leading-edge products which up until now has been a small component of the company's revenue mix.

I am also very pleased to report that we have successfully shipped our first 65 nanometer node product to a Photronics customer and demonstrated 65 nanometer logic capability at MP Mask. This is an important milestone as it validates the portability of technology across product segments. Furthermore, it provides us with a high degree of confidence in our ability to compete effectively at the advanced nodes.

Beyond the technology benefits, MP Mask is also redefining customer supplier collaborations. By combining the best characteristics of merchants and captive suppliers we can ensure the smoothest possible process node transition into volume manufacturing. In fact, we have already begun to integrate valuable process improvements pulled from the learning cycles of MP Mask into our other global facilities.

The construction of our North America NanoFab is on track for completion by the end of calendar 2007, and we are planning for an aggressive ramp up in 2008. Our staffing plan is also proceeding to schedule. Organizationally we implemented structural changes to achieve centralized day-to-day management of operations and technology development replacing the regional approach that had been in place.

Dr. S.H. Jeong in his new role as Chief Operating Officer together with Dr. Chris Progler, our CTO, have begun to integrate our three outstanding regional operating organizations into an even more productive global one. In addition, we added critical talent to the organization with several key hires in operations, technology, sales and finance.

Photronics has moved decisively, motivated by the necessity of transforming our company into a tightly integrated profitable technology leader. Our accomplishments so far are exciting. I am encouraged that investors I speak with largely agree with our strategy and much like all of us, they want to see continued execution and results. We understand this, and we're committed to deliver.

Before turning the call over to Sean for his review of the financials, I want to conclude by expressing my many thanks to our customers, suppliers and investors whose support is a powerful force in our continued success. I especially want to extend my deepest appreciation to our employees, a lot has been asked of you and you have responded with conviction every time. Your intensity keeps us moving forward, and your passion nurtures tremendous loyalty with our customers. I am proud to be part of such a strong and professional 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 2006. I will also review our balance sheet and cash flows during the period and discuss our outlook going forward. To supplement this narrative we have posted on our website two slides for your reference. Slide one is semiconductor IC and FPD revenue splits for fiscal years 2004 through 2006. This slide is IC and FPD revenue splits by quarter for fiscal year 2006.

During the quarter we incurred an after-tax charge of $2.4 million or $0.05 per share resulting from the previously announced restructuring of our North American manufacturing network. The total charge incurred year-to-date is approximately $15.6 million or $0.31 per share and is on track with the previously announced range of $15 to $18 million.

For purposes of our discussion on operations for the fourth quarter to fiscal year 2006 I will be primarily referring to our operating results excluding the impact of the charges relating to the North American restructure. Also, during our Q3 conference call we disclosed the breakout of our IC and FPD photomask sales. For purposes of our high-end and [mainstream] revenue disclosures we will, however, continue to combine IC and FPD together. Based upon a review of this data, we will not be able to provide any further granularity at this time on our combined operating model as we have determined such disclosures could place us at a competitive disadvantage.

Net sales in our fourth quarter amounted to $115.3 million, an increase of $3.5 million or 3.1% as compared with the fourth quarter last year. The year-over-year increase is primarily related to the improved tape-out activity for high-end IC photomask offset by a slight decline in FPD revenue of $1.3 million as compared to Q4 2005.

Sequentially sales increased by $7.1 million or 6.6% as a result of improved demand for both IC and FPD photomask. Sales of advanced photomask were 40% of total sales during the fourth quarter as compared to 32% in the third quarter, an increase in absolute dollars of $11.5 million, which relates to improved tape-outs for G6 and above FPD sets, as well as increased 130 and 90 nanometer IC sets.

Included in our high-end metrics are mask sets with semiconductor design at and below 130 nanometers and for FPD sets used to fabricate flat-panel products using G6 and higher technology.

As a percent of total sales for the fourth quarter, sales were approximately 58% in Asia, 25% in North America and 17% in Europe. When including the revenue attributable to the MP Mask joint venture which we do not consolidate, our revenue would have been approximately $133 million for the fourth quarter and total high-end sales would have increased to $54 million or 48%.

Gross margin for the fourth quarter was 31.3% as compared to 31.4% in 2005. Sequentially gross margin improved 90 basis points primarily as a result of improved demand for IC and FPD photomask at the high-end.

Selling, general and administrative expenses for the fourth quarter were $15.8 million as compared to $14.3 million last year with the increase primarily related to our Asian expansion specifically startup costs for our new facility in China and to a lesser extent increased costs related to the implementation of FAS 123(R). Sequentially SG&A increased $250,000. SG&A as a percent of sales was 13.7% during the fourth quarter of 2006 as compared to 12.8% in 2005, 14.4% sequentially.

Research and development expenses which consist principally of continued development for advanced process technologies were $4.4 million in the fourth quarter as compared to $8.4 million in 2005. Sequentially R&D decreased by $2.4 million due in part to our redeployment of R&D resources through our Micron joint venture and the closure of our Austin, Texas facility. R&D represented 3.8% of sales in the fourth quarter of '06 compared with 7.5% last year.

As we discussed in our May 18, 2006 conference call, we projected R&D to decrease by up to $5 million annually as a result of improved efficiencies related to our global R&D efforts due principally to the MP Mask joint venture. A significant decline in R&D expenses for the fourth quarter is an aberration associated with the redeployed Austin toolsets. We do, however, expect R&D expenses to increase on a sequential basis for Q1 2007 as a result of the completion of the redeployment of the Austin advanced toolsets.

During the fourth quarter we generated operating income of $16 million or 13.9% of sales as compared to operating income of $12.5 million or 11.2% of sales in the fourth quarter of '05. Sequentially our operating margin increased by $5.4 million which is 75% of the increased sales volume of $7.1 million. Our operating model continues to demonstrate significant leverage as we maintain an operating infrastructure that is matched to the opportunities in the marketplace.

As we have stated on previous calls, the next few quarters will likely experience some moderate fluctuations on the operating margin line as we continue our expansion and look to continue to monetize our facilities in Taichung and Shanghai. In view of the many opportunities that we see ahead, the fluctuations resulting from our investing in Photronics future growth will be short-term and are not expected to be reflected as a negative change in the overall fundamental operating model of our company.

Net other expense for the fourth quarter were $700,000 as compared to $200,000 in the fourth quarter of '05, increase year-over-year is related to reduced interest income and increased interest expenses which was offset by a onetime investment gains of $1 million.

During the fourth quarter we recorded a tax provision of $1.1 million which was lower than our forecasted range of 1.6 to 2.2 million as a result of increased income flow in from the U.S. Net income on a GAAP basis was $9.8 million or 8.5% of sales for the fourth quarter of 2006 as compared to net income of $8.7 million or 7.8% of sales in the fourth quarter last year.

Net income per diluted share on a GAAP basis was $0.21. Net income and income per diluted share exclusive of the restructuring charge was $12.2 million and $0.26 per share respectively for the fourth quarter of 2006. Actual results were in excess of forecasted guidance which excluded the restructuring charge as a result of the following. Higher than forecasted sales of $1.3 million, favorable onetime investment gains of $1 million and reduced income taxes of $1.1 million at the high-end. The aggregate of which equals approximately $0.05 per share.

As we exited the fourth quarter, we had approximately 1500 employees equating to sales of $307,000 per employee on an annualized basis.

Now taking a look at our fiscal 2006 operating results before the impact of the restructuring charge, net sales for 2006 were $455 million up approximately $14 million as compared to 2005. Sales of FPD photomask increased 26% to $100 million. Sales of IC photomask decreased slightly [by] 2% to $355 million, a decline principally associated with the redeployment of the high-end Austin toolsets. Including revenue attributable to the MP Mask joint venture, which we do not consolidate and all of which is considered high-end, our total fiscal 2006 revenue would have equated to approximately $490 million.

Year-to-date gross margin was 32.3% as compared to 32.9% last year, a decrease of 60 basis points. Decline directly attributable to our increased operating infrastructure. SG&A expenses increased $7.9 million to $62.2 million or 13.7% of net sales. SG&A last year totaled $54.3 million or 12.3% of net sales. The increase in SG&A is primarily related to our Asian expansion specifically in Taichung and Shanghai and the implementation of FAS 123(R).

Research and development costs were $27.3 million for 2006 as compared to $32.2 million in 2005. R&D was 6% of sales for fiscal '06 versus 7.3% of sales in the prior year. Operating income exclusive of the restructuring charge for fiscal 2006 was $57.5 million or 12.6% of sales as compared to $58.7 million or 13.3% in fiscal 2005. Net other income and expense improved to income of $3.6 million in 2006 compared with expense of $3.3 million in 2005 as a result of the following. Increased interest income associated with higher cash balances, year-over-year foreign exchange gains, and gains on sales of certain investments offset by increased interest expenses.

For fiscal 2006 we recorded a tax provision of $10.5 million which amounts to effective tax rate of 17.1% exclusive of the restructuring charge. Net income and EPS on a GAAP basis was $29.3 million or $0.56 per share respectively. For fiscal 2006 exclusive of the restructuring charge, our net income amounted to $45 million or $0.97 per diluted share.

Now turning to the balance sheet, Photronics balance sheet has experienced a positive transformation over the past couple of years; the strength in the balance sheet and improved liquidity enabled us to strategically invest in market opportunities such as our joint venture with Micron. Cash, short-term investments as of October 29, 2006 amounted to $199 million and working capital amounted to $128 million. During the fourth quarter on a sequential basis cash and working capital improved by $35 million and $30 million, respectively.

On the balance sheet perspective we recorded the $135 million investment with Micron as follows. Approximately $64 million has been treated as an equity investment in the joint venture on our balance sheet as we do not have effective control of the JV and want to remind you again that we will not consolidate [staffs] and result of operations. We will, however, record our share of the JV's net income or loss on a quarterly basis through the nonoperating income expense line.

Approximately $71 million, a majority of which will be amortized over its expected useful life is captured in the other intangible net line on the balance sheet. We also recorded a $15 million liability for the remaining payments which are due in equal installments of $7.5 million in May 2007, and May 2008, respectively. At the end of the quarter current liabilities included $87 million of debt which relates to a 4.75 convert due in December 15, 2006 which I will speak about shortly.

Accounts Receivable increased $14.3 million as compared to the end of last year as a result of the increased sales during Q4 '06 and timing related to the Micron supply agreement. A similar increase in accounts payable of $11 million since the end of last year was also a result of the timing of payments to MP Mask for services rendered. Other accrued liabilities, which increased $14 million since last year, include the $7.5 million payment owed to Micron in May 2007.

Total debt at October 29, 2006 was $257 million. The principal components of the outstanding debt include $87 million 4.75 convert due in December '06, $150 million 2.25 convert due in April of '08 and approximately $20 million of foreign loans. We plan to pay off the 4.75 bonds when they mature on December 15th. As I have highlighted, we have cash on hand of $199 million at year end, and we expect to continue to generate additional cash during Q1 2007 as we did during Q4 2006. After retiring the bonds we will still have cash in excess of $110 million.

Taking a look at our 2007 capital needs we have met with a number of financial providers and have received commitments for additional financial flexibility should we determine we need it. The type and term is subject to final negotiation; however we are confident that our access to capital will not inhibit our growth plans.

Other long-term liabilities increased to $23.9 million and includes $7.5 million payment to Micron which is due in 2008 and our minority interest at the end of the fourth quarter amounted to $46 million which relates to the minority interest in the equity of our 58% majority owned subsidiary, PSMC. Shareholders equity, aggregated $614 million which amounts to a book value per share of $14.81.

Taking a look at our cash flows, the cash provided by operations for the fourth quarter of 2006 was approximately $36 million; year-to-date cash provided by operations was $116 million. Cash flow using investing activities during 2006 amounted to approximately $201 million of which $95 million presented cash payments for capital expenditures and $120 million represents our initial investment in the Micron venture. As Mike spoke to briefly, free cash flows from operations which are net of CapEx were $22 million in 2006 as compared to $21 million in 2005. Total CapEx on an accrual basis for 2006 was approximately $113 million and it primarily related to our Greenfield facilities in Asia.

Taking a look ahead, our short-term visibility as always continues to be limited as our backlog is typically one to two weeks. We believe, however, that in 2007 we will continue to see increased design activity especially at the advanced nodes. We are also encouraged by a number of strategic opportunities created our relationship with Micron, our expanded presence in FPD masks and increased penetration and capacity to support 130 and 90 nanometer customers.

As a reminder, we typically experience some normal seasonal shutdowns associated with the holiday period during our first quarter. This year we anticipate an increase in the number and duration of customer shutdowns as compared to last year. We do expect to see the Asian foundries matching their production schedules to the U.S. and European holiday periods. As a result, we believe it is prudent to take a conservative view in forecasting revenues and earnings for Q1 of 2007.

Based upon our current operating model, the projected outlook for revenue for the first quarter of 2007 is in the range of $107 to $113 million. While we will not be providing detailed guidance for the second quarter this morning, initial inputs from our largest global customers indicate that we will likely track to historic patterns of strong sequential revenue performance during the second quarter as these customers release designs that will be held up through the year end holidays.

Capital expenditures for fiscal 2007 on a cash basis are forecasted to be approximately $120 million to $150 million as we selectively invest in capability and customary relationships that enable us to continue to achieve profitable technology leadership and consolidate market share gains. Our focus is in high return capital programs that align us with advanced technology customers. Although we are not providing specific cash flow guidance for fiscal 2007, we do expect to fund our 2007 capital expenditures from our operating cash flow.

We would like to emphasize to you this morning that we maintain a significant degree of flexibility in how we invest capital into our organization, so that if the trend, if trends accelerate or decelerate we can move quickly to optimize our competitive position while also aggressively managing our cost structure. At the same time, we feel it is important to remind the members of the investment community that we see opportunity for growth and are confident that we can increase our market share.

During 2007 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 the areas which we are taxable. Accordingly, we are estimating the effective tax rate for fiscal 2007 to be approximately 20%. For the first quarter of 2007 this will equate to a range of $1.2 to $2.0 million in whole dollar terms. As a result, based upon our current operating model we estimate earnings per share for the first quarter of 2007 to be in the range of $0.10 to $0.16 per share.

In summary, again we will 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 remarks. Now I would like to turn the call over to Mike.

Thanks, Sean. We would like to now open it up for Q&A.

(OPERATOR INSTRUCTIONS) Daniel Berenbaum, Susquehanna Financial Group.

A question about the MP Mask joint venture, since you're not consolidating the revenue that is going to the minority interest line, how should I think about how that minority interest line might trend over the next couple of quarters? And also is there anything else or what are the other components of that line in terms of your investments in PSMC and PKL, remind me where we are in ownership there.

The minority interest line, as we exited the fourth quarter virtually all of which relates to the minority interest in PSMC, we effectively own 100% or 99.7% of PKL. So to the extent the minority interest line moves up going forward or goes down forward, that will be directly attributable to the operations in Taiwan.

Suresh Balaraman, Thinkequity.

Can you talk about the pricing situations and the different geographies with respect to the high-end masks, as well as the regular mainstream masks?

Pricing you are saying?

Yes.

If you separate IC from flat-panel, the IC pricing has been relatively stable. We still see, as I have mentioned in the past on our calls, particular events that occur where there is competitive bidding or something like that. But generally speaking I would say that pricing has held pretty well year-over-year, and we don't see any necessary reason that that's going to get too volatile over the next twelve months.

In FPD we are seeing what we expected was typical price down driven heavily because of the end users driving their cost structures down and obviously pushing the supply chain to follow. So we've got roadmaps in place to accelerate our costs down efforts and also be able to maintain the margins that we expect to get from the business. So I would say generally flat-panel is probably more aggressive on the price down curve than IC is right now, other than as I mentioned we might have a specific competitive bid situation.

[Kahn McCardle], Needham & Co.

Good morning, gentlemen and thanks for taking my call. I was wondering on the IC side could you talk about the tone of business, mostly application and geography?

Sure, let's see, generally what we are seeing is the memory business has remained very strong from a capacity point of view. The demand, most of the fabs are running at high utilization rates. Very interesting one of our memory customers that I spoke to said basically that because they are running at such full capacity they are having difficulty stuffing new designs into these fully loaded facilities. I think that is consistent with memory makers all over the globe, and I think that will release. And one of the reasons why we had a relatively soft November and lowered our guidance this quarter to accommodate that is because we saw that there was some softening there.

There is also in the analog side we have, we've seen generally stable conditions I would say. Foundries as I said are tracking with the U.S. IBM's. Wireless is also down generally, so it is sort of a mixed bag. The optimism we have -- almost every customer we've talked to is suggesting that we're going to have a very, very strong second quarter. From our point of view our positioning with the tools and the facilities and the capability we have online we believe we are going to be able to have significant growth in 2007.

Janet Ramkissoon, Quadra Capital.

Yes, I had some translation problems during the call, and I missed Sean's comment about financing opportunities and any comment that was made about repayment of the debt. Could you please repeat that, Sean?

Sure, Janet. I said that we intend to pay the debt, the $87 million convert that is due on December 15, which is we have cash on hand today of $199 million or at the end of the year. After repayment of that debt we will still have cash in excess of $110 million, and we do expect to generate cash during the first quarter. I also said that we have met with a number of different financial providers, and we do have commitments should we determine we need it to gain additional financial flexibility into 2007. But I also said that our planned capital expenditures will be self-funded based upon our operating cash flow, and we will continue to evaluate as we move forward.

What is the current position on letter of credit? I know that you had a pretty substantial letter of credit in place, and which was supposed to have come due. Could you just review what your position is with letter of credits at this point?

Janet, I think you may be referring to a revolving line of credit which we had expire, we let expire in July of 2005 and we didn't renew it. In fact, we had a three-year $125 million revolver that we took out in 2002, 2003 that we only borrowed $11 million during that period on it. So we will look and we are confident our access to capital will not be limited should we determine we need it. We are very confident in our ability to generate, as I said, cash flow from operations just as we've done over the last three years, we generate free cash flow. And depending upon the opportunity we will continue to scale our infrastructure to match market demand.

Patrick Ho, Stifel Nicolaus.

Thanks a lot. Question for Sean and one for Mike. For Mike first. Given I guess the many moving parts you have in your business right now and the ramp of your FPD business what could you say is the most influential, or the biggest thing that will affect gross margins as you look into fiscal year [2000]. And for Sean, can you just give a breakdown of the options expensing on the cost of goods in the expense line?

Let me take a stab and maybe Sean could add a little more color on the gross margin as well. But I think our take is that we do have expenses ramping as you know and as we've talked about we have -- we've been probably the biggest driver in FPD as we've talked about is the material cost is such a big component compared to the IC piece. And so making sure that we can get the facilities ramped to a productive level where we are yielding an efficiency will offset that. And then coupling that as I mentioned earlier is you've got the ASP coming down with the material cost component being so high. So I would say that from a macro level for the business the major impact on gross margin would be probably in FPD in the short-term. But we have not changed our model nor our expectations that we expect flat panel margins to be consistent with our IC margins.

With respect to our stock-based compensation expense, I can tell you for fiscal 2006 it approximated about $2 million, $1.9 of $2 million. Any other questions?

Jay Deahna, JPMorgan.

Good morning, a couple of questions here. Mike or Sean, the first one is, in the October quarter your flat panel revenues, how did they compare to the April quarter, which I think was the peak?

They were up -- oh, comparative -- the Q2 quarter was $28 million in FPD and in Q4 October quarter was $25. And as you remember, we dipped down to $21 in Q3. So we rebounded as I indicated we would but not quite to the level we were at in Q2.

Fred Ramberg, MS Howells.

You talked about delivering tape-out at 65 nanometer, and so through '07 I would assume this is going to become a measurable part of the IC revenue. Can you talk a bit about the rate of growth and at least in a 30,000 foot level where you might see that percentage of revenue by into fiscal year '07?

I'm going to let Chris maybe add on after I make a few comments. I think generally we don't expect a huge amount of 65 nanometer revenue generation in '06 or '07. Our plan was to qualify and get a few critical customers qualified in our MP Mask facility, shift the necessary revenue out of that and position those customers to accelerate into our NanoFab once that is completed by the end of the year and into '08. From a market perspective that is consistent also with what we are hearing from customers who have tried to -- have basically slowed their 65 nanometers. Now with a few exceptions we have most customers are retracking back to 90 nanometer designs. Chris, maybe you could add a little more color to that.

Not much more to add. We will be pretty selective in the customers we bring into the MP Mask entity at 65. We will have a couple qualified through 2007. We probably will bring at least one other Photronics facility online for 65 in 2007. That is our current plan; but I think 2008 is a much stronger scenario for 65 just due to the node migration logistics of the broad customer base.

And just to add one final comment, this is, we are positioned now in a way that we've never been positioned in the company before with leading-edge. We have the capability of being able to do the 65 nanometer.

Matt Petkun, Davidson & Co.

Just to clarify, it looks to me like you're trailing edge revenues were down 15% this year year-over-year which is obviously being offset by a lot of strength at the leading-edge and in the flat panel part of the business. I am just wondering how you guys would kind of [belief] that we are in terms of moving away from the 0.18 business, have we kind of stabilized there or do you think that will continue to decline?

No, actually it is very interesting, it is a good question. We were looking at some data the other day to look at what PSMC is doing in their captive facility. And for the last six quarters the 0.18 business and above has represented 50% of their tape-out activity and that has been very, very consistent. Obviously the other 50% is mixed between 130 and 90. The other interesting data point there is that 90 has -- while it has accelerated, it has got 25% of the total -- it has sort of leveled out. And so to my point earlier is I think we are seeing continued design activity at the 180 and above nodes, consistent activity I'll say, and I think that through 2007 we are more likely to seeing an increase in 90 nanometer designs and 130 rather than 65. And I think that is tracking with what we expect from our customers, as well.

I can make one additional clarification there on the 65, we are mostly talking about logic applications. On the memory side there is already fairly healthy shipments of the 65 node. So we have to start splitting memory and logic at this point. There is actually fairly healthy 65 shipments from memory and 45 will ship in 2007, as well.

Daniel Berenbaum, Susquehanna Financial Group.

Can you give us a little color on what you think your marketshare is both the flat panel and the IC side and where your opportunities are for both of those?

We've said it's very hard because we're the only public company reporting where the marketshares actually turn out to be. On a flat panel basis we believe that it is probably in the mid teens, somewhere between 15 and 17%. Through our fiscal 2006 how that ends up for calendar 2006 probably be about the same.

In IC, on a macro level again it depends on whether you carve out the captives, if you carve out Japan which are not served markets for us, if you give all in we are probably in the midteens also. And that number increases obviously as you move more toward our served market. And we've been very clear as we have laid out our strategy that our opportunity is in the leading-edge or advanced masks, which is why we've done Micron and Sean indicated and you can see from the contribution of what MP Mask has today and what the growth of our NanoFab will be, we believe we can make a significant [end] to marketshare going forward in the high-end.

Timothy Arcuri, Citigroup.

I have three really quick ones. First of all, you're saying that the R&D savings that you had in October are not sustainable going forward, so I guess I am curious what the sustainable level is of R&D, number one. Number two, Mike said that he feels more optimistic about the April quarter based upon what customers are saying. I am wondering what gives him or what gives the customers the confidence given that there is what could be a pretty healthy inventory correction going on out there? And then last thing, what is your percentage of revenue from memory today? Thanks.

I will take the first part of that on R&D. We feel the R&D expense here in Q4 was the trough, if you will, it will increase, but I also said and we remain committed to that our total R&D savings year-over-year if we look back to Q2 would be at least $5 million because we have a more effective spend of R&D effort. We have a centralized versus a decentralized model, which is more efficient. We are going to capitalize on the MP Mask JV and Micron technology agreement. So we front loaded the cash payment on the R&D in essence, in that regard of the $120 million.

So I was just trying to highlight that we will continue to spend on R&D. We have more efficient spend and I believe we will gain and it will be proven in the future on our high-end marketshare gain the results will demonstrate that is a more effective spend.

On the optimism for Q2 and the rest of the year I think a couple of factors. One is we like underutilized fabs because typically in a cycle when the fabs are full we can't get the designs released out, and we are seeing that today in memory, as I mentioned, and the indication is that there will be some relief there in memory going into the first half of the year and certainly in the other areas where I think you and others have reported that utilization rates are coming down. That is typically the time when new designs will go into the fabs and so that will drive additional tape-out activity. That is what our customers are telling us.

The other thing I mentioned earlier is that there are some 65 nanometer design activity in the Logic side that has been retract to 90 nanometer designs. Customers are telling us that they are not moving as quickly. We think that put a little bit of a bottleneck in the design process, and we expect that will release into the first half of '07 for us.

Third is that seasonally as Sean indicated the first quarter for us is seasonally soft because of the holidays. A lot of those designs that get delayed for Christmas and Thanksgiving burst out at the end of the year, and then the last is in flat panel. Historically, the data suggests that the first six months of the year tend to be the most aggressive tape-out activity as they release new designs, prove them out and get them ready for the holiday season rush.

So a lot of positive indicators, very few negative ones that we see right now. I think I would be more concerned if fab utilizations were higher because I think that might be an indicator that we might see continued softening of the tape-out activity but that is not the indication we see.

Jay Deahna, JPMorgan.

I got cut off a little early last time. I've got a couple of questions. On the flat panel did you say that third quarter revenues were $21 million and fourth quarter were $23?

It was $21 and $25.

Okay, and then so in the April quarter of fiscal '07 do you expect to get above the 28 level that you saw in the April quarter last year?

We're not going to guide to that today, but I would say that we are very optimistic that it is going to be in that range or above.

So you get a dip in the January quarter pretty much in everything and then we start to grow again, is that what you're saying?

Exactly.

Okay, now in the -- you said that Sean said in the initial commentary that IC mask revenues were down a little bit in fiscal '06 largely because of the shift, it would be the Austin toolset. Was the mask market or your served part of the market actually up in the year, and what do you view as the secular growth rate albeit the mask market or your increasingly served portion of it?

The mask market was up modestly in '06, probably our CAGR for the macro market for IC mask is in the 3 to 5% range. However, the sub 130 nodes are growing at a much higher rate and so that is where we need to gain share and that is where we are focused on, why we redirected the company, redeployed the assets from Austin.

What we are very excited about is we now, we will have going into our second quarter all the tools that we need to capture the capacity in place to be able to take marketshare in those nodes. We will have the FPD deployment in place in Taiwan, particularly obviously in Korea where we've been successful, but in Taiwan we have access now to a market that was not available to us. We have all of our facilities ready with the capacity to take share, and we know that our service performance will differentiate us and we will continue to drive that differentiation.

[Chip Bonnett], FM Global.

Good morning, a couple questions if I could. First, Sean you talked about a onetime investment gain. Can you put a little color around that? And also talk about the MP Mask contribution which I think runs through the other income line in the P&L. And then can you talk about utilization rates at all at MP Mask? Thanks.

Okay, Chip. I will answer the first two, then I will let Mike or Chris answer the third question. The onetime investment gain as we had said investment that we liquidated during the quarter, and then the onetime gain of about $1 million simply said, with respect to the MP Mask, MP Mask was set up when we formed a joint venture back in May to be essentially a self-funding breakeven operation.

We did say that we would take the income or loss, our share of the income or loss of the equity earnings in MP Mask in our nonoperating income expense line which we have done. But I can tell you that there hasn't been a significant positive or negative with respect to the operations that JV is essentially running at breakeven point. But I can tell you though is that through our relationship with MP Mask and Micron and coupled with redirection of the centralized R&D, the transaction in totality has been accretive to Photronics.

And Mike or Chris if you want to talk about the utilization at MP Mask, if you guys can.

I can just make a few brief comments. Utilization at MP Mask is very high, very strong both from the Photronics R&D side and our customer qualifications and Micron's use. In fact, the facility hit a number of output milestones over the last few months. So [utilization] very strong and very leading-edge product mix and R&D portfolio going through there.

The other thing, Chris I would just comment on is when you look at what has taken place at Micron from the time we signed the JV up with the IM Flash JV, the expanded fabs in U.S. and Asia, you can't conclude anything other than things have gotten really much better from when we started. And that all opens up opportunity for Photronics.

I agree, Mike. I think also because of the utilization there the opportunity for outsourcing for Photronics is going to pick up quite a bit in 2007.

Daniel Berenbaum, Susquehanna Financial Group.

Again just to follow-up on the MP Mask, you said that is sort of neutral to the bottom line. When do you get to see some revenue that you might gain through the partnerships there? You talked about the Boise NanoFab the on-line by the end of calendar '07. Should we expect to see maybe some revenue that you might see from Micron or from IM Flash coming through at the end of calendar '07 or earlier?

Dan, we will see revenue flow as a result of our relationship with MP Mask during fiscal 2007, and we will embed that in our guidance each quarter.

(OPERATOR INSTRUCTIONS) Timothy Arcuri, Citigroup.

This is actually Brian calling in for Tim, had a quick follow-up. What percent of your revenues currently are from memory?

We don't typically breakout the components of our revenue by a product type for competitive purposes.

Fair enough.

Kris Shankar, Banc of America.

I just wanted to find out are you guys still maintaining your 20% operating margin at 135 to 140 million revenue run rate?

That is correct.

Our next question comes from Brett Hodess of Merrill Lynch.

This is Kip Long on behalf of Brett. Just had a quick question on Q1, wanted to get a sense of what you thought the mix of business was in terms of leading-edge IC flat-panel. If you could give that out. Thanks.

We typically don't breakout again for competitive purposes, we give guidance number all-in on the high-end and mainstream business including FPD and IC, and that is how we -- we essentially run our businesses is still our nine, ten manufacturing locations and we look at all-in and that is how we manage it. So we do not break out for guidance purposes the splits at this point in time.

But I would say, Sean, maybe just to add a little color to help you on your question if you look at our historical trend we've been trending up and we expect to be up in the fourth quarter as well in high-end performance.

First quarter.

First quarter, sorry.

Kris Shankar, Banc of America.

I just wanted to find what is it that your larger customers see this year in moving quickly to 65 nanometer, what is the reason?

Chris, you want to --?

Why some of them are not moving quickly to 65, was that the question?

Yes.

I think it is some of the application oriented things with 65 nanometer node. At this point there is only certain class of devices that really can benefit from that type of Logic technology and the design process is expensive and lengthy. So I think it is fairly typical of still the early phases of the node.

I think those are the main reasons, I don't think there's anything exceptional. I don't think there are any big surprises in the process technology or new things that companies have learned as they try to roll these technologies out. Actually the application space is still somewhat limited for this node, and the design process is still a bit complicated.

Jay Deahna, of JPMorgan.

What do you view is your normal revenue percentage decline in my first fiscal quarter and how does your guidance compare to that this year?

Typically it is in the range of 4 to 7%. And if you look at what we did in Q4, that is lower than the range.

[Ginny Euhn], JPMorgan.

Good morning. You gave us the stock comp expense for the year. Could you give us the allocation of breakdown between SG&A and cost of goods sold? And then also your minority interest expense went up this quarter. Can you give us some guidance for that going forward? And then also your days of inventory also fell to 22 from 28. I just wanted to know if that is kind of what happened with the third quarter or just an aberration and is this a more normal level? Thanks.

At this point in time we don't breakout for the year fiscal 2006 the stock-based compensation to the various components whether it is cost of goods sold, SG&A or R&D. I cannot guide on minority interest other than to say that going forward to the extent that it goes up or goes down it is reflection upon our operations in Taiwan of our majority owned subsidiary.

And I'm sorry the last question, Mike.

I was just going to say just to add to that, we are -- we've invested in Taiwan. It is a very large market, and we would hope that it will -- no, let me put it this way. We expect that it is going to improve in 2007 based on the tools that we've put in place there to capture market size.

Our inventory turns, our inventory levels will fluctuate moderately as we move forward. The flat panel blanks have a longer lead-time than the semi IC blanks, so you may see some moderate fluctuations there. But bear in mind with respect to our inventories is essentially all raw stock, it does turn very quickly and we need it for production as market orders come in.

Mr. McCarthy, there are no further questions at this time. I will now turn the call back to you.

Thanks. This is Mike Luttati. Thank you everyone for your attention and participation in this morning's call.

We are very optimistic as I said in our outlook for 2007. We have positioned the company to take advantage of the most advanced technologies in both IC and flat-panel and look forward to talking to you again in February.

From each of us at Photronics I would like to wish you all a safe and joyous holiday season and a prosperous new year. Thank you very much.

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.