Photronics Inc (PLAB) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Photronics Q3 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 Thursday, August 16, 2007. I would now like to turn the call over to Michael McCarthy, Vice President of Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone. My name is Mike McCarthy, Vice President of Investor Relations and Corporate Communications for Photronics and I would like to thank you for joining us for our fiscal 2007 third-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 '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 2007 fourth-quarter results after the market closes on Tuesday, December 4.

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 Photronics' third-quarter results. After Sean provides an update on the fourth-quarter guidance, Mike will moderate a Q&A session. Joining Mike and Sean this morning during the Q&A will be Dr. Chris Progler, our Chief Technology Officer.

Before turning the call over to Mike, I'd like to remind everyone that Photronics will be hosting its ninth annual analyst meeting in Boise, Idaho on Thursday, September 13. Presentations and dinner are on the agenda. On Friday, September 14, we have made arrangements to tour the MP Mask and NanoFab facilities in the morning. This meeting will also be available live and archived via webcast on our website. Registering for the event can be done over the website by clicking on the active link on the right-hand side of our page. This will be a great event to both learn more about our strategy and see the facilities we have put in place that are enabling Photronics to realize its goal of profitable technology leadership. Mike?

Thanks, Mike and good morning, everyone. On August 1, we pre-announced the results of our July quarter. Estimates were lower based on two major market factors that affected our performance. First, we experienced the continued softness in our flat panel display business as customers remained focused on aggressive cost reductions and productivity improvements.

Second, our European IC business declined as a major customer in the region worked through a strategic realignment of various partnerships focused on next-generation process technology. All that said, the management team and I are disappointed with the results and are committed to improving going forward.

Just over 12 months ago, we created MP Mask, our joint venture with Micron, which was a critical strategic step towards repositioning the Company as a profitable technology and marketshare leader. Although the traditional benchmarks of sales growth and earning quality have yet to fully reflect this action, along with others that we have taken, we have made great progress. So clearly there is more hard work ahead. We are encouraged that this broad transformation of Photronics is nearly complete and are confident that executing against these strategic initiatives will enable our Company to fully realize its goals.

At our analyst meeting on September 13, we will discuss the nature of how our business model has been changing, highlight some of the major items we have in play and discuss the levers that we believe will be critical in driving growth in 2008 and beyond.

Our business is a capital-intensive, high turns business. Market factors aside, visibility into our order pipeline is limited, typically one to two weeks. Though our customers do give us a reasonable view into their design cycle, the timing of a design release can be highly variable based on the completion of the many increasingly complex steps leading to a tape-out.

This variability is intensified as our mix changes to high-end FPD and IC masks since they carry higher ASPs. A few sets moved in or out of a given quarter does have an impact on revenue guidance at our current levels.

With a firmly established and embedded cost control culture inside Photronics, we have adapted reasonably fast to changing market conditions, especially while we are in the midst of executing a strategic transformation of the Company into a technology leader role.

Looking out over the next two to four quarters, we expect that strategic initiatives, in combination with fluid market dynamics, will create continued volatility around our top line, both positive and negative, in any given quarter.

The ramp of our China facility, a release of tape-outs from an active design pipeline and flat panel displays, most notably for G7 and above technologies, and the startup of our North American NanoFab are all planned to have a long-reaching, positive impact beginning in calendar 2008.

As expenses have been ramping as a result of the new facilities, we have continued to take disciplined actions to reduce our overall infrastructure costs and improve productivity. These measures are always implemented in a way that does not compromise the completion of our strategic initiatives.

For instance, during the course of 2007 as we ramped two new facilities in Taiwan and China, the total number of employees in Asia was essentially unchanged. In North America, we have added approximately 50 employees to date for the US NanoFab; yet, our combined number of employees in North America and Europe was also flat.

Improvements in our global integration efforts have enabled us to identify and then wring out inefficiencies. I believe there is still more that we will be able to achieve there and we are seeing the benefits of a consolidated R&D effort centered at MP Mask. As intended, Photronics and its customers are getting more for less as a result of the strong collaboration with a technology customer and partner.

In summary, I just want to emphasize that the management team, myself and all the dedicated employees of Photronics are fully committed and accountable for executing on the strategic actions and most importantly to deliver the results expected of all our stakeholders. We are mindful of the challenges and energized to perform.

I will now turn the call over to Sean for a review of the Q3 financials and an elaboration of our Q4 guidance and then we will be happy to answer your questions. Sean?

Thanks, Mike and good morning, everyone. I will provide a brief analysis of our financial results for the third quarter of fiscal year 2007. I will also review our balance sheet and cash flows during the period and discuss our outlook going forward.

Net sales in the third quarter amounted to $104.3 million, a decrease of $3.9 million as compared with the third quarter of last year. The year-over-year decrease is primarily related to decreased high-end sets, high-end sales for FPD photomask coupled with reduced ASPs for both FPD and mainstream IC photomask. Revenues for FPD and IC photomask declined $2 million and $1.9 million respectively to $19 million and $85.3 million respectively during Q3 as compared to Q3 '06.

Sales of advanced FPD and IC photomask were approximately 12% and 9% respectively of total sales for the quarter. Included in this percentage are mask sets for semiconductor design at and below 90 nanometers and for FPD sets used to fabricate flat panel products using G6 and higher technology. As a percent of total sales for the third quarter, sales were approximately 58% in Asia, 26% in North America and 16% in Europe. Sequentially, combined sales of both IC and FPD photomask decreased $5.3 million with reduced FPD sales accounting for $2.3 million and reduced IC sales of $3 million, which were principally in Europe.

Gross margin for the third quarter was 22.7% as compared to 30.4% in Q3 2006. The decrease is associated with the reduced year-over-year sales coupled with an expanded manufacturing base primarily associated with our two new facilities in Asia. Sequentially, gross margin decreased 120 basis points primarily as a result of reduced high-end mix and reduced ASPs.

Selling, general and administrative expenses for the third quarter were $16 million as compared to $15.5 million last year with the increase primarily related to the startup expenses associated with our NanoFab in Boise, Idaho. Similarly, on a sequential basis, SG&A increased $1.6 million, which is primarily related to the preopening expenses associated with the NanoFab.

R&D expenses, which consist principally of continued development for advanced process technologies, were $4.2 million in the third quarter. As we continue to develop our advanced technology initiatives in the US NanoFab and in Asia, we do expect associated costs to increase in Q4 and into 2008.

During the third quarter, we generated operating income of $3.4 million or 3.3% of sales as compared to operating income of $7.4 million or 6.8% of sales for the second quarter of '07. We will continue to match our cost structure to the changing nature of demand and new opportunities in the global market environment and we remain committed to improving our operating margin. The next few quarters, we will likely experience some fluctuation in the operating margin line as we continue to work to monetize our new IC and FPD facilities in Asia and build the NanoFab in the US. The incremental costs for the fourth quarter related to the NanoFab, including additional R&D costs, are projected to be in the range of $1 million to $3 million.

Even as we work through this expansion, I assure you that we are continuously working to reduce our costs. We have active cost containment and cost avoidance programs in place and have accelerated several initiatives which position us better to address our current operating environment.

Additionally, we've continued to assess our global manufacturing strategy as our customer base continues to evolve and migrate. If this ongoing assessment warrants the management team to decide that there is a need to evaluate future facility closures, asset redeployment and further workforce reductions, we will do so. However, all these actions would be predicated by market conditions and customer requirements.

Net other income and expense for the third quarter was income of $900,000 as compared to expense of $1.3 million in the third quarter of 2006. The increase year over year is related to increased foreign currency gains and decreased interest expense associated with our reduced year-over-year debt.

During the third quarter, we recorded a tax provision of $1.1 million, which equates to an effective tax rate of 26%. Net income was $2.2 million or 2.1% of sales for the third quarter and net income per share was $0.05 for third quarter of 2007.

As we exited the third quarter, we had approximately 1500 employees equating to sales of $278,000 per employee on an annualized basis.

Now taking a look at our nine month year-to-date operating results before the impact of one-time events, net sales for the first nine months of 2007 were $320 million, a decrease of approximately $19.7 million or 5.8% from the first nine months of last year. The decrease is a result of reduced sales of FPD photomask year over year of $14.3 million and reduced IC sales of $5.4 million, both of which were associated with reduced ASPs.

Year-to-date gross margin decreased to 24.9% from 32.7% as a result of our increased manufacturing base and reduced ASPs. Selling, general and administrative expenses were flat year over year. Research and development costs were $13.3 million for the first nine months of '07 as compared to $23 million last year. Other income net amounted to income of $1 million in 2007 compared with income of $4.3 million with the decrease a result of the following; decreased investment income associated with lower investment balances and reduced year-over-year foreign currency gains.

During the first nine months of '07, we recorded a tax benefit of $3.4 million. The year-to-date tax benefit primarily resulted from the $7.4 million net benefit recorded in the second quarter of 2007 related to the resolution and settlement of US and foreign tax matters associated with uncertain tax positions in prior years. For the first nine months of 2007, our net income amounted to $24.2 million or $0.53 per share.

Now turning to the balance sheet. Cash and short-term investments at July 29, 2007 amount to $145.2 million and working capital to $124 million. Total debt at July 29, 2007 was $174.6 million and the principal components of debt include $150 million, 2.25 convert due in April of '08 and approximately $25 million in foreign loans.

During the quarter, we entered into a five-year, $125 million revolving facility and as a result, we have classified $125 million of our $150 million, 2.25 convert, which is due in April 2008, as long term. At the end of the quarter, we did not have any outstanding borrowings on our revolving credit facility.

Cash flows. Taking a look at cash provided by operations for the third quarter was approximately $23 million and amounted to $94 million year to date. Cash flow using investing activities during the first nine months of 2007 amounted to approximately $9 million of which $57 million represents cash payments for capital expenditures offset by $48 million and the net proceeds of sales of short-term investments and other items.

Year-to-date free cash flow, which is cash flow from operations net of capital expenditures, is approximately $37 million. Cash flow using financing activities amounted to $92 million of which $95 million represented the repayment of debt.

Taking a look ahead. Our short-term visibility, as always, continues to be limited, typically one to two weeks. Turning to the outlook for the fourth quarter, many near-term industry factors reflect continued softness while we expect to see moderate improvement in the environment for design activity, especially for advanced IC, 90 nanometer and high-end flat panel. We feel that it is prudent to remain cautious.

Based upon our best analysis, our revenue guidance for the fourth quarter is in the range of $100 million to $106 million. While we are not providing specific revenue guidance for the first quarter of '08, I would like to remind the participants on this call that our first quarter of '08, which ends in January, includes Thanksgiving and the year-end holiday periods.

Total capital expenditures on an accrual basis year to date approximated $73 million. Capital expenditures for fiscal 2007 are expected to be in the range of $150 million to $175 million on a cash basis and in reviewing our initial pass at 2008, capital expenditures are projected to be in the range of $60 million to $70 million. This initial range excludes a five-year capital lease related to the NanoFab of approximately $55 million to $60 million.

Additionally, the delivery and acceptance of tools in the NanoFab and in Asia may reduce or increase 2007 CapEx with a corresponding increase or decrease in 2008. The timing and delivery of the tools will dictate the need, if any, for additional financial flexibility. We continue to review all of our financial options and are confident that our access to capital coupled with the anticipated cash flows will not inhibit our growth plans.

We would like to emphasize to you this morning that we've maintained a significant degree of flexibility in how we invest capital into the organization so that if a trend accelerates or decelerates, we can move quickly to optimize our competitive position while also aggressively managing our cost structure. At the same time, we also understand the importance of executing on our revenue and earnings targets.

During 2007, our tax rate will be impacted by the flow of income from jurisdictions for which we have tax holidays or credit and our limited ability to recognize tax benefits in areas which we are taxable. Accordingly, for the fourth quarter of fiscal 2007, this will equate to a range of $1.0 million to $1.5 million in dollar terms. As a result, based upon our current operating model, we estimate earnings per share for the fourth quarter of fiscal 2007 to be in the range of a loss of $0.06 to earnings of $0.02 per share.

Now that concludes my prepared remarks. I would like to turn the call over -- now I would like to turn the call over to Mike.

Thanks, Sean. We would now like to open the line for questions.

(OPERATOR INSTRUCTIONS). Timothy Arcuri, Citigroup.

Hi, guys. A couple of things. I guess the first thing is what would it take, Sean, specifically for you to get a little more draconian in terms of cost-cutting? Is there a certain time by which if the business doesn't get better that you would start to cut or is it more a revenue-driven sort of a thing? What is the specific decision tree that you are looking at to make further cuts?

Tim, the specific decision tree really relates to the geographic locations of our manufacturing facilities. We've continued to cut our core costs, but -- our manufacturing facilities, because we operate in such a high fixed-cost environment, really dictate if you want to use the term draconian-type moves.

As we mentioned in the text, our customer base has evolved and migrated principally to Asia and that is where our investments have been and we expect to benefit from the NanoFab, but we are continuing to look at it. We'll probably have further clarity when we talk in the analyst meeting in a couple of weeks.

Let me maybe pick up. This is Mike. We have done a lot during the course of the year that we haven't sort of described, which is sort of why we weren't able to add headcount in some of the locations and not necessarily add to the total cost. So we've continued to have headcount reductions and managed the replacement costs very tightly. We did implement a salary freeze for all senior level people in the Company and that has been in effect since April of this year and obviously will continue.

We have done all the typical things you do in T&E -- expense reductions, etc. and I think the major one is that we do have a balanced scorecard system where we measure performance at the company level and that is a link to the variable component of our pay. The way we are tracking right now, I am expecting there is not going to be one this year, but we will see how that plays out.

In terms of major cost reduction, as Sean said, it really comes down to having to make a decision on a particular site and right now, the regional business levels we are looking at with the customer mix that's occurring and we're not afraid to do that as you saw what we did in Austin a year or so ago. But I think we want to make sure we don't do anything that compromises our short-term strategic direction as we bring the NanoFab up and as we position ourselves in each of the regions.

Okay. I guess, Mike, just a quick follow-up on that then, I guess two things. First of all, so I guess looking at that, if business doesn't get better in January, let's say that revenue did not get better, would that necessarily bring you to make a decision to cut further?

I believe so.

So if it didn't get better, you would not necessarily make any cuts?

No, no, no. I am saying we would.

Oh, you would. Okay. Great. And then I guess last thing for me, if you listen to some of the tool vendors into the flat panel space, they are now talking about things getting a little bit better on the bookings side into the third quarter. So when you go back and look at what the delay is between when the tool vendors start to hear better things out of the flat panel display makers to when the design activity begins to really increase, how does that make you feel about flat panel? Because I would think given their comments that flat panel should start to get better in the third quarter unless there is something specific going on this time that hasn't happened in prior cycles. Thanks

Sure, Tim. We have two things occurring. Obviously in Korea, we have an established base with our Korean customer base there and that business has been relatively flat quarter over quarter and we expect that as 8G ramps toward the back end of this year, probably more into calendar Q1 based on some of the new technologies '08 holiday season that we will start to see an increased level of tape-out activity and that sort of aligns with what you are suggesting on the equipment coming in.

In Taiwan, obviously we have a new facility. We actually have seen some improvement in Taiwan bookings activity, but it is mostly on the lower-end product. As we start to see AUO, CMO and others start to ramp 7.5G product into backend of this year and in early next year, we are hoping we will hit on both cylinders there because we certainly have the capability, we have the capacity and we have the proximity to the customer.

Okay, guys. Thanks.

Suresh Balaraman, ThinkEquity.

Thanks. A couple of questions. When I look at the cost of goods sold line, there is a sharp drop in the absolute number and the depletion looks pretty similar to last quarter. Can you explain -- help me clarify what is going on there?

I'm sorry, Suresh, the sharp drop in --? Are you talking about in the percentage?

No, in terms of absolute numbers. You went from $83 million to $80 million on a sequential basis. So the $3 million difference in cost probably came from materials or labor, but non-depreciation-related part.

Well, depreciation and amortization for the quarter was down probably about $1 million or so as a result of some tools coming off the depreciation [rolls], principally in the US and some in Europe, so that is a component of it. Additionally, the mix does have an impact with respect to the absolute dollars. As Mike alluded to, there has been some ongoing management of headcount and efficiencies in each manufacturing location that we had some from during the quarter.

Okay. And in terms of the mainstream IC business, historically that has been pretty stable for you guys, but in the last four quarters, it is down from 85 or so to 70-ish, now 72, 73. What is fundamentally going on there? You are now heading into the seasonally strongest quarter for you guys and for the first time in almost a few years, you are talking about a loss situation. So my key question is do you have cash (inaudible) in the mainstream IC business? Has there been a marketshare shift or has there been a significant change in pricing?

No actually -- I'm not sure where you -- we have a slide on the website that shows our total IC revenue. There has been certainly some ASP erosion. We talked about this in the past on the mainstream business. It has been mostly driven by mix. We believe that if you look at what has been occurring in the overall market and where we are positioned in mainstream that given the ASP erosion and our sales growth that we have actually at least held, maybe gained some share. So clearly the activity that we have not been able to take as much advantage of has been the shift into 90 and we haven't gotten the traction as we would like to have.

This by the way has confirmed for us the strategic moves that we have been making to position ourselves for the high end, which is really where the growth is going forward. We will elaborate more on this. We have done a fairly extensive analysis of what is going on in the business that we are going to share at the analyst meeting on the 13th.

Okay. And the final question is in the MP Mask segment, you guys have talked about fiscal '07 goals last year when you first got into it. Can you just give us an update at least qualitatively on where we stand on that in terms of the profitability that would add to the overall enterprise kind of thing?

Sure, Suresh. The association with the joint venture in MP Mask has been accretive to the Company and it is our ability to utilize MP Mask as a subcontractor for certain customers certainly has benefited. At the same time, we are continuing with the (inaudible) process at other locations so we can back-fill any additional orders that are needed when our NanoFab comes up and running. But overall it has been a success.

Can you guys give us some numbers? I think you talked about an additional [$5 million to $16 million] a year in terms of revenues that it would get you guys. What kind of numbers --?

That is when we have our NanoFab up and running because we don't consolidate MP Mask's operations as of yet. So when we have our analyst meeting in two weeks, we will provide much further clarity and an update on where we are and what we expect in the future.

Yes, our intention, Suresh, is to give you all the components of the building blocks that we see coming from the various pieces of the business into '08.

Colin McArdle, Needham & Co.

Good morning, guys. Thanks for taking my questions. Mike, I was wondering do the new facilities in Asia contribute from a revenue standpoint in the quarter and how should we think of those ramping over the next few quarters?

PKLT has, which is our Taiwan flat panel facility, has continued to generate revenue. And as I mentioned a few minutes ago, they are starting the quarter off relatively good. I don't know how that will continue through the quarter, but we are optimistic that that will pick up certainly as the mix shifts to the high end and that again may be toward the backend of '07, early '08.

China has been a disappointment frankly for us. We have had some ramp-up issues, some customer quality issues. We've done sort of a SWAT team focus on getting that facility going and we do believe that we will start to see -- we had some incremental, some small revenues in Q3. We'll have some additional revenues ramping into Q4. Nothing that I would say is substantial enough to talk about, but we do expect that to be part of the component of our '08 growth and we will share that with you again at the analyst day.

Okay, thanks. And Sean, gross margins it sounds like are going to be down slightly or somewhat in the fourth quarter and based on your comments regarding the holiday season and the inclusion of Thanksgiving in Q1, should we expect them to be down again and how do you look -- what do you look for gross margins over the next few quarters and obviously growing contribution from Asia?

Well, we do expect to increase the two greenfield facilitates hopefully into Q4 and first quarter of next year, some revenue contribution from those -- additional from those locations, which should obviate some of the gross margin pressures we have. As those situations improve, we will be bringing on the NanoFab in the beginning of calendar '08. So whether that hits at the end of Q1 or the beginning of Q2, we will have more margin pressure there to ramp that up.

So as Mike alluded to, we will provide the building blocks, where we expect the margins, how they are going to increase and whether they go down for a quarter and then go back up as we ramp a facility. We are very excited about the investments we have made there and it is going along well and we are committed to moving that up as quickly as possible, but there will be some short-term pain there. So we will, in a couple of weeks, provide, as Mike stated, further granularity on margins.

As for this quarter, what I would say is if we are able and successful hitting the high end of the margin or the revenue guidance, I would expect that margins may be flat to up slightly.

Okay. I look forward to Boise.

Patrick Ho, Stifel Nicolaus.

Thanks a lot. Going back to the flat panel display side of the business, I understand that things are volatile, especially with the new facility ramping up. Are you feeling any additional competitive pressures as you're I guess trying to gain traction particularly in the Taiwan area?

Yes. Hi, Patrick. It's Mike. There has been sort of an overcapacity situation in FPD for some time, so there has been a lot of adjustments and especially as the panel makers have now slowed their design tape-out activity, it has sort of intensified that. I do believe, however, as I said earlier, that as the higher-end panels start to become a bigger part of the volume that we will participate in a way that will allow us to compete more effectively let's say and also grow -- not only grow but gain marketshare in Taiwan and also in Korea.

Okay, great. And I guess short term, I understand some of the long-term volatilities I think associated with your gross margin trends with the different facilities. I guess over the next two quarters is revenue the biggest I guess lever for gross margins and any swings on that will I guess help on the absorption side. Is that the biggest lever that I should think about?

Absolutely, Patrick. The leverage, because of the high fixed-cost nature of the business, works both ways, so to the extent we are able to improve the revenue sequentially from some of our existing manufacturing facilities, that absorbs the costs and would drive the revenue up. So if we see continued revenue growth into Q1, Q2 of next year, we should see less pressure on the gross margin line as we bring the NanoFab up. While we are not providing specific guidance on that today, that is the biggest lever -- how we monetize the assets, how we deploy the assets and how we get the facilities ramped.

Okay, great. And I guess a final question for you, Sean. I know you don't give out specifics on the stock options expensing, but what was like I guess the EPS impact? Was it just $0.01 or $0.02?

It was probably -- it's about $0.01.

Great. Thanks a lot.

[Tom Dimsley], Merrill Lynch.

Yes, good morning. Another question on the flat panel side. Where do you see the market right now in terms of merchant versus captive and then low end versus high end?

Merchant versus captive, the bulk -- the only real captive in the business is LG and they probably -- I don't know what exactly they represent -- it's a small percentage, certainly under 15% of the market. So I would say the captive market or the merchant market is about 85%. I don't anticipate any additional captive capacity being brought on line for the reasons I mentioned earlier. One, there is certainly suitable capacity in the market, but there is not a need to add it and there is certainly the cost structure for the panel makers. That would add another component of cost that they wouldn't need.

Okay. And what about the low end versus high end, say G7 and above versus G6 and below?

I would say the higher dollar volume of the market is currently in G6 and below and that will change I believe through '08.

Okay. And then where do you see your share high end versus low end at this point?

We have a higher share at the high end.

Okay. All right. And then Sean, did you mention that you'd expected SG&A to go up $1 million to $3 million next quarter for the NanoFab?

Our operating costs would go up $1 million to $3 million, which would include from SG&A and R&D related to the ramp at the NanoFab in Boise primarily.

And was that kind of a one-time startup or was that just a higher level to support the larger infrastructure?

That is getting the employees positioned to turn on the manufacturing, to get the tools installed, to get it set up and qualify that facility as soon as possible and once the facility is turned on, those costs -- commensurate costs would flow into cost of goods sold. It does -- when you start -- have a greenfield site, you need to hire prudently obviously, but you also need to hit the targets that we are looking to capture that revenue from our supply agreement with our partner.

Okay. Then finally, how do you look at interest expense going into the fourth quarter?

Interest expense should go up. We are projecting to go a bit into the line, but as we do so, we will look to capitalize on some other opportunities.

Okay. So it goes slightly negative for overall interest income then?

Yes.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). [Katherine Berger], A.G. Edwards.

Thank you for taking my question. Could you say where do you see the merchant versus the captive market on the semiconductor side and any trends you are seeing there?

Yes, this is Mike. I would say generally the trend that we are seeing in merchant versus captive has not changed dramatically from what has been occurring over the last 10 years, which is a further migration to the merchant market either for -- the most recent one was of course NEC selling their captive facility to Dai Nippon Printing.

I think that one of the things that we are going to talk about at our analyst meeting is we have done some modeling on where the industry is going in high-end capacity and that our belief is that there will be a supply/demand crossover point that is going to drive captives who need more of the merchant capacity. So we will show some of that at our analyst day, but our view is that there will be a shrinking of the captive capacity more toward the merchant going forward. Chris, I don't know if you have any other comments on that.

No, Mike. I would agree with you. I think, as historically been the case, that very, very high end is more heavily weighted to captives of say 45 nanometer. Probably a larger fraction of that is happening in the captives now for sure, but we haven't seen a dramatic change in the captive versus merchant profile in the past few years. I would just echo your comments on changeover in capacity needs on the merchant side in the next couple of years, mostly driven by longer ride times, longer process times for the photomasks. But they will be easier to elaborate on in Boise.

Just to clarify, the captives today represent about a third of the market and that will continue to erode. However, they are going to keep -- there are obviously competitive reasons to keep some internal capacity for IP protection as an enabler to their semiconductor roadmap. So we will -- I would expect to see Samsung and Micron and TSMC and Intel, IBM for instance to maintain some level of captive capacity for the high end. One of the things that we said we'll show you is the increasing times for rights and such, we believe will drive them to outsource more of their node level or node minus one technologies.

Thank you. And then how would you characterize again the semiconductor business among the memory and the foundry and the wireless guys?

This is another area we are going to talk about at our analyst day to decompose the segments that we serve. We have been traditionally as a result of our technology position more in the analog and lower-end logic customer base. So we are very excited with the exposure to Micron to enhance our position in the DRAM and flash and that will strengthen us not only at Micron obviously, but at other customers around the world in memory and certainly for high-end logic. So it opens up a very significant growth opportunity for us.

Okay, great. Thank you.

Matt Petkun, D.A. Davidson & Co.

Good morning. Sean, I was wondering if you could provide any more specific details about the line of credit and what rates you might be getting there and obviously we don't know how much you are going to draw from that line of credit, but just help us understand what the credit market looks like from your perspective today.

Sure, Matt. The line of credit was entered into in early June. Fortunately for us, before the issues that we see in the credit market today, so the rates were favorable. It is a $125 million revolver with expansion capability that has $10 million increments up to $175 million. Further, it provides for additional debt or senior debt add-ons of up to $35 million for instance if we want to do a capital lease or something on those lines. We will -- as we file our 10-Q in a couple of weeks, naturally the credit facility and the terms will be clearly defined in there and be shown as an exhibit to the 10-Q. But based upon our senior leverage ratio today, the interest rate I believe is LIBOR plus 87.5 basis points.

Okay, great. And then I was wondering if you guys -- obviously this is some of what you will be talking about at your analyst day, but when you look at the opportunity with MP Mask and the new NanoFab, especially the new revenue you will be generating through the NanoFab, Mike, do you see more of that coming from say the existing -- your competitors -- the revenues coming from competitors in the merchant market or taking captive business? And also would you say that the majority of those revenues will be coming from North America?

Matt, it's twofold. I think initially we will see clearly the Micron business migrate into the NanoFab. That is our first customer and it will be a pre-qualified opportunity for us to ramp the facility. We have talked about IM Flash, which I don't consider to be Micron because they are an independent company and they make their own decisions. So I think that would be certainly from a competitive point of view an opportunity to gain share. And then the third component would be other commercial customers that we do business with today. Probably initially they will come from Europe and North America, but we believe that there will be opportunities to leverage that site as a global asset.

Great. Thanks.

It will probably be later in the year.

Right. And just one kind of follow-on question to that, Mike. The state of the joint venture today, MP Mask, and I know those results are consolidated, so I don't really see how things are moving there, do you see volumes in that joint venture that are high enough that if you had the NanoFab in place today, you would be getting sales from Micron or do you see there needs to be a little bit more of a pickup in Micron's internal demand?

I will start and then I will let Chris pick it up. The forecast we have suggests that there is capacity to build into '08 based on their demands and IM Flash's demands and some of their other partners. Tech Semi is an example. Obviously they've got the new facilities coming online, which will be driving additional demand there. Then probably the more important point to make here is that the intent of the joint venture was that once we had a high-volume manufacturing site built, we would scale down the joint venture to become more of a technology development center and less of a production facility, which today it is, serving a high percentage of Micron's needs. So basically we will be moving capacity out and shrinking that facility and its expenses down. Chris, I don't know if you want to add to that?

No, just some very similar summary. We have forecasts and we have had them for over a year from the process of record, customers of MP Mask and those haven't changed much. So none of our assumptions are different. Then there is the added element, as Mike mentioned -- the strategic plan is to ramp down the volume production at MP Mask and pursue actually a little more aggressive R&D agenda in that facility as well both for Micron, their affiliates and Photronics and our third-party customers. So those two things combined create a good opportunity for a quick start.

Okay. Thanks so much.

Krish Sankar, Banc of America.

Just a couple of questions. Did you say what the CapEx was for the quarter? I think I missed it?

I'm sorry, Chris. I couldn't hear that.

Sorry. Did you tell what the CapEx was for the quarter? I missed the number?

CapEx for the quarter was, on an accrual basis, was $37 million.

And do you guys still plan on spending about $150 million for the fiscal year?

$150 million to $175 million on a cash basis and the timing -- that could fluctuate up or down depending upon some of the tools being -- when they are delivered and when they are installed and when title actually transfers.

We started moving equipment into the NanoFab a couple of weeks ago, so we are on the trajectory to bring that equipment in, everything is on schedule for our qualification into our Q1 or toward the end of calendar Q4.

Okay. And looking at a lot of moving parts in your business at this point and maybe you guys will give the model -- new model in Boise, but is it fair to assume that your (inaudible) operating margin goal is pretty much broken at this time or you need a much higher revenue level to get there?

I don't think it is broken, Chris. We did add some -- quite a bit of infrastructure that we need to get the commensurate revenue flow. Where we stood as we exited this quarter, we would have had to do, depending upon the mix, anywhere from $145 million to $147 million in revenue. We are putting the NanoFab up and running and obviously, as we get into second quarter of 2008 when that turns on, that is going to add to the revenue as well as the costs. So as a result of the investments that we have made over the last few years, our ability to monetize those investments and as quickly as we do it will dictate when we get back to our -- closer to our target.

Okay. What is your breakeven prior to interest and taxes (inaudible) in the July quarter?

This quarter, we made $2.2 million on revenue of $104 million. So from a bottom-line perspective, $102 million, $103 million and as we stated in my text, those costs will go up related to specific initiatives and as those costs go up, we are looking to pull additional costs out.

Okay. And then one final question. Considering that the amount of captive shops in FPD is much lower and there is no such trend of advanced generations getting more captive, is it fair to assume that the pricing trend for FPD is much better in terms of like getting more pricing premium with this IC mask?

There is pressure on both obviously. Certainly as -- this is a supply/demand question and we believe, however, that as the market moves to the higher end, they do demand higher ASPs. There is a level of differentiation in the technologies for those masks that will demand somewhat of a premium. But our business has been based on driving costs down and being efficient and productive and improving our yields and (inaudible). Those are all the key operational metrics we drive against. So we just have to assume that there is going to be some level of ASP erosion. However, I agree with your sentiment that I believe that the higher end -- much like the higher-end IC devices drive a higher ASP, theoretically a higher margin, so it should be FPD.

All right. Thank you.

[Chip Bonnet], FM Global.

Good morning. A couple of questions if I could. First in LCD, if you listen to the panel makers and the glass makers like Corning and even OEMs that are involved in monitors, they have all talked about improving trends in LCD, they have talked about utilization rates rising. They talk about better pricing. So to me, it seems like the supply chain in LCD is much healthier than say a year ago. So I am just wondering -- I guess I would have expected that to lead to more design activity given the health of these guys and I am wondering what your take is on why that hasn't happened and maybe some more discussion on what will get that to improve?

We agree with you and it is actually -- we are seeing indications of that. A lot of what has happened over the last 12 months in FPD is the panel makers have really worked on wringing out their factories, productivity improvement, lowering costs and there is a fairly rich pipeline of design activity from what they tell us that has not popped yet centered around these delays that have occurred in the rollouts of G7.5 and G8 technologies, which we think will accelerate in 2008.

Now the question is will it happen in December of '07, January of '08, February of '08. We have been a little cautious here because we actually thought it would have picked up by now as well and we haven't seen it and we know we are not losing share. We have got a very good sense of what is going on at each of our key customers, certainly in Korea and now in Taiwan. We have less visibility obviously in Japan since we don't have a presence there, but in Taiwan and Korea, we have a very, very good handle on what is being done and you are right, they are indicating that it is coming.

Just to follow on that, is the design activity from the panel guys seasonal? So for instance, does it pick up some time late spring or summer so they have got a lot of new designs for the holiday period?

Typically it has. In fact, if you look historically and of course we don't have that much history here, but if you look at our kind of Q1, Q2 time period, it tends to peak in that period for new designs that are going to get ready for the holiday season. So I would expect, given everything we are hearing from the equipment makers to the panel makers to what our customers are telling us about their design cycle, that we are going to see a nice pop between sort of the January and April timeframe.

Okay. That is great color on that. And then, Mike, you started to allude to this. One of my questions was in terms of your results, they have been a little lackluster and I am wondering if you can characterize those as more kind of industrywide issues or has there been some slight share loss in either the IC or LCD area?

I don't think from a share loss point of view, our mainstream business, we feel very confident about our position. We're very close to our customers there. Most of those customers in the mainstream business have established two suppliers and you may have a quarter where you go from having 60% of their business to 70% and then the next quarter back to 55% or something like that, but it is very -- that has been very stable. The ASP piece of it has certainly driven it down.

I think the major challenge for us and the reason for our inconsistent results has been a shift to 90, our inability to capture the high-end share as that has moved and, as I said earlier in my comments, this has really sort of confirmed for us that the moves we have made with MP Mask, shutting down Austin, reallocating the toolsets is absolutely the right move for the long term. I think on last quarter's conference call, I mentioned that. We're finding when you are the second or third in on a process qual and when there is a process of record, it is tough and the customer -- the bar gets raised and it takes a long time. We can't be put in that position going forward. So the intent of MP Mask is to give us, if you will, a leapfrog in the technology and get ourselves at least in a position where, worst case, we are number two rather than number three.

Yes, it sounds like a good move strategically. In terms of the issues in the IC area, you talked about some European customers and I don't have a full understanding, but I guess there was an alliance that might have been dissolved or something, so it seems like revenues from that area were abnormally depressed. So is it reasonable to assume that that would pop back to prior level run rates, so you should get a little bit of a bounce-back in revenue from that area this quarter?

Europe sort of goes in shutdown mode at least in August with holidays and things. We tend to see seasonal slowness there. Trying to sort through -- I have some visits scheduled actually with some of the key customers there to get a sense of what their game plan is going to be going forward. We still believe -- we have very good strategic relationships with the European customers, NXP, ST and so forth, so I feel good about our position there. The question is where are they going to migrate their work? Will they continue to have a significant presence in Europe and tape-out activity in Europe or will it move and that is part of -- as we look at -- as Sean said earlier, as our global footprint and our global network, we have to be adaptable to that.

Okay. And the last question -- thanks for taking my questions -- is the timeline on the NanoFab, I'm sure out in Boise you are going to give greater clarity on that, but what are we talking generally in terms of when you think if the demand there that that facility is fully ramped? Is it the fourth quarter of calendar '08 or is it late '09, just kind of some general timeframe might be helpful.

Well, the plan right now, as I said earlier, is to bring Micron product and its associates in early and then start to migrate other customers. I would expect that we would get -- by the end of '08, I am not sure we will be at full capacity, but we should be certainly over the 50% point well into -- and Chris, I don't know if you have a different view on that, but I would say somewhere in the 50% to 70% range.

Yes, I would agree. I mean our target is to be -- internally our phase one ramp target by mid 2009, but we have kind of a stretch goal there to be there end of 2008 and for the startup equipment set by the end of phase one, it will be pretty well-utilized. So that gives you a rough idea.

Okay, that's great. Thanks so much.

Mr. McCarthy, I will now turn the presentation back to you. Please continue with your presentation.

Okay. We would like to thank everyone for the participation today and your attention, your questions and we look very much forward to seeing you all at our analyst day in Boise and hopefully we will answer a lot more of your questions there. Thank you.

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.