Photronics Inc (PLAB) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Photronics first-quarter earnings 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 call is being recorded Wednesday, February 16, 2011.

I would now like to turn the conference over to Richelle Burr, Vice President and General Counsel. Please go ahead, Ms. Burr.

Thank you and good morning, everyone. My name is Richelle Burr, Vice President and General Counsel of Photronics. We would like to thank you for joining our first-quarter 2011 conference call.

Before we begin, I would like to remind all participants about the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995 and thus any statements we make during this call except for historical events 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 that may affect the Company's operations, markets, pricing, competition, procurements, manufacturing efficiency, and other risks detailed from time to time in the Company's SEC reports. These statements will contain words such as believe, anticipate, expect, or similar expressions.

This call will remain archived on our website until we report our second-quarter 2011 results. Joining us on the call today are Constantine Deno Macricostas, Chairman and Chief Executive Officer; Sean T. Smith, Senior Vice President and Chief Financial Officer; Dr. Christopher Progler, Vice President, Chief Technology Officer; and Dr. Peter Kirlin, Senior Vice President US and Europe.

Deno will first provide a brief review of market conditions and our strategic direction. Sean will then provide a comprehensive review of Photronics' first-quarter performance. During Deno's and Sean's remarks, they will be referring to slides posted on our website under the investor relations link. Deno?

Thank you, Richelle, and good morning, everyone. As you know from the preliminary financial results we provided last week, we have excellent news to share with you. Please turn to slide 3 in our slide presentation.

Our first-quarter 2011 was record setting for us in terms of total sales. This performance shows the success of our strategies for investing and capitalize on opportunities for high-end integrated circuits and flat-panel display photomasks. Financially, we reported $120.8 million in sales with sequential growth of 10% over Q4. We also achieved non-GAAP earnings per diluted share of $0.20, up from $0.14 per share sequentially.

Sales were strong across both IC and FPD segments. IC sales was unusually down in the mid-single digits in the first quarter due to seasonality were actually up numeral 4%. And they were up in both high-end and mainstream. High-end IC increased 7% to $18.9 million. Our mainstream business was up primarily due to 90 nanometer growth, which showed the success of leveraging our global assets.

We had a record quarter in flat panel display with sales of $32 million, an increase of 29% sequentially. As noted in our pre-release, we did experience some pulling of sales into the first quarter in Asia as a result of the Lunar New Year. The benefit was approximately $5 million and was mainly related to FPD.

While our mainstream FPD sales were flat sequentially, our high-end sales grew 55%. This really demonstrates the success of our third-quarter fiscal 2010 investment in high-end capabilities and our ability to turn this investment into revenue very quickly.

EBITDA of $42 million for the quarter was a near record for us and I would also like to point out that Q1 was our fifth consecutive quarter of improved normalized profits. The bottom-line performance demonstrated our ability to contain costs while focusing on long-term growth.

On the balance sheet side, we continued to generate strong cash flow. Our net cash increased $21 million from the fourth quarter to $30 million. (inaudible) to report again when I invest on the [high-end].

Please turn to slide 4. As we have stated during the past few calls, over 90% of our capital spend has been dedicated to high-end customers. We continue to see the rewards of those investments. Our 65 nanometer and below business grew 7% sequentially. Our 45 nanometer and below business grew 33%.

Due to our investment in FPD production in Korea, our G7 and above flat panel display business increased 55% sequentially to $20.3 million.

Please turn to slide 5. Our leading-edge capabilities coupled with excellent customer service and manufacturing cost efficiency position Photronics for significant high net market share growth in the US and Asia. At the high-end, the greatest demand is coming from memory and logic customers with node conversion and new capacity (inaudible) are now seeing stronger commitments from some of our foundry customers as they migrate to new nodes. We expect strong demand at the leading edge to continue through 2011.

Please turn to slide 6. While we are in great position to capitalize our high-end investment, we plan to deploy additional high-end capacity to ensure that we will maintain our momentum at and below 45 nanometers and fully leverage the opportunities before us.

For 2011, we remain on plan for CapEx in the range of $75 million to $90 million and Q1 annualized EBITDA of $168 million exceed our projected $150 million for fiscal year 2011. Our strong free cash flow is well in excess of our CapEx plan.

As I mentioned before, we had a good level of downside production in our high-end investment. If we experience any softness in the market, the equipment we are purchasing will be needed when demand returns as customer requires 45 and below nanometer technology. Application trends in device innovation are in our favor for sub 45 nanometer demand.

Let me close with a few key thoughts. First, our high-end strategy has been very successful. It is reflective of Photronics strong first-quarter results. Our investment in the NanoFab in Asia and our partnership with Micron during the past three years has certainly paid off.

Second, we will continue to execute our high-end strategies, including target investment to drive future growth and success while continue to serve our mainstream customers. And have already (inaudible) in market share gains. We still have significant opportunities to grow our position in the high-end market.

Third, we expect to report in 2010 top and bottom line growth with strong free cash flow while continuing to strengthen our balance sheet.

Before I turn the call over to Sean, I would like to thank the entire Photronics global organization for their hard work and dedication, their vision, teamwork, and commitment to execution has enabled Photronics to deliver outstanding results in this recent quarter. Due to their efforts, we are well positioned to capitalize on many exciting opportunities in 2011 and beyond.

And now I will turn the call over to Sean.

Thanks, Deno, and good morning, everyone. I will provide a brief analysis of our financial results for the first quarter of 2011. I will also review our balance sheet, cash flows during the period, and discuss our outlook going forward. During my remarks, I will be referring to slides posted on our website under the investor relations link.

Slide 7 refers to a reconciliation of GAAP to non-GAAP information or EPS. Slide 8 details our sequential revenue for Q1 2011 including high-end splits. Slide 9 details the capitalization of the balance sheet and debt. Slides 10 and 11 reviews Photronics' high-end IC and FPD revenues quarter-over-quarter.

Net sales for the first quarter amounted to $120.8 million, which was slightly higher than our revised guidance of $119 million to $120 million and sits significantly higher than our initial guidance of $107 million to $111 million as a result of strong high-end demand for both FPD and IC photomasks. As Deno mentioned, we also experienced approximately $5 million in [Korean] orders, principally FPD prior to the Lunar New Year, which began the first week of February.

Revenues for IC and FPD photomasks were $88.8 million and $32 million respectively. Sequentially total sales increased by 10%. Advanced IC sales were $18.9 million of total IC sales for the quarter, a sequential increase of $1.2 million or 7%.

In addition to increased high-end demand for IC photomask, we did experience an increase in mainstream sales, IC sales of $2.3 million despite a typically seasonally down quarter. The increased IC mainstream demand was primarily attributable to increased 90 nanometer demand which is additional evidence that our high-end mix-and-match global strategy is truly leveraging our asset base.

Turning to FPD sales, advanced FPD sales were $20.3 million which represents a sequential increase of $7.2 million or 55%. Included in high-end IC and FPD, our mask sets for semiconductor designed at and below 65 nanometers and FPD sets used to fabricate flat-panel products using G7 and higher technology.

As a percent of total sales for the first quarter, sales were approximately 65% in Asia, 26% in North America, and 9% in Europe.

The gross margin for the first quarter was 25.3%. Sequentially gross profit increased by $5.3 million or 49% and gross margin improved by 230 basis points as a result of the increased sales volume.

Selling, general, and administrative expenses for the first quarter were $10.7 million, a slight increase of $400,000 from the fourth quarter. R&D expenses, which consist principally of continued development for our global advanced process technologies, were $3.8 million in the first quarter, down approximately $200,000 sequentially.

During the quarter, we generated operating income of $16.1 million or 13.3% of sales. EBITDA for the quarter, as Deno mentioned, was $42 million, which equates to $168 million on an annualized basis. With the strong quarter, we achieved our previously discussed near-term goal of annualized EBITDA in excess of $150 million. In addition to maintaining the annual EBITDA in excess of $150 million, we are moving closer to achieving our next goal of operating margins of at least 15%.

In the past, we have discussed the leverage in our operating model has on our increased revenue. In comparing Q1 2011 to Q4, the incremental operating margin was approximately 46% for the first quarter on increased revenues of $10.8 million. The 46% incremental margin is slightly lower than our targeted range of 50% to 60% primarily due to mix and certain increased manufacturing costs to capitalize on the higher demand.

Other income, expense net for the first quarter was income of $957,000 and includes favorable foreign currency exchange gains during the quarter and interest income which are offset by interest expenses.

During the first quarter, we recorded a tax provision of $3.5 million, which was higher than our guided range of $1.5 million to $3 million as a result of the increased income. And additionally, minority interest expense was $1.5 million, which was $1.2 million higher sequentially.

Both GAAP and non-GAAP net income was approximately $12.1 million for the first quarter of 2011 and GAAP and non-GAAP EPS were both at $0.20 per diluted share.

At the end of the first quarter, we had approximately 1325 employees, which equates to revenue per employee of $365,000 on an annualized basis.

Now turning to the balance sheet, cash and cash equivalents at January 30, 2011 amounted to $113 million with working capital at $82 million. Accounts payable and accrued current liability amounted to $129 million as compared to $108 million at the end of the fourth quarter, with the increase primarily related to increased accrued CapEx. At the end of January, we had approximately $53 million of CapEx accrued for.

Total debt at January 30 was $82.6 million. The principal components of outstanding debt include the $57.5 million senior unsecured convertible notes which are due in September 2014; approximately $22.5 million in aggregate capital lease obligations for the US NanoFab; and approximately $2.6 million related to an obligation with a customer who co-funded a tool purchase. At the end of January, we did not have any outstanding borrowings on our revolving credit line, which matures in February 2013. And at January 30, 2011, our net cash improved to $30 million, which was a $21 million sequential increase.

Taking a look at our cash flows, cash provided by operations for the first quarter of 2011 was approximately $42 million. Depreciation and amortization for the quarter amounted to $23.2 million, which was a $700,000 sequential increase.

Cash flow used in investing activities during the first quarter amounted to approximately $23 million and includes $19 million for cash payments for capital expenditures. Net cash used in financing activities during Q1 amounted to $7 million which relate to net debt repayments for the quarter.

Our CapEx needs on a cash basis for fiscal 2011 are projected to be in the range of $75 million to $90 million as we are presently evaluating the addition of high-end capacity for our leading edge IC network. As Deno mentioned, the significant high-end market share gains that have driven our increased revenue in 2010 and through the first quarter of 2011 validates our high-end investment strategy. During 2011, we plan to principally invest in high-end capacity in Boise, Korea, and Taiwan.

As we look forward, the management team is evaluating opportunities for additional growth, continued market share gains, and potential strategic initiatives which could improve our growth prospects. We are also looking to continue to improve our balance sheet, reduce our cost of capital, and obtain additional financial flexibility.

We review all of our financial options on a regular basis and we are confident that our access to capital coupled with the anticipated cash flows will enable us to execute on our growth plans and capitalize on strategic opportunities.

Please turn to slide 12 as we take a look ahead. Our visibility as always continues to be limited as our backlog is typically one to two weeks. As we discuss, we did benefit from the pull-in on some orders ahead of the Lunar New Year. So taking this all into consideration, we are projecting revenue for the second quarter of 2011 to be in the range of $117 million to $121 million.

During 2011, our tax rate will be impacted by the flow of income from jurisdictions from which we may have credits upon our limited ability to recommend tax benefits in areas which we are taxable. Accordingly, we are estimating taxes for 2011 to be in the range of $12 million to $15 million and for the second quarter, this will equate to a range of $2.5 million to $3.5 million in whole dollar terms.

As a result, based upon our current operating model, we estimate earnings per share for the second quarter of fiscal 2011, which is exclusive of the impact of any of the warrants, to be in the range of $0.15 to $0.18 per diluted share.

As we progress in fiscal 2011, our financial priorities remain the same. Please turn to slide 13. Because of the opportunities we see before us coupled with the strong leverage in our business model, we are well-positioned to maximize free cash flow. We also plan to continue to reduce the cost of capital and debt as well as invest prudently and maintain financial flexibility as we achieve our financial goals.

Please turn to our summary slide on slide 14. We began fiscal 2011 with excellent performance both from a sales perspective as well as the bottom line as we capitalized on strong operating leverage. The investments we have made during the past few years on high-end IC and FPD photomask capabilities are really paying off. Our growth in the high-end in Q1 is both a testament to the success of our strategy as well as a sign of things to come. We remain confident that we will continue to take share at the high-end and capitalize on many exciting opportunities.

2011 promises to be an exciting year of operational achievements and robust top and bottom line growth for Photronics and we look forward to building on our momentum in the quarters to come.

With that, I will turn the call over to the operator for questions and answers.

(Operator Instructions) Patrick Ho, Stifel Nicolaus.

Thanks a lot and congratulations, guys, on a nice quarter. Sean, can you just remind us again about your current debt maturities and with the cash flow generation you're expecting this year, what are your plans for those various debt instruments going forward?

Sure, Patrick. As we said in the prepared remarks, our credit agreement, which is -- we entered into last year expires in February of 2013 and is an amendment from our initial credit agreement. So it is fairly restrictive with respect to options and investments and covenants as we move forward. Hopefully as we continue to improve and build cash, would look to kind of modified that agreement and make it less restrictive so we can capitalize on some opportunities in the marketplace.

The convertible instrument is due in September of 2014 and has an interest rate of about 5.5%. So as we continue to look to -- we will look to use our existing cash and opportunities in the marketplace to reduce our cost of capital as we move forward.

Great, that's very helpful. Maybe a question for Chris. You guys had a really strong high-end IC quarter. Can you comment on the mix of business coming out of the NanoFab? Was this from your primary customer, Micron and its affiliates, or did you see any kind of pickup from other customers? Basically how diversified was the mix this quarter that drove the strength in Q1?

Sure. Thanks, Patrick. I will make a few comments and then Peter can follow-up as well. I think primarily we see the memory side of the business very strong, a couple of fabs coming online that were under construction in the facility last year, so that's a big part of the increase we're seeing.

We're also seeing a fairly broad-based take-up of logic products. We have one of our high-end logic customers qualifying for our new node. So I'd say it's fairly broad-based but memory-driven and driven by new capacity at advanced nodes. Peter, I don't know if you want to make any additional comments.

Yes, the high-end business, as Chris said and is evident in the revenues is vibrant and there's -- starting to also see what I would describe as a corollary impact. Our customers really are impressed with the capability we have in Boise and as they've bought high-end reticles, we have worked with them and they see at a 90 nanometer set for example, maybe we build one, two or three reticles in Boise and we build the remaining 30 layers someplace else. And that gives them the best of all worlds where they get great performance on the critical layers and at the same time they get the responsiveness and the local relationship that they have always enjoyed. So our high end is really working on many levels to drive the business forward.

Great, maybe a final question on my end in terms of your mainstream business. You mentioned a pick up there and part of the mix and match strategy that it looks like that's being validated. Can you just discuss whether qualitatively those were share wins or did you just see an overall pickup in business trends that helped the mainstream business?

I think as I just said, Patrick, the way we look at that is primarily profit share gain where we've used the NanoFab at the tip of the spear with this technology to penetrate more of the 90 nanometer market.

Great, thanks a lot, guys.

Chris Blansett, JPMorgan.

Good morning, gentlemen. A quick question on the linearity of your CapEx spend this year. How should we view this?

Chris, this is Sean. It's a difficult question to answer because as we -- on our cash payments we kind of wait till the tools are qualified and we renegotiate terms so as we anticipate spending $75 million to $90 million, there may be some peaks and valleys within a quarter on that.

For example, we had $40 million accrued of CapEx at the end of Q4 and now we have $53 million. We do expect to spend all that. The timing could either be pulled in or pushed out depending upon our acceptance of certain tools.

Okay, the second question is I wonder if you can give a relative quality mix of the business you expect in the current quarter versus the last year. Your midpoint in your tax rate is a little bit lower than last quarter and your revenues are slightly below but your EPS is meaningfully lower. I wasn't sure if you're getting -- expecting or mainstream business in this current quarter than you did in the last one as a percentage.

Chris, we don't typically for competitive purposes break out our high-end and mainstream when we give our guidance. But what we do expect and we've stated publicly and Deno reiterated, we do expect high-end IC growth moving forward certainly into 2011. We are optimistic that we will continue to, as Peter alluded to, get some share wins at 90 and above which could help the business, but our growth primarily will be in 2011 at the high-end of both FPD and IC.

Okay and the last question for me is with the surge of demand you had for high-end FPD, is this simply tied to a new cycle of products coming out or is this somewhat tied to some of these newer technologies like 3-D TVs and the like? What is really driving that upswing?

Hi, this is Chris. I can make a few comments on that. I think it is (inaudible), we are seeing some increased output in panel manufacturing, but primarily it's driven towards new design cycles. I think that 3-D TV was more 2010 and the switch to 240 (inaudible), so we are seeing a little bit of volume there.

But the OLED backlighting on the regular LCD TVs is a significant driver. It's opening up a lot of new opportunities for designing new products. A few customers and a larger customer, such as Samsung Mobile are looking at active matrix OLED, which is a fairly intensive manufacturing process from the mask side. So you seeing a lot of good R&D and design activity in active matrix OLED as well.

So I think it is a mix, new products, new technologies, and also some increase in [outflow] at the existing nodes.

Okay, that's very helpful. Thank you, guys, I appreciate it.

Krish Sankar, Bank of America.

Yes, thanks for taking my question. I have a few of them. Sean, are you looking at guidance for Q2? Is it fair to assume that the overall IC revenues will be up and flat panel would be flat to down?

I think without -- I think we did as we mentioned in our guidance, we did experience the (inaudible) was primarily FPD, so without giving specifics, I don't think I would disagree with that comment.

Got it. Okay. And then the new design cycle you mentioned for FPD, what do you think -- like do you think that the overall FPD high-end FPD business will eventually gain through the year or you think it will be more lumpy and hard to predict?

Maybe I will give you a quick answer and then I'll turn it back to Chris. But Chris, one thing that we did not experience in fiscal 2010 was a substantial increase in high-end business on FPD because we did not invest -- we (inaudible) all our eggs in the high-end IC. We did invest in the summer time of 2010 with a high-end precision tool that we certainly benefited from in Q1. So while we did lose some share in 2010, we believe we will gain that share back in 2011.

And Chris, perhaps you can give a little color too?

Sure, I think it is a growing business and we are excited about it. I think it has a lumpiness characteristic that modulates that that won't go away particularly at the high-end because they are fairly high dollar reticle sets. So those individual sets at the high-end could change things and cause its kind of lumpiness you're referring to. But overall, the trend is good for that business. It's a growing business and we are participating in design cycles for new products at our most important customers. So I think we will participate in the growth in that side.

What is the margin profile between your IC and flat-panel segments?

The margin profile, Krish, the target profile is essentially the same, however, the FPD side has a little bit more of a variable margin because the material component of that is a lot higher. However, it's less labor-intensive and has less tooling as compared to the IC side.

Okay, if you just can help us if you can leave us -- what do you think was your (inaudible) market share on both the IC and FPD overall and on the merchant mask side?

On the merchant side, we are actually in the process of trying to obtain some data from SEMI that we hope we will be able publish for Q2. But we do believe our market share overall including the captive side was 12% to 13%. It is difficult to determine with respect to our competitors, our two primary competitors, their share because they don't report separately. But we do believe we took share from a couple of our competitors especially at the high end during 2010 and we can expect to continue [D-cell] in 2011.

On the FPD side, I believe since we primarily operate in Korea and Taiwan, our share is about plus or minus a few percentage points, about 20%.

All right. Thank you, guys.

Thank you. This is (inaudible) in for Stephen Chin. Deno and Sean, congratulations on nice results. I have a quick question on -- just follow-up on the prior question. What are your expectations for TAM in both IC and FPDs, if I may?

I'm sorry, did you say on TAM?

It yes, on the TAM in FPD and IC markets for 2011.

I think 2011, there was a recent article in EE Times that SEMI had published the TAM including captives for IC was about $3.1 billion and FPD is probably $600 million to $700 million.

Thank you, that's helpful. And you just mentioned that you would expect FPD to go down sequentially in the second quarter. I'm just trying to sort of reconcile the fact that your utilization rates at the FPD factories are expected to go up in March and then subsequently. Do you expect for FPD revenues to maybe grow in the July quarter?

We would expect that for 2011, our FPD revenues to grow year-over-year because of additional high-end capacity we put in. As Chris mentioned, at times because the high ASPs and the lower unit volumes coming through it does kind of cause a little bit of a problem forecasting that, but year-over-year we do expect it to increase. Hopefully Q1 or Q2 is a good strong quarter, probably won't reach the level of Q1, but we do expect overall growth to be -- in 2011 to be good.

Chris, I don't know if you have any further comments.

Not really. Just to say that the capacity, the output expansions of the fabs will always correlate with increased reticle activity. They may be running designs of existing products. We may have shipped the reticles for those product in previous quarters. So there is some correlation over the long-term that can be strong, but quarter-to-quarter, output of the fabs and the reticle volume don't necessarily correlate completely.

That's helpful. My last question is just more bookkeeping. You started breaking down between 65 nanometer and 45 nanometer. I'm just trying to figure on the high-end what was the revenue breakdown between 65 and 45 and maybe 45 and below?

We haven't specifically spiked down our 45 nanometer on a quarterly basis just to say that it has grown for competitive purposes. But it's fair to say that we did experience in the growth in the total component there was more weighted toward 45 and below.

Thank you.

(Operator Instructions) Tom Diffely, D. A. Davidson.

Good morning. Thanks for taking my question. First thing, Sean, I'm still a little unclear. At the high-end of your guidance at $121 million, why is the EPS down sequentially?

That is a good question there, Tom. Part of the reason is if we look at Q1 actual results, we had other income expense of about $1 million and included in that was a significant FX gain of $1 million sequentially. We can't anticipate that to occur in Q2 as well and we are also bringing on additional capital in.

So that's probably about $1 million to $1.5 million of additional costs, potential costs coming in. That's why the high-end of the guidance is down from the $0.20 we just achieved. Plus cash would be up as well potentially.

And depreciation was going to be another $500,000, it sounds like?

It could be. It's hard to determine. It's all depending upon when we turn the tools on. We had forecasted $500,000 to $700,000 for Q1. We did come in at about $700,000, so it should be up. How much remains to be seen and as we grow our high-end, we may also need to [price]. Peter could provide a little color on this, put -- hire some additional engineers to handle the demand but it won't be significant.

Okay, but you are not expecting a kind of degradation from the mix itself?

No, not at all.

Okay, good. All right, then I guess the more general question. When you move to more of this high-end production, does that have an impact on your visibility or your backlog level? Do you get better visibility with the high-end customers than you do with the lower customers or mainstream?

This is Deno. The [ability is to say basically] but just from the backlog increasing because deliveries have more extended on the mature business is like overnight (inaudible) deliver it.

On the high-end it could be two or three weeks, so we do have a more backlog on the high-end, definitely we do. On (inaudible).

Yes, I was just wondering if the high-end customers have to share their plans with you a little further in advance just make sure you guys have that capacity available for them?

I will turn it over to Peter. Quickly yes, but maybe Peter can explain a little bit better.

Certainly the high-end business is more of a partnership and I think the key there is the barriers to change are quite tremendous. So once you win high-end business, there's a much larger barrier in place for having it move and it's more of a partnership [what] goes up because the delivery times are longer, but speaking very honestly, our high-end customers still have a great deal of difficulty predicting exactly when their reticle designs are going to be released. So although there's more communication, there's still unpredictability in exactly when the latest, greatest design is going to tape out.

Okay, all right. Then when you look at relative strength in the memory market now, as you look through the year, where do you see that strength coming from? Is it DRAM or are you starting to see more in the NAND and NOR side as well?

This is Chris. I can make a few comments. I think it's fairly broad-based. We are actively engaged in high unmanned DRAM and now NOR flash. So we're participating in all three major segments of memory and they are all going through node migrations now and capacity expansions.

We are shipping now into Singapore, high-end NAND. We have customers, high-end DRAM fabs in Taiwan, and we have new opportunities in NOR based on Micron's acquisition of Numonyx. So we see it pretty strong across all three segments. I would say DRAM and NAND right now share the majority of our upside in the current situation.

And if you look at capital spending, it looks like a lot more of it this year is going to fabs that are going to be based in the US. I know you guys have made some pretty significant investments over the last few years in high-end capacity. Have your competitors done the same thing in North America or are they still primarily based in Japan with the technology?

Basically our competition on the high-end is to Japanese companies, TMP and Toppan. And most of the (inaudible) in Japan. That is both those two companies, the high-end technology and fabs, they are in Japan. Both TMP and Toppan, they have, if you want, technology [nowhere] in Taiwan, so they have technology centers in Taiwan but not leading edge like in Japan. But we say most in Japan.

Okay, then just finally, you talked about some pull-ins for the flat panel in the first quarter. In the last couple of weeks then, have you seen a void of the flat-panel business because of that?

Tom, it's kind of too early to tell, to be honest with you, because Asians -- Lunar New Year -- our people just came back to work last week, so the faster it impacts us. So we gave our guidance based upon what we know as of today and earlier late last week but we do expect flat panel to -- as we said, year-over-year to grow and to grow at the high end.

Okay, thank you.

Chip Bonnett, FM Global.

Good morning, gentlemen. You put up a good quarter here, Sean, and these calls get longer all of a sudden.

(multiple speakers) the quarter.

Yes, a few questions for you here. First, just on kind of I guess a capacity utilization type of question. With the current capacity in place, what kind of revenue level can you support on a quarterly basis before you've got to do more investment to keep growing?

A good question, Chip. It's a somewhat difficult question because we are putting -- we made some -- we purchased some tools last year, have made the -- placed the orders for tools to come in this year, the timing of which those tools come in and get up and qualify and can generate revenue really change. But I think it would it fair to say we did 121 almost in Q1 and depending upon the mix, perhaps we could have done 130 or so plus or minus but that number should continue to increase as we put capital in.

Certainly and perhaps Peter could also talk a little bit about what our opportunities -- or what we do in Boise when we do get somewhat constrained with MP.

If Boise is copy exact to MP, the tools we are installing in Boise this year were ordered last year, the tools -- further the tools we are installing in Boise have already been installed at MP, so we have already gone through a cycle of learning on installing and ramping those tools.

So although there is a six- to nine-month lead time on equipment, typically when we get them in Boise in the NanoFab, we have world class cycle time on ramping them to production and therefore, I think what you heard in the script, which is justified, we really quickly turn CapEx into revenue.

Okay, great. Just on the CapEx side in capacity, with your CapEx guidance I think you said it was like $75 million to $90 million. Which -- do you see that potentially moving up through the course of the year? In prior years we sometimes have seen that number fluctuate around depending on what's happening with your business.

Chip, at this point in time, then I will turn it back over to Deno, we don't anticipate it to go up but we did mention in the script that the management team is keeping its eye on additional opportunities, strategic opportunities, initiatives, market share gains, and to the extent we are going to move forward, we will certainly discuss that.

But we are in a pretty good position to capitalize on some opportunities. I don't think CapEx this year, the cash CapEx will go up at the range that we gave.

I agree with you, Sean. Definitely not going to increase. As a matter of fact, we do hope the CapEx will help NanoFab to become -- get a critical mass because of the investment, it has come more efficient in terms of margins in the NanoFab.

Okay, then jumping on over to the expense side of things, you have kept R&D buckled down pretty well and I'm wondering does that number have to start moving up at all? And also SG&A has -- you guys reined that in pretty tightly and I'm wondering after a little better times than the past year or two, does that number start to go up? Do you have merit increases, etc. then we start to see that line move up?

Chip, on the R&D side, that shouldn't fluctuate too, too much moving forward. Just as a reminder to the audience that MP mask is our primary R&D facility. The investment there, we have the technology license agreement which in essence, we prepay for R&D. So we are still getting world-class development and perhaps Chris can talk about that a little bit after I finish on SG&A.

SG&A, we don't expect to have that ramp up too much moving forward. As we put some additional capital, (inaudible) their costs in the system, their management team is charged with continuing to look at every option to keep costs down and rein in costs so they don't run away from us.

Do you -- do you have to increase headcount at all? I think that's been pretty flat for a while now.

I think this quarter we increased headcount by about 2% or so or less than 2%, about 25%. On the manufacturing side, in engineering side I think we said earlier we would to so if we feel the need. But as far as the back-office functions, we're going to keep it pretty lean like we always have.

Chris, do you want to talk about R&D a little bit?

No, I'll just reiterate, Sean, what you said. I don't see a significant need to increase R&D very satisfied with the technology coming out of our joint venture. That's a cost shared model on a very leading-edge roadmap driven primarily by the memory applications that we inject the logic IC roadmap into the JV.

So even for all these multiple patterning strategies, double triple patterning, some of our customers are looking at all the way out to EUV, we feel we have those technologies covered through our R&D model without dramatically increasing our internal expenses.

Okay, great. Just on visibility, last call you guys talked about having some visibility for the first six months. So now we are kind of three months through this, which was I thought kind of uncharacteristic of you guys given the -- your leadtimes are pretty small there.

But -- so you obviously had been seeing some good demand trends and some customers coming on here. Can you talk about visibility going forward here? Would you change that window?

I will start and then turn it back over to Deno. I think we do believe that 2011 we're going to see high-end growth in both FPD and IC. We give guidance just for one quarter out. That said, and we gave the ability for Q2 but I think the management team feels with the collaborations Peter said was at the high-end in some these customers and we projected demand, that we feel pretty comfortable that we will see growth year-over-year.

Definitely. The industry is still robust and we are gaining market share. So we do feel very confident we're going to continue growing going forward really. At the same time, like Sean said earlier, watching our costs, that we will continue our costing, that we will continue to do well not only on the top line but bottom line.

Okay, and then my final question would be for you, Deno. CEO, well you have been in place for awhile then there was talks about a CE search going on and just wanted to know how long are you for the job here and any updates on this front?

The update really, we strictly have a committee that's looking for and researching and I do hope that this year and I believe will be this year.

Okay, and you are looking at both internal and external candidates?

We're looking at both, yes.

Okay, great. Nice quarter.

(Operator Instructions) Velin Mezinev, Donald Smith & Co.

You referred to potential strategic opportunities. What strategic gaps do you have that you'd like to fill?

With this opportunity we see from an acquisition to diversify to any other areas, we are looking, yes, if an opportunity develops. Not for organic growth as much for opportunities to grow and maybe diversify or to acquire some other entities. I don't know how much can I explain (inaudible).

Okay, thanks.

Thank you. Ladies and gentlemen, there are no further questions at this time. I will turn the call back over to Deno.

Thank you, everybody, for participating in our conference and thank you. I will see you soon at the next quarter conference again. Thank you.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and ask that you please disconnect your line. Good day.