Photronics Inc (PLAB) 2011 Q3 法說會逐字稿

Welcome to the Photronics third-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 conference is being recorded Wednesday, August 17, 2011. I would now like to turn the conference over to Mr. Pete Broadbent, Director of Investor Relations. Please go ahead, Mr. Broadbent.

Thank you, and good morning, everyone. My name is Pete Broadbent, Director, Investor Relations of Photronics We would like to thank you for joining our third-quarter 2011 conference call. Before we begin, I'd like to remind all participants about the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Thus, any statement 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, market, pricing, competition, procurement manufacturing efficiencies, 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 be archived on our website until we report our fourth-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 Strategic Planning, 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' third-quarter performance. During Deno's and Sean's remarks, they will be referring to slides posted on our website under the Investor Relations link.

Before I turn the call over to Deno, I'd like to inform everyone that we will be hosting an analyst Investor Day at our Boise facility on September 8th, 2011. Deno?

Thank you, Pete, and good morning everyone. Once again we have good news to share with you. We achieved our guidance for both revenue and EPS. Achieved quarterly records for another of top and bottomline metrics.

Please turn to slide three in our slide presentation. In Q3, we grew sales to $135.9 million, a new quarterly record for the Company. IC sales also achieved a new quarterly high of $104.9 million. High-end IC sales grew to 33% of sales, $34.9 million. These results once again demonstrate the success of our investment at the high-end. As Sean will share with you, we believe our growth rate is outpacing the competition. We are gaining market share. Sales for FPD Photomask were $31 million during the quarter, with high-end of 58% of sales.

Please turn to slide 4. Our partnership with Micron and investment in nanoFab has provided an excellent foundation for significant growth at the high-end in memory and logic application. Material mix at nanoFab, in general terms, is broad-based. Half of the mix in memory, the other half is in mix of logic and other special applications, including image sensors, OEM and specialty products. Sequentially, we are incremental high-end IC growth in the US, Korea and Taiwan. I'd like to note that our success in gaining market share is not just due to technology, but also our superior customer service. Our customers think about Photronics brand, they think customer service.

Please turn to slide 5. We also performed exceptionally well on the bottom line. We exceeded our guidance range and recorded $0.23 in non-GAAP diluted EPS. Gross and operating margin contributions on increased revenue, over 60%, demonstrating the strong leverage of our business model. Non-GAAP net income of $16 million is also a new record for us. We again, exceeded 15% operating margins, reporting 16.8%, a 90 basis point sequential increase.

EBITDA of $48.1 million for the quarter was also a record for us, represents the seventh consecutive quarter of improved normalized profits. Also it was the fourth consecutive quarter of growth in the top line as well as growth in operating margin. We continue to be diligent in controlling costs while focusing on long-term growth. As a result, we continue to strengthen our balance sheet, improving working capital and increasing net cash. We now have much better financial flexibility to continue executing our high growth strategy.

Please turn to slide 6. We continue to see the value of our investment, dedicated to high-end customers. Our 65-nanometer and below business grew 24% sequentially. And our 45-nanometer and below business grew 27% sequentially.

Please turn to slide 7. For 2011, we're on plan for CapEx in the range of $80 million to $90 million. Q3 annualized EBITDA of $192 million is more than enough to support our CapEx plan and also to generate strong free cash flow. We are capitalizing on our high-end investment, and we plan to deploy additional high-end capacity to satisfy demand at and below 45-nanometer. These high-end investments are not only gaining us market share but will protect us -- while they protect us against down risk.

Looking forward, we're mindful of general economic conditions and we'll continue to be vigilant in our cost control. At the same time, while a slowdown in consumer demand will affect the semiconductor industry, our business is design-driven. New IC and FPD design and node migration drive further demand. We believe the general trend in new design and migration is in our favor.

Let's take a quick look at some of the trends we are seeing in the market for both high-end IC and FPD. In IC, we're seeing widespread high-end production at 45-nanometer and below. In logic, we see some adoption of 28-nanometer. New memory nodes, named and 25-nanometer and (inaudible)32 and 35 nanometer are ramping rapidly. While also now seeing the high -- the first high volume microprocessors at 22-nanometer. These are all positive drivers for high-end photomask demand and we're now shipping or actively qualifying customers in both memory and logic across these nodes.

On display side, we are seeing increasing innovation in displays for mobile devices, which is an emerging area for the photomask market. Of note is the emergence of AMOLED technology. This technology should drive more complex mask, at higher mask volume. Some of our customers are expanding capacity for AMOLED displays. To capitalize on these and other trends, driving high demand, we will continue to carefully invest in high-end capacity. Our initial linear expectation for 2012 cash CapEx is in the $70 million to $90 million range. Our strengthened balance sheet and ability to generate strong free cash flow give us flexibility to capitalize on opportunities to grow our position in the market.

Before I turn the call over to Sean, I would like to thank the entire Photronics global organization for their efforts this quarter. Our team delivered record results once again and are continuing to build on high-end strategy and customer service. And now I will turn the call over to Sean.

Thanks, Deno, and good morning, everyone. I'll provide a brief analysis of our financial results for the third quarter of 2011. I will also review our balance sheet and cash flows during the period and discuss our outlook going forward.

Please turn to slide number 8. Our results, as Deno discussed, were excellent. We achieved a number of records for the quarter and we are optimistic about our future. For purposes of our discussion, I will be comparing our non-GAAP operating results to the third-quarter guidance we published during the Q2 conference call. During the quarter, we acquired $5 million of our outstanding 5.5% convertible notes by delivering $3.2 million in cash and approximately 700 shares of our common stock with a value of approximately $6.5 million. The net impact of this transaction was a non-forecasted charge of approximately $5 million, the majority of which were 78% was non-cash. Our non-GAAP results excludes this charge.

Please turn to slide number 9. Net sales in the third quarter amount to $135.9 million, which was higher than our guidance of $128 million to $133 million, as a result of stronger than expected demand for high-end IC photomasks. Slides 10 and 11 show our quarter-over-quarter IC and FPD revenue performance. Revenues for IC and FPD revenues, photomask were $104.9 million and $31 million respectively. Sequentially, total sales increased by 2%. As a reminder, our Q2 sales of $133.1 million included $5 million in one-time orders associated with the Japan earthquake.

Breaking out sales geographically, 59% of total sales were from Asia, 32% in North America and 9% in Europe. As Deno mentioned, advanced IC sales increased to $34.9 million or 33% of total IC sales for the quarter. This represents a 24% sequential increase or $6.6 million. Advanced FPD sales increased 18% to $17.9 million, or 58% of total FPD sales. Included in high-end IC and FPD are mask sets for semiconductor designs at and below 65-nanometers and FPD sets used to fabricate flat panel products using G7 and higher technology.

Slides 12 and 13 show our year-to-date revenue results. Year-to-date sales have increased 24% to $390 million. For the first 3 quarters of 2011, IC sales have increased 21% to $295 million. This represents 90% of 2010's full year IC sales. For the first 3 quarters of 2011, FPD sales increased 34% to $95 million. This represents approximately 100% of 2010's full year FPD revenues. Year-to-date high-end IC sales have increased 86% to $82.1 million, compared with last year. Year-to-date high-end IC -- I'm sorry, high-end FPD sales increased 35% to $53.4 million, compared with the 9-month period last year. These statistics clearly validate the success of our high-end strategy.

If you turn to slide 14, you can see our steady progress in capturing high-end IC sales during the past 8 quarters. In the past year, we have steadily grown high-end IC sales from 21% to 33% total sales. In slide 15, as Deno spoke about, we provide you with an overview of our overall market share growth in the IC photomask market, which we believe has grown significantly over the past year. In fact, based upon recently-published data, our largest IC competitor actually had decreased IC revenues for the 12 months ended March 2011. While our other global competitor grew which only 3.9% for the 12 months ended March 2011. In contrast, we grew 19%, mostly at the high-end, for the 12 months ended April 30th, 2011.

Now, let's continue through the income statement. As a result of our success in increasing high-end sales volume, gross margin for the third quarter climbed 70 basis points sequentially to 28.1%. Gross profit increased by $1.8 million, amounting to a 62% drop-through on incremental sales. This is slightly higher than our targeted range of between 45% and 50%, as a result of manufacturing efficiencies and cost savings activities. SG&A expenses for the quarter were $11.8 million, as compared to $11.4 million in the second quarter, but essentially flat as a percentage of sales. R&D expenses, which consist principally of continued development for our global advanced process technologies, were $3.5 million in the third quarter, slightly down from $3.9 million in Q2.

Please turn to slide number 16. On our Q2 conference call, we established a new internal goal of generating an operating margin of at least 17.5% which was our prior peak. As Deno mentioned, during the quarter, we generated operating income of $22.9 million, or 16.8% of sales, which was just short of our goal. EBITDA, as defined in our credit agreement for the quarter, was $48.1 million. This equates to $192 million on an annualized basis. As you can see on the chart on the right, trailing 12 months EBITDA is now at $170 million.

In the past, we have discussed our operating model leverage with a targeted drop-through of 45% to 50% on incremental revenue. In comparing Q3 to Q2, the incremental operating margin was approximately 63% for the third quarter on increased revenues of $2.8 million. The 63% incremental margin is higher than our targeted range, as I mentioned, due to manufacturing efficiencies and cost saving activities. The year-to-date incremental operating margin for the first 3 quarters of 2011 as compared to the first 3 quarters of 2010 was 49%. Other income and expense, exclusive of the $5 million charge previously discussed, was expense of $400,000, and includes net interest expense of $1.3 million offset by foreign exchange gains and non-cash income on warrants.

During the third quarter, we recorded a tax provision of approximately $4.9 million, which was higher than our guided range of $3 million to $4 million, as a result of higher pre-tax income in geographic areas in which we are taxable and the resolution of certain open tax matters. Minority interest expense during the quarter was $1.4 million while non-cash stock compensation expense was approximately $700,000. GAAP net income was $11.3 million, with EPS of $0.16 per diluted share. Excluding the one time $5 million charge and $200,000 of non-cash warrant income, as Deno mentioned, non-GAAP net income was $16 million or $0.23 per diluted share. At the end of the third quarter, we had approximately 1,330 employees. This equates to revenue per employee of $408,000 on an annualized basis.

Now turning to the balance sheet. As Deno mentioned, our balance sheet continues to improve. Cash and cash equivalents at July 31 amounted to $203 million, and our net cash, which is cash less debt, improved by $23 million sequentially to $44 million. Our working capital also improved during the quarter, with working capital of $203 million at July 31st, which amounts to sequential increase of $24 million. AP and accrued current liabilities at the end of the quarter amounted to $133 million as compared to $135 million at the end of the second quarter. At the end of July, $39 million of CapEx was accrued for, which is down $5 million from the second quarter.

Please turn to slide 17 as we review our capitalization. Total debt at July 31st was $159 million. The components of outstanding debt include $22 million of 5.5% senior unsecured notes due October 2014, $115 million, 3.25% unsecured notes due April 2016, and approximately $20 million for a capital lease obligation and approximately $2 million related to an obligation with a customer who co-funded a tool purchase. At July 31st, we did not have any outstanding borrowings on our $30 million revolving credit line, which matures in April of 2015.

Now, taking a look at our cash flows. Cash provided by operations for the third quarter was approximately $40 million, and year-to-date was $104 million. Depreciation and amortization for the quarter amounted to $23.6 million. Cash flow used in investing activities during Q3 amounted to approximately $22 million, and $70 million year-to-date, and includes $59 million for cash payments for capital expenditures. Net cash used in financing activities during Q3 amounted to $3 million, and represents the repayment of debt.

Our CapEx on a cash basis for fiscal 2011, as Deno mentioned, is in the range of $80 million to $90 million. The significant high-end market share gains that have driven our increased year-to-date 2011 revenue validates our high-end investment strategy. During 2011, we have invested principally in high-end capacity in Boise, Korea and Taiwan.

As we look forward into 2012, the management team is evaluating opportunities for additional growth, continued market share gains, and potential strategic initiatives that could improve our growth prospects. We are also focused on improving our balance sheet, reducing our cost of capital, and maintaining our financial flexibility.

Please turn to slide 18 as we take a look ahead. We typically experience some reduced orders, principally main stream, related to US and European summer holiday vacation season. We also typically experience, as we did last year, a slowdown in FPD orders for Q4. During the latter half of July, we did see a modest slowdown in orders for main stream IC and FPD photomask. At this point in time, we do expect a similar trend to continue into Q4.

So taking this all into consideration, we are projecting revenue for the fourth quarter to be in the range of $125 million to $130 million. We are estimating income taxes for 2011 to be in the range of $15 million to $16 million, and for the fourth quarter this will equate to a range of $3.5 million to $4.5 million. As a result, based upon our current operating model, we estimate earnings per share for the fourth quarter of 2011, exclusive of any impact of warrants, to be in the range of $0.14 to $0.18 per diluted share. As we progress into fiscal 2012, our financial priorities remain the same.

Please turn to slide 19. Because of 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 we invest prudently and maintain our financial flexibility. Our initial look at 2012 CapEx is in the range of $70 million to $90 million. This initial estimate will of course be contingent upon market conditions.

Please turn to our summary on slide 20. We have turned in an excellent performance for the first 3 quarters of 2011, both from a sales perspective as well as the bottom line, as we have capitalized on strong operating leverage. The investments we have made during the past few years on high-end IC and FPD photomask are really paying off. Our 86% year-to-date growth for high-end IC is both a testament to the success of our strategy as well as a sign of future success. As we enter the final quarter of the fiscal year, we are confident we will continue to take shares at the high-end and look to capitalize on many exciting opportunities in fiscal 2012. With that, I'll turn the call over to the operator for questions and answers.

Thank you. (Operator Instructions). Our first question comes from the line of Edwin Mok of Needham & Company. Your question, please.

Hi. Thanks for taking my question and congrats on a great quarter. First question I have relates to guidance. In terms of slightly sequentially lower on your guidance, is that -- does any of that relate to the industry and we have heard some production problems at 32-nanometer for some of the leading chip makers, did that impact you guys and also lower CapEx, did that impact you guys as well?

Edwin, I'll start and then I'll turn it over to Peter and Chris for additional color. The guidance that we provided during the quarter is primarily as a result of what we saw was a slowdown mid-July forward through this date, primarily with respect to mainstream IC and the FPD market. We still believe we're confident in the high-end and we don't see any substantial sea changes in that. With that I'll turn it over to Peter and then Peter can throw it to Chris.

As far as our high-end business is concerned, if we look back to Q1 versus Q2, we saw incremental growth at 50%. Last quarter, it was 24%. If you compare this quarter this year to the prior quarter in 2010, our business is up literally 100%. So there's no doubt, absolutely no doubt we're gaining market share in the high-end market segment. I think that's undeniable at the present time and we're gaining that share based on execution, and execution is something that you build over time. So we have lots of solid momentum in our high-end business.

So as we look into the current quarter, we see some customers who are struggling, other customers who are aggressive. And given the balance in our high-end business, we expect further market share gain as we move forward. So could there be some softening? Yes, I think there could. I think it will be customer-specific.

Generally speaking, we all know that given the last 50 years that Moore's Law continues and the high-end is normally the port in the storm when the industry slows down. And we also know that we have very strong execution there. So overall, our view of the high-end is -- remains bullish. I'll turn it over to Chris to -- Chris can I think elaborate some specific trends in the high-end. Chris?

Thanks, Peter. Edwin, on your question regarding production problems and that being impactful to our guidance, I really don't see that. Generally for photomasks, even if there are yield problems, we don't see that right away in photomask demand and it can actually cause a bump up in photomask demand, as customers try to do redesigns and re-spins. Generally speaking, we don't see that correlation that strongly at least at the onset. Furthermore, for the high-end, we are not really noticing, at least for the customers we serve primarily yield issues anyway at their high-end nodes. I think the biggest uncertainty is just end user pull, the final applications, how much take-up these designs will have in the marketplace, and a little bit of general apprehension in the design user base as opposed to what we consider production problems among our customers.

Great. Very, very helpful color. One thing I wanted to drive down on that is in terms of your customer mix between memory and logic, in your presentation, you show roughly around half and half. Is that for high-end or is that just -- is that -- or do you guys have similar mix for your IC side of the business? That's the first part. Second part is given weaker memory price right now, do you see actually customers try to accelerate, in line with what you said, Chris, try to accelerate those transition to leading edge, and therefore helping you guys.

I think I'll make a comment on the accelerating the bit cell shrinks for memory. We are seeing an effort to pull in some road maps here and there where possible, and that does have to do with some of the weaker pricing in memory that everybody's aware of. So yes, we are seeing some of that, a little faster attempt at node transitions. We're also seeing a broader product portfolio in memory, more emphasis on mobile applications for a few of the memory customers, so they'll also try to diversify into higher margin memory businesses as part of the current climate. So I think I would agree with what you said, that that side of it has a positive impact on photomask demand when you see prices go down on some of those products. Now, long term of course anything that weakens our customer base on the long term trend line, we're concerned about but it doesn't flow in as quickly to mask demand and mask nodes as it does, say, for wafer volume and other things and capital equipment.

Regarding our business mix, the balance between memory and other where logic is the largest component of other is -- that's specific to our high-end business. If you look at our mainstream business, it's much more strongly weighted away from memory to logic and analog and other aspects of the market.

Very helpful. Two more, one on the guidance. Sean, if I kind of take the midpoint of the guidance implied, let's just say high expenses, I was just curious, does that just come from lower margins or basically just on the volume related, lower gross margin, or are you anticipating higher operating expense in the current quarter?

We're not anticipating higher operating expenses in the manufacturing or in SG&A or other operating costs. In fact, we're looking to reduce some of those costs as we did during this quarter. To the extent our top line does go down, it will have an impact on the gross and operating margins, we'll try to minimize that.

I see. Great. Very helpful. One last question, just on cash. Looks like you guys are generating really good free cash flow. If I take what your preliminary CapEx guidance for the coming year, likely you'll continue to generate free cash flow. Sean, just curious, what is your focus here? Is it going to be mostly on debt reduction? Any thought about buyback, maybe dividend, anything like that?

Our focus is to continually improve and strengthen the balance sheet to provide opportunities for a number of different programs or initiatives including strategic initiatives, potentially capitalizing on some opportunities there in the marketplace. To the extent it's attractive for a stock buyback, we'll have to review that with our Board at the appropriate time but we certainly want to continue to improve the balance sheet. Bear in mind, this is a capital intensive business and the cost of these tools that are coming online or that will go in at the leading edge are quite expensive. We're going to be tempered. We don't want to get too far ahead of ourselves but we want to continue to improve on a sequential basis.

Great. Again, good job, guys. I'll let the other people ask questions. Thank you.

Thanks, Edwin.

Thank you. Our next question comes from the line of Patrick Ho of Stifel Nicolaus. Your question, please.

Thanks a lot and congrats as well on the quarter. First off, in terms of the design-ins at the high-end where you're gaining share, you mentioned in addition to technology that you've been executing better. Can you just give a little color in terms of some of the qualitative or the characteristics of why you're executing better than your peers? Is it faster turnaround times in the design-ins? Is it getting to the customers earlier? Just give a little bit of color in terms of how you're getting these new share wins.

Yes, it really is -- it's a number of factors. One is certainly our mix and match manufacturing strategy, where we built the critical layers largely in the nanoFab, which are the most difficult, so we concentrate the difficulty and actually the volume manufacturing learning therefore on one site. And then we have -- we built a semi-critical and the non-critical layers locally, which are already high yields so our geographic proximity drives cycle time and of course, the local presence enables superior customer service because we have the dialogues with the customers in the local language, when they have questions or they want to re-prioritize their critical WIP, that conversation is held real-time. So it's a number of factors at work that allow us to continue to gain market share at the high-end, both highest level in a single sentence, superior service to the customer on one hand in the local language, and superior manufacturing execution on the other.

Great. Maybe a little bit also in terms of the going forward high-end IC mix. Do you see that staying at that 50/50 kind of memory to logic mix or do you see it either turning back to the memory side of things or do you see logic becoming a bigger percentage on a going forward basis?

Patrick, I think that based on the comment I made earlier, I think we can see some fluctuation in that business mix quarter to quarter, based on which customers are being more aggressive moving to the next node. That typically drives a spurt in volume but generally speaking, I see the balance we have in the high-end being preserved. So I don't see a dramatic change in that picture next quarter or the quarter after that or the quarter after that. Chris, do you have any comments?

No, I would agree with Peter's comments fully. I think we want to target a roughly 50/50 mix for the high-end work there. We're getting there. We're very close and we would like to keep it where it is and we think that's our goal and that's kind of an optimum operating model for risk and reward in the nanoFab so we're pretty comfortable we're going to stay there.

Great, and a two-part question for Sean in terms of the CapEx and depreciation and amortization going forward. First in terms of CapEx, you guys have done a really good job of adding on capacity to meet this increased demand. How quick is the turnaround time in terms of I guess getting equipment from your supplier and putting out the CapEx dollars? And the second question related to that is depreciation and amortization, with you guys spending CapEx these last two years, I'm expecting it to go up but what falls off that maybe doesn't send D&A up significantly in 2012?

I'll take the latter first and go back to the former, Patrick. The D&A forecast as we move forward, I think we mentioned last call it was going to go up maybe $300,000 to $500,000 a quarter. That will certainly happen we believe in Q4 and we'll work to offset some other costs. It's not going to go up too significantly as we get into 2012 because we do have a variety of tools that are falling off the depreciation role. So we'll be well situated there.

With respect to our capital spending and our capital plan, the management team continually evaluates that, at least three, four times a month, what we want to do, where we want to place the orders, when we want to do it, what customer will that serve. So it's been done on a very strategic methodical method over time so that at least in fiscal 2011 we haven't missed any opportunities as we did in 2010, primarily on FPD side. So we think we can move fairly quickly if we see opportunities. We do have some tools that are still coming in, that is baked into the CapEx guidance. Our global procurement team has done an excellent job with that, so we don't believe we'll miss any opportunity and to the extent we feel we can expand even more rapidly we will have the financial flexibility to do so.

Great. Thanks a lot, guys.

Thank you. Our next question comes from the line of Tom Diffely of D.A. Davidson. Your question, please.

Yes, good morning. I guess another question on the nanoFab in the high-end. Of the 50/50 mix right now, is there a margin difference between logic and memory that you're seeing?

The answer is not -- no, not really. Our business, whether it be logic, memory or high-end tooling, the margin profile on all of that business is more or less the same. Again, it can vary. It varies. It can vary by customer, but generally it's very similar.

Okay. The reason you like a 50/50 mix is just for the different product cycles?

That's correct. That's absolutely right. As I said earlier, when our customers go through node transitions, we see an uptick in their business volume, so a balanced mix more or less signal averages, there's no transitions over the customer base which it makes the manufacturing operation much easier to run with high performance schedule when you don't have all of your customers turn at once, you have one turn out of 20, it's far easier to manage the uptick.

Okay. I was a little surprised to see you talk about the sensor business there. Is that high-end business? And what are the end markets and potential growth of that part of the business?

Chris, you want to--?

Sure. I can make a few comments on the sensor business. The business is built initially on carryover from Micron's spin-out of Aptina. They had a pretty strong CMOS image sensor business there and we still serve that very well. I think that technology does go through node migrations but it's for different reasons and on different timing than the standard Moore's Law switch. We do see a lot of design activity, because as you know, these image sensor cameras are built into a huge number of mobile devices now. A lot of design work for form factor, pixel ratios, a variety of things and we do see shrinks as well for resolution intensive imaging applications. It's a very complementary driving technology to memory and standard use logic.

Okay. And then moving to the--?

Comment I would make regarding our high-end business, and it was -- Deno hit on it. That is, we had significant high-end business in Taiwan and Korea. In addition to having a diversity of customers in the nanoFab, we also have significant business anchored in Asia. So all of that together, it works to damp any oscillations in a specific market or with a specific customer.

All right. And then moving to the memory side, it sounds like every customer's a little bit different on how they respond to the pricing pressure that you see in the DRAM market. Are there any broad-based correlations though between design cycles and pricing or is it really customer-specific?

I think it is customer-specific. You could take some of the large players. Samsung historically has actually invested into downturns quite significantly to try to increase their market share and solidify their gains on the DRAM side in particular. So they've taken that strategy and we benefit from that. As you know, they're one of our larger customers.

Some of the other memory players will attempt to turn nodes faster to try to get their costs down, shrink their bid cells which directly relates to chip costs, they'll take advantage if they have the capital and resources to push a faster node transition. They may not pull all of that into volume production until the business returns but they will push node transitions. So from an R&D and mask perspective, we benefit from that. I guess in memory as well, one thing I would like to point out, we have exposure now to the three large classes of memory applications, DRAM, NAND and/or Flash. I think we're the only mask maker of the main competitors that has that broad based exposure and there's different drivers for each of these, mobile versus commodity versus enterprise systems and so within memory we actually have a fairly diversified product driver base. So we're not seeing tremendous impact, at least right now, from cost down pressures in DRAM.

And on the display side, sounds like the growth is coming from the high-end, but I was under the impression that the last quarter or two, AMOLED been the big driver. My impression that was kind of the lower size G4, G5 type tool. I was kind of curious, is AMOLED the driver today or is it really still the high-end, G7 and above?

Yes, for AMOLED in terms of high-end, the form factor, the substrates are smaller, that's correct, it's mostly mobile applications. In a given generation the masks are much more complicated and there are more of them to build the transistor level of the AMOLED, so you might need eight or ten masks to build a transistor back-plane in AMOLED and far fewer for an LCD. So high-end from that point of view, you might even consider a smaller substrate like Gen 4, Gen 5, is actually a high-end mask in the AMOLED case, because the transistors are denser, resolution's tighter and the masks are more complex, and they also need to go on the higher end writers as well for those reasons. High-end is actually broadening out in the flat panel display business because of introduction of AMOLED.

So when you categorize something as high-end, it's not necessarily G7 and above anymore?

I'll turn that to Sean if we've kind of formally made any distinction there. From a technology perspective I would say that that trend you've highlighted is correct, yes.

I think, Tom, we have not recharacterized our high-end but as Chris alluded to, those AMOLED mask sets are much more complex, there's more layers to them and they're technically, if we classified them a similar way to IC, they would be high-end and we're looking to redefine the definition as we move forward. The primary reason that we're a little less optimistic in the near term on the FPD side of the business is, a couple of our largest customers, it's been in the press, have undergone a slowdown in trying to maintain their costs so we don't anticipate, just as last year, that to improve for at least a couple of quarters. Last year if you remember, FPD, the general FPD business was very slow August, September, right through the second week of October and then it picked up and grew significantly for us as evidenced by our -- the great three quarters we've had. So we're still optimistic and feel we have a good position. It's not a market share shift at all but it has slowed down at least in the near term.

Okay. And then finally, if you do see upside to your guidance range for the quarter do you think it's most likely to come from the high-end or is it just the mainstream improving after a slow start?

I think it could be a combination of both, actually. We tried to guide at the high-end where we think we're going to be. We want to be prudent about it. We've had a couple of great -- we had a great year so far with growth that we had not necessarily anticipated. And that is a very high paced growth. So we're still bullish as Peter alluded to on the high-end of the business. And the main stream customers you want to serve, so when they start increasing their tape-outs we'll be there, and we do not believe as a team, that we will lose any share in the near term and we would expect to continue to gain share as we move forward.

Okay. Thank you very much.

Thank you. Our next question is of the line of Krish Sankar of Bank of America.

Good morning. This is Paul Thomas for Krish Sankar. Thanks for taking my questions. Let me go back to the 4Q guidance, if we take the $5 million revenue out from Japan in 3Q, should we be thinking of 4Q as flat quarter-over-quarter? And I guess that would be a little bit surprising given your commentary about the slowdown in mainstream. Is the slowdown in mainstream you're referring to the $5 million in revenue going away, or is it more than that?

I think what we're seeing in the mainstream side is a seasonality slowdown in the US and Europe, and we have a broad customer base. Some of our customers continue to be bullish, and some are pulling back to some extent. The guidance really reflects to our positioning that we have seen a slowdown from mid-July, certain facets of the business. We still believe that we have high-end opportunities which is baked into our guidance. So we just believe it's a temporary pause and when we have our -- when we have our analyst meeting in three or four weeks, we'll be able to discuss further about the opportunities we see in the marketplace and what's the state of the environment.

Okay. So maybe if there's a slowdown on the mainstream side you're seeing still strength on the high-end, so ICs are sort of flattish expectations in the 4Q, I guess taking out the $5 million from 3Q?

I think the biggest component of what we're talking about with respect to the guidance is at the slowdown in the FPD market with very high ASPs and then to a lesser extent mainstream IC.

That's very helpful. And then maybe one last one. What's the right interest expense for fiscal 4Q as part of your guidance?

Other income and expense all-in, which includes interest income, interest expense, foreign currency gains or losses, should be in the range anywhere from $1 million to $2 million. It can fluctuate.

Okay. All right. Thanks a lot, guys.

Thanks, Paul.

Thank you. Our next question is from the line of Stephen Chin of UBS. Your question, please.

Hi. This is Mahavir Sanghavi for Stephen Chin. Hi, Sean and Deno. Congratulations on excellent results and share gains. Sean, I just wanted to clarify one thing. You said the $5 million pull-in in Japan, was that in fiscal 2Q or 3Q?

That was in fiscal 2Q. We talked about primarily some mainstream IC and some FPD and we didn't anticipate that business to repeat itself.

Right. Got it. Makes sense. And so, just a question on the guidance, Sean. What utilization rates are you seeing at 60-nanometers and above, starting you said mid-July is when you started to see a slowdown and could you give us some idea about how it has trended during normal down cycles, unlike 2008?

I'll start and then I'll turn it over to Peter. With respect to specific utilization rates, we don't necessarily discuss that. But I don't believe we saw any mid-July point forward a change in the high-end IC. Peter, perhaps you could provide further color on that.

If you look at the mainstream of our business, the two slowest months of the calendar year are the months of August and the months of January, and it's driven by literally seasonal factors where designers are literally not in the office. They're on vacation. So we see a drop-off in tape-outs.

And if you ask the question, is this August any dramatically different than a typical one, the answer is it doesn't smell or look dramatically different than what we've seen in prior years, except for 2008, which was a remarkable deceleration. So it feels more or less typical. As far as the high-end goes, the march there tends to be more deliberate, regardless of vacations or other factors. Because the customers are focused on year-in and year-out on the node transition.

What about the mainstream, Peter?

That was my comment regarding August. I mean, August feels like--.

Okay.

--a normal August. It doesn't feel like 2008. It feels like, looks like what we typically will see in July and August and early September. Always makes giving guidance challenging.

Got it. And are there any sales incentives built in for the 4Q. Even though I understand you're nicely up for the year, Sean, could you comment on that?

You mean sales incentives with respect to our sales team?

Yes, for the fourth quarter, just for the year end.

Our entire organization is focused on growing the top line and certainly we would love to come out and report higher results than what we guided to, but this is where we believe we're in but we're all as a team incented to do the best job we can possibly do, but there are certain overriding economic factors that do dictate our customers tape-out activities, especially this quarter as we talked about with FPD and mainstream IC.

Got it. And is there a way to quantify the contribution of AMOLEDs to that advanced FPD? Could you give us just some idea, is it a majority of the advanced FPD sales or--?

Right now, as we talked about a little bit earlier, we don't include it in -- we don't include it in high-end, and we haven't really quantified to the marketplace for competitive purposes what that contribution is. We as a team are evaluating our position and we understand that it is a growth opportunity, but we're also very careful about protecting our information since we are the only pure play photomask manufacturer that publishes its status. We're evaluating it, and we'll probably be discussing it a little bit more at the analyst meeting.

That's great. One last question. Just given the scenario right now, could you comment on where you're seeing more strength in terms of logic and memory and on the second, on the CapEx spend for next year, are you trying to spend with a strategic partner or strategic alliance or is this going to be, again, over the three regions? Thank you.

I'll handle the CapEx and turn it over to Chris and Peter. Certainly all of our CapEx spend in the last few years has been -- we could classify it as strategic partnerships with a variety of different customers and we'll continue to do that as we move forward in three of the highest areas, nanoFab in Boise, in Taiwan, certainly in Korea, including FPD in Korea where we have a very strong toe hold. Peter, perhaps you can?

The strongest part of our business right now is the 20 and 30 XX, 20 to 30 and 30 to 40. Those two nodes are where our business is growing at the most rapid clip. So it's the high-end of the high-end where we see the most vibrant market.

And between memory and logic? Is it across the board?

It's both. It's both high-end logic, which pushes towards the smallest geometries and high-end memory. That's where our business is the strongest. That's where it's growing.

Thanks. I'm done with my questions.

Thanks.

Thank you. (Operator Instructions). Our next question is from the line of Zach Shafran of Waddell & Reed. Your question, please.

Good morning, gentlemen. Could you provide some detail on the breakdown of the CapEx estimate as far as equipment versus facilities?

Zach, most of the CapEx estimates certainly that -- our initial estimate for 2012 is primarily all equipment.

Okay. Thank you.

You're welcome.

Thank you. Our next question is from the line of Chris Blansett of JPMorgan. Your question, please.

Good morning. This is Bill Peterson calling in for Chris. Congratulations on the good quarter. Along the CapEx lines, I guess can you speak to utilization trends, breaking down between FPD, I guess both high end and then high end IC? How do you view Q4 and going into early calendar 2012?

I think, Chris, for competitive purposes, we do not break down utilization trends between high end IC and FPD. But certainly based upon the results that we've experienced this year and all of our investments going forward are into the high end we're running at a fairly healthy clip. I'm sorry, Bill. I was calling you Chris.

No problem. I guess in terms of the CapEx, the near term CapEx, should we view that more in the IC or some breakdown in the FPD as well.

Well, it's a combination of both but just a rule of thumb, and it could fluctuate from quarter to quarter, year to year, but it's almost in line with our revenue split, 75%/25%.

Okay. Very good. Helpful. I guess finally from my side, looks like you have incrementally increased or upped the tax rate for the fiscal year. How should we view that and model that moving forward?

We haven't provided full year guidance for 2012. We don't provide full year guidance. When we announce our Q4 results, we'll give a run rate on the tax rate for 2012 but I guess if we're trending $15 million to $16 million for this year, we would work to keep it in that similar type of range and to the extent we continue to grow our profitability in the US where we have some tax -- we have significant tax benefits, you could see the effective rate go down.

Okay. Very good. Thanks again.

Thank you. Thanks, Bill.

Thank you. Ladies and gentlemen, there are no further questions at this time.

I'd like to thank you, everybody, for participating in the conference. Thank you. Have a good day.

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