Photronics Inc (PLAB) 2012 Q4 法說會逐字稿

Welcome to the Photronics fourth 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, December 5, 2012. I would now like to the conference over to Pete Broadbent, Vice President of Investor Relations and Marketing. Please go ahead, Mr. Broadbent.

Thank you, and good morning everyone. My name is Pete Broadbent, Vice President, Investor Relations and Marketing of Photronics. We would like to thank you for joining our fourth quarter 2012 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. And 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 and 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 first quarter 2013 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 and 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' fourth quarter performance. During Deno and Sean's remarks, they will be referring to slides posted on our website under the Investor Relations link. Deno?

Thank you, Pete. Good morning, everyone. Please turn to slide 3 in our slide presentation. In Q4 we achieved sales of $104.2 million, ahead of our revised guidance. Sean will provide detailed revenue breakdown. First, a few highlights and some comments on the trends of our business. General softness in semiconductor and flat panel display markets impacted demand for both IC and FPD photomasks this quarter. This slowdown reflected challenging global electronics industry environment. Yet, the fundamental of our business remain strong. And despite current trends, we are confident in our market position and long-term growth opportunities. Our management team remains diligent in controlling costs.

Even with the top-line decrease, we were profitable and generated cash. We delivered solid growth and operating margins of 23.3% and 7.3%, respectively. We generate non-GAAP earnings of $0.07 per share, which exceeded our revised guidance. Non-GAAP EBITDA was $28 million, and we improved our net cash position by $22 million sequentially. So despite the soft electronic industry environment, we continue to generate profits and improve our cash position. Also, we believe that we strengthened our growing leadership position in the marketplace. Today we have a strong world position -- global operations. We are the leading edge technology. We have a strong balance sheet. Basically, we believe we are the most cost-efficient [mission] supplier in the business.

Photronics is profitable, and based on published reports, we don't believe our competition is. While winning in a tough environment, market trends position the strong to get even stronger. We are poised for growth. In the near term, the team is focused on reducing costs, gaining additional customer qualification, and generating cash. The discussion I'm having today with our customers on the leading edge would not have been possible a few years ago. Our leading edge technology provides us with opportunities to grow share over the coming years. So outlook is tied to global economic condition. We believe that strategic opportunity is in the marketplace. Our goal is to be in the best position to capitalize them.

As a result, we are pleased with our progress and prospects for future growth. Looking forward for the coming year, we believe the softness will carry through this quarter, and hopefully stabilize. We do believe the industry growth will begin during the year, and we'll finish the year with improved momentum. Longer term, we believe the basic trends in the new electronic devices will yield continuous growth and market share gains for Photronics. And we are uniquely positioned to outperform the competition in the coming years.

Please turn to slide 4 in our slide presentation. Looking back on this past year, revenue was down 12% as the market was soft compared to a strong 2011. Mainstream revenue declined 19% year-over-year. We saw the drop mostly in the first quarter. After that, revenue remained essentially flat at approximately $60 million per quarter. At the same time, our high-end IC sales grew 16% for the year. This demonstrate the continued success of our high-end strategy. High-end growth might have been even better had the memory market been stronger. Sequentially, high end sales were down during the last two quarters as the industry softness affected both high-end memory and logic.

I'd like to highlight again that it is a very competitive environment. I would believe we are winning in the marketplace. Though sales were down, we were profitable again this year, and we'll continue to strengthen our financial position. Before I turn the call over to Sean, I would like to thank the entire Photronics global organization for their efforts throughout the year. Our team continued to deliver better efficiencies and technology solution to our customers every day. 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 fourth quarter of fiscal year 2012, review our balance sheet and cash flows, and then provide our outlook for the first quarter of 2013. For purposes of our discussions, I will be primarily comparing our non-GAAP operating results to revised fourth quarter guidance we published in our October 31, 2012 press release.

Please refer to slide 5 for our GAAP to non-GAAP net income and EPS reconciliation as we review the first quarter -- fourth quarter. During the quarter, we did incur a minor charge of about $200,000 related to the Singapore consolidation. Slides 6, 7, and 8 show our sequential quarterly and year-to-date IC and FPD performance. Fourth quarter revenue decreased by 10.6% sequentially to $104.2 million as a result of the general softness Deno discussed for both IC and FPD photomask. During the quarter, we experienced sequential declines for both high-end and mainstream IC and FPD photomask. Revenues for IC and FPD photomask were $83.9 million and $20.3 million, respectively, for the fourth quarter of 2012. Breaking out sales geographically, 60% of total sales were from Asia, 31% from North America, and 9% from Europe.

High-end global IC sales were $23.6 million, or 28% of total IC sales for the quarter. This represents a sequential decrease of $3.8 million. Global mainstream sales decreased sequentially by $2.6 million, or 4%. Advanced FPD sales were $11.7 million, or 58% of total FPD sales. As a reminder, high-end IC revenues consist of revenue derived from semi designs at and below 45 nanometers and high-end FPD revenues consist of revenue at and above G8 as well as AMOLED-based products.

Now let's continue through the income statement. Gross margin for the fourth quarter was 23.3%, which was down 440 basis points sequentially as a result of decreased sales. The 23.3% gross margin for the fourth quarter was actually higher than our Q1 2012 gross margin when we had revenues nearly 8% higher at $112 million. Selling, general and administrative expenses for the fourth quarter were $11.4 million, down sequentially by $400,000 or 3%. Research and development expenses, which consist principally of continued development for our global advanced process technologies and qualifications at advanced nodes, were $5.3 million. During the last six months of 2012, we experienced increased qualifications for which we should benefit us in 2013.

Please turn to slide 9. During the quarter we generated operating income excluding the consolidation charge of $7.6 million or 7.3% of sales. EBITDA, as defined in our credit agreement for the fourth quarter, was $28 million and for the year amounted to $135 million. Also for the year, free cash flow was $63 million, which is EBITDA of $135 million less non-finance cash CapEx of $72 million. Other income and expense for the fourth quarter was expense of $1.6 million, which was up about $900,000 sequentially, due principally to unfavorable foreign exchange. During the quarter we recorded a tax provision of $1.6 million. GAAP net income was $3.8 million or $0.06 per diluted share, and non-GAAP net income was $4.1 million or $0.07 per diluted share. At the end of the fourth quarter, we had approximately 1,292 full-time employees, and this equates to revenue per employee of $323,000 on an annualized basis. For fiscal 2012, our headcount decreased by 58, or 4%.

Now turning to the balance sheet. Despite missing our initial guidance and decreased sequential operating results, our balance sheet actually improved quarter-over-quarter. Cash and cash equivalents at the year-end amounted to $218 million, and our net cash was $41 million, or up $22 million sequentially. Our working capital at the end of the quarter was $233 million, which was up $21 million compared to Q3 2012. Diligent inventory management, and to a lesser extent improved AR turns, contributed to this improvement. Accounts payable and improved current liabilities at year-end amounted to $79 million, and at the end of Q4 2012, $7 million of CapEx was accrued for.

Please turn to slide 10 as we review our capitalization. Total debt at year-end was $177 million. The principal components of outstanding debt include $22 million of a 5.5% senior unsecured convertible notes which are due in October 2014, $115 million 3.25% senior convertible unsecured notes due in April 2016, approximately $15 million for a capital lease obligation, $24 million, 2.5% five-year term loan related to the nano-fab building, and approximately $1 million related to an obligation with a customer who co-funded a tool purchase. At the end of fiscal 2012 we did not have any outstanding borrowings on our $30 million revolving credit line, which matures in April of 2015.

Taking a look at our cash flows. Cash provided by operations for the fourth quarter was approximately $25 million, and depreciation and amortization was $20.2 million. For fiscal 2012, cash provided by operations was $133 million. Cash flow using investing activities during Q4 amounted to approximately $5 million, and was $112 million for the whole year of 2012. Fiscal 2012 cash used in investing activities includes $72 million of cash CapEx, a $25 million loan on the nano-fab building, and $13 million of increased investments in our joint venture. Net cash used by financing activities during the quarter amounted to $5 million, and includes $4 million related to the repurchase of PSMC shares. During fiscal 2012, we increased our ownership in PSMC from 62% to 72%.

Please turn to slide 11 as we take a look ahead. We expect our cash CapEx needs for 2012 to be in the range of $70 million to $90 million. We do, however, have the flexibility to accelerate or decelerate our spend, depending upon market conditions. We do expect to continue to generate free cash flow once again in 2013, and our 2013 investments will principally be geared towards high-end leading edge products for IC and FPD applications. The significant high-end increases and market share gains we have seen over the past few years have certainly validated our high-end investment strategy. Our visibility, as always, continues to be limited as our backlog is typically one to two weeks. For Q1, we do expect to experience some reduced orders related to the year-end holiday season. We also expect to continue to see a somewhat muted market overall for IC and FPD products.

So taking this all into consideration, we are projecting revenue for the first quarter of 2013 to be in the range of $96 million to $100 million. During 2013, our tax rate will be impacted by the flow of income from jurisdictions for which we may have credits, and upon our limited ability to recognize tax benefits in years which we are taxable. For first quarter fiscal 2013, this will equate to a range of $1 million to $2 million in whole dollar terms. For fiscal 2013, we estimate total taxes will range from $11 million to $13 million. As a result, based upon our current operating model, we estimate earnings per share for the first quarter to be in the range of breakeven to $0.03 per share.

Please turn to slide 11. In summary, I'll leave you with a few key thoughts. First, we continue to expect to generate free cash flow in 2013. Second, we are confident about our business model and our ability to weather any short-term softness in the market while continuing to grow our market share at the high end. We see continued opportunities in our customers' businesses and node migration plans, and we have a strong financial position and excellent technology to capitalize on those plans. And finally, we expect to continue to build on the momentum that we have established over the past few years as a leader in advanced photomask technology. Although our visibility is limited, as always we plan to match our operating infrastructure to the market environment. Now I'd like to turn the call over to the operator for questions and answers.

Thank you.

(Operator Instructions)

Krish Sankar, Bank of America Merrill Lynch.

This is Thomas calling on behalf of Krish Sankar. Thanks for taking my questions. Quickly, can you provide us some color on how to think about the revenue decline into January quarter? How much of it is part of the typical seasonality in 1Q versus the impact of a cyclical slowdown in the industry? And is it really semi or FPD that's driving the sequential decline?

Thomas, this is Sean. I think as a comment is we believe it's a combination of both. We do, in the US and Europe, expect to experience some softness related to the typical holiday season when fabs shut down for a week or two and then gear back up. The Asian New Year this year is, I believe, in early February. So, we have less of an impact with our Asian revenue.

But overall, the guidance is comprised of a combination of all of the factors of the seasonality and of the softness in the market. But as Deno said in his prepared remarks, that we do expect to see improvement as we get into 2013, and it should be somewhat of a stable environment as we move forward.

Great, and looking at your breakeven level, it's remained roughly the same compared to three years ago when you reached breakeven at around $98 million. Can you talk about your thoughts around the effects of cost control, or maybe if gross margins are a factor, and why the breakeven level has remained relatively unchanged?

Thomas, this is Sean. The breakeven level for this year actually has gone down. Our bottom-line breakeven was about, for the last quarter was about $96 million or so, and our operating income breakeven is about $91 million. If we look at my prepared remarks, our gross margin was actually higher at $104 million in revenue than we did in Q1 of this year.

I think what you're referring to is three or four years ago we dropped our breakeven down to approximately $90 million, but that was before we invested in the high end. We didn't have any high-end business, and it came back up. But we've done, arguably, a fairly successful job of managing our cost controls and generating a lot of leverage within the model.

Great, and last one from me. I wanted to get your perspective on which particular aspect of the market you expect to see driving a rebound or a stabilization. Would it be from semi or flat panel? And within semi, memory or logic customers? Thank you.

This is Chris. I can make a few comments on semi. I think the foundry logic should be fairly strong going into latter part of 2013. The 28 node seems to be picking up and more broadly adopted. Memory, I'm sure you follow it. You understand there's still a lot of inventory and systematic issues there, but we also think due to coming consolidations in the industry and some capacity coming offline, we do think we're going to see a return to node migrations in memory in 2013 as well. So, for IC, I would say those two aspects are most important.

On the display side, I can make a few comments and pass it on. I think we'll start to see high-end display, such as AMOLED scale to larger form factors. Next year, there will be more R&D towards that, bigger displays using AMOLED. So, that could drive some increased R&D activity as well.

Great. Thank you so much.

Edwin Mok, Needham and Company.

Sean, let me first ask you, what is your operating breakeven now? I think actually previously you guys talked about it around $95 million, in the mid-$90 millions was the operating breakeven? Is that $90 million now, or is it below that, or where we are right now?

Our operating income breakeven, Edwin, for the quarter was approximately $90 million to $91 million, and our bottom line breakeven was about $96 million. It is mix-dependent, but that's roughly. So, it has come down from, say, two, three quarters ago. We continuously have cost reductions in place to minimize the impact of any softness.

So, do you expect that level to come down even more in the January quarter? Is that how I should read that?

That is our goal.

Great. That's very helpful. And then second question is, I think on your prepared remarks you talked about some new qualification that you guys have secured over the last six month, right? Any way you can kind of quantify that? Is that a semi, FPD? And within semi, FPD, which, at least in semi, is it logic or memory? And in FPD, is it mostly related to AMOLED?

Yes, in the semi space, the focus of our qualification efforts have been in the logic space. And as Chris said earlier, that's likely the first segment of the business to start to improve when improvements occur. So, we're optimistic that when the business turns, that we'll be right on the leading edge of that.

And I think there's one other thing that Chris said, and that is there's consolidation occurring in the memory space. In one particular case, that consolidation is being driven by one of our largest customers and partners. So, we will benefit from that directly when that deal concludes. So, we are pretty optimistic, certainly about the second half of the year. And to the extent the business recovers sooner, particularly the logic space, we should see a recovery in our business right along with it.

And then in FPD?

Yes. FPD, as far as new qualifications, you're starting to see broader interest in AMOLED-style displays. I think you're going to see more companies use those. And so, you start to see that kind of technology more broadly adopted at other panel makers. Even outside of Korea, I think you'll start to see some of that being used.

You're also seeing some qualification activity around faster refresh rate displays. Those are smaller transistors across multiple display makers. So, I think that's the concentration of where the display work is, as opposed to historically larger panel sizes. Less activity in that area on the LCD. [Plate] (multiple speakers) technologies as well that are starting to get momentum -- flexible displays. There's some new backplane, transistor technology Sharp is working on that looked very interesting. So, all these things will drive qualification work for masks.

Yes, but I would imagine those efforts are more long-term opportunity for you guys? Is that -- ? (multiple speakers)

Sure, it's long-term opportunity in terms of revenue, but your question I think was related to qualification activity. And starting from R&D pipeline up through qualification, it can be a few year kind of cycle when a new display technology is being prepared. So, it is actually a fairly long front tail on some of that work.

I see. So, this increased qualification, it could potentially benefit 2013, but it's more likely a 2014 driver? Is that how we should think about the timeframe for that?

Yes. I think so.

I see. Great. Very helpful. One last question on the gross margin side -- it obviously came down because of the low volume, so I understand mix could be a driver there, right? But how do we kind of think about gross margin if your revenue level get back to like the July or the April quarter level, right? And what would be the kind of -- if we think about mix, right, is it more high end would drive better gross margin? Is it a high mix of semi? Just if you can kind of give us any way of thinking about that would be helpful.

Sure, Edwin. The team's goal is still, as we get incremental revenue, we targeted a 50% drop-through, and we expect to continue that and hopefully better that as we get into 2013. To the extent, as Deno stated in his remarks, the situations stabilize and we start picking up incremental revenue as we go out into 2013, we should see a significant drop-through on that revenue. And the sooner it snaps back, the bigger the dollar amount will be.

With respect to mix, certainly high end would drive the absolute revenue a lot higher because it's less units, but once we reach our saturation point, we're indifferent as to high end or mainstream.

I see. Great. That's all I have. Thank you.

Stephen Chin, UBS.

Question on 2013 outlook. Fiscal-year '11 was a no-change year for the advanced IC fabs, and you performed really well there. So, do you think you can perform the industry in '13? And also to tag along with that, what are the important themes for advanced IC fabs next year in both logic and in memory?

I think as far as relative industry performance, certainly in the last cycle, we outgrew the photomask market. We outgrew the merchant space. And we believe we outgrew the captives. And the reason for that largely was the penetration of the leading edge driven by memory, with logic filling in, in the back end of the cycle. The work we've done over the last year or more in new qualifications has largely all been focused on logic, and its customers and nodes in the last cycle where we didn't have -- where we had little or no revenue contribution. So, we are most definitely expecting our business to do better in the current cycle than the industry, based on the new technology nodes and new customers that we continue to put into the portfolio every day. So, the short answer's yes.

Okay. Great. Question on operating leverage. In fiscal '12, your sales declined by more 12%, while OpEx grew by about 10%. So, how should we think about OpEx in '13?

You're referring to -- just to clarify, you're referring on OpEx, you're referring to R&D and SG&A, correct?

Yes.

Yes. SG&A, essentially year over year was up a very insignificant amount. It should remain relatively stable with the level of 2012, and hopefully down slightly. R&D should range, per quarter, in the range of $4.5 million to $5 million. That's really, as Peter and Chris alluded to, is the pipeline to advance high-end growth. So, we don't mind if that number necessarily goes up a bit. That means we have more activity for future revenue growth.

Got it. And question on cash. What is the average level of cash you're looking to run the business, and what is the net cash you're targeting essentially? And do you have any plans to return cash to shareholders?

Our net cash grew to about $41 million quarter over quarter. And we stated in the past, our goal is to get to net cash of $75 million. We do have some opportunities as we look going forward at advanced leading edge. So, we want to ensure that our first opportunity is to pay down debt to the extent we can, and then after that we look to other opportunities, potentially returning to some shareholders. But it is a capital-intensive business, and we want to get to a net cash position first, of at least $75 million.

Okay. Last two questions. Question on the operating model. You have talked about an EBITDA target in the past. How should we think about a more normalized operating model? And also, is your advanced IC business a lower operating margin business than you had previously estimated?

We ended the year at $135 million of EBITDA. Certainly was down from our 2011 performance. And we would like certainly get that back up over $150 million, and then up, once we can hit on all cylinders, up over $175 million. So, that's all contingent upon the revenue stream that we get in.

With respect to high-end IC, I think you're referring to, what is it, the margins are -- is lower than what we anticipate. I would say no, it's not.

Okay, not even operating margin?

No.

Okay. Thank you. And last question, we're seeing some initial ramp activity at some Chinese FPD manufacturers, such as BOE. Would you see some activity there in 2013?

Well, I don't know at this time if we anticipate significant activity for us on an FPD side in China. We don't have a facility there, and the cost to ship is quite large. I'm sure we do have plans in place to explore opportunities as they present themselves.

Okay. Great. Thank you. That's all I have.

Tom Diffely, DA Davidson.

Sean, first wanted to talk a little bit about the mainstream business. It was down 19% last year. It was kind of the one bad part of the story. I'm curious, was the drop-off a combination of volume and pricing? And how do you look at that mainstream business on a long-term basis from a size point of view?

I think certainly the mainstream business, as we've stated all along, is very competitive. And to some extent, it is a war of attrition. We believe we're winning that war. It was a combination of both price and units. But we believe certainly as we look at our model, and I think as Deno alluded to in his prepared remarks, and I'll turn it over to Peter for some additional color, it's a very profitable segment of our business. The margins are good, and we generate quite a bit of cash. And it has stabilized after the first quarter.

Peter, do you want to add to that?

Yes, Tom, our mainstream business on a sequential basis really stepped down to about $60 million in the first quarter. And it's been stable, plus or minus $1 million or $2 million on a quarterly run rate basis all year long. Really, at the beginning of the year we saw the mainstream customer base, they got conservative early, and they've remained conservative. I guess the good news in that is they haven't gotten more conservative. So, it's a stable base that we hope to build upon when the market recovers.

I would also say that, without a doubt, it's a shrinking market. And the fact that our revenues in it over the year have been stable, I think reflects the fact that we're picking up -- well, I know we're picking up unit volume. So, we're gaining market share.

Do you view 2011 as more of the abnormal year, then, on the high side versus the year we just finished?

I think we had good momentum in 2011 in the mainstream business, and the good momentum was a result of the fact that the market was more or less firing on all cylinders. So, all our customers where they were the high end, or mainstream, or customers that have abundance of both were optimistic about their business and were launching new products. In addition to that, as we were gaining high-end market share, there was a wake behind that that was positive for our mainstream business.

So, in 2011 we kind of had all -- we had the wind at our back, and as far as the market is concerned and from an execution point of view, we had all vectors pointing up. So, that was 2011. We didn't experience that in 2012. Having said that, I don't think it's out of reason to think that we could go through a similar period again. But time will tell, because I do think that when the market turns again, we'll be picking up more business. I think there'll be somewhat of a wake again behind us. So, I do think we could see a 2011-like period again.

Okay. All right. And then, I guess, if you look at the high-end business where all the growth is coming from, and where it's really kind of the future of the Company. Sean, how would you characterize the high-end capacity today? Just on a -- I don't know if utilization rate's the right metric or not, but talk about the high-end capacity today versus how much you would be adding with that $70 million to $90 million of CapEx next year?

Well, certainly adding that $70 million to $90 million strategically, we will increase our high-end capacity in three primary locations -- in Boise and in Korea and in Taiwan -- to capitalize on and to align ourselves with our customer roadmap. So, without quoting the specific percentage of utilization, because that's rather something we don't typically do, we certainly have installed capacity today to do well in excess of $130 million-plus, $140 million-plus depending upon the mix. So, we want to be prepared for the opportunity as we move forward, because we believe we see it with our customers, and we want to align ourselves.

And, Deno, I don't know if you want to talk a little bit about some of what our plans are on some leading-edge capacity as compared to our competition?

No, we're very bullish about the longer term, definitely. Aligned with the right customers. I think we're the strongest mask maker in the memory sector there. We see opportunities there the second half of next year. We're qualifying with some key logic customers. And I believe the Company's a very good position long term, and we'll make the right investment for the future. Short term is going to be tough, another quarter or two, but long term we're very bullish, we feel very strong.

Okay, and a lot of times you guys talk about the capacity being $130 million, $140 million, but I was just, I guess, curious if with a little bit of softness in the mainstream, if the important thing to look at is the capacity for the high end. And if that's tight and requires more capital spending, then that impacts the cash flow over the next year?

Well, I think what we've done subtly and strategically, we've invested and we've worked with our customers and our tool vendors to improve our cash, yet continue to invest and improve the balance sheet. Behind the scenes, I know the team is doing a very good job of putting capacity in place and capitalizing on opportunities. Certainly to Peter's comments on the mainstream, if that comes back and we see the "wake," or they're firing on all cylinders, we have installed capacity there obviously that we can hit, fill, and deliver those orders relatively quickly.

Okay.

One more comment here. We feel very bullish for longer term because our competition not investing. We believe it will be a great demand for high-end capacity. One of the things on the business pick up again.

The high end, it seems like all the pieces are in place there. You have the memory side, obviously, when Micron and (inaudible) recovery. You've got that. Elpida's coming into the fold, and then the high-end logic, it sounds like between Samsung, Intel, and Global Foundries, a lot of potential growth there.

Just kind of curious more on the near-term basis with the seasonality. Have you seen the seasonal trends through the year change at all? I mean, over the last 10 years, you kind of -- business peaks in the fourth quarter, then obviously falls off in the first quarter because of the shutdowns. But because of the memory exposure, is the peak going more third quarter these days?

I think the last two to three years, the peak has been either Q2 or Q3, with Q4 the last two years certainly down. But you're correct, Tom. If you look back 5, 10 years, go even 3 years ago, our typical seasonality, if you will, can fluctuate because of the opportunities we now have at the leading edge. So, historical patterns, aside from the mainstream holiday season, it is really difficult to determine. It's more market driven.

Yes. Okay. And I guess this last question here. You talked about the R&D going between $4.5 million and $5 million. Does that mean that the kind of the recent run of kind of high levels of R&D for the high-end qualifications? Is that going to drop down again in the first quarter, or do you think it stays at a higher level for a couple of more quarters?

It's difficult to say. It's really the opportunity that we have. We're not necessarily projecting absolute dollars between $4 million and $5 million in R&D. I think we averaged about $4.5 million in the last two quarters, or about $5 million. So, it's all dependent upon the opportunities we see in the marketplace. But it is absolutely dollars well spent for the future of the Company.

Yes, in terms of large new R&D initiatives, we don't see those on the horizon. We'll call R&D sustaining next node technology developments, new qualifications, those sorts of things, and expect it to be relatively steady because the opportunities just are there, and we want to take advantage of them.

Okay, is that actually just material cost then, or is it time on your tools?

It's a combination.

Yes, what generates that R&D cost in that case?

A combination of materials, labor, tool time. So, it's a combination of a number of factors.

Okay. All right. Thank you.

Just, as Deno mentioned, our competition's not investing. That's creating opportunities for us. So, as Sean said, it's money very well spent because as when the business returns, it transitions right into revenue.

Yes. Okay. Thank you.

Christopher Blansett, JPMorgan.

This is [Bill Peterson] calling in for Chris. Thanks for taking the question. If I can just poke at the CapEx plans again. I believe you guys talked about opportunities, and it sounds like what Chris said was that a lot of EC kind of more second-half opportunities. May be housekeeping, but are you talking fiscal second half or calendar second half? It's only a few months off, but just trying to get a feel for linearity relative to your CapEx plans. And also how you view some of those revenue opportunities?

Well, our CapEx plans, Bill, some of the tools have longer lead times than others. So, obviously, as we prepare for 2013 and even to 2014, we have to make some plans for those opportunities. So, we prepare well in advance of what we expect. We need to do so.

And with respect to the second half, whether it's calendar or fiscal, I think Deno mentioned, and I'll turn it back to Deno or Chris or Peter, if they have any further comments. We expect it to pick up, hopefully pick up sooner than later, but that's on installed capacity which we have in place. And we haven't provided guidance necessarily for the second or third quarter, but if it snaps back, if you will, quicker, we certainly can handle those orders.

Yes. The CapEx is related to, we talked a little bit about capacity expansion, but also some capability insertions as well. And as Sean mentioned, those have to be a little bit in advance of when we anticipate a qualification and production ramp. So, they are staged appropriately in that the capability will come in a little sooner than we expect to need it. And any capacity expansion we might need, we would time with an expansion of the manufacturing opportunity.

Okay. That's helpful. I guess also related to qualifications, could you provide some color on whether or not these qualifications are at customers that have their own mask houses, or are they at customers that do not have their own mask houses, thus you're competing with the competition in the merchant space? Trying to get a feel for this item because I think a lot of the captive mask houses, if they're running relatively low utilization, that may lead to less opportunity, at least in the near term for you.

Yes. The answer is it's both, both customers with and customers without their own captives. So, we're working new quals really across a broad base of customers.

I think the other comment you made is correct, and that is, on the -- I mean, the reality of the leading edge today is -- to be successful, one thing you have to do, it's not all you need to do, but you've got to be the trusted partner of some of the industry leaders. And the good news is, is we've been very successful at doing that. That's no small feat. That's not easy to do, but we've done it. When the business turns down because they have their own captives, our business goes down more rapidly. That's the bad news. The good news is when the business snaps back and their captive capacity is exceeded, when the revenues ramp for us, they'll ramp quickly.

That's helpful.

Historically, captives would pull a lot of the work internal, sometimes exclusively. But these process technologies are much more complicated now, and they know they cannot disengage from the outside supplier, even when they have excess capacity. Because they need to continue to work on qualifications, they need to send us business and orders, so we can work on yields and things like that. So, you don't see that complete pull in of work inside a captive that maybe you'd seen many years ago when they had excess capacity. They know they have to stay engaged. So, we'll have a viable supply base.

Okay. That's helpful. Maybe a question about seasonality. It's more near-term focused. I'm wondering, when you look at even the current quarter, do you see some indications that designers or customers are trying to spend money that they have available for the year? Do you see like an uptick, for example, in the very near term followed by maybe people taking off after the holidays? How do you really look at the near-term seasonality effects, and again, you said visibility is low, but that should at least be on the horizon now.

The largest effect, the most general effect we see with Christmas, is it's when customers who have fabs, not all certainly, but if they do shut down for annual maintenance, that's when it is done, over the Christmas holidays. And the designers tend to take more time off. So, that is the overriding largest effect.

We do see a small effect of some customers spending their budgets out for the year. I mean, honestly, those customers tend to be ones that get funding from government agencies that are on a time clock, so to speak, a calendar time clock. But that is a much smaller muted effect relative to the larger holiday effect that the designers aren't working, therefore, they're not taping out. And that it is a non-trivial fraction of our mainstream customers with fabs, close the fabs down for annual maintenance.

Okay. Along those lines, are you seeing more customers shutting down facilities this year compared to last year or prior year when it seemed that maybe it could have been stronger businesses?

No. Actually, it's pretty typical, which gives me some optimism, because if you'd had asked me that question two or three months ago, it appeared like the holiday shutdowns, the mainstream sector were going to be more of them and they were going to last longer. But as the last few months have played out, it's looking in the mainstream much more like a typical year.

Okay. Thanks, guys. That's helpful. That's all for me. Thanks.

(Operator Instructions)

Michael Bertz, Kennedy Capital.

Just wanted to follow-up on one of the earlier questions around, I guess it was more from the standpoint of qualifications. But I want to examine it more from a volume perspective, or the actual business units that you're doing, and think about the mix of the business and how it's changed over the last couple of years. I know you don't have perfect visibility into the end markets where your customers are taking those products that are from your assets and then deploying them, but how that sort of changed over time, particularly as you've invested more heavily in the high-end side of the business?

Do you mean the end users, the transition from PCs to mobile, that sort of thing? Is that what you're -- ?

Yes.

-- what you're getting at?

Yes, exactly.

I think the changes we're seeing are similar to what a lot of suppliers and semiconductor companies in the industry are seeing, which is a kind of move from the desktop into the mobile space. And then much more emphasis on consumer-oriented applications that are high end. Historically, those were not high-end technologies. Today, some of those drive roadmaps more aggressively than any other application, particularly in the low power arena. So, I think you're seeing much broader use of high-end technologies in lower-cost devices.

On the other hand, the number of companies doing high end and the number of tape-outs is not increasing. The number of companies working on high end actually is pretty stable, maybe declining a little bit. So, much more penetration of high-end technologies into more devices, but fewer companies working on it. And much more complicated process technologies.

In terms of our total mix of units and how that blends in, maybe Peter, you might have a comment, or Sean, on that, but is that answering your question to some extent?

Yes. We're getting there, yes.

Okay, and on the memory side, if you're following memory, you know that DRAM PCs are a huge consumer of DRAM chips. That's a flat to declining trend, and nobody believes that's going to change. The mobile DRAM is growing, but it's not replacing the bit count that PCs used to have. So, DRAM is relatively flat. But NAND flash solid-state storage, on the other hand, of course, is exploding year over year for bit growth. But there's a lot of competition in capacity in that space for the end makers. But for a company like Photronics, it's created a whole new high-end segment, which is solid-state or flash-type memory. So, that's been a very positive trend, I think, in the industry in the mobile applications.

Okay, thanks. Sean, any comment, then, on what you think about the total mix of units and how that's been across business, how it's changed?

Generally, Michael, three, four years ago we did not have access to high-end business. We wanted to have high-end business, and we were going through the qualification process. The mix differential, as Chris alluded to, there's less customers, but the ASPs are much higher. So, it's heavily weighted to our growth, and it's more on the high-end leading-edge technology collaboration that we didn't have three or four years ago. So, it's much more a designer working with the -- or fab manager working with our team, as opposed to the mainstream side of the business where it's more of a commoditized buy. That's the biggest change.

Okay. Just one more thing to follow-up on this. So, if you were to characterize how you guys thought your mix of business looked, let's say, two years ago versus the industry, and again, that sort of shift we've seen from computing to mobile, do you think you were more heavily weighted in the industry towards computing, let's say two or three years ago versus now? And do you think that's completely flipped the other way, where you're maybe more heavily weighted towards mobile just as the industry has gone?

No, I don't think we were more heavily weighted to the computing side some number of years ago. The mainstream business is more driven by analog applications, power devices, discretes, very, very broad use of very, very -- fairly low-cost chips. The computing side is microprocessors and very, very dense high-end DRAM. At that time, we did not have that much exposure to those segments. We do now. So, we're enjoying some of that, but also those high-end logic and memory chips are moving into the mobile space. So, our kind of application area has changed from that point of view, I would say. But no, we were not computing heavy, per se, three to five years ago.

Fair enough. I guess I'm approaching computing more from the end-market standpoint, which, of course, would pull a lot of analog and power discrete as well, not just the microprocessors, but I understand your point. So, that makes sense.

Let me ask this other question, then. If you think, then, specifically about the mainstream business, which stepped down significantly in fiscal quarter one this year, and then has been basically stable, again, if thinking around where all those little bits and pieces go, would you have characterized that step down and being more conservative from your customer standpoint as maybe trying to manage the supply chain better without visibility for the year being really, really strong demand? Or is it really that demand itself is really just fallen to a low-level, and then just stayed there?

I think our customers were out in front of demand in the mainstream. They reacted more quickly, as small companies tend to do, and then they stayed the course. Where our larger customers that are really -- have large fabs, have big R&D budgets, they stayed the course through a longer fraction of the calendar year, and then adjusted more rapidly at the end of the year. So, that's how I would answer the question. I think our mainstream customers more or less got in sync with demand at the beginning of the year. And our larger customers made the effort to adjust towards the end of the year, and their adjustment was quicker, therefore, and more dramatic.

Okay, great job. Thanks. And the last question. You guys made the comment about in the high end where you're not seeing competitors making the same kinds of investments necessarily that you guys are. Would that be something you would look at across both merchant and captive competitors, or is it one more than the other?

I think it's the captives do, at least the few larger captives that remain do continue to invest quite heavily to support their primary customers, their internal use. We're really referring more to the merchant-side competitors. And we view captives as to some extent competitors, but more positively as collaborators and partners for the most part.

Okay. Great. Thanks, guys.

Patrick Ho, Stifel Nicholas.

Maybe just a follow-up on some of the high-end IC questions you mentioned. You talked about the 28 nanometer as being the year of qualifications this past year, and you're waiting for, I guess, a turn about the environment to see some of, I guess, some of that turn into revenues. Can you maybe discuss a little bit how much of it is the market environment versus the improvement at yields that the chipmakers themselves are seeing at 28, which could drive, I guess, an acceleration in revenues?

Patrick, I think it's both. When we talk about the industry, we talk about the logic roadmap. The large microprocessor company that everyone thinks about, really drives logic technology, with, of course, TSMC slotting in behind. But the rest of the foundries are more than a full node in arrears, as you know. So, I wouldn't say, although I don't want to speak for our customers, that any foundry right now is happy with -- that any foundry reached plateau yields in this particular business cycle at 28. So, as the next cycle goes forward, we're going to have a much better process platform in the foundry space, much more robust, and we're going to have a market uplift. Both of those factors point very favorably towards an evolving demand profile for us.

Okay. Great. That's helpful. And maybe a specific question for Chris in terms of some of the design activity. Again, 28 nanometer was a lot of the activity last year in terms of designs. What are you seeing on the IC front in terms of 20-nanometer designs, and the activity that's coming to you? And what are some of the, I guess, issues that you're dealing with on that node?

Yes, 20 nanometer is a very interesting node for the foundry. Of course, Intel's in production at 22, moving to 14 shortly. The 20 node for a foundry is a very interesting one because right now I think they're struggling with the strategy on going to the FinFET style transistor, and how quickly that will work. Some of the design community seems to believe the ROI for a 20-nanometer foundry is not completely there because the speed doesn't scale quite as well, and they're not getting the power benefit. So, I think all the foundries, frankly, are struggling a little bit with that node.

With that said, the early adopters, the big fabless companies, will do a planar 20-nanometer devices. We are engaged with foundries now on 20-nanometer development in R&D. But that 20, 14 are going to be two interesting nodes, and that story, I think, is going to unfold over the next year in terms of how the foundries approach it and what process technologies they offer.

Great. And a final question for me, and maybe for Sean specifically in terms of CapEx and the variability between the high end and the low end of your guidance. In the past you've mentioned that you're trying to catch up a little bit on the flat-panel display high-end capacity. Is there any weighting to one of those businesses in that CapEx number? Or is it going to be more dictated by, I guess, whichever IC or flat-panel display sees, I guess, higher activity?

I think, Patrick, generally our CapEx matches the revenue stream. Typically, any given year or given quarter, FPD/IC is 75/25 split. So, we don't give specific guidance for competitive reasons. But to Deno's remarks, and Peter and Chris I think followed up, certainly we're investing at the high end. When we talk about investing at the high end and our competition isn't, that's related primarily to the IC segment.

Great. Thanks a lot, guys.

Thanks, Patrick.

Ladies and gentlemen, there are no further questions at this time. I'd like to turn it back to Deno Macricostas for closing remarks.

Thank you for participating in this morning's call. And I would like to wish you, all of you, a very happy holidays and a prosperous year. Thank you, guys.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your line.