Photronics Inc (PLAB) 2014 Q1 法說會逐字稿

Welcome to the Photronics first quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded on Wednesday, February 19, 2014. I would now like to turn the conference over to Pete Broadbent, Vice President of Investor Relations & Marketing.

Please go ahead, Mr Peter Broadbent.

Thank you. Good morning, everyone. I would like to thank you for joining our first quarter 2014 conference call. Before we begin, I would like to remind all participants about the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Thus, any statement that 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 second quarter 2014 results.

Joining us on the call today are: Constantine Deno Macricostas, Chairman and Chief Executive Officer; Dr Peter Kirlin, President; Sean T Smith, Senior Vice President and Chief Financial Officer; Dr Christopher Progler, Vice President, Chief Technology Officer and Strategic Planning. During our remarks this morning, we will be referring to slides posted on our website under the Investor Relations link. Now, I would like to turn the call over to Deno Macricostas. Deno?

Thank you, Pete. Good morning, everyone.

I would like to begin with a few high level comments on our business outlook and then turn the call over to Peter to discuss our results for the first quarter and the trends we see in the market. Over the past several years, our leadership team has worked hard to position us to take advantage of the opportunities we see and are interested in right now, establish a strategic plan to maximize our growth in both mainstream and high-end, [lower] cost, strengthen our financial base, align our investments strategically and build stronger partnership with our customers.

As a result, we now have the opportunity to capitalize on the strong trends to gain market share, outgrow the industry and build shareholder value. The semiconductor photomask business, our high-end equipment footprint is well-positioned globally to support our customers. We represent the largest install base of our best advanced equipment of all the merchants combined.

As Peter will note, we are strategically located close to our customers. Our customers continue to be aggressive in moving towards advanced knowledge. We expect to be a strong merchant supplier at the high-end for several years.

(inaudible) our team is well established for its leading technology capability. But benefit from strong customer relationships and a transition to new technologies. We expect this industry to continue to innovate and increase the demand for our leading edge photomask.

So as we look forward, I'm very optimistic about our ability to deliver for our customers and our shareholders. Our pending joint venture with DNP in Taiwan is progressing well through the regulatory approval process. This combination of resources and capability will create the largest domestic supplier of leading edge photomask in Taiwan, with a scale to address 28-nanometer and beyond technology. When we close this, we are expected to drive significant high-end [photo logic] business of Photronics.

Our partner Micron continues to successfully integrate it's [sub in a] capacity and offers us an opportunity in high-end memory. Our FPD customers continue to advance new designs that will bring opportunities to accelerate high-end growth. Importantly, we have several banking arrangements and a strong management team.

As a result, I am very excited about the opportunities ahead for the Company. As the marketplace continues to move in our favor, while the best positioned merchant in the industry. We expect this to translate to meaningful growth an profitability for the Company and our shareholders.

Now, I would like to turn the call over to Peter.

Thank you, Deno. Good morning, everyone.

Please turn to slide 3 in our slide presentation. In Q1, we achieved sales of $101.5 million, beating our revised guidance. Sean will provide a detailed breakdown of our financials, but first a few highlights on the quarter and some comments on the trends in our business.

ICs were $76.2 million, down $3.6 million sequentially. This was attributable to a decline in our mainstream sales of $4.6 million. High-end IC sales were up 7% sequentially. FPD sales came in at $25.3 million. Though this is down 3% sequentially, sales were essentially flat with Q1 a year ago and represents solid demand for us in display photomasks.

If you look at the performance in these three segments of our business, FPD was basically stable, high-end IC was up $1 million in the seasonally soft quarter and mainstream IC was down on more than usual seasonal softness. Q1 is typically our weakest quarter due to the holidays. This year, the way the holidays fell in the US and Europe, we expect that we saw a two-week versus one-week shutdown.

In Asia, we expected some pull-in of business, par the lunar new year that did not materialize. From the mainstream market, we experienced pronounced seasonal weakness. Today, the mainstream business has returned to pre-holiday levels.

Finally, we had hoped to see the beginning of a ramp of the next technology node by a large memory customer that would have generated uplift in our revenues. They have delayed the ramp. We are confident this new transition will occur this year. When it does, it will have a significant impact on our top line.

Looking forward, we're hearing from our customers that they expect 2014 to be strong. Generally speaking, when our customers' business is strong, our business grows. As we've stated before, we expect 2014 to be a growth year.

We had several drivers that will enable us to outgrow the photomask industry as a whole. In memory, with Micron's acquisition of Elpida, we have recently completed the qualification of the Boise campus, still yet another memory customer's foot in this technology. So we are sitting in a very good position with memory. When the next memory node ramps, we expect to do well.

As far as logic is concerned, we are installing a strong high-end through-print globally, which will drive our 28-nanometer revenues as our foundry customers begin to ramp strongly at 28. Regarding high-end logic qualifications, just like memory, we are clearly seeing that the process technology that is used behind leading edge e-beam equipment, is becoming more important because it creates its own unique signature on the reticle. In order to make these very difficult qualifications seamless, you really need to work with a customer as a partner and that means being local.

As our competitors have become more conservative in the face of this challenge, we have become more aggressive in supporting our leading edge customers. Superior customer service, which is the culture upon which our Company is built, plays right into this new reality. So on one hand, we are relying on what is old which is Photronics focus on service. We are also relying on what is new, which is our leading edge technology, to bring the solution, not just to high-end in memory in the US, but the high-end customers everywhere.

Throughout the world, we are installing the local capability and then partnering with our customers to give them the mass solution that works. As far as the FPD business goes, overall, the market has a very positive tone right now. Our largest customers are in Korea. We have a strong footprint there.

As you have seen, we have done well in the analog space and that is a clear growth driver for us. Another positive trend we are seeing is that standard display technology is moving from amorphous to low temperature polycrystalline silicon due to higher electron mobility. This provides superior brightness.

We saw an uptick in that work during the past quarter. To the extent this new material gains traction in the current next year, this will create additional demand in the flat panel photomask market. When we look at the landscape, not only do we see an upward trend in the IT market, we see the same thing in the FPD space. So we are quite optimistic for our prospects. We will benefit from both IT's customer's ramp in technology nodes and FPD customer's ramp in new materials.

But as the analytic polycrystalline silicon, we will benefit from both. On the bottom line, we continue to be tenacious and control our costs.

In Q1, we achieved gross margin of 22.5% and non-GAAP operating margin of 6%. Non-GAAP diluted EPS of $0.04 per share met our revised guidance range of $0.03 to $0.04. Non-GAAP EBITDA was $25.7 million for the quarter.

Now for a more detailed breakdown on the financials, I will turn the call over to Sean.

Thanks, Peter. Good morning, everyone.

I will provide a brief analysis of our financial results for the first quarter of FY14, review our balance sheet and cash flows, our forecast going forward and also provide a brief update on the Taiwan JV. Please refer to slide 4 for our GAAP to non-GAAP net income and EPS reconciliation as we review the first quarter. For purposes of our discussions, I will be comparing our non-GAAP operating results to the revised first quarter guidance we published in our February 10, 2014 press release.

Slides, 5, 6, and 7 show our sequential quarterly and year-over-year IC and FPD revenue performance. First quarter revenue decreased by 4.2% sequentially to $101.5 million, for the reasons Peter discussed. Revenues for IT photomask were $76.2 million, down $3.6 million sequentially, while FPD photomask revenues decreased $900,000 to $25.3 million.

Breaking out sales geographically, 65% of total sales were from Asia, 25% from North America and 10% from Europe. High-end global IC sales were $16.6 million, or 22% of total IT sales for the quarter. This represents a sequential increase of $1 million.

Advanced FPD sales were $15.6 million, or 62% of total FPD sales. As a reminder, high-end IT revenue consists of revenue derived from semi designed at and below 45-nanometers and high-end FPD revenues consists of revenue at and above G8 as well as analytic-based products.

Now, let's continue through the income statement. Gross margin for the first quarter was 22.5%, down 270 basis points sequentially, as a result of the decreased sales volume. Selling, general and administrative expenses for the fourth quarter were $12.3 million, and includes $400,000 of expenses related to the pending JV. Sequentially, SG&A was down $100,000, when excluding the transaction costs for the pending JV for both quarters.

R&D expenses, which consists principally of continued development for our global advanced process technology and qualifications at advanced nodes, were $5 million, down $1.4 million sequentially, primarily as a result of the progress made on an Asian foundry qualification. During the quarter, we generated operating income of $5.6 million, or 5.5% of sales. Excluding the costs related to the pending JV, operating income was $6.1 million, or 6% of sales. Sequentially, operating margin was down 47% of the lower sales, which is exclusive of JV costs.

EBITDA as defined in our credit agreement for the quarter was $25.7 million and for the trailing 12 months was $109 million. Other income and expense for the first quarter was expense of $900,000, down $500,000 sequentially, due primarily to favorable FX. During the first quarter, we recorded a tax provision of $2.7 million, which was higher than our guided range of $1 million to $2.5 million, as income from taxable jurisdictions was higher than it forecasted.

GAAP net income was $2 million, or $0.03 per diluted share. Non-GAAP net income, excluding the pending JV transaction expenses, was $2.4 million, or $0.04 per diluted share. At the end of the first quarter, we had 1,310 full-time employees. This equates to revenue per employee of $310,000 on an annualized basis. Non-cash stock comp expense was $1.1 million for the quarter.

Now, turning to the balance sheet. Although we reported lower sequential operating results, our balance sheet was stable. Cash and cash equivalents at the end of the quarter amounted to $189 million. Our net cash which is cash less debt was $19 million, down $3 million sequentially. Our working capital at the end of the quarter, was $177 million, down $37 million sequentially compared to Q4.

This was due principally to a $19 million payment of a term loan in the quarter which was classified as long-term, as well as a $20 million increase in our accrued CapEx. Accounts payable and accrued current liabilities at the end of the quarter, amounted to $106 million. At the end of the quarter, we had $39 million of CapEx accrued for, as I mentioned, which was up $20 million, from the fourth quarter.

Please turn to slide 9 as we review our capitalization. During the quarter, we announced we entered into a five-year $50 million revolving credit facility and the repayment of a total of $21 million term loan previously due in 2017. The new credit facility provides for increased financial flexibility, reduced interest rates and relaxed financial covenants.

Total debt at quarter end was $170 million. The principal components of outstanding debt include $22 million of a 5.5% senior unsecured convertible note due in October, $115 million 3.25% senior unsecured note due April, 2016 and approximately $9 million for a capital lease obligation and $24 million related to a capital lease for an e-beam tool. As of today and throughout the quarter, we did not have any borrowings outstanding in our new five-year, $50 million credit agreement.

Taking a look at our cash flows, cash provided by operations for the first quarter was approximately $14 million. D&A was $17.9 million for the quarter. Cash flow used in investing activities for CapEx during Q1 amounted to approximately $12 million. Net cash used by financing activities during the quarter amounted to $23 million of which all was primarily related to repayments of debt.

Now, if you please refer to slide 10, a quick update on our planned JV in Taiwan. As we've stated before, in November, we announced the formation of a non-cash JV, with DNP in Taiwan. In essence, PSMC our wholly owned subsidiary will be merged with DNPs Taiwan subsidiary, EPTT. The joint venture is subject to regulatory approvals and closing conditions and is projected to be finalized in the next few months.

Let me briefly highlight some of the key provisions of the JV. Photronics will own 50.01% and consolidate the JV in our financial statements. Photronics will manage and control the JV, this is absolutely critical to our ability to be successful with our high-end strategy.

We estimate that our top line will grow by at least $80 million annually, with the vast majority of the revenue being comprised of high-end IC products. The JV will be well capitalized and should be self-sufficient.

We expect to incur in the range of $1.5 million to $2.5 million in additional expenses related to the JV prior to closure. We also expect to extract annual tax synergies of at least $5 million to $7 million, beginning with two quarters of the formation of the JV. We do expect the JV to have an accretive impact to the bottom line in EBITDA in FY15.

Please turn to Slide 11, as we take a look ahead. We expect our cash CapEx needs for 2014 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 expect to continue to generate free cash flow once again in 2014. Our 2014 investments are principally geared towards high-end leading edge products for IT and FPD applications.

During Q2, we do expect depreciation and amortization to increase $1 million to $2 million sequentially as certain tools will be placed into production. Our visibility, as always, continues to be limited as our backlog is typically one to two weeks. As we are in the third week of Q2, we can report our mainstream IT business in the US and Europe, as we turn to a more normalized run rate.

We also expect a delay in the memory ramp to Q3 for a key customer. While we are very optimistic, we will complete the 28-nanometer claw, for a key logic foundry customer, we're not banking on a substantial uplift for Q2. So taking this all into consideration, we are projecting revenue for the second quarter of 2014 to be in the range of $100 million to $105 million. That said, should the high-end IC memory and/or logic ramp accelerate during the latter part of the quarter, we do have some upside as we have the installed equipment in the business.

During 2014, our tax rate will be affected by the flow of income from jurisdictions for which we may have tax credits and upon our limited ability to recognize tax benefits in the areas for which we are taxable. For the second quarter of 2014, this will equate to a range of $2 million to $3 million. For FY14, we estimate total taxes will range from $11 million to $13 million. As a result, based upon our current operating model, we estimate EPS, exclusive of any JV transaction costs, in the second quarter of 2014, to be in the range of $0.01 to $0.05 per diluted share.

In summary, I will leave you with a few key thoughts. First, we expect top and bottom line improvement in 2014 and continue to expect to generate free cash flow. Second, we are confident about our business model and our ability to grow market share at the high-end. We see continued opportunities in our customer's businesses, and known migration plans. We have a strong financial position and excellent technology to capitalize on those plans.

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. Now, I would like to turn the call over to the operator for Q&A.

(Operator Instructions)

Edwin Mok, Needham.

So the first question I guess is about the expense and margins. Directionally speaking, where do you see the OpEx and gross margin go in the next quarter?

To the extent we have additional incremental revenue, we would expect a 50% drop-through on the growth in operating margin.

50%. Okay. Then how about the OpEx?

We do not anticipate any substantial changes in our OpEx going forward.

Okay. I see. That's great. Then I guess the second question I have is with regards to the Ultra HD TV, do you guys see the 4K UHD TV to be a driver for your flat panel display business this year?

This is Chris. I think from the development side, we are seeing activity on 4K, mostly shrinking the pixel size and resolution on the mask. In terms of volume adoption, that technology going into mass production, it is too soon for us to see that. The price point is still high, et cetera.

But in terms of R&D masks and design activity, we are seeing work connected with 4K. But I don't think that is a driver, at least in my view, of the flat panel business. I think there are other things such as new materials that will be stronger drivers in the industry this year.

I see. So perhaps later next year then? Okay. That's all I have. Thank you very much.

Thank you.

Patrick Ho, Stifel Nicolaus.

Maybe as a follow-up to the gross margin question, going forward, not only in this quarter but over the next few quarters, what are going to be the key variables that will, I guess, drive gross margins, whether up or down?

Patrick, the key variable is the volume that's going to come through and our ability to maintain a cost structure and reduce some costs. That's why we still project to have a 60% drop-through on incremental revenue. The model is still intact.

As you noticed in this past quarter, we had a 47% reduction in operating income on the decreased sales volume. So it does tie closely together. I did mention that our DE&A would go up $1 million to $2 million during the quarter. So we have to do some more work on our operating costs to minimize that impact.

Great. That's helpful. A bigger picture question, in terms of qualifications, now that you're kind of in the process or done on the 28-nanometer side, how does it look going forward in terms of qualifications for next generation nodes? Whether it is 20-nanometers or the next generation after that, the thin set, 14-nanometers, how are those qualifications going? Because I just want to get a bigger picture outlook in terms of the road map.

The calls generally are proceeding well globally, whether they be 1X memory or 14-nanometer logic. If you look at the business, generally, the way our customers are headed, on the logic nodes anyways, it looks like, as everyone knows, the 2X, the 22 or the 20-nanometer mode, with the exception of [AOWARD] West Coast's semiconductor manufacturer. It's going to be a non node.

So we are doing well sub-20 on the quals. But I also would point out that on the 28-nanometer node, with the exception of TSMC, the rest of the foundry space is still -- it's really early in the game. So we expect to see as the year evolves. The other foundry suppliers leaving TSMC as they really gain traction, we expect to see significant revenue on this year of 28.

Great. Thank you.

(Operator Instructions)

Tom Diffely, DA Davidson.

Sean, first a question on the guidance, $100 million to $105 million. It seems like if your mainstream business is returning to normal levels, that should be enough in and of itself to get you above $105 million. Are you actually expecting a decrease on the high-end side due to the memory ramp delay?

Not necessarily. We just wanted to make sure that we were prudent in our guidance. Just on another topic, although we're not providing specific guidance typically over the last couple of years, Q2 in FPD is down a little bit.

So based on the visibility we have today, and the impact of some of the high-end memory ramps, if it comes in, like I said, we have the opportunity to do better than that. But that's our best estimate of where we stand today.

Okay. When you look at the potential memory ramp, is that more of a NAND or DRAM driven event?

Tom, it is really both. So we expect to see both NAND and DRAM more or less ramp simultaneously. So as Sean said in his prepared remarks, -- I also said in mine, we are expecting now to see that in the third quarter. It would be great if it pulled in a little bit sooner. But that is the best information we have now.

Okay. Did you say during your prepared remarks that you were fully qualified in all of the consortium of partner, all of the pieces of your big customer, in the memory side?

Yes. What I said was, we worked really hard with the new addition to the family, to be qualified on their memory technology, which is unique and distinct. Yes. The Boise campus is all set and ready to go. So we're hopeful that, that node will ramp sooner rather than later. But also as Sean said is, we have seen this push out now on us a quarter or two. We are going to wait until it materializes before we guide on it, rather than the other way around.

Okay. That makes sense. Then on the high-end logic side, does it matter to you whether or not you have big product lines going through your customer? If it is a number of smaller products? If there is a transition, does that matter to you? Or is it just as long as that fab is fully utilized, you benefit?

Tom, this is Chris. Could you just clarify the question? Do you mean design starts versus volume usage of a fab on a single part? The difference between those two?

Yes. If you're just looking at some of your high-end customers and them doing the large run for one of their customers, if that transitions and you have a huge run of a single product versus several runs of smaller products in a fab, does it matter to you from a profitability point of view what scenario you're in?

I think it is healthy to have a combination of both. If there are a lot of kind of short runners in many designs, the mask unit numbers go up. So that is certainly beneficial.

But often times those can be smaller field masks at a little bit lower ASP, even within a given node. The high runners tend to be the largest most complex masks oftentimes. So ASP's tend to be a little higher. The best scenario is both, a base of high runners at a given node and then a healthy design mix as well, is really the best option for us.

Okay. Then Chris, I know in the last couple years, the flat panel business is driven a lot by the new designs, especially the AMOLED. We are starting to hear from the other equipment vendors though that capacity buys are coming back. They expect some nice capacity over the next year. Do you see that as a good driver as well?

For sure, we see on the LCD side, particularly kind of a resurgence, a little bit, in design activity, trying to push that platform a little faster. New materials coming in as well. Finer pixels and things like that. So it seems to me, AMOLED is looking strong. But also we have seen some R&D resulting in new products on the standard LCD side that should drive demand also.

Okay. Then finally, Sean, when you look at the joint venture, you talked about it being accretive in FY15. Is it too early to figure out what the impact on FY14 is going to be from a dollars and cents point of view?

It's a good point, Tom. It is too early to tell because we're not sure when it is going to close. When we announced the JV in November, we said it should be accretive in 2015 if not sooner. I believe at that point in time, we had earmarked at the end of January.

But it takes a little while with the regulatory processes. We're dealing with three different -- the US, Japan, and Taiwan. So if it happens during this quarter, before we end this quarter, we will certainly do everything we can to get those synergies in place to make it as accretive as soon as possible.

Okay. Thank you.

Ladies and gentlemen, there are no further questions at this time. I would like to turn the conference back over to our host.

Thank you for participating in this morning's call. I would like to thank all of the Photronics employees for their dedication and hard work. Thank you, guys. Have a good day.

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