Photronics Inc (PLAB) 2014 Q4 法說會逐字稿

Welcome to the Photronics fourth quarter earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded, Tuesday, December 9, 2014. I would now like to turn the conference over to Pete Broadbent, Vice President Investor Relations and Marketing. Please go ahead, Mr Broadbent.

Thank you. Good morning, everyone. I'd like to thank you for joining our fourth quarter 2014 conference call. Before we begin, I would like to remind all participants about the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995, 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 first-quarter 2015 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. Before we begin, I'd like to point to two upcoming calendar items. Photronics' Management will be presenting at both the Needham Growth Conference in New York City on January 13 and the Stifel Technology, Internet & Media Conference in San Francisco in early February. Now, I'd like to turn the call over to Deno Macricostas. Deno?

Thank you, Pete. Good morning, everyone. Please turn to slide 3 in our presentation. I would like to begin by speaking about our market position and the progress we have made this year. We successfully completed a joint venture in Taiwan. The JV has made us stronger, [in Asia] -- in a strategic Asian market for our customers, restructured our loan agreement, continued to pay down debt, strengthening our financial position. Importantly for future growth, we've deployed additional capability, both in IC and FPD, to serve our high-end customers globally. The result is that we're now the leading IC photomask merchant in the world. Most importantly, we have taken these steps to leverage our position during the next technology cycle of the leading edge.

As the industry now focuses on the sharp 20-nanometer products, Photronics is out in front of our competition. We believe we have more capability and capacity for 14-nanometer logic and 16-nanometer memory that I know for our competitors combined. This is first time we have held such a technological lead in our 45-year history. By all accounts, considering the size and scale of the sub 20-nanometer business, it's a great time to be in this position.

We have achieved this success, in large part, because of our experienced and proven leadership team's intensive focus on serving our customers in a culture of driving force of operation. But also, we have been successfully executing on the long-range plan that was drafted a number of years ago to focus on leading edge technology. In spite a short journey in this business, over number of years we have invested capital to become a technology leader initiating important strategic partnerships. Now, all of these efforts are coming together for what we need in the marketplace.

We are confident that this strategy and our execution is the best way to grow the Company to maximize shareholder value. 2014 was an important year for Photronics. [It was key] that we put in place the pieces to drive our future success. As we proceed through 2015 and the next technology generation, we expect to capitalize on this position. I'm very excited for our employees, our customers and our shareholders about the opportunities I have for the Company. Now, I would like to turn the call over to Peter.

Thank you, Deno. Good morning, everyone. Please turn to slide 4 in our slide presentation. In a moment, Sean will provide a detailed breakdown of our financials. But first, a few highlights and a few comment on [diligence] in our business. In Q4, we achieved sales of $124.3 million, short of our guidance of $125 million to $130 million. Offsetting some nice gains in our mainstream business was a reduction in 28-nanometer demand in a key founded customer. This particular founded customers spent our Q4, burning silicon to successfully verify their first wave of 28-nanometer designs. Although it impacted our quarter.

This represents a positive step-forward for both of us, now a link for the potential for increased 28-nanometer photomask demand in the coming quarters. Also in the quarter, we had expected a lift from the initial node migration by one of our memory customers, which didn't materialize. In this case, having shipped just one leading-edge mask set, we have met our revenue expectations for the quarter.

Turning to the positives. Continued strength across our broad customer base helped us to achieve mainstream revenues of $65.9 million, up 3% sequentially. FPD revenues were also up 3% sequentially at $24.9 million. In order to remain operational, integration objectives at PDMC were completed in Q4. Year-over-year high-end revenues were up $24 million at $104 million. Looking forward, we have successfully qualified at both the 1x logic and memory nodes. We believe that we had experienced no loss of market share as we work closely with our customers as they attempt to ramp these advanced nodes to commercial viable yield.

In Q4, we were profitable in generating cash. We delivered gross and operating margins of 21.4% and 7.5% respectively. We generated non-GAAP earnings of $0.07 a share. Non-GAAP EBITDA was $33 million. We improved our net cash position by $22 million sequentially. Overall, the trends in the semiconductor and flat panel display photomask markets are quite positive for Photronics. We're well-positioned to mainstream IC market with the right capacity for our customers, a high degree of operational efficiency and a conservative focus to improve our competitive position.

At the high-end, we are well-positioned to capture a significant share of the 28-nanometer business as it continues to scale in the merchant market. [In addition], we are poised significantly ahead of our competition with [rice cooling] of high-end IC and FPD equipment, capturing meaningful share to next technology nodes. A few short years ago, we were a strong mainstream photomask Company. Today, we believe we are the photomask technology leader with more installed leading-edge capacity than the rest of the merchant market combined.

Looking forward, we expect 2015 to be strong. 28-nanometer foundry logic is currently building for the next generation memory in FPD arriving mid year, followed by 1x logic late in the second half. As Deno mentioned, we've achieved key milestones in our strategic plan. Our customers are making progress in node transitions. We are focused on delivering growth and value for our shareholders. Now, I'll turn the call over to Sean.

Thanks, Peter. Good morning, everyone. I'll provide a brief analysis of our financial results for the fourth quarter of 2014, review our operating results, balance sheet, cash flows and forecast. Please turn to slide 6, 7 and 8, which shows our sequential, quarterly and year-over-year IC and FPD revenue performance. Fourth-quarter revenue was approximately $124.3 million, down $600,000 sequentially due to the reasons Peter mentioned. Revenues for IC photomask were $99.4 million, down $1.2 million sequentially. Revenues for high-end IC photomask which are 45-nanometers and below were $33.5 million or 34% of total IC sales. Sequentially, high-end IC revenue decreased $3.1 million.

The decrease was primarily related to reduced high-end tape-outs in Taiwan and to a lesser extent the US. The decrease was partially offset by increased sequential IC mainstream revenue of $1.9 million. For 2014, high-end IC revenue increased 30% to $104 million, while mainstream sales increased $8 million to $249 million. As a reminder, our mainstream business is a significant cash generator for us. Revenues for FPD photomask were $24.9 million, up $600,000 sequentially. High-end FPD revenue for the quarter at $15.2 million was essentially flat on a sequential basis. Breaking out to force sales geographically, 71% of total sales were from Asia 22% from North America and 7% from Europe.

Now, let's continue through the income statement. Gross margin for the fourth quarter was 21.4%, down 150 basis points sequentially. The decrease was related to increased manufacturing costs, principally equipment, the bulk of which is not expected to be recurring. Selling, general and administrative expenses for the fourth quarter were $11.5 million. SG&A decreased approximately $800,000 sequentially as a result of cost savings and cost avoidance programs. R&D expenses, which consists principally of continued development for our global advanced process technology and qualifications at advanced nodes, were $5.8 million, up $600,000 sequentially.

During the quarter, we generated operating income of $9.3 million or 7.5%. EBITDA, as defined in our credit agreement for the fourth quarter, was $33 million, down $1 million sequentially. This represents $117 million for the year. Also, our free cash flow for the year was $25 million. Other expense net for the fourth quarter was down $600,000 sequentially, principally driven by foreign exchange -- favorable foreign exchange.

During the fourth quarter, we reported a tax provision of approximately $2 million. Minority interest expense was $2.4 million and principally consists of DNP share of PDMC's profits for the fourth quarter. Minority interest expense decreased $700,000 during the quarter. GAAP and non-GAAP net income was $4.3 million or $0.07 per share. At the end of the fourth quarter, we had 1,500 full-time employees, which equates to annualized revenue per employee of $331,000.

Now, turning to the balance sheet. For FY14, we have strengthened our consolidated balance sheet including our net cash position from $22 million at the beginning of 2014 to $51 million at year-end. Cash and cash equivalents at the end of the quarter amounted to $193 million. As I mentioned, our net cash which is cash less debt was $51 million at the end of the quarter, up $22 million sequentially, principally as a result of our previous outstanding 5.5%, $22 million convertible notes converted into equity in October. Our working capital at the end of the corner was $197 million as compared to $205 million at the end of Q3.

Accounts Receivable at the end of the quarter decreased $8.4 million sequentially to $94.5 million principally or no, as a result of improved collections. AP and accrued current liabilities at quarter end, amounted $129 million, down $10 million sequentially primarily as a result of reduced accrued CapEx. At the end of the quarter, $31 million of CapEx was accrued for, down $5 million from the third quarter.

Please turn to slide 10 as we review our capitalization. Total debt at the end of the year was $142 million. The principal components of outstanding debt include a $115 million 3.25 senior unsecured note due April 2016 and approximately $27 million in capital lease obligations. Our leverage ratio improved 1.76 times at the end of 2013 to 1.21 times at the end of FY14. During the quarter and through today, we have not borrowed on our five-year $50 million credit agreement.

Taking a look at our cash flows. Cash provided by operations for the fourth quarter of 2014 is approximately $35 million. D&A was approximately $21.7 million. In cash provided by operations for FY14 was $96 million with DNA amounting to $80 million. Cash flow using investing activities, amounted to approximately $33 million in the fourth quarter, which is primarily all CapEx. As previously stated, 2014 cash CapEx amounted to $91 million. Net cash used by financing activities during Q4 2014 amounted to $2 million. For the year was $30 million, both primarily for repayment of debt.

Please turn to slide 11, as we take a look ahead. Taking a look at CapEx. We expect our 2015 cash CapEx needs to be in the range of $100 million to $110 million. We do, however, have the flexibility to accelerate or decelerate our spend depending upon market conditions. We expect to generate -- continue to generate free cash flow in 2015. Our 2015 investments will be principally geared towards high-end leading-edge products for IC and FPD applications.

Our visibility as always continues to be limited as our backlog is typically only one to two weeks. For Q1 2015, we do expect to experience some reduced orders related to typical year-end holiday seasonality. That said, we are projecting revenue for the first quarter 2015 to been a range of $120 million to $126 million. During 2015, our tax rate will be affected by the flow of income from jurisdictions for much we may have credit and upon our limited ability to recommend tax benefits the near as which we are taxable.

For the first quarter of 2015, this will equate to a range of $2 million to $2.5 million in whole dollar terms. For FY15, we estimate total taxes will range from $11 million to $13 million. We will continue to be impacted by the minority interest expense related to PDMC. For the first quarter of 2015 we're estimating minority interest expense to be in the range of approximately $2.5 million to $3.5 million. As a result, based upon our current operating model, we estimate EPS for the first quarter of 2015 to be in the range of $0.02 to $0.07 per diluted share.

In summary, I will leave you with a few key thoughts. First, we expect top and bottom line improvement in 2015. Second, we expect our EBITDA to continue to grow in 2015. Third, we're confident about our business model and our ability to grow market share at the leading-edge. We see continued opportunities in our customers businesses and node 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 & Company.

First question is just maybe a high level. Now that you have completed a joint venture -- the Taiwan joint venture, for the last two quarters already, how do you think business is trending there? You now have been running it for a little bit. It's the business running at $20 million for the quarter run rate? Have you thought about when you bought the business or when you did the joint venture? Any color you could provide? How much of that business comes from mainstream versus high-end?

Edwin, I will make some comments about the general [tonnage] business. Then I will turn it over to Sean. The market in Taiwan is more or less what we expected it to be. When we did the deal, we did it primarily to accelerate our move in Taiwan into the high-end of the business. If you recall, we had the choice of either investing there ourselves, building a facility and equipping it or doing the JV. The JV was a quick way to the end state we desired in Taiwan and indeed, that's where we are. In my remarks, you heard me say that the 28-nanometer business in particular during the quarter wasn't as high as we had expected it would be.

On the other hand -- so the reason for that is the 28-nanometer take-outs we had the prior quarter were being run through silicon -- final silicon qualification during this quarter. The results of that were largely positive. The business this quarter in Taiwan looks strong. We've already seen more 28-nanometer take-outs quarter-to-date in Taiwan than we did all of last quarter. I think in general, Taiwan, for the IC industry particularly the foundry businesses, where we see the growth. We have the capacity and capability there to exploit it. So more or less, it is and it has been and we expect it will be what it was when we originally did the deal. So Sean do want to add any comments.

Just as a reminder, Edwin, we did say to your point that the JV would have incremental revenue of at least $20 million with approximately 75% of that being high-end. If you step back from the beginning of the JV year-to-date and I would say definitely, we've hit those targets. One other comment though from a synergy standpoint, we are also still on target with our plan. That said, as you can see, minority interest expense is down for the quarter which is primarily a result of the decreased top line that Peter just alluded to in his remarks.

Okay, great. Thanks for giving for the color about the 28-nanometer delays in revenue as well. So, if we can get some color about the memory. It sounds like there's no transition or the customer didn't happen as slowly as you thought. Do you think that is something that will come back in the January quarter? Or is it more like an [our call] that you're out before we start to see those.

As far as the memory transition is concerned, it feels to us as you heard in my remarks that we really see strength in that as we move into the middle of our year which is two months accelerated relative to the calendar year. So it slowed down but it certainly not going away. So feels like mid year for us. Mid-fiscal year. Did you have any color?

Okay. Great, thanks for the color. One last question, China, if I look at the model and your guide for revenue comps [vanished] but the midpoint of EPS is guiding down sequentially can you walk me through the math there?

Midpoint of this guidance is down. We expect some increased costs coming into the quarter. But if we hit the high-end, we'll be at about $0.07, if not beat that. So that is our target to get to the high-end of the range.

So the increased cost is in the OpEx side because of year-end? Or any compression on margin side?

No. We'll have some additional tools coming online to capture some high-end business. But it's not going to be a significant cost increase. We'll manage it.

Okay, great. That is all I have. Thank you.

Harlan Sur, JPMorgan.

Given the advanced known migrations ahead of you both logic and memory, given your pipeline, what is the likelihood that advanced IC photomask represents 50% or more of your total IC revs either in FY15 or exiting FY15?

That's a great question. In a scenario when -- we are exiting the end of the fiscal year, in the scenario where the 28-nanometer foundry logic market is very healthy and the non-TSMC base in Taiwan in both 1x logic and high-end memory are in commercial volumes we could easily see a doubling of our high-end IC revenues. As shocking as it might sound that does not require a lot of orders in the quarter. Maybe it requires it more incrementally 28-nanometer orders but less than 10 high-end memory logic orders a quarter with a solid 28-nanometer business gets us to that point. These are big-ticket tape-outs.

To Peter's point, Harlan, as well, if we go back to Q3 in which we did we break out quarter at the high-end, 36% of our revs related to high-end business and since that time, we've continued to install and bring online additional high-end capacity so the numbers Peter's talking about would be achievable. I would also say if you -- just going back to my prepared remarks, all the qualification work that we need to do to realize or monetize our investment has already been done. Historically, technology new transitions has been primarily driven by [lithography]. When you get down to where we're presently operating, there's a lot of, whether it be 3D memory or whether it be [thinset]. There's a lot of materials challenges that our customers are struggling to solve that is sort of delaying the car from pulling out of the garage. But the lithography aspects are largely enhanced.

Great. Thank you for that great color. Then on the FY15 CapEx outlook, if you can just help us understand what percentage of the CapEx is targeted for IC versus FPD? What kind of revenue per quarter does this CapEx size the Company for?

Harlan, in our Q3 conference call, we did indicate that we're pulling in an FPD tool that will be delivered during this fiscal year and installed. Typically, we operate about 75% to 25% split. I think this year maybe a little bit -- it could be 50/40 depending upon the cash expenditures but certainly the entire CapEx is related is related to primarily to all high-end applications in the US, Taiwan and in Korea. To Peter's point, we expect to monetize those as soon as possible and hit some of the revenue numbers that Peter was talking about where the percentage of high-end business that you referred to earlier.

Great. Then just my last question, last call, I think you talked about being qualified at 14-nanometers for one of your Asian customers? When do production tape-outs start to hit your photomask pipeline?

We expect to see that business materialize in the middle of our fiscal year. It's not just in Asia, it's also now in the United States where we're qualified.

Great. Congratulations on that. Thank you.

Thanks, Harlan.

(Operator Instructions)

Patrick Ho, Stifel Nicolaus.

Accounting for the seasonality that you typically experience in the January quarter, would if be fair given some of your comments about the push-outs the leading-edge IC mask -- would it be fair to characterize that could be potentially up quarter-over-quarter while you see your mainstream business go down with normal seasonality?

Yes. That is a fair comment, Patrick. Basically, what we expect in the current quarter is an uplift in the 28-nanometer foundry logic. Balancing the classic, seasonal slowdown in mainstream. If memory were -- 14-nanometer were really participating in the quarter, we would expect to see upside, but that's not baked into our guidance right now.

Great, that is helpful. Just when you answered the question a second ago regarding 14-nanometers logic, I think we can all attest that there's a lot of yield challenges going on with that transition that the industry is seeing. I guess giving guidance or a specific commentary, what gives you confidence that you can do those tape-outs, say, mid year your fiscal year for 14-nanometers and you won't potentially see push-out, given that the customers may be struggling themselves to get their yields up and start their own volume productions.

That's a great question, Patrick. It really a (inaudible). It looks more like a Rubik's Cube does than the old-fashioned checkers it used to be. But there's at least one customer that we all know of that seems to have this technology in hand. So I think we can bank on them.

Great. A final question, maybe for Sean. In terms of some of the FX impact that we're seeing particularly in the past quarter or so. With the yen weakening and the dollar strengthening, have you seen any competitive dynamics changes particularly for the mainstream business given those performing currency impacts?

The mainstream business continues to be competitive, but we haven't really seen the c-change there. I did mention that the FX hasn't had a significant impact on that. I did see -- or we did see, as I mentioned in my prepared remarks, an increase in the mainstream business of about $8 million quarter-over-quarter -- year-over-year which is primarily related to increase market share. We also do benefits on the FX side because we do buy some of our tools and other equipment in yen. So we do see some reduced costs going forward.

Great. Thank you very much.

Thanks Patrick.

(Operator Instructions)

Tom Diffely, DA Davidson.

Maybe just tail-in on the last question about the mainstream. What is your big picture view of mainstream on the out-year basis? Maybe both on a terms of units as well as the competitive environment.

Tom, the mainstream is in a slow decline. But it's kind of unusual in the sense that its a very mature business that's, what I would call quarter micron engraver on eight inches, really pretty stable. Whether it be analog or power semiconductors that are made on those nodes, they're is no economic benefit to shrink further. Where the mainstream business does drop away is at the 90-, 65- and to a lesser degree 130-nanometer nodes. So that's where we see the slow erosion of the mainstream.

If you look at our industrial footprint -- or manufacturing footprint in the US or Europe, we're very well positioned with the right tools sets to continue to service the part of the market that is largely stable and where the rest of the mainstream market is dropping away is largely the foundry space. There's enough overall pan there that we see ourselves positioned so we can continue to either stay stable or in fact even incrementally grow market share.

I think, Peter, too, we said on the prior call, just to double up on that. We certainly have benefited on the foundry side of getting some excess tools put in our facility. We're servicing those customers as we go forward.

Another way of saying what Sean just said is, we have 45 years of being a service leader and the industry's low cost producer. All the work we do every quarter to preserve the integrity of our business model despite the fact that we're adding high-end capacity that we're waiting to monetize. All of that is what continues to make us highly competitive in the mainstream market.

Okay. At some point, over the next few years would you expect to see more of an Internet of things type push where you get lot higher volumes of these lower cost chips? Most people aren't seeing an impact today, but I'm wondering longer term if you think that might be impactful for your mainstream business?

No. Without a doubt. A few weeks ago, we had the senior leadership team globally together. That was a major discussion point for us and how it [macs] into our mainstream business. The industrial footprint that we continue to tune, as Sean pointed out with the right, incremental capacity bonds. Of course, the other node, that if you could just find a way to wrestle -- move it away from TSMC, that it's going to be usually benefit for leader nodes things -- at least as far as our [elushit] team's view is concerned. I wish we could get someone the phone, but I -- unfortunately, speaking for all of them is the 28-nanometer node.

Okay, thanks. Then Sean, when you look at the current tool set, how do you view incremental gross margin on additional revenue at this point?

I think we still target, Tom, the 50% drop-through on the incremental margin. Now, our margins are fine this quarter. It wasn't related to the operational issues, but rather we saw an increase in equipment related costs, maintenance type costs, principally in Asia. The bulk of which won't be recurring. So going forward, we expect to achieve our 50 -- our target is still 50% drop-through. We do expect -- we got it up on the high-end to $126 million, but that profile will still hold true to form. It will drop down to the operating margin line as well.

I would also like to add just one other point relating to our operating expenses, Peter talks about cost controls and cost containment programs. If you look year-over-year at our OpEx, it's essentially flat at $59 million, SG&A and R&D together. That's in a period of increasing costs, so there's quite a bit of cost avoidance and cost savings programs in place that we're actually achieving results. So that's why we have confidence in the integrity and the integrity of the business model.

Great. Thank you very much.

You're welcome.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to you, Mr Macricostas, for any closing remarks.

Thank you for participating in this morning's call. I would like to thank the Photronics team for their dedication and hard work this past year. I'd like to wish everyone a Happy Holidays and a Prosperous New Year. Thank you.

Ladies and gentlemen, this does conclude your conference for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.