Photronics Inc (PLAB) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Photronics first quarter earnings call. During the presentation, all participants will be in a listen only mode. (Operator Instructions). This conference is being recorded, Wednesday, February 24, 2016. I would now like to turn the conference over to Troy Dewar.

Thank you, Chelsea. Good morning, everyone. Welcome to our review of Photronics 2016 first quarter financial results. Joining us this morning are Dr. Peter Kirlin, Chief Executive Officer, Sean T. Smith, Senior Vice President and Chief Financial Officer, and Dr. Christopher Progler, Vice President, Chief Technology Officer, and Strategic Planning. The press release we issued this morning, along with the presentation material which accompanies our remarks, are available on the investor relations section of our web page.

Comments made by any participants on today's call may include forward-looking statements, that such include words as anticipate, believe, estimate, expect, forecast, may, will, should, or the negative thereto and similar expressions within the meaning of US federal securities laws. Forward-looking statements are based on a number of risks, uncertainties, and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied. More complete disclosure regarding these forward-looking statements can be found at the bottom of our press release. Photronics assumes no obligation to update any forward looking information.

Finally, during the course of our discussion, we'll refer to certain non-GAAP financial metrics. These numbers are useful for analysts, investors, and management to evaluate our ongoing performance. Reconciliation of these metrics to GAAP financial results is provided in our presentation materials. At this time, I'll turn the call over to Peter.

Thank you, Troy, and good morning, everyone. The financial results we reported earlier today reflect a combination of factors, some good and some less good, which in the whole contribute to record first quarter sales, significantly higher income than the same period last year, and strong cash flow providing additional financial strength and flexibility to fund our growth plan.

On the positive side, demand for high-end FPDs and memory photomasks continue along the growth trajectory we saw last year, as display customers in Korea continue to release new products featuring advanced LCD and OLED displays, and memory customers continue to transition to 20nm DRAM. These two market sectors have been strong for us over the last several quarters and the market and technology leadership position we've built has enabled us to enjoy profitable growth from these two trends. The better news is we anticipate growth in these markets to remain strong for us, with memory ramping 3D NAND, just as the DRAM activity tapers later this year, and more product innovation pushing demand for advanced for FPD masks.

On the not so positive side, mainstream IC saw softer than normal seasonal slowdowns in US and Europe, and high-end logic was soft as we experienced reduced demand from some of our large Asian foundry customers. We believe that the high level of macroeconomic uncertainty caused our customers to grow more conservative, effectively damping demand. Beyond that, on the high end, it's more and more apparent that new nodes are increasingly more complexed and difficult to produce. When this happens, new design launches can be delayed meaning that the demand for photomasks can be pushed out. Given the high average selling prices of these advanced mask sets, pushing out even a few orders has a significant negative impact on our results.

Given the challenging and uncertain market dynamics throughout the semiconductor and display market, I'm proud of the performance by our team and the hard work that allowed us to achieve the results we reported. How did we do this? Well there are a number of factors which contribute to our performance. First, we have great market position in FPD. We are clearly among the technology leaders and still the only producer with the most advanced litho tool in the industry. Our capacity has been sold out since we installed this tool late last year and given the tremendous amount of product innovation and new panel designs, particularly with the OLED display, we believe there is sufficient justification to consider investing in more capability and capacity which could further position us to grow our leadership position.

The second factor which contributed to our first quarter performance is greater diversity in IC. We have significant presents in high-end and mainstream sectors, across all product segments. This is by design and allows us to withstand downturns in one product area while the other softens the impact. Memory strength helped to mitigate the softness we observed in logic during the quarter.

Finally, we performed well due to the tremendous customer service and outstanding cost control. This is nothing new. It's been a part of our DNA since the company was founded over 45 years ago. It's allowed Photronics survive decades of intense competition, industry consolidation, and it's what will help us keep and extend our leadership position going forward. We cannot control the market dynamics as it relates to end market demands, but we can control our customer support and operations, and I?m very confident this will remain a differentiating characteristic of our company into the future.

Looking beyond the most recent quarter results and next quarter's projections, there are several reasons why I continue to believe 2016 will be a great year for Photronics.

Our presence in high-end market and our ability to make the most advanced photomasks at the lowest costs with great customer service is a winning combination. Certainly, high-end presents the most attractive opportunity for growth. It is also where we are able to provide state-of-the-art masks and enable our customers to produce advanced semiconductors and flat panel displays. The memory market is continuing its transition to 20nm DRAM, we will begin to ramp 3D NAND later this year. On the logic side, Moore?s Law may be slowing, but is not stopping. And since our demand is driven by new design activity and not simply node migration, we anticipate demand for high-end logic masks from our customers to grow.

Finally, FPD continues to offer attractive growth and opportunity. OLED, once an emerging technology, is becoming a more focused area for investment by our commerce. One of our largest FPD customers is planning to convert some of their LCD capacity to OLED, effectively more than doubling their output by the end 2016. This industry is very robust at the moment, for both mobile and large format TV, and we are well-positioned to take advantage of this trend. In addition to the high-end opportunities, we also see growth drivers within our mainstream IC business. It's been interesting to watch the amount of industry consolidation through M&A which has occurred during the last 12-18 months within the semiconductor space with no signs of slowing down. One of the key drivers for these companies to team up is the goal of increasing product breadth, often with the vision of putting more functionality on mature technology. This plays into the overarching trend often referred to as the internet of things. Any time there's a new or revised design, there's a need for new photomasks. Industries such as automotive and industrial play right into our strength. We have a global manufacturing presence and capability to produce masks across the entire spectrum of legacy nodes. We continue to seek ways to improve market position, whether through market share gains, additional asset purchases, or strategic M&A to bring about further industry consolidation.

Finally, our global leadership team is increasing more confident that we'll is have the opportunity to enter China to better support our growing customer base there. We need to proceed in a manner which reduces risks and provides a good path to build a long-term sustainable business, but I do believe this market could generate significant growth for us if we invest wisely.

The final thought I would like to leave you with is that we are a much healthier company today than we have been in recent years. Sean will have more to say on this during his remarks, but our balance sheet is strong, with a growing cash balance and low debt levels, which will become even lower in April with the maturity of half of our convertible securities. During the volatile market such as what we are now experiencing, it is important to remain diligent with our investments and keep a steady hand. There are many reasons to be optimistic regarding our long term outlook, but it requires discipline and a firm resolve to be successful. I?m convinced we are on the right path and trust in the ability of our team to perform.

I will now ask Sean to provide more details on our Q1 performance and outlook.

Thanks, Peter, and good morning, everyone. First quarter sales increased 5% year-over-year and was our highest first quarter ever, as an increase in high-end sales more than offset lower mainstream shipments. Sequentially sales were down 8%, slightly more than typical seasonal trend. Lower sales in high-end foundry logic, principally in Asia and a to lesser extent, lower US and European based mainstream sales. Breaking Q1 sales out geographically, 66% of total sales were from Asia, 28% from North America, and 6% from Europe.

IC sales were down 2% compared with last year and 11% sequentially. We realized the benefit of product diversity, as the impact of soft logic demand was partially mitigated by continued strength in memory. High-end IC sales were $41.2 million, a sequential decline of $8.7 million principally in Asia. The transition to 20nm DRAM is still ongoing, driving strong, global demand for high-end memory masks.

On the high-end logics side, our customers are in the process of ramping 28nm and 14nm and as is typical with any new product introduction, demand has been lumpy over the last several quarters. In mainstream, greater than normal seasonal softness in the US and Europe and lower foundry demand in Asia led to year-over-year and quarter-over-quarter decreases. While we anticipate demand for high-end memory to remain strong and for mainstream to rebound from the slow seasonal trend in the US and Europe, high-end logic demand will likely not recover until the second half of 2016, and we anticipate potential headwinds in Asia due to the Chinese New Year.

Sales of FPD photomasks were flat compared with a very strong fourth quarter and up 37% over last year, on the continued strength in the high-end which increased 7% sequentially. Demand for advanced LCD and OLED display is extremely strong and we've seen an increase in backlog, giving us the ability to selectively accept orders that optimize revenues and profitability, which is why mainstream sales are lower. Given the current level of demand and the future growth we expect in this sector, we're in the process of determining our next investment to expand our capacity and capability. Considering the cost and lead time as we install our additional writing tool, we need to exercise caution and sound stewardship when making investment decisions. Until then, we expect sales to remain flat, limited by our installed capacity.

Gross margin for the first quarter was 27.3%, down 420 basis points sequentially as a result of reduced volumes, principally as discussed, mainstream IC and foundry logic. Operating expenses increased modestly by $500,000 to $17.9 million compared with the previous quarter. All in for Q1, our operating profit margin was 13.5%.

EBITDA for the quarter was $50 million, and on a trailing 12-month basis, $177 million, a new record for Photronics. As previously reported, we did benefit from a one-time net gain of $8.8 million in the quarter related to the sales of an investment in a foreign entity. Income taxes of $3.7 million fell sequentially as a result of lower pretax income. We would like to note that the one-time gain had no impact on our taxes for Q1 since this was in the US. Minority interest expense for the quarter was $2.5 million, down $1 million sequentially. Excluding the one-time gain, net income was more than double the first quarter of 2015, but down sequentially due to lower sales and the resultant impact on profitability.

GAAP net income for Q1 was $21 million, and excluding the gain, net income was $12.2 million. GAAP EPS amounted to $0.28 per diluted share and excluding the gain, EPS amounted to $0.17 per diluted share.

Now turning to the balance sheet. We ended the quarter with a cash position of $231 million, bringing our net cash position to $101 million. Working capital improved by $35 million sequentially. I would like to remind everyone that the $57.5 million of our convertible debt becomes due during the second quarter with a conversion price of $10.37 per share. In the event the shares do not convert, we certainly have sufficient cash on hand to pay the principal. Also, please recall that our investment in MP Mask JV in Boise amounts to approximately $93 million. The JV will not renew when the current term ends in May of this year and we anticipate receiving a cash payment from Micron for our investment after the JV concludes.

Cash CapEx for the quarter was $22 million. We still anticipate spending approximately $50 million to $75 million in CapEx this year, while that amount could increase if we decide to invest in additional capacity.

Before providing second quarter guidance, I would like to remind you, everyone, that our visibility as always is limited. Our backlog is typically one to two weeks. Also, demand for some of our products such as high-end IC foundry logic is inherently lumpy and difficult to predict. Given those caveats, we expect revenues in our second quarter to be between $120 million and $130 million. This range assumes high-end memory and FPD remains strong and mainstream in the US and Europe rebound from their seasonal slowdown, and high-end logic remains soft due to lackluster demand from Asian foundries. We're also assuming some headwinds in Asia due to the Chinese New Year. Based on this revenue expectation and our current operating model, we estimate EPS for the second quarter of 2016 to be in the range of $0.08 to $0.16 per diluted share.

The first quarter was challenging, not only for us and our customers, but for the markets we serve. The good news is that thanks to the investments we've made and the market share we've gained over the last several years, we had higher sales than any first quarter in our history and achieved solid profitability. Further, we see signs of improving market conditions throughout the balance of 2016 and anticipate returning to a growth trajectory by the second half of the year. Coupled with our growing cash balance, we are well-positioned to grow profitably and continue to invest in growth.

Thank you for your interest. I will now turn the call over to the operator for your questions.

Thank you. (Operator Instructions). Our first question comes from the line of William Stein with SunTrust. Your line is now open.

Great, thank you for taking my question. Guys, you've had some tremendous earnings growth in the last few quarters. If your April guidance winds up playing out to the midpoint, though, you wind up with the first negative year-over-year earnings growth quarter in a while. I'm wondering if you've contemplated when you think that reverts back to positive year-over-year growth? Do you think that's in the July quarter or is it further out, perhaps not until fiscal 2017? Any color on that would be helpful.

Well, I think we're hearing the same thing from our customers as many of the other suppliers in the space are, and that is the second half of the year is to be quote unquote, strong. Having said that, we run with two weeks' worth of backlog, so it's hard for us to with any kind of certainty predict what happens in the second half of the year. So generally speaking, our customers are optimistic. We believe we're in the bottoming right now. The strength of the rebound and the timing of it is hard to predict.

That's fair and helpful, Peter. One other, if I can, on NAND. You mentioned 3D NAND. I'm wondering if cross-point is an opportunity for the company and if so, in what sort of timeframe should we be contemplating a benefit?

Without a doubt, we are already qualified for the 3D cross-point memory supply chain to both end customers, both Micron and Intel. Without a doubt, that for us represents a significant piece of business. The question again is, the timing of it. I think our thoughts are that it's not material in 2016. That's more of a fiscal year 2017 demand uplift for Photronics, but without a doubt, it's like a brand new memory market that we had not addressed previously, so the opportunity is significant.

If I can -- thank you. If I can just squeeze in one more.

Will, if I can just interject for a second to comment on if we're at the midpoint of range. If we are at the midpoint of the range, our revenue will be up versus the first six months of last year because we did $123.5 million in Q1 and $127 million in Q2 last year, and we just did $130 million.

Got it, and I acknowledge that it's a helpful clarification. If I can just squeeze in one more. The weakness in high-end logic, should we think about that as largely coming from the joint venture in Taiwan or is this more sort of wholly owned business where you're seeing this weakness?

If you look at the high-end logic market, we have basically three nodes in that bucket that are commercial today. It's 40, 28, and 14, and the severity of the problem due to a lack of demand, ramps as you go down step. So 40 is lackluster, 28 is poor, and 14 is more than poor. So I'll let you decide who might, what Asian foundry customers those might most reflect on, but that's how the picture stacks up for us, and unfortunately as you step down those, the ASP of each set goes up, so it doesn't take a lot of 14-nanometer demand to have a material impact on our revenues.

Understood. Thanks for the helpful clarifications and good luck.

Thanks, Will.

Thank you. Our next question comes from the line of Steven Chin with UBS. Your line is now open.

Hi, guys, that is Dan on behalf of Stephen. Thanks for taking the question. First of all on the guidance, can you give color on how we should think about gross margin going forward if the macro remains weak? Is it just mostly a function of revenue, volume and customer mix, or are there other things you can do to keep gross margins steady?

We have a number of levers we can pull, Dan to keep gross margins steady. Obviously, our objective is to hit the high-end of the range and with our cost reduction programs we can still have good leverage. We still stick by it to the extent our revenue grows, we expect at least a 50% drop through. When you look at -- just one other point, when you look at Q1s results, they're in lock step with Q3 of last year before we had the big growth in Q4. The top line was essentially the same, the operating margin was spot on, and the EPS was exactly the same. So as Peter mentioned in his prepared remarks, operationally the company performed very well and to the extent we don't see revenue growing or we revenue dropping, we have some levers that we can pull to minimize the impact on gross margins.

Got it, that's helpful, thank you. Next question on 3D NAND ramp in China you mentioned you might have some 3D cross-point exposure from Intel in fiscal 2017, but I'm wondering for the 3D NAND ramp in China that Intel is doing, curious to hear whether if you would have exposure here and if so, when should we start to see revenue?

Yes, we certainly are looking forward to that flow of business as Intel equips and then ramps that factory. So again, we're already qualified. I think we build more NAND reticles than any merchant suppliers or merchants. Again, that appears to us to be modest demand this year. Our fiscal year in 2016, we have more of a strong uptick in our physical 2017. And again, you can easily triangulate that with the capital equipment guys and what is a normal time to install and ramp new equipment.

Got it, okay. Just last question on OLED, which obviously has been performing really well. Just curious to hear your thoughts on what sort of growth rate we should expect from this business over the next few years, and then how do margins compare to corporate average?

This year is an interesting year. This year is going to be a year where, particularly in Korea, a lot of new OLED and AMOLED capacity is being installed. And normally what that generates is significant installation of capacity this year and early calendar year 2017 will generate a lot of demand for masks immediately following. We're looking to try to ensure that when that slug of new capacity comes online that we're properly positioned to take advantage of it. I do believe that we should see a significant step up in the AMOLED and OLED demand in 2017 and then beyond. We're trying just like we did the last time, to time our expansion in capacity and capabilities so that when the customers are ready, we're ready.

All right, thanks, guys.

I guess to quantify that, the last time we added a tool, one increment of litho capacity, our AMOLED or FPD revenues jumped by $5 million approximately on a quarterly basis. So each litho tool is a $5 million to $6 million step up in our quarterly run rate.

And to Peter's point that as we monetize that, our margins will go up without giving specific ranges.

Okay, that's helpful, thank you.

Thank you. Our next question comes from the line of Edwin Mok with Needham and Company. Your line is now open. Mr. Mok, if your phone is on mute, please unmute it.

Hi, good morning, guys, thanks for taking my question. I actually wanted to ask a question around the first quarter. First, if I go back three months ago and listened to you on the call I think you guys were already anticipating the lumpiness on the high-end logic side of the business. Did that business just came in a lot worse than you expected, result in the eventual weaker 1Q? And I have two follow-ups.

Yes, it did. What we saw was the demand that was projected for the high-end, both in Taiwan and Korea as the quarter rolled itself out. The tape out continues to push out, push out, push out, so there was like Chinese water torture as far as the business level is concerned. I think we're very confident that we lost no market share. The business simply didn't materialize. Even leading up to -- normally what we see in both the US and Europe before Christmas, then in Asia before Chinese New Year's, is there's a big push in the last few weeks to get the designs that have been lingering out the door, and unfortunately this year that push did not materialize, so that's more or less how the quarter evolved.

Okay, that's helpful. Can I ask you guys about China? One of your large customers in Taiwan has built up ample capacity in China. I was wondering how likely are you going to be able to get business from that and how you're going to service that business because you have no capacity in China?

We're servicing that business today primarily from Taiwan, but also to a lesser extent from Korea and the nanoFab, depending on the technology node. Our revenues, our quarterly revenues from China today are on an upward trend, they have been for the last two plus years. So they are now material to Photronics and it?s not actually just IC, but FPD as well. In the short-term, we can currently service the China demand from outside of China. In the long run, we think there's an opportunity for our business in both IC and FPD, an opportunity to become a domestic source of supply. Doing that the right way, it's clearly important, that represents a significant capital investment for us because it's not low-end business where the growth is, it's high-end, so that's a lot of new expensive tools. So we're actively discussing with both customers, as well as local, the various local governments how to enter that market in a way that maximizes our upside, but at the same time mitigates risks, and until we get to the point where we're comfortable, we'll continue to service demand from outside of China.

Okay, that's helpful. Then I guess lastly, go back to OLED. You mentioned that some of your customers is adding OLED capacity and in converting some of the LCD capacity to OLED. Just curious, anyway you can give us some sense in terms of, I don't know what the proper way to do it, apples to apples, but your exposure for LCD versus OLED, how much opportunity do you see, for example, if a customer is running the LCD line versus the OLED line? Do you see a similar opportunity or less opportunity?

I think the opportunity is really in different locations. The OLED and AMOLED opportunity clearly is in Korea, but if you look at our high-end business as you know, 75% of our high-end business or FPD business is high-end. We don't split it out between LCD and AMOLED, but 75% of the business is high-end. So we see a high-end opportunity for AMOLED and OLED in Korea, and we see a high-end opportunity for LCD in China. So the way we address those two opportunities likely will be different, but both are significant.

Okay. So basically, if I understand that answer correctly, from LCD to OLED, you can't compare -- there's no comparison in terms of if there is a bigger dollar spend on mass in OLED versus LCD? I guess that's what I'm asking. I guess the dollar spent on the mask for LCD or OLED similar, more or less? That's what I'm trying to ask.

This is Chris. I can make a comment on the mask complexity piece. For sure, the OLED devices have more mask layers and even mask layer is more complex, so I think the ASPs of the OLED masks are higher, but the form factor, the size of the masks tend to still be much larger for LCD applications for TVs and things like that, so that drives higher ASP. So the complexity in the masks counts goes up for OLED, the mobile displays, but still LCD is high-end driven mostly by larger-size masks and they have higher ASPs. I don't know if that helps, but that's the way to distinguish the mask value in each of those, I think.

If I can come back and answer your question maybe with more clarity. If we could find a way to appropriately address the high-end in China and the growth in Korea of the large format of LCD and the OLED/AMOLED respectively, it represents a doubling of our high-end business, would represent about a doubling.

All right, great, thanks, that's all I have. Thank you.

Thanks, Edwin.

Thank you. Our next question comes from the line of Tom Diffely with DA Davidson. Your line is now open.

Yes, good morning. First, did you guys suffer any damage or have any impact from the earthquake in Taiwan?

Fortunately the answer is effectively not. I think we lost seven reticles in total that were in the manufacturing line, so it's essentially zero.

What about the impact on your customers and potentially the business you got from them?

I think our customers depending on which customer may have lost a few days' worth of production on the IC side of the business. One of our competitors on the FPD side of the business actually had some significant problems, so the net effect overall to us is essentially a wash.

Okay. So when you look at the high-end IC where most of the softness is right now, what should you about expect to come back first, the 28-nanometer business or the 14-nanometer business?

That's very hard to say precisely, but if we had to guess, we would expect the 28 will come back before the 14.

Okay. And are your tools qualified potentially then to the 10-nanometer node or do you need new tools or new supplemental pieces for that?

As far as the 10-nanometer goes, we're actively working with our customers in a joint development fashion. There's no real commercial demand there yet. By the time there is, we'll be qualified. I think we have all of the capability we need to make those masks. When we reach high volume production, we'll probably have to add capacity and at that time, perhaps some capability, but it will be more capacity.

Okay. And then, Sean, what was the CapEx in 2015?

Total CapEx?

Yes.

Cash CapEx I believe was $104 million.

So in the $50 million to $75 million for this year, does that include any mainstream at this point, or was your comment earlier that if you invest in mainstream, that would be in addition to the $50 million to $75 million?

There's some components for strategic additions for movements, whether newer tools or used tools in there. But a lot of the cash CapEx, Tom, in this year that we're talking about is most of it is already installed or was installed, and we're just paying for it this year.

I guess after the big year of CapEx last year, do you expect any type of ramp or increase in the depreciation expense in the next few quarters?

Not necessarily, as I think we've talked about this before. I think we were at $20.9 million this quarter all in as we have brought new tools on, including high-end tools, older tools fall off the depreciation rolls, so we haven't seen a significant increase.

I guess the gross margin declined sequentially, that was already an absorption as opposed to the mix or an increase in depreciation?

That's correct. As we talked about in Q4, our incremental gross margin on the increased sales was about 74% and on the decreased sales, it was eerily similar, it was at 79%, so it was pretty symmetrical.

And finally, when you look at the guidance for the out quarter, the midpoint down 4% or 5%, it sounds like each of the segments, the way you described them, whether flat or improving for the mainstream -- where is the sequential weakness you believe that gets your midpoint down quarter-over-quarter?

If you look at what we saw in the US as far as the mainstream and in Europe as far as the mainstream business is concerned, normally after Christmas we see a rebound in about three weeks. It's now recovered to preholiday levels, which is good news. The bad news is it took about five weeks to get there. If Asia behaves the same way the US did vis-a-vis the Chinese New Year, it will be a longer recovery period for the mainstream business. So therefore, we would see a drop in the mainstream revenues throughout Asia, which now happen to be our largest -- Asia is our largest market, so we don't know how quickly things recover, but if Asia looks like the US and Europe, we built that into the guidance.

Okay, that makes sense. Thank you.

Thanks, Tom.

Thank you. (Operator Instructions). our next question comes from the line of Patrick Ho with Stifel. Your line is now open.

Hi, there, this is Brian on for Patrick. Thanks for letting me ask a few questions. First, just isolate on the slowdown in your mainstream IC business. Were any markets in particular weaker than originally anticipated? I know you just discussed the linearity in the past quarter. Also, embedded in your Q2 outlook, what market or markets more specifically are you seeing a rebound in US and Europe? Is it more automotive weighted, is it industrial weighted? Then I have a follow-up question. Thanks.

There really wasn't a specific end market for customer concentration in what we've seen. It really is broad-based, so it would be, I think, inappropriate to try to single out any one end market as being responsible for the overall slowdown.

Okay. Also on the way up, any sort of granularity that you can provide the second part of that question?

No. Again, there's no doubt the semiconductor industry is becoming much more closely aligned with those global GDP because the applications are everywhere, and the slowdown and the pick up in the business in the US and Europe more or less happened everywhere, all the markets, all of the customers. It was a broad-based phenomena, and what we're seeing as Asia comes out of Chinese New Year's, again, it doesn't seem to be any customer end market concentration.

Okay, thanks, that's helpful. My second question, following a very strong growth year in the leading edge IC photo mask business in 2015 and also your comments regarding second half weighted recovery from leading edge logic, how confident are you still that the leading edge will grow in 2016, also factoring any possible technology or yield-driven delays that might be occurring?

If you look at our business now, we have basically all the major customers now are our customers. Really the question you're asking is how well do they competitive vis-a-vis TSMC, because the industry doesn't want to be sole sourced to 28-nm or 14-nm. Our customers don't want that to be the case. So there's a clear overall industry drive to develop viable second sources of both 28 and 14. To the extent that that happens, our business is going to grow -- to the extent that it doesn't, our business is going to struggle.

Okay. Thanks. Maybe to throw a quick one in there. Just kind of curious, roughly speaking, when looking at your leading edge IC masks business, how much is that memory driven, so DRAM plus NAND combined? Are we talking about a third of that perhaps? Any help you can provide there would be great.

Yes. Generally we don't break further segments of our high-end business out. Logic, there's three components of it really, memory, IDM logic and foundry logic. We started out and we walked across the market in those steps and today we have broad exposure. That's the good news, so that when one market suffers and the business goes down -- you look at Photronics, we're effectively back to Q3 levels which for us is still reasonably high gross margins, high operating income, double digit operating income. We're not happy with last quarter, we're not happy that the business didn't perform the way we had hoped it would on the top line. On the other hand, relative to our historical financial performance, we did quite well. I can't breakout the high-end for you. We're pretty confident that as the year goes on, the high-end logic business will bounce back. The difficulty we have is predicting the cadence of it.

Okay, thank you.

Thanks, Brian.

Thank you. Our next question comes from the line of Tom Diffely with DA Davidson. Your line is now open.

Yes, thanks, just one quick question for Chris. What's the current view for OLED TVs and if the market does move to the OLED TVs, does your tool set handle the large size and complexity that it would require?

Thanks, Tom. Yes, the tool set does handle the large size and the complexity. As far as OLED TVs, the OLED back lighting is already in use. You see a lot of TVs that you can go buy with the OLED back light. What it hasn't driven though is the complexity or switching or the transistor layer yet for TV, the so-called AMOLED applied to large-format TVs. I think that's still quite a ways off before that happens. It's very difficult technology to yield for reasonable costs, but folks are definitely working on it. And the good news is that the OLED back lighting is embedded now in high-end TVs. So it's coming, but I think it's still some ways off before it can be done economically. Our tool set definitely supports that technology though.

Great. Thank you.

And the other thing on laptop screens, that sort of stuff, there you're going to see it next, I think, adopted much more widely.

Okay. Thank you.

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

Okay, thank you once again for taking time to join our discussion this morning. 2016 is beginning with lots of challenges as well as opportunities. We like our position as we navigate through the next few quarters and look forward to updating you along the way.

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