Photronics Inc (PLAB) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Photronics fourth-quarter earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded Tuesday, December 6, 2016. I would now like to introduce your host for today's conference, Mr. Troy Dewar, Director of Investor Relations. Sir, you may begin.

Thank you, Kaylee. Good morning, everyone. Welcome to our review of Photronic's 2016 fourth-quarter financial results. Joining me 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 webpage. Comments made by any participants on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast. These forward-looking statements are based upon a number of risk, uncertainties and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied and we assume no obligation to update any forward-looking information.

Finally, during the course of our discussion, we will refer to certain non-GAAP financial metrics. These numbers are useful for analysts, investors and management to evaluate our ongoing performance. A reconciliation of these metrics to GAAP financial results is provided in our presentation of the materials.

At this time, I'll turn the call over to Peter.

Thank you, Troy, and good morning, everyone. Earlier this morning, we released our fourth-quarter results which are in line with our preliminary results posted early November excluding the tax benefit. Sales in this quarter were the lowest we've seen since early 2014 before forming the joint venture in Taiwan. We experienced a double-digit decline in sales and corresponding decline in operating income.

Needless to say, we are very disappointed in these results and did not anticipate the decline in demand when we provided the fourth-quarter guidance in August. I will explain why demand for our products was so muted during the fourth quarter before providing our 2017 outlook.

Over the last decade, Photronics has been extremely successful in building a leading presence in the merchant photomask market.

This was achieved by concentrating on high-end products that offer higher growth potential. One downside to the high-end business is that the customer concentration is much greater. For example, our high-end FPD business is primarily weighted to two large customers. Similarly, high-end IC sales are generated by a handful of customers.

Typically, if we see soft demand from one high-end customer, stronger sales from one or more of the others, with different end market exposure, offsets the decline. However, during the most recent quarter, demand from essentially all of our high-end customers was soft. Some of this was expected, as we stated during our last conference call. But some of the softness was not expected, which drove the shortfall in sales.

Sean will provide more granularity in his comments, but the weakness was felt across all markets. In FPD, the industry is transitioning from LCD to OLED, leading our largest customer to announce the re-tooling of a second factory in Q4. In addition, this same customer redirected significant manufacturing capacity to produce millions of AMOLED displays as a result of a product recall, thereby significantly reducing their mask demand.

In logic, 14 nanometer and 28 nanometer ramps were choppy, driven by end market demand and our customers' yield and loading, and did not play out favorably for us during the quarter. And in memory, one of our largest customers is between node transfers in both NAND and DRAM, and new devices have not yet appeared in the special memory market, which is also making a node transition.

Combining all these factors resulted in very weak demand in contrast to the fourth quarter of 2015 just one year ago when all our markets were strong and we achieved record results. As always, we have reacted by reducing cost to minimize the impact to margins. Given the high fixed cost of our operation, we must pull a lot of small levers to have a meaningful impact on cost and we're working very hard to maximize profitability.

You can see this in our income statement where operating expenses for the quarter were down sequentially and year-over-year. The good news from the quarter is that the cash flow remained relatively healthy, allowing us to strengthen our balance sheet, which is crucial as we continue to evaluate opportunities to consolidate our industry or diversify our business.

While we want to take the needed time to respond to your questions on our near-term performance, we also want to remind everyone of our long-term opportunities and where we are heading as an organization. Our long-term strategy consists of three primary objectives: winning new high-end business, expanding market share in mainstream, and extending our presence geographically. There are several drivers in 2017 which should help us advance in meeting these objectives.

The flat panel display industry is at an inflection point as technology for the most advanced mobile devices transitions from LCD to OLED. The new technology offers improved visual quality and lower power consumption, two important characteristics for consumers.

While estimates vary, OLED penetration in the smartphone displays today is approximately 20%. By 2020, this penetration is expected to more than double to between 40% and 50%. The biggest driver of the shift is expected to be the adoption of AMOLED by Apple beginning in 2017.

We are investing in additional capacity to prepare for this increase in demand and look to ramp production at the end of our second quarter. Our expectation is that by the end of 2017, the new tools we install will be running near full capacity. Beyond 2017, we believe OLED penetration to not only smart phones, but also other existing and new display applications, will continue to be a source of growth for us.

Turning to memory IC, it is encouraging to see price improvements from both DRAM and NAND and producers of leading-edge memory were already reporting better sales. The healthier price environment has triggered many of the memory companies to ramp up design activity as they transition to 2X DRAM technology.

It will take some time for these designs to make it to the manufacturing floor and drive demand for new masks, but we do expect to see this demand beginning in our second quarter. Additionally, the leading-edge memory producers are expected to continuing moving to new nodes and to introduce new memory architectures. This should also provide us opportunities that are likely weighted towards the second half the year.

High-end IC logic tends to be more volatile than any of our other high-end markets. The typical pattern is that a customer installs new capacity, the capacity is filled at a speed dictated by yield and this drives new mask demand. Then orders pause until additional capacity is installed. This last quarter is one of those pauses between capacity availability for new designs.

Over the cycle, the trend is up and to the right, but as we've seen over the last few years, high quarter-to-quarter variability is the way this market segment behaves. Looking forward, we see growth occurring in the traditional areas of Taiwan and Korea, with more and more tilt toward China.

Speaking of China, our investment there is moving forward. We anticipate breaking ground in February and capital outlays in 2017 will be primarily directed at the facility and clean room. The majority of the spending for the first wave of equipment is planned for 2018.

A second wave of equipment spending is anticipated in the 2020 timeframe. Our plan provides the flexibility to delay or accelerate tool orders based upon market conditions.

We're also continuing to evaluate the possibility of increasing the percentage of redeployed tools, which will reduce overall cash outflows for the project. We see China as the next phase of growth for our business and are managing our corporate-wide capital investments accordingly. Therefore, we do not expect our capital spending to deviate from historical norms as a percentage of revenue moving forward.

Our overall view of the China market has not changed since we announced the facility last quarter. We remain excited about the opportunity and what it can mean for our company, our customers and our shareholders.

In November, we announced a relatively small acquisition of manufacturing assets, intellectual property from Infinite Graphics.

While the financial impact is not expected to be material to our 2017 results, there are several reasons we like this transaction. First, it provides us with a tool set with the cost structure needed to profitably manufacture large area IC masks. These are primarily 1X lithography products similar to our display masks, but serve the IC packaging market at a lower price point.

Second, we have obtained intellectual property for both advanced packaging and 3D microstructure arrays. Together, these capabilities provide us with an entry into the advanced packaging space, an area that is in the early stages of what we believe to be a secular growth phase over the next several years.

As Moore's law slows, advanced packaging technologies, such as TSMC's wafer-level fan-out packaging, we are enabling device makers to shrink the size and/or power consumption at the system level which is a clear differentiator for mobile products such as mobile phones and tablets. And as advanced packaging develops, we believe 1X lithography complexity will advance which plays directly into our core capability.

As you can see, the prospects in front of us during the next 12 to 24 months provide ample growth opportunities. While I would like to see a more positive demand environment now, I like our position in the market and the growth opportunities ahead. There is a lot of work needed to get there but I remain confident we are on the right path.

With that, I will now turn the call over to Sean to provide more detail on our Q4 performance and outlook.

Thanks, Peter, and good morning, everyone. Sales during the fourth quarter dropped 13% sequentially and 24% year-over-year. As Peter mentioned, weakness was seen across all of our markets, primarily at the high-end for both IC and FPD.

Sales of IC photomask fell 10% to $82 million sequentially, mostly at the high-end as customers reduced their demand for new masks. High-end IC photomask decreased approximately $7 million sequentially. We do not believe we lost any market share during the quarter, but rather our sales were a function of customer timing regarding new product releases.

Demand for FPD photomasks was down $6 million sequentially as our largest customer had taken some production off-line and is transitioning from LCD to OLED. In the long-term, this transition is very positive for us, but does hurt us in the nearer-term demand. We're still on schedule to monetize our new FPD tools in the latter half of FY17, which should enable us to grow our sales as the industry ramps up production of new OLED displays for mobile devices.

Breaking out sales by region, 73% were from Asia and 27% were from the US and Europe. Gross margin for the quarter was 19.1%, down 640 basis points as a result of the reduced revenue and increased equipment expense, principally depreciation. SG&A expenses for Q4 were down $970,000 sequentially, primarily related to reduced compensation expenses.

We have spoken in the past about our operating leverage in our model. This helps us when sales are rising and also pressures our margins when sales decline.

We were able to reduce operating expense 12% compared with the fourth quarter of last year, limiting the decline in operating profit. Despite lower sales, we still were able to achieve a 4.9% operating margin for the quarter. EBITDA was $29 million for the fourth quarter and $150 million for the year.

Income tax expense includes a nonrecurring benefit of $1.8 million or $0.03 per share related to the recognition of certain tax benefits in Taiwan. This moved our net income to $5.3 million or $0.08 per share with the tax benefit.

Taking a look at our balance sheet, our year-end balance sheet shows a cash balance of $314 million with net cash totaling $247 million, an improvement of $173 million from last year. Cash CapEx for the quarter was $5 million, bringing the year-end total to $50 million. For 2017, we anticipate spending approximately $100 million in cash CapEx including the balance of our FPD investment and China IC investment.

We are working to increase the amount of redeployed tools used in China, as Peter alluded to, which will have the effect of reducing cash outflows for new tool purchases. Based on our initial China investment plan, we have stress tested our balance sheet throughout the investment period and assuming local borrowing in China to take advantage of interest subsidies, we believe net cash will stay above $150 million throughout the next few years.

Before providing first-quarter guidance, I just want to remind everyone that our visibility is always limited as our backlog is typically one to two weeks. Also, demand with some of our products is inherently lumpy and difficult to predict. Finally, as our high-end business has grown and ASPs for these mask sets are higher, a relatively few number of high-end orders can have a significant impact on our sales for the quarter.

Given these caveats, we expect our first-quarter sales to be between $104 million and $112 million. We also anticipate seasonal trends in mainstream as both Christmas and Chinese New Year fall within our first quarter of 2017. Based on this revenue expectation and our current operating model, we estimate earnings for the first quarter to be in the range of $0.01 to $0.06 per diluted share.

I also want to announce a change in policy regarding the announcement of preliminary results. In the past, we have issued preliminary results if they are above or below our guidance. Going forward, we no longer intend to issue any preliminary announcement, either positive or negative.

It is fair to say that 2016 results were lower than we anticipated 12 months ago. However, we don't believe anything structurally has changed in our operations and we have tremendous balance sheet, which should allow us to manage through lower demand environment while also investing in future growth. We are on the right path and remain optimistic in the long-term market drivers.

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

(Operator Instructions)

Neal Burke, UBS.

Good morning, guys. Thanks for taking my questions. This is Neal on for Steven. You said that you got a little extra earnings power from reducing OpEx by sales coming in essentially flat quarter-over-quarter. I'm wondering, given your sort of fixed cost structure, if there was any more levers that you could pull going forward if sales don't recover or stay flat?

You know, Steven, there's always levers that we pull. We have a long history of being a low-cost producer and, globally, we have a large number of cost reduction programs running constantly.

So we are going to continue to drive expenses out of the business. We do that in good times and bad times.

When times get bad, it gets a higher degree of focus because the loading level in our factories diminishes. So there's more time for people to spend looking for cost reduction than production. So it accelerates during times of slow demand but it never stops.

Got it, thank you.

Edwin Mok, Needham & Company.

Hello, thanks for taking my question. First, I guess just to clarify on the guidance, if I take the midpoint, it's kind of flattish, maybe potentially up a little bit. But your comps suggest that everything is stable. Just curious what would drive your business to go to the high end of the guidance range?

I think, for example, if you look at the various segments of our business, foundry memory has basically, is entering the third quarter of a redesign for 2X DRAM technology. We have not planned for pull-in of any tape-outs from that market segment into the quarter. Should any one of them hit one or two orders, two orders would push us to the top end of the range, so that is one thing that could pop the quarter.

Another thing that could pop the quarter is, more of a recovery in the FPD market headed into the beginning of the calendar year next year. And actually, what would be needed to do that is actually a softening of the overall demand for our customers. Right now, the second tier customers, particularly for 42 inch and smaller displays, are really running almost flat out basically back-fill the capacity left behind by Samsung, whereas they are closing down their G7 factory.

Should any one of those or a number of those customers get more aggressive at developing new products, we could easily see an uplift in the FPD space. So when I look at the business, I guess, to me those are the two areas that would be most likely to be better than we might anticipate now.

Okay. That's helpful, actually. Maybe talk beyond this first quarter. I think, two things I want to ask. First, on the IC side, you mentioned in your prepared remarks that you have seen heavier design or you are anticipating heavier design activity in the memory areas going into the fiscal second quarter. Just curious, are you talking about those foundry memory customer or are talking about something specific on NAND or DRAM? Any color you can provide on that commentary?

Yes, we expect to see an uplift in foundry memory before we expect to see demand materialize for a major node transition so that to us is more a second half of calendar year FY17 event, given the current visibility that we have. But as you know, that's a moving target.

The foundry memory, on the other hand, is approaching the goal line with a number of customers, so that's not heavily weighted to any single customer. It is a significant number of smaller companies that are all retooling for the next node.

Okay. That's helpful. On the FPD side, I have two questions. First, as you mention your largest customer is converting lines from LCD to OLED. Based on what they are planning on converting, do you have a way to think about what could be your revenue opportunity once those conversions are done from that customer?

Chris?

Based on the capacity that they are putting in. Is there a way to think about account revenue opportunities on the capacity that they are putting in?

So your question, Edwin, is regarding when the new display technologies will be in mass production?

Yes, so once they move and once this customer converts to, from LCD and OLED, just curious, any way we can now think about a continuing number of pieces of OLED display mass glass that you could predict to push through the factory. How much mass opportunity do to think you can capture from this customer? It might not be, obviously, it might not all happened in one quarter, but at least kind of in aggregate, what kind of aggregate opportunity -- ?

My feeling is going to be pretty gradual through 2017. You know the big driver volume for this display retooling, I think everybody knows what it is, and if you look at the supply change for OLED displays, you say a lot of inventory building, so there's clearly production plans going online. I think it's going to be kind of gradual through 2017.

I think the second quarter of calendar year 2017 would probably be the strongest indicator in start of this mass production on multiple sorts of AMOLED display formats for some of these new applications. But all the signs are there and we look at the inventory for components that need to be put into these displays. So to be more specific than that, it is really difficult to say.

Okay. That's fair. Lastly, so we have heard actual capacity for launched LCD is getting a little tighter now because partially because of this conversion and partially because of all the push towards OLED. Just curious, does that create additional opportunity for you in the LCD side from the other customer, for example, some of the customer in China and Taiwan? And how you guys are going to capture those opportunities.

Yes, we are well diversified across the customer base, so we are shipping into China from both Taiwan and Korea. So right now, what we would describe as the mainstream LCD market, demand is actually pretty muted. Why? Because when Samsung took their -- its actually two factories they're converting. One was a G7 factory. The other is a factory that today is used to build IT displays. So it is not one, it's two.

But in any event, Samsung taking that capacity off-line has created better pricing. So what our customers in Taiwan, and to a lesser degree, China have done in reaction to that is run their existing designs to higher volume levels. That's actually a negative for us because when that capacity is full on existing designs, there's no demand for new reticles. It is better for us when they are trying to gain market share by bringing new products to market.

Now, as China moves to the larger format LCD, that is great for us because that means new masks because it might be the same design but it is on a larger size substrate so there is more of them. And of course, there is additional new products that result from that. So all the capacity that is going into China starts coming online, that's going to create an explosion in demand for displays. And I really mean, when I use the word explosion, I don't think it is overstated. But that is not a first-quarter event for us.

Great, actually, that is very good color. Thanks, that's all I have.

Thanks, Edwin.

William Stein, SunTrust.

Great, good morning and thanks for taking the questions. First, I'm hoping you can detail a little bit more about the cash outlay with regard to the investment in the new China facility. I think in the past, you suggested that there could be an additional investment for flat panel in China and I'm wondering if you can talk about timing and sizing of that?

Yes, thanks, Will. In our guidance for 2017, we mentioned in the prepared remarks, it's going to be about $100 million including some initial investments Peter alluded to for the clean room and building there and the bulk of the investment will be in 2018.

We have not deviated at this point from our initial announcement on China's investment, so the number has not changed. Perhaps if we've redeploy tools that could go down and perhaps at the end of Q1 we could give further guidance, but right now, we're sticking on the original plan.

And that $160 --

And to further answer your question, as long as -- the current plan that we have in place coupled with the demand outlook across the globe, we have more high-end capacity installed today than our competitors combined. You can see where we sit relative to capacity utilization. So our look forward over the trajectory of the investment in China does not have us presently deviating from what our, as I said, from historical capital investment as a percent of revenue.

So we don't see the IC investment in China in any way materially distorting our business model from the CapEx to revenues perspective. Should we invest in capacity for FPD in China, that is not built into our forecast at the present time. That would be in addition to the investments that are planned.

Having said that, I think we mentioned during the last call that we had a significant customer commitment in China that will base-load that facility. If we would likewise step up and make a significant FPD investment, we would be looking for a similar kind of commitment to mitigate the risk of making a substantial investment and that takes time.

Thanks for the clarification. I just want to make sure I understand. The $100 million CapEx spend next year is for the entire business, not just for China, and the $160 million investment in China is both multi-year and a gross number that includes both new cash outlay and some transition of capital that is already been deployed. Is that the right way to think about it?

Correct, Will. Some of that, in the $100 million, some of it's carryover from the FPD investments we made or tools that are coming in that we need to pay for this year. And then it's the initial build-out of the China facility, but the $160 million is built out over a period of years, as Peter alluded to.

Okay. And one other, if I can. You mentioned both consolidation and diversification options for future growth. It seems pretty clear you made a very small but diversifying acquisition in the quarter. Is that more the sizing and type of investment we should anticipate? These relatively small contributing tuck-ins or maybe, more broadly, can you characterize the M&A funnel?

The way I would characterize the funnel is broad. There's a number of potential things to do there. But having said that, it may range from small to large, but the way we look at that space is we would want anything we do to be accretive. So when you put a financial hurdle on it, it makes you more a picky acquirer.

So beyond that, I don't think I can really categorize the things that we are looking at, but it is very clear there's a lot of consolidation happening across the industry as the customers consolidate, it drives consolidation back through the supply chain. So we have a strong balance sheet, positions us well to have those conversations. But at the same time, we are, I think, picky and we should be in what we would do.

Great, thank you.

Thanks, Will.

Tom Diffely, D.A. Davidson.

Yes, good morning.

Hello, Tom.

Sorry about that. Sorry. Peter, earlier you talked about the near-term softness in the business. Are you seeing any pricing pressure at all caused as a reaction to that?

The answer is no, not really. Our large customers, we tend to have annual agreements that dictate pricing. They also generally bracket market share. So the bulk of the softness happens to be in that segment of our business.

So there is not price pressure and there is not, as Sean said, loss of market share. There's simply loss of TAM. And that's not true everywhere. But generally speaking, the other pieces of our business, which are highly diversified, the pricing environment is really not remarkably different in any way.

Okay. Would you say that there's actually a loss of TAM or is it more just the timing of the TAM is a little different?

Well, sadly, I think it is both because some of the TAM that our customers -- so in the memory space, it is just a shift in time, to be explicit. In the logic space, if our customers don't get the business, the 800 pound gorilla does.

So it is not a loss of market share from Photronics to one of its merchant competitors. It's a loss of market share to a very large captive and it has nothing -- we have a very, almost no ability to influence that. But that TAM often, some of it pushes out, but sadly, a big chunk of it disappears.

And then on the display side, I think it's, we've already made some comments about that. I think it's more of a shift in time in TAM. When the new designs come out, they will be there for the taking. But right now, it's more profitable for our customers to run against a healthy demand environment designs that are already in manufacturing. But if you look, for example, at our FPD business, mainstream is pretty stable. Where the hurt was at the high end and we already described what was responsible for that.

Yes. Okay. And you mentioned that, on the memory side, expected some of these to move to production in the second quarter. Have you seen, then, are getting the pilot line work on those projects that could move to production?

Yes, the way that works is we've already gotten the pilot line tape-outs and we actually got them two or three quarters ago. So what happens is a foundry, a memory foundry, will qualify a new technology. Then they release the design kits to their customers who then go away and do their designs at that new node.

So we are already qualified and what we are waiting for is this first wave of 2X foundry DRAM, but what happened is the 3X business that we were enjoying, given the precipitous fall in memory pricing, simply dried up to nothing. So normally there would be a tail but, there is no tail. There's absolutely zero tail. And that's obviously been felt in our business.

Okay. And you feel as though the 2X yields right now are sufficient enough for them to move to actual production over the next one to two quarters?

Yes, without a doubt.

Okay, Great. And, Chris, getting back to the question Edwin had earlier on the LCD versus OLED, maybe if you could give us an idea of what the relative photomask opportunity is just moving a line from LCD to OLED? Is OLED are capital intensive for photomasks?

I don't think it's more capital intensive than the large area LCD masks because they run on similar kind of high-end equipment even though the form factor or the size of the displays are smaller for the AMOLED. As far as the number of masks in the set, that goes up pretty strongly. Maybe more than doubles the number of masks or lithography steps need to make an AMOLED display versus an LCD display. So the set content certainly goes up.

And I think the ASP for each individual mask also tends to go up in AMOLED because the masks are more complicated. So I think even though the form factor is smaller, generally, it provides a pretty healthy uptick to the size of the market for FPD masks when it's adopted and that is mostly driven by the larger number of layers per set and the more complex masks that need to go into making those kind of displays.

As far as quantifying how much larger we could imagine the FPD mask opportunity getting by wide scale introduction of AMOLED for new phones and things, I think I wouldn't really want to do that, but I will say that it's definitely a healthy upper trend as far as the impact to the market overall.

It sounds like you have to install two new tools just to keep up with current demand.

Well I'll flip that back to Sean I think. I don't think we need to, I mean, we have some projects going on with efficiency and we always try to use the tools for the highest ASP products and we do mix shifting and mix balancing to get the best and highest profit products going through the FPD lines.

As far as meeting the capacity needs, I think we will invest as the capacity is required, but certainly our capability is there. We're qualified for these products. We have excellent mask technology. We're working with the big players in these displays so the technology is certainly there. So we can deploy new equipment quickly as the market needs it.

Okay.

Yes, Tom. I think two quarters ago when we announced that we were making these investments, these tools have long lead times to get in, so we're prepared.

Okay. Great. And finally --

So we think we have come to market with the capacity additions as closely as we can with, but ensuring that we don't lose market share.

Okay. And then finally, Peter, when you look at the comment you made about the explosive growth in China, was that comment directed towards the position of China going into OLED over time was or there something else in there I missed?

It's really both, right? There's clearly -- if you look at China, if you count the number of projects underway, where there's already shovels in the ground then there's already been orders placed for equipment, it's somewhere between 15 and 20 lines of capacity going into China over the next -- there's not much that's going to come in. There's some, there's a little bit coming in in the first half of next year and it starts to build late in calendar year next year and then into 2018.

By the time all the capacity is online, China will be the second largest, will have the second largest installed base of FPD manufacturing equipment worldwide by the end of 2018, if everything happens the way it is plan to, and I think you see that, the investors have already seen that in, for example, in Applied Materials booming, though FPD sales, they happen to have 18 months, one of the longest lead.

One of their tools, I won't mention which one, but it has a lead time of about 18 months. It's the longest lead time item in an FPD factory. And you can, as I said, anyone can look and see how strong their booking for FPD are. So today, China is a distant number three behind Korea and Taiwan and Japan but, by the end of 2018, it's going to be number two vying from a number one position.

Great. Thanks for your time today.

Thanks, Tom.

(Operator Instructions)

Patrick Ho, Stifel.

Thank you very much. Two parts in terms of the memory IC business for you guys. First, on the DRAM side, as the industry moves to the 2X node that you mentioned, are there any concerns on your end that, given some of the customer issues and the delays on that end as 1X becomes part of their roadmap, that somewhat overlaps and it can minimize some of the 2X opportunity that you are seeing?

Yes, well that market, Patrick, tends to lag the leading edge by about two by technology nodes. It's a much smaller volume market. We use the word either foundry or specialty memory. So I think, I guess, there is a possibility that market could push to 1X more rapidly than what we would historically expect out of it.

But right now, that doesn't seem to be on the horizon, near-term anyways. And actually the pricing environment in memory improving, if anything, will delay the next node transition in foundry memory.

Okay. Great. Thanks for your help.

Yes, and if I can make one other comment, it does look like there is kind of a 2X and 2Y node, if you will, among the least of foundry users, so I think you'll probably see another shrink of the bit cell into the low 20s that they will use for foundry and that is actually, I think, a pretty solid node for foundry memory.

And we have a lot of, probably a historically high number of yield enhancement projects going on with the foundry memory community now. That's wafer yield. So I think there's going to be good products in these 2X, 2Y nodes for the foundry memory space. So it should have a pretty good run with those products, I think.

Great, that's helpful. And maybe going to the NAND flash side, can you broadly discuss your exposure especially with the industry transition to 3D NAND and how you're able to capitalize upon that opportunity? Because obviously capacity is being put in place by the leading suppliers and the demand obviously is still very strong out there given these capacity ramps. Can you broadly speak of your exposure to that emerging opportunity?

Well, this is Chris. I can make a couple starting comments. So we are qualified, as you probably know, for 3D NAND, actually multiple generations of 3D NAND. We're building some of these masks now and have been in production for quite a bit of time coming out the Micron joint ventures. So we are certainly capable to build those masks and we are, either working with or qualifying with, most of the major manufacturers for 3D NAND.

As far as the difficulty of the masks, what the mask composition looks like, tends to be larger numbers of masking layers, a fewer number of critical layers, I would say, but a larger number of overall masking layers, so it is a good opportunity for photomask. We see pretty quick shrink path on 3D NAND also. By that I mean in 3D NAND, it's more the number of layers that are stacked and how the device is architected.

We see companies moving pretty quickly because the first generations of 3D NAND are not really able to be that profitable. There's issues with them, so we think that roadmap is going to go pretty quickly and we are working with, I think, the major suppliers of that and mostly those that are connected to the Micron, Micron Technology, Intel, Intel's project in China. So we have exposure to those programs.

Yes, I would likewise say that 3D Crosspoint, the best proxy for that from a mask perspective is 3D NAND, so there's a high degree of similarity as far as the reticle goes in those two technologies.

Great, thank you very much.

Thanks, Patrick.

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

Thank you once again for joining us this morning. While 2016 ended with a challenging quarter, we are extremely excited for 2017 with anticipated growth from FPD driven by the AMOLED ramp and the construction of our China factory to serve the rapidly growing IC market there. I look forward to updating you as we progress. Happy Holidays to everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does concludes the program and you may all disconnect. Everyone, have a wonderful day.