Photronics, Inc. (NASDAQ:PLAB) Q1 2024 Earnings Call Transcript
Photronics, Inc. (NASDAQ:PLAB) Q1 2024 Earnings Call Transcript February 21, 2024
Photronics, Inc. misses on earnings expectations. Reported EPS is $0.48 EPS, expectations were $0.49. PLAB isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Photronics First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, February 21st, 2024. I would now like to turn the conference over to Richelle Burr, Chief Administrative Officer. Please go ahead.
Richelle Burr: Thank you, Lilian. Good morning, everyone. Welcome to our review of Photronics Fiscal 2024 First Quarter Results. Joining me this morning are Frank Lee, our Chief Executive Officer; Chris Progler, our Chief Technology Officer; John Jordan, our Chief Financial Officer; and Eric Rivera, our Chief Accounting Officer and Corporate Controller. The press release we issued earlier this morning, together with the presentation material that accompany 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 and include such words as anticipate, believe, estimate, expect, forecast, and in our view. These forward-looking statements are based upon a number of risks, 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. 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 ongoing performance. A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. At this time, I will turn the call over to Frank.
Frank Lee: Thank you, Richelle, and good morning, everyone. We achieved sales growth compared with last year and both IC and FPD increase with high-end growth being partially offset by soft mainstream demand in both sectors. Compared with the fourth quarter, sales were down due to seasonal trends and four fewer days in the first quarter. Demand was weaker and sales were softer than we expected during the first month of the quarter for both IC and FPD. Demand improved during the quarter, increasing our revenue run rate and giving us confidence that revenue will improve in the second quarter. Earnings improved over last year as operation leverage drove higher gross margins. Our quarter-over-quarter comparison, no varying cost gross margin to fall.
Once again, our team has somewhere to control expenses and deliver solid margins even with lower sales compared with fourth quarter. The first quarter earnings were $0.42 per share on a GAAP basis and $0.48 per share on a non-GAAP basis. Operation cash flow improved from the first quarter of last year, allowing us to further strengthen our balance sheet to support our growth plans. I will now like to offer some comments on the overall market, mass market and demand environment. As I stated earlier, mass demand was solved at the start of first quarter for both IC and FPD. Demand improved through the quarter, including the US spike in orders we see ahead of Chinese New Year, which started on February 9th. While still early following the holiday break, we do expect demand trends we saw prior to Chinese New Year to continue in Q2.
For IC, we are seeing a growing trend in no migration from customer in Asia as they move to 28 and 22 nanometers to improve performance. The trend is driving tap-out demand for our high-end businesses. In memory, the industry is seeing a recovery in demand. Our memory exposure is with Tier 2 providers now typically high-value applications. They are seeing encouraging demand trends as well. For FPD, our business outlook looks good even as the overall display industry remains soft. As a technology leader with a strong market presence in the more advanced AMOLED displays, we have a competitive advantage that keeps demand high for our display mask. Display for premium smartphone are continually asked new features, adding new features and panel maker are innovating to gain market share.
This benefits us as we have greater -- we have great relationships with large panel makers and can provide high-quality mask to help them achieve their goal. With the momentum during the second half of the first quarter and expect our revenue to grow in the second quarter. As this happens, we will remain focused on controlling costs to increase margins and increasing cash flow to support growth investments. I'm optimistic about the rest of the year, expecting the semiconductor industry should transition to the next phase of growth, leading to an increase in photomask demand during our second to third fiscal quarters. We believe our technology, strong customer relations and global presence will position us to continue to perform well. Before turning the call over to John to review Q1 results, I would like to public congratulations John on his upcoming retirement.
John has been an important member of our executive team since joining Photronics in 2017 and has been a great partner to me over entire time, especially during my time as CEO. He has led us through tremendous growth and geographic expansion. On behalf of the entire organization, I wish him well in retirement. John, the floor is yours.
John Jordan: Thank you, Frank, for those kind words. I am looking forward to retirement and spending more time with my family and some favorite projects. Although I'm leaving, I'm confident in the company's continued success. The CFO role in any company is a challenging position. In our case, I believe we have met that challenge with the strong support of an excellent finance organization. Eric, our Corporate Controller, who will assume the role of Interim CFO, as one of our Treasurer and both their staffs and our international CFOs and their staffs. The Photronics Board is demanding and supportive and the cohesiveness and commitment of the leadership team to a well-defined strategy of targeted investment and consistent execution will help ensure that success.
Now turning to first quarter results. Revenue was $216.3 million up 2% year-over-year and 5% less than last quarter. As Frank mentioned, our first quarter began slowly, but gained momentum as end market demand seem to recover. The first quarter is typically the seasonally slowest quarter in our fiscal year. Slower demand at the beginning of the first quarter exacerbated the seasonal decrease and there were four fewer days than the previous quarter, all combining for the sequential decrease. First quarter IC revenue was $157.6 million, up 1% year-over-year and 4% lower sequentially. High-end revenue increase led by strong foundry logic demand in Asia and high-end revenue in the US. Mainstream revenue was lower due to softness in Asia, in part related to the stronger high-end demand resulting from customers' migration to the more advanced nodes.
The long-term growth drivers remain intact as we support customers' technology road maps and investments as they expand capacity to support supply chain regionalization. FPD revenue of $58.7 million improved 8% compared with last year and was down 7% from Q4's record level. High-end FPD revenue improved year-over-year on an increase in demand for AMOLED displays used in mobile applications, although it was lower sequentially on normal seasonal softness. The mainstream FPD decline was attributable to the slow start to Q1 we alluded to before. We remain the technology leader, which gives us confidence in our ability to continue to outgrow the market as panel makers release innovative products to gain market share. Gross margin was 36.6%, slightly higher year-over-year and slightly lower quarter-over-quarter, consistent with changes in revenue and the effect of high operating leverage in both directions.
Operating expenses were higher this quarter primarily related to higher employee compensation expense. The resulting operating margin was 26.6%. Net income in the quarter was $26.2 million or $0.42 per diluted share. Adjusted for the nonoperating loss, net income was $29.9 million or $0.48 per diluted share, an improvement from last year and somewhat lower than our very strong Q4 earnings. We generated $41.5 million in operating cash flow, 50% higher than last year due to higher net income and effective working capital management. Our CapEx investments for growth were $43.3 million in the quarter. Our CapEx guidance for the year will remain at $140 million, primarily in both high-end and mainstream IC to address anticipated demand. We ended the quarter with a cash balance of $508.5 million, short-term investments of $13 million and debt of $23.4 million providing us with ample liquidity to fund investments in organic growth.
Before I provide guidance, I'll remind you that our visibility is always limited as our backlog is typically only one to three weeks and demand for some of our products is inherently uneven and difficult to predict. Additionally, the ASPs for high-end mask sets are high. And as this segment of the business grows, a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Given those caveats, we expect second quarter revenue to be in the range of $226 million to $236 million. We believe the momentum that built during the first quarter will continue into Q2 driven by solid long-term demand drivers across our markets. Our pricing environment has stabilized around the mid-30s -- mid to high 30s percentage gross margin level.
And at the midpoint of our guidance for Q2, we anticipated gross margin in the 38% range somewhat better than the margin in Q1. Based on those revenue expectations and our current operating model, we estimate non-GAAP earnings per share for the second quarter to be in the range of $0.50 to $0.58 per diluted share. After a slow start to the year, we're encouraged by strengthening demand during the quarter and into second quarter. We anticipate the continuation of these trends, along with the performance of our global team to provide sequential improvement in the second quarter and continued growth through 2024. I will now turn the call over to the operator for your questions.
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