Photronics Inc 2026 Q3 Earnings Call

Good morning, everyone. Welcome to our review of Photronics fiscal third quarter 2026 financial results. Joining me this morning are George Macricostas, Chairman and Chief Executive Officer, Eric Rivera, President and Chief Financial Officer, and Frank Lee, Senior Executive, Asia. The press release issued earlier this morning, along with the presentation materials accompanying our remarks, is available on the investor relations section of our website and in the Form 8-K filed with the SEC this morning. This call includes forward-looking statements that involve risks and uncertainties which could cause Photronics results to differ materially from management's current expectations. We encourage you to review the forward-looking statements disclosure included in our earnings release and in our most recent 10-K and subsequent filings.

In the coming months, we will be participating in the following investor conferences: Three Part Advisors in Chicago, Lake Street Capital in New York, and the CEO Summit at SEMICON West in San Francisco and SEMICON Europa in Munich. With that, I will now turn the call over to George.

Thank you, Ted, and good morning, everyone. Total fiscal Q3 revenue of $216 million increased 3% year-over-year was above the high end of our guidance range. Our fiscal third quarter results reflect the recovery of some of the semiconductor design releases that were delayed and pushed out of our fiscal second quarter. We began to recognize some of this recovery during the month of May, as we had previously communicated during our Q2 earnings call. This gradual recovery continued through the remainder of fiscal Q3. As discussed during our prior earnings call, we indicated that delays in new semiconductor design releases were driven by several factors, including elevated fab utilization rates, memory constraints, and geopolitical uncertainty. While these factors continue to affect the photomask industry, some design releases have moved into production.

With semiconductor wafer utilization rates remaining high, fabs are prioritizing higher profitability projects and expanding capacity at higher technology nodes. These node migration actions, especially at 28, 22, and 14 nanometer, are occurring across a broad set of customers in different geographic locations. Node migration and a sequential improvement in high-end business conditions benefited our high-end IC business, which recorded a record 44% of ICs, $155 million in revenue. Our ongoing regionalized investments in the U.S. and Korea remain on track. At our Allen facility, we continue to target initial revenue late this fiscal quarter with its geographical diversification contribution reflected in fiscal 2027 revenue and beyond. In Korea, clean room preparation for the expansion project to 8 nanometer has been substantially completed. Having received some of the initial tools, the timetable for planned installations remain on schedule.

These investments are expected to position Photronics to benefit from node migration and regionalization trends as we diversify geographically. Increasing our capabilities and capacity at the faster-growing high-end portion of the market also expands our potential to capture opportunities from a variety of customers, including captives, as they look to increase outsourcing. As we remain on track to deliver more advanced 8 nanometer capabilities in Korea over the next year and a half, we are further advancing our global technology capabilities beyond 8 nanometer with a focus on EUV, customer partnerships, and other mask technologies. Over the past several years, we have been leveraging partnerships with industry leaders to supply EUV R&D masks and solutions to customers while the full turnkey EUV merchant market develops. We have also supplied EUV-related masks to the semiconductor equipment supply chain.

Through focused internal R&D programs and capital investment and the expansion of business partnerships, we intend to gradually introduce new EUV capabilities. This pragmatic EUV strategy should expand our addressable market at the high end. Our intentions are to manage the EUV investment cycle by expanding our EUV capabilities as the associated business opportunities emerge. Turning to FPD, revenue of $61 million remains near all-time highs, reflecting our strength in producing more complex masks. Strong OLED demand was driven by consumer electronics such as flagship and high-end smartphones scheduled for launch in developed markets in the coming months. This high-end FPD demand is expected to continue through fiscal Q4 and beyond. We received additional G8.6 AMOLED orders from a growing customer base, an indication that the G8.6 market is broadening.

Combined, these high-end projects are expected to be offset by consumer electronics for the emerging markets, where the tight memory conditions have disrupted some product launches. Our most advanced FPD writer, which was installed earlier this year, entered mass production during the quarter. It has received strong market traction as it aligns well with our customers' technology roadmaps. We expect this writer to remain a pivotal tool in strengthening our market-leading position in the high-end of FPD mask market. I now turn the call over to Eric to review our third quarter results and provide fourth quarter guidance.

Thank you, George. Good morning, everyone. Fiscal third quarter revenue came in at $216 million, an increase of 3% both year-over-year and sequentially, as we recognized some recovery from the semiconductor design release delays that had occurred during our fiscal second quarter. Overall, we experienced improved demand conditions in Taiwan, along with the U.S. and Korea, particularly at the high end. IC revenue of $155 million increased nearly 5% both year-over-year and sequentially, and represented 72% of total revenue. The high-end portion of IC represented 44% of IC revenue, recovering as business conditions improved and wafer fabs prioritized more profitable chip designs, accelerating node migration trends. Our mainstream business declined to $86 million, due in part to node migration trends. Node migration from mainstream to high-end is an overall positive to the company, as it is a natural evolution to higher ASPs per chip design.

We are expecting mainstream to increase in the U.S. in fiscal 2027, as we expect to capture market share at higher end nodes once the Allen expansion is complete. Turning to FPD. Fiscal Q3 revenue of $61 million declined modestly in the quarter, though remains near all-time highs. Customer activity in Korea for high-end consumer electronics remained strong, while China demand was influenced by the timing of certain consumer electronic releases for emerging markets that are being impacted by the industry's tight memory conditions. Overall gross margin of 33% improved sequentially on product mix and increased revenue, and the associated operational leverage in our financial model. Operating margin was 21%, and diluted GAAP EPS attributable to Photronics shareholders was $0.49 per share. Excluding foreign exchange impacts, non-GAAP diluted EPS was $0.50 per share.

The improved performance of our IC business, along with our display operations remaining near all-time highs, contributed to our earnings during the quarter. Operating cash flow of $76 million represented 35% of revenue. CapEx was $37 million. Fiscal year to date CapEx of $130 million reflects the timing of outlays associated with the $330 million of CapEx we have been guiding to for fiscal 2026. We are updating our fiscal 2026 CapEx guidance to a range of between $255 million and $305 million. We remain committed to the projects and timelines driving our original $330 million CapEx guidance. However, the cadence of orders and vendor delivery of certain high-value tools to our fabs can vary, causing the timing of our capital expenditures to fluctuate. To the extent any planned spending shifts beyond this fiscal year, we would expect it to carry over into fiscal 2027.

I will provide fiscal 2027 CapEx guidance during our fiscal Q4 earnings release in December. Total cash and short-term investments increased by $35 million in the quarter to $673 million, including $504 million held within our joint ventures, in which we hold a 50.1% ownership interest. As we consider the cash needs associated with our planned investments, we are starting from a position of significant financial strength, with a strong balance sheet and a business that generates substantial cash from operations. With customers demonstrating a willingness to partner with us, we believe we are well-positioned to make these investments while maintaining a disciplined approach to achieving attractive returns. To support these investments, which also include our EUV investment strategy George discussed earlier, we may supplement our existing liquidity through borrowing.

As a reminder, our capital allocation strategy remains focused on three priorities: reinvesting in the business to support organic growth, pursuing strategic opportunities, and returning capital to shareholders. We will continue to evaluate the most effective use of our cash and remain disciplined and opportunistic in our capital allocation decisions, prioritizing investments that offer the highest expected returns. Before providing guidance, I'd like to remind you that demand for our product is inherently variable. High-end mask sets carry significantly higher ASPs, meaning even a small number of orders can materially impact revenue and earnings. Because of the tight fab capacity, memory, and geopolitical conditions, visibility into the timeline of design releases has become even more uncertain, as we have recognized over the past two quarters. Meanwhile, the order delivery time remains in the days or weeks, requiring rapid response times for our operations.

As a result, we are widening our revenue guidance range for fiscal Q4. As of today, we expect fiscal Q4 revenue to be in the range of $207 million-$227 million. Based on those revenue expectations and our operating model, we estimate fiscal Q4 operating margin between 19% and 24%, and non-GAAP diluted EPS between $0.40 and $0.56 per share. I will now turn the call over to the operator for your questions.