Photronics, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Dec 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Photronics Q4 Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. Please be advised that today’s conference is being recorded, Wednesday, December 9, 2020. I would now like to hand the conference over to Troy Dewar, Vice President of Investor Relations.

[Troy Dewar:]

Thank you, Jimmy. Good morning everyone. Welcome to our review of Photronics 2020 fourth quarter financial results. Joining me this morning are Peter Kirlin, our Chief Executive Officer; John Jordan, our Chief Financial Officer; and Chris Progler, our Chief Technology Officer. The press release we issued earlier this morning, along with the presentation material which accompanies our remarks, are available on the Investors section of our web page.

[Peter Kirlin:]

Thank you, Troy, and good morning, everyone. Despite operating in a very challenging environment, full year revenue in 2020 was $610 million, the highest ever in the third consecutive year of record revenue. FPD achieved record revenue for the second year in a row, surpassing last year's record level total by an eye-popping 32%. IC revenue in 2020 was the second highest ever, just shy of a record established in 2015. We also achieved record revenue products shipped to customers in China on a consolidated basis as well as for both IC and FPD. It was a great year for Photronics, the achievement of many significant milestones. For the fourth quarter, revenue was lower as typical seasonality was worsened by geopolitical factors, primarily in FPD, where mobile display demand was constrained by U.S. trade sanctions against Huawei. In IC, we saw strengthening trends among some logic/foundry customers, in the U.S. and Asia. However, memory demand was weaker. With a combination of these factors, our revenue was down 5% sequentially. With the quarterly decrease in revenue and the high amount of operating leverage in our business, we saw a contraction in profit margin. Operating expenses stayed under control as we maintain cost discipline in the midst of challenging circumstances thus we're able to deliver $0.10 in diluted earnings per share. We ended the year with $279 million in cash, an increase of $72 million from last year. This was accomplished even as we spent $71 million on CapEx, investing in future growth, and $34 million on share repurchases, returning cash to our shareholders. I believe these achievements demonstrate that our investment strategy is working, and we are on the path to improving long-term shareholder returns.

[John Jordan:]

Thank you, Peter. Good morning, everyone. As Peter mentioned, 2020 was a record revenue year. The year began on a run rate in Q1 well in excess of the $630 million target we set almost three years ago. And after the COVID related disruption in Q2, we recovered to a run rate still in excess of the target. Q4 was again impacted by geopolitical influences when the trade sanctions against Huawei suppress the FPD business while that supply chain reset. Nonetheless, $610 million, fiscal year 2020 revenue exceeded the fiscal year 2019 record by 11% and set the third consecutive annual revenue record. During fourth quarter, our business typically sees a slight seasonal decrease in demand, as the design cycle winds down from recent introductions of new consumer electronics products. Our fourth quarter decline revenue was exacerbated by pockets of softness in some sectors and a negative impact from U.S. trade sanctions against Huawei. Revenue for the quarter was up 5% compared with last quarter and $0.04 compared with the same quarter last year. IC revenue was particularly strong in China has received a record level of product to customers there. Foundry, logic demand drove the increase as the region continued to be a healthy location for new design activity. In other geographies, Korea and Taiwan also saw a good foundry logic demand and U.S. logic revenue benefited from an emergence of trusted supplier opportunities for defense applications. The area of weakness for high-end IC was memory, where recovery is not expected until sometime during 2021.

[Operator:]

Our first question comes from Patrick Ho with Stifel. Your line is now open.

[Patrick Ho:]

Maybe first off, Peter, in terms of the mainstream IC marketplace. Can you just help reconcile a little bit of the commentary I've been getting in terms of high utilization rates for many market segments within the trailing edge geometries, and I guess just the kind of the mixed outlook you're talking about on that side of things?

[Peter Kirlin:]

Yes. So if you look at our mainstream business this year, Patrick, can you look at it at the 100,000 foot level, it's been pretty stable quarter-to-quarter, right? Revenues of high 60s, $67 million, $68 million, maybe that $70 million, if you peel back that remarkably stable trend, right, what has happened during the year is a rotation of the business from the U.S. and Europe into primarily Taiwan and China. So our mainstream business is demand profile is shifting with, as I said, with the West seeing the market diminish with growth in the Far East. We think that rotation is more or less run its course, and we see upward demand in the foundry logic business in Asia. And we expect that to continue and strengthen. Actually, as we move through next year and into the following year, so there's been a shift. We think the shift is more or less complete, and we're actually really bullish on the market opportunity in China and Taiwan. And you'll hear a bit more about that next week, but it's a clear target for us for growth.

[Patrick Ho:]

Fair enough. And maybe as my follow-up question on the memory side of things. I concur that the current environment for most of the memory market continues to be soft. But at the same time, you do hear of the industry transitions, both in terms of DRAM as well as NAND towards next-generation devices. Can you reconcile a little bit of typically the shift to next-generation nodes and layer counts, that's usually a positive driver for Photronics in terms of design wins. Can you reconcile, I guess, a little of what's going on there versus some of the softness that you're seeing in the near term?

[Peter Kirlin:]

Yes, it's interesting because, again, if you look at our IC business, year-to-year, we've had a lot of -- our business has been sold through right, this year, where we've had two -- we would describe as pretty healthy quarters by Q1 and Q3. And those quarters have been at about a $640 million run rate, which is great, but we've had Q2 and Q4. Q2 was basically driven down into the high 500 on a run rate basis by COVID. And Q4 was driven to just slightly below $600 million by basically trade war impacts. So our business has been schizophrenic from, what I would describe as, strong and normal to profoundly influenced by external factory. Through that, our memory, likewise, has been a sold through the year up and down. And the only real material trend you can see if you look year-over-year, our memory business is down, which I think reflects the overall state of the memory industry. From the perspective of our customers, we're expecting our memory business to step up significantly next year, particularly as we get into the early spring. So, we see this as more or less where we are as near-term belly. But we're optimistic, given what we see in the market for a rebound in the memory business and our particular customers have pretty aggressive plans for no transition next year, which is really, as you point out, what drives our revenue in that industry. So yes, so that's a quick summary.

[Operator:]

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Peter Kirlin for closing comments.

[Peter Kirlin:]

Okay. Thank you for joining us this morning, and we look forward to reconnecting next money during our Investor Day.

[Operator:]

Before we sign off, speakers, I do see two other participants join the Q&A queue. Would you like to continue to take their questions?

[Peter Kirlin:]

Of course, yes.

[Operator:]

Understand. Our next question comes from Tom Diffely with D.A. Davidson. Your line is open.

[Unidentified Analyst:]

This is for Tom this morning. I guess I wanted to ask how much conservatism do you, I guess, are you including in your first quarter outlook? I understand that right now, obviously, the geopolitical headwinds are difficult to sustain, but any color on the actual quantifiable specificity number?

[Peter Kirlin:]

Yes. So if you look at our business, normally, Q1 seasonally is down maybe 5% off of Q4. So the midpoint of our guidance reflects a flat quarter. So our businesses -- our markets are improving. So, we pegged the guidance to basically improving improvements in our market to offset seasonality. That's what we've done, if you look at our IC business, right, first, demand trends in Asia, pretty solid. If you look at FPD, right, last quarter, we estimate that the industry -- our industry photomedicine industry may be brand at about 70% utilization in FPD in terms this is internally what we estimate. That's the worst quarter, I can remember. My memory maybe goes back three to five years, I'm getting old, but it was a really sour quarter for FPD. Likewise, the month of November through Thanksgiving remains sour. Right around Thanksgiving, the FPD market started to rebound and it continues to improve. Now, could it -- what will it do, right? We don't know. So, we're trying to kind of age between a normal market and what was a terrible market. Our utilization was probably $15 million percent above the industry average last quarter, but it's the first quarter in several years where we haven't been sold out. So that's kind of our market. That's what we see and that's our guidance.

[Unidentified Analyst:]

Thank you so much for the color there.

[Peter Kirlin:]

Yes, I would also add, unlike prior years, right, before the new revenue recognition rules, right. Every plate we have in the line has a percent completion associated with it, right. So, our business is a complete reflection of what the market is. We're not a capital equipment company that runs with backlog that can pull some tools into this quarter that would ship next quarter with a week two to in backlog, right. Our business is an exact representation of what the market gives us. There's no ability for us to manage our WIP or our backlog to strength in one quarter at the expense of another. Management has no operational discretion whatsoever comes in. We make it, then you guys see exactly what the tone of the business is real time.

[Operator:]

Thank you. Our next question comes from Gus Richard with Northland. Your line is now open.

[Gus Richard:]

Real quick on SMIC which has just gotten banned, are you seeing customers migrate their business to other foundries? And is that helping the mainstream?

[Peter Kirlin:]

Well, I think to the extent that happens over time, right. Yes, first of all, SMIC is a customer of ours. They're not a big customer because they have their own captives, but they're customer. Anything that harms the customer for us is a negative. We don't like to see any customer harmed in any way by external factors that are not driven by the market. So, I think that would be the first comment. We wish SMIC, like all our customers well, and it's our culture, regardless of where a customer sits in the world to all run through walls to help them be successful. That's really what we want. Having said that, it is true that if you shift market demand from a customer that builds the -- a significant fraction of their own photomasks to customers who buy them on the merchant market, that's going to create demand for Photronics, but it's not a happy way in our mind of seeing our market expand.

[Gus Richard:]

Got it. And then, there's been a number of companies that have planned to or have listed on the star market where valuations for semiconductor-related companies are significantly higher than the U.S. Is that something you guys might consider? Or any thoughts there?

[Peter Kirlin:]

Well, we can -- we constantly, relentlessly, look for ways to increase shareholder value. And this is one of many possibilities that we either have or intend to consider a move like that has some potential upside, and it could have potential downs depending on what happens on the geopolitical front. Yes, so we're aware of that we're looking at it, but we're a company generally that's been around for 50 years, and we're normally slow to move to new trends because that's typically a good way to get a lot of hours in your back. So, we're very aggressive with market, so we unlike others, have really rushed headlong into China, because we see, that's where the growth is in our industry. So, from an execution perspective, we're very aggressive from the standpoint of, what I would describe as other trends, we generally like to see others move forward. Look at the outcome of that and evaluate both of them the minuses based on some kind of history and then make an informed decision. So that's where we are.

[Gus Richard:]

Okay, thank you for that.

[Peter Kirlin:]

Yes, that looks interesting, but it's early in the games, yes.

[Gus Richard:]

Yes. Okay, this is for me. Thanks so much.

[Operator:]

Thank you and I'm now showing no further questions in the queue at this time.

[Peter Kirlin:]

Okay, so thank you for joining us this morning and we look forward to reconnecting next Monday.

[Operator:]

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program. You may now disconnect.