Photronics Inc (NASDAQ:PLAB) Q1 2023 Earnings Call dated Feb. 22, 2023.
Corporate Participants:
Richelle Burr — Chief Administrative Officer
Frank Lee — Chief Executive Officer
John Jordan — Chief Financial Officer
Chris Progler — Chief Technology Officer
Analysts:
Thomas Diffely — D.A. Davidson — Analyst
Presentation:
Operator
Good day and thank you for standing by. Welcome to the Photronics First Quarter Fiscal 2023 earnings call. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to Richelle Burr, Chief Administrative Officer.
Richelle Burr — Chief Administrative Officer
Thank you. Ryska. Good morning, everyone. Welcome to our review of Photronics fiscal 2023 first-quarter results. Joining me this morning are Frank Lee, our Chief Executive Officer; John Jordan, our Chief Financial Officer; Chris Progler, our Chief Technology Officer; and Eric Rivera, our Chief Accounting Officer and Corporate Controller. The press release we issued on Monday, together with the presentation material that 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 or 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 material. At this time. I would like to turn the call over to Frank.
Frank Lee — Chief Executive Officer
Thank you, Richelle. And good morning everyone. I’m pleased to report we achieved revenue of $211.1 million in Q1, which exceeded our expectations. This was against backdrop macro challenges and uncertain industry conditions showing that Photronics was able to navigate a difficult environment very well. Indeed, the IC photomask market has been mixed, with strong demand in certain nodes and suffering demand in others.
On the positive side, we had received strong order flow from Asian foundries for mid range nodes from 65 nanometer to 45 nanometer, mainly for smart car, LED driver, automotive, image sensor, IoT, and other specific applications.
Our customer long-term purchase agreement that we enter over last few years benefit us by preserving market share and providing a good mix of product demand Helping us maintain revenue. This agreement have helped us better plan for capital reinvestment and handle period of slowing industry demand. On the FPD side. our Q1 fab utilization remained at a high-level, with smartphone display showing particular trends for China panel makers. This provide a major contribution to our FPD business growth and was consistent with a strong demand for our mid range IC display driver photomask heliograph. Gross margin and operation margin were slightly softer in Q4, Asia. Asia maintain a strong level through continuous cost-control management and price strategy. John will discuss our financial matrix in more details later. Looking-forward to Q2 outlook, based on current order trends and ongoing input from our customers, we anticipate demand to remain stable in Q2, resulting in guidance that is roughly in line with our first-quarter operation results. While demand uncertainty beyond Q2 is higher than usual, we continue to work closely with our customers to understand their demand and ready to support their business. In many cases, photomask demand can remain steady even during industry downturn as photomask demand is design-driven and now always-on the same cycle as wafer starts or display production. Longer-term, we believe photomasks are a great place to be in the semiconductor and FPD supply chain. As design-heavy future and great outsourcing for our captive march up owing to growing photomask demand. Moreover, global [Indecipherable] regionalization of IC supply will be a positive long-term driver of photomask as these new fabs require mask. We believe our global presence, growth technology portfolio and the close customer relationship position us to capitalize on this market trajectory over the long-term. We have made a good start in 2023, which will be a challenge a year. I have full confidence in Photronics global team And we will continue to support our customers by navigating through dynamics as they evolve and by executing with world class performance in capability, cost, and delivery. Before turning the call over to John, I would like to offer a few comments on our continued evolution of export control laws. Japan and Netherlands recently agreed to tighten restrictions on export of chip manufacturing technology to China. This may create additional risk for us as we rely on some Japanese firm for material to us and service necessary to manufacture photomask. We continually review our import and export practice to ensure compliance with regulatory requirements and work closely with our partners, vendors and suppliers to create brands that best serve our customers. The new restriction did not have a material impact on our first-quarter results. We continue to review the restriction and what impact that may have on our future operations. With that, I turn the call to John.
John Jordan — Chief Financial Officer
Thank you, Frank. Good morning, everyone. Revenue increased slightly in the first-quarter as both IC and FPD were up somewhat from the fourth-quarter and successfully offset typical seasonal trends, particularly for high-end technologies. Design activity continued reasonably robust. Our commercial teams have done a great job working with customers to understand their technology roadmap and win quarters. And our global team executed well and delivered. IC revenue was $156.6 million, up 0.2% sequentially. An increase in high-end demand particularly in Asia offset limited softness in mainstream. The supply demand imbalance continues to support a favorable pricing environment. And for the most part, we’re able to maintain ASP pricing, exclusive of premiums established over the last two years.
FPD revenue improved 1% sequentially to $54.5 million. Again growth in high-end revenue more than offset lower mainstream demand. High-end growth came from improved G10.5 plus demand and continued strength in mobile displays. Many times, the production capacity dedicated to strong demand for high-end masks can lead to reduced production of mainstream masks. Gross and operating margins were about two percentage points less than fourth-quarter margins due to less favorable mix and somewhat lower expediting premiums that customers pay to accelerate deliveries. Although the revenue increase was in high-end, both IC and FPD, not all high-end business is created equal. Difference in mix including nature of the product, product pricing and margins and location of manufacturer, especially related to memory, all effect operating margin outcome.
Operating expenses were slightly increased sequentially on higher people costs. First-quarter SG&A costs are typically higher than fourth-quarter due to higher employer taxes and health-care costs. SG&A increased from first-quarter last year due to overall higher salaries and wages, driven by labor market conditions and health-care costs. Nonetheless, operating expenses remained well below the 10% of sales implied in our target model. Maintaining a tight grip on expenses is part of our DNA, so to speak.
Non-operating loss in the quarter of $14.4 million resulted primarily from the unrealized loss from month-end re-measurement of U.S. dollar denominated balance sheet items into the local functional currencies in our foreign operations. The re-measurement exercise produces an unrealized noncash, accounting for variations in currency relationships, which can result in either a gain or loss each quarter. These non-operating items have been generally favorable over the last two years. Due to the degree of variation in the fourth-quarter and first-quarter amounts, we provided a non-GAAP presentation to demonstrate that operating results excluding the FX loss were in line with expectations.
The income tax provision of $12.6 million and noncontrolling interest expense of $15 million resulted in net income of $14 million and diluted EPS of $0.23 on a GAAP basis. On an adjusted basis, net income was $24.4 million and diluted EPS was $0.40. Last quarter, non-GAAP net income and EPS were $31.2 million and $0.51 respectively. The analogous net income and EPS last year were $14.2 million and $0.32.
Cash-flow generated from operations was $28 million in the first-quarter. We invested $31 million in capital expenditures and received a $1 million in government incentives. For full-year 2023, our capex forecast remains at approximately $130 million primarily for increased high-end in mainstream IC capacity. Our cash balance including short-term investments was $374 million at the end of the quarter or $340 million net cash after $34 million in debt.
We believe we have ample liquidity for our investments in growth and for resilience against uncertainties we may face in 2023. 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 $205 million to $215 million. We anticipate that the current revenue level will be sustained in the second-quarter and the ability to maintain revenues at this level ratifies our belief that the industry’s cyclical phase is not necessarily reflected in demand for photomasks. Based on those revenue expectations in our current operating model, we estimate earnings per share for the current quarter, the second-quarter, to be in the range of $0.38 to $0.48 per diluted share. We have made a great start to 2023. Photomask demand has been stable and our commercial and operating teams are performing well. Despite near-term uncertainty, we remain optimistic for the positive long-term view of increasing photomask demand. We believe we are the market-leader and we plan to continue to grow and carefully manage margins to keep moving toward attainment of our long-term financial targets. I’ll now turn the call over to the operator for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions]. Our first question comes from the line of Thomas Diffely of DA Davidson. Your line is now open.
Thomas Diffely — D.A. Davidson — Analyst
Yes, good morning and thank you for taking my call, my questions. So, John, I’m curious, when you look at the for second-quarter guidance, you talked about it being stable quarter-over quarter. Why do you think you’re not seeing the typical post Chinese New Year ramp in demand and is it just being offset by some other moving parts.
John Jordan — Chief Financial Officer
I think I’ll defer that one to Frank who has much more authority on Chinese New Year and the order rates.
Frank Lee — Chief Executive Officer
Typically, a lot of paper [Phonetic] happens before Christmas or Chinese New Year. This year, it’s slightly different because of the overall industry environment. So, we do see some mainstream paper start to increase. But, on higher side, we haven’t seen recover — strong recovery yet. But according to our input from our customer and from our sales, we believe the paper may start to happen later in the quarter, but we need to continue to monitor situation.
Thomas Diffely — D.A. Davidson — Analyst
Okay, thank you. And then in your prepared comments, you talked about growing nationalism. What regions in particular are you looking at there? And when do you think the capacity will be in place to benefit PLAB and kind of your ongoing business?
Chris Progler — Chief Technology Officer
Hi Tom, this is Chris. All the regions have programs to expand their domestic supply chains for semiconductors. Every major producing region has that. So we’re looking at all of them. U.S. and Europe in particular seem to be wanting to install significant amounts of new capacity. So. we’re tracking that. We’re meeting with customers. We’re looking at also an opportunity to apply for incentives ourselves to expand our networks there. As far as when that might materialize, I think you have to look at probably a three-year — two to three-year horizon at minimum, probably four to five years to really achieve the full entitlement of those kind of government initiated program.
So we’re seeing a little bit of it frankly already where some companies are trying to get ahead of the curve by expanding capacity. But I think you should think about probably a three-year horizon before it really takes hold.
Thomas Diffely — D.A. Davidson — Analyst
Okay, thanks Chris. And then Chris, follow up on this question. Maybe a little bit more on the Japanese technology restrictions, is it too early to tell, but what nodes does that include and what is your percentage of business of those potentially advanced nodes?
Chris Progler — Chief Technology Officer
I think for the most advanced nodes, the EUV in particular, I don’t see that having a large impact. Our EUV business is actually growing Year-over-Year. We expect it to happen again this year, but it’s mostly to support OEMs, equipment manufacturers, R&D programs, piloting, that sort of thing. So we don’t have a big exposure to production impacts from EUV, although it is growing for us.
The mid range nodes of course today I think as you know the scanner companies are still selling mid range scanner. This is really Deep UV 248 and dry ARF at immersion into all regions around the world. If that was severely curtailed, that has a major impact on future capacity of those nodes, because a lot of our key mid range products fit into those nodes. So that we do have to watch pretty closely. It does not seem to be happening right now, but it could in the future. So we keep an eye on it for sure.
I guess one of the ideas is that the world will still need those chips and if those tools do not go to one region, they’re going to go to a different region and it gets back to this regionalization opportunity we see. So that would be the response, if you ask how we will make up for it. The idea is, those fabs — chips are going to be built in someplace. And we certainly are plugged in all regions of the world, and we’ll try to take advantage of that. There may be another comment or two from Richelle on this particular topic. She is working on it very diligently every day.
Richelle Burr — Chief Administrative Officer
I think that’s, Chris, I think everything you said is accurate. And we’re still waiting to see what actually Netherlands and Japan finally agree to.
Thomas Diffely — D.A. Davidson — Analyst
Okay, thank you both. I appreciate that extra color. And then final question, John, you talked about capex of $130 million this year. I was surprised you talked about the mainstream expansion. I thought we are still at a point where the pricing in the mainstream market did not support the acquisition of new tools for that space.
John Jordan — Chief Financial Officer
So and that’s good memory Tom. You’re absolutely right. But as we mentioned, I think at the beginning of last year, there is still point tools that we can supplement our existing lines with and to the extent that those are available. There other used tools on the markets that we may be able to pickup at much less than new price and those for the most part are not even produced anymore. So to the extent we can scavenge tools like that, we also supplement the existing lines. So it’s really just on a point tool kind of exception basis.
Thomas Diffely — D.A. Davidson — Analyst
Okay, well, thank you all for your time this morning.
John Jordan — Chief Financial Officer
Tom, thanks for getting up early to call in.
Thomas Diffely — D.A. Davidson — Analyst
Just another day on the West Coast here.
John Jordan — Chief Financial Officer
Yeah.
Operator
[Operator Instructions]. Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to Frank Lee for closing comments.
Frank Lee — Chief Executive Officer
All right. Thank you. Thank you for joining us this morning. We have made a good start in 2023 and we are working hard to serve our customer and control our operations so we can maintain our revenue and margins. We remain optimistic on the long-term demand outlook for photomask and believe we can maintain our position as the market leader. Thank you again for your interest and have a great day. Thank you.
Operator
[Operator Closing Remarks].