Photronics, Inc (NASDAQ: PLAB) Q2 2023 Earnings Call dated May. 24, 2023.
Corporate Participants:
Richelle Burr — Chief Administrative officer
Frank Lee — Chief Executive Officer
John Jordan — Chief Financial Officer
Analysts:
Linda Bolton Weiser — D.A. Davidson — Analyst
Chris Progler — Photronics, Inc — Analyst
Gus Richard — Northland — Analyst
Presentation:
Operator
Good day and thank you for standing-by. Welcome to Photronics Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [ Operator Instructions]. As a reminder, this conference is being recorded Wednesday, May 24, 2023.
I would now like to turn the conference over to Richelle Burr, Chief Administrative Officer. Please go ahead.
Richelle Burr — Chief Administrative officer
Thank you, Kevin. Good morning, everyone. Welcome to our review of Photronics fiscal 2023 second 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 Corporate Controller and Chief Accounting Officer. The press release we issued earlier this morning together with the presentation materials that accompany 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 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 the 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 — Chief Executive Officer
Thank you Richelle, and good morning everyone. Second quarter results was strong. As we achieved record revenue and profit. Demand for our products grew in both IC and FPD with sequential revenue growth in all regions. Our position as the largest merchant photomask supplier provide us broad exposure to global markets and make us less dependent on any single any one sector or region. In addition, we have a talented and dedicated global team. They performance has been ever strongest to deliver record results in Q2. IC demand was strong again this quarter, especially for mainstream. This sector has been growing for the last several quarters. Demand for advanced portion of mainstream in 44 to 55 nanometer range is especially strong. On the other hand, we observe some softness in higher. However, we expect this to recover in the next one to two quarters and to reserve growth trend. Within FPD demand invariably grew significantly. Our customers are releasing new designs for multi displays as they try to get market share in the next generations of smartphones, tablets and PC. Demand for LCD has stabilized with good sequential growth. We expect this favorable trend to continue. Gross and operation margin benefit again this quarter from strong pricing and tight cost management across the organizations.
As a result, we earned $0.65 per share on a GAAP basis and $0.45 — $0.54 per share on a long term basis after [indecipherable]. This was an excellent quarter as we continue to gear through another record year. Photomask demand is driven mainly by new designs. Design activity is often follow different demand cycle than capital equivalent or wafer starts. For example, our customers often release new designs when their demand is soft and utilization is slow. And that could be a better time to introduce new products into their operations. The other condition that drive photomask demand is capacity expansion. Either through new fab or new tools in existing fabs. This better tend to make photomask demand more sustainable and even counter — cut the cost. Since I was named CEO one year ago. I’ve been an another time we saw employees across three organizations. And have enhanced driven a great in which has a current coverage to win.
In addition, we have strategically invest in technology and develop advanced process know how for our leading edge mask solutions. By working closely with our customers, we are able to fully support our technology and product roadmap. Our [indecipherable] EUV product lines continue to expand and achieving a number of important milestones. Included in our first EUV driven mass shipments in Q2. We have a great market position as a leading photomask supplier with 11 strategically located manufacturing sites. Based on data recently published by Tech Inside, we shipped approximately 30% of all photomask units globally. The leading providers of semiconductors and [indecipherable] trust us to supply their photomask. This confirms our leading position and is an indication of our growth and diverse market position.
Finally, we have a great balance sheet, our funds gross through cash flow generation and financial discipline, we have a strong and flexible balance sheet that provides increase that into your base in growth. While also providing support. Sure, we see a decline in demand. We are on track to deliver another record year in 2023. Later on, John will provide our Q3 guidance in more details. Photomask market demand is strong and our team is performing well and very optimistic about our future.
With that, I will turn the call over to Joe. Thank you, Frank.
John Jordan — Chief Financial Officer
Good morning, everyone. Second quarter revenue of $229 million was another record. A 9% sequential increase and 12% increase over last year second quarter. That represented the 9th consecutive quarter of year-over-year revenue growth. Demand remained robust across both IC and FPD reflecting strong design activity from our customers with these new products and expanding production capacity. Shipments within and into China, represented 51% of second quarter revenue. We are the global market leader in merchant photomask and our customers partner with us to achieve their product roadmap objectives. IC revenue of $167.1 million was up 7% sequentially and 15% compared with last year. Demand was strong across all regions and mainstream growth more than offset some high end softness. Pricing remains favorable as demand growth continues to outpace some increases in supply. We are seeing the strongest demand within the higher end of the mainstream technologies, which aligns well with the investments we have made to increase IC capacity. Our winning commercial teams are doing a great job of bringing those orders in. And we believe new designs and increases in chip capacity driven by regionalization of the semiconductor supply chain, we will continue to drive long-term positive trends in the photomask sector.
FPD revenue was also a record in the quarter, improving 14% quarter-over-quarter and 6% year-over-year.[indecipherable] panels used in advanced mobile displays, continue to fuel healthy demand for high end masks, which represented 83% of the FPD revenue in the quarter. Mainstream revenue also grew sequentially with increased right capacity and stable LCD demand. Gross and operating margins increased quarter-over-quarter by more than 260 and 270 basis-points respectively to 38.6% and 29.2%, which were 430 and 500 basis-points more. Then the margins reported in second quarter last year. This say sustained strong margins benefited from volume leverage, pricing power, favorable mix and disciplined cost management.
Operating expenses increased by 6%, but at 9.3% of revenue were lower as a percentage of revenue. Second quarter operating income of $67 million is the most, the company has ever recorded in a quarter. The non-operating gain in the quarter of $13.6 million resulted primarily from the unrealized gain from remeasurement of US dollars denominated balance sheet items into the local functional currencies of our foreign operations. This compares with a loss of $14.4 million in the first quarter, resulting in a $28 million sequential tailwind due to changing FX rates. Similar to last quarter, we have provided non-GAAP results that excludes the foreign exchange effect for better comparison of operating results.
GAAP EPS was $0.65 a share. After eliminating the effects of foreign exchange and the related income taxes and minority interest adjusted EPS was $0.54 for Q2. Compared with adjusted EPS of $0.40 last quarter and $0.38 in the second quarter last year. The strong net income performance and tight working capital management produced an outstanding $82 million in cash from operating activities. We invested $27 million in capital expenditures in the quarter, bringing [indecipherable] capex to $58 million. Our 2023 capex forecast remains approximately $130 million primarily for increased IC capacity. Our cash balance was $367 million at the end of the quarter and we held an additional $45 million in short-term investments. We have $28 million debt remaining consisting almost entirely of low cost equivalent leases. Our cash and short-term investments, combined with funds available under the credit agreement provide ample liquidity for our growth investments and resilience against uncertainties we could face in the future.
Before I provide guidance or 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 third quarter revenue to be in the range of $224 million to $234 million. We believe photomask demand will continue to do well in the current semiconductor environment. And we will continue to strive to increase our market leading position. Based on those revenue expectations and our current operating model. We estimate non-GAAP earnings per share for the third quarter to be in the range of $0.48 to $0.54 per diluted share.
Year-to-date, we have grown revenue 12% and expanded operating margins by 570 basis-points. Demand remained strong and our team is performing well. Our confidence that we can achieve our long-term targets and continue creating shareholder value. This is supported by our level of execution, strong balance sheet and positive outlook on continued strong design activity. I will now turn the call over to the operator for your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] My first question comes from Tom Diffley with DA Davidson. Your line is open.
Linda Bolton Weiser — D.A. Davidson — Analyst
Hi, good morning. This is Linda on behalf of Tom Diffley. Thank you for letting us ask questions. First of all, congratulations on a great quarter. So I guess my first question, in terms of the continued geopolitical issues, we have seen in the past few days. Japan now tightening export controls in China this coming after export restrictions by the US and I think I believe you mentioned you had 51% our shipments into China this quarter. So I’m wondering if you could quantify any headwinds that you’ve seen from China in terms of like the macro headwinds. And then the Japan Development and it would be just compare to your next quarter.
Frank Lee — Chief Executive Officer
Yes, thanks for that. Linda, good morning. Richelle Burr, who’s our Chief Administrative Officer, will cover that question.
Richelle Burr — Chief Administrative officer
Hey Linda, so with respect to the geopolitical tensions in — today, we’re not received. We have not had a material impact in our quarter because of the export control regulations and the geopolitical. The issues that are going on between China and the US, we are cognizant of the Japan tightening the controls again we monitor the controlled very carefully. We are working closely with our suppliers. We have been working with our suppliers, so that they can get licenses and we get licenses for the [indecipherable] tools or the parts that we need to continue our operations in China.
Linda Bolton Weiser — D.A. Davidson — Analyst
Thanks Richelle. That’s helpful and then I guess my second question, in terms of the demand side of things you noted, strong demand in the quarter, but as memory demand remained sluggish and mature holding up well. What are you seeing on the labor front for you guys and maybe discuss how this is impacting your pricing dynamics as well as your margin profile.
Chris Progler — Photronics, Inc — Analyst
This is Chris. I think the good question was related to particularly memory masks demand in the quarter with the market kind of look like in the dynamics, did I get that correctly.
Linda Bolton Weiser — D.A. Davidson — Analyst
Correct. Yes, that’s correct.
Chris Progler — Photronics, Inc — Analyst
Yes, so we have exposure to part of the memory market and those customers haven’t been as strong as they were in previous quarters, but particularly our most advanced DRAM customer is still doing fairly strong roadmap and development cycles, preparing for recovery of the markets, it looked like some of the memory pricing has started to stabilize maybe instead of bottom, maybe not, but the two or three primary customers we have on memory seems to be a bit more optimistic about what might unfold in the second half of 2023 calendar year and we’re seeing pretty strong R&D cycles and pretty strong product development cycles still, so that hasn’t changed. So, but strong in the quarter, but it looks like at least customers we serve. I’m getting a bit more optimistic about the latter half of 2023.
Linda Bolton Weiser — D.A. Davidson — Analyst
Thank you for the color. And then my last question is on capex. Maybe John, I might have missed it, but what are you thinking in terms of capex for this year and maybe could you give us a split for this year for FPD and IC.
John Jordan — Chief Financial Officer
Yes, most of the $130 million that we’ve got planned for this year Linda is in IC. The it seems as though we’ve really targeted our capex. Well, because the demand is in the high-end of the mainstream business, which is where we’ve invested significantly in the past year. Also some of our tool as we call end-of-life. So we have been into repair certain all tools with more efficient and update tools. So some capex we nicely spending on the end of life toolk replacement.
Linda Bolton Weiser — D.A. Davidson — Analyst
Got it. Thank you for your time.
Chris Progler — Photronics, Inc — Analyst
Linda Just like to add-on the geopolitical situation Richelle’s comments are well placed as they relate only to IC because the FPD business is not impacted by I think it is not controlled. FPD is not controlled, FPD has more [indecipherable]. But those impact IC and not FPD.
Linda Bolton Weiser — D.A. Davidson — Analyst
Thank you so much for your time.
Chris Progler — Photronics, Inc — Analyst
Thank you Linda.
Operator
[Operator Instructions ] Our next question comes from Gus Richard with Northland. Your line is open.
Gus Richard — Northland — Analyst
Yes, thanks for taking my question. Good morning, appreciate it. Real quick could you talk a little bit about expedites are you still seeing those in the mature side or is that activity slowed.
Frank Lee — Chief Executive Officer
Okay, Gus thank you. The premium side has been slowed down in Taiwan, however. We still has don’t kind of agreement which we signed last year or early this year. And in those long-term agreement, the premium charge has been defined and we continue. I will continue through that period of agreement and certainly agreement is for two years, some agreement is for three years. So we will maintain certain premium charge in this year and next few years.
Gus Richard — Northland — Analyst
Got it and then in terms of industry wide capacity. It seems like particularly mature it remains tight. And I’m just wondering as you look across the industry on the IC side of things. Is it just high in certain regions like China, where-is it type globally. Can you talk about how you see that evolving over the next couple years.
Frank Lee — Chief Executive Officer
In our industry, we will see if suspension some new [indecipherable] in China and this new players some are in a very early-stage, some are start to get customer qualification and credit market. However, we believe the impact whereas start on the low-end of the business and also for this new [indecipherable] achieved certain economic scare you went take several years. So our business in China, basically, we are focused on the higher end of the mainstream and so we weigh us on differentiation with new competitors. Outside of China Photomask IC photomask capacity expansion actually is not significant and as we just mentioned we spent on capex part of those of course is for capacity expansion. But that some portion of those end of life replacement and this kind of end of life situation happen to every merchant and not only to us. So, even with every [indecipherable], but some tool will be end of life. So, overall. capacity increase their limit.
Gus Richard — Northland — Analyst
Got it. So basically just summarize. Overall, you see the capacity kind remaining tight and the incremental capex is for replacement of all the tools that are no longer supported.
Frank Lee — Chief Executive Officer
Correct.
Gus Richard — Northland — Analyst
Got it and then over the last 40 years IC photomask margins rarely have gotten into the 30s. And I’m just kind of curious what gives you the confidence that sustainable level just given the history of the industry.
Frank Lee — Chief Executive Officer
I think. at least in the best years as you mentioned photomask is not a big player is semi industry. Lot of companies are focusing on Wafer fab capacity expenditures and paid attention to photomask supply. So the surprise demand, of course was on the other side more supply than demand. However, because most merchant photomask are not making is enough money to make an investment. So gradually the trend has shift between the supply-and-demand. Especially in the past two years. rather new IC [indecipherable] create a rather new way for wafer fab. So the combination of supply side of photomask do not dispense on the demand side rater a new wafer fab and new product demand. So the supply and-demand is balance is getting worse. And under such situations, we believe we have some leverage in terms of pricing and also profit margin.
Gus Richard — Northland — Analyst
Got it, got it, and. And just last one for me. Are you seeing an extension in the mature markets of lead times or have they stabilized at this point.
[Technical issue]
Frank Lee — Chief Executive Officer
Our lead time was very long last year. And before the shortage and the lead time lag, 7, 10 days, the longest. And lastly some lead time was as long as 90 days and at this moment, the lead time have been improved, but still it is much, much longer than than the normal lead time before. So we are still are seeing premium charge and but this lead time is different from note to note certain nodes the [indecipherable] improved.
Gus Richard — Northland — Analyst
Got it. Thank you so much. I think that’s it from me.
Frank Lee — Chief Executive Officer
Thank you. Gus.
Gus Richard — Northland — Analyst
Thanks very much.
Operator
[ Operator Instructions ] And I’m not showing any further questions at this time, I’d like to turn the call back over to Frank.
Frank Lee — Chief Executive Officer
We are you have great value chosen to enjoy us this morning. And appreciate your interest in Photronics. Our performance through the first half 2023 has exceeded our expectations. Market demand is strong and financial ventures are improved year. I am proud of the way with our team has performed to serve our customers and continue to contribute to our achievements. We believe we are under our way to achieving our long-term target and look-forward to updating you again our progress and have a good day-to everyone. Thank you.
Operator
[ Operator Closing Remarks].