Photronics exceeds expectations with $216 million in Q4 sales; strategic investments position for high-end growth in 2026.

Good day and thank you for standing by and welcome to the Photronics fourth quarter fiscal year 2025 earnings conference call. At this time all participants are in the listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host Ted Morrow, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone. Welcome to our review of Photronics' fiscal. Fourth quarter 2025 financial results. Joining me this morning are George Macrocasis. Chairman and CEO Eric Rivera, CFO Frank. Lee, Head of our Asia Operations and Chris Progler, cto. The press release we issued earlier this morning together with the presentation material that accompanies our remarks are available on the Investor Relations section of our website. This call will include forward looking statements. That involve risks and uncertainties that could cause Photronics results to differ materially from management's current expectations. We encourage you to review the notice. Regarding forward looking statements contained both in today's earnings release as well as our SEC filings. Most recent SEC filings during the quarter. We will be participating in the New York Summit next week and the Needham Growth Conference in January. I will now turn the call over to George.

Thank you Ted and good morning everyone. We delivered strong financial results with sales of 216 million exceeding expectations and increasing 3% sequentially. The major positive in the quarter was record high-end IC revenue led by the US and Asia non-GAAP Diluted EPS also surpassed guidance coming in at $0.60 per share. During the quarter, we recognized a tax valuation allowance reversal reflecting an improvement in our US execution and outlook which Eric will elaborate on. As we look to 2026, we will continue to leverage our operational strengths and geographic footprint spanning 11 production facilities to continue to deliver high quality photomasks. As previously communicated, we are currently executing strategic geographic expansions at existing facilities, reinforcing our position as a leading merchant provider of photomasks.. These initiatives are expected to enhance the revenue contribution from these facilities, broadening and further diversifying our geographic revenue mix. Our investments are aligned with two industry trends. First, advanced node migration. Progression to more advanced nodes requires more mask layers per IC device and finer resolution mask features driving increased mask demand and higher mask set ASPs. Our investments will increase our exposure and to higher end nodes in the US and in Korea. Second, regionalization. Semiconductor manufacturing continues to diversify globally including meaningful reshoring of production in the U.S. we are a market leader in the U.S. and will pursue numerous higher end opportunities through our U.S. investment plans. More specifically, a year ago we announced our capacity expansion and capability extension at our Allen, Texas facility. We expect to begin tool installation in the coming months with customer qualifications in the spring time frame and initial revenue later in 2026. In Korea, our clean room expansion is underway with equipment installation beginning in 2026. Customer qualifications for 8 nanometer are expected through fiscal 2027 with revenue contribution beginning in 2028. Additional node migrations are expected as market demands develop. Together, these initiatives will diversify our geographic revenue mix and increase our exposure to leading edge chip designs. During the quarter we achieved several positive technical and commercial developments to highlight a few. 1. We are recognizing more outsourced opportunities from captive mask makers including leading edge DRAM and logic nodes. 2. In advanced IC packaging we saw increased demand for our larger format masks that support AI driven chip packaging applications. 3. We completed shipments of masks fabricated with our newest generation DRAM node mask process co developed with a key memory customer. 4. Demand tied to edge AI applications continues to rise across Asia, highlighting our exposure to this critical segment. And finally, our advanced Multibeam Mask Writer we installed in the US earlier in 2025 is now in full production with over 20 customers qualified including multiple EUV users. Our technology roadmap continues to advance through joint development with customers, collaborations with consortia such as IMEC and partnerships with critical suppliers. I will now review market conditions heading into fiscal 2026 before turning the call over to Eric. The high end of the market remains strong, supported by sustained investment in hyperscale data centers for AI rollouts. This momentum continues to drive demand for the highest end photomasks. Many of our high end customers are providing positive forecasts that reinforce favorable node migration trends and global manufacturing regionalization. While the high end of the market remains robust, the mainstream IC market remains soft though appears to be stabilized. Returning to our quarterly results, IC revenue was 157 million. We achieved a quarterly record in high end IC representing 42% of IC revenue thanks to a strong technology portfolio and exceptional execution. Demand in the US has been particularly strong, validating our expansion initiatives designed to bring additional advanced production capacity to the market. As a reminder, we are the only US headquartered company that can produce trusted photomasks and our Boise facility is the only commercial high end US trusted mask facility. In flat panel display. Revenue of 58 million declined sequentially reflecting order timing. Demand softened later in the quarter and into the early days of Q1 but has since rebounded. FPD mask demand is expected to remain strong throughout Q1. Earlier in 2025, we shipped our first two G8.6 AMOLED orders and anticipate additional G8.6 demand in fiscal Q1 as adoption of this technology expands in consumer and enterprise high performance display segments. I will now turn the call over to Eric to review our fourth quarter results and provide first quarter guidance.

Thank you George Good morning everyone. Fourth quarter revenue exceeded expectations at 216 million, increasing 3% sequentially. Though declining 3% year over year, IC revenue of 157 million declined 4% year over year. However, we experienced a meaningful mix shift towards high end shipments which reached record levels in both absolute dollars and as a percentage of total IC revenue at 42%. High end IC strength reflects strong order patterns globally including in the US which now represent 20% of total revenue where reshoring efforts. continue to create a favorable demand environment. Meanwhile, our mainstream IC revenue declined 12% year over year due to several factors. The declines are broad based geographically because of market conditions. However, the mainstream IC decline was deepened by recent geopolitical impacts across mainstream customer segments primarily in China. Additionally, we strategically redirected mainstream capacity including capabilities obtained from end of life tool replacements towards higher end opportunities. Turning to FPD, fiscal Q4 revenue of 58 million declined 1% year over year due to timing of order patterns as we look to fiscal Q1. The temporary FPD slowdown that emerged later in Q4 persisted through much of November but has since abated with recovering order levels. Gross margin improved to 35% exceeding expectations driven by a favorable product mix. Operating margin of 24% also exceeded our guidance range. Diluted GAAP EPS attributable to photronics shareholders was $1.07 per share. We experienced a favorable 16.8 million benefit related to the reversal of historical US tax loss valuation allowance. We had recorded this tax valuation allowance as the benefit was previously deemed unrealizable given the improved performance and outlook of our US Business. US GAAP required a reversal of this tax loss allowance resulting in the positive 16.8 million result to GAAP net income. Excluding foreign exchange impacts and a deferred tax valuation allowance reversal. Non GAAP diluted EPS was 60 cents per share. Our earnings performance reflects a greater contribution from our US operations. During the quarter we generated 88 million in operating cash flow equating to 41% of revenue. Capex was 68 million bringing full year capex to 188 million. As discussed throughout the year, we have entered a period of elevated capital investments to drive future organic growth. Exemplifying this commitment, our initiatives in the US And Korea will further strengthen our ability to capitalize growth trends, including increased captive outsourcing, high end node migrations and geographic supply chain diversity. For fiscal 2026, total CAPEX include typical annual spending, incremental end of life tool upgrades, and special project investments in the US And Korea. Notably, end of life tool upgrades bring new capabilities, enhance production efficiency, and allows us to target higher value opportunities. We expect fiscal 2026 CAPEX to total approximately 330 million. All investments have been carefully vetted to meet our return thresholds and align with. Major industry demand drivers. Total cash and short term investments increased $12 million sequentially to $588 million, which includes $422 million of cash held in our joint ventures. Our capital allocation strategy includes three Reinvesting for organic growth Pursuing strategic opportunities Returning cash to shareholders after spending $97 million in fiscal 2025, we will remain opportunistic in repurchasing the remaining $28 million under our stock authorization. Before providing guidance, I'd like to remind you that demand for our products is inherently variable. Visibility is limited with typical backlog of only one to three weeks. Additionally, high end mass sets carry significantly higher ASPs, meaning even a small number of orders can materially influence revenue and earnings. Demand is also affected by IC and display design activity and secondarily by wafer and panel capacity dynamics. Given current market conditions and the industry outlook George discussed, we expect fiscal Q1 revenue to be in the range of 217 and 225 million. Based on those revenue expectations and our operating model, we estimate fiscal Q1 operating margin between 23 and 25% and non GAAP diluted EPS between 51 and 59 cents per share. I will now turn the call over to the operator for your questions.

Thank you Melissa and gentlemen, as a reminder to ask a question, you will need to press Star 11 on your telephone and wait for your name to be announced. Please stand by for our first question.

And our first question coming from the line of Tom Diffoley with DA Davidson your line is now open.

Hi, good morning, this is Linda on for Tom Diffoley. Thank you for letting us ask questions. My first question is on the market share now that your largest competitor just went public. What is your relative if size and or trends in share? Any color there will be very helpful.

Could you repeat the question? I'm sorry.

Oh, can you hear me now?

Yes, we can, but we didn't hear the question clearly enough.

Oh, okay. Yeah. So my first question was on market share. So with your largest competitor being public now, I was wondering how you're viewing your relative size and trends in the market share versus your competitor.

So our market share. Thank you Linda. This is Eric. So we see the market share being as we have perceived in the past. The fact that Techsen now is public helps us get a little bit more detailed. But we see our market share being exactly what we thought before. They have a little bit more. They have more market share than we do for sure. When you consider. Our FPD business that they don't participate in, we're about the same size when you combine them. The same size on FPD and different elsewhere. So Techsen doesn't participate in FPD. Photronics does. Techsen. Has a larger market share than Photronics does. Nic. However, when you consider our FPD business, we're around the same size.

Okay, got it. And then looking at the overall competitive environment, what is your view on the overall health of the environment? Yeah, any comment there would be helpful.

Yes, we are seeing a lot of node migration and especially in the States in the past. We have our major operation facilities in Asia. But right now with ensuring of semiconductor industry in the United States, our Boise site side which has the high end capability. We are the only high end merchant mask supplier in the country and with all the growing high end demand in the country, we believe we are on the right track to capture more high end shares. So this also answers your first question that our market share with the growing US demand especially in the high end and trusted product, we believe our market share will continue to increase and it. Will be supported by our investments in our Allen facility as well which is. Supporting the reshoring efforts as well.

Thank you. That makes sense. And then I also wanted to touch on the mainstream business. You said that there is continued softness there but you're seeing it stabilizing. Just curious if you're seeing any kind basically what you're seeing on the supply and demand side of things and yeah, how that has impacted margins and maybe how that is impacting your capital spend for next year.

Our mainstream market we are referring to mainly our mainstream business in China as most people are aware that in China due to the geopolitical issue they do have some made in China policy. There are quite a few new local mask houses in China. However, Photronics as a market and technology leader in China. We try to differentiate ourselves from our local competitors. We are focusing more on our anchor key customers. We build relationship with these key customers with better product quality, support and so on. And also we utilize our capacity better mainly for more higher value product mix. So I think there are some competition in the mainstream, especially the low end of the mainstream. But with our capability and also with our tour capacity and so on, we are moving ourselves to higher value product mix.

Great. Thank you for your time this morning.

Thank you. Thank you Linda.

Thank you. Our next question coming from the line of Christian Schwab with Craig Hallam Your line is now open.

Great, thanks for taking my questions. Fantastic quarter. So just to follow up on the mainstream. Is it fair to say that the new market entrants in China. You know, on the. I guess higher, the less complicated nodes,. Is where you're seeing I would assume, increased pricing competition. And so as we think about that business and your shift to higher margin, should we think about that business. Potentially being under any gross margin pressure or should we assume we're going to focus where quality and support. And better products stand out and the growth rate there could be a little muted? I'm trying to kind of put all the pieces of the puzzle together?

Okay. As I reported in China right now there are very strong demand for our high end product, especially in 22nm and 28nm technology. So for these technologies there are many, many layers in one set of devices. So our capacity in our China facility we are using most of the capacities for the high end, not necessary for critical layers, but also for semi and non critical layers. So those. Critical and those non-critical and semi-critical layers actually, they have a much better ASP than the so called typical mainstream. So. In summary, our capacity needs to be optimized, and so higher value for higher gross margin and profit margin is our the way we are doing business and the way we are working on the market.

Great, that's clear. Thank you for that. As GA adoption and flat panel display. Eventually begins to broaden out into more mainstream applications. You know your ASPs there are, I believe they are, anyway, materially higher. Given the layer count. When would you expect that to begin to be a meaningful percentage of that business? Is that something that happens in time 26 fiscal year 26 or is that something that's in 27 and beyond?

Yeah, hi, this is Chris. Yeah, so the G8.6 is at the early stage of production ramp. There's only a few fabs that are running that. But we're seeing additional fabs come online actually in multiple regions. For G8.6 display. The application space is just as you said, it's larger format OLED displays and it automotive medical applications. So the application space is fairly broad. So we do expect that to be an opportunity for us because we have a leadership position there as far as when it will have material impact on revenues and things like that. We don't really want to talk about that here But I think 2026 you'll see gradual increases in the component of our display revenue driven by G8.6. I think that's all we'll probably say at the moment.

Okay, that's great. And then you know, as we're adding. You know, new capacity and geographical expansion and replacing you know, end of life tools, I know that brings new capabilities and probably a different pricing structure. Is there any. Puts or takes to gross margin over a multi year basis given those significant investments that we should be thinking about?

Well, Christian, Eric here. So as we invest. In our tools we do so. Understanding the market and where we see growth being and basically we do expect to have increased revenue and as a result contributions to gross margin. Our CapEx also includes purchases of end-of-life tools which provide also increased capabilities. So we do expect to see increased. Revenue. Increased depreciation as well associated with it. We expect our gross margins to. Continue at the same rate and perhaps grow. As we make these investments.

This is George, it's no different than the past. I mean we've always had end of. Life tools in the past and replacing them etc. I mean the new tools have better throughput, better capabilities, etc. So it should not be anything material. Change as far as the depreciation that. Is associated with the new tools.

Great. Fantastic. And then have you guys. My last question here, sorry for asking so many. As we ramp up the Allen, Texas facility, can you give us an idea of like revenue potential? I don't need to know exactly where you could give capacity. I could figure it out. But you know what should we assume the revenue capabilities of additional U.S. capacity over a multi year timeframe could add to the company? Is that fair?

I understand the question Christian. So let me address the question. What I can. I don't want to go to the level of granularity where we're disclosing how much revenue we're going to have by site. So you know what I can say is that as a result of these investments we're going to go into the sort of the mid-range nodes or the higher End of the mainstream depending on how we define that. Right. And we're going to have more capabilities that is going to have incremental revenue and profitability to Photronics in the US.

We expect gross margins to improve. We expect revenue to start on these investments towards the second half of the fiscal year 26 and we expect those to continue on to 27 when we're fully ramped. And one other point Christian, we might make is, there's kind of a knock on effect to this Allen project and that it will free up more capacity in our Boise site which is our most leading edge facility, because some of those mid range masks we run there. So as Allen ramps its revenue of course will go up but the Boise will have more capacity to deploy for higher end applications. So it's really a combination net benefit of both sites. As far as the opportunity.

Great, great. No other. Well, let me sneak one more question in. Given the significant. Reshoring activities. That are potentially going to be going on on a multi year basis, you know, here in the United States there are certain manufacturers who are going to be adding additional capacity who source photomasks from outside of the United States which some applications, it may seem to me that they might be cost prohibitive to get all the way over here. Do you have any idea or aspirations that you're willing to share with us what you think the opportunity for. Captive guys going to the merchant market over a multi year time frame? Or is that. Am I just saying the obvious because we're adding capacity everywhere? But if there's any clarity on the movement from captive to merchant that you're anticipating, other than just semiconductor unit growth, any clarity there would be helpful, I think. So to be clear, is your question do we expect the captives to be entering the merchant market effectively competing with.

Us or did I misunderstand?

No, I'm saying giving up market, you know, giving market share, looking to merchant market suppliers versus doing it internally. Do you think that. That is a trend that could come to the marketplace in particular in the US geography?

Sure. I was going to say, I mean. Unless it's a capability issue that they. Can'T get it here. I mean typically the cycle time is a big issue. They would want to have a more locally sourced for cycle time reasons, a more locally sourced mask shop. So I think we have the local advantage. I think the issue could be if. There was one would be under capabilities. But I'll let some of the other. Folks on the team here chime in. I think we can broadly answer the question that we've seen over the last year, maybe a little longer the tendency of the captives overall as a group to look at more outsourcing opportunities. And that's not just in the US that's in other regions as well. So generally we're seeing an increase in interest and desire for the captives to outsource. This could be less critical layers of very advanced sets. It could be memory products that historically were done internally. But let's say broadly there's more outsourcing opportunity, particularly related to photronics. We're well positioned in regions that have some of the largest captives and also some of the largest fabs. So we do expect to capitalize on that increased outsourcing trend of captives. I think beyond that, we won't be more specific at this time, but we do see it as an opportunity.

Fantastic. That was extremely helpful. Go ahead.

I'm sorry, I'll just add something quickly that I guess stating the obvious. Right. The regionalization trends, essentially there'll be more fabs making more wafers. They'll need more photomasks. So the trend, the regionalization trend is only positive for merchant photomask manufacturers like photronics.

Yep, 100% get it. No other questions. Thank you.

Thank you, Christian. Appreciate the questions.

Thank you. Our next question coming from the line of Gauci Sriharan with single research. Your line is now open.

Thank you. Good morning guys. Can you hear me?

Yes, we can.

Gauche.

Good morning. Good morning. Just on that, I'm glad you brought up that outsourcing issue. How do you guys think about the. Outsourcing increase in sales, about how you think about pricing and margins of those layers of relative to traditional mainstream IC?

Well, high end has higher ASPs. Higher ASPs are good. They generally have a higher margin with them. So any outsourcing that comes out of the captives would generally be on the high end areas. And generally speaking, the captives, when they're. Outsourcing, at least my experience is they. Pay, I mean, I don't want to. Say a significant premium, but they're definitely. Not bottom fishing for what the merchants can give them. Typically they're outsourcing and they need it. And they're paying a fair price. So I don't see them being overly cost conscious, if I'm making sense. Gotcha.

Thank you. The first question was you talked a few quarters about how the customers were in holding patterns because of tariffs. Geopolitics, setting aside Q1, are you seeing any change in the mix of conversation? You're having more long term planning discussions that would tell you about the sentiment that is quietly improving under the surface.

Okay, so overall. With respect to the export restrictions, I think that's what you're referring to or the tariffs. I guess tariffs are both of them. So we're seeing a little bit more easing of that. I think as you said, customers have understood the landscape and as a result they're able to plan better in such order. Now that is true for most regions. Perhaps in China, maybe it still remains the same the issues that you just described. But for the rest of the world, I think customers have a good plan of where they're going to do their orders and as a result we're there to benefit from that. Does anybody want to add, I guess we can also say the two projects we've announced, the one in the US and the one in Korea, were based on longer term, both short and longer term conversations with customers on their future demands and the opportunities. So those projects came out of, I would say a more robust longer term opportunity dialogue with key customers. So we are seeing an increase in that and we're acting on it appropriately by making the right investments in these projects. And the high end ICE grew nicely in Q4. How concentrated is that growth towards a handful of programs or customers? And what would you see in the pipeline that gives you confidence that this becomes a broader, more diversified, high end run rate for the rest of fiscal 26? This is Chris, I can make a few comments. I think the high end growth were basically from our existing core customer base. There were a few new customers, mostly our core customer base that expanded production and capacity as well. So that was memory customers, foundry logic probably being the strongest and recovery in Asia. So it's broad based, it's a broad product mix coming out of foundry and memory and it's our existing, mostly our existing customer base, but more robust order patterns that match up to their improving demand cycles as well. So we think it's sustainable, it's consistent with the market generally improving and we're well positioned with some of the stronger IC players. So we do think it's sustainable and if anything we see more opportunities there. In the high end for sure. Gotcha.

Thank you. And I'll just make this my last question on Korea. Specifically with the capability extension and an increased exposure to the leading edge chips, how does the commercial model in Korea compared to U.S. other customers are inclined to sign longer term agreements or is it a more transactional kind of quarter to quarter work?

We don't want to be very specific on this one, but as Chris just mentioned our customer, especially the advanced logic foundry customer. They continue continue their outsourcing policy not necessary for mature note but going to a high end and more higher end. So I think even there are no long term agreements but the trend. Is continuing. So we do have a lot of conversation and communication with the customer about their roadmap and their outsourcing demand and that's one of the reason we are doing the career side capacity and capability expansion.

Thank you guys. I'll take the rest offline.

Thank you Gauchi. Thank you. I'm showing there are no further questions in the queue. I will now turn the call back over to TED for any closing comments.

Well thank you for joining us today. We really appreciate your interest in photronics. Look forward to catching up with everyone throughout the quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.