Photronics (NASDAQ:PLAB) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.

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Summary

Photronics reported Q2 fiscal 2026 revenue of $210 million, flat year-over-year, with IC business decreasing 5% to $148 million due to delayed design releases.

The company is investing in US and Korea operations to enhance capabilities and expand into more advanced technology nodes, with new facilities expected to generate revenue by the end of 2026 and 2027.

Q2 FPD revenue increased 13% year-over-year to $62 million, driven by strong demand in China and Korea, particularly for high-end consumer electronics.

Management highlighted ongoing geopolitical uncertainties and high fab utilization rates as factors delaying design releases, but remains optimistic about long-term growth opportunities.

For Q3, Photronics expects revenue between $207 and $215 million, with operating margins of 18-20% and non-GAAP EPS between $0.39 and $0.45.

Full Transcript

OPERATOR

Good day and thank you for standing by. Welcome to the Photronics Q2 fiscal year 2026 earnings conference call. At this time all participants are in a 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 one-one on your telephone you will hear an automated message advising that your hand is raised. To withdraw your question, please press star one-one Again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ted Moreau, Vice President of Investor Relations. Please go ahead.

Ted Moreau (Vice President of Investor Relations)

Thank you Operator Good morning everyone. Welcome to our review of Photronics' fiscal second 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 for 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 on the Form 8K filed with the SEC. 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 SEC filings. In the coming weeks we will be participating in investor conferences hosted by Bank of America in San Francisco, Three Part Advisors in New York, D.A. Davidson in Nashville and Singular Research in Las Vegas. With that, I will now turn the call over to George.

George Macricostas

Thank you Ted and good morning everyone. In Q2 global photomask dynamics reflected a mix of supportive long term drivers alongside temporary headwinds. Industry demand for leading edge memory and logic chips for AI applications remains exceptionally strong. Manufacturing these chips requires a significant number of high end photomasks which creates a compelling multi year growth opportunity for Photronics. We are taking several strategic actions to strengthen our position in this growing market which I will discuss later in more detail. Importantly, as a reminder, photomask demand is more closely aligned with semiconductor design releases than to wafer starts. In the near term. Several factors have delayed design releases including elevated FAB utilization rates, memory supply constraints and geopolitical uncertainty. Eric will further elaborate on these factors. Given these unexpected near term headwinds for certain chip design releases. The seasonal recovery following Chinese New Year has not occurred to the extent anticipated. As a result, our Integrated Circuit (IC) business decreased 5% year over year to 148 million, resulting in total fiscal Q2 revenue of 210 million which was essentially flat year over year. Despite the near term industry headwinds, we continue to execute against our investment priorities and strengthen our position in the robust high end market segment. Our ongoing investments in our US and Korea operations are designed to strengthen Photronics' long term competitive position as we expand site capabilities into more advanced technology nodes. Both expansion projects remain on track and over the next several years we expect these investments to help us capture photomask demand and support a more geographically diverse revenue base. Strategically, these investments align us with the industry's ongoing manufacturing regionalization trends. They also position us to benefit from increased outsourcing opportunities from captive photomask producers which will further shift our product mix towards more advanced geometries that carry higher ASPs. At our Korea facility we are preparing our clean room for the arrival of key equipment to extend our capabilities down to 8 nanometer and below and we expect installations to begin later in the fiscal year. At our Allan facility we are beginning production of qualification masks and continue to target initial revenue late in the fiscal year with a more meaningful contribution to revenue growth in 2027 and beyond. Over time we expect the site will become an important mask supplier for US onshore mainstream semiconductor manufacturing for leading edge AI chips. Our high end US facility in Boise is qualified to produce masks at the 7 nanometer node and our teams are working closely with customers on even more advanced nodes. Photronics facility in Taiwan and the US are also well positioned in to capture the increasing opportunities in advanced chip packaging applications. Turning to Flat Panel Display (FPD), revenue of 62 million increased 13% year over year reflecting our capability to produce more complex larger mask sizes and our strong differentiation in AMOLED, our market leading high end capabilities in the dynamic China market remain strong and should support display revenue growth in the coming years. In Korea where we maintain strong market share, positive seasonality returned during fiscal Q2 after a slower start to the calendar year, the launch schedules of high end consumer electronics, particularly in smartphones and smartwatches for western markets remain on track. Encouragingly, these high end consumer electronics have not been impacted by tight memory conditions. Our recently installed Flat Panel Display (FPD) masquerader is entering production. This tool is expected to maximize our opportunity in G8.6 AMOLED which carries higher ASP mask layers and is anticipated to be more widely adopted later in the calendar year. We expect continued strength in the Korea Flat Panel Display (FPD) market ahead of this higher resolution upgrade cycle. Returning to Integrated Circuit (IC) While we are observing some signs of order recovery, near term visibility regarding the timing of certain design releases remains limited. For the medium and long term secular demand trends remain positive as highlighted at the beginning of my prepared remarks. We are excited about the benefits our expansion projects are expected to provide with initial US revenue anticipated late in fiscal 2026 and initial revenue from our Korea expansion by the end of fiscal 2027. Both expansion projects are expected to open additional leading edge opportunities. I will now turn the call over to ER Integrated Circuit (IC) to review our second quarter results and provide third quarter guidance.

Eric Rivera (President and Chief Financial Officer)

Thank you, George Good morning everyone. Second quarter revenue came in at 210 million roughly flat year over year and and down sequentially following the strong performance in fiscal Q1. Leading up to the Chinese New Year holiday, IC revenue of 148 million represented 70% of total revenue. High end represented 38% of IC while mainstream IC revenue was 91 million. Design releases and associated revenue, particularly from our foundry customers, were shaped by several factors during the period. First, the semiconductor industry is currently experiencing higher than normal FAB utilization rates. As a result, FABs have been unable to accommodate additional design releases from some of their customers because of this limited capacity. Additionally, many chip OEMs have prioritized revenue and profitability from existing products, which has led them to continue wafer production on current designs while delaying new releases. Second, the recent surge in memory prices and related supply constraints have contributed to delays in the launch of several new consumer electronic products as OEMs have worked to secure memory supply and manage rising product costs. The final factor contributing to delays for design releases is geopolitical developments including the US Iran conflict, which have increased macroeconomic uncertainty. Looking ahead, we expect our capital investments in the US and Korea to begin generating revenue at the end of 2026 and 2027 respectively. As the new capacity goes into full production, we expect our revenue mix in fiscals 2027 and 2028 to shift in two ways by node towards high NIC and geographically towards the US and Korea. These investments are consistent with our long term strategy to further diversify our revenue mix by geography and technology node. Turning to FPD, fiscal Q2 revenue of 62 million increased 13% year over year and represented one of the strongest quarters in the history of our display business. Demand remained strong in the China market as activity shifted towards the high end category. In Korea, we saw a re acceleration of business activity as customers prepare for regularly scheduled consumer electronic launches this fall. We foresee accelerated display market growth over the next several years following the increasing trend of G8.6AMOLED applications. Display Market growth is concentrated in China and Korea, which are competitive strongholds for Photronics gross margin of 31% reflects the combination of operational leverage inherent in our financial model driven by our significant fixed cost infrastructure as well as product mix. Operating margin was 20%. Diluted GAAP EPS attributable to Photronics shareholders was $0.54 per share excluding foreign exchange impacts. Non GAAP diluted EPS was $0.42 per share. The strong performance of our display operations contributed to our earnings during the quarter. Operating cash flow of 47 million equates to a healthy 22% of revenue. Capex was 46 million reflecting investments in Korean expansions to support 8 nanometer production, the installation of new equipment in Allen, Texas, end-of-life tool upgrades and facility optimization initiatives as we have previously discussed, we have entered a period of elevated capital investments to drive future organic growth. Our initiatives in the US and Korea as endorsed by our customers, will further strengthen our ability to capitalize on growth trends including surging AI applications, increased captive outsourcing, high end node migrations, geographic diversification and regionalizations. We maintain our fiscal 2026 CapEx guidance of 330 million with elevated CapEx focused on strategic investments in the US and Korea along with peak end-of-life tool upgrades. Given the favorable long term secular growth outlook of the photomass market, we continue to evaluate additional investment opportunities to further support our strategic priorities and long term growth objectives. We will provide additional details as appropriate if and when we decide to move forward with these potential projects. Total cash and short term investments remains flat at 638 million including 477 million held within our joint ventures in which we hold a 50.01% ownership interest. Our capital allocation strategy remains focused on three priorities Reinvestment 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. With respect to internal reinvestment, we will continue to emphasize projects that support future revenue growth and enhance long term shareholder value. Before providing guidance, I'd like to remind you that demand for our product is inherently variable. Visibility remains limited with a 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 impact revenue and earnings. Demand is also influenced by IC and display design activity and to a lesser extent by wafer and panel capacity dynamics. Given current market conditions and the influence of elevated AI demand on FAB utilization and therefore design starts, we expect fiscal Q3 revenue to be in the range of 207 to 215 million. Based on those revenue expectations in our operating model, we estimate fiscal Q3 operating margin between 18 and 20% and non-GAAP diluted EPS between 39 and 45 cents per share. I will now turn the call over to the operator for your questions.

OPERATOR

Certainly. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by when we compile our Q and A roster. And our first question will come from the line of Maxwell Michaels of Lake Street Capital Markets. Your line is open, Maxwell.

Maxwell Michaels (Equity Analyst at Lake Street Capital Markets)

Hey guys, thanks for taking my questions. First one from me. In terms of visibility, when did things really start to get cloudy in the quarter? Just given the guidance for Q2 came in a little bit below that. So really, when did visibility become cloudy in the quarter?

Eric Rivera (President and Chief Financial Officer)

Hello Max, this is Eric. Thanks for the question. So it really started becoming cloudy when the conflict with Iran and the US started during the quarter. Then after that we started seeing fab utilization was also affecting us.

Meg

Meg. I'd like to comment more on this. Typically we have a very strong booking before the Chinese New Year and after Chinese New Year there will be a temporary slowdown. But this year the slowdown after Chinese is much longer than we anticipate. Of course, the headwinds as George and Eric report highlight, may be the factors causing this longer slowdown in the taper after Chinese New Year. So we do see the slowdown right after Chinese New Year, which is in the end of February. End of February. Okay.

Maxwell Michaels (Equity Analyst at Lake Street Capital Markets)

And then I guess my second question and follow up to that would be when you're talking to your customers, I mean, have they given you any sort of rough timeline of when they expect to bring in these new designs or they still have no idea either. Our customers actually are still optimistic about midterm outlook. However, in the near term, the visibility remains kind of limited. So we see a lot of delay in the tape-out in Q2. However, at the beginning of Q3, we did see some recovery of those delay. A lot of tape-outs have happened since beginning of May. However, going forward we remain very cautious. But at this moment, customer still optimistic about the midterm outlook. Okay, I'll take the rest of mine offline. Thank you.

OPERATOR

And our next question will be coming from the line of Goshi Sri of Singular Research. Your line is open, Goshi.

Goshi Sri (Equity Analyst at Singular Research)

Good morning gentlemen. Can you guys hear me? Yes, we can.

OPERATOR

Okay. Thank you.

George Macricostas

I just wanted to get these customers that are deferring designs. Were they already in the pipeline or is this more about new designs that are starting to slow down and do those recovery times differ? Yes, actually, whenever customer make a new design, they tap out the data to the foundry fab. Then the foundry fab give the order to the masthouse they select. This time, the new design slowdown actually happened at the end of the foundry customer, namely the design house. So the design house actually has a slower new tape-out new design release. So it's not in the pipeline. It's at the very beginning of the new design release. Eric, on the margin compression side, are there any specific levers you guys can

Goshi Sri (Equity Analyst at Singular Research)

pull if the demand kind of stays soft for another couple of quarters? Are there any variable cost reductions available or is it fundamentally a cost business that needs utilization to recover?

Eric Rivera (President and Chief Financial Officer)

Yeah, very little. Very little levers we can pull. I mean, it's really the product mix that will be available that the market gives us is what we'll have. Most of our cost is fixed or a big portion of it anyway is very fixed. So we don't have much levers to pull there.

Goshi Sri (Equity Analyst at Singular Research)

Gotcha. And on the Allen side. So if the Allen qualifies. So if Allen begins delivering qualifications masks in Q3 as planned and the demand kind of stays soft till early 2027, does bringing the new Allen capacity online to a weak demand environment kind of adds depreciation costs, making margins even more compressed? Or is there the Allen cost structure kind of light enough at the qualification state that doesn't meaningfully impact P and L until commercial production begins?

Eric Rivera (President and Chief Financial Officer)

Yes. So the Allen expansion already started. We started qualifications already in Q3, so everything is moving according to our timeline. We expect revenue generation to occur later in the year and we do not expect that the current economic environment will depress the returns that we're expecting on our island expansion in the current year or in the next? At the moment. Okay, sorry. I'd like to add some comments to your question. Our Allen expansion is not only capacity expansion, we are upgrading our technology. So the qualification basically is for the technology, which Allen cannot do at this moment. So once we qualify the customer, I think we will increase our market share in the technology, know which Allen can produce right now. Also another purpose of adding expansion is we are planning to transfer some lower end of the high end, or sorry, the high end of the mainstream from our Boise side to add so we can spare more capacity in our Boise side to take higher SP over orders so this is a win for Boise side and also a win for Aaron side. And in terms of the memory supply

Goshi Sri (Equity Analyst at Singular Research)

constraints and OEM cost pressure headwinds, I'm curious as to see whether you're seeing this evenly across your geography. For example, are your US customers, Korean customers, are behaving differently to your Chinese and Taiwan foundry customer in terms of deferring designs or is it fairly based across all regions? Yes, the memory shortage and especially also the price surging has huge negative impact on the consumer product, especially the low end consumer product. So those are many in Asia. So I think this impact happened in Taiwan and also in China. Gotcha. Thank you for the caller. I'll jump back in the queue. Thank you.

OPERATOR

And our next question will come from the line of Christian Schwab of Craig Halem. Your line is open, Christian.

Christian Schwab (Equity Analyst at Craig-Hallum Capital Group)

Yeah, great, thanks. I understand the delays that you're seeing at design starts and thanks for all that clarity. As we increase our capacity capabilities on lower geometry node chips on a kind of a medium term basis, can you

Eric Rivera (President and Chief Financial Officer)

give us an idea of either a yearly revenue target or a market share goal? And then my second question along those lines is on the advanced node side, you know, is 7 or 8 nanometers is the best that we're going to be able to make or do we have aspirations to get down below that? Thanks, Christian. This is Eric here. So starting with your last question first, in terms of our aspirations to go 8 nanometer, 7 nanometer, you know, we're going to continue going down node. I mean we have to do that because that's our industry. We have to continue investing and we see a lot of opportunity there. So definitely we plan to go below those ranges now with respect to the revenue that we expect to get out of our island facility with our recent investments, I'm not going to get into detail of revenue by site from that perspective, but that should give us, that should give us an opportunity to expand our market share in the US and we expect the US to be at least in 27 to be heading us From a revenue expansion perspective. Our percentage of of increase should be larger in the US than anywhere else. Great. Thanks for. We're working with customers to that end. Frank, maybe you'd like to elaborate.

Frank Lee (Senior Executive for Asia)

Yes, George. Yes. I think our investment not necessary for the capacity only because we are seeing a lot of ongoing onshore semiconductor manufacturing in the States and for tronis, we are actually very, we have a very unique, strong position in the country that because we have the Boise site where we have the very advanced Photomask technology. And also we have Air insight where we can make mention for so the capacity expansion and the technology upgrade by our CapEx is to serve our company's goal. We like to be the main photomass supplier in the United States.

Christian Schwab (Equity Analyst at Craig-Hallum Capital Group)

Great. Thank you for that clarity. No other questions.

OPERATOR

Thank you. Thank you. Christian

Ted Moreau (Vice President of Investor Relations)

and I would now like to turn the conference back to Ted for closing remarks. Thank you, Tanya. And thanks everyone for joining us on the call today. We really appreciate your interest in photronics. Look forward to connecting with everybody throughout the quarter. Have a great day.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.