Photronics, Inc. Stock

Good day, and thank you for standing by. Welcome to the Photronics Third Quarter Fiscal Year 2026 Earnings Conference Call.

[Operator Instructions]

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.

Thank you, operator. Good morning, everyone. Welcome to our review of Photronics Fiscal Third 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, 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 in the Form 8-K filed with the SEC this morning. 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 10-K and subsequent filings. In the coming months, we will be participating in the following investor conferences: Three Part Advisors in Chicago, Lake Street Capital in New York and the CEO Summit at SEMICON West in San Francisco and SEMICON Europe in Munich. With that, I will now turn the call over to George.

Thank you, Ted, and good morning, everyone. Total fiscal Q3 revenue of $216 million increased 3% year-over-year and was above the high end of our guidance range. Our fiscal third quarter results reflect the recovery of some of the semiconductor design releases that were delayed and pushed out of our fiscal second quarter. We began to recognize some of this recovery during the month of May as we had previously communicated during our Q2 earnings call. This gradual recovery continued through the remainder of fiscal Q3.

As discussed during our prior earnings call, we indicated that delays in new semiconductor design releases were driven by several factors, including elevated fab utilization rates, memory constraints and geopolitical uncertainty. While these factors continue to affect the photomask industry, some design releases have moved into production. With semiconductor wafer utilization rates remaining high, fabs are prioritizing higher profitability projects and expanding capacity at higher technology nodes.

These node migration actions, especially at 28-nanometer, 22-nanometer and 14-nanometer, are occurring across a broad set of customers in different geographic locations. Node migration and a sequential improvement in high-end business conditions benefited our high-end IC business, which recorded a record 44% of IC's $155 million in revenue.

Our ongoing regionalized investments in the U.S. and Korea remain on track. At our Allen facility, we continue to target initial revenue late this fiscal quarter with its geographical diversification contribution reflected in fiscal 2027 revenue and beyond. In Korea, clean room preparation for the expansion project to 8-nanometer has been substantially completed. Having received some of the initial tools, the timetable for planned installations remain on schedule.

These investments are expected to position Photronics to benefit from node migration and regionalization trends as we diversify geographically. Increasing our capabilities and capacity at the faster-growing high-end portion of the market also expands our potential to capture opportunities from a variety of customers, including captives as they look to increase outsourcing.

As we remain on track to deliver more advanced 8-nanometer capabilities in Korea over the next 1.5 years, we are further advancing our global technology capabilities beyond 8-nanometer with a focus on EUV, customer partnerships and other mask technologies. Over the past several years, we have been leveraging partnerships with industry leaders to supply EUV R&D masks and solutions to customers while the full turnkey EUV merchant market develops.

We have also supplied EUV-related masks to the semiconductor equipment supply chain. Through focused internal R&D programs and capital investments and the expansion of business partnerships, we intend to gradually introduce new EUV capabilities. This pragmatic EUV strategy should expand our addressable market at the high end. Our intentions are to manage the EUV investment cycle by expanding our EUV capabilities as the associated business opportunities emerge.

Turning to FPD. Revenue of $61 million remains near all-time highs, reflecting our strength in producing more complex masks. Strong OLED demand was driven by consumer electronics such as flagship and high-end smartphones scheduled for launch in developed markets in the coming months. This high-end FPD demand is expected to continue through fiscal Q4 and beyond.

We received additional G8.6 AMOLED orders from a growing customer base, an indication that the G8.6 market is broadening. Combined, these high-end projects are expected to be offset by consumer electronics for the emerging markets where the tight memory conditions have disrupted some product launches.

Our most advanced FPD writer, which was installed earlier this year entered mass production during the quarter. It has received strong market traction as it aligns well with our customers' technology road maps. We expect this writer to remain a pivotal tool in strengthening our market-leading position in the high end of FPD mask market. I now turn the call over to Eric to review our third quarter results and provide fourth quarter guidance.

Thank you, George. Good morning, everyone. Fiscal third quarter revenue came in at $216 million, an increase of 3%, both year-over-year and sequentially as we recognized some recovery from the semiconductor design release delays that had occurred during our fiscal second quarter. Overall, we experienced improved demand conditions in Taiwan, along with the U.S. and Korea, particularly at the high end.

IC revenue of $155 million increased nearly 5%, both year-over-year and sequentially and represented 72% of total revenue. The high-end portion of IC represented 44% of IC revenue, recovering as business conditions improved and wafer fabs prioritized more profitable chip designs, accelerating node migration trends. Our mainstream business declined to $86 million due in part to node migration trends.

Node migration from mainstream to high end is an overall positive to the company as it is a natural evolution to higher ASPs per chip design. We are expecting mainstream to increase in the U.S. in fiscal 2027 as we expect to capture market share at higher-end nodes once the Allen expansion is complete.

Turning to FPD. Fiscal Q3 revenue of $61 million declined modestly in the quarter, though remains near all-time highs. Customer activity in Korea for high-end consumer electronics remains strong, while China demand was influenced by the timing of certain consumer electronic releases for emerging markets that are being impacted by the industry's tight memory conditions.

Overall, gross margin of 33% improved sequentially on product mix and increased revenue and the associated operational leverage in our financial model. Operating margin was 21% and diluted GAAP EPS attributable to Photronics shareholders was $0.49 per share. Excluding foreign exchange impacts, non-GAAP diluted EPS was $0.50 per share. The improved performance of our IC business, along with our display operations remaining near all-time highs contributed to our earnings during the quarter.

Operating cash flow of $76 million represented 35% of revenue. CapEx was $37 million. Fiscal year-to-date CapEx of $130 million reflects the timing of outlays associated with $330 million of CapEx we have been guiding to for fiscal 2026. We are updating our fiscal 2026 CapEx guidance to a range of between $255 million and $305 million.

We remain committed to the projects and time lines driving our original $330 million CapEx guidance. However, the cadence of orders and vendor delivery of certain high-value tools to our fabs can vary, causing the timing of our capital expenditures to fluctuate. To the extent any planned spending shifts beyond this fiscal year, we would expect it to carry over into fiscal 2027. I will provide fiscal 2027 CapEx guidance during our fiscal Q4 earnings release in December.

Total cash and short-term investments increased by $35 million in the quarter to $673 million, including $504 million held within our joint ventures in which we hold a 50.01% ownership interest. As we consider the cash needs associated with our planned investments, we are starting from a position of significant financial strength with a strong balance sheet and a business that generates substantial cash from operations.

With customers demonstrating a willingness to partner with us, we believe we are well positioned to make these investments while maintaining a disciplined approach to achieving attractive returns. To support these investments, which also include our EUV investment strategies George discussed earlier, we may supplement our existing liquidity through borrowing.

As a reminder, our capital allocation strategy remains focused on 3 priorities: reinvesting 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.

Before providing guidance, I'd like to remind you that demand for our product is inherently variable. High-end mask sets carry significantly higher ASPs, meaning even a small number of orders can materially impact revenue and earnings. Because of the tight fab capacity, memory and geopolitical conditions, visibility into the time line of design releases has become even more uncertain as we have recognized over the past 2 quarters.

Meanwhile, the order delivery time remains in the days or weeks, requiring rapid response times for our operations. As a result, we are widening our revenue guidance range for fiscal Q4. As of today, we expect fiscal Q4 revenue to be in the range of $207 million to $227 million. Based on those revenue expectations and our operating model, we estimate fiscal Q4 operating margin between 19% and 24% and non-GAAP diluted EPS between $0.40 and $0.56 per share. I will now turn the call over to the operator for your questions.

[Operator Instructions]

Our first question comes from the line of Christian Schwab with Craig-Hallum.

Congrats on the solid execution in the quarter. I'm wondering, as we transition to higher node applications, I know you guys talked -- mentioned partnership a little bit more than I remember in previous calls. I'm just wondering if you could elaborate on what type of partnerships that you kind of expect that might help drive future success in more competitive lower node applications, in particular, if that's what you were trying to hit or suggest. I guess it wasn't clear to me.

Yes. The partnership that we're -- or partnerships that we're referring to are specific to EUV.

And then as far as the EUV partnerships, can you just remind me when you would expect to be fully ramped on that technology? I guess -- I'm sorry, I don't know if that was clear to me either.

Sure. Yes. So we are monitoring the merchant market and seeing how it is developing, so that it's effectively economically viable for us to enter it or at least makes sense for us to catch the wave, so to speak, and enter at the right time. That takes a long time to ramp. So we are monitoring that and currently using our partnerships with folks in the industry. And that will -- hopefully, we'll be able to report more on that in quarters to come.

And then as far as the Allen, Texas facility, I think last time you talked about entering qualification mass production and I think initial revenue targets late this year, which seems to be on track. But can you give us an idea or remind us, if you will, of what the potential revenue capacity of that facility fully utilized would be?

Christian, Eric here. So we're not going to get into details as to how much revenue capacity we have there other than to say that we are expanding our capacity beyond what we historically have had, particularly in the higher end of the mainstream. And that additional capacity is helping us in essentially 2 ways.

First, it will help us increase the mainstream at the high end for areas that we haven't been servicing up until now. And furthermore, that's also going to help us expand the -- expand Boise's ability to focus on the high end. So it's going to help us in 2 ways, more expansion at the high end of the mainstream and also help us grow our high-end revenues with Boise focusing on that.

So to be clear, we have been servicing the high end out of Boise, and it will be serviced out of Allen is where we're capturing more of the higher end by bringing it out of Boise, sort of the mid -- how I would call, the midrange nodes, like the less critical part of the high end, if you will. We're not talking 14-nanometer. We're talking the midrange nodes, 65-nanometer, et cetera.

Our next question comes from the line of Max Michaelis with Lake Street Capital.

Congrats on the quarter. First one for me, just on the quarter. I know in Q2, you guys had some issues related to design releases being delayed. I know that kind of was what drove the growth in Q3 for high-end IC. I mean, are we fully caught up? Or is there still more to do on that front?

So a lot of the design releases that were supposed to occur in Q2, but didn't. It did, in fact, come across in Q3. So that was particularly helpful for Q3. Having said that, the conditions that were present in Q2 still largely remain, which are high fab utilization rate, high cost of memory and of course, the geopolitical conditions.

Sounds good. And then still relatively new to the story, but just given the focus on EUV, can you help me kind of frame why the focus on EUV now and kind of how much incremental capital spending you guys expect on top of sort of this $255 million to $305 million of CapEx maybe into next year as well, too?

Sure. So with respect to EUV, as George mentioned, on the prepared remarks and -- as well as just on the previous question. We're waiting for the merchant market to develop on EUV before we make significant investments for a full turnkey, we call it internally, which means we'll be able to process every aspect of an EUV mask internally. In the meantime, we have -- we are able to provide those services to our customers via partnerships.

But again, it's while we wait for the market to develop. The reason for that is because those are significant levels of CapEx. So we want to make sure that we have the appropriate internal rate of return on those investments before we dive in.

Our next question comes from the line of Gowshi Sri with Singular Research.

Congrats on the high-end recovery. Can you all hear me, though?

Yes, we can, Gowshi.

On the -- on the Allen, when that starts generating revenue in Q4, is that work from new customers, midrange moving from -- moving over from Boise? Or is that -- how much of it is incremental to the company?

So we're not going to necessarily get into much detail, but we currently do service of these customers. So the customers are largely the same with a few exceptions here and there, but they're largely the same. We have provided the services between both sites, Allen and Boise. This will be incremental to Allen, more capacity, as I mentioned in the previous questions. And more importantly, that will also help us grow Boise on the high end.

So on the China side, I know you guys have pointed before that that's now kind of gearing towards the 22-nanometer, 28-nanometer. So was the decline mainly mainstream? Or is there a competition on the high-end business as well?

So China market is competitive as we've discussed before in previous calls, primarily on the -- primarily on the mainstream. We have some local mask houses as competitors, and they're focused on the mainstream. And as a result of the last 1.5 years, 2 years, we have been focusing our efforts on the high end where we have our competitive advantage and technology leadership.

So on the mainstream designs that are still coming through, are the customers complete market set? Or are you seeing more partial -- where they only kind of replace a few layers?

Gowshi, I'm going to need you to repeat that question because you broke up midstream.

Okay. On the mainstream designs that are still coming through, are the customers ordering complete market sets? Or is that partial restrings?

Usually it's complete market sets, complete mask sets rather.

Okay. And on the gross margin side, I know Q4 was around the same revenue number, but gross margins kind of contracted about 180 basis points even with a better mix. What are we looking at in terms of that margin compression versus Q4?

So you're referring to what are we expecting for Q4 versus Q3?

No, no. Q4 last year did around the same number of top line, but -- and Q3 had a better mix, but we saw margin compression. Just kind of trying to figure out what's in the cost of goods here.

Sure. So a number of things, primarily is driven by volumes and market -- and mix, not just product mix, but also geographical mix of where the earnings and where the revenue occurs. So it's a combination of those items.

Our next question comes from the line of Danial Yermakhan with Freedom Broker.

Congrats on a great quarter. Just a quick question. The Q4 revenue guidance range is around $20 million. And I mean, what's driving this wider band? Is it mainly timing? Or what does -- why the visibility is lower than the previous quarter?

Sure. Thanks for the question. So as mentioned on the prepared remarks, it's because the conditions in the market that were existent in Q2 remain in Q3, and we expect it to remain in Q4 and beyond for some time, which are, #1, high fab utilization rates; #2, high memory costs; and #3, geopolitical conditions. Because of those 3 factors, our visibility is even more limited than it has been in the past.

And I think just to add to that, this is George, Danial, is that as we've stated in the past, 1 mask set on the high end is a big dollar amount that can swing quite a bit of -- a couple of million plus dollars in a quarter easily with 1 mask set. So you combine that with all the regions that we're in and what Eric just said, basically, it could get a bit choppier, less predictable results until things maybe come back to where they were before. So hopefully, that helps.

Yes. And just quickly on the end-of-life tool upgrades. Last quarter, you mentioned that it's expected to peak in 2026. Could you provide any color? Is there any shift to next year?

Yes. sure. There's some of our CapEx is expected to shift on to fiscal year 2027 as a result of ordering pattern as well as delivery from our vendors. So as a result, the peak may be in '27 as opposed to '26.

And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Ted Moreau for closing remarks.

Thank you, Shannon, and thanks, everybody, for joining us today. We really appreciate your time. I look forward to connecting with everybody throughout the quarter. Have a great day.

This concludes today's conference. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Photronics Q2 Fiscal Year '26 Earnings Conference Call. [Operator Instructions] 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.

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 8-K 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.

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 multiyear 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 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 U.S. 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 Allen 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 U.S. onshore mainstream semiconductor manufacturing. For leading -edge AI chips, our high-end U.S. 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 U.S. are also well positioned to capture the increasing opportunities in advanced chip packaging applications.

Turning to 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 remains 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 FPD mask writer 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 FPD market ahead of this higher resolution upgrade cycle.

Returning to 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 U.S. 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 Eric to review our second quarter results and provide third quarter guidance.

Thank you, George. Good morning, everyone. Second quarter revenue came in at $210 million, roughly flat year-over-year 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 U.S.-Iran conflict, which have increased macroeconomic uncertainty.

Looking ahead, we expect our capital investments in the U.S. 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 fiscal 2027 and 2028 to shift in 2 ways: by node towards high-end IC and geographically towards the U.S. 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 G8.6 AMOLED 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 expansion 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 U.S. 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 regionalization.

We maintain our fiscal 2026 CapEx guidance of $330 million with elevated CapEx focused on strategic investments in the U.S. and Korea, along with peak end-of-life tool upgrades. Given the favorable long-term secular growth outlook of the photomask 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 remained 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 3 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 products is inherently variable. Visibility remains limited with a typical backlog of only 1 to 3 weeks. Additionally, high-end mask that 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 million 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 $0.39 and $0.45 per share.

I will now turn the call over to the operator for your questions.

[Operator Instructions] Our first question will come from the line of Maxwell Michaelis of Lake Street Capital Markets.

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?

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

Go ahead, Frank.

Max, 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. So -- 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 tape-out 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. And then I guess my second question and a follow-up to that would be when you're talking to your customers, I mean, have they given you any sort of rough time line on when they expect to bring in these new designs? Or they still have no idea either?

Our customers actually are still optimistic about the mid-term 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-out have happened since beginning of May. However, going forward, we remain very cautious. But at this moment, customers are still optimistic about the mid-term outlook.

And our next question will be coming from the line of Gowshi Sri of Singular Research.

Can you guys hear me?

Yes, we can.

Okay. I just wanted to get these customers that are deferring designs, are they -- 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, they are -- whenever a customer make a new design, they tape-out the data to the foundry fab, then the foundry fab give the order to the mass house 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 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?

Yes, 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.

And on the Allen side, so if we -- if the Allen qualifies -- so if Allen begins delivering qualifications masks in Q3 as planned and the demand kind of stays soft until 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 our P&L until commercial production begins?

Yes. So the Allen expansion already started -- we started qualifications already in Q3. So everything is moving according to our time line. 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 Allen expansion in the current year or in the next at the moment.

Gowshi, sorry, I'd like to add some comments to your question. Our Allen expansion is not only capacity expansion. We upgrade 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 node, which Allen cannot produce right now.

Also another purpose of Allen expansion is we are planning to transfer some lower end of the high end or the -- sorry, the high end of the mainstream from our Boise side to Allen. So we can spare more capacity in our Boise side to take higher ASP orders. So this is a win for Boise side and also a win for the Allen side.

And in terms of the memory supply constraints and OEM cost pressure headwinds, I'm curious to see whether you're seeing this evenly across your geography. For example, are your U.S. customers, Korean customers are behaving differently to your Chinese and Taiwan foundry customers 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 mainly in Asia. So I think this impact happened in Taiwan and also in China.

And our next question will come from the line of Christian Schwab of Craig-Hallum.

Great. I understand the delays that you're seeing in design starts and thanks for all that clarity. But as we increase our capacity capabilities on lower geometry node chips on a kind of a medium-term basis. Can you 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, 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, we're going to continue going down node. I mean we have to do that because that's the -- 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 Allen 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 an opportunity to expand our market share in the U.S., and we expect the U.S. to be at least in '27 to be heading us in the -- from a revenue expansion perspective, our percentage of increase should be larger in the U.S. than anywhere else.

We're working with customers to that. And Frank, maybe you'd like to elaborate.

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 Photronics, we are -- actually the very -- we have a very unique strong position in the country that because we have the Boise side where we have the very advanced photomask technology. And also we have Allen side where we can make the mainstream photomask. So the capacity expansion and the technology upgrade by our CapEx is to serve our company's goal. We like to be the main photomask supplier in the United States.

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.

And this concludes today's program. Thank you for participating. You may now disconnect.

Thank you.

Welcome to the Photronics First Quarter and Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] 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.

Thank you, operator. Good morning, everyone. Welcome to our review of Photronics' Fiscal First 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, Head of Asia operations.

The press release we issued Wednesday morning, along with the presentation materials accompanying our remarks is available on the Investor Relations section of our website and on the Form 8-K 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 March, I will be attending the upcoming OFC trade show in Los Angeles and would welcome the opportunity to meet with investors.

With that, I will now turn the call over to George.

Thank you, Ted, and good morning, everyone. Accelerating demand during fiscal Q4 continued throughout fiscal Q1 with sales increasing 4% sequentially to $225 million, exceeding expectations. We executed on the robust high-end demand in Asia ahead of Chinese New Year, propelling our high-end IC business to a second consecutive quarterly record. Revenue and gross margin strength contributed to GAAP diluted EPS of $0.74 and non-GAAP diluted EPS above expectations at $0.61 per share.

Over the past 9 months since stepping into the CEO role, I have prioritized strengthening our operating efficiency. While I'm not sharing specific metrics today, we have been making pinpoint actions to drive continuous improvement. We are executing with urgency and discipline to continue to elevate quality, improve yield, accelerate cycle times and enhance customer experience. We're optimistic that our improved operational performance will drive higher revenue and continued market share gains as the industry demand expands.

In our IC business, revenue of $165 million increased 7% year-over-year with our high-end business growing 19%. We continue to recognize growth for masks that support exciting areas such as AI-driven chip packaging applications and masks for high NA, EUV development projects. We believe the high-end strength will continue, as order demand remains healthy, to partially mitigate the upcoming seasonal impact following Chinese New Year. As we leverage our global footprint and strengthen sales leadership, we are sharpening our focus on high-end opportunities that advance our node migration strategy while broadening our geographic diversification.

Our ongoing expansion projects in the U.S. and Korea will enter volume production in 2027. Customers in these regions are pursuing broader outsourcing strategies and have ensuring their technology requirements, helping to drive our technical road map.

In the United States, we continue to see healthy customer qualification activity across both advanced logic and memory technologies. In logic, we are supporting high-volume manufacturing at 12 and 14-nanometer while extending qualifications to 8-nanometer and below technologies. For advanced DRAM memory, we are engaged in qualification activity, leveraging our new IP processes using our multi-beam mask writer for patterns below 20 nanometers.

Our Allen facility expansion remains on track as we're starting to install tools with customer qualifications, expected to be completed by the second half of this year. Our plan is to expand production capabilities in Allen to meet the increasing photomask demand for U.S. mainstream wafer fabs, including technology nodes from 90-nanometer to 40-nanometer.

In China, our competitive positioning remains strong in this fast-growing market. We will continue delivering quality masks with an emphasis towards higher-end nodes playing to our competitive advantages and where competitive intensity is lower.

Turning to FPD. Revenue of $60 million increased 3% year-over-year. At the high end, our technology advantages enable us to produce more complex and larger mask sizes. In Korea, we recently took delivery of and will soon be installing the most advanced mask writer for the FPD market. This new writer improves resolution and enhances accuracy while allowing us to maintain high throughput. As the first display mask supplier to have the capabilities this tool provides, we will be extending our technology leadership, delivering the highest quality AMOLED photomasks for a variety of applications, including G8.6 mask size, which improves screen quality for consumer electronics. G8.6 AMOLED is a market that remains in its infancy with adoption expected to broaden later this year.

Looking ahead at fiscal Q2, we continue to see positive underlying demand. While the full seasonal effect of the Chinese New Year in mid-February will be reflected in revenue, design starts remain healthy and support our full year growth trajectory. In summary, the regionalization of global semiconductor manufacturing combined with increased outsourcing from captives is opening up leading-edge opportunities, driving our capability and capacity expansion plans. We remain focused on operational efficiencies and executing on the implementation of these investments to fully capitalize on these opportunities.

I will now turn the call over to Eric to review our first quarter results and provide second quarter guidance.

Thank you, George. Good morning, everyone. First quarter revenue exceeded expectations at $225 million, increasing 4% sequentially and 6% year-over-year. IC revenue of $165 million increased 7% year-over-year. We achieved record high-end IC revenue of $71 million, an increase of 19%. Strength in Asia accelerated, leading up to Chinese New Year, where we have strategically emphasized high-end opportunities. Revenue in the U.S. increased slightly year-over-year, and we expect the U.S. to be a contributor to revenue growth over the coming year. Mainstream IC revenue was flat year-over-year at $94 million.

Turning to FPD. Fiscal Q1 revenue of $60 million increased 3% year-over-year. This quarter, we experienced a mix shift towards strong demand in the mainstream category targeted at the China IT display market. While these projects fall within mainstream, they feature larger-sized screens that align well and play directly to our competitive strengths. We expect demand trends to continue in fiscal Q2 with a modest offset from Chinese New Year.

Gross margin was at the high end of expectations at 35% as we benefited from higher revenue levels and a greater mix of high-end IC revenue, which combined to drive up our operating leverage. Operating margin was 24%. Diluted GAAP EPS attributable to Photronics shareholders was $0.74 per share. Excluding foreign exchange impacts, non-GAAP diluted EPS was $0.61 per share. Our earnings to shareholders in the quarter reflected the strong demand in Asia leading up to Chinese New Year. We also achieved the second highest quarter of operating cash flow in the company's history at $97 million, equating to 43% of revenue. CapEx was $48 million, which primarily consisted of equipment to further extend our technical leadership in FPD.

As we have previously discussed, we have entered a period of elevated capital investments to drive future organic growth. We are reiterating our fiscal 2026 CapEx guidance of $330 million with elevated CapEx focused on special project investments in the U.S. and Korea, along with accelerated end-of-life tool upgrades. Our initiatives in the U.S. and Korea will further strengthen our ability to capitalize on growth trends, including increased captive outsourcing, high-end node migrations, geographic diversity and regionalization. We continuously review CapEx plans as we monitor market demand requirements relative to our manufacturing capacity and capabilities and additional projects we are considering.

Total cash and short-term investments increased by $49 million sequentially to $637 million, including $459 million held in our joint ventures in which we hold 50.01% ownership interest. Our capital allocation strategies include 3 priorities: Reinvesting for organic growth, pursuing strategic opportunities and returning cash to shareholders. As a reminder, we opportunistically used $97 million to repurchase 5 million shares in fiscal 2025 for an average purchase price of $19.52 per share.

For 2026, we will continue to emphasize internal investments to drive future revenue and earnings growth. 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 1 to 3 weeks. Additionally, high-end mask 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 seasonal impacts of Chinese New Year that George referenced, we expect fiscal Q2 revenue to be in the range of $212 million and $220 million. Based on those revenue expectations in our operating model, we estimate fiscal Q2 operating margin between 22% and 24% and non-GAAP diluted EPS between $0.49 and $0.55 per share.

I'll now turn the call over to the operator for your questions.

[Operator Instructions] Our first question comes from the line of Christian Schwab from Craig-Hallum.

This is Ben Taxdahl in for Christian Schwab. First thing -- or my first question is just with that slight sequential decrease in revenue and operating margin, is there anything else we should be thinking about besides the Chinese New Year? And then my follow-up to that would be, what are some things that need to happen to kind of hit that higher end of that guided range?

Yes. Christian, I think in this year, the Chinese New Year fell into middle of February. So most customers, especially the fab design house customers, they are taking the long holidays. So we do see the customer tape-out forecast will resume in the middle -- early of March. So I believe we do have a lot of activity from the orders before the new year. However, because of the temporary slowdown during the long holidays and the first week after the holiday, so there may be a slight impact on the output, and that's why our forecast is slightly lower than Q1. Basically, no, we don't see major difference in the market environment, but the holiday did make some impact on our output.

Okay. Good context there. Now just with the Allen facility coming online and then just thinking about the high-end Boise facility and also kind of the high-end IC revenue these last 2 quarters, is there -- can you kind of talk about that? And then also maybe a little bit of a proxy for the high-end IC going forward? Is it going to be kind of continued at these same rates, these last 2 quarters? Or is it going to be lower or higher.

The Allen project, actually, we kicked off the project several quarters ago in terms of planning the facility, clean room expansion and equipment purchasing. Right now, our clean room has been ready, and we have a tool delivered already. At this moment, we are in the process of installing the new equipment, which will be complete. And sequentially, we need to do certain customer qualification. So we believe once the qualification complete, Allen site will be able to contribute to our business, especially in the midrange of mainstream.

At the same time, Allen can support our Boise facility, take some middle or low-end mass layer away from Boise so we can spare the Boise capacity for the real high-end business. And we see a lot of high-end opportunities, which we have to maximize our Boise capacity in terms of the product mix. Also, I think both George and Eric report, we are going to do a lot of CapEx expansion, which include Boise high-end capacity expansion to meet a strong high-end customer demand.

All right. Good. And then just my last question here, switching over to flat panel. Discussing your leadership in AMOLED and kind of the G8.6 sets or size and the materially higher ASPs with that. Can you remind me of the different applications of that technology? And then maybe just help us understand the size and scope of that opportunity over the next few years would be really helpful.

For G8.6, as George reported, it's in the infant stage of business development. We did receive a very first set of G8.6 photomask from our Korean customer, and we do see a lot of Chinese customers are in the process of developing G8.6 AMOLED business. So we believe with our process capability and also the most advanced new writer we just installed in Korea, we will be the leader in G8.6 flat panel business. Eric, do you have anything to add here?

Thank you, Franco. I think you covered all areas here. So I have nothing else to add.

Our next question comes from the line of Gowshi Sri from Singular Research.

My first question is on the margins. You've been consistently printing kind of mid-30s even as mix improves. Do you think there's any risk that we are temporarily overearning here or because of unusually tight high-end supply? Or is that we should expect some more normalization as more capacity, including your own comes online over the next year or 2?

Gowshi, this is Eric here. So we don't see Q2 being much different than Q1 at the moment from a product mix perspective. Of course, the market is going to determine that, but that's what we're expecting it to be similar. In terms of our CapEx that we are projecting, as I mentioned on our prepared remarks, we're entering a stage of elevated CapEx investments as a result of the opportunities the market is affording us, and we will certainly capitalize on them. With that comes increased depreciation, of course, when the tools are in place, but also revenue will increase for many of those projects. And those CapEx that are related to end-of-life tools, a lot of our end-of-life tools provide additional capabilities that will enable us to improve our product mix. So in general, I would say that although margins could surely fluctuate primarily because of product mix, we don't expect our margins to fall off a cliff. Lewt me also -- I'm sorry, go ahead, Gowshi.

No, no. Go ahead.

Yes. I was going to just...

Eric, sorry. Please go ahead. I can comment afterwards.

I'm passing it on to you, Frank. Go ahead.

All right. Gowshi, actually, we do have a lot of high-end business. And as I just mentioned, we need to maximize our most advanced site, Boise, output. And that's one reason we need to have Allen site to take some loading away. At the same time, to increase the capacity in Boise site, we are working with many customers to qualify a new writer called multi-beam writer. This writer has a much, much higher throughput, which can improve our overall diesel capacity. So right now, it's not really so-called business constraint, it's actually a little bit capacity constraint. So with the CapEx and also with the multi-beam qualification in Boise site, we will try to increase our high-end capacity. And of course, the high-end capacity will contribute greatly to the gross margin.

Thanks for the color. And on the Asia side, in China, you said that it's kind of stabilized soft mainstream. Now it's been a couple of quarters. Are you seeing any the local competitors adjust their behavior or either moving up the node themselves or becoming aggressive on pricing in the segments? Or are you -- is it still deemphasizing and could that change the economics of your stabilized soft mainstream outlook?

So in -- I'm sorry, go ahead, Frank.

Sorry, we should not talk. I think you talk first. I talk later. No problem, yes.

No problem. So with respect to Asia and China specifically, I think we're focused on the high end where there's less competition. That's where we have a competitive advantage from the new entrants and the increased competition there. They're more focused on the mainstream as they learn the business, if you will. So given our strategy, we see our margins relatively flat or slightly improving. It all depends on our product mix, but we're focused on the product mix on the high end, where there's less competition. Frank, would you like to add something to that?

Sure, sure. I think in China market, even there are several, many newcomers, but because for customers, the high-end qualification require a lot of human resource, wafer resource from the wafer fab. So most of our high-end customers, they just have 1 or 2 suppliers. They are not really interested to spend a lot of resource to qualify #4, #5. And -- so we believe the entry barrier for the newcomers to the high-end business is very high. So for ourselves, Photronics, we do have a facility locally in Xiamen, and we are focusing on the high-end business in China. We have a business for major Chinese high-end wafer fab. So we will continue to improve our cycle time, the delivery and so on and also to maximize our high-end product mix. So we believe the newcomers may have some negative impact on the mainstream. But on the high-end side, we do have a lot of advantages.

Got you. So since Asia was the stronger demand, the key driver to the beat, can you give us a little bit color on what that demand looks like under the hood? And does that mix look structurally different from what you are seeing a year or 2 ago?

Okay. I think the main driving force is the diversification because due to the geopolitical reason, the onshoring, the regionalization, the customer, the design house, they have to manufacture their product in different countries. So for example, if they need to sell their chip to China, they need to make their wafers in China, Chinese foundry companies. So with this, a lot of duplicate tape-out happens because of this issue. At the same time, for Chinese customers, the migration to 22, 20-nanometer happened in this year. A lot of companies are doing technology migration as compared to a couple of years ago. So we do see a lot of new tape-outs in 22, 28-nanometer from our China customers.

Thank you. At this time, I would now like to turn the conference back over to Ted Moreau for closing remarks.

Thank you, Gigi, and thank you, everyone, for joining us today. We appreciate your interest in Photronics and look forward to catching up with everyone throughout the quarter. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Thank you.

[Audio Gap] critical segment. And finally, our advanced multi-beam mask writer we installed in the U.S. earlier in 2025 is now in full production with over 20 customers qualified, including multiple EUV users. Our technology road map continues to advance through joint development with customers collaborations with consortia such as IMC 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 U.S. 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 U.S. headquartered company that can produce trusted masks, and our Boise facility is the only commercial high-end U.S. 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 2 G 8.6 AMOLED orders and anticipate additional G 8.6 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 U.S., 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 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 water 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 recovery 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 U.S. 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 U.S. business, U.S. GAAP recorded 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 $0.60 per share. Our earnings performance reflects a greater contribution from our U.S. 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 U.S. 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 U.S. 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 priorities: reinvesting for organic growth, pursuing strategic opportunities and 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 1 to 3 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 million 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 $0.51 and $0.59 per share.

I will now turn the call over to the operator for your questions.

[Operator Instructions] And our first question coming from the line of Tom Diffely with DA.

This is Linda on for Tom Diffley. My first question is on the market share. Now that your largest competitor just went public, what is your relative size and/or trends in share? Any color there would be very helpful.

Could you repeat the question? I'm sorry.

Can you hear me now?

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

Okay. Yes. 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 had perceived in the past, the fact that Texan now is a public helps us get a little bit more detail, but we see our market share being exactly what we thought before. NIC, 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.

Same size on FPD and different elsewhere?

So Texan doesn't participate in Photronics does. Tecan is larger at a larger market share that Photronics does -- NIC. However, when you consider our FPD business, we're or on the same size.

Okay. Got it. And then looking of the overall competitive environment, -- what is your view on the overall health of the environment? Yes. Any comment there would be helpful.

Yes. We are seeing a lot of loan migration and especially in the States. In the past, we have our major operation facilities in Asia. But right now, with the insurance of semiconductor industry in the United States, our voice side, which has the high-end capability. We are the only higher merchant mass 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 answer your first question that our market share with the growing U.S. demand, especially in the high-end and trusted products, 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.

That makes sense. And then I also wanted to touch on the mainstream business. You said that there's 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 yes, how that has impacted margins? And maybe how that is impacting your calculus 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, they are -- due to the geopolitical issue, they do have some met in China policy. So they are quite a few new local mass house 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 a relationship with this key customer, 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 mainstream, especially the low end of the mainstream. But with our capability and also with our tool capacity and so on, we are moving ourselves to higher value product mix.

Our next question is coming from the line of Christian Swap with Greg Halm.

Greatness, a fantastic quarter. So just a follow-up on the mainstream. Is it fair to say that the new market entrants in China -- on the, I guess, higher -- the less complicated nodes, it is where you're seeing, I would assume, increased pricing competition? And so as we think about that business and your shift to higher mix, should we think about that business potentially beating under any gross margin pressure? Or should we assume we're going to focus where quality and support and better products stands out and the growth rate there could be a little muted? I guess I'd try to kind of put all the pieces of the puzzle together.

Okay. As I reported in China, right now, they are very strong demand for our high-end product, especially in the 22- and 28-nanometer technology. So for this technology, there are many, many layers in one set of device. 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 noncritical layers.

So those critical and those are noncritical semi-critical layers. Actually, they have a much better ASP than the so-called typical mainstream. So in summary, our capacity need 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. As GA adoption and flat panel display eventually begins to broaden out into more mainstream applications, 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 fiscal year '26? Or is that something that's in 27 and beyond?

Yes. This is Chris. Yes. So the GA 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 GA .6 display. The application space is just as you said, it's a larger format, OLED displays and IT, automotive, medical applications. So the application space is fairly broad. So we do expect that to be a a strong opportunity for us because we have a leadership position there.

As far as when it will have a 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're probably we'll say at the moment.

Okay. That's great. And then as we're adding new capacity and geographical expansion and replacing 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 multiyear basis, given those significant investments that we should be thinking about?

Christian, Eric here. So as we invest in 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, et cetera. I mean the new tools have better throughput, better capabilities, et cetera. So it should not be anything material changes 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? And we don't need to know exactly where you could give capacity, I can figure it out. But what should we assume the revenue capabilities of additional U.S. capacity over a multiyear time frame could add to the company? Is that fair?

I understand the question, Christian. So let me address the question into what I can -- I don't want to go to a level of granularity where we're disclosing how much revenue we're going to have by site. So what I can say is that as a result of these investments, we're going to go into the sort of the midrange 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 U.S.

We expect gross margins to improve, we expect the 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 kind of a knock-on effect to this Allan 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 multiyear basis here in the United States, there are certain manufacturers who are going to be adding additional capacity to 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 multiyear time frame? Or is that -- am I just saying the obvious because we're adding capacity everywhere? But if there's any clarity and the movement from captive to merchant that you're anticipating other than just semiconductor unit growth? Any clarity there would be helpful, I think.

To be clear, is your question, do we expect the captives to be entering the merchant market effectively competing with us? Or is...

I'm saying 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 U.S. geography?

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 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.

And 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 U.S., 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.

I'll just add something quickly that, I guess, stating the obvious, right, the regionalization trends -- essentially, there will be more fabs making more wafers. They will need more photomask. So the trend -- the regionalization trend is only positive for merchant photo manufacturers like Photronics.

Our next question coming from the line of Galeria with Single Research. .

Just on that, I'm glad you brought up that outsourcing issue. How do you guys think about the outsourcing increase in sales at -- how are you thinking about pricing and margins on those ways of laterative to traditional mainstream IT?

Well, high end has higher ASPs, higher ASPs are good that 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 huge premium, but they're definitely not bottom fishing for the -- for what the merchants can give them. Typically, it's -- 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.

Got you. The first question was, you talked about a few quarters about how the customers were in holding patents 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 quitely improving under the surface?

Okay. So overall, with respect to with respect to the export restrictions, I think that's what you're referring to and over the tariffs, I guess, the tariffs or both of them. So we're seeing a little bit more easing of that. I think as you said, customers are customers have understood the landscape and as a result, they're able to plan better and such order.

Now that is true for most areas. Perhaps in China, maybe it still remains the same, the issues that you've 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 can -- we're there to benefit from that.

I guess we can also say the 2 projects we've announced, the 1 in the U.S. and 1 in Korea or 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 customers. So we are seeing an increase in that, and we're acting on it appropriately by making the right investments in these projects.

Yes. And the high-end IC grew nicely in Q4. How concentrated is that growth towards a handful of programs or customers 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 are 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.

Sowe 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.

Got 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 ships, how does the commercial model in Korea compared to U.S.? Are the 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 their outsourcing policy, not necessarily for mature node but go into a high end and more higher end.

So I think even there are no long-term agreements, but the trend and -- is continuing. So we do have a lot of conversation and communication with the customer about their road map and their outsourcing demand. And that's one of the reasons we are doing the Korea side capacity and capability expansion.

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.

5 Well, thank you for joining us today. We really appreciate your interest in Photronics. I 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.

Good day, and thank you for standing by, and welcome to Photronics Fiscal Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note that today's conference is being recorded.

I will now hand the conference over to your speaker host, Ted Moreau, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Welcome to our review of Photronics Fiscal Third Quarter 2025 financial results. Joining me this morning are George Macricostas, 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 most recent SEC filings.

In the coming weeks, we will be participating in the Singular Research investor conference and we'll be meeting with investors at the SEMICON West Trade Show, which will occur in Phoenix this year. I will now turn the call over to George.

Thank you, Ted, and good morning, everyone. We had another solid quarter with sales of $210 million ahead of expectations, and flat both year-over-year and sequentially. Our flat panel display business continues to perform well to offset more challenging demand in IC. Non-GAAP diluted EPS was also well ahead of guidance at $0.51.

At Photronics, we leveraged our legacy as an efficient photomask provider, critical to the manufacturer of semiconductors to drive profitability and cash flow. In fiscal 2025 to date, operating cash flow has been 25% of revenue, which has enabled a strong balance sheet with $576 million of consolidated cash and short-term investments. We also continued to return cash to shareholders by repurchasing $21 million of stock in the quarter, bringing the total year-to-date to $97 million.

After taking over as CEO 3 months ago, we have been evaluating opportunities, our positioning in the market and our internal operational execution. With the market driving geographic diversity of semiconductor production, we have identified excellent opportunities that we're looking to capitalize on. We are leveraging our strong balance sheet to reinvest in our business, driving competitive advantages, revenue and earnings growth in the future.

As part of the strategy back in December, we communicated our initial step to geographically diversify our revenue with the announced U.S. expansion plans. We have been expanding our cleaning facility in Texas for capacity and capability extensions to service increased demand for U.S. midrange nodes. We're also elevating our leading edge production capabilities in Idaho with the installation of a new multi-beam mask writer to enable the highest end of our product portfolio.

These U.S. projects coincide with a significant number of semiconductor industry announcements over the past year regarding major manufacturing reshoring of semiconductor production to the United States. As a merchant market leader in the U.S., we are further strengthening our position to benefit from this reshoring of semiconductor production.

Expanding our geographic revenue diversification strategy within our existing footprint for the past several quarters, we have been assessing and closely collaborating with customers in various geographic regions to further strengthen our existing manufacturing capabilities. More specifically, we are evaluating capability extensions at Photronics facility in Asia to extend from 14, down to 6-nanometer and 8-nanometer production. We would expect these new capabilities to contribute to revenue in the latter half of 2027 or 2028.

We also continue to invest prudently in great opportunities and evaluate our optimal geographic footprint by collaborating with our customers to support their growth initiatives. Over time, our internal investments are expected to deliver a more diversified and robust geographic revenue base than we recognize today, which we expect to offset the growing competitive environment in the China IC market.

Regarding China, since Frank led the establishment of our operation that over 5 years ago, we have achieved many close customer relationships that have contributed to meaningful revenue growth and cash flow for the company. We will continue to optimize our product mix there to maintain our business performance.

As we expand our global capabilities, it becomes more critical than ever that we execute a fully integrated and world-class global sales program. Toward that, we have recently hired a new Head of Global Sales, who will drive a coordinated global sales strategy designed to capture market share in this continuously evolving global semiconductor landscape.

Further, as we prepare for the next stage of Photronics growth and continue to invest for the future, we will leverage our unparalleled operational leadership that forms the basis of our 56-year legacy. We remain relentless in our efforts to improve efficiencies across the organization, further optimizing our cost structure and maximizing profit potential. This is an area that we have closely evaluated over the past 3 months. We're not making, nor do we anticipate making, drastic wholesale changes. Rather we periodically make strategic and targeted organizational improvements within information technology, operations and sales to best deliver business performance within our expanding network.

Returning to our results for the third quarter. In our integrated circuits end market, revenue of $148 million reflects the continued headwinds experienced through 2025, including the uncertainty associated with geopolitical trade restrictions, particularly in the Asia region that are muting demand. Similarly, unresolved tariff negotiations have temporarily influenced design release from our customers in Asia.

Turning to our flat panel display market. Revenue of $63 million was the result of strong demand from our customers in Korea and China, driven by the timing of major smartphone, tablet and laptop design releases. The display market continues to prioritize development of panel products with enhanced capabilities, such as faster refresh rates and enhanced energy efficiency of mobile devices that must have thinner, lighter and more flexible displays. As a result, flat panel makers are actively developing new technologies for advanced [indiscernible] and touch panels that require more high-end mask layers. Utilization of these higher value masks, along with the increasing adoption of foldable consumer electronics, and scaling to larger form factors, are favorable demand drivers that we expect to capitalize on over the next several years.

I now turn the call over to Eric to review our third quarter results and provide fourth quarter guidance.

Thank you, George. Good morning, everyone. Third quarter revenue was above expectations at $210 million, which was relatively flat both sequentially and year-over-year. IC revenue of $148 million declined 5% year-over-year. High-end IC revenue represented 36% of total IC revenue and increased 8% year-over-year. We recognized a recovery in our high-end business resulting from strong order patterns in the United States. Our mainstream IC revenue declined 12% year-over-year with the majority of the decline having occurred in Asia, while mainstream in the U.S. and Europe were stable.

Turning to FPD. Revenue of $63 million increased 14% year-over-year, led by strength in Korea. FPD continued to benefit from the uplift in seasonal demand particularly for higher-end applications utilizing our advanced AMOLED technologies. Geographically, during the quarter, our Taiwan facilities generated 33% of total revenue with China at 24%, and Korea at 21%. The U.S. and Europe together accounted for 22% of total revenue. Keep in mind, the IC market is only a portion of our China revenue. We have built a strong and stable FPD business in China, and our IC operations there are generated out of our 50% joint venture in Xiamen.

We reported gross margin of 34%, which was higher than expectations, and our operating margin of 23% was above our guidance range. Diluted GAAP EPS attributable to Photronics shareholders was $0.39 per share. After removing the impact of foreign exchange, fully diluted non-GAAP EPS attributable to Photronics shareholders was $0.51 per share. Our overall profitability reflects a greater contributions from our operations in the U.S. and Korea.

During the third quarter, we generated $15 million in operating cash flow, which represented 24% of total revenue. CapEx was $25 million in the quarter. We remain on track to spend $200 million in CapEx in fiscal 2025 on a combination of capacity, expansion, capability improvements and end-of-life tool replacements. Total cash and short-term investments increased by $17 million in the quarter to $576 million, which includes $397 million of cash in the joint ventures.

We have three elements to our capital allocation strategy, including organic growth, strategic investments and returning cash to shareholders. During the quarter, we repurchased 1.2 million shares for $21 million and received approval from our Board to increase the repurchase authorization by an additional $25 million. We now have $28 million available under our share repurchase authorization.

As communicated throughout our prepared remarks, our fiscal 2026 capital allocation priority will lean towards investing in our existing business to deliver geographic revenue diversification in the future, while we remain strategic with respect to future stock repurchases.

Before providing guidance, I'll remind you that demand for our products is inherently uneven and difficult to predict, with limited visibility and typical backlog of 1 to 3 weeks. In addition, ASPs for high-end mask sets are high, meaning a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Additionally, and as we have highlighted previously, our business is influenced by IC and display design activity, and to a lesser degree by wafer and panel capacity dynamics. Given current market conditions and continued geopolitical uncertainty, we remain cautious about the near-term demand environment.

We expect fourth quarter revenue to be in the range of $201 million and $209 million. Keep in mind, we have 2 fewer days in Q4 than last quarter, and 6 fewer days than Q4 last year. Based on those revenue expectations and our current operating model, we estimate our fiscal Q4 operating margin to be between 20% and 22%. Our non-GAAP earnings per share for the fourth quarter are expected to be in the range of $0.42 to $0.48 per diluted share.

I'll now turn the call over to the operator for your questions.

[Operator Instructions] And our first question coming from the line of Tom Diffely with D.A. Davidson.

Appreciate the chance to ask a couple of questions. First, I just wanted to ask a quick question about the fourth quarter. Do you see the mix being very similar to the third quarter? Are there any changes in what's driving the revenue?

Tom, Eric here. Yes, we see the mix in the fourth quarter to be similar to that of the third quarter, correct.

Okay. And then you've made some comments about tariffs and trade restrictions. I assume those don't impact you directly, but it impacts your customers, which impacts just your revenue, as opposed to a direct restriction on what you can and can't do?

That is correct to some extent. So the trade restrictions, as you know, we have manufacturing facilities at different locations in -- throughout the world. So it doesn't impact us directly. It does impact our customers as you suggested.

From a -- to a lesser extent, it does impact perhaps our material purchases and any equipment purchases we may have. But to date, those impacts haven't been material.

Okay. And you are fairly regionalized where you take most of your equipment and most of your -- I guess, most of your materials from the region that you're serving?

Well, no. So from a material perspective, as I mentioned, that does impact us. We have a lot of material purchases from Japan, for example, and those would incur some tariffs if we bring them to United States.

Okay. And maybe just a quick question on the investments you're about to make. When you look at the multi-beam to go to the higher end, is that for essentially serving Samsung and TSMC at the higher end nodes? Or is that for your other independent customers that are actually moving to those nodes?

So it would be for the higher end nodes or the -- yes, the higher end nodes for customers similar to what you mentioned there, including Samsung, which we've talked about that in the past. I won't go into more detail as to what the other customers are, but they are for that level of customer.

Okay. And then last question. When you look at the potential to move down to the 6-nanometer, 8-nanometer node in Asia. Does there -- is anything has to happen as far as getting the okay, or the permission to have that level of technology? Or is that already clear and it's really just a pure investment thesis at this point?

Alright. So our restrictions for those type of nodes would be in China. And these are -- if we were to invest in Asia, it would be in a non-China location. We would be looking at anywhere else. As you know, we have Taiwan, we have Korea footprints there. So it could be at any of those sites.

Our next question is coming from the line of Christian Schwab with Craig-Hallum Capital.

Congrats on the great quarter and guide. Just a follow-up on the 6-nanometer to 8-nanometer product expansion. Can you give us an idea of what end market products that those chips would be going into? I assume you're working with your customers. Can you give any clarity regarding that, that would be great?

Chris, Chris, you can take -- perhaps take that Frank or Chris, either?

Christian, this is Chris. It's mostly high-end processors starting to see edge AI devices that are driving some things, EVs and AI embedded into cars, these sorts of things. So higher-end processors, mobile communications. A little bit of memory as well, DRAM in particular. So it's fairly broad, most of the higher-end use cases the industry has for these nodes.

Fantastic. And then regarding your CapEx, which -- go ahead.

Yes. This is Frank. I'd like to add a few more comments. For this high-end technology, very often, we are working with our customer, most of them have their own captive [indiscernible]. So it's a customer-oriented. It depends on the customer demand. And I think our investment will be -- in combined with customer captive outsourcing future demand. So I think the product/mix is very complicated. And it's a mix with different kind of products, including logic and memory.

Great. And following up on that, do you see your move smaller IC nodes, which is smaller than you historically have operated in? Does that represent a potential market share gain opportunity for you over a multiyear time frame? Is that the way we should be thinking about it?

Yes. This is Chris. We do see that opportunity for market share gain. Right now, those nodes, say, 6-nanometer, 8-nanometer, the commercial mask makers, merchant mask makers, are fairly recent entries into those nodes. So to some degree, it's still kind of a jump ball because those nodes are ramping in the commercial space.

By making these investments, and also what we should point out, in our site in Idaho we're already capable of servicing nodes to the 6-nanometer, 8-nanometer level. We do believe we'll have a good multi-region solution to take advantage of merchant growth for these sorts of IC nodes.

Fantastic. And then regarding your CapEx at $200 million elevated above your historical percentage range of aggregate revenue, if you will. And these investments, not only in Asia, as you highlighted, but also in Texas and Idaho is -- when would you anticipate CapEx to potentially normalize back to your historical level?

Is that -- as we exit next calendar year? Or do you think CapEx investments, given the growth opportunities, will be elevated at current levels for multiple years past this?

Yes. This is George. Basically, we're looking at about a 3-year higher-than-normal CapEx. Part of it is end-of-life tools, which also give us more capability. We've been able to extend the life of many tools for much longer than normal. So part of it is end of life tool replacement, which again gives us extra capability, but also its investments, strategic investments, in Asia for increased technology ability, more advanced nodes. Those are probably the two big categories.

Of course, you know about the expansion in the U.S. in Allen, Texas. That's already in the budget. But basically, that's the -- what we're looking at is future higher nodes and the life tool replacement, but also giving us some more capability with those replacement tools.

Great. And then as far as capital intensity at end-of-life tools, I would think that maybe by the end of next calendar year, your end-of-life tool, replacement work should be finalized and additional -- slightly higher CapEx ranges would be more due to advanced technology spending? Am I thinking about that right? Or will end-of-life tools linger a little bit longer than that?

It will linger a little bit longer than that. We're basically not trying to do it all in 1 year. We're obviously trying to balance investing in future advanced technology nodes, like we mentioned in Asia and here in Allen, that's more midrange investment because we have Boise for the high end, but it's more of a combined end of life and future investment for the next few years.

I think after 3 years, we'll be more normalized because that end of life tool cycle will be behind us. It's not something we would want to do in 1 year anyway because it is -- it can be disruptive to some degree.

Correct. I understand. All right. And then as we think about the flat panel display business. There's pretty optimistic third-party research, talking about the migration to Gen 8.6 for obvious reasons of thinner, lighter, flexible, et cetera, of around a 15% CAGR for many years to come.

Is that a market that as far as a growth rate where you think that you are extremely well positioned to capitalize on, and actually maybe outperform the aggregate growth rate of the industry?

Yes, you are correct. We are -- we have the technology for G8.6 AMOLED. And our customer in Korea has been working with us. And also, we are working closely with two important customers in China. So our growth in FPD in the coming years will grow with the tremendous contribution from G8.6 AMOLED.

Right. And then our work in directionally, probably accurate, but probably not an exact percentage. But our work suggests that the ASP given the increased layer count for photomasks at that strong growth market are probably as much as 50% higher. Would you agree that that's directionally accurate?

Or how should we be thinking about, not only is the growth rate great, but the prices are materially higher? I understand you can't make a comment regarding competitive reasons. But directionally, is that the way we should be thinking about it?

We don't usually comment directly on ASPs for this. I assume you're talking about the kind of blended ASP for an AMOLED G6 set, which is the current high-volume manufacturing, versus the same kind of asset build the G8.6.

Yes, for sure, we expect to see ASP lift between those two products. Also, frankly speaking, the materials cost also will go up because the substrates are larger. But generally, we do expect ASP to be higher. We expect margins to be better. But we really don't think we should comment on specific numbers and percents at this point.

Great. And then my very last question here has to do with capital allocation. Congratulations on taking advantage of your stock being mispriced and stepping up and buying a material amount.

Have you guys, unlike many of your peers, focused in this market, or call it, mainstream semiconductors as a meaningful percentage of revenue? Your profitability and cash flow profile consistency is materially different. Have you guys ever considered beginning to introduce, say, a modest dividend to return more cash to shareholders as another metric?

We've evaluated ways to give back -- cash back to our shareholders. At the moment, we still believe that share repurchases is the best tool for us. We've evaluated that internally and externally as well with some advisers.

Having said that, I would say that over the -- as mentioned in the prepared remarks, over the next few years, we're going to be focusing more on internal investments. We're going to focus more our attention and prioritize that than share repurchases necessarily. Although as mentioned, of course, we will be opportunistic, or I should say, rather continue to be opportunistic and doing so, and that's why we have the authorization expanded by the Board. But we will continue to be opportunistic. We have evaluated dividends. We still believe that share repurchases is our best tool at the moment. Does that answer your question?

That it does. No other questions.

Our next question coming from the line of Gowshi Sri with Singular Research.

Can you hear me?

We can.

My first question is looking at the sequential change in gross margins between Q2 and Q3. Is that entirely due to mix shift within the IT segment? Or is there some ongoing cost inefficiencies associated with the recent build-out?

It will be a combination of everything, but the biggest factors would be just a mix -- mix -- overall business mix, primarily in Asia that's causing that.

Okay. And on the on the new technology ramp, with the multi-beam mask writer in Boise, can you give us any update on customer adaptation, qualification time lines, whether this new capacity is translating to tangible order visibility for customers?

Sure. I can make a couple of comments. Yes, Gowshi, the qualifications are well underway there. We have, let's say, 3 to 5 customers already qualified on it, we're ramping the utilization of that. It's a nice mix of customers on that tool. Some are very, very leading-edge products, EUV, that sort of thing. Others are customers. We have qualified on our single beam tools, and we're providing additional capacity to them and capability to them with the multi-beam, particularly in right speed and cycle time.

So the adoption has been good. We're continuing to work on it. I think we have probably another 6 months or so to get all of our first passive customers qualified, but progress is good and the customer reaction has been positive.

We should point out, it's the only multi-beam and commercial mask maker hands in the U.S. So the mix in the U.S. is going higher end. So we're getting a lot of interest in the use of this tool particularly from U.S. customers.

And given that your comments on elevated CapEx for the next couple of years, a significant portion of your cash is tied up in JVs. How much flexibility do you have to allocate, or redeploy those funds for strategic needs, or buybacks in the U.S.?

So we have -- we control the cash for sure. That's why we -- that's why we consolidated in accordance with U.S. GAAP. We can certainly use that at the joint venture regions. And if needed, we can certainly dividend it out to the U.S., to the corporate office here in the U.S. Of course, if we were to dividend that out, we'd have to give our share to the -- to our minority share partner there. But we do control the cash we control when we -- when and if we do dividends. And when we do so, we get our share.

Awesome. And then just my last question. With the U.S. government involvement with Intel, does that affect, or have any effect on your business, or potential in the U.S. market?

Maybe you want to talk about that? I'll make a few comments, and then I'll share it. I'll pass it over to Chris for his comments.

I think if the government helps Intel, that strengthens Intel. Intel is a customer of ours. If our customer of ours is stronger, that can only be better for merchants like Photronics. But I'll pass it on to Chris for additional comments.

Yes. And we have a pretty strong product portfolio in the U.S. that's used by U.S. government entities, so-called full trusted products in both Allen and Boise to the extent the government investment pushes Intel in the direction of supplying more government-related ICs and things like that, that's helpful for us because we're qualified to build those. So it could lead to some more outsourcing.

But generally, I just echo Eric's comments. Anything that helps Intel to be stronger, and also more committed to designs in the U.S. region, is going to be beneficial for us. Because we're the only high-end commercial mask maker in the U.S. today. So that will be generally beneficial for us.

And I'm showing there are no further questions in queue at this time. I will now turn the call back over to Ted Moreau for any closing remarks.

Thank you, Olivia. Really appreciate everybody joining the call today. And we appreciate your interest in Photronics. I look forward to connecting with everybody throughout the quarter, and have a great afternoon. Thank you.

Thank you, everyone. Thank you.

This concludes today's conference. Thank you for your participation, and you may now disconnect.