Photronics Q2 FY2026 Earnings Call - Near-Term Design Delays Offset by AI-Driven Long-Term Growth

Operator: Thank you for standing by. Welcome to the Photronics Q2 fiscal year 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Ted Moreau, Vice President of Investor Relations. Please go ahead.

Ted Moreau, Vice President of Investor Relations, Photronics: 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.

George Macricostas, Chairman and Chief Executive Officer, Photronics: Thank you, Ted. Good morning, everyone. In Q2, global photomask dynamics reflected a mix of supportive long-term drivers alongside temporary headwinds. Industry demand for leading-edge memory and logic chips for AI applications remains exceptionally strong. Manufacturing these chips requires a significant number of high-end photomasks, which creates a compelling multi-year growth opportunity for Photronics. We are taking several strategic actions to strengthen our position in this growing market, which I will discuss later in more detail. Importantly, as a reminder, photomask demand is more closely aligned with semiconductor design releases than to wafer starts. In the near term, several factors have delayed design releases, including elevated fab utilization rates, memory supply constraints, and geopolitical uncertainty. Eric will further elaborate on these factors. Given these unexpected near-term headwinds for certain chip design releases, the seasonal recovery following Chinese New Year has not occurred to the extent anticipated.

As a result, our 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 remain strong and should support display revenue growth in the coming years. In Korea, where we maintain strong market share, positive seasonality returned during fiscal Q2 after a slower start to the calendar year. The launch schedules of high-end consumer electronics, particularly in smartphones and smartwatches for Western markets, remain on track. Encouragingly, these high-end consumer electronics have not been impacted by tight memory conditions. Our recently installed 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.

Eric Rivera, President and Chief Financial Officer, Photronics: 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.

The recent surge in memory prices and related supply constraints have contributed to delays in the launch of several new consumer electronic products as OEMs have worked to secure memory supply and manage rising product costs. The final factor contributing to delays for design releases is geopolitical developments, including the US-Iran conflict, which has 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 fiscals 2027 and 2028 to shift in two 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 expansions to support 8 nanometer production, the installation of new equipment in Allen, Texas, end-of-life tool upgrades, and facility optimization initiatives. As we have previously discussed, we have entered a period of elevated capital investments to drive future organic growth. Our initiatives in the 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 regionalizations. 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 50.1% ownership interest. Our capital allocation strategy remains focused on three priorities: reinvestment in the business to support organic growth, pursuing strategic opportunities, and returning capital to shareholders. We will continue to evaluate the most effective use of our cash and remain disciplined and opportunistic in our capital allocation decisions, prioritizing investments that offer the highest expected returns. With respect to internal reinvestment, we will continue to emphasize projects that support future revenue growth and enhance long-term shareholder value.

Before providing guidance, I’d like to remind you that demand for our products is inherently variable. Visibility remains limited with a typical backlog of only one to three weeks. Additionally, high-end mask sets carry significantly higher ASPs, meaning even a small number of orders can materially impact revenue and earnings. Demand is also influenced by IC and display design activity, and to a lesser extent, by wafer and panel capacity dynamics. Given current market conditions and the influence of elevated AI demand on fab utilization, and therefore design starts, we expect fiscal Q3 revenue to be in the range of $207 million-$215 million. Based on those revenue expectations and 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: Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question will come from the line of Maxwell Michaelis of Lake Street Capital Markets. Your line is open, Maxwell.

Maxwell Michaelis, Analyst, Lake Street Capital Markets: Hey, guys. Thanks for taking my questions. First one from me. In terms of visibility, when did things really start to get cloudy in the quarter? Just given the guidance for Q2, came in a little bit below that. Really, when did visibility become cloudy in the quarter?

Eric Rivera, President and Chief Financial Officer, Photronics: Hello, Max. This is Eric. Thanks for the question. It really started becoming cloudy when the conflict with Iran and the U.S. started during the quarter. After that, we started seeing fab utilization was also affecting us. Go ahead.

Maxwell Michaelis, Analyst, Lake Street Capital Markets: Okay.

Frank Lee, Senior Executive for Asia, Photronics: Shen Nan, please.

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. This year, the slowdown after Chinese is much longer than we anticipate. Of course, the headwinds as George Macricostas and Eric report highlight, may be the factors causing this longer slowdown in the tape out after Chinese New Year. We do see the slowdown right after Chinese New Year, which is in the end of February.

Maxwell Michaelis, Analyst, Lake Street Capital Markets: End of February. Okay. I guess my second question and follow-up to that would be, when you’re talking to your customers, have they given you any sort of rough timeline on when they expect to bring in these new designs, or they still have no idea either?

Frank Lee, Senior Executive for Asia, Photronics: Our customers actually are still optimistic about the midterm outlook. In the near term, the visibility remains kind of limited. We see a lot of delay in the tape out in Q2. At the beginning of Q3, we did see some recovery of those delays. A lot of tape outs have happened since the beginning of May. Going forward, we remain very cautious. At this moment, customers still optimistic about a midterm outlook.

Maxwell Michaelis, Analyst, Lake Street Capital Markets: Okay. I’ll take the rest of my offline. Thank you.

Operator: Our next question will be coming from the line of Gowshihan Sriharan of Singular Research. Your line is open, Goshi.

Gowshihan Sriharan, Analyst, Singular Research: Good morning, gentlemen. Can you guys hear me?

Eric Rivera, President and Chief Financial Officer, Photronics: Yes, we can.

Gowshihan Sriharan, Analyst, Singular Research: Okay. Thank you. I just wanted to get these customers that are deferring designs. Were they already in the pipeline, or is this more about new designs that are starting to slow down? Do those recovery times differ?

Frank Lee, Senior Executive for Asia, Photronics: Yes. Actually, whenever customer make a new design, they tape out the data to the foundry fab. The foundry fab give the order to the mask house they select. This time, the new design slowdown actually happened at the end of the foundry customer, namely the design house. The design house actually has a slower new tape out, new design release. It’s not in the pipeline. It’s at the very beginning of the new design release.

Gowshihan Sriharan, Analyst, Singular Research: Thank you, 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?

Eric Rivera, President and Chief Financial Officer, Photronics: Yeah, very little levers we can pull. 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. We don’t have much leverage to pull there.

Gowshihan Sriharan, Analyst, Singular Research: Got you. On the Allen side, if Allen begins delivering qualifications masks in Q3 as planned, and the demand kind of stays soft till early 2027, does bringing the new Allen capacity online to a weak demand environment add depreciation costs, making margins even more compressed? Is the Allen cost structure kind of light enough at the qualification stage that it doesn’t meaningfully impact P&L until commercial production begins?

Eric Rivera, President and Chief Financial Officer, Photronics: Yeah. The Allen expansion already started. We started qualifications already in Q3. Everything is moving according to our timeline. We expect revenue generation to occur later in the year, and we do not expect that the current economic environment will depress the returns that we’re expecting on our Allen expansion in the current year or in the next at the moment.

Gowshihan Sriharan, Analyst, Singular Research: Okay.

Frank Lee, Senior Executive for Asia, Photronics: Goshi, sorry. I’d like to add some comments to your question.

Our Allen expansion is not only capacity expansion. We are upgrading our technology. The qualification basically is for the technology which Allen cannot do at this moment. Once we qualify the customer, I think we will increase our market share in the technology node which Allen cannot produce right now. Another purpose of Allen expansion is we are planning to transfer some lower end of the high end or the mainstream from our Boise side to Allen, so we can spare more capacity in our Boise side to take higher ASP orders. This is a win for Boise side and also a win for the Allen side.

Gowshihan Sriharan, Analyst, Singular Research: Got you. In terms of the memory supply constraints and OEM cost pressure headwinds, I’m curious as to see whether you’re seeing this evenly across your geography. For example, are your U.S. customers, Korean customers behaving differently to your Chinese and Taiwan foundry customers in terms of deferring designs, or is the pause kind of fairly based across all regions?

Frank Lee, Senior Executive for Asia, Photronics: Yes. The memory shortage and especially also the price surging, has huge negative impact on the consumer product, especially the low-end consumer product. Those are mainly in Asia. I think this impact happened in Taiwan and also in China.

Gowshihan Sriharan, Analyst, Singular Research: Got you. Thank you for the call. I’ll jump back in the queue. Thank you.

Operator: Our next question will come from the line of Christian Schwab of Craig-Hallum. Your line is open, Christian.

Christian Schwab, Analyst, Craig-Hallum: Yeah, great. Thanks. I understand the delays that you’re seeing at design starts, and thanks for all that clarity. As we increase our capacity capabilities on lower geometry node chips on a kind of a medium-term basis, can you give us idea of either a yearly revenue target or a market share goal? My second question along those lines is, on the advanced node side, is seven or eight nanometers is the best that we’re going to be able to make, or do we have aspirations to get down below that?

Eric Rivera, President and Chief Financial Officer, Photronics: Thanks, Christian. This is Eric here. Starting with your last question first, in terms of our aspirations to go eight nanometer, seven nanometer, we’re going to continue going down node. We have to do that because that’s our industry. We have to continue investing, and we see a lot of opportunity there. 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 2027, to be heading us from a revenue expansion perspective, our percentage of increase should be larger in the U.S. than anywhere else.

Christian Schwab, Analyst, Craig-Hallum: Great. Thanks.

George Macricostas, Chairman and Chief Executive Officer, Photronics: We’re working with customers to that, and Frank, maybe you’d like to elaborate?

Frank Lee, Senior Executive for Asia, Photronics: 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. Photronics, we have a very unique, strong position in the country because we have the Boise site where we have the very advanced photomask technology, and also we have the Allen where we can make the mainstream photomask. 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.

Christian Schwab, Analyst, Craig-Hallum: Great. Thank you for that clarity. No other questions. Thank you.

Ted Moreau, Vice President of Investor Relations, Photronics: Thank you, Christian.

Eric Rivera, President and Chief Financial Officer, Photronics: Thank you, Christian.

Operator: I would now like to turn the conference back to Ted for closing remarks.

Ted Moreau, Vice President of Investor Relations, Photronics: 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.

Operator: This concludes today’s program. Thank you for participating. You may now disconnect.

Eric Rivera, President and Chief Financial Officer, Photronics: Thank you.