Photronics, Inc. (PLAB) Earnings

Management highlights

### Long-Term Market Drivers - Demand for high-end photomasks for leading-edge AI memory and logic chips remains exceptionally strong, creating a multi-year growth opportunity for Photronics. Photomask demand is more closely aligned with semiconductor design releases than wafer starts. - The industry trend of semiconductor manufacturing regionalization and increased outsourcing from captive photomask producers creates opportunities to shift product mix toward higher average selling price (ASP) advanced geometries. ### Strategic Capital Expansion Projects - U.S. Courier facility: Cleanroom is being prepared for key equipment to extend capabilities down to 8nm and below, with installations expected to begin later in FY26. - U.S. Allen facility: Qualification mask production has begun, with initial revenue targeted late in FY26 and meaningful revenue contribution expected from 2027 onward. The expansion is also a technology upgrade; shifting lower high-end mainstream orders from Boise to Allen frees Boise capacity for higher ASP orders, and the site will become a key supplier for onshore U.S. mainstream semiconductor manufacturing. - U.S. Boise facility: Already qualified to produce 7nm node masks for leading-edge AI chips, with ongoing development for even more advanced nodes. - Korea expansion project: Remains on track, with initial revenue expected by the end of FY27. The newly installed FPD mask layer is entering production to support higher ASP G8.6 AMOLED masks. - Taiwan and U.S. facilities are well-positioned to capture growing demand for advanced chip packaging applications. ### FPD Segment Operational Updates - FPD demand is strong in China's high-end segment, and Photronics holds strong market share in Korea, where positive seasonality returned in Q2. High-end consumer electronics launch schedules (smartphones, smartwatches) for Western markets remain on track and have not been impacted by memory supply constraints. Accelerated FPD market growth is expected over the coming years driven by G8.6 AMOLED adoption, with growth concentrated in Photronics' core strongholds of China and Korea. ### Financial Performance - Gross margin was 31%, operating margin was 20%, diluted GAAP EPS attributable to shareholders was $0.54, non-GAAP diluted EPS (excluding foreign exchange impacts) was $0.42. Operating cash flow was $47 million (22% of revenue), and Q2 CapEx was $46 million. Total cash and short-term investments stood at $638 million. - Capital allocation priorities are: reinvestment for organic growth, pursuing strategic opportunities, returning capital to shareholders. Management remains disciplined in prioritizing high expected return projects.

Guidance

- Fiscal Q3 26 revenue guidance is set at $207 million to $215 million, with an expected operating margin of 18% to 20% and non-GAAP diluted EPS of $0.39 to $0.45 per share. - Full fiscal 2026 CapEx guidance is maintained at $330 million, with the majority of spending allocated to strategic expansion projects in the U.S. and Korea plus required end-of-life tool upgrades. - Initial revenue from the U.S. Allen expansion is expected late in fiscal 2026, with initial revenue from the Korea expansion expected by the end of fiscal 2027. Meaningful revenue contribution from new capacity is expected from 2027 onward. - As new capacity reaches full production, revenue mix is expected to shift toward high-end nodes (by technology) and toward the U.S. and Korea (geographically) in fiscal 2027 and 2028.

Segment performance

Total company revenue for Q2 FY26 was $210 million, essentially flat year-over-year. 1. Integrated Circuit (IC) segment: Revenue reached $148 million, a 5% year-over-year decrease, representing 70% of total company revenue. High-end IC revenue accounted for 38% of total IC segment revenue, and mainstream IC revenue was $91 million. 2. Flat Panel Display (FPD) segment: Revenue was $62 million, a 13% year-over-year increase, representing approximately 29.5% of total company revenue, marking one of the strongest quarters in the segment's history.

Risks & headwinds

- Near-term headwinds: Three key factors have delayed semiconductor design releases and reduced near-term revenue visibility: 1) Elevated fab utilization rates have left fabs unable to accommodate new design releases, and chip OEMs have prioritized production of existing profitable products over launching new designs; 2) Surging memory prices and supply constraints have delayed new consumer electronics product launches; 3) Geopolitical uncertainty (specifically the U.S.-Iran conflict) has increased macroeconomic risk and delayed design activity. - The expected seasonal demand recovery after Chinese New Year did not materialize to the anticipated extent in Q2, resulting in revenue coming in below prior guidance. - Photronics demand is inherently variable, with a typical backlog of only 1-3 weeks, resulting in limited near-term visibility. Small changes in high-end order volume can materially impact overall revenue and earnings due to high ASPs for these products. - A large portion of Photronics' operating costs are fixed, so there is limited ability to cut variable costs if demand remains soft for an extended period, meaning margins are heavily dependent on utilization and product mix.

Analyst Q&A

• Q: When did visibility into near-term demand become cloudy, and what timeline do customers project for the recovery of delayed design releases? /

  A: Visibility clouded starting in late February after Chinese New Year, as the post-holiday demand slowdown lasted far longer than expected. The U.S.-Iran conflict and elevated fab utilization exacerbated the slowdown. While customers remain optimistic about the medium-term outlook, near-term visibility remains very limited. Early signs of order recovery were seen at the start of Q3 in May, but management remains cautious about near-term performance.

• Q: Where are delayed design releases occurring in the product pipeline, and what cost adjustment levers are available if demand stays soft? /

  A: The slowdown is occurring at the very beginning of the design release process at chip design houses, not among already approved projects in the pipeline. Most of Photronics' costs are fixed, so there are almost no variable cost levers to pull to offset soft demand; margins are primarily dependent on market-driven product mix. The geographic impact of memory supply constraints is concentrated in Asia (Taiwan and China), where it primarily impacts low-end consumer electronics products.

• Q: How will the Allen expansion impact margins if demand remains soft into 2027, and what is its strategic purpose? /

  A: The Allen expansion is progressing on schedule, with qualification already underway, and management does not expect current soft demand to hurt long-term expected returns from the project. At the qualification stage, the cost impact on the P&L is minimal, with no meaningful depreciation pressure before commercial production launches. Strategically, the project is as much a technology upgrade as a capacity expansion: it allows Photronics to serve new advanced nodes, and shifting mainstream high-end orders from Boise to Allen frees Boise capacity to take higher ASP advanced node orders.

• Q: What are Photronics' medium-term goals for advanced node market share and technology development? /

  A: Photronics plans to continue investing to develop capabilities below 7nm and 8nm nodes, which is required to keep up with industry demand and capture ongoing growth. The company targets becoming the leading photomask supplier for the growing onshore U.S. semiconductor manufacturing market, and expects faster percentage revenue growth in the U.S. than other regions starting in 2027 as the Allen expansion comes online, expanding U.S. market share.