Good day. Thank you for standing by. Welcome to the Photronics fourth quarter and full year 2022 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 this session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded Tuesday, December 13th, 2022. I would now like to hand the conference over to your host, Richelle Burr, Executive Vice President, Chief Administrative Officer, and General Counsel. Please go ahead.
Thank you, Michelle. Good morning, everyone. Welcome to our review of Photronics fiscal 2022 full year and fourth quarter results. Joining me today are financial officers ongoing performance. A reconciliation of these metrics to GAAP financial results is provided in our presentation material. At this time, I will turn the call over to Frank.
Thank you, Richelle. Good morning, everyone. Q4 was sort of finished to a great year. Revenue grew 24% in 2022 as we achieved our fifth consecutive year of record revenue. Both IC and FPD generate strong growth as design activity remained robust. We saw annual growth across nearly all product types. It remains clear that our broad technology portfolio, operation excellence, and the close customer relationship have made us the market leader. Q4 revenue was less than third quarter revenue, with demand slowing in high-end logic IC. This demand will be indicated by the current semiconductor industry downturn as design activity remained relatively strong. There was also some negative impact from depreciation of Asian currencies on FPD business. However, we believe the factors causing the softer demand will be transient, and we maintain our positive view on the long-term demand trend.
Gross margin and operation margin was essentially flat compared with the third quarter as we mitigate the impact on lower volume by closely managing our costs, while continue to benefit from strong pricing. We also realized a foreign exchange gain that John will discuss in more details later. The end result is we deliver EPS of $0.60 for fourth quarter. Looking now to industry outlook. While we believe the demand trends in addition to customer capacity expansions are intact in the long- term, the midterm picture is cloudier due to current market uncertainty. Factors such as high interest rate, rising inflation, and slowing GDP are already having a negative impact on some sectors of the electronic product supply chain and could potentially impact photomask demand.
Moreover, adding to the uncertainties is the U.S. government's new export restriction imposed on China on certain semiconductor technologies that may further impact the Chinese IC industry. So far, these actions have had minimal impact on Photronics' business or operations. However, the situation is dynamic and fluid, which we continue monitoring. At the same time, we will ensure our compliance with all regulations while taking necessary actions to mitigate the impact on our supply chain and business. Although the near-term view is uncertain, we are confident that as IC design and manufacturing continue to play a central and expanding role in the global economy, photomask as a key element within the ecosystem will continue to strive over the long- term. Currently, IC manufacturing regionalization is spurring investment across the world.
This new capacity will generate additional photomask demand. For choice, we're capitalized on these opportunities from a position of leadership and strength. Our deep customer relationships are built on trust, supported by our technology, service, quality, and global production capacity. This customer relationship, coupled with many long-term purchase agreement, have continued to support our competitive advantage in the business. I would like to thank the entire Photronics team for excellent performance in the fourth quarter and throughout the whole year. We navigate challenges and change and embrace opportunities as we deliver another record year. Our long-term strategy is intact and on track to achieve our financial targets. I'm proud of what we have accomplished together and believe we can do even better in the future. At this time, I will turn the call to John.
Thank you, Frank. Good morning, everyone. Revenue in the fourth quarter was lower sequentially as some softer demand trends were experienced in both IC and FPD, primarily for high-end products. Our product diversity and global customer base helped mitigate the high-end softness, with mainstream revenue higher for both IC and FPD. We have invested in tool sets for a broad array of technologies and nodes, enabling us to support our customers' technology roadmap across both high-end and mainstream. As a result, fourth quarter revenue of $210 million was down only 4% sequentially, despite the declines in high-end product revenue. Our commercial teams have done a great job working with customers to identify opportunities. Our operations teams were effective in supporting this demand with on-time execution, delivering the highest quality products that enable our customers' success.
IC revenue of $156 million in the fourth quarter was up 25% year-over-year and down 3% sequentially. Although high-end revenue was lower quarter-over-quarter due to some reduction in Asian foundry logic demand, that business has been significantly better than last year's fourth quarter due to some increases in capacity through the year. mainstream revenue improved on continued strong demand, especially in Asia. FPD revenue of $54 million was down 8% quarter-over-quarter and 3% year-over-year. Demand for mobile display masks was lower as panel makers focused on producing current products for new premium smartphones and not releasing new designs. G10.5+ demand was also lower during the fourth quarter. We were successful in picking up mainstream motor fill to maintain higher capacity utilization.
Gross and operating margins were essentially flat the third quarter as improved pricing and continued cost discipline offset the negative impact of lower volumes on operating leverage. Gross margin of 38.2% and operating margin of 28.8% are already within our target model range. Based on our outlook and the continued focus on cost reductions, we expect to continue to deliver margin improvement as our revenue moves into the targeted zones, with price increases holding stable in 2023, while the outlook for continuation of premiums may be less certain. Operating expenses decreased compared with the third quarter as we balance the need to maintain margins while also investing in people and resources to support revenue growth, positioning us to continue to grow both revenue and profit.
Non-operating income of $11 million was primarily due to FX gains, primarily resulting from remeasurement of US dollar-denominated balances in foreign locations into the local functional currencies. Income tax provision of $16 million resulted in an effective tax rate of 24.5% for the fourth quarter and 25% for the full year. Diluted EPS for Q4 was $0.60, an 18% increase over Q3 and 82% increase over the $0.33 of last year's fourth quarter. Diluted EPS for the whole year of 2022 was $1.94, an increase of 118% over 2021, demonstrating the achievement of the entire Photronics team during a challenging and changing year.
Cash flow generated from operating activities was $79 million in the fourth quarter, bringing the 2022 total operating cash flow to $275 million. We used this cash to invest in growth by funding capital expenditures of $66 million in the quarter. Full year CapEx was $109 million, net of nearly $4 million in government subsidies. For 2023, we expect CapEx to be approximately $130 million as we continue to invest in growth. Primarily for high-end and mainstream IC capacity. We also continued to reduce debt during the quarter, bringing total year-end total long-term debt to $42 million, a reduction of $69 million since last year-end. Cash balance at the end of the quarter was $320 million.
If we include short-term investments of $39 million, net cash and short-term investments at the end of the quarter was $316 million. Our balance sheet is strong and flexible. We're able to pursue growth investments, both organic and inorganic, while also being prepared to weather potential future economic challenges and uncertainty. Before I provide guidance, I'll remind you that our visibility is always limited, as our backlog is typically only one to three weeks, and demand for some of our products is inherently uneven and difficult to predict. The ASPs for high-end mask set are high, and as this segment of the business grows, the relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings.
Given those caveats, we expect first quarter revenue to be in the range of $203 million-$213 million, as we expect positive demand trends with less than typical seasonality. Based on those revenue expectations and our current operating model, we estimate earnings per share for the first quarter to be in the range of $0.40-$0.48 per diluted share. 2022 was a great year. We grew revenues 24%, plus in our fifth consecutive year of record revenue, expanded margins, which places us into the bottom end of the range in our target model, and strengthened our balance sheet, generating cash, reducing debt, and investing in growth.
Looking forward, we believe positive long-term market trends and our leadership position, together with financial flexibility, positions us to continue our profitable growth and achieve even greater success for our customers, our employees, and our shareholders. I will now turn over to the operator.
Thank you. Again, if you have a question at this time, please press star one one on your touch tone telephone. One moment while we compile our Q&A roster. Our first question comes from the line of Hans Chung with D.A. Davidson. Your line is open. Please go ahead.
Hi, thank you for taking my question. First, it seems that you have the pretty good gross margin for the quarter. Just wanted to kind of deep dive, like what's the driving factors that... I know you mentioned some cost management and the pricing is still variable, so just any detail on that. And then how should we think about the gross margin into 2023? Hello?
Hans, I think they're having technical issues. Just a moment, sir.
Okay.
Michelle?
Hello? Can you hear me?
I can hear you now, sir. Go ahead.
Okay. Yeah.
Yeah.
Yeah.
I'm not sure where did we leave off?
Yeah. Let me-
So-
Yeah, let me... Do you mean-
The pricing environment has been very good, so our pricing is stronger than has happened historically. We expect that pricing to maintain. We've seen even as demand is still strong but not quite what it has been, the pricing holds up. We have pricing agreements across the board. In Asia, they've held, as I mentioned, as demand is not quite as strong. We did, we have had premiums as people pay to, quote, queue hop to move up in the queue because the queue for mainstream deliveries has been much more extended than it had been historically. Those premiums are less predictable, but through the fourth quarter, both pricing and premiums have held up.
The combination of change in mix with some of our operations picking up business and improving their margins and with sustained pricing strength, we think we'll stay within the margin ranges that we've been experiencing.
Okay. Next question just, I know you mentioned that the China, recent impact from China, the restriction that's minimal to our business. You also mentioned there is still some uncertainty. Just want to kind of get more, understanding like, what's the potential risk, from the, new China export control, or is any indirect impact from that?
So far, Hans, we've been, there are a couple of factors. One is that our business in China is primarily mainstream. Most of the restrictions that are issued are to prevent, you know, leading edge technology from leaking into Chinese military primarily. Those restrictions, to some extent have affected us, but we've been able to essentially figure them out, understand them, and work with them. The restrictions have affected us very little over the past few years since they started imposing them. I think, if they study in the leading edge technologies, we're gonna remain unaffected. We spend a lot of effort to understand the restrictions as they're imposed, and to make sure that we stay within the law.
So far, not much effect. There has been some, but very minimal, and we expect that to continue. As restrictions continue to get issued, we'll continue to assess how they affect our business and work within the restrictions. Hopefully, we'll continue to experience the same, you know, the same minimal effect that we can because they're directed primarily at leading edge technologies where we're not engaged.
This is Chris. I might add one thing to that on the... There is a positive side to this. Since the leading edge has become kind of restricted in China, a lot of that capacities can deploy to mid-range and mainstream. That's creating a fairly healthy design pipeline at mid-range and mainstream nodes in China. Raj is seeing that in the local facility. Those are sweet spot nodes for us, particularly how we're tooled up there. That's kind of situation, but fortunately, that's kind of a positive knockout effect for our local business.
Got it. Thank you. I'll jump to Keith.
Thank you. One moment for our next question. Our next question comes from the line of Gus Richard with Northland Capital Markets. Your line is open. Please go ahead.
Yeah, thanks for taking the question. About six months ago, Toppan Photomask was spun out and sold to private equity. I'm just wondering, you know, given that transaction, it's been a little bit of time, you know, how has that affected the market or hasn't it?
Michelle, Has that technical difficulty cleared up?
Yes, you're loud and clear, sir.
That's right. Thank you. Do we have other questions?
Did you not hear Hans' question?
I did not.
Hans, could you repeat your question, sir?
Yes. Can you hear me?
Yes. Thank you, Hans.
This is Gus. Real quick, Toppan Photomask got spun out about six months ago. It's been in that state for a while now. I'm just wondering how is that impacting the photomask market? You know, or is it or is things remain the same?
Gus, thank you. Basically, we don't see major change in the business model. Toppan, since their spin-off, they haven't made a major capital investment. Even they announced some project in Texas, but nothing materialized. At this moment, from customer side, from our side, we haven't seen a real difference.
Got it. Thanks for that. In terms of the $130 million in CapEx, can you provide a little bit of color? Is that for, you know, debottlenecking? Are you gonna get some, you know, high throughput tools for, you know, mainstream? Is it gonna be for high end? You know, can you give a little color on where you're investing?
Sure. actually, in the past 12, 16 months, the equipment lead time in photomask is also very long, same as in semiconductor business. Some tool we actually order one year and a half ago. The tool will come in in 2023. The main purpose of this tool is to serve the mainstream business expansion.
We do have some tool which are going to be end of life. We are doing certain tool replacement in addition to mainstream business expansion. The tool to be replaced are old tool. The new tool has a better performance, higher throughput. We expect not only just a replacement, we will see some new capacity added to our overall production capacity.
Got it. The last one for me, you talked a little bit about, you know, demand, softening a bit. Can you put that in context of lead times? You know, lead times have stretched quite a bit, from days to, I think, weeks or months. You know, how has lead time changed over the, you know, the course of the quarter?
The softened demand actually start about two, three months ago, particularly in the high-end side. It doesn't really impact our fab utilization. We still have enough work. Of course, the lead time to customer has been reduced because the wait level is lower. However, there are certain signs the demand for the high-end is coming back. At this moment, it's a little bit too early to be very precise in terms of the degree of recovery. From our input from sales and customer, we do see the high-end fab start to come back.
Got it. Got it. I think that's it for me. Thanks so much.
Thank you, Gus.
Thank you.
Thank you. I'm showing no further questions at this time, I'd like to hand the conference back over to Frank Lee for any further remarks.
Thank you, Michelle. Thank you for joining the meeting. I'm very pleased with our performance in 2022 and proud of the way our team has responded to the challenging and changing environment. We are well-positioned to continue our success in the future and are looking forward to updating you as we continue to make progress. Thank you for your interest, and have a good day. Thank you, everybody. Thank you.
This concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a great day.