Welcome, everyone, to the 28th Annual Needham Growth Conference. Today we have with us Photronics, ticker PLAB, and we have Ted Moreau from Investor Relations doing a presentation. Please take it away.
All right, thank you. Appreciate it. Thanks for joining, everyone. Kind of a quick run-through of who Photronics is. These numbers are, we have an October fiscal year-end, and so these numbers are the fiscal year for 2025. Revenue was a little flattish, but obviously, you can see from the numbers here we generate really good operating profitability and cash flow. Market cap actually is a little stale. We had a nice reaction to our earnings call, which occurred on December 10th this past year. That was our fiscal Q4 earnings call. The stock actually really had a very strong move, was actually up almost about 50% that day. So our market cap today is more like $2.1 billion-$2.2 billion. In the lower left-hand corner, we show revenue based off of geographic origin. So that's revenue produced out of those facilities in China, facilities in Taiwan.
You can see Taiwan is about 33% of our total revenue. China represents about 26% of total revenue today. That is actually split. For the first time we broke this out, our exposure on our FPD business and our IC business. So you can see from that graph or that pie chart, 11% exposure for China FPD, 15% China IC. And the reason we did that is because of the competitive dynamics in the China market. Competitive intensity is a little bit greater on IC in China versus in FPD. We have technological advantages that keep us a little bit ahead. And so we can talk about that a little bit later if there's questions on that. But generally speaking, in the lower right-hand side, you can see we have two areas that we generate revenue.
One is semiconductor integrated circuits, so that's typically 70%- 75% of total revenue, and then flat panel display, which makes up the remaining quarter of our business. I don't know if everybody knows what a photomask is, but we basically take a semiconductor chip design and etch it onto a glass plate, ship it off to our customer base, typically is the semiconductor manufacturing site. So we don't really talk very much with R&D organizations. We tend to talk to manufacturing operations organizations. So our largest customers, we have three 10% customers that we disclose in our filings. You would see United Microelectronics, which is UMC. They're based in Taiwan. Samsung is a 10%+ customer. And they're actually split between IC and FPD. And then we have Semiconductor Manufacturing Incorporated, which is based in China. They're about a 10% customer, also known as SMIC.
We ship off the semiconductor, or I'm sorry, we ship off the photomasks that have the semiconductor chip design that's etched into the glass plate, send those off to the manufacturing organization. The glass plates get inserted into a lithography tool. Light laser shines through. The glass plate projects the image onto the wafer. Therefore, we are at the very beginning of the front end of the semiconductor manufacturing line. For every semiconductor chip that's out there, there is a set of photomasks. Every semiconductor chip has a number of layers that can vary from, say, 20 layers up to, say, 80 layers or 100 layers. For every layer requires one photomask. So when we ship off a set of photomasks, we call them a set, and we'll get into that in a little bit.
Flat panel display market is very similar to the IC business, except in IC, the photomask is typically six inches by six inches, except for in certain cases, we talked about a little bit on our most recent earnings call, some advanced packaging opportunities that we've been participating in. In that situation, the photomask is actually a little bit bigger than that six inches by six inches. But generally speaking, it's six inches square. And then on the flat panel display, it's similar technology, similar production process in our cleanroom facilities, except these photomasks are much bigger. They're several meters wide, several meters tall. Because if you think about for a display, if you have a 70-inch square, a 70-inch screen TV, you need a photomask that's 70 inches, right? Or at least that size so you can fit the display within that piece of glass.
So what are the trends that are hitting the industry and why is Photronics well positioned for trends that are coming down the pipeline? Obviously, we're tied into the semiconductor industry. So as semiconductor business, the market grows, generally speaking, we're going to grow along with it because the photomask market, which I'll talk about a little bit later, the photomask market typically is about 1% of the total semiconductor market. So as the semiconductor industry grows, we should generally grow along with it. But on top of that, we have seen, especially since the COVID timeframe, when supply chains were disrupted, much of the world realized, or much of the industry realized, hey, we're very dependent upon China and upon Taiwan to manufacture semiconductor chips.
And so the industry took an initiative, obviously being a little geopolitically influenced more recently, but took the initiative to start diversifying itself geographically, starting to reshore semiconductor production into the United States. We're even seeing more semiconductor production occurring in Japan, in Korea, in Europe. There's even consideration in Southeast Asia, Middle East. So the more semiconductor manufacturing locations that open up, the more opportunity there is for a company such as Photronics. And part of that reason is if you have one chip design, but you're going to manufacture that chip design in maybe two locations, hypothetically speaking, you would need two sets of photomasks, right? One for each location. So that would be a positive for us. Captives are outsourcing more. So some of the captives in the market today, Taiwan Semiconductor is going to be the biggest captive out there. They're a very big company, obviously.
I think everybody's familiar with them. There's opportunities where they're looking to outsource a little bit more, and it's tied into their developmental work or their expansion into Arizona. Samsung's looking to outsource more. Semiconductor Manufacturing International Corporation, SMIC, they're looking to outsource a little bit more. So we are seeing just kind of a trend towards more outsourcing by the captives. The next trend that's in our favor is node migration, and we'll get into this in a little bit, but there will be a graph that you'll see in a couple of slides where you actually see a pretty significant hockey stick, parabolic move on the dollar value of a mask set as you get into more leading-edge chip designs. So that's very encouraging.
And as every year, you'll tend to see semiconductor chips move to, generally speaking, move to the next generation or every release, next generation of geometries or next node. And every time they do so, they have to release a new chip design. We need a new photomask set. So that's obviously something that works in our favor. And then on flat panel display, we really have a competitive advantage at higher end in that market, higher value photomasks for flat panel display. So as you get into bigger mask sizes, more advanced mask sizes, that's where we have a competitive advantage. And then obviously, operational excellence. We're very good at producing high-quality photomasks. It's one of the reasons why we are a market leader in the merchant part of the market and then generate a lot of cash flow, as I showed on that opening slide.
So the semiconductor industry, I think everybody's been talking about reaching $1 trillion by 2030. Maybe that timeline has moved up. I'm hearing some rumblings that some of those numbers are changing. So maybe that lower left-hand side of this page is maybe a little bit dated. I don't know. We'll see how that plays out. But hypothetically speaking, let's say semiconductor market grows to $1 trillion. Historically, the photomask market's been about 1% of the semiconductor market. So that says that this past year, maybe the photomask market was $6-$6.5 billion and maybe growing to $10 billion over the next several years. It feels as though it's, if we think about how that plays out from a growth rate perspective, it feels as though the industry's growing at about 9% CAGR over the next several years.
The photomask market is broken up, and you'll kind of see this on the lower right-hand side between the merchants such as Photronics and the captives. A decade ago, a little bit more than a decade ago, the captives were a much lower percentage of the total photomask market at about 40%. They have grown to now, this past year, they were 63% of the total photomask market. And that's not to say that they're bringing more business in-house. And you'll see this on one of the upcoming slides. But it's really the value at the higher end, at least this is how we're interpreting it, is the value at the higher end of the market is increasing at such a rapid rate that it's causing the market share differences to skew a little bit.
One of the reasons why we win is because of the significant global footprint that we have. We have 11 cleanroom facilities throughout the world, three here in the United States. We have two in Europe, and then the rest are in Asia across Korea, Taiwan, and China. We are actually undergoing a very significant expansion at our facility here in Dallas, or not here, in the United States, at our facility in Dallas, Texas. I say here because I work out of the facility in Texas, so it's inherently kind of one of my thoughts. But we're expanding that facility down to 65 nanometers initially, and eventually we have plans to go to 40 nanometers.
We see the opportunity there as being pretty meaningful with a number of customers giving us strong indications that they are going to use up that additional capacity that comes online and capabilities that come online in the coming years. We have said that we expect to start generating revenue out of that new facility in late fiscal 2026. So again, we have an October fiscal year end. And so that's really the timeline there. And so obviously, the United States probably would be a pretty good growth driver for the company in the fiscal 2027 timeline. As we expand and get this capacity and capabilities up and running at 65 nanometers, we're actually what we're doing is we're going to transition some of our production out of our Boise, Idaho facility. Our Boise, Idaho facility is the only high-end facility commercial mask maker in the United States.
It's also the only government-trusted high-end facility in the United States, and so we do governmental work there, but there are some programs we do at that facility that actually can produce masks down to seven nanometers today. We do have some production there at, say, 65 nanometers that we're going to transition over to Allen, Texas, therefore freeing up capacity at our Boise facility for other high-end opportunities. The other significant investment plan that we have coming that we've actually already committed to and we've started to work on is in our South Korea facility. At that facility, we have historically been producing masks at the higher end of our mainstream business, but we've committed to progressing down to eight nanometers, so really tackling the high end of the market. Obviously, we have customers there that have been very supportive of this investment plan.
And so we're really optimistic about these two opportunities. And I'll talk a little bit about why that's important. And because if you think about this will help diversify our geographic mix. Thinking back to that first slide, about 80% of our revenue originates in the China market, or I'm sorry, in the Asia markets. That's split across China, Taiwan, and Korea. So this should help boost our Korea presence and the amount of revenue that we're generating out of Korea. And then the United States, obviously, that's going to help with the reshoring. So both efforts should diversify the geographic mix a little bit more. These two facilities, so let me kind of step back a little bit. We have two joint venture facilities. I don't know if you're aware, but we have two joint venture facilities.
One is in Xiamen, China, on the IC side, and the other one is in Taiwan, also on the IC side. So these investments will actually allow us to generate greater earnings power to shareholders. Because if you look at our net income, our earnings per share, we have earnings per share, and then we have earnings per share to shareholders. Because of these investments, we will generate more revenue and therefore more profitability that will benefit shareholders in the future. And then it does also target these investments will help us target more high-end opportunities down the road as this production comes online. So why is going after the high-end important? So as you can see from this graph, on the bottom line, the X axis, you can see the different geometries ranging from 130 nanometers down to more leading-edge, 2 to 3 nanometers. And so as.
And then on the Y axis, you see the mask value. So as we get into more leading-edge, higher-end geometries, the value of the mask set increases almost exponentially, almost parabolically. And then you can kind of see within this, the background shade, we generate a lot of business at the 130 nanometers all the way down to 14 nanometers today and a little bit of 12. We are striving to participate more in the very leading edge. That's what the Korea facility is designed to do. That is what our Boise facility is designed to do. So we are going to be targeting more higher-end opportunities in the future. But today, a lot of that photomask demand is actually being serviced by the captives. And so this is where we are looking towards some of these captives to outsource a little bit more to companies such as Photronics.
Many of the captives, as I said earlier, do business with us. A lot of the captives are customers for us today, and we're looking to expand with them. A lot of people ask, "Okay, well, so you're not so in the very leading edge, what are the applications there?" That's typically your AI in the hyperscale data centers, or maybe it's an application processor for your smartphones, that sort of thing. That's typically, yes, you have a question?
Yeah. I do want to ask the trend that you mentioned, captive is outsourcing to you and other manufacturers. But based on my understanding, for more advanced nodes and the process node is very complicated. They have to iterate and improve in-house. That's why they keep captive, right? And what they're outsourcing are those more mature and easy to mass produce, that kind of process. And so first, I want you to express your view on my statement. And second, so if that's true and you're only getting the old mature process node, how does that boost your revenue?
I think what you're saying is absolutely true, generally speaking, that they want to focus more and more. They want to maintain concentrated production at the leading edge. Though we do have indications, there is a reason why we are going down to 8 nanometers for Korea, right? So there are opportunities that are out there that we have identified that will allow us to participate in that part of the market.
Can you share what kind of cheap mask they're outsourcing to you, the Korea part?
Well, I'm not going to really don't want to get into exactly the specifics about that today, and I don't know if I ever will, but because we have agreements with customers and you don't really want to violate those agreements, right, and so I would just say, generally speaking, though, there are opportunities that are opening up.
I see. Thank you.
But to your point, the captives will continue to probably dominate the production of leading-edge photomask production. But there are opportunities here and there that we are going after to target, for sure.
Thank you.
Okay. And then on the display side, again, this is a business that's very complementary to our IC business. We feel as though we have technological advantages in the display market that others cannot match. We were the first company to ship, and we believe still the only company to ship photomasks for Generation 8.6 AMOLED technologies. That is a technology that is in the very early stages of proliferating throughout the display market. We think that probably accelerates in the 2027 timeframe. We also are very good at producing masks at larger screen sizes. And so if you looked at our high-end versus our mainstream mix on our display business, we'd be at about 85% for the high-end. So why do we win?
I kind of referenced this a little bit earlier, but so where global footprint is a very significant factor. You want to be partnered close to your customer locations. You want to reduce shipping time. So cycle time and delivery time becomes a very important factor. Obviously, you have to produce masks that are very high quality with very few, if any, defects. I mean, you really can't actually have defects in your design, in your production of photomasks. But because you can't actually, I mean, if you think back to what the utilization is of a photomask where the laser shines through to project the image onto a wafer, actually having a speck of dust or a speck of dirt on the glass would show up on the wafer for print, right? And so you have to avoid those situations. So responsive delivery, high-quality masks, trusted supplier.
We've become a very, very trusted supplier, particularly in the Asia markets, which is a factor at play as to why we are quite confident about our position in the China market and the Asia markets, despite some Chinese local players having entered into the market. We feel pretty good about our position because of our trusted supplier status, and then on the technology side, yes, I mentioned we are an innovator and a leader on the FPD side. In semiconductor IC, it's a little bit harder to differentiate on the technology side, though we do have advanced designs where some of our competitors are not able to do that, and we have equipment that we are able to utilize more efficiently than some of our peers, so I had talked earlier about the expansion in North America at our Texas facility and then our expansion in Korea.
This is kind of a history of what our capital intensity ratio is on the graph on the left-hand side. You can see a spike that occurred in 2019 that was associated with our expansion into the China market, and then in the 2020 to 2024, we had kind of a standard capital intensity run rate of about 15%. We are now going through an investment cycle that's consisting of, obviously, U.S., Korea, plus end-of-life tool replacement costs, and so that's what caused the elevated capital intensity ratio for 2025. We spent $188 million in 2025 on CapEx. In 2026, we're going to spend $330 million on CapEx, is what we've guided to. That's because of the continued investment in the U.S. The expansion in Korea kicks off in a big way, and this should be our peak year on end-of-life tool replacement costs.
Just kind of a quick review of the numbers for Q4. Won't spend much time on this. Revenue was increased a little bit sequentially. Gross margin remained at a mid-30s% level, which is important because there's been a lot of questions about the history of our company and producing gross margins in the low 20s%. And now we're in the mid-30s%. And is it sustainable? And I think over the last four years or so, we've definitely demonstrated that we've been a consistent mid-30s% gross margin profile company. And that obviously helps drive revenue, or I'm sorry, profitability and cash flow. We did see an acceleration in our business in the quarter, particularly in the China market and Asia markets, leading up to Chinese New Year, which we see as continuing throughout Q1.
I want to touch, actually. I'm going to touch real quickly on the balance sheet, and then we can open it up for any additional questions, but we have $588 million of cash on the balance sheet, of which $422 million resides at our two joint ventures, which is important to understand, and obviously, we're talking about the accelerated investment in the United States and Korea. That's expanding our CapEx program, so our usage of cash really is focused on CapEx at the moment. We did buy back $97 million worth of stock in fiscal 2025, but since we are focusing more on CapEx at this point in time, I would venture a guess to say that that's going to be the priority over any additional share repurchases in the future, so with that, I will open up the floor to any additional questions. Yes?
Let me just ask Mike's question on the recording. In flat panel display, may I inquire how much is captive?
The captive percentage on flat panel display is lower than it is on IC. And IC, I said, the captive portion was 63%. I actually don't have that number off the top of my head. I'd have to dig into it. What I would say is over the last five years, we have held very steady at about 27% market share and then obviously very focused on the high end. We feel really good about our position and really good about our technological capabilities there. And so we see our positioning continuing and being a market leader in that market. But I don't think that. I don't know for sure. I'm going to have to dig into that number, but I don't think that the captive portion is anywhere near as high as it is on IC.
Second, two more questions. When you move toward higher-end nodes, how should we be thinking in terms of gross margin? Will it be accretive right away? Will it take some time to go to the steady state?
Yeah. So as you think about gross margin in any given project, there's really not a trend that you can identify to say, yes, high-end has a better gross margin profile than mainstream on a project-for-project basis. And the reason for that is because mainstream projects typically run over a fully depreciated set of tools versus high-end projects typically run over tools that still are going through the depreciation timeline. With that said, in aggregate during a quarter, if we have a high percentage of revenue produced at high end, then we have a higher ASP that we're generating and therefore generating more revenue overcoming the very significant fixed cost infrastructure that we have. And so that will drive a margin uplift. But on an individual basis, there's no real trend. It's project by project.
Third question. In terms of cash usage, a large amount of cash is in China. So for share repurchase, I assume that the company has to rely on the cash in the U.S. If they want to take out cash from China, I know that you can use dividend as the purpose or the reason. But do you have to pay extra?
So if we're going to use the $422 million of cash that's associated with our joint venture, if we're going to use that cash, it can be used very freely within the two joint ventures. If we were to expand to a different geographic region, that's going to be hypothetically. This is a hypothetical. I'm not saying that we're not committed to this at whatever, but I'm just talking hypothetically.
If we were going to expand to another geographic region that's part of the joint venture, then we can use that cash. So 100% usage of that cash in those kind of scenarios. If we were to use that cash for Photronics, not part of the joint venture, in that situation, the likelihood would be you dividend it out. We have a 50.01% ownership. So it's basically a 50/50 split. If it's going to be repatriated to the United States, we probably get taxed on that as well, right? So at probably a 20% tax rate. So in that scenario, you would only have access to about 40% of that cash balance that you would allocate for that usage. So that is a little bit of a deterrent, I would say, to using cash for that purpose.
Yeah. One for me. Would you mind just comparing your overall perception of just the health of the demand environment for the high-end versus the more traditional end markets?
So over the last couple of years, the mainstream has been a little bit more sluggish. And I think we've seen that across much of the analog space, industrial markets, automotive markets, and whatnot. Obviously, it's great to hear that the analog chip guys are seeing a better demand environment. For us on the mainstream, it remains to be seen whether or not that actually translates into a better demand environment. Obviously, we are tied to design starts, less to actual volume.
So they can see improvements in volume, but it doesn't necessarily translate. So we'll see how that plays out. Certainly in the October quarter, and then we're seeing it in the January quarter based off of the guidance, we're definitely seeing an improvement in the high end, as I had mentioned, particularly in the Asia market heading into Chinese New Year. And then actually in the United States, we also have seen a strengthening of demand at the high end, which was anticipated. I think that the high-end demand in Asia, obviously given we had beaten fiscal Q4, was a little bit unanticipated. Yes, go ahead . Question on, yeah, I'll repeat your question. Question on demand.
Yeah. So you mentioned you see growth in Korea and China market. And I wonder that's on the IC side more or the FPD side? And so if it's IC, more mainstream or high end? You said Korea is high end, but I wonder what's going on in the Chinese market?
Yeah, so I mean, on FPD, the end market or all the customers are basically in Korea or China, right? And so as FPD grows, those two markets are going to grow along with it, and then on IC, yeah, I mean, I would say we're definitely seeing in the very near term, we have seen in Q4 and for the guidance for Q1, we have seen a strengthening of demand, particularly associated with Taiwan and China, and then longer term, what we're seeing is opportunities, obviously both in China and Taiwan, but opportunities accelerating in Korea.
Those are mainstream or high end?
We are going after more higher end opportunities.
I see. That's why you're doing massive CapEx recently.
Correct. That's why we're expanding our facility in Korea. That's why we actually took a strategy a number of quarters ago to focus our China business more on the high end because there are Chinese local players in the market at the mainstream that are trying to utilize a little bit of pricing in order to capture share. That's why we are shifting our business more towards higher end in China. Yeah.
Hi, thank you. I wanted to ask you about the high end of your mask business. I believe about five or six months ago, you've got your multi-beam capabilities running. Can you help us dream the dream, think a little bit about what sort of share you might be able to take and what if we move to 3-nanometer, 2-nanometer? How fast can that develop? Because I think you're the only U.S. manufacturer with this capability now. A lot of this is onshoring. And then can you help us think about what the ASP would be on these very high-end mask stores where you are now? Thanks.
Questions that are a little bit more challenging to answer. I can't really get into the ASPs. I mean, I guess I could go back and just show the very dramatic move as you get into the high end. But then also the multi-beam has a distinct advantage as you get into higher end production, right? Your write time improves significantly. So I guess that's all. And I'm not going to get into market share. I apologize.
Those are things that are not only a little can be tough to predict, right? But we do have this multi-beam that was installed in last spring. It's been producing masks already for customers, and it's been a very productive usage. So we're very pleased with that. Yes, I do believe we're the only ones with a multi-beam writer in the United States, although there are multi-beam writers in other geographic regions at competitors.
Great. With that, we are out of time. That is the end of the Q&A and presentation. Thank you, everyone, for coming. Enjoy the rest of your conference.
Appreciate the questions. Thank you so much.