Good morning, and thank you all for joining us for our next Midwest IDEAS Conference presentation. Presenting next is Photronics, which trades on Nasdaq under the ticker symbol PLAB. Representing the company today is their Vice President of Investor Relations, Ted Moreau.
Thank you, William. I really appreciate everybody joining us today. I run investor relations at Photronics. I've been with the company for about two years. I do send out a distribution list on anything that we want to communicate to the investment community. If you want to be added to that distribution list, my email address is on every single press release that goes out, so feel free to send me a message. Photronics, we're a company that provides photomasks for the semiconductor industry. And you need a photomask in order to do a chip design. Think of our business as when a company issues a semiconductor chip and comes up with the chip design, and then wants to go through the manufacturing process, you absolutely have to have a set of photomasks in order to accomplish that.
I always want to make sure people understand our business is contingent upon semiconductor design releases, and not necessarily as much about wafer starts or wafer fab equipment. It's really important that we understand that, because that's influenced our business this year, because of the success of the semiconductor industry. Some of these chip design releases have been delayed a little bit, and we can talk about that as we talk about the year, but it's really important to understand as we walk through our business and how you think about the catalysts for our business. As you look at these numbers, these are trailing 12 months, and we reported yesterday, we have an October fiscal year end. These are trailing 12 months as of the earnings call from yesterday morning. And you can see that we generate pretty good cash flow over the years.
We have about 2,000 employees. See in the lower left-hand corner, revenue by geographic mix. This is revenue from geographic origin. We'll talk a little bit about where our facilities are located, but it's very important that our business. We have facilities throughout the world. We have 11 clean room facilities throughout the world. It's very important for us to have facilities close to our customer locations. It's one of the most important things that we have about our business. And you can see, China's a pretty important market, but it's both on the semiconductor and the display side, and we'll talk about that in a little bit as well. Asia represents about 80% of our total revenue, but we are investing to expand our facilities in the United States. We're expanding to expand our facilities in Korea. We'll talk about that.
From a technology perspective, we have two categories for both our semiconductor business and our display business. We have a high-end category for both, and we have a mainstream category for both, and we're trying to capture more and more of that high-end part of the business, and we'll get into that. Again, semiconductors is about three-quarters of the total business, and display is the remaining quarter. So what exactly do we do? Again, we make a photomask. We take a piece of glass, we receive a semiconductor chip design, and with that design, we etch that design into the piece of glass, and that becomes our photomask. Then the photomask, in every semiconductor chip design, there's a number of layers, and every layer requires one piece of glass. So within that one chip design, we create a mask set.
At 90 nm , we're probably talking about 25 layers or about 25, give or take, masks per chip design. At 14 nm, which is a little bit more advanced, not the most leading-edge designs in the world that you see today out of GPUs from NVIDIA and AMD and whatnot, but at 14 nm , we're probably talking about 70 to 80 layers or 70 to 80 photomasks for that chip design. So that's within our set. As you get into more advanced chips, it requires more layers, and therefore more photomasks. So we have a unit volume improvement as you go into higher-end geometries, and then we'll get into the ASP implications in a little bit. That chip design or that set of photomasks, we send those off to wherever the manufacturing location is. Right now, for example, NVIDIA is a fabless semiconductor company.
They don't manufacture any chips in-house, so they are not a customer of ours. We don't even talk to NVIDIA. We talk to companies like UMC, which is a manufacturing company. We talk to GlobalFoundries. We talk to Intel, Taiwan Semiconductor, Samsung, any company with manufacturing locations, Texas Instruments, Onsemi, Infineon, those sorts of companies. The photomask is inserted into a lithography tool. The laser shines through the lithography tool, and through the mask, and it projects the image that's been etched into the mask onto the wafer, and that's basically how you get your semiconductor chip design onto the wafer for the very beginning of a semiconductor manufacturing of a chip. Very similar process on display. Again, display was 28% of total revenue. The difference being for a semiconductor, your photomask is about 6 inches by 6 inches.
For the display, it could be several meters wide, a couple meters tall, very heavy pieces of glass, so it's a much more automated process. Our display business is pretty much in Korea, China, and a little bit in Taiwan. But again, it's a very similar process. As we think about the semiconductor business, there is a very significant, almost parabolic move that's occurring on the ASPs as you get into the most advanced semiconductor chip designs. a lot of our business historically has been in the 130 nm and even older. We break down our semiconductor business, what we call high-end and mainstream. Our high-end category being 28 nm, 22 nm, 14, and down to 7 nm, in that range. The most recent quarter of our semiconductor business, high-end represented 44% of total.
What we were trying to do, and what the industry always does, is transition to more advanced geometries, right? Our mainstream business historically has been in the 90 nm, 130, and older. As we expanded into China, we began focusing more on 40 nm, 65 nm, and we've seen an ASP bump there. As we've continued to advance as a company, we've advanced into more high-end, where the ASPs are significantly better, right? I'm going to quote an initiation report on one of our competitors that this Morgan Stanley team from Japan did in the November timeframe. They said at 90 nm, that mask set, the ASPs for that would be about $50,000 of revenue for that one chip design, right? At 14 nm, now you're going from about 25 masks for the set to close to 80 masks for the set.
For the entire set, we're talking about $1 million in revenue contribution. As you actually get into 5 nm, and we'll talk about that in a little bit as well, as you get to five nanometers, you're talking about $10 million to $20 million for that one semiconductor chip design, for the photomask set. So a very parabolic move. What we are doing, we're investing in our business in order to expand more at the, I'll say, the more parabolic move of the photomask industry in order to capture more and more of that business. Some of that comes through outsourcing of some of our customers. Samsung is a 10% customer of ours today, and we supply masks to them on both the semiconductor side and the display side. But on the semiconductor side, they have a captive operation.
They design a lot of the photomasks in-house for their operations and for their needs, but they do outsource some. We're working with them and some of the other captives like TSMC and Intel and a company called SMIC, which is Semiconductor Manufacturing International, that's based in China. We're working with these guys that do captive operations, but they're looking to outsource more. As they focus on 5 nm and four nanometer and 3 nm , 2 nm , and then the next generation of semiconductor technology, which gets into Angstrom, which we don't need to talk about, as they continue to shift, they start to open up opportunities to companies such as Photronics, at what we call the more trailing edge. It's the near leading edge. That should help us down the road capture more of these higher ASPs.
This is a little bit about the market. You see in the lower left-hand corner, this is the worldwide kind of a demonstration of the growth of photomask demand over the next, say, four years. Even on the lower right-hand side, you see kind of our market share. The very top is our portion, and we're at 10% of the total photomask market, and this includes the merchant side and the captives. The captives are about two-thirds of the total market. In 2025, they actually increased their market share. That's not to say that they're actually doing more in-house from a unit perspective. It's just those ASPs are going through the roof, right? If you looked at Taiwan Semiconductor, which is a customer of ours, they're actually a top 20 customer of ours.
We estimate that we manufacture on a unit volume basis about as much as TSMC does in-house. We also estimate, because of those differences of ASPs, if you were to place a revenue dollar value on TSMC's business, which is all 100% of their photomask needs, is captured in-house. They do not sell externally. We estimate that if you were to put a revenue dollar value on their business, it would be at least five or six times greater than what we did last year, and last year, we did about $620 million of revenue on our semiconductor photomask business. We do believe that the market share growth that they are seeing from a revenue perspective is because of the differences in ASPs. Conceivably in the coming years, the captives go to 70%.
We are holding our own, and doing pretty well, and this is only on the semiconductor side. On the display side, our market share is about 28%, give or take. That has held very steady over the last, say, five years, even as some of the Chinese competitors have grown their business and expanded in display. Again, 11 clean room facilities throughout the world. We have three here in the United States. Our headquarters are in Connecticut. Our high-end facility in the United States is capable of handling production down to 7 nm. We are doing some things to free up capacity there. We are actually producing some masks at 65 nm today, but that is not very productive. What we are doing is we are expanding our Texas facility to more advanced masks.
Historically, we have been producing masks there at 180 nm and 130 nm, and we are expanding our Texas facility to 65 nm. That, once we are up and running there, and we should be up and running in the next month or two, then we are going to shift some production out of Boise over to Texas, freeing up our ability to capture more business at 7 nm, 10 nm, 14 nm, 22 nm in Boise. That should help, if we are successful here, that should help our ASPs and revenue growth in the United States. The United States represents about 17%, 18%, 19% of total revenue. We would expect that in fiscal 2027, October fiscal year-end, that the United States represents a little bit higher percentage of total revenue. 80% of our revenue is generated out of Asia. We have three facilities in Taiwan.
It is largely on the semiconductor side, but we also have a display facility. Two facilities in China, one on both the semiconductor side and one also on the display side. We have a facility in Korea that is also semiconductor and display. We are expanding our semiconductor business there to 8 nm. The bulk of the business out of our Korea facility today is about 40 nm, so we are going to hopefully capture more business once that facility is upgraded, which we are expecting in about a year from now. We are expecting to generate significantly greater business there at 8 nm and 10 nm, and largely because of customers that are very close to that facility, and I think you could probably imagine who that could be.
In display, I am not going to add too much more, but what I will say is, we are the first company in the display market supplying photomasks to be able to supply what is called generation 8.6 AMOLED. If you think about a display is all about consumer electronics, right? Every screen that you have, whether it is a TV such as this one, it is your laptop, it is your Apple Watch, your iPhone, your iPad, whatever, a Samsung Galaxy phone, whatever it is, every display requires a set of photomasks. The next generation of photomask design is for what we call, again, AMOLED generation 8.6. We are just now starting to see that market improve, so that should help our growth rates a little bit in the display market.
Although I will say, what we talked about yesterday on our earnings call, we are seeing really good business out of the Korea market, which is for high-end consumer electronics such as the iPhone, Apple Watch, iPads and whatnot, that are going to be released this fall. On the flip side, we are actually seeing a pullback a little bit in the China market, and that is because lower-end consumer electronics are having a hard time capturing memory. If you are familiar with the semiconductor industry at all, right now, its demand for memory is going through the roof. It sounds as though the memory companies are talking about it. It is going to take another two, three, four years before supply and demand comes into equilibrium.
A lot of lower-end consumer electronics going into the China market, or even being sold from China into other emerging markets, they are having a very difficult time capturing memory. That is delaying the release of these consumer electronics, and therefore, that delays the need for a photomask for us. That is impacting our display business a little bit, but we still are pretty positive about display overall. Then, competitive advantages, it is all about execution. There is not a lot of difference between our ability to create a photomask versus our biggest competitor in the merchant market. It is a little bit more about execution and how much capacity you have and what your turnaround time is. Again, being close to your customer facilities is hugely important to reduce that shipping time.
Some customers come to us and place orders with us, and they ask us what our turnaround time is, like, "How long can you get the photomask to our facilities?" If we say it is within a week, we are very likely to be able to keep that order. If we say it is two weeks, we are very likely to lose it. Your response time has to be very fast, and that is one of the biggest differentiators as to why you win business and more business goes to somebody else. Then obviously, I guess, you have to have high-quality products.
If you do not have a high-quality product, that is obviously not a good thing. Again, we are going through an investment cycle. Historically, if you look at this graph over the last, say, 10 years, on average in any given year, we spend about 10% of our revenue on CapEx.
But starting last year, last fiscal year, we began an upgrade cycle for our facilities. A lot of the equipment that is in our facilities, we have had in there for decades. We are going through an upgrade cycle to replace some of that equipment. Then also, again, we are expanding our Allen, Texas, facility and upgrading that facility, and we are expanding our Korea facility to upgrade that facility. Because of that, we are going through a CapEx cycle right now that began last year. It is continuing this year. Then it likely extends into next year. I do not know what fiscal 2028 will bring at this point in time. I would imagine it probably remains elevated above the traditional 15% of total revenue range, but we will see how that plays out.
As we think about the themes of the business and what is driving this business, it is really a couple of things. One, it is the regionalization and reshoring of semiconductor production into the United States. That is why we are expanding the United States. The more places that semiconductor chips are manufactured, the better it is for us. In the past, or at least historically, a lot of semiconductor chips have been manufactured in the Taiwan market, in the China market. But because of COVID, the industry realized very exposed to those two markets, and we needed to diversify. That is a significant positive for us because the more facilities or more locations that manufacture chips, the more business that gets spread out throughout the world. That is a very significant positive for us. We are also seeing, down in Arizona, TSMC is expanding very aggressively.
They are building out a number of facilities here in the United States. But they are not the only one. GlobalFoundries is expanding in the United States. Samsung is expanding in the United States. So we are seeing this reshoring of semiconductor production that we are trying to take advantage of. Node migration, I talked about that before, and the ASP's improvement. Over the coming years, I do not expect a whole lot in the way of industry growth on unit volumes. A lot of the revenue growth that we expect is going to be a little bit on market share capture in the United States and Korea, and then the ASP increases that we see that will be associated with that market share capture. Particularly as captives, the TSMCs, the Samsungs, the Intels, SMIC, those sorts of companies outsource more.
Again, I do think that from a revenue perspective, their market share probably goes up, but from a units perspective, they are looking to outsource a little bit more down the road. Then on the display side, it is the upgrade to generation 8.6, but then also, we are starting to see foldable phones being introduced into the market, so that is a positive for our display business as well because you need an incremental number of photomasks now that a smartphone is going to have three displays on it instead of one. Then the company is just great at execution and then also generating cash flow. I think on an operating cash flow basis, we tend to be around 35% of total revenue, and then free cash flow will be dictated based off of this CapEx cycle.
Historically, we tend to be around about 25% of total revenue for free cash flow. The most recent quarter, touched on this a little bit. I actually have to step back a little bit because in the spring, in our April quarter, we had some push-outs and delays of some of the orders that we had received, and that's because of the success of the industry. Very difficult for companies to capture memory, at least on the consumer electronics side, and so that's released some of the chip delays or chips design launches that had occurred. Also, some of the customers in the Asia market, their utilization of those fabs are higher than they've been in the past.
They actually told some semiconductor chip designs, "You have to delay your design because we don't have the capacity for it." That impacted our business as well. Now, what we did start to see in this July quarter that we just talked about yesterday, throughout the July quarter, we started to see some of those designs being released. That was because these same fabs that were tight on capacity, they added capacity in the 14 nm, 22 nm, 28 nm range. They started to accept some of the chip designs for that range, or they told a customer of theirs where they said, "Hey, you have a chip at 40 nm. I'm not going to produce that today because my demand is really high.
But if you move that chip design to 28 nm or 22 nm, I will then manufacture it for you." We started to see that. That was a positive, and that helped the node migration trends that we talk about and that we benefit from. The quarter was a little bit better than what we had expected previously, which was encouraging. Again, gross margins about 33% of revenue. Let me touch on those. Historically, gross margins had been in the low to mid-20 range. COVID hit, along with our investment in the China market. Over the last couple of years, we started to see an improvement in gross margin profile because of greater revenue running through our very fixed cost, fixed infrastructure. Operating leverage ran through the model, driving up our gross margin profile.
When COVID hit, the whole industry raised prices because of constraints within the industry. We also raised prices, so that helped to lift our gross margin profile. Over the last several years, we've been able to improve our gross margin profile into the mid-30s, give or take, 33% most recently. It looks like it's going to be about flattish on the margin profile in the coming quarter. Just kind of talked about a bunch of this. Not too much more to add. Just highlighting that our high end on the semiconductor side was 44%, which as a percentage of the total high end was the highest we've ever been. On the display side, 85% of revenue is we consider high end. Very strong balance sheet, $673 million of cash on the balance sheet.
That is on a company that generates $850 million - $900 million in annual revenue. With that said, about $504 million of the cash balance resides at our two We have two joint ventures, both on the semiconductor side. One is in China, one is in Taiwan. $504 million of the cash balance resides at those two facilities, which is very important because we are going through this CapEx cycle. Any cash held at those facilities has to be spent at those facilities, right? If we wanted to utilize any of that cash for our U.S. expansion or our Korea expansion, then we have to dividend it out to our joint venture partner. It is a 50/50 split.
If we moved $100 million, or dividended out $100 million, $50 million comes to us, but then we get taxed at 20%, so it is really about $40 million on that $100 million. That is not a really productive use of cash. We did say on the most recent earnings call, because of the heavy CapEx cycle that we are going through, there is only about $165 million or so of cash not residing in our joint ventures. If we need cash, we would either issue debt or a line of credit and probably go down that path at this point. Not likely to use equity in order to raise any cash. Guidance for the next quarter, I think we guided basically flat to slightly up sequentially.
We actually changed the guidance for the full year on the CapEx side because of some of the delays, and that is taken to receive some of the equipment on some of this upgrade. But we did maintain our timeline to generate revenue out of both our Texas expansion and our Korea expansion. With that, we have about seven and a half minutes left. I will take any questions if anybody has them. Yes.
Can you repeat that?
The joint venture ownership is 50.01%. Yeah. We entered into the Taiwan joint venture in the 2013 timeframe, 2014 timeframe, and the China joint venture in the 2018, 2019 timeframe. Yep, go ahead.
Of the.
I think if you looked at our net income and the net income to shareholders, it's like three-quarters of the net income generated is net income to shareholders, right? It's like about a 30%, maybe a third of it ends up Or yeah, maybe it's more like a third of it ends up sticking with the, going over to the other. I'm sorry?
Wait, a third of it.
To our joint venture partner, right. Net income to shareholders ends up being about 70% of the total net income, right? Because we do generate a portion of that for ourselves, right? Or about 50% of it to ourselves.
Are there any outsourced players below 5 nm? It looks like you've lost market share about how that should ground if so.
A couple of things that have happened over the last several years. We've had a number of customers that we've been supplying to in the China market that we've had great business with, that we lost because of geopolitical factors. We were told by the U.S. government, "You have to stop shipping to that customer." Or in another situation, we were shipping to a Chinese customer out of our Taiwan facility, and Taiwan put that customer on the restricted list and said, "You can no longer ship to that customer." We actually had to shift production out of our Taiwan facility over to our China facility in order to satisfy or in order to continue to ship to that customer. The problem was our China facility doesn't have as much capacity as our Taiwan facility, so that also led to a lower revenue profile with that customer.
That's been the biggest factor. The biggest headwind to our business in the last couple of years has been that factor of geopolitical factors influencing who you can do business with in the China market. Yes, our business today, our Boise facility can go down to 7 nm today. Our largest competitor is this company called Tekscend, which went public in October of last year. They were spun out of a company called Toppan. Toppan is a large conglomerate in Japan. Tekscend is based in Japan. They have been subsidized by the Japanese government in order to produce masks at what's called extreme ultraviolet technology, EUV. The EUV technology entered into the industry at 14 nm. There's a very large lithography company out there in the Netherlands called ASML, if you're familiar with them. They sell their equipment for about $300 million, one piece of equipment.
We're obviously not going to use their equipment in our facilities, but TSMC would. EUV is critical from 14 nm down to 3 nm today, right? Much of that business, essentially all of that business today is captive. Captives are not outsourcing any EUV. Now, the Japanese government did say, "Hey, we will subsidize Toppan in order to produce EUV capabilities." They've been kind of going through that process, and they're about to start producing capabilities for masks for that technology in the coming, I would say, probably any minute now. We talked about this yesterday, we have a plan to go to EUV, but a full EUV program would cost us about $300 million. For a company generating $850 million to $900 million in annual revenue, you're very cautious about doing that.
You don't want to do that too early because you could end up crippling the company if you're not careful. We have a strategy that we're going to follow over the coming years in order to go down that path. Probably takes us a good maybe a five-year investment cycle. I don't know exactly how long, but we're thinking multiple years at the very least, where we're going to introduce certain capabilities within EUV in order to capture part of the market that we believe is starting to open up from the captives, where they're starting to release some of that to the merchant suppliers. At the moment, there's one company out there that's requesting EUV masks. That's not a big enough market for you to incur that $300 million.
It's a cautious approach, but it's a way to continue to invest in your capabilities and capture more of that higher end of the market, and spreading out that investment cost. It's kind of like we're in a way waiting for the market, but we're going to be proactive as we wait, as opportunities arise. Other than that, the capabilities within Toppan's clean room facilities and our clean room facilities are very comparable, and we all buy the same equipment and it's just, can you produce masks at those geometries? Yep.
On the previous slide, when you were talking about ASML, how do you see 5 nanometer on there? You guys can only go down to seven right now. Is that correct? The next step is five?
Today, our Boise facility can produce masks down to 7 nm . I didn't put 5 nm on there simply because that was simply a graph issue. Currently, we're producing masks down to 7 nm . We don't do a lot of business at 7 nm today, but we do produce masks there. In the facility, which is in Boise, that we're producing 7 nm masks, with the same equipment, we are advancing our capabilities to actually go down to four. We're not ready for that today. We're not presenting any revenue out of that today. That's on the come yet, but we are advancing our capabilities. Our Korea facility is going down to 8 nm , and then eventually we have plans to go beyond 8 nm as well. Those things will take time in order to get there, but we have those in the plans.
Again, my email address is on every press release that goes out, so feel free to reach out to me at any time. We have an October fiscal year end, so our next earnings call will be December 9th, and I have a very short, quiet period of about three weeks. Other than that, feel free to reach out to me just about any time. Thank you so much for listening. Appreciate it.