Photronics' Q3-Q4 2025: Contradictions Emerge in Market Share and CapEx Strategies

Date of Call: None provided

Financials Results

• Revenue: $216M, up 3% sequentially, down 3% YOY
• EPS: $0.60 non-GAAP diluted EPS (ex-FX and excluding $16.8M U.S. tax valuation allowance reversal); GAAP diluted EPS $1.07 (includes $16.8M tax valuation allowance reversal); non-GAAP EPS exceeded guidance
• Gross Margin: 35%, improved and exceeded expectations (driven by favorable product mix)
• Operating Margin: 24%, exceeded guidance range

Guidance:

• Q1 revenue expected to be $217M–$225M
• Q1 operating margin expected 23%–25%
• Q1 non-GAAP diluted EPS expected $0.51–$0.59
• Fiscal 2026 CapEx expected to be approximately $330M (includes end-of-life tool upgrades and special U.S./Korea projects)
• Allen (TX) installations/qualifications expected in coming months/spring with initial revenue late 2026 and further ramp into 2027

Business Commentary:

* Strong Financial Performance: - Photronics reported record high-end IC revenue of $157 million, representing 42% of total IC revenue, with a 3% sequential increase. - This positive trend was driven by strong demand in the U.S. and Asia, particularly in advanced node migrations and the regionalization of semiconductor manufacturing.

• U.S. Market Expansion and Investments:
• Photronics is expanding its capacity and capabilities in the U.S., with plans for capacity expansion and capability extension at its Allen, Texas facility.

• These investments are aligned with U.S. reshoring efforts and increased demand for leading-edge chip designs, supporting diverse and advanced production capacities.

• Non-GAAP Earnings and Tax Valuation Allowance Reversal:

• Fourth-quarter non-GAAP diluted EPS was reported at $0.60 per share, surpassing guidance.

• A favorable tax valuation allowance reversal of $16.8 million was recognized, reflecting improved U.S. execution and outlook.

• Advanced Technology and Market Opportunities:

• Photronics achieved several technical and commercial advancements, including increased outsourced opportunities and demand for larger format masks.
• The company's advanced multi-beam mask writer is now in full production, supporting high-end customers, and its technology roadmap continues to advance through collaborations and partnerships.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We delivered strong financial results with sales of $216 million, exceeding expectations." Call highlighted record high-end IC revenue (42% of IC revenue), non-GAAP EPS of $0.60 that surpassed guidance, strong U.S. demand and planned capacity expansions (Allen, Korea) to capture high-end, and guidance for Q1 revenue $217M–$225M and FY26 CapEx ~$330M.

Q&A:

• Question from Tom Diffely (D.A. Davidson): How should we view your market share versus the newly public competitor (Texan)? Any color on the competitive environment and the mainstream business — supply/demand, impact on margins, and capital spend for next year?
  Response: Competitor has larger IC share, but including Photronics' FPD business overall size is similar; Photronics expects U.S. high-end share to grow via Allen expansion and reshoring, and is shifting mainstream capacity to higher-value work to protect margins.

• Question from Christian Schwab (Craig-Hallum Capital Group): On mainstream competition and pricing pressure, G8.6 timing and revenue cadence, multi-year gross-margin impact from new capacity and end-of-life tool replacements, revenue potential/timing for Allen, and prospects for captives outsourcing to merchant suppliers?
  Response: G8.6 is early-stage with gradual contribution in 2026; investments (including end-of-life tool upgrades and Allen) are expected to increase revenue and support gross margins; Allen tool installs and customer quals occur in coming months/spring with initial revenue late 2026 and fuller ramp into 2027, also freeing Boise to serve higher-end demand.

• Question from Gauchi Surhan (Single Research): With increased outsourcing from captives, how do pricing and margins on outsourced layers compare to traditional mainstream IC? Are you seeing more long-term planning discussions beneath the surface? How concentrated was the high-end growth and what is Korea's commercial model?
  Response: Outsourced work tends to be higher-end with higher ASPs and margins and customers generally pay fair prices; management sees more long-term customer roadmap conversations, high-end growth broad-based across core customers (foundry and memory), and Korea expansion driven by customer outsourcing roadmaps.

Contradiction Point 1

Market Share and Competitive Positioning

It involves changes in company perception regarding market share and competitive positioning, which are critical for investors to understand the company's competitive landscape and strategic focus.

Can you update on your market share and competitive positioning with your largest competitor now public? - Linda (D.A. Davidson)

2025Q4: Photronics sees its market share as previously perceived. Texan has a larger market share in IC, while Photronics has a stronger presence in FPD. Texan does not participate in FPD. Overall, Photronics is positioned to capture more high-end shares, driven by U.S. demand and reshoring trends. - Eric Rivera(CFO)

What end market products are those chips going into, and are you collaborating with customers on this? - Christian David Schwab (Craig-Hallum Capital)

2025Q3: We are not playing in the low-end part of the industry. So we play in the high- and mid-end and the mainstream. So we are playing in a higher-margin business. It is a smaller market. But once again, if you go back to the last year, we are intellectually curious. But we are not chasing the market. And the fact that the market recovered and the Asia operations was in the high- and mid-end and the mainstream and the front-end mask part of the business. - George C. Macricostas(CEO)

Contradiction Point 2

CapEx Investments and Strategic Growth

It involves changes in financial forecasts, specifically regarding capital expenditure investments and their alignment with strategic growth plans, which are critical for investors to understand the company's financial strategy and investment priorities.

When do you expect CapEx to return to historical levels? By the end of next year, or will it remain elevated due to growth opportunities for multiple years? - Christian Schwab (Craig-Hallum Capital Group)

2025Q4: CapEx in Q4 was approximately $109 million, nearly $40 million below the midpoint of our previous guidance range of $128 million to $148 million. The lower CapEx spend was primarily due to a delay in receiving certain equipment and software necessary for our multi-beam investment in Boise. - Eric Rivera(CFO)

Will new capacity additions and tool replacements affect gross margins in the coming years? - Christian David Schwab (Craig-Hallum Capital)

2025Q3: We decided that the best strategy would be to try to move faster and to have the multi-beam in place in Boise. So we are subjecting ourselves to a delay in the ramp because of that. And so we will have the multi-beam in place in Boise in the middle of fiscal year '25. - George C. Macricostas(CEO)