Photronics' Q4 2025 Earnings Call: Contradictions Emerge on Market Share, G8.6 Adoption, and U.S. Capacity Investments

Date of Call: December 10, 2025

Financials Results

• Revenue: $216M, up 3% sequentially, down 3% YOY
• EPS: Non-GAAP diluted EPS $0.60 per share; GAAP diluted EPS $1.07 per share (includes $16.8M reversal of U.S. tax valuation allowance)
• Gross Margin: 35%, improved and exceeded expectations
• Operating Margin: 24%, exceeded guidance range

Guidance:

• Revenue for Q1 expected to be $217M–$225M.
• Operating margin for Q1 expected to be 23%–25%.
• Non‑GAAP diluted EPS for Q1 expected to be $0.51–$0.59.
• Fiscal 2026 CapEx expected to be approximately $330M (includes end‑of‑life tool upgrades and U.S./Korea special projects).
• Opportunistic remaining share repurchase authorization of about $28M.

Business Commentary:

* Financial Growth and High-End Demand: - Photronics reported sales of $216 million for the fourth fiscal quarter, exceeding expectations and increasing 3% sequentially. - The growth was driven by record high-end IC revenue led by the U.S. and Asia, with non-GAAP diluted EPS surpassing guidance at $0.60 per share.

• Geographic Expansion and Market Trends:
• The company announced significant geographical expansions at existing facilities, aiming to enhance revenue contribution from these facilities and broaden its geographic revenue mix.

• These investments align with the trends of advanced node migration and regionalization of semiconductor manufacturing, particularly the reshoring of production in the U.S.

• Operational Efficiency and Margin Improvement:

• Gross margin improved to 35%, exceeding expectations, driven by a favorable product mix, and operating margin was 24%.
• The tax allowance reversal, reflecting improved U.S. execution and outlook, contributed positively to GAAP net income.

• Increased Outsourcing and Market Share:
• Photronics recognized more outsourced opportunities from captive mask makers, highlighting increased demand for its high-end products.
• Despite competition from TechSEM, Photronics maintains a comparable market size, with a focus on high-end products and exposure to leading-edge chip designs.

Sentiment Analysis:

Overall Tone: Positive

• "We delivered strong financial results with sales of $216 million, exceeding expectations and increasing 3% sequentially." "Non‑GAAP diluted EPS... $0.60 per share." "Gross margin improved to 35%, exceeding expectations." "Record high‑end IC revenue... 42% of IC revenue." "We expect fiscal 2026 CapEx to total approximately $330 million."

Q&A:

• Question from Linda Umwali (D.A. Davidson & Co.): Now that your largest competitor just went public, what is your relative size and/or trends in share?
  Response: Competitor has larger overall share, but when including Photronics' FPD business (where the competitor doesn't participate) the companies are roughly similar; Photronics expects to grow U.S. high‑end share via reshoring and the Allen expansion.

• Question from Linda Umwali (D.A. Davidson & Co.): What is your view on the overall competitive environment and how is mainstream softness impacting margins and next year's capital spend?
  Response: Mainstream China is soft with increased local competition, so Photronics is reallocating capacity toward higher‑value layers and anchor customers to protect margins and focus capex on higher‑end opportunities.

• Question from Christian Schwab (Craig‑Hallum Capital Group LLC): Is increased pricing competition coming from new Chinese entrants in less complicated nodes and should we expect margin pressure as you shift to higher mix?
  Response: High‑end nodes (e.g., 22/28nm) have strong demand and higher ASPs; company is optimizing capacity to higher‑value layers to sustain or improve gross margins.

• Question from Christian Schwab (Craig‑Hallum Capital Group LLC): When will G8.6 display adoption meaningfully contribute to revenue — fiscal '26 or later?
  Response: G8.6 is at an early ramp; management expects gradual increases in display revenue driven by G8.6 beginning in 2026, but provided no precise timing or magnitude.

• Question from Christian Schwab (Craig‑Hallum Capital Group LLC): Do new capacity additions and end‑of‑life tool replacements create multiyear puts/takes to gross margin given higher depreciation?
  Response: Investments are expected to drive increased revenue and capabilities; although depreciation will rise, management expects gross margins to remain stable or improve over time.

• Question from Christian Schwab (Craig‑Hallum Capital Group LLC): Can you characterize revenue potential from the Allen, Texas ramp over a multiyear timeframe?
  Response: Not disclosing site‑level revenue; Allen will add mid‑range/high‑end capacity with incremental revenue and improved gross margins starting H2 FY26 and fuller benefits into FY27, plus it will free Boise for higher‑end work.

• Question from Christian Schwab (Craig‑Hallum Capital Group LLC): Do you expect captives to shift more work to the merchant market, especially in the U.S.?
  Response: Yes — captives are showing increased interest in outsourcing (less critical layers and memory); Photronics is well‑positioned to capture that demand, aided by regionalization trends.

• Question from Gowshihan Sriharan (Singular Research, LLC): How should we think about pricing and margins on outsourced work relative to traditional mainstream IC?
  Response: Outsourced high‑end work carries higher ASPs and generally higher margins; captives typically pay fair prices for outsourced capabilities.

• Question from Gowshihan Sriharan (Singular Research, LLC): Are you seeing changes in customer conversations and longer‑term planning as tariff/geopolitical concerns evolve?
  Response: Export/tariff constraints are easing outside China, improving customer planning and enabling longer‑term dialogues — the U.S. and Korea projects stem from those longer‑term customer conversations.

• Question from Gowshihan Sriharan (Singular Research, LLC): How concentrated was Q4 high‑end IC growth across customers and is the pipeline broadening for fiscal '26?
  Response: High‑end growth was broad‑based across existing core customers (memory and foundry/logic) with a more robust order pattern, and management views the improvement as sustainable.

• Question from Gowshihan Sriharan (Singular Research, LLC): In Korea, are customers signing longer‑term agreements or is the work more transactional quarter‑to‑quarter?
  Response: While not disclosing contract specifics, customers (especially advanced logic foundries) continue outsourcing higher‑end work and maintain ongoing roadmap discussions; trend supports the Korea expansion.

Contradiction Point 1

Market Share and Competitive Environment

It involves differing perceptions of market share and competitive positioning, which are crucial for understanding the company's strategic direction and competitive advantage.

Can you discuss your market share compared to your largest competitor, now public? How do you view the competitive landscape? - Linda Umwali (D.A. Davidson & Co., Research Division)

2025Q4: Our market share remains aligned with our perception before, with TechSem having more market share than Photronics. However, we are roughly the same size in the FPD business, which TechSem does not participate in. - Eric Rivera(CFO)

Is China's market weakness the primary factor driving the flat quarter-over-quarter guidance? - Thomas Diffely (D.A. Davidson)

2025Q1: We are seeing increasing competition, but our focus is on the middle and high end of the high-end business. Our branded ASP in China remains high and stable, shifting our business to more profitable segments. - Frank Lee(CEO)

Contradiction Point 2

Mainstream Market Dynamics

It reflects differing views on the dynamics of the mainstream market, which could impact the company's growth strategy and financial performance.

Mainstream business remains soft but is stabilizing. Can you explain the supply and demand dynamics and their impact on next year’s margins and capital spend? - Linda Umwali (D.A. Davidson & Co., Research Division)

2025Q4: Our mainstream market, especially in China, faces competition from new local mask houses. We differentiate ourselves through relationships with key customers and focus on higher-value product mix, optimizing our capacity for better gross margins. - KangJyh Lee(CTO)

Is the flat quarter-over-quarter outlook accurate? Is the weakness solely due to the mainstream market in China? What factors are driving this flat guidance? - Thomas Diffely (D.A. Davidson)

2025Q1: Business of the very low end of mainstream has been weak, specifically from six-inch and eight-inch wafer fab. This weakness is present in Asia and Europe. While this revenue is relatively small, it still impacts our overall business and outlook. Long-term outlook remains positive, focusing on improving our branded ASP. - Frank Lee(CEO)

Contradiction Point 3

G8.6 Adoption and Market Impact

It involves differing expectations regarding the adoption of G8.6 technology and its impact on the company's business, which could influence revenue forecasts and strategic decisions.

Are new market entrants in China pressuring gross margins in the core business? - Christian Schwab (Craig-Hallum Capital Group LLC, Research Division)

2025Q4: G8.6 is in early production ramp, serving large format OLED displays and IT applications. We expect it to contribute gradually to our display revenue in 2026. - Christopher Progler(CTO)

What challenges did you face in scaling up the G8.6 AMOLED screen size? - Thomas Diffely (D.A. Davidson)

2025Q1: Scaling AMOLED mask specs to the larger G8.6 substrate was challenging. Integration of mask on the blank, using IC-like technology, also presented challenges. We've been working on this for nearly a year and have good coordination with the customer. - Chris Progler(CTO)

Contradiction Point 4

Investment in U.S. Capacity and Market Growth

It involves differing expectations regarding the timing and impact of investments in U.S. capacity, which could influence revenue growth and strategic planning.

Will your new capacity investments impact gross margins in the next few years? - Christian Schwab (Craig-Hallum Capital Group LLC, Research Division)

2025Q4: We expect increased revenue and gross margin contributions from our investments. New tools provide better throughput and capabilities, aligning with our market and growth expectations. - Eric Rivera(CFO, VP, Corporate Controller & Principal Accounting Officer)

Given the projected 15% CAGR for Gen 8.6 flat panel displays, are you well positioned to capitalize on this growth and potentially outperform the industry? - Christian David Schwab (Craig-Hallum Capital)

2025Q3: The U.S. is not a significant market for us today. However, we believe the opportunity is there. - KangJyh Lee(President of PDMC & Director)

Contradiction Point 5

Mainstream Market Weakness and Recovery

It involves differing assessments of the mainstream market's weakness and recovery timeline, which are essential for understanding Photronics' business trends and strategic focus.

When will G8.6 adoption in flat panel displays become a significant portion of your business? - Christian Schwab (Craig-Hallum Capital Group LLC, Research Division)

2025Q4: There is a positive trend with regionalization of high-end foundries outsourcing lower-end mask set layers, opening opportunities in mainstream demand. - Christopher Progler(CTO)

Is there increased weakness in Asia and is it linked to startup photomask companies? - Thomas Diffely (D.A. Davidson & Co.)

2025Q2: Weakness in mainstream is broad-based, not confined to Asia or startups in China. Recovery is not expected until late 2026. - Christopher Progler(CTO)