Photronics (PLAB) is trading nicely higher today (+12%) after reporting 4Q17 (Oct) earnings this morning. In case you're not familiar, Photronics is a supplier of photomasks. Photomasks are high precision quartz plates that contain microscopic images of electronic circuits.
A key element in the manufacture of semiconductors and flat panel displays, photomasks are used to transfer circuit patterns onto semiconductor wafers and flat panel display substrates during the fabrication of integrated circuits, a variety of flat panel displays and, to a lesser extent, other types of electrical and optical components. They are produced in accordance with product designs provided by customers at manufacturing facilities in Asia, Europe, and North America.
In August 2017, PLAB announced a major investment plan. The company will invest a minimum of $160 mln over the next five years to build a state-of-the-art manufacturing facility in China for high-end and mainstream flat panel display (FPD) photomask production, with capability up to G10.5+ and AMOLED. The news followed the August 2016 announcement to build an IC manufacturing facility in Xiamen, China.
PLAB notes that China is becoming an increasingly important manufacturing region for flat panel display, both LCD and AMOLED. This investment will place Photronics in the strategically enviable position as the largest merchant FPD photomask supplier in China, with leading edge technology for large format displays, including G10.5+, and AMOLED for mobile displays.
Construction is planned to begin in late 2017 and production should start in the early spring of 2019. In conjunction with the investment agreement, Photronics has obtained customer commitments from two of the largest domestic display manufacturers in China, which should help quickly fill the planned production capacity of the facility and enable profitability soon after start up. The display market in China is very dynamic at the moment, with many leading-edge fabs under construction. PLAB says it wants to take a measured approach to its investment, while continuously monitoring the market as it develops.
Turning to the OctQ results, EPS came in at $0.08, which was at the higher end of prior guidance of $0.03-0.09. Revenue rose 13% year/year and 8% sequentially to $121.0 mln, which was a good bit above prior guidance of $108-116 mln. In terms of guidance for 1Q18 (Jan), PLAB expects EPS of $0.02-0.09 and revenue of $110-118 mln. The mid-point of each guidance number is above market expectations.
Breaking down the numbers a bit, Integrated Circuit (IC) revenue makes up the bulk of total sales and IC sales came in at $96.1 mln, up 13% sequentially and 17% YoY. Flat panel display (FPD) revenue was $24.9 mln, which was a decrease of 6% sequentially and 1% YoY.
Revenue improved this quarter on the strength of high-end mask sales, particularly in IC where high-end memory continued the positive trend of the last four quarters, and high-end logic advanced on growing Asia foundry 28 nm demand. High-end FPD also improved due in part to continued growth in demand for AMOLED in China. Operating margin improved to 10.3% due to operating leverage and effective cost control.
PLAB says that continued strong cash generation has supported its ability to fund planned investments, including two China projects. The capex forecast of approximately $250 mln in 2018 will be the most the company has spent in one year. However, management believes its China investments, when complete and fully operational, will provide attractive returns.
In sum, this was a nice quarter for PLAB, both in terms of the OctQ results and the JanQ guidance. Looking ahead to JanQ, PLAB says underlying high-end IC demand drivers still appear healthy, potentially tempered by anticipated seasonal softness. PLAB expects high-end FPD demand to remain flat. However, as its China investments start to turn into production in early 2019, PLAB should be positioned nicely as the largest merchant FPD photomask supplier in China.