Photronics, Inc.

Good day, and welcome to the Photronics Q4 FY23 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded Wednesday, December 13, 2023. I would now like to turn the conference over to Rochelle Burr, Chief Administrative Officer.

Thank you, Michelle. Good morning, everyone. Welcome to our review of Photromic's fiscal 2023 fourth quarter results. Joining me this morning are Frank Lee, our chief executive officer, Chris Progler, our chief technology officer, John Jordan, our chief financial officer, and Eric Rivera, our chief accounting officer and corporate controller. The press release that we issued earlier this morning, together with the presentation material that accompanies our remarks, are available on the investor relations section of our webpage. Comments made by any participant on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast, and in our view. These forward-looking statements are based upon a number of risks, uncertainties, and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied, and we assume no obligation to update any forward-looking information. During the course of our discussion, we will refer to certain non-GAAP financial metrics. These numbers are useful for analysts, investors, and management to evaluate ongoing performance. A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. At this time, I will turn the call over to Frank.

Thank you, Richelle, and good morning, everyone. The phosphorus team had another outstanding year in 2023, and it is a record revenue for the sixth consecutive year. Over that six-year period, we have achieved a compound annual revenue growth rate of over 12%. For fall 2023, revenue grew 8% year-over-year, the photo mask market overall was fracked, and the semiconductor industry overall is expected to contract by up to 12%. For Chinese year-over-year revenue growth, once again offers testimony to the tendency of design-driven photo mask demand to be less cyclical than the industry in general. Most recent indications from industry leaders and from our customers is that the current semiconductor cycle contraction should transition to the next phase of growth around the middle of next year. Thus, if pay cycles and current observations can be considered indicators, photomask demand should resume a more robust growth phase during the 22nd to 3rd fiscal quarters. Margins for the quarter and year were also outstanding. We achieved operation margin of 28.5% for the first quarter and 28.4% for the full year 2023, the best year in the history of the company. The combination of the following has continued to support the sustainability of this margin level. The high operation leverage, stable pricing from our long-term purchase agreement, our focus on delivering the best quality mask, and our driving for being the low-cost producer. As a result of the solid operation results and the contribution from below-the-line items, we earned in Q4 $0.72 per share on a gap basis and $0.60 per share on a long gap basis. Strong cash flow was generated in 2023, contributing to a stronger balance sheet. and increasing our cash position with reducing debt. We continue to invest in growth, position us to continue the past several years strong performance. To summarize, we achieved another record year in 2023, growing revenue in frame market. Our team performed well and our customers continue to trust us as their photo mass partner. We are investing in high return projects and are positioned to continue to outgrow the market and create value for our shareholders. I'm proud of our accomplishment and excited about our future. And I would especially like to express my gratitude to the more than 1,800 employees that have worked hard to achieve these results. At this time, I will turn the call over to John to discuss the results further.

Thank you, Frank. Good morning, everyone. Our fourth quarter finalized another great year for Fortronics. In my comments, I'll first discuss the fourth quarter results, then the results for the full fiscal year. Fourth quarter revenue of $227.5 million increased 8% over fourth quarter of last year and 1% sequentially. Photronics' fourth quarter always ends on October 31st, which may add or subtract days to the standard 91-day 4-4-5 fiscal calendar. This year, fourth quarter was boosted by an extra two days in the quarter. It was our second highest quarterly revenue ever, only 1% off the record established in Q2 of fiscal year 2023. Our revenue into China in Q4 declined from 53% of total revenue in Q3 to 44%, replaced by revenue with other customers. It might be worthwhile to add some further color regarding the China business. Although we derive a good portion of revenue from China, as do others in the semiconductor and display industry, what makes the China business somewhat unique is that there is a significant number of new designs and fabs in China driving photo mass demand. And since there is a much smaller captive market in China, the preponderance of the photo mass production is being provided by merchant manufacturers like Fortronics. To business by major category, IC revenue of $164.5 million in the fourth quarter was up 1% sequentially and 5% year-over-year. Our high-end revenue, defined as IC masks using 28 nanometer and smaller technology, drove the increase. with 27% sequential growth, which more than offset the reduction in mainstream revenue. High-end revenue was strong in Foundry Logic in both US and Asia. The 9% decrease in mainstream revenue resulted in large part from lower delivery premiums due to somewhat moderated demand and more normalized lead times for those products. For the FPD product category, fourth quarter FPD revenue was a record $63 million, up 3% sequentially and 17% year over year. A 7% increase in high-end revenue, defined as LTPS, AMOLED, and G10.5 large area masks, drove the increase from strong demand for AMOLED display masks used in mobile displays where we have technology leadership. The additional FPD production devoted to high-end mass production then resulted in 13% lower mainstream revenue. Gross margin was solid at 37.3%, although slightly lower due substantially to the decreased premiums for expedited delivery of the mainstream IC masks. Operating expenses decreased somewhat and declined as a percentage of revenue to less than 9%, helping us achieve an operating margin of 28.5% in the quarter. Gap net income in the quarter was $44.6 million, or $0.72 per diluted share. Non-gap net income, which eliminates foreign currency effects, primarily unrealized, was $37.2 million, or $0.60 a share. For reference, our reconciliation of GAAP to non-GAAP results is included in the press release and supplemental slides. For the year, total revenue of $892.1 million was 8% higher than the $824.5 million reported in fiscal year 2022. The sixth straight year of record revenues, as Frank mentioned, a compound annual growth rate of 12% over the last six years. Revenue in fiscal year 2023 was nearly double the revenue of fiscal year 2017 when we repositioned the business and initiated the targeted investments to address where we anticipated growth to be in the photo mass space. IC revenue for the year was a record and grew 9.8% as strong demand for mainstream masks for a good part of the year offset a slight decrease in high-end revenue, primarily in the U.S. Near term, our investment will be primarily in IC capacity to continue outgrowing the market and take advantage of our market strength and close customer relationships. FPD revenue is also a record for the year, up 4%. with high-end growth consistently driven by AMOLED demand. We anticipate this trend to continue into fiscal 2024. Gross margins for the year were 37.7%, 200 basis points over the strong gross margin in fiscal 2022, and we anticipate the gross margin will remain in the current range due to stable pricing, cost controls, leverage. Maintenance of this level of gross margin in the face of erosion of delivery premiums during the latter half of the year indicates a pricing and operating environment that supports the sustainability of the margins. Operating expense for the year was nearly unchanged from the prior year, up less than $800,000, and declined as a percentage of revenue to 9.3% from 10% in the prior year. Operating margin was 28.4% compared to 25.7% in fiscal 2022. And operating income in fiscal 2023 was $253 million. During our six years of 12% revenue growth, operating income has grown at a compound annual growth rate of 41%. and operating margin quadrupled. GAAP EPS for the year was $2.03, and adjusted for the effects of foreign exchange variations, non-GAAP EPS was $2.04. GAAP EPS similarly has grown at a CAGR, compound annual growth rate, of 48% during the six years that revenue has increased 12%. Operating cash flow of $106.6 million for the quarter and $302.2 million for the year were also records for the company resulting from higher net income and effective management of working capital. CapEx for the quarter was $21.1 million and $131.2 million for the year which resulted in free cash flow for the year of $170.9 million. For 2024, we expect to invest $140 million in CapEx, primarily in both high-end and mainstream ICs, to address current and anticipated demand growth. We'll also be taking delivery of a new multi-beam lithography tool in the U.S. for development, then phase-in to high-end production enhancements, then leading-edge development during our fiscal year 2025. We ended the year with a cash balance of $499.3 million and short-term investments of $12.9 million. Some investments of cash that were previously classified as short-term investments have been reinvested in shorter-term instruments that are now classified as cash equivalents and included in the cash and cash equivalents balance at October 31st, 2023. The aggregate of cash and cash equivalents in short-term investments increased from $358.5 million at year-end 2022 to $512.2 million at October 31, 2023. Our only remaining debt consists of low-cost equipment leases of $24.6 million. Our net cash position of $475 million provides ample liquidity to fund investments in organic growth. It also has continued to provide resilience against uncertainties inherent in an industry downturn. We have $32 million remaining of our previous $100 million authorization to repurchase our common stock, and we will continue evaluating when to resume the share repurchase initiative. Before I provide guidance, I'll remind you that our visibility is always limited as our backlog is typically only one to three weeks, and demand for some of our products is inherently uneven and difficult to predict. Additionally, the ASPs for high-end mask sets are high, and as this segment of the business grows, a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Given those caveats, we expect first quarter revenue to be in the range of $217 to $225 million. First quarter revenue from Photronics is typically seasonally lower than fourth quarter. And as I mentioned, this year's first quarter has fewer days than normal, 89 versus 91 in a typical 445 fiscal calendar. Due to fourth quarter ending on October 31st, which as I mentioned, put 93 days into the fourth quarter. and shortened the first quarter. Photronics has continued to increase revenue during the entire semi-downturn, while many in the industry are reporting revenue declines, and the industry as a whole anticipates about a 12% decline in 2023 revenue. Due to the design-driven, somewhat counter-cyclical nature of the business, We expect to continue to do well in the current semiconductor and display environment, continue to report year-over-year revenue growth, and increase our market-leading position. Based on those revenue expectations and our current operating model, we estimate non-GAAP earnings per share for the first quarter to be in the range of 45 to 53 cents per diluted share. We believe that the increasing trend of both high-end IC and FPD and our additions to capacity will continue to support healthy gross margins. Our disciplined cost control will help ensure that the gross profit flows down to operating income and earnings to continue to build shareholder value. I'll now turn the call over to the operator for your questions.

Thank you. If you would like to ask a question, please press star 1-1. If your question hasn't answered and you'd like to remove yourself from the queue, please press star 1-1 again. One moment for questions. Our first question comes from Tom Diffley with C.A. Davidson & Company. Your line is open.

Yes, good morning. I appreciate the chance to ask a question here. First question on the mainstream market. Could you just talk a little bit more about the health of this market in terms of both demand and pricing?

Okay, Tom. The mainstream business, especially in the AUH foundry business, as many foundry companies report, has slowed down quite a bit with a very kind of low wave effect utilization rate. And with the slower market demand, our premium charge in this product segment has reduced since Q4 last year, 2023. So we believe the mainstream business slow may continue for another quarter or two. However, the business from 12-inch wave effect seems to stabilize and start to recover in terms of photo mass demand. So I think our compound ASP should be able to sustain even our premium charge in the mainstream has reduced to a certain low level.

Tom, I'd like to supplement that a little as well, just in terms of pricing. So as Frank mentioned, the premiums have essentially not quite disappeared, but eroded significantly. Nonetheless, the pricing, I sort of compare it to the inflation picture in the U.S., where the inflation rate has tapered off to 3%, 3.5%. But nonetheless, the prices are still 17% higher than they were two or three years ago. So we've wound up with the same situation with IC pricing, where although the premiums have really almost evaporated, the pricing is still at a level, and I kind of referred to that in my comments, we were still able to maintain this upper 30, you know, mid to high 30% gross margin level.

Okay. Maybe just to follow up on that, is pricing still below where it would cost to buy a new tool in the marketplace to build extra capacity, such that it should remain a fairly stable market for you over the next few years?

Yes, actually, as Tom mentioned, our price for mainstream has increased by quite a certain percentage two years ago. And during these two years, the price erosion is very minimal, even the premium discharge. So for mainstream business, our major capital investment basically will be in replacement for the end-of-life tour. There will be not much new capacity, especially in the measuring area. So the only capital spending will be for end-of-life tour replacement, and current pricing will sustain our current margin level.

Okay, thank you for that. And then I'm just curious, on the high-end IC side, what are some of the end-market drivers that you're seeing for it?

The end-market drivers?

We see a lot of demand still from the MRA driver IC, which use 22 to 28 nanometer technology. And this is... Our strengths, we are a major merchant master supplier for these technology nodes, and the applications basically are mainly for driver IC. Chris, you want to add some comment to this? Yeah, thanks, Tom.

It's pretty wide, actually. But like some of the companies we follow, auto is down. from some others like TI reported pretty good auto demand, but definitely that's still driving some tape-out activity, particularly in the compound semiconductor area. A lot of the FAS, you know, utilization is kind of bottom, but it's running pretty low still historically in the maybe high 60s. So there's a lot of new product development going on in consumer electronics and those fields which are driving tape-out demand, but not so much wafer volume. Particularly in Q4, there was a fair amount of design activity on the consumer side. Industrial is still pretty weak. Everything around the so-called AI ecosystem is pretty healthy. So we don't build a lot of photomass sets, although some for direct AI processors. But all the ancillary chips that go around these AI applications were quite strong, as you can imagine following the industry. So there's no segment that that I think we see really spiking back strong, but it's relatively broad and a lot of design activity to try to refill wafer capacity because inventory has also been worked out. So there's some reorders and things like that and pipeline as well. Memory is still pretty weak. Although pricing stabilized, memory is still pretty weak. Particularly our 3D man business was down fairly strongly and has not fully recovered yet.

Okay, yeah, no, I mean, the reason I asked the question is, you know, we basically heard that most of the segments are bouncing along the bottom here. It's, I guess, pretty impressive. You've been able to keep your revenue flow as you have despite the slowdown. And, you know, most people expect that starting maybe mid next year, we start to see some recoveries and it puts you in a good position for that. So I guess on that same front, where do you see capacity constraints right now? And where are you going to focus 140 million of CapEx?

Our major investment will be, number one, as I mentioned, the end of the live tour replacement. The other one is we are positioning ourselves to demand in 22 and 28 photomask demand, especially in China. We are going to enhance our U.S. shop capacity and capability. So some investment will be in the state for Boise and .

Okay, great. And final question, maybe for Chris. A few years ago you talked about the EUV Consortium and how you're part of that. Any update on how that activity is going or what potential? role you might play there?

I mean overall our EUV business continues to grow year over year and even quarter over quarter. The OEM side of that business is probably the strongest and then class of products we call fab products is also fairly strong because there's a lot of EUV scanners entering the industry. And then the third category, device masks, these are prototype and demo masks. Also Consistent with ASML's reports, we see a lot of strength in EUV and the merchant market gradually evolving up, and we're in a pretty good position for that. As far as consortia, we're still in discussions with various groups. We're pretty well plugged into the New York Creates program, and they just announced a very large state-sponsored funding infusion into that project. There's also a consortium forming in Japan we are starting to have conversations with as well around the rapidus project. So, nothing I think we can announce right now, but there's two or three different avenues we're pursuing now to join on to these consortia initiatives.

All right. Well, great. Well, thank all three of you for your time today.

Thank you, Tom. Thanks very much for coming on to the call.

Thank you. As a reminder, to ask a question, please press star 1-1. Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to Frank Lee for closing comments.

Thank you, Michelle. Thank you for joining us this morning. We performed well in 2023 and our position to continue this performance in 2024. Long term, our end markets are expected to grow significantly. As a merchant photo market leader, we are in a great position to continue to outgrow the market, leveraging our competitive advantage to serve our growing global customers. I'm proud of our team's performance in 2023, delivering record revenue and firmly establishing Petronas as the emerging photo mass partner of choice. We are optimistic regarding our future growth opportunities and look forward to updating you as we make progress. Have a good day and thank you.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please connect your lines. Good day. Thank you. You're very welcome. you Thank you. Thank you. Good day, and welcome to the Photronix Q4 FY23 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded Wednesday, December 13, 2023. I would now like to turn the conference over to Rochelle Burr, Chief Administrative Officer.

Thank you, Michelle. Good morning, everyone. Welcome to our review of Photromic's fiscal 2023 fourth quarter results. Joining me this morning are Frank Lee, our chief executive officer, Chris Progler, our chief technology officer, John Jordan, our chief financial officer, and Eric Rivera, our chief accounting officer and corporate controller. The press release that we issued earlier this morning, together with the presentation material that accompanies our remarks, are available on the investor relations section of our webpage. Comments made by any participant on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast, and in our view. These forward-looking statements are based upon a number of risks, uncertainties, and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied. and we assume no obligation to update any forward-looking information. During the course of our discussion, we will refer to certain non-GAAP financial metrics. These numbers are useful for analysts, investors, and management to evaluate ongoing performance. A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. At this time, I will turn the call over to Frank.

Thank you, Richard, and good morning, everyone. The photonics team had another outstanding year in 2023, and it is a record revenue for the sixth consecutive year. Over that six-year period, we have achieved a compound annual revenue growth rate of over 12%. For fall 2023, revenue growth 8% year-over-year, while the photo mask market overall was flat, and the semiconductor industry overall is expected to contract by up to 12%. The Fortranix year-over-year revenue growth once again offers testimony to the tendency of design-driven photo mask demand. to be less cyclical than the industry in general. Most recent indications from industry leaders and from our customers is that the current semiconductor cycle contraction should transition to the next phase of growth around the middle of next year. Thus, if pay cycles and current observation can be considered indicators, photo mass demand should resume a more robust growth phase during the 22nd to 3rd physical quarters. Margins for the quarter and year were also outstanding. We achieved operation margin of 28.5% for the first quarter and 28.5% for the full year 2023, the best year in the history of the company. The combination of the following has continued to support the sustainability of this margin table. The high operation leverage, stable pricing from our long-term purchase agreement, our focus on delivering the best quality masks, and our driving for being the low-cost producer. As a result of the solid operation results and the contribution from below-the-line items, we earned in Q4 $0.72 per share on a gap basis and $0.60 per share on a long gap basis. Strong cash flow was generated in 2023, contributing to a stronger balance sheet and increasing our cash position with reducing debt. We continue to invest in growth, positioning us to continue the past several years' strong performance. To summarize, we achieved another record year in 2023, growing revenue in frame market. Our team performed well and our customers continue to trust us as their PhotoMath partner. We are investing in high return projects and are positioned to continue to outgrow the market and create value for our shareholders. I'm proud of our accomplishment and excited about our future. And I would especially like to express my gratitude to the more than 1800 employees that have worked hard to achieve these results. At this time, I will turn the call over to John to discuss the results further.

Thank you, Frank. Good morning, everyone. Our fourth quarter finalized another great year for Fortronics. In my comments, I'll first discuss the fourth quarter results, then the results for the full fiscal year. Fourth quarter revenue of $227.5 billion increased 8% over fourth quarter of last year and 1% sequentially. Fortronics' fourth quarter always ends on October 31st. which may add or subtract days to the standard 91-day 4-4-5 fiscal calendar. This year, fourth quarter was boosted by an extra two days in the quarter. It was our second highest quarterly revenue ever, only 1% off the record established in Q2 of fiscal year 2023. Our revenue into China in Q4 declined from 53% of total revenue in Q3 to 44%, replaced by revenue with other customers. It might be worthwhile to add some further color regarding the China business. Although we derive a good portion of revenue from China, as do others in the semiconductor and display industry, what makes the China business somewhat unique is that there is a significant number of new designs and fabs in China driving photo mass demand. And since there is a much smaller captive market in China, the preponderance of the photo mass production is being provided by merchant manufacturers like Photronics. The business by major category, I see revenue of $164.5 million in the fourth quarter, was up 1% sequentially and 5% year-over-year. Our high-end revenue, defined as IC masks using 28 nanometer and smaller technology, drove the increase, with 27% sequential growth, which more than offset the reduction in mainstream revenue. High-end revenue was strong in Foundry Logic in both U.S. and Asia. The 9% decrease in mainstream revenue resulted in large part from lower delivery premiums due to somewhat moderated demand and more normalized lead times for those products. For the FPD product category, fourth quarter FPD revenue was a record $63 million, up 3% sequentially and 17% year-over-year, a 7% increase in high-end revenue, defined as LTPS, AMOLED, 10.5 large area masks drove the increase from strong demand for AMOLED display masks used in mobile displays where we have technology leadership. The additional FPD production devoted to high-end mass production then resulted in 13% lower mainstream revenue. Gross margin was solid at 37.3% although slightly lower due substantially to the decreased premiums for expedited delivery of the mainstream IC masks. Operating expenses decreased somewhat and declined as a percentage of revenue to less than 9%, helping us achieve an operating margin of 28.5% in the quarter. Gap net income in the quarter was $44.6 million, or 72 cents per diluted share, Non-GAAP net income, which eliminates foreign currency effects primarily unrealized, was $37.2 million, or 60 cents a share. For reference, our reconciliation of GAAP to non-GAAP results is included in the press release and supplemental slides. For the year, total revenue of $892.1 million was 8% higher than the $824.5 million reported in fiscal year 2022, the sixth straight year of record revenues, as Frank mentioned, a compound annual growth rate of 12% over the last six years. Revenue in fiscal year 2023 was nearly double the revenue of fiscal year 2017 when we repositioned the business and initiated the targeted investments to address where we anticipated growth to be in the photo mask space. IC revenue for the year was a record and grew 9.8% as strong demand for mainstream masks for a good part of the year offset a slight decrease in high-end revenue, primarily in the US. Near term, our investment will be primarily in IC capacity to continue outgrowing the market and take advantage of our market strength and close customer relationships. FPD revenue is also a record for the year, up 4%, with high-end growth consistently driven by AMOLED demand. We anticipate this trend to continue into fiscal 2024. Gross margins for the year were 37.7%, 200 basis points over the strong gross margin in fiscal 2022, and we anticipate the gross margin will remain in the current range due to stable pricing, cost controls, and operating leverage. Maintenance of this level of gross margin in the face of erosion of delivery premiums during the latter half of the year indicates a pricing and operating environment that supports the sustainability of the margins. Operating expense for the year was nearly unchanged from the prior year, up less than $800,000, and declined as a percentage of revenue to 9.3% from 10% in the prior year. Operating margin was 28.4% compared to 25.7% in fiscal 2022, and operating income in fiscal 2023 was $253 million. During our six years of 12% revenue growth, operating income has grown at a compound annual growth rate of 41% and operating margin quadrupled. GAAP EPS for the year was $2.03 and adjusted for the effects of foreign exchange variations Non-GAAP BPS was $2.04. GAAP BPS similarly has grown at a CAGR, compound annual growth rate, of 48% during the six years that revenue has increased 12%. Operating cash flow of $106.6 million for the quarter and $302.2 million for the year were also records for the company, resulting from higher net income and effective management of working capital. CapEx for the quarter was $21.1 million and $131.2 million for the year, which resulted in free cash flow for the year of $170.9 million. For 2024, we expect to invest $140 million in CapEx, primarily in both high-end and mainstream ICs, to address current and anticipated demand growth. We will also be taking delivery of a new multi-beam lithography tool in the U.S. for development, then phase-in to high-end production enhancements, then leading-edge development during our fiscal year 2025. We ended the year with a cash balance of $499.3 million and short-term investments of $12.9 million. Some investments of cash that were previously classified as short-term investments have been reinvested in shorter-term instruments that are now classified as cash equivalents and included in the cash and cash equivalents balance at October 31st, 2023. The aggregate of cash and cash equivalents in short-term investments increased from $358.5 million at year-end 2022 $512.2 million at October 31, 2023. Our only remaining debt consists of low-cost equipment leases of $24.6 million. Our net cash position of $475 million provides ample liquidity to fund investments in organic growth. It also has continued to provide resilience against uncertainties inherent in an industry downturn. We have $32 million remaining of our previous $100 million authorization to repurchase our common stock. And we will continue evaluating when to resume the share repurchase initiative. Before I provide guidance, I'll remind you that our visibility is always limited, as our backlog is typically only one to three weeks. And demand for some of our products is inherently uneven and difficult to predict. Additionally, the ASPs for high-end mask sets are high, and as this segment of the business grows, a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Given those caveats, we expect first quarter revenue to be in the range of $217 to $225 million. First quarter revenue from Fortronics is typically seasonally lower than fourth quarter. And as I mentioned, this year's first quarter has fewer days than normal, 89 versus 91 in a typical 445 fiscal calendar. Due to fourth quarter ending on October 31st, which as I mentioned, put 93 days into the fourth quarter and shortened the first quarter. Fortronics has continued to increase revenue during the entire semi-downturn While many in the industry are reporting revenue declines, and the industry as a whole anticipates about a 12% decline in 2023 revenue. Due to the design-driven, somewhat counter-cyclical nature of the business, we expect to continue to do well in the current semiconductor and display environment, continue to report year-over-year revenue growth, and increase our market-leading position. Based on those revenue expectations and our current operating model, we estimate non-GAAP earnings per share for the first quarter to be in the range of 45 to 53 cents per diluted share. We believe that the increasing trend of both high-end IC and FPD and our additions to capacity will continue to support healthy gross margins. Our disciplined cost control will help ensure that the gross profit flows down to operating income and earnings to continue to build shareholder value. I'll now turn the call over to the operator for your questions.

Thank you. If you would like to ask a question, please press star 1-1. If your question hasn't answered and you'd like to remove yourself from the queue, please press star 1-1 again. One moment for questions. Our first question comes from Tom Diffley with C.A. Davidson & Company. Your line is open.

Yes, good morning. I appreciate the chance to ask a question here. First question on the mainstream market. Could you just talk a little bit more about the health of this market in terms of both demand and pricing?

Okay, Tom. The mainstream business, especially in the AUH voluntary business, as many foundry company report has slowed down quite a bit with a very kind of low wave of utilization rate. And with the slower market demand, our premium charge in this product segment has reduced since Q4 last year, 2023. So we believe the mainstream business may continue for another quarter or two. However, the business from 12-inch wave affair seems to stabilize and start to recover in terms of photo mass demand. So I think our compound ASP should be able to sustain even our premium charge in the mainstream has reduced to a certain low level.

Tom, I'd like to supplement that a little as well just in terms of pricing. So as Frank mentioned, the premiums have essentially not quite disappeared but eroded significantly. The pricing, I sort of compare it to the inflation picture in the U.S. where the inflation rate has tapered off to 3%, 3.5%. But nonetheless, the prices are still 17% higher than they were two or three years ago. So we've wound up with the same situation with IC pricing where although the premiums have really almost evaporated, the pricing is still referred to that in my comments, we were still able to maintain this upper 30, you know, mid to high 30% gross margin level.

Okay, maybe just to follow up on that, is pricing still below where it would cost to buy a new tool in the marketplace to build extra capacity, such that it should remain a fairly stable market for you over the next few years?

Yes, actually, as Tom mentioned, our price for mainstream has increased by quite a certain percentage two years ago. And during these two years, the price in ocean is very minimal, even the premium discharge. So for mainstream business, our major capital investment basically will be in replacement for the end-of-life tour. There will be not much new capacity, especially in the measuring area. So the only capital spending will be for end-of-life tour replacement, and current pricing will sustain our current margin level.

Okay, thank you for that. And then I'm just curious on the high-end IC side, what are some of the end-market drivers that you're seeing for it?

End-market drivers?

We see a lot of demand still from the MRA driver IC, which use 22 to 28 nanometer technology. And this is... Our strengths, we are a major merchandise supplier for these technology nodes. And the applications basically are mainly for driver IC. Chris, you want to add some comments to this? Yeah, thanks, Tom. It's pretty wide, actually.

But like some of the companies we follow, auto is down. Some others like TI reported pretty good auto demand, but definitely that's still driving some tape-out activity, particularly in the compound semiconductor area. A lot of the FAFSA utilization is kind of bottom, but it's running pretty low still historically in the maybe high 60s. So there's a lot of new product development going on in consumer electronics and those fields which are driving tape-out demand, but not so much wafer volume. Particularly in Q4, there was a fair amount of design activity on the consumer side. Industrial is still pretty weak. Everything around the so-called AI ecosystem is pretty healthy. So we don't build a lot of photomass sets, although some for direct AI processors. But all the ancillary chips that go around these AI applications were quite strong, as you can imagine following the industry. So there's no segment that really spiking back strong, but it's relatively broad and a lot of design activity to try to refill wafer capacity because inventory has also been worked out. So there's some reorders and things like that and pipeline as well. Memory's still pretty weak overall. Pricing stabilized, but memory's still pretty weak. Particularly our 3D man business was down fairly strongly and has not fully recovered yet.

Okay, yeah, no, I mean, The reason I ask the question is, you know, we've basically heard that most of the segments are bouncing along the bottom here. It's, I guess, pretty impressive. You've been able to keep your revenue flow as you have despite the slowdown. And, you know, most people expect that starting maybe mid next year, we start to see some recoveries and it puts you in a good position for that. So I guess on that same front, where do you see capacity constraints right now? And where are you going to focus 140 million of CapEx?

Major investment will be, number one, as I mentioned, the end of the live tour replacement. The other one is we are positioning ourselves to demand in 22 and 28 photomask demand, especially in China. And also, we are going to enhance our U.S. share capacity and capability. So some investment will be in the state for Boise and Ellenside.

Okay, great. And final question maybe for Chris. A few years ago you talked about the EUV Consortium and how you're part of that. Any update on how that activity is going or what potential role you might play there?

I mean overall our EUV business continues to grow year over year and even quarter over quarter. The OEM side of that business is probably the strongest and then class of products we call fab products is also fairly strong because there's a lot of EUV scanners entering the industry. And then the third category, device masks, these are prototype and demo masks, also growing. Consistent with ASML's reports, we see a lot of strength in EUV and the merchant market gradually evolving up, and we're in a pretty good position for that. As far as consortia, we're still in discussions with various groups. We're pretty well plugged into the New York Creates program, and they just announced a very large state-sponsored funding infusion into that project. There's also a consortia forming in Japan, we are starting to have conversations with as well around the rapidus project. So, nothing I think we can announce right now, but there's two or three different avenues we're pursuing now to join on to these consortia initiatives.

All right. Well, great. Well, thank all three of you for your time today.

Thank you, Tom. Thanks very much for coming on to the call.

Thank you. As a reminder, to ask a question, please press star 1-1. Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to Frank Lee for closing comments.

Thank you, Michelle. Thank you for joining us this morning. We performed well in 2023 and our position to continue this performance in 2024. Long term, our end markets are expected to grow significantly. As a merchant photo market leader, we are in a great position to continue to outgrow the market, leveraging our competitive advantage to serve our growing global customers. I'm proud of our team's performance in 2023, delivering record revenue and firmly establish Petronas as an emerging photo mass partner of choice. We are optimistic regarding our future growth opportunities and look forward to updating you as we make progress. Have a good day and thank you.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please connect your lines. Good day.