What happened

Shares of semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) slumped on Wednesday after the company reported fiscal second-quarter results. Photronics missed analyst estimates across the board, posting a larger-than-expected revenue decline. The stock was down about 9.1% as of 1:11 p.m. EDT.

So what

Photronics reported second-quarter revenue of $108.3 million, down 12% year over year and nearly $3 million below the average analyst estimate. Integrated circuit photomasks generated $82.6 million of revenue, down 9% year over year, while flat-panel display photomasks produced $25.7 million of revenue, down 20% year over year.

40 micron posts.

Image source: Photronics.

Net income came in at $0.03 per share, down from $0.16 per share during the prior-year period and $0.02 shy of analyst expectations. Photronics CEO Peter Kirlin explained the earnings shortfall while emphasizing the progress the company made during the quarter:

Operating margin decreased mainly due to a drop in gross margin as a result of an unfavorable product mix. We were able to generate cash, building upon our already strong balance sheet. Strategically, we achieved three important milestones since our first quarter report: the first of two new writing tools is being installed to add FPD capacity; construction began on our new China IC facility; and this morning we announced a new joint venture in China.

Now what

Kirlin is "cautiously optimistic" that Photronics will achieve sales growth and margin expansion in the third quarter. He pointed to rapidly strengthening demand in the flat-panel display segment as a reason for optimism, as well as the fact that the company's facilities are running at full capacity. Photronics guided for between $110 million and $120 million of revenue for the third quarter, and EPS between $0.05 and $0.12.

Photronics operates in a cyclical industry, so ups and downs are to be expected. A solid third quarter could erase Wednesday's losses, but for now investors are punishing the stock.

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