Q3 2003 Cymer, Inc. Earnings Conference Call
Boston, Oct 22, 2003 (CCBN StreetEvents) -- Event Transcript of Cymer, Inc.
conference call, 21-Oct-03 5:00pm ET.
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Corporate Participants
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* Terry Slavin Cymer - Director of Corp. Comm. and IR
* Robert Akins Cymer - Chairman and CEO
* Pascal Didier Cymer - President and COO
* Nancy Baker Cymer - Senior VP and CFO
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Conference Call Participants
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* John Pitzer Credit Suisse First Boston - Analyst
* Philip Lee J.P. Morgan Chase - Analyst
* Nick Tishchenko Fulcrum Global Partners - Analyst
* Brett Hodess Merrill Lynch - Analyst
* Steven Pelayo Morgan Stanley - Analyst
* Shakar Pramanick Prudential Securities - Analyst
* Cristina Osmena Needham & Company - Analyst
* Patrick Ho Moors & Cabot - Analyst
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Terry Slavin, Cymer - Director of Corp. Comm. and IR [2]
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Thank you, operator. Good afternoon and thank you for joining us today. On
today's call, I am joined by Bob Akins, our Chairman and CEO; Pascal Didier,
President and COO, and Nancy Baker, Senior Vice President and CFO. Bob will
discuss recent industry trends, provide a summary of the third quarter and
update you on other significant events. Pascal will then review operations in
the third quarter, will discuss progress and a number of operating initiatives,
as well as Cymer's plan for dealing with the current industry environment. Nancy
will review the Company's financial performance for the third quarter and will
provide financial guidance for the fourth-quarter of 2003.
As usual, a series of slides accompany the webcast and the webcast, slides and
press release are available on Cymer's Website at www.Cymer.com. The webcast and
slides will be available on our Website for 15 days after the call.
I would like to remind you that if you are planning to attend Cymer's Fourth
Annual Analyst Day here in San Diego on Tuesday, November 4th, and you have not
yet responded to our invitation via former e-mail, please do so as soon as
possible so we can plan appropriately. At the Analyst Day, our senior management
team will offer a number of presentations to update you on our business and
prospects. We hope you will be able to attend and look forward to seeing you
here.
Before we begin our prepared remarks, I must remind you that our comments today
will review actual results from the third quarter 2003 and will include
forward-looking statements, including statements concerning our anticipated
future financial performance. In addition, we may include statements regarding
Cymer's share of light sources installed chipmakers, backlog and book-to-bill
ratios which should not be construed as predictions of future performance.
Each of these statements is based on the information available to us today.
This information is likely to change over time. Our actual results may differ
materially from those projected on this call. There are a number of risks and
uncertainties that may affect our business and future results including those
associated with the demand for semiconductors in general, businesses of our
major customers and customer demand for our products, the timing of customer
orders and shipments, our production capacity and execution of our product
roadmaps, including our ability to ramp up manufacturing at our new facility in
San Diego, our ability to manage our expense levels, performance of our
competition, and macroeconomic conditions and other factors including those set
forth in our SEC filings.
Our comments also contain non-GAAP financial measures within the meaning of SEC
regulation G. These majors are not in accordance with nor are they intended to
substitute for GAAP measures. Cymer uses such measures to evaluate and manage
its operations and is providing this information to investors to allow for the
performance of additional financial analysis. Cymer provides a reconciliation
for each non-GAAP financial measure used to the most directly comparable GAAP
measure on the Investor Relations section of its Website at www.Cymer.com.
I will now turn this call over to Bob.
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Robert Akins, Cymer - Chairman and CEO [3]
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Thank you, Terry, and I also extend a warm welcome to all of our callers. The
first section of my remarks today begins with an industry and economic overview.
It is hard to deny that most of the developments in the IC and equipment
sectors, as well as the global economy in general, were mildly upbeat in the
third quarter. This included a number of announcements by chipmakers planning to
set out existing lines or equip new ones. For example, Samsung's Line 13 Phases
1 and 2, TSMC's Fab 12 and EMC's Fab 12A.
The Chipmaker Billion Dollar CapEx Club, which has shrunk markedly over the
past three years to a disappointingly small six companies in 2002, is now
expected to grow to about eight companies for 2003 and may grow to 10 companies
in 2004. These include additional Japanese vendors, namely Sony and Toshiba,
whose long focus on system on a chip architecture is becoming a market reality.
Overall IC factory utilization continues to rise in the quarter and is now at
about the 90 percent mark, and our (inaudible) run-rate stabilized in the third
quarter at a historically high level. As 130 nanometer and smaller geometry
capability is now offering at maximum capacity, orders for advanced DPV tools
and light sources picked up moderately in the third quarter. Simply put, many
chip factories are very busy. In fact. IC unit production in 2003 is now
expected to be on par with that produced in 2000, the industry's peak year.
Unfortunately, due to chip ASP erosion, this year's total chip revenue is
expected to fall more than $50 billion short of year 2000 revenue.
Before equipment orders can increase more robustly, I expect chipmakers will
need to see both a credible demand picture and improvements in our own
profitability. We continue to believe that the industry will experience more
robust recovery in the first half of next year.
Second, the third quarter 2003 overview. Unlike the more volatile first and
second quarters of this year, which included unexpected krypton fluoride light
source push-outs, business in the third quarter developed much as anticipated
going into the quarter. Revenue, product mix and ASP all came in within our
previous guidance. Demand for the XLA 100 medical system remains strong as a
significant shortage of our Q3 shipments was focused on geometries between 130
and 90 nanometers.
Last quarter we announced the first installation of our XLA at a leading DRAM
manufacturer in Europe, a light source installation which is now complete and
soon to support first production. The XLA adoption rate accelerated
significantly in the third quarter with half a dozen more installations underway
at multiple leading DRAM, systems on a chip and DSP manufacturers around the
world, powering scanners from multiple lithography tool suppliers.
Overall, our fourth quarter of loading percentage installation at chipmakers
decreased slightly as a direct result of our decision to not serve the niche
market for our downside process development applications with low-power single
chamber light source designs as I discussed in our last conference call. We were
effective in managing to lower overall operating expenses for the quarter. Over
the past two years, R&D has been the area of expense driven most above the range
called for in our business model as we develop the XL platform and gave birth to
the XLA 100.
As projected, R&D expenses decreased about 25 percent quarter on quarter in Q3
as we completed the XL common platform design and as production of the XLAs in
our new XLA purpose built manufacturing facility became more predictable. Last
quarter we discussed our plans to reduce our operating income breakeven from the
Q1 2003 estimated level of $75 to $80 million in quarterly revenue through a
targeted $60 million by the fourth quarter of this year. Although we made
substantive progress towards this goal in Q3, more remains to be done as we did
not enter the fourth quarter with the savings required to achieve a $60 million
breakeven. Pascal will detail the progress we have made and the schedule we have
set to realize additional savings going forward.
Section C -- the 2003 Cymer Japan Technology Symposium. Most of you know that
each year we host the Lithography Technology Symposium in Japan concurrent with
Semicon Japan in December. In past years, many of you have attended this event.
We feature at our symposium many of the industries lithography gurus and attract
a really outstanding group of direct and chipmaker customers from all over the
world. Our 11th Annual Symposium will feature a keynote address by Jane Dell
(ph), an Intel assignee to international Semitec (ph) where we serves as
Lithography Director. The symposium will be composed of two sessions, the first
consisting of Cymer key technical paper presentations, and the second, what
promises to be a lively lithography technology roadmap panel discussion.
The paper section will be comprised by presentations by Cymer personnel
updating this status of our studies of DUV light induced optical damage,
development and scanning efforts of the XLA 100 multiproduct and an update of
our DUV (ph) forest research.
Beginning with the optical damage studies. In the conference call for Q1 of
this year, I explained how we deliberately pulsed stretched by a factor of two
the twice higher pulse energy output of our XLA 100 light source to maintain the
peak power during each pipe pulse at historically acceptable levels. We do this
to minimize any potential damage that could be done to downstream few silicon
optics in the scanner, namely in the eliminator and projection lens if the
pulses were not stretched in this way. In this study, multiple fused silicon
samples from our three direct customers are being exposed to pulses of
(inaudible) but with various pulse energies and pulse durations, and the samples
checked periodically to access damage. At the Symposium, our longer-term
results, approximately 40 billion pulses worth, will be presented,
characterizing damage from both compaction, that is densification, and
decompaction or rarifaction (ph) of fused silicon.
The second paper will be the XLA 100 and beyond. With the first year's
production of the XLA 100 pretty much under our belts by December, this
Symposium will be the first comprehensive public presentation of the product
specifications and performance of this new model. The paper will contain a brief
review of multitechnology and actual performance of the product now that it is
produced routinely in quantity by our manufacturing arm.
Also to be presented will be the results of XLA life testing at Cymer starting
in late 2002 and the related models predicting cost of consumables and cost of
operations. The scalability of the XL platform and most of the technology will
be explored with special emphasis on the design approach for achieving a future
XL-based high NA argon fluoride light source and argon fluoride immersion light
source and to obtain even longer optical pulse durations in the future.
The third paper will be on Cymer's DUV source research. Our work toward
development of a dense class of focus-based DUV light source continues to yield
improvements in source power, conversion efficiency and pulse repetition. We
will present a current status snapshot of these developments as well as discuss
our roadmap for ongoing improvements.
The second session of the Symposium will be a panel discussion dealing with
what is perhaps the most rapidly changing and confusing advanced lithography
roadmap ever for 45 nanometer, 32 nanometer and below. The panel discussion will
be moderated by Tony Yen, a familiar name in lithography circles and a new
member of the Cymer team that Pascal will expand upon later in this call.
Techniques to be discussed will include argon fluoride, both wet and dry; F2,
both wet and dry; and DUV with participation by panelists from each of our three
direct customers, as well as silicon chipmakers. (inaudible) for argon fluoride
immersion, (inaudible), Canon and Nikon have all proposed schedules but which
they plan to perform feasibility studies and make go/no go program decisions by
about the end of this year. Therefore, December is appropriate timing for such a
discussion. I look forward to a comprehensive and spirited panel interaction.
The last section of my presentation is on Bob Gisborn (ph). Before closing my
proportion of these prepared remarks, I unfortunately have to report to you the
tragic and untimely death of one of our executives, Mr. Robert Gisborn (ph).
Bob, who has served for the past three years as our Vice President of
Procurement, was killed in only September in a crash of his private aircraft
during landing. Bob was an extremely valuable contributor, a great person to
work with, and as part of his legacy built a strong procurement group at Cymer
which now carries on in his absence. In honor of Bob's many contributions and in
tribute to his epitomizing Cymer's corporate values of integrity, teamwork,
drive for innovation passion to succeed, and balance through humor, we recently
dedicated our quarterly Values in Action Employee award in his name. Bob was
only 44 years old, and he will be greatly missed.
For review of Q3 operations, I will now turn the call over to Pascal.
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Pascal Didier, Cymer - President and COO [4]
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During my comments section, I will review our (inaudible) customer light source
ownership, third quarter's shipments and product mix, booking and book-to-bill,
installation shares of chipmakers and (inaudible) insulations, CDs update,
(inaudible) 60 million for our breakeven goal and some changes to our
(inaudible) structure.
First, our joint customer light source ownership analysis. As already
mentioned, business in the third quarter was up more predictably than in the
first half of the year. We shipped 34 light sources, up three units to
approximately 10 percent from the 31 light sources shipped in Q2. We installed
48 light sources at chipmakers and other end users in the third quarter, down 4
percent from the 15 installed units in the prior quarter. We now estimate that
the number of our light sources owned by our direct customers and available for
production is approximately 196 units, down from the 208 units reported at the
end of Q2 2003.
These inventory numbers have dropped to a new all-time low in each of the last
several quarters, primarily due to efforts by all three Cymer tool manufactures
and outsources to reduce lead time significantly. We would, however, expect
inventories to increase as an upturn in demand as the servicing tools become
more evident.
Q3 shipment analysis and product mix. Our Q3 2003 product mix remained heavily
weighted towards technology buys, which (inaudible) approximately 74 percent of
our light source shipment for the quarter. The XLA 100 accounted for 71 percent
of system shipment, up from 65 percent of shipment in the second quarter, while
the ELS 7000, our most recent (inaudible) product, accounted for just three
percentage of shipments, down from 19 percent of shipments in Q2 2003. 6010, our
mature (inaudible) product, accounted for 26 percent of light source shipment.
As Bob mentioned in Q3, the utilization of our installed base continued at
historically high leverage in Q2. Our nonsystem revenue was 38 percent of total
revenue in the third quarter. This nonsystem revenue level reflects the high
(inaudible) utilization, an increasing number of layers on each wafer that was
mentioned with DUV light sources as more production conditions of the 139
nanometer load and below.
Booking and book-to-bill. Total booking for the third quarter of 2003 was 67.5
million, a 13 percent quarter-over-quarter increase compared to 59.7 million in
the second quarter of 2003. The overall book-to-bill ratio for the third quarter
was 1.15. This is a higher book-to-bill ratio than we expected to achieve when
we issued our September 8th guidance and was due primarily to a higher than
anticipated level of orders for both systems and consumables that we received
later in the quarter. The increase in bookings was evenly distributed between
argon fluoride and krypton fluoride products.
The installation (inaudible) chipmaker is an original installation. We estimate
that the fourth-quarter share of Cymer light sources installed at chipmakers as
of September 30th was approximately 86 percent, down slightly from the 88
percent level at the end of the second quarter and from 90 percent in the first
quarter. As we stated in previous conference calls, we expect our holding
marketshare to (inaudible) in 2003 as a direct result of our decision to not
address the niche market, serving process (inaudible) with single chamber argon
fluoride light sources.
Moving forward, as an increasing number of XLA 100s are installed at
chipmakers, we expect to reverse this downward trend as our argon fluoride
(inaudible) systems (inaudible) tools come for installation in Q4 2003 and in Q2
2004.
Let me now tell you the number of our light sources installed by region in the
first nine months of 2003. 53 in the United States; 24 in Japan, 42 in Korea, 9
in Taiwan, 11 in the People's Republic of China, 21 in Europe, and 5 in
Singapore. That brings the number of primer light sources installed at
chipmakers and other end users as of September 30th, 2003 to 2151. The U.S. and
Korea have been the strongest regions for light source installations for the
first three quarters of 2003.
The facilities update. During the course of Q3 2003, we continue to transfer
all our San Diego manufacturing capabilities and (inaudible) services to our new
building, CSD-6. As a result, we completed the closure of CSD-1 and CSD-2
facilities on schedule. In the new facility CSD-6, we are now manufacturing all
of our KRS (ph) and our light sources product as well as most of our
consumables. As we continue to realize the benefits of the facility design and
build to met our specific needs, we expect further efficiency improvements and
product manufacturing cycle time, (inaudible) improvement and other (inaudible)
management and flow.
(inaudible) toward our 60 million quarterly breakeven goal. We made significant
progress toward our goal of 60 million quarterly breakeven during the third
quarter. During the quarter, we began to realize the benefits of our XLA 100
cycle time and material cost reduction to date and demonstrated success in
reducing the expense level of our key business units. However, we still need to
make some key improvements, especially in the area of XLA cost reduction, and
infrastructure cost in order to meet our $60 million breakeven.
We are continuing to make improvements in our efforts to reduce the XLA cost at
a slower pace than anticipated. The primarily reasons for this are the slower
reduction of higher cost inventory, which was purchased in the early stage of
the XLA 100 production ramp; future material purchase agreements producing lower
material costs; however, we must be (inaudible) inventory before we realize
these benefits; the ongoing (inaudible) an upturn being pushed into 2004
resulting in higher inventory values carrying over into Q4 2003 and Q1 2004 cost
of XLA product.
Ongoing general improvement being made to the platform of the (inaudible) of
our XL design. The engineering changes are driven by improvements necessary for
greater efficiency in manufacturing ability of the mobile products, as well as
early introduction of industry-related improvements.
In the area of infrastructure, we vacated and shutdown CSD-1 and CSD-2 in San
Diego as scheduled at the end of Q3 2003. At this time, we are still carrying
approximately $1 million of quality cost associated with those buildings, and we
are not anticipating to eliminate those costs until Q2 or Q3 2004 depending on
the real estate market. We currently estimate that our quarterly breakeven is 65
to 70 million in revenue, down from the Q2 estimated level of 75 million to 80
million. The current business visibility in our revised cost reduction plan
focused on the XL platform cost. We now expect to reach our $60 million
breakeven target by Q2 of 2004.
Changes to our cost structure. First, the creation of a manufacturing
(inaudible). In the third quarter, I decided to (inaudible) our manufacturing
capabilities under the leadership of Jim Corider (ph) as the position of
Executive Vice President of Manufacturing Operations reporting directly to me.
Jim's organization now focuses on manufacturing efficiencies, cost reduction,
quality improvement and cycle time reductions and inventory management. With
this change of our organization structure primary business units, ETA, LSS and
SMS now focus on product definition, product engineering, sales, marketing and
support of their expected customer bases. I believe that a structure change will
bring sharper focus and faster response to our customers and market demand.
Second, Tony Yen joining Cymer. Many of you saw a price relief at the end of
September announcing that Dr. Tony Yen has joined us as Senior Vice President of
the Service Market Development. Tony comes to us after an approximate two years
of Cymer International Symantec, ISMT. He served as co-director of the
intelligence division and was responsible for developing and executing the ISMT
(inaudible) strategy to take semiconductor technology down to the 30 nanometer
node. Prior to his ISMT assignment, Tony served for five years of Department
Manager of Advanced Lithography Technology at Taiwan Semiconductor Manufacturing
Corporation. We are extremely pleased to add another world-class lithography
expert of Tony's caliber to our already outstanding team. Those of you who are
familiar with our industry know how highly he is regarded in the lithography
sector. Tony's years of experience with some of the world's leading chipmakers,
coupled with his extensive knowledge of advanced lithography and collaborative
lead
ership of large complex organization (inaudible) our leadership position and
competitive strengths as we move forward to develop Next Generation lithography
technology.
I will now turn the call over to Nancy for the financial review.
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Nancy Baker, Cymer - Senior VP and CFO [5]
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For the third quarter ended September 2003, total revenue of $64.4 million was
up 3 percent from the second quarter of 2003 level of $62.4 million. This
increase in revenues was primarily due to a 10 percent increase in the number of
light source systems sold, partially offset by a 6 percent decrease in
nonsystems product revenues from quarter to quarter.
System revenue shipments in the third quarter totaled 34 units and resulted in
a foreign currency adjusted ASP of $1,144,000 compared to 31 units and a foreign
currency adjusted ASP of $1,128,000 in Q2 2003. This ASP increase primarily
reflects the continued heavy participation of the XLA 100 in the product mix in
Q3 2003 at 71 percent of the light sources sold versus 65 percent in Q2. Product
mix along with a fluctuating yen resulted in the third quarter actual
overselling price of $1,152,000 compared to $1,159,000 in Q2 2003.
Total nonsystems product revenue, which consist of system upgrade kits,
consumable spare parts and service revenue, declined to 38 percent of total
revenue for the third quarter versus a record high of 42 percent of total
second-quarter revenues. This decrease in nonsystems product revenue was
primarily due to a reduction in upgrade kits for the older 5000 series light
source systems from period to period.
R&D contract revenues totaled $564,000 for the third quarter of 2003, which was
up from the Q2 level of $239,000. For the nine months ended September 30, 2003,
ASML accounted for 22 percent of total revenue. Canon represented 25 percent,
Nikon 22 percent and chipmakers and other industry-leading factors accounted for
31 percent.
The gross margin on product sales came in at 25 percent for the third quarter
of 2003 compared to 16 percent for Q2 2003. 7 points of the margin improvement
from quarter to quarter were due to cost of a reduction force and asset
write-off in Q2 and which had no negative impact in Q3. Operating efficiencies
associated with the XLA 100 learning curve improved throughout Q3 resulting in
an increased quarterly gross margin of 5 percentage points. However, the Q3
gross margin improvement was down 3 percentage points due to lower than
forecasted inventory balances tied to timing of raw material receipts from the
end of Q3 to early Q4 and its associated reduced manufacturing overhead
absorption, as well as additional Korean Customs expenses associated with our
Korean operations for the period.
Our R&D investment totaled $12 million or 19 percent of revenues in Q3, a $4.3
million or 26 percent reduction from Q2 2003 spending as we complete the
productization of the XLA 100 which was first shipped in Q1 of 2003. Q3 2003
SG&A expenses totaled $24.5 million or 38 percent of revenue compared to $11
million or 18 percent of revenue in Q2 2003. This increase in spending was
primarily due to the $15.6 million tenant improvement write-off associated with
the facility we vacated during the quarter.
Third-quarter 2003 activities resulted in a 31 percent operating loss or $20.2
million compared to a second quarter 2003 operating loss of 27 percent or $17
million. For the third quarter, interest and other income totaled $2.1 million
offset by interest and other expense of $2.5 million and foreign exchange gain
of $482,000 resulting in a net other income of $30,000 and yielding a pretax of
$20.1 million.
Our 2003 estimated annual effective tax benefit rate remains at approximately
60 percent. This benefit rate reflects the increased impact of Cymer's tax
credit and foreign sales incentives in a low income or loss environment. Profits
in our Korean subsidiary attributable to our minority shareholders total
$467,000 for the third quarter of 2003 versus $166,000 in Q2 of 2003.
Third-quarter 2003 net loss totaled $8.5 million or a diluted loss per share of
24 cents on 35,302,000 weighted average shares outstanding. Excluding the $15.6
million tenant improvement write-off, net of tax would have resulted in a
third-quarter net loss of $2.3 million or a diluted loss per share of 6 cents.
This compared to second quarter 2003 net loss totaling $5.2 million or 15 cents
per share on a diluted basis of 34,577,000 weighted average shares outstanding.
Cash, cash equivalents and short and long-term investment totaled $379.6
million at September 30th, 2003, and working capital totaled approximately $419
million. Net cash used in operating activities totaled $973,000, primarily due
to the increase in customer Accounts Receivables in the quarter. Investing
activities provided net cash of $7 million as we continued the construction of
CSD-6 and purchases of required manufacturing for that facility in the quarter
offset by net changes in short and long-term investment maturities. Financing
activities generated cash during the third quarter, primarily due to the receipt
of $18.8 million through employee stock option exercises. During Q3 2003,
capital spending totaled $13.1 million, and depreciation and amortization for
the third quarter 2003 was approximately $7.2 million. Once again, capital
spending for the quarter continued to run behind plan due to the timing of
progress billing associated with the construction of the CSD-6 facility in San
Diego. This delay
in capital spending will be made up in Q4 2003 as the construction of the CSD-6
facility is complete.
In the receivables area, balances increased as revenues increased quarter over
quarter; however, the average DSOs decreased to 80 days from the Q2 level of 82
days. Inventory decreased $6.6 million or 7 percent to $88.9 million at
September 30th, 2003 from $95.5 million at June 30th, 2003. This quarter to
quarter decrease in inventory was primarily due to the increase in shipments
associated with a production ramp of the XLA 100, as well as the timing of raw
material receipts from the end of Q3 to early Q4. Our backlog, including new
systems, consumables and upgrade kits, increased to $109.5 million at September
30th, 2003 from $100.4 million at June 30th, 2003.
Now moving on to our current forecast. At this point in the quarter, we are
estimating Q4 2003 total revenues to be up 5 to 10 percent from the Q3 level
with foreign currency adjusted ASPs of approximately $1 million. This slight
decline in ASP continues to reflect a product mix heavily weighted to expected
XLA 100 product shipment, but with a slight increase in krypton fluoride
capacity tools for Q4 2003. We currently estimate gross margins to be up again
to be between 30 and 35 percent. This higher estimated gross margin for Q4
reflects our movement down the previously noted learning curve associated with
the introduction of the XLA 100, as well as the benefit of the cost-saving
measures taken earlier in 2003.
We are anticipating R&D spending to be between $13 and $14.5 million for the
quarter. We expect SG&A expenses to be between $10 and $11 million. We currently
model net other income and expense at $300,000 expense for the quarter excluding
net effects of foreign currency going forward. Capital spending for Q4 2003 is
expected to be between $5 and $10 million. This is primarily due to the CSD-6
facility's final billing and manufacturing and sales equipment purchases.
We are planning to update -- currently planning to update -- to issue a
quarterly update between December 8th and 12th, and our Q4 2003 press release
and conference call are currently scheduled for Tuesday, January 27, 2004.
This concludes the prepared portion of the call. Operator, will you please
assist us with the question-and-answer portion of the call. |
