Transcript of Conference Call Part 1 - Remarks by Akins & Angus
Ladies and gentlemen, thank you for standing by. Welcome to the Cymer Inc. third quarter 1997 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. At that time if you have a question you will need to press the one followed by the four on your push button phone. As a reminder, this conference is being recorded Thursday October twenty-third 1997. Your speakers today are Bill Angus, Vice President and Chief Financial Officer and Bob Akins, President and Chief Executive Officer. I would now like to turn the conference over to Mr. Bill Angus.
Thank you. Welcome everyone to the Cymer third quarter conference call. During our call today, we will be making various forward looking statements, including statements regarding anticipated revenue growth, operating results, and manufacturing capacity. Actual results may differ from those projected in any such statements due to various factors, including the demand for semiconductors in general and in particular for leading edge devices with smaller geometries, the rate at which semiconductor manufacturers take delivery of photolithography tools from the company's customers, the timing of customer orders, shipments, and acceptances, and the company's ability to meet its production goals. Your attention is also invited to the risk factors contained in our form 10-K and 10-Qs regularly filed with the SEC.
For the third quarter ended September 30, 1997, Cymer is reporting net income of 7,047,000 dollars or 23 cents a share on 30.5 million weighted average shares outstanding. Revenues for the quarter totaled 57,468,000. This compares with net income of 2,006,000 or ten cents a share on 20.1 million weighted average shares outstanding in the third quarter of 1996. And revenues a year ago for the same quarter were 18,246,000. On a sequential basis, third quarter revenue increased 15 percent compared with revenues of 50,132,000 in the second quarter of this year. The third quarter operating income increased 21 percent compared with operating income of 7,970,000 in the second quarter. For the nine month period ending September 30, Cymer recorded net income of 18,885,000 dollars or 62 cents per share on 30.3 million weighted average shares outstanding. The revenues for the nine month period 144,571,000. This compares with net income with 2,963,000 or 15 cents a share on 21.1 million weighted average shares outstanding and revenues of 37,428,000 for the 9-month period ended September 30, 1996. Additionally, all weighted average share amounts have been adjusted for the two for one stock split for shareholders of record effective August 21st 1997.
Net income for the third quarter declined 5 percent from the second quarter net income of 7 million for hundred and thirty thousand. However, if the company's 1997 tax rate of 25 percent were applied uniformly across the first three quarters, net income would have increased 7 percent from the second to the third quarter of 1997.
Gross margin on product sales for the third quarter of 1997 was 36 percent, compared with 38 percent in the second quarter and the first nine months of 1997. Margins narrowed in the third quarter as a result of one-time charges associated with bringing the Company's new manufacturing facility more fully online and charges to establish a reserve to cover additional costs of Cymer's previously-announced Continuous Improvement Program.
At September 30, 1997, cash, cash equivalents and short-term investments totaled 167.1 million dollars. Capital spending for the quarter totaled 15.3 million, and stockholders' equity was $3.88 per share on a weighted average basis.
At this time I'd like to turn the microphone over to Bob Akins who will give us an update on operations.
Welcome again ladies and gentlemen. I'd like to start the day by talking a little bit about the market picture, discuss the competitive situation, then move on to a review of operations as they continue to expand here at the company, discuss the aftermarket operation - the field-service support and logistics and training - and last I'd like to have some closing comments about this last quarter, and then open this up to questions and answers.
Moving on to the market picture: As we have said in recent conferences and calls, end-user demand for Deep-UV remains strong. In fact, chipmakers continue to press Deep-UV tool manufacturers for increasing capacity and delivery of more tools. It appears that our projections of mix and match ratio being limited only by the availability of these Deep-UV tools is still very much the case. We are comfortable with Dataquests' ongoing and most recent estimates. We think they are indicative of what the industry may actually be able to perform. We believe that VLSI estimates closely follow the demand for Deep-UV. And as we have stated in the past, the industry may not be able to deliver enough units to meet demand. Secondly, the demand for Cymer's laser remains strong. The order rates from our customers remains strong. The urgency of delivery of lasers to customers remains urgent and unchanged. Forecasts from our customers for the foreseeable future remain strong.
On the backlog picture, our backlog at the end of the third quarter was 116.3 million dollars. Let me refresh your memories: the backlog at the end of the first quarter was 91 million dollars, at the end of the second quarter 122 million dollars and now at 116.3 million dollars. The six month book-to-bill in Q1: 1.67, six month book-to-bill for Q2: 1.31, and six month book-to-bill for Q3:1.25. As we discussed in our last conference call, we believe that the six month book-to-bill is perhaps the most appropriate measure of book-to-bill given the concentration of Cymer's business into a very small number of customers, and the synchronization - or lack thereof - of their orders with respect to the closing of a quarter. However, I'd like to reiterate as we stated in our press release today that based on significant orders received since the close of the third quarter, and on customer forecasts, we expect continued sequential growth for at least the next two quarters. As we discussed in the past that we would like to manage our customers to six months of high visibility purchase orders if possible, with another six months of forecast. Sometimes we are more successful than others with various customers, longer and shorter than that period of time. And within that time frame we feel comfortable with revenue growth increasing for at least the next two quarters.
We expect to see ups and downs in this business. We have gone on record as saying that many times in the recent past. We expect that will continue. We will work with customers to best manage delivery schedules going forward to minimize impacts of such up and downs. That kind of fluctuation certainly typifies the cut-in of a new technology such as Deep-UV lithography at this stage.
On the competitive front, I think it's best described - our competition status is best described today - as trying to introduce their equipment to Cymer's 5000-series laser. I'll point out that at this point in time, to the best of our knowledge, there is no third-party [Akins stresses the 'third-party'] information verifying actual performance or providing reliability data on the competitor's products. At this time, as we have been discussing recently, we are introducing our so-called "second-generation improvements." - our CIP Continuous Improvement Process improvements - into our products in the field. These are improvements that have been generated only because we are in the business of volume producing these lasers. We know how to build lasers better now than we did last year. Our suppliers know how to build critical components and assemblies better now than they did last year. That extra knowledge - that extra performance - in the area of lifetime of modules and cost of ownership only came because of Cymer's pushing of volume production and our suppliers pushing volume production to the levels that we have. So we are now, as you know, implementing those kinds of next-generation improvements into our products to ensure that all of our lasers in full-volume production see the benefit of such improvements.
We feel that we have greater than a one-generation lead in the next generation Argon-Fluoride laser. I discussed that in some detail in our last conference call at the end of the second quarter, and [at] the presentation that our Doctor Sandstrom, Vice-President Advanced Research made in the Hokkaido Conference. We are on schedule, with the delivery of prototype lasers, as scheduled, before the end of this year. Those lasers will be available in two different varieties: partially-narrowed, for the all-refractive projection systems, and, uh- I'm sorry, highly-narrowed for the all refractive - and partially-narrowed for the partly-reflective or catadioptric systems.
Again as previously discussed, we have been working on some next-generation technologies applicable to both Argon-Fluoride and Krypton-Fluoride. Those two critical technologies go by the name of pulse-stretching and also multi-kilohertz operation. Pulse-stretching allows one to tailor the pulse of the laser to achieve optimal lifetime for the optics train by minimizing damage to optical material. And multi-kilohertz operation of course provides extra throughput, and extra precision in dosage control for both steppers and especially for the next-generation of scanners. We are certainly proud to announce in this conference call that we have successfully completed some critical demonstration milestones on both programs as part of our Sematech program, and we have realized 1.4 million dollars in revenue in this quarter as a result of those successful demonstrations. Those technologies certainly greatly enhance competitiveness of future products that Cymer can introduce.
Moving on to the operations area, I want to begin by saying that we now have the capability to produce enough excimer lasers to meet worldwide semiconductor industry demand. That of course has come about only by a very aggressive schedule, and ramping up the manufacturing facility in San Diego as well as with our manufacturing partner in Japan. I can't restate enough that our ongoing growth and performance as a company will depend not only on us tapping-in and implementing that capacity but also on our direct customer's ability to do the same in their own factories. And of course their customers - the chipmakers - to successfully implement this Deep-UV process in production. As such, we expect that over time our growth rate will begin to mirror that of the Deep-UV transition itself - the transition from I-Line systems to Deep-UV.
In the third quarter, we revenued 126 lasers. 124 of those were for lithography application, 2 of those were our higher-power industrial lasers. The move to our new manufacturing facility here in San Diego called CSD2 has for the most part been complete. And as a result we have now between CSD2 and our original manufacturing facility and Seiko an effective number of test bays worldwide of approximately 46. That expansion in San Diego and with Seiko now gives us the ability to put in place, uh - or have put in place - a raw capacity to produce more than 1000 lasers per year and the spare parts required to support them. I want to caution everyone that we don't plan to use that capacity to its full extent in 1998, and remind everyone that one of our customers recently told us that, in their opinion, the demand by chipmakers for Deep-UV tools in 1998 would be approximately 700 systems, and in the same breath said he doubted that the industry would have an industry-wide capacity to meet all of those requests.
The continuing challenges in our operation areas focus principally on improving efficiencies, improving first-pass yields and consistency. That really manifests itself in three different areas, the first being process control. Our new factory was designed to be process-control friendly. We have all new types of equipment being brought and put in place in that factory to automate many of the manual processes to measure and control many of the heretofore uncontrolled processes. We've been applying the same kind of methodology with all of our critical suppliers, greatly expanding our ability to do supply-chain management in a more traditional sense. We've been very successful to date with such an improvement, helping the company to ensure an ongoing and long-term supply to all critical components. In addition, that supply-chain management had been principally responsible in the improvements in various components and assemblies I had referred to earlier that allow us to build better and more consistent lasers now than they could a year ago. Last of course, the ongoing hiring and training of critical functions in the operations area. The company has continued to expand greatly in the number of employees and many of those are in the training mode now. Over the course of the year and next year it will be realizing more and more efficient labor from that new work pool.
Moving on to the Continuous Improvement Process, and the big five program in particular: This is being managed principally by operations in conjunction with our marketing, sales, and also our aftermarket operations groups. Remember that the big five program is aimed principally at increasing the lifetime of modules in the laser, impacting the cost of ownership in a positive way. By implementing these changes in lasers in the field, we better guarantee the success of our technology in full production. It's been strongly supported by our direct customers. We took 1.5 million dollars of additional reserve specifically for this program in the third quarter. As we discussed in our last conference call, all the big five improvements were not cut-in at the beginning of this quarter, but over the course of the quarter, and as a result, additional reserves were necessary for those lasers that were not fully shipped with these modifications. Going forward, the schedule for implementation will be gated principally by scheduling and coordination with our direct customers and the chipmakers to provide the correct access to these lasers in a timely fashion.
Growth margins, as Bill mentioned earlier, were down from the second quarter. In Q2 they were 38%, in third quarter they were 36%. Three principal explanations for that, the first being that certain one-time costs associated to moving to the new factory and bringing that new factory and every [incomprehensible] online. The impact of the ongoing warranty reserves for our CIP big five program. And lastly, inefficiencies due to our September last-minute reallocation of test bays for various customers. We were not testing lasers in a particularly efficient way at the end of this quarter, and that also had its impact.
Moving on to aftermarket operations, we have continued to make gains in meeting the most challenging area of that particular functions' ongoing growth, and that is of hiring and training new people on a worldwide basis. I referred in the last conference call to the fact that we had 68 people in that department worldwide. That's not only technical - not only field-service engineers and tech support - but also administrative people. That increased to 124 in the second quarter, and at the end of the third quarter to 164 individuals. Certainly, Cymer is the only Deep-UV laser supplier which is currently building a worldwide organization capable of supporting the semiconductor industry.
Installs of our lasers on steppers or scanners at chipmakers has increased significantly. There are more of those installs at chipmakers in the third quarter than in the first six months of the year. Our direct customers - stepper manufacturers - continue to predict to us that there will increases in install rates of significance for the fourth quarter, and in the first quarter of 1998.
The strategies for supporting the laser vary significantly from direct customer to direct customer, some planning to support the laser more fully, others basically telling Cymer that they would prefer if Cymer could provide all the support for the lasers at the chipmakers. Where Cymer and our direct customers have synced up our support plans - tightly dovetailed the programs together to minimize escalation. time, to maximize understanding at the chipmaker and how to best move forward to [short silence in recording in which there might have been a word here] chipmaker satisfaction is very high. And I think we'll be discussing that subject more and more in subsequent quarters.
Two closing comments. Looking forward, we are certainly committed to minimizing the recurrence of the kinds of rumors and speculations that we saw in the last quarter, especially in the month of September. I've certainly gone on record on many occasions recently, stating that it's Cymer's business and Cymer's policy to relate the facts and to maintain and contain our comments to the facts and not to deal in speculation or rumors. There will be times going forward, as there have been in the recent past, when we cannot answer all the questions that were asked. We of course are limited by confidentiality agreements with our customers which are instrumental to our maintaining customer confidence. You'll need to respect those agreements, as we need to respect those agreements. We certainly recognize the need for a more formalized investor relations capability at Cymer, and I want to inform everyone that we have retained investor relations professionals to work with us over the upcoming weeks, months, and the long term. Our goal is to improve the consistency, timeliness, and flow of information to the investor community, and I'll be keeping you more informed about this in the near future, and any impacts that that may have on our policies and procedures on investor relations going forward.
Now I'd like to open the meeting to any questions.
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