Transcript of 4Q Conference Call, Part 2 Questions and Answers
Bret Hodess, Montgomery Securities
Good afternoon. Congratulations on such a banner year, guys. [Bob and Bill say thanks, they appreciate that]. I have a couple of questions. First of all, considering going forward you won't comment on the units anymore as other parts of the business accelerate the spares and service and whatnot. Can you give us an idea of what the chamber sales and the other spares and service portions are at now and perhaps what they might trend to over the coming year. And can you remind us if this will have any impact on the margins as you start to see those parts of the business accelerate.
Bob Akins
Bill is looking up the information on chambers, Brett. Let me just add to the first part of your sentence there and to what Bill said. Over the course of 1998 we are going to be going from truly a single-product company - one product for one particular application - to this family or suite of products I referred to earlier, with our 5000-series laser continuing for sale for a number of years in the future. Our new 5010 model, the new Orion product, the ArFl laser model that we introduced in late 1997. So prices and volumes of those will be a complex mix of issues, obviously. And we are not particularly anxious to go into detail about those specifics in front of our competition in the public domain. I'm talking about that, plus the growing revenues from service and spare parts as an entity. I'll turn this over to Bill now for a comment on chambers.
Bill Angus:
Let me just talk briefly about spares and service revenue as a percentage of total revenues in general. In the fourth quarter here, spares and service were 9 percent of total revenue. And year to date for the year was 8 percent total revenue from spares and service. In 1998 we think that that could almost double for 1998 up to about 15 percent of revenue, according to what we think might happen. The one thing I want to emphasize - and it's very important to understand this right now - our visibility in a lot of the aspects of the business right now is very hazy, [given] the conditions and all the developments that you are all well aware of at this point. However, to the extent that we do realize these increased spares and sales, it will definitely have a positive impact on our margins.
Hodess:
A positive impact?
Angus:
Yes.
Hodess:
Ok. And if I could just ask a quick follow-on. With the ArFl lasers going into, uh, this year going into sales, Bob, is this focused on .15 micron and below types of development or, considering that we've been hearing mostly lately that KrFl will be at .18?
Akins:
Yeah. Actually as you know from our December SEMICON Japan seminar, the consensus of the group there was that, indeed, because of the extendibility of KrFl, and the additional difficulties of developing ArFl tools and manufacturing processes quickly, that more than likely, KrFl will not only own the 0.18 micron generation, but would probably own the 0.15 micron generation. And the ArFl would come in about the 0.13 area. Most chipmakers are now subscribing to that roadmap. As a result, the short-term demand for large quantities of ArFl for production of course is going to be pushed off. But the inception point for beginning the process development of the job has to start as originally scheduled. Even to make the 0.13 time frames. So we'll see an ongoing number of ArFl lasers sold. Not as many in the short term as we would have expected a year ago, but still the inception point has started, and we'll see a slow growth as we sell those laser for the stepper companies to refine their own lenses and tools, and then of course for chipmakers to start the process effort as well.
Hodess:
Great, thank you.
Robert Mayer[? Pronounced 'mayor'], DLJ:
I have a few questions, actually. First of all, in terms of if you see a slowing in the stepper market which it appears most people are expecting right now. The impression I have had is that most of the slowing or a lot of the slowing would be directed at capacity expansion as opposed to technology buys, and those would be aimed at I-Line versus deep-UV. I'd be curious if you, what you see in terms of breakdown if there is a slowdown how that would impact deep-UV versus I-Line. And you are indicating guidance down of 10 to 15 percent for both earnings and revenues in the first quarter. I was wondering if you might, even though your visibility is limited, is that something we should use going forward into the year and is that reduction in expectation based upon a likewise reduction in orders, or an anticipated reduction in orders.
Akins:
Uh yes, of course uh that decrease in revenues is directly tied to our understanding of the ongoing conditions of the stepper business itself. And we agree completely with your earlier statements that there will be a uh uh all steppers are going to get hit, but deep-UV will be hit less than the I-Line tools. In fact, we are anticipating that because of that preferential shift to the deep-UV tools, that probably you'll see deep-UV accounting for roughly 50 percent of the total steppers sold by the end of 1998. So, this if anything is accelerating the industry's - on a fractional basis - the industry's purchase of the deep-UV tools preferentially. And obviously factories being equipped with these tools are concerned about forward extendibility, and the deep-UV tools they purchase have a much longer extendibility than if they put those dollars into I-line tools. So, our thesis is the same as yours, Robert, and - but in spite of that preferential purchase of deep-UV, the slowing is, we feel, significant enough that it will have an impact overall on the [sounds like deep-U, so I suspect he means deep-UV] marketplace compared to what we thought it might be even a few months ago.
Mayer:
Have you seen a slowdown in orders across all your customers, or has it been different amongst the customers, or is this seen as an inventory balancing? Could you give us a little more light into what you're seeing in terms of the order rate flow?
Akins:
No, it hasn't been the same all across the board. Obviously, the overall trend is in the downward direction. But there is one exception to that. One of our customers has not decreased their orders. I'll add to that that we have not seen any cancellation for any KrFl production-bound tools. We've seen pushouts - delays - but there have not been any cancellations.
Mayer:
Ok. And one final question. In terms of the competitive landscape, can you provide us an update? Have you seen or heard of any competitive lasers being used in production systems or any other place?
Akins:
No. Of course we see the same press releases that many folks see, and we try to utilize all other advantage that we have to gather any information on the competition's status. But to the best of our knowledge, there are no production-bound systems that contain anything but the Cymer laser. The activity by our competitors to sell units for evaluation to our integrator customers continues. And they still continue to deliver a few systems to chipmakers for evaluation. Again, we expect that will always continue, but as far as systems actually being sold for actual use, we are not aware of any. I didn't mention, in any specific way, what we are doing on the competitive front with the 5010 and the Orion model that we will be introducing over the course of the year. I'll keep my remarks here principally to the Orion, but the Orion is a 2 kilohertz 20 watt average-power machine, with substantial improvements in pulse-to-pulse stability, bandwidth, and other areas. To put that in context, over Cymer's history, we have gone from the late 80's, where we had early 4000 models operating in about the 500 pulse per second range, putting out something like 4 or 5 watts, up to a kilohertz, which we introduced at the end of 95 early 96. So it took the company about 7 or 8 years to double its pulse repetition rate. Pulse repetition rate is so critical of course, not just for throughput but for dosage control, especially with the new generation of scanners about ready to hit the market. And basically, increasing the pulse repetition rate becomes exponentially more difficult in technology development. So with the Orion, just basically 2 years after the 5000 series introduction, we'll be introducing a model which has another full factor of 2, which is 3 or 4 times faster than we've been able to make progress in the past. And again, with the exponentially difficult technology development for pushing up rates to the multi-kilohertz area. So this is, we feel, significantly raising the bar from a performance standpoint that hits all the critical stepper and chipmaker critical performance areas, controlling throughput, smoothness of dosage control, accuracy of dosage control - especially in the scanner mode, of course enhancing resolution as the bandwidths go down for the high numerical aperture lenses which are critical for the success of all the future steppers and scanners. And the higher pulse repetition rate and average power, which allows you to expose the wafers faster and process more wafers per hour.
Mayer:
Thank you, and congratulations again.
Jay Deana [?], Morgan Stanley:
Good afternoon Bob and Bill [Bob and Bill say hi]. Couple of questions here. How many deep-UV steppers were installed at chipmakers in the fourth quarter?
Akins:
82 or 83.
Deana:
Ok. And uh starting in the first quarter, do you envision installed crossing over and being a higher number than laser shipments?
Angus:
About equal.
Deana:
Ok.
Angus:
And that's just a guess.
Deana:
Right. Ok. Did you get any pushouts in the fourth quarter?
Akins:
Uh, fourth quarter. No, not in the quarter. [Simultaneously, Angus says No, not really].
Deana:
Ok. In terms of the new products, Bob, is the 5010 an enhanced version for step-and-repeat and the Orion optimized for step-and -scan?
Akins:
Yes, that's correct Jay. The 5010 continues to operate a 1 kilohertz and 10 watts average power, but it has significantly improved pulse-to-pulse stability and bandwidth. The bandwidth of course is aimed at uh all of these are aimed at the stepper uh that the last uh the most recent [unintelligible] in stepper or the uh or a very early-age scanner, a non-advanced scanner. Of course the bandwidth allowing you to get the improved NA [pronounced 'en ay', whatever that is] lenses and still achieve a reasonable depth of focus, and the pulse-to-pulse stability, principally an asset for the dosage control for the scanner.
Deana:
OK, and Bill, what was the R&D revenues in the fourth quarter?
Angus:
R&D revenues in the fourth quarter were 423 thousand.
Deana:
Ok, and last quarter, the fourth quarter, you started the quarter off with a slug of bookings and that gave you some visibility. What does the March quarter look like for bookings?
Angus:
We've never talked prospectively like that, Jay.
Deana:
Ok.
Akins:
Yeah, because of our historical not providing that kind of information, plus the difficulties of really understanding how this market going to unfold over the course of the year, especially due to the Asian conditions. It makes it especially difficult for us to be uh to make those kinds of projections.
Deana:
Ok, yeah I understand, that's fair enough. And the last question is, Bill, can you give us a regional split of your revenues, or a customer split?
Angus:
Yeah, I can give you a customer split, because that will be reported in our filings. Our largest customer of course is Nikon. 39 percent of our revenue was with Nikon. Canon was number 2, with 25 percent of our revenue was from Canon. ASM Lithography was number 3 at 24 percent, and SVG at 6 percent.
Deana:
Was that for the year or the quarter?
Angus:
That's for the year. We only report that on a year to date basis.
Deana:
Great. Thanks very much.
Akins:
By the way, Jay, going back to the earlier part of your question, let me also just add that we've seen a real change here over the past year, year-and-a-half in our marketplace, in that it has been at any given point in time . a lithography tool supplier has had a deep-UV tool to operate. [Bear with me readers. Akins mind was jumping several ways in this next sentence. I've done the best I could with it.] But now we're seeing over the past year and especially in 1998 and early 99, instead of one KrFl tool, you've got the current KrFl tool uh stepper, the advanced KrFl stepper, the advanced KrFl scanner, and then of course an ArFl (well ArFl will be principally a scanner [unintelligible] the technology) you've got the ArFl next generation scanner. So you've got 3 if not 4 different types of steppers, so a whole plethora of deep-UV tools, all requiring something different from the laser light source to be truly cost-effective and enable performance. So our introduction of this suite of tools is designed at the widening marketplace for the tools as well.
Deana:
That's great, and actually there was one other thing I wanted to ask you, and that is are you seeing the chipmakers accepting deep-UV machines and ramping them up into production easier now that say 6 or 9 months ago? Are they moving down the learning curve across the board on that?
Akins:
Very much so. Very much so. I mean, for two different reasons. One of course [is that] the chipmakers who took the deep-UV tools the earliest had to go through the kind of process that we've described in the earlier conference calls of verifying that their process works, having their facilities people and operators learn how to cope with this new kind of tools. Once they have gone through that process with the first couple of lasers, subsequent laser that go into that factory or even other factories owned by that same manufacturer will experience much faster - and are seeing - much faster total rampup times for the tool. And certainly, of course, as the number of tools increases, there's an ongoing robustness in all the support structure, everything from [sounds like 'flood recess'], to gas supply, so on so forth. So it's happening more and more easily as time goes by.
Deana:
Great. Thanks a lot.
Leonard Sanders, Needham and Company
I have a couple of questions. First of all, could you talk about the time it takes for the stepper companies to adopt your lasers. You've been talking about that declining. Do you see that still declining with your new products?
Akins:
Uh yeah. That time is actually very customer-specific. Different customers have different manufacturing processes and level of expertise in incorporating the product. But I think it's as short as 17 or 20 weeks, and as long as 5 or 6 months, depending on the customer and uh - I'm talking about the 5000-series KrFl laser. Going forward, we expect our customers will all get better at doing that and integration times to shrink. And the factories to work more efficiently. We are seeing signs of that, and over the course of 1998 we expect that we - everyone is focusing more and more on efficiency - we expect to see them to become more efficient in that respect as well.
Angus:
Yeah, but Bob, the lead times on the new tools.
Akins:
Yeah. The new tools, different subject. Expect that for tools like the 5010, the 5000 series advanced ArFl that we're shipping, expect to see some dramatically increased lead-times as those lasers [unintelligible] attached to new machines with new control systems, so on so forth. So while the 5000-series will become more and more efficient, we'll be balancing that to some extent with longer integration time for the new products.
Sanders:
And could you go over the ASPs [presumably 'average sales price']of the new products?
Angus:
It's a very sensitive subject right now, Len. Because we have proposals in front of customers and we have a lot of , let's just characterize it as very interesting reactions from them.
Akins:
Yeah, I think that as I mentioned, the introduction of the 5010 will be in the second quarter of this year, and of the new platform tool, the Orion laser, in the third quarter. So I think it would be somewhat inappropriate for us to be putting prices in the public domain actually prior to the introduction. As soon as we have .
Angus:
And it would be great if the customers actually paid those prices.
Akins:
As soon as we have actually finished that portion of the [unintelligible] process we'd more than pleased to get those numbers out in the public domain. But obviously the value that is being provided by the laser and what it enables the stepper to do is significantly increased, and we expect an [sounds like 'elbow'] upward trend in our average sales prices, especially in the second half of the year when those units are actually delivered. They are [unintelligible] smaller quantities in 1998 and become much larger contributors to our overall revenue in 1999.
Sanders:
Ok. One of the things you discussed early on was the infrastructure build and - this is something you guys have been focusing on for several quarters. Could you discuss where you are in that process and how much additional increase we should see in that area?
Akins:
Yes. We now have 176, is it?, people in our customer support activities around the world. We had an extremely small number at the beginning of 1997, so this has been a very significant rampup for the company. I'm not going to portray that all those individuals are highly-trained, because some of them have only joined the company a few months ago. We've grown the number of offices as mentioned from about 4 to 9. We have a total of 17 presences around the world. In some cases those are full-size offices and in other cases [there are] only a few field systems and they're working out of their home. But they're all strategically located in 17 different locations for their proximity either to a direct integrator customer or end-user. And I think this has been one of the fastest if not the fastest growth in creating that kind of support infrastructure that the company has seen. However, what we've done is to put that in place - I'm not going to pretend that it's done - the process has been robustly started in 1997. We'll have to continue in 1998 because the installed base of tools, especially those at chipmakers in production, is expected to grow dramatically on a fractional basis over the course of 98. There will be a very significant demand for those tools [unintelligible] accent on support in production. In addition, with the introduction of the new products, we are going to be having a full suite, and in many cases these tools are very different. I mean, ArFl can be extremely different from KrFl in its training and level of expertise necessary. As can the Orion, being a brand-new platform for example. So there's going to be a significant infrastructure for training of field-service engineers, multiple expertise technical support people, additional spare parts and spare parts logistics for handling these multiple products. So we seen some substantial growth there in order to make the most of this new product introduction at the chipmaker.
Sanders:
Ok thanks. And lastly, I missed some of the numbers you rattled off in the beginning of the call. Could you repeat your [sounds like 'cat backs'] for the quarter, your depreciation, the number of employees, the backlog number.
Angus:
The backlog number, Len, is 108 million 704 thousand. The capital spending for the fourth quarter was 11 million 610 thousand. I don't believe we actually mentioned the number of employees, but yearend it was 809.
Sanders:
Ok, and depreciation?
Angus:
For the quarter . wait a second...
Akins:
While Bill is looking it up, Lenny, let me complete my answer to you earlier. Prior to the fourth quarter 97 we had been remarking in response to questions that Samsung was in our frank opinion, the only company that had a deep-UV in full production. And now, this is not a complete list, but we discussing this earlier today, that we need to add to that list NEC, and Hiroshima in Scotland, Mitsubishi Electric in [unintelligible], Toshiba in [unintelligible], the IBM-Toshiba partnership in Manassas, Virginia, and IBM U.S. as well, should all be considered to have these tools in full production.
Angus:
Depreciation for the quarter was 2 million 740 thousand.
Sanders:
Ok, thanks a lot. |
