Cymer Q2 1998 Conference Call, Part 1 of 3 - Opening statements
CYMER, INC.
SECOND QUARTER FINANCIAL RESULTS CONFERENCE CALL
July 27, 1998
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Cymer, Inc. Second Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode, but later we will conduct a question and answer session. At that time if you have a question, you will need to press the 1 followed by the 4 on your pushbutton phone. As a reminder, this conference is being recorded, Monday, July 27, 1998. I would now like to turn the conference over to Mr. Bill Angus, Senior Vice President and Chief Financial Officer at Cymer, Incorporated. Please go ahead, sir.
Angus Thank you. Hello, everyone. Thank you for joining us this afternoon. As you know, statements in this conference call regarding the effects of Cymer's new products, its competitive landscape, new product introduction schedules, market conditions and revenues, spending and earnings projections are forward-looking statements based on current expectations that involve a number of risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that could cause such differences include those described under risk factors in our forms 10K and 10Q, regularly filed with the SEC. Now I'd like to turn this over to Bob Akins, our President. Bob.
Akins: Hello, everyone, I'd like to thank you again for joining us today. I will begin by reviewing the operational highlights of the June quarter. Following that, Bill will present the detailed financial report. Lastly, we will share with you our best understanding of what lies ahead for Cymer in the immediate future.
For purposes of today's discussion, I assume that all of you have received a copy of our press release. Just to recap a few highlights from the quarter. First, we have met three expectations, with revenues increasing 7% over Q1 and year-to-date revenues increasing 18% over last year. We also saw strong market acceptance of our 5010 laser, as evidenced by new orders totaling 16 million dollars in just three months since introduction.
Despite this success, the worldwide economic cycle that now impacts our industry is more severe than experienced in the early 1990s and perhaps will exceed that of the mid 1980s. Recognizing that, we have taken, and will continue to take, steps to adjust our standing, consistent with our best understanding of the emerging revenue picture ahead of us. Based on this, we are proactively managing our breakeven point accordingly. However, we will continue to invest in certain strategic areas that we feel are essential to maintaining our leadership position in the DUV light source business. These include strategic R&D for new product introductions; building a stronger internal foundation to support end users worldwide; and enhancing our marketing capability aimed directly at the chip maker.
I would like to review these areas and update you on our activities in each. The first category is our investment in R&D for new product development. With the focus on bringing value to the marketplace, we have identified the key technical parameters of our laser that most directly impact the performance and the productivity of the lithography tool. This has resulted in our introduction of higher performance lasers to meet the industry's emerging requirements for new steppers and scanners. As previously announced, we first shipped our new laser, the ELS 5010, in March. The 5010 is an advanced laser with enhanced color purity or bandwidth which enables the newest generation of high numerical aperture DUV steppers to achieve maximum resolution. Additionally, the 5010 offers significantly improved pulse energy stability, which is essential for the first generation of DUV scanners to achieve accurate and consistent dosage over the exposed field. Finally, the 5010 is designed to provide improved reliability, serviceability, and reduce cost of operation to an increase in expected lifetime of the key replaceable modules. There has been stronger strong initial customer demand for the 5010 laser. As announced in our press release of July 13, we have received orders for 5010 totaling more than 16 million dollars within three months of its first shipment. Orders have come from our three largest customers: ASML, Nikon, and Cannon, who plan to use the 5010 in their most advanced lithography tools. I should point out that these orders are not additive to our normal business, but rather reflect the migration away from the 5000 series to the new 5010. To date this conversion is occurring at a rate faster than we initially anticipated. Needless to say we are very pleased with the initial market success of the 5010 and we believe that it is bringing more value to our customers, while at the same time providing for Cymer increased average sales prices and widening the gap between Cymer and our competitors.
Our next new product slated for introduction is our Orion 6000. Based on all [recording gap] platforms, providing increased ease of service, the Orion 6000 is designed to specifically meet the more stringent demands of powering scanners. Throughout next year, we expect that these scanners enjoying growth as a percentage of all lithography tools delivered. In fact, we expect to see scanners representing the majority of all lithography tools delivered by the year 2000. The Orion platform produces twice the average power of the 5010, 20 watts versus 10 watts. And twice the pulsepartition rate, 2 kilohertz up from 1 kilohertz. It is therefore expected to increase scanner improvement by approximately 15% and with further improvement and pulse energy stability, scanner dosage control will even be more accurate, enabling future improvements and die yields.
Increased module lifetimes, coupled with improved serviceability are designed to make the Orion 6000 platform the least expensive laser to operate per wafer level to date. Orion 6000 marks the single largest step ever taken by our company to increase our product competitiveness.
Orion 6000 platform alpha units have recently undergone successful performance verification testing in our facility by our customers and our program is on schedule to begin shipments by the end of the third quarter. As we are currently in negotiations with customers, we're not in the position to discuss the Orion 6000 pricing at this time other than to say that it will be higher than that of the 5010.
With both these products, we remain very much on track with our product roadmap and believe that we are raising the competitive bar faster now than ever before in our history.
The second category of ongoing strategic investment is that of continuous improvement in our ability to support our existing end users worldwide. In 1996, and especially in 1997, we created a global service capability from the ground up. This included setting up customer support entities in Korea, Taiwan, Singapore and Europe, as well as greatly expanding our operations in Japan and the United States.
Our Cymer Japan expansion into a new facility in Motoyowata will incorporate a significant increased capacity to train our customer support engineers. We are currently on schedule with our new facility build out and planning to occupy the new Cymer Japan location next month.
During the second quarter we also announced the opening of our Singapore office, which allows us to strengthen our partnerships with key customers in Singapore and Asian countries and to prepare for the growth opportunities at that marketplace [words that sound like 'of force']. Singapore currently has nine integrated circuit fabrication plants and hopes to grow this number to 25 by the year 2005. We continue to see a shift of chip makers preferring direct laser support provided by Cymer. The reasons are not surprising. While the laser is optical in nature, its core technologies are very different from those in the lithography tool. Cymer is in an increasingly unique position to offer not only field service engineers well versed in these core technologies, but also tiered levels of more expert technical support from our engineers and from our scientists. This expertise, coupled with an expanding global presence and spare parts availability allows us to offer our unique suite of service products to chip makers worldwide. In fact, in production, when our direct support is properly synced up with the stepper or scanner supplier, chip makers are achieving laser up times of 98%.
Another area of strategic importance to Cymer is to continue to enhance our marketing capabilities aimed directly at end users or chip makers. In addition to providing service and support directly to chip makers, we are seeing an increasing desire on their part to have direct marketing relationships with us. There are several reasons as to why a direct relationship would be mutually beneficial. Remember that Cymer gained its original market entry by appealing directly to chip makers with what we and they perceived to be a better solution. Continuing to build on these relationships allows them to access a more complete set of service products while at the same time achieving a better understanding of the linkage of our technology with their manufacturing roadmaps to acquire products that most closely fit their needs.
At this time I would like to turn the discussion over to Bill, for a review of the second quarter financials.
Angus: Thank you, Bob. First of all, the bottom line net income and earnings per share for the quarter were in line with street estimates. Revenues increased 7% on a sequential basis to 53 million 22 thousand as compared to Q1 revenues of 49 million 679 thousand. As discussed in the press release, industry conditions resulted in a lower number of units shipped for the quarter. In fact, total unit shipments decreased by 14% for the second quarter in a row. Laser installs at chip makers increased 18% in Q2, as compared to Q1 while our customer held inventories decreased roughly 5%. Strong market acceptance of our new laser, the 5010, along with the sale of some next wavelength generation Argon fluoride lasers, resulted in higher average selling prices for the quarter. Now that pricing negotiations have been finalized with our customers, we can disclose that the 5010 has an average selling price of 503 thousand, an increase of 23% as compared to an ASP or the 4000 series of 410 thousand. While we will continue our policy of not disclosing specific units sold for the various product lines, the higher ASP associated with the sales of the 5010 helped contribute to a higher overall ASP for the quarter of 425,000 as compared to an ASP of 395,000 for Q1.
Revenues from the sale of spare parts and service more than doubled from first quarter levels as our growing installed base of lasers began to come off warranty. Year-to-date, ASM Lithography has accounted for 42% of our sales, Nikon 27%, Cannon 21% and SVG Lithography, 6% of our revenue. Overall gross margins decreased from 38% in Q1 to 36% in Q2. This decrease in margin is attributable to increased inventory reserves taken this quarter for our now obsolete 4000 series of lasers.
R&D totaled 8.3 million or 16% of revenue in this quarter. On an absolute basis, this was a 6% increase from the prior quarter. This planned increase was related to development expenses for the 5010 and the Orion as part of our continuing strategy to move aggressively forward to develop and introduce new products. We anticipate going forward that on an absolute basis, R&D revenues should remain rather flat as we continue to strategically invest in value added products while continuing to manage the bottom line.
Selling and marketing expenses was 4 million or 8% of revenue, a 2% increase in absolute terms from the previous quarter. As planned, we continue to develop our global marketing infrastructure to support not only a multiple suite of products but potentially multiple end users as we increase our marketing efforts directly to chip makers. G&A was 2.6 million or approximately 5% of total revenues. This is right about where we had expected it to be. Income from operations totaled 4 million or 8% of revenues, with net income totaling 1.7 million, 6 cents per share diluted on 30,291,000 shares outstanding. Our tax rate for the quarter was 30%, which should be our effective tax rate for the year. Net income for the quarter was down on a sequential basis primarily due to the reduction in gross margins.
Backlog at June 30th, 1998, including both new systems and spare parts, was 81,366,000 as compared to March 31st of 1998 backlog of new systems and spare parts of 110,818,000. We have begun to include spare parts numbers in our total backlog number and have restated the March 31st, 1998 number to facilitate comparison. The spare parts have and will continue to provide a growing portion of total revenue as our installed base grows and lasers come out of warranty.
Cash, cash equivalents and short and long term investments totaled 168,714,000. Working capital totaled 169,533,000 while capital spending further declined to 4,831,000 for the quarter compared to 5,719,000 for the first quarter of 1998. Depreciation for the quarter was 3.6 million compared to 3.4 million for the first quarter of 1998. Inventory levels increased due in part to the rapidly changing sales forecast as we entered into 1998, as well as the brand increase in spare parts inventory. Our objective is to manage inventory levels lower through the second half of the year while maintaining positive relationships with our critical suppliers. During the quarter, the company purchased an additional 205,000 shares under its stock repurchase plan, bringing total repurchased shares to 305,000. Current market conditions are expected to continue for the foreseeable future. Based on the information currently available to us, we expect total revenues for the third quarter of '98 to be flat as compared to those of the second quarter. We expect that this will be comprised of fewer laser sales as we continue to work with our customers to manage their laser inventories. At the same time, revenue from increased sales of spares and service, coupled with a rise in ASPs for the laser products are expected to help offset fewer laser shipments. Again, we caution at best we have only a 90 day visibility and we cannot rule out the possibility of further revenue declines before the industry recovery commences. Bob?
Akins: As I stated earlier in this report, we believe that the industry downturn in which we are now immersed is one of substantial magnitude and duration. To begin with, the industry is hitting with a recent period of heavy investment in capacity expansion. Overlaying this is the global economic picture. We are especially concerned about the economic issues in Japan and that country's ability to take fast, decisive steps to deal with an economic situation of immense size and scope. On the other hand, we firmly believe in the fundamentals driving this industry and the emerging business it supports. We have confidence in Morris Loft and we believe strongly in DUV as the only viable subquarter micron [sounds like 'parroting'] process and perhaps the single biggest key to manufacture of virtually all advanced chips in the future. We believe equipment suppliers will see an upturn at the end of 1999 or the beginning of the year 2000. A few of the most advanced manufacturing technologies, including DUV, should logically turn around one or two quarters earlier; that is, in the second half of 1999. However, I'd like to remind you that we have only short term visibility.
In the medium term, the sale of DUV tools continues albeit at a lower rate than envisioned even a few months ago. Instead of procuring larger numbers of DUV tools to build new or seriously refurbished factories, chip makers are taking delivery of a smaller number of these tools and using them in a full mix and match configuration with their existing I line steppers. Since most of the existing tool sets in the factory are capable of supporting quarter micron fabrication, this relatively small investment in the quarter micron patterning capability highly leverages a very expensive fab. The much discussed delay of 300 millimeter wafers also reinforces the move to DUV. Chip makers have only two fundamental options to achieve economies of scale in their operations. One is to move to larger wafers so as to yield more die per wafer. The other is to shrink die size to higher resolution lithography to yield more die from their current 8 inch wafers. With the 300 millimeter transition expected to be the most expensive retooling in history, chip makers worldwide are taking the second option-reinforcing the accelerated transition to quarter micron and 0.18 micron DUV lithography.
Additionally, we believe the transition from wafer steppers to wafer step and scan tools, scanners, is occurring on schedule as expected, impacted little to none by market slowness. Remember that scanners offer higher resolution over larger field sizes with further improvements in field flatness, depth of focus and critical dimension control. This conversion will ultimately be a very complete one as scanners cannot mix and match with steppers due to large differences in field sizes. As scanners are much more demanding on laser performance relative to steppers, the high performance scanner enabling laser products that we are introducing starting this year are a very critical component to our overall competitive strategy.
This concludes our report. I would now like to open the session for questions and answers. Operator, if you could assist us with this at this time. |
