Cymer Q2 1998 Conference Call, Part 2 of 3 - Q&A
CYMER, INC.
SECOND QUARTER FINANCIAL RESULTS CONFERENCE CALL
July 27, 1998
Operator: Ladies and gentlemen, we will now begin the question and answer session. If you have a question, you will need to press the 1, followed by the 4 on your pushbutton phone. You will hear a three tone prompt acknowledging your request and your questions will be pulled in the order they are received. If your question has been answered and you would like to withdraw your [inaudible], you may do so by pressing the 1, followed by the 3 on your pushbutton phone. If you are using a speakerphone, please pick up your handset before pressing the numbers. One moment please for the first question. Robert Mayer with DLJ, please go ahead with your question.
Mayer: Yeah, hi, well, congratulations on the quarter. I have some questions about business going forward. As reported by ASM last week, they have about 90 units or so in backlog and of the 30 units they received in the quarter, about half were DUV, so it sounds like they've had a relatively big drop in terms of the incoming order rate that they've seen the first half of the year. What have they done in terms of scaling new, or I shouldn't say specifically about them but, in general, what have your customers done in terms of their backlog and working down their backlogs and their outlook for business going forward?
Akins: To begin with, I think that a lot of the impact that all of our customers are seeing on reduction in their backlogs have to do with their reduction of I-line bookings. As you are aware, Robert, as more DUV tools find their way into factories, and are used in this mix and match configuration, the I-line tools are being freed up, which they can be used elsewhere in the factory or in a new factory, a different factory. This has reduced the demand instantaneously for I-line tools very significantly so we're seeing reductions pretty much across the board for our customers being principally I-line and secondarily, DUV. On the DUV side, again, all of our customers are having their visibilities cut significantly and that's being passed along to us as well.
Mayer: Yeah, half the units they had, 30 units ordered in the half, half were DUV and half were I-line, actually that was, the I-line percentage was up sequentially and they really didn't explain that but have you had any sort of guidance or what's your view as to the number of units that you have out in the field and the pipeline so to speak at customers these days?
Angus: Yeah, I think its safe, you know, we're just gonna be shipping fewer lasers each quarter here and have, and we have so far and Q3's gonna be down again and wouldn't be surprised maybe Q4's down again given these current circumstances. So, I think, you know, the overall the systems shipments are down and direct customers are managing us in that direction to reduce our shipments to them, which we're doing.
Mayer: Okay. Any kind of thoughts or guidance as to what percent down you think it would be? Would it be down 20% eventually or more or less?
Angus: Well, we've been down 14% in a row here for two quarters in a row. So I, it's awfully hard to say Robert, it's gonna really get us into more of a predicting mode than I'd like to be and it's just really can't.
Mayer: Okay, and one last question. What sort of risk do you think exists to the current 81 million in backlog? Do you feel, I mean, what are your views as to the firmness of that backlog currently?
Angus: I think our basic timeline is this, the backlog is firmness in that it will be ultimately shipped and I don't think there's a high chance of cancellation; there is always the potential for push outs.
Mayer: What kind of push outs did you get in the quarter?
Angus: I think we had minimal pushouts in this past quarter but that doesn't mean it won't happen again.
Mayer: Okay, thanks.
Operator: Bret Hodess with NationsBank Montgomery Securities, please go ahead with your question.
Hodess: Afternoon.
Angus: Bret.
Akins: Hi, Bret.
Hodess: Couple of questions, guys. First thing, can you split out what percentage of sales and spares and service was?
Angus: No, Bret, we've got a problem here with that because we, for competitive reasons, we really don't want to get into a discussion of number of units that we're shipping and there are various ways, given that we're talking about ASPs, that our competitors could back in and start calculating how many units we're shipping to our customers. So we don't want to go there. Let me just in a general way say that spares and service here could easily see the north side of 25% of revenues going forward into next year.
Hodess: And can you, tell us then on what the margin limits on the spares and service looks like and as the mix shifts over time, Bill, you know, you could clearly had it looked like a couple hundred basis points pressure this quarter because of the charge on the 4000 obsolescence but what might be, in a flat revenue environment and the mix shifting towards spares and service, what might the margins be?
Angus: Well, the the margins, I would say, at this level of business if it was just a straight shift and no higher ASPs available to us then I think you'd start to see the revenue, the margins stay flat, maybe even down slightly. What, in the spares area, we have a service nut that we're trying to amortize which is the cost of our field service organization all over the world and so that's a bit of a drag, if you will, on the whole spares and service revenue. Ultimately, though, we'll overcome that as the spares and service revenues grow and we just haven't had enough, but we're not there yet. So in the short term, it could be a drag and then ultimately we'll get over that. It just depends on how fast and at what rate those total revenues grow.
Hodess: And then another question along these lines, how's your experience now with the chamber replacements, is it tracking at what you thought, where you'd have to replace the chambers once or twice a year as they move into production?
Angus: Yes, yes, chamber sales is one of the major drivers of the increasing revenues in spares.
Hodess: And finally, when you look at the inventory at your customers declined 5% from the previous quarter, now that the customers are looking at the 5010 product, what's happening with that inventory of the older 5000 series? Are customers expected to continue to place that in the field or do you think there'll be some obsolescence in that area as they may want to move, as you said earlier, the highest end product?
Angus: Bob, go ahead.
Akins: Well, I think what we'll find here, Bret, and of course, we're having those kinds of conversations with our customers on an active basis. Obviously, some of that inventory will stand as it is. There are a number of tools being delivered that will continue to be powered by the 5000 series laser in the short term. Suffice it to say that we're in conversations with all of our customers relating to how that inventory and it's state of competitiveness might be best approached. It's a little different kind of situation with each custome,but those conversations are going on and we'll be taking a number of actions, it's different with each customer, accordingly.
Hodess: Could those actions come in the form of customers wanting to you to replace them with 5010s or give them a discount on 5010s as a result of the inventory or other things that might impact the sort of the price you may get for the new sales.
Akins: The most discussed option is an upgrading of the 5000 series laser to a more, a higher performance kind of configuration.
Angus: Which would be a revenue event for us.
Hodess: Great, thank you.
Akins: Thank you Bret.
Operator: Leonard Sanders with Needham & Company, please go ahead with your question.
Sanders: I wanted to go back to the scanner issue that you talked about before and there are people saying that the scanner transition is, may or may not be as easy as some of the stepper companies are saying and could you talk about how that would affect your business?
Akins: Well, as you know, the Orion is being introduced principally on our part as a scanner, laser to power scanner and I should reinforce the fact that the 5010, because of its performance levels, can be an excellent laser for powering either a very advanced stepper or a first generation scanner. I think that what we're finding with our customers is that in addition to powering scanners, there may be some reasons that some of our customers may choose to put Orions even on to steppers to increase improvement of those tools as well. So, obviously, with the stepper the increased power level of the laser significantly reducing the exposure time of the stepper itself. So I think we're gonna find that these higher performance products have market drivers both in stepper and scanner. If our world changed and transitioned to the scanner, that would help to move some of that. But in respect, at this point in time, although there may be additional process and hardware challenges to implement scanners, at this point in time, we don't see a reflection of that in the conversion rate and expect that scanners will be a very significant, you know, larger than 50% of the business in the year
2000.
Sanders: Okay. Can you talk about parts commonality across all of the different lasers that you manufacture?
Akins: Well, the 5010 sits inside of the 5000 series enclosure but most of the key modules in that product are different. Now, they, some of them are relatively easy to exchange; others of them require some very significant rework of the 5000 series frame and enclosure some and so forth but we feel that, you know, the, remember that the 5000 series is a one kilohertz platform to go to a higher pulse repetition rate and it means increasing the need for a lot of ancillary support equipment for higher rep rate for moving power from the units and so forth. And because of that, when we decided to introduce the, like when we introduce the Orion 6000 platform, it is an all new platform, designed to be able to handle the extra needs of power and cooling to support the higher power and higher rep rate operation and in addition, offers from very significant scalability. That platform was designed to start off life at 2 kilohertz and 20 watts and then to go to higher levels of performance over time without any significant changes to the enclosure itself, to the platform. So, we're seeing, we're seeing most of the changes in the core modules of the product but more and more over time the ancillary power and cooling issues are becoming significant and controlling at the platform generation.
Angus: A little bit further amplification there. We have done analysis based on the build up of material and the overlap of the 5000 and the 5010 and while there are very important key differences in the proprietary modules, the bulk of the dollar investment commonality is the same between the two. So there's not a huge risk of 5000 obsolescence going to 5010 there.
Sanders: Okay. Could you give us the number that you took as reserves for the 4000?
Angus: 1.3 million
Sanders: Thank you
Operator: Jay Deana with Morgan Stanley Dean Witter, please go ahead with your question.
Quayle: Actually, it's Steven Quayle for Jay Deana. Hi, guys. You had hired a new VP of process quality and going to be focusing on market forecasting capacity planning. What's you guys' estimate now for the laser market in '98 and '99 and what do you think about the transition to .18 micron as well as the volume adoption of quarter micron, how that's proceeding?
Akins: Yes, we did bring on board that person, he's name is Ted Holsaway, who joined us as our Vice President of Process Quality and while he, himself would not be responsible for the functions you just mentioned, he's helping to champion and to lead efforts in the company to put in place certain process groupings, one of which of course, is market analysis and forecasting. At this particular point in time, again, due to our visibility, of course, we are, you know, using every week in the company enhanced processes to try to understand what's going on here. At this point on time with our limited visibility with customers, I think it's, it'd be, you know, beyond the scope of what we've already said in our first portion of this conversation today, Steve, I think it'd be irresponsible for us to offer additional speculation as to what the size of those markets could be. You know that in recent history we have looked at the total available market opportunity for laser suppliers to this marketplace, synchronized to another market forecaster's estimate, like Dataquest for example. And I think that the basic messages there were that when this industry does see its way to a rebound and the market grows again, there's a very substantial opportunity for the supplier of lasers, spare parts and services and we've been sharing those numbers with, you know, openly over the past few months but I think show a more significant market opportunity than what otherwise have been guesstimated. The last part of your question Steve was?
Quayle: Just the transition to .18 microns, how you see that proceeding as well as the volume adoption of quarter micron, any insights there.
Akins: Any insights...
Quayle: Accelerating, slowing down.
Akins: Well to begin with, I think that this probably isn't' overly insightful but the fact that 0.18 will be done by quarter micron, I mean, by krypton fluoride at 240 nanometers is pretty much well accepted. So that is certainly not being questioned now. If Intel is the only one of the companies who has really spoken up and speaks very frankly about their schedules for moving on to 0.18 micron and as you know, the quarter micron transition will be completed at Intel by the end of 1998. The 0.18 micron will be started in the middle of 1999 and will probably take, you know, one to two years to bring to some kind of relatively complete installation. And that's about all we have right now, I mean, certainly 0.18 will be a relatively straightforward extention and has, will use the same wavelength and same process.
Quayle: All right. And a couple of more quick questions here, you mentioned managing your costs for a new break-even run rate. What's that break-even run rate? And my last question is just relative to the competition. What do you see now. It seems like they make a lot of noise about the next generation of 193s and the 157s, what do you have to say on the competition?
Akins: Let me deal with that second half of the question, Bill has information on the break-even part of your question. Going along the lines of what you just said, yes, we do continue to see very active marketing by both our competitors. You were up at Semicon, Steve, so you know very well that our competition is continuing to be aggressive, not only on the real side of things but also in their advertising and promotional materials and activities for what they can achieve. I guess I'll reinforce the fact that Cymer never has been particularly hypish in the way it talks about what it can do. We prefer instead to deliver tools that actually work in production as opposed to making claims. At this point in time it's been very difficult for us to compare our production-based performance to the laboratory claims of our competition. We feel that they must be getting closer to being able to introduce a 5000 series to quote our product and, of course, this is the reason behind our move to the 5010 and then to the Orion and I think our hopes for the success of the 5010 are being realized as that laser's acceptance will put an earlier than expected end to the viability of the 5000 series product. And it all comes down to just us being able to execute in real terms the delivery of products and services that are production worthy before the competition.
Angus: Break-even points are roughly about 46 million dollars' worth of revenue on a quarterly basis.
Quayle: Okay, thanks guys. |
