Cymer Q3 1998 Conference Call, Part 1 of 3 - Opening statements
CYMER, INC.
THIRD QUARTER FINANCIAL RESULTS CONFERENCE CALL
Oct 26, 1998
Speakers: Marie Burke, Director of Investor Relations, Bill Angus, Senior VP and CFO, Bob Akins, President and CEO
Burke: Thank you for joining us this afternoon. First of all, I apologize for the technical difficulties that we've experienced. As you know, statements in this conference call regarding the effects of Cymer's new products, its competitive landscape, new product introduction schedules, future development in semiconductor manufacturing technology, market conditions and revenue, spending and earnings projections are forward-looking statements, based on current expectations, and involve a number of risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors can include such differences can include those described under the risk factors in our forms 10-K and 10-Q regularly filed with the SEC. I'd like now to turn over to Bob Akins our President. Bob?
Akins: Hello everyone. I'd like to thank you again for joining us today. For purposes of today's discussion, I assume that all of you have received a copy of our press release dated today. I will begin by reviewing the operational highlights of the September 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.
First of all, I would like to state that during this industry downturn, we are continuing to adjust our spending, without sacrificing future competitiveness. As part of a plan to reduce overhead structure and improve efficiencies, during the 3rd quarter we reduced our global workforce by approximately 12%. In addition, we implemented a mandatory shutdown, reduced all senior executive salaries, and scaled back certain additional compensations programs and other operating expenses. Despite economic conditions that continue to severely impact our industry, we remain extremely confident that DUV excimer laser lithography is the technology of choice to enable the manufacture of semiconductor chips for the foreseeable future. With less than 25% of wafer layers produced today utilizing this technology, as an accelerating geometry shrink (unintelligible) at chipmakers, the market is positioned for substantial growth. Cymer remains committed to meeting our customer's needs, both now and in the future through technology leadership and a worldwide service and support organization. We've continued to execute our strategic roadmap for maintaining technological and market leadership by meeting customer and chipmaker requirements, with technology-based, value-added solutions. These solutions range from introducing new products with enhanced performance capabilities, to reducing the cost of operation of our lasers, to enhancing our global service and support organization. Four specific recent developments demonstrate this. First, during the quarter we continued to see a rapid conversion to our new high-performance product, the ELS-5010. The 5010 represented approximately 50% of our KrFl laser shipments for the 3rd quarter, up from 20% in the second quarter of this year. The 5010 is an advanced laser with an 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 and serviceability through an increase in expected lifetime of the key replaceable modules. The second development was the first implementation of an ongoing program designed to reduce the cost to operate our lasers at chipmakers. Chipmakers are increasingly focused on enhancing the productivity and cost-effectiveness of their tools, especially during difficult economic times such as these. Our cost-of-operation reduction program is part of our end-user pull-through strategy, which looks at ways to enhance our tools for the chipmaker, and as a result of key technology breakthroughs as well as continuous improvement engineering verified by field data. When implemented through a 5000-series upgrade, these improvements - which will be standard in the 5010 - can reduce the cost of operation of our lasers by as much as 45%. Due to these improvements, chipmakers indicate that Cymer is in the lead with respect to cost-of-operation reduction technology. As a market leader, we believe strongly in focusing our technical efforts not only on developing new laser models, but also improving the performance of our installed base.
The third development was the first shipment, as planned, of our ELS-6000, which was formerly called the Orion. The ELS-6000 is a next-generation tool that is specifically designed to meet the more stringent demands of powering next-generation scanners, and potentially high-productivity steppers. As we discussed in the previous conference calls, we expect to see the stepper-to-scanner transition continue over the next year, with the majority of these tools being scanners by the end of next year. The ELS-6000 provides twice the power and twice the repetition rate of the 5010, which should translate into at least a 15% increase in throughput for the chipmaker.
Lastly, we also continued to strengthen our worldwide service and support capabilities, with the expansion of our service and support centers in both Japan and Korea. The new 14,000-sq. ft. facility in the greater Tokyo area is intended to provide chipmakers and lithography manufacturers in this key region with enhanced training, technical support, service, and spare parts. Our new customer training center in Korea is designed to provide local training for Cymer's customers, Cymer's customer base in this region, which is one of the largest users of DUV steppers and scanners. Again, these two expansions are key to Cymer maintaining its worldwide customer service and support organization. So far we have been extremely successful in servicing our installed base, which exceeds 500 lasers. We have also maintained an average uptime for customers monitored exceeding 98%. With these four advancements we are continuing Cymer's technological and market leadership, while clearly raising the competitive bar.
I'd now like to turn the discussion over to Bill Angus to give a more detailed financial review.
Angus: Thank you, Bob. Revenues for the quarter decreased 16% on a sequential basis, to 44,448,000 as compared to 2nd quarter revenues of 53,022,000. If this number were normalized for currency fluctuations, which we continuously hedge, the net decrease would have been 12%, or inline with our forecast for a 10-15% reduction. As discussed in the press release, industry conditions resulted in a lower number of units shipped for the quarter. In fact, total unit shipments of lithography tools decreased by 25% as compared to the 2nd quarter. Lasers installed at chipmakers decreased 40% in Q3 as compared to Q2, while customer-held inventories increased roughly 2%. Continued market acceptance of our 5010 laser again resulted in higher average selling prices for the quarter. Laser ASPs rose to $442,000 in Q3, as compared to $425,000 in Q2. On a currency-adjusted basis - and remember, we hedge our foreign sales contracts - the ASPs rose to $469,000 in Q3, as compared to $433,00 in Q2, or a 7.6% increase. For the year, currency-adjusted ASPs have increased 13%. Year-to-date, ASM Lithography has accounted for 40% of our sales, Nikon 28%, Canon 21%, and SVG Lithography 6% of our revenue. Overall gross margins decreased from 36% in Q2 to 35% for Q3, due primarily to lower sales volume. R&D totaled 7.6 million, or 17% of revenue for the quarter. On an absolute dollar basis, this was a 9% decrease from the prior quarter. The decrease was primarily related to employee benefit cost savings measures implemented during the quarter. Selling and marketing expense was 3 million, or 7% of revenue, a 24% decrease in absolute terms from the previous quarter. This savings was achieved despite the expansion of our Korean and Japanese support operations by reducing operating expenses including employee benefit cost savings measures. G&A for the quarter was 2 million, or approximately 4% of total revenues. Income from operations totaled 3 million, or 7% of revenues, with net income totaling 1.5 million, or 5 cents per share diluted, on 29,472,000 shares outstanding. Our tax rate for the quarter was 30%. Net income for the quarter was down on a sequential basis primarily due to the reduction in gross margins. Backlog at September 30, 1998, including both new systems and spare parts, was 43,650,000, as compared to June 30, 1998 backlog of new systems and spare parts of 81,366,000. Cash, cash equivalents, and short- and long-term investments totaled 166 million. The company's operating activities generated 21.4 million in cash during the 3rd quarter. Working capital totaled 138.1 million, while capital spending was 5.3 million for the quarter, compared to 4.8 million for the second quarter of 1998. Depreciation for the quarter was 3.9 million, compared to 3.6 million for the second quarter of 98. During the quarter, the company purchased an additional 1,558,000 shares under its stock repurchase plan, bringing total repurchase shares to 1,863,000 as of Sept 30, 1998. From here on out, I want to remind you that we will be presenting forward-looking statements regarding future operating results, and again refer you to our 10-Qs and 10-K, as filed with the SEC, which carry the risk factors related to such information. Current market conditions are expected to continue for the near term. Based on information currently available to us, we expect total revenues for the 4th quarter of 1998 to decrease by 16 to 20%, as compared to those of the 3rd quarter. We expect that this will be comprised of fewer laser sales, as well as a reduction in spares and service revenues, as we continue to work with customers to manage their inventories. With our operating break-even currently based on approximately 43 million in revenue on a quarterly basis, we estimate a loss in Q4 of between 15 and 20 cents per share. This projected loss may include inventory write-downs resulting from rapidly changing customer product mix demand. Bob?
Akins: As I stated earlier in this report, this industry downturn has been one of substantial magnitude and duration. I want to caution you that we are part of a highly volatile environment, and forward visibility is, at best, 90 days. Thus we cannot rule out the possibility of additional revenue declines before the business recovers. However, since the end of Q3, we are seeing some pickup in demand, and anticipate that new orders will begin to climb in the upcoming quarters. While this won't translate into immediate revenue gains, and volatility is the anticipated near-term norm, we do expect to see some pickup, some upticks, in quarterly revenue in 1999, driven by our new 5010 laser products and its improved capabilities. We continue to firmly believe in the fundamentals driving this industry and DUV technology as the only viable sub-quarter-micron patterning process, and perhaps one of the single biggest keys to the manufacture of virtually all advanced chips in the future. We believe that the most advanced manufacturing technology - including DUV - should logically be the first to turn around as the industry rebounds. Chipmakers are continuing to shrink die size to higher-resolution lithography to improve cost-effectiveness, by producing and yielding more die from their current 8-inch wafers, reinforcing the accelerated transition to quarter-micron and 0.18 micron DUV lithography. This concludes our report. I would now like to open the session for questions and answers. |
