Cymer 4th quarter 1998 Conference Call, Part 2 of 4
Robert Maier (MAY-er), DLJ: Yes, hi guys. Couple questions on - I'm just doing some quick math here, and it would seem at least that one of your customers has a fair inventory of some of the older units. And given that you've written off some of the older units just because there's a rapid move to the newer technology, would, is there any potential of retrofitting existing units or upgrading existing units that a customer would have in inventory but not shipped, or are those units basically old news and we're moving on to new units?
Akins: Yes, the opportunity that you've just described is there and is a real one. As I mentioned in our call, in our presentation, we have taken some of the technology breakthoughs and some of the results from our Continuous Improvement Programs and rolled those not only into our new products, but also into the availability of upgrade kits that could be implemented, purchased from Cymer as a product, and implemented to improve the cost of operation of a 5000-series to make it more or less comparable with that of a 5010. Those upgrade kits are now in the qualification stage, both from a technical perspective - that's the first phase of qualification - and soon into a return-on-investment qualification for each manufacturer of steppers and scanners or in some cases chipmakers to have an understanding of how fast this cost of ownership will pay for itself. We expect to see some revenue from this just starting perhaps in Q2 and in the 2nd half of the year to have the sale of those upgrade kits comprise a larger portion of revenue for the company.
Maier: Would it be correct to assume that those upgrade kits would be made available at a perhaps lower margin base, given that the client may have a bit of an inventory exposure? And the second half of that question is to what extent would customers upgrading existing inventory of lasers impact potential new sales to those customers? I would assume that would perhaps slow some sales to customers who have inventory.
Angus: The question you ask is a delicate one, because obviously we are already in negotiations with our customers. And I do not want to preempt the opportunities of our sales force to properly negotiate with our customers who have that inventory. Obviously we are sensitive to customers who are in that position, and we will try our best to work with them. Of course, there could be a possibility that the sale of these two integrators may have a lesser margin. But I wouldn't want to preclude that or say that's a foregone conclusion at this point in time.
Akins: Let me just add to what Bill said, Robert, in remember that these upgrade kits address the cost of operation of the 5000-series lasers that they'll be implemented on, not the performance. And of course we're seeing a large portion of the demand for today's products being technology-driven and as a result one would need to purchase the 5010, or in the future the 6000 to actually access that technology advantage.
Maier: Ok, and one other question: Could you give us an update as to competitive positioning. Any other competitors have any production uh lasers in production systems that you know of or can you give us a current competitive state of the industry?
Akins: Our detailed knowledge of what goes on inside of a competitor is as limited as it's ever been. Over the past few months, I think I mentioned our last conference call, we have had the emergence of a new competitor in Ushio, the Japanese manufacturer of the mercury bulbs. And they have announced at the last international ArFl conference that they too have launched an excimer laser development program, with focus on the ArFl generation. So we formally speaking have now three competitors in Komatsu, Ushio, and Lambda Physic. At the end of the year, 1998, we had 597 lasers installed at chipmakers. At the end of that same year, 3 competitors between the three of them had about a dozen systems installed at chipmakers. We monitor that position very carefully, and of course one of the reasons that we're continuing to make the R&D investment that we are is to try to move our company forward as quickly as possible.
Maier: And one last question: Previously there had been a bottleneck in terms of lens materials which had slowed down the stepper industry. I would assume that we're recovering here, even though we're moving to shorter wavelengths, that lens materials or other shortages that stepper manufacturers are not a gating factor that would otherwise change the equation.
Akins: The answer to that is yes and no. Certainly the issue as it was discussed before, a year or two ago, was the availability of fused silica for 248nm KrFl systems. The industry was expecting to ramp much more rapidly for a more prolong period of time, and our best information tells us that availability of fused silica now for that generation is there, it's not a problem. For 193nm, there's been lots of discussion recently about calcium fluoride and the use of calcium fluoride at least in a limited way initially in the projection tools for that particular wavelength. That continues to be a issue which is being worked by everyone in the industry. Tremendous progress is being made. I think it's seen as a very significant factor, but perhaps not the most fundamental factor limiting the ramp up rate for ArFl systems. And remember that ArFl is not expected ramp up for some time, so there's considerable time for the industry to address that. I will also bring up the fact that photoresist at 193nm is another issue that doesn't receive too much attention. It's different than 248nm. There's a significant amount of development that has to go on before we have a production-worthy ArFl resist, and so that's one to be watched as well over the next 2 years or so.
Nikolai Tischenko (tish-EN-ko), AB and Amerault (AM-er-oh): I have just one question, maybe it will become two. Could you please give us some more detail on what is the basis of your confidence as you decided to keep your breakeven point higher? Does it have anything to do with better than expected ramp up of 6000 machines?
Akins: Our cautious optimism in that particular area is based up our conversations with our direct customers, as well as those with chipmakers. And of course everyone on this call is watching the chipmaker activity very intensely. We think that there's a firming-up of DRAM prices. We're watching the quarter-micron capacity versus DRAM demand equation very carefully. And because in general of the trends we have seen in the industry, we think that yes, the industry has reached the low point, and we expect to see some growth going forward. The 6000 activity certainly is not the basis of our optimism. The 6000 is a long-term investment for us. While we have delivered units as we have already announced in the past, we expect those units to go through a prolonged qualification period as those lasers are being attached to a brand-new generation of scanners or in some cases perhaps even steppers. But, we expect that will be a late-1999 the year 2000 timescale for an actual ramp up to begin on those. So, we look at that as a future, forward-going investment on our part.
Wu: Bob, this is David Wu also from AB and Amerault in San Francisco. By stepping, uh by seeing the cycle bottom and coming back, what would be a satisfactory rate of revenue that you think that you can achieve even by.? Would it be Q2 or would it be the second half of 1999?
Angus: I think we may start to approach but not achieve breakeven in Q2. It is our expectation that we would break into profitability in the secondhalf of the year.
Mark Fitzgerald, Merrill Lynch: When you're going back and looking at the inventory that's out there, 5000s, who actually makes the decision of what ends up on a lithography tool? Is that made by the OEM or is that made by the end user, the device manufacturer?
Akins: The OEM certainly has a substantial say in the matter for the qualification of the tool. But as time has gone on, and one of the reasons why we will be investing more heavily in our sales and marketing capability, not only to our direct customers but also chipmakers, as the chipmaker is learning about what is available in laser technology going forward they are being more and more vocal in expressing their preferences to the stepper manufacturers as to what laser is attached to what lithography tool. So it's a combination of both.
Fitzgerald: So I mean it kind of begs the question then if you're NEC or Intel, why would you want a 5000 laser that's been upgraded when you can get a 5010? Have you run into those issues out there in talking to the end users?
Akins: Yes. In fact, one of the reasons why the conversion from the 5000 to the 5010 was and is faster than anticipated is exactly that particular dynamic. That once they learn about the 5010, many chipmakers of course want to insist that they receive that new laser on their machine. I'll also point out that especially when filling out some of the existing factories, many chipmakers have a "copy exact" type of manufacturing philosophy, which for them would mean that they would like to stick with the same laser that they have purchased in the past. And therefore, though there might be a latest-and-greatest product out there, there's still an ongoing demand for the 5000 series lasers.
Fitzgerald: And one other question: Were there any cancellations in terms of the quarter? On your backlog?
Angus: No. We've been experiencing push-outs every quarter, but as far as outright cancellations, I do not believe so.
Fitzgerald: Ok, so is it fair to assume you have booked somewhere ins the 30 million dollar range? Is that a fair level?
Angus: Well, I was pretty specific on that book-to-bill that we gave, so I guess …
Fitzgerald: Oh
Angus: you can run those numbers out. But …
Fitzgerald: Oh, ok, I didn't hear that.
Angus: Oh, ok. We gave a book-to-bill of .. overall book-to-bill of .83, with a systems book-to-bill of .91 and a spares book-to-bill of .63.
Fitzgerald: Ok. And is it fair to assume the system sales that we're talking a majority of them are 5010?
Angus: Going forward, yes.
Jay Deahna, Morgan Stanley Dean Witter: Bill, the first question is, if you look at your loss in the quarter from operations, excluding the charge, what would that be?
Angus: A million.
Deahna: In terms of per share?
Angus: Oh, that was the operating loss, Jay. I don't know, I haven't run that out. We could do it here quickly. Maybe we could come up with and answer for you.
Deahna: Ok, fine. And Bill, the next question for you is that other income dropped significantly in the quarter. Why is that? Is there a foreign exchange gain or something?
Angus: Yes. You mean the loss dropped?
Deahna: Right.
Angus: Yeah. There was foreign exchange rate gains in the quarter of 1.3 million, Jay.
Deahna: Ok. In the next couple of quarters do you expect that other income line to be, you know, negative a million or something? Or where are we going to bounce back to on that? |
