Cymer 4th quarter 1998 Conference Call, Part 1 of 4
Marie Burk, Director of Investor Relations: 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. For purposes of today's discussion, I assume you have all received a copy of our press release. We're going to begin today with our President Bob Akins reviewing the operation highlights of the December quarter, and following that Bill Angus, our CFO will present the detailed financial report. Lastly we hope to share with you our best understanding of what lies ahead for Cymer in the immediate future. I'd like to now turn it over to Bob.
Bob Akins: Hello everyone. I'd like to thank you again for joining us today. Certainly 1998 was a turbulent and difficult year for every company in our industry. Due to the technology -driven nature of DUV lithography our business was impacted on a relative basis far less than many other semiconductor equipment suppliers. In fact, the focus of chipmakers on geometry shrinks to achieve lower cost is probably the most obvious trend to emerge worldwide over the past 12 to 18 months. In spite of our focus on controlling our spending in 1998, we did not cut back on R&D and new product development. This has enabled us to continue to execute our strategic roadmaps for maintaining technological and market leadership by meeting customer and chipmaker requirements with technology-based and value-added solutions. These include introducing new products with enhanced performance capabilities, reducing the cost of operation of our lasers, and enhancing our global service and support organizations. During the 4th quarter, we continued to see a conversion to our high-performance ELS 5010 as they accounted for over 50% of our shipments during the quarter. We currently expect this quarter, that is Q1 1999, to mark the end of our older ELS 5000 laser production. The ELS 5010 is enabling the newest generation of high numerical aperture DUV steppers to achieve maximum resolution. In addition, it is offering significantly improved pulse energy stability, essential for the first generation DUV scanners to achieve accurate and consistent dosage over the exposed field. Finally, we expect the 5010 to provide improved reliability and serviceability thru an increase in expected lifetime of the key replaceable modules. As chipmakers transition to sub-quarter-micron geometries, the need for more advanced lithography tools teamed with even more sophisticated light sources becomes increasingly critical. Recognizing this, we developed and formally introduced our newest product, the ELS 6000, which we had formerly called the Orion, at SEMICON Japan. The ELS 6000 is a 20-Watt 2kHz laser that we expect to play a major role in the production of semiconductor devices with design rules at 0.18 micron and below. The ELS 6000 is specifically designed to meet the more stringent demands of powering next-generation scanners and high-productivity steppers. We are continuing to see signs that the stepper-to-scanner transition is going to occur rapidly, with as much as 70% of tools shipped by some customers this year expected to be scanners. With twice the power and twice the pulse repetition rate of the 5010, the 6000 is capable of increasing scanner thruput as I will detail in this call shortly. In addition, improved puse energy stability can provide better dosage control, improve yields, and lower costs. Finally, the ELS 6000 provides a new modular platform designed to meet industry needs for several technology generations. The 6000 is currently available for beta testing, with production systems shipping in the 2nd half of 1999, and ramping to higher volumes beginning in the year 2000. In concert with the ELS 6000 introduction at SEMICON Japan, we hosted the 6th annual Cymer DUV symposium, which attracted over 120 lithography technologists from leading fabs and lithography tool manufacturers around the world. Data on the latest DUV photolithography research in advanced integrated circuit manufacturing was presented by researchers form Hyundai, Hitachi, Finley Technologies (the premier supplier of lithography tool optical simulation software), as well as scientists from Cymer. Predictive modeling presented by Doctor Y.M. Hom of Hyundai demonstrated that using Cymer's new ELS 6000 laser can reduce exposure times and would thereby increase lithography tool thruput significantly. The improved specifications of our 6000 were shown to improve wafer-layer thruput by anywhere from 10 to 70 percent, depending upon the layer's specific pattern and resist sensitivity. Overall, a weighted average over various layers would result in approximate thruput increase of 30 to 35 percent over lithography tools lesser-performance 10-Watt 1kHz lasers. Additional modeling performed by Finley Technologies details how the improved how the improved energy stability of ELS 6000 improves dosage control at the wafer, resulting in improved CD control. We expect that the performance and thruput improvement capability of the 6000 will enable a new generation of advanced DUV photolithography tools available to chipmakers late this year of early in the year 2000. For chipmakers, enhancing the productivity and cost-effectiveness of their tools has become increasing critical, especially in today's difficult economic environment. The combination of technological breakthroughs during the development of the ELS 5010 and our ongoing continuous improvement program resulted in a new program to improve efficiency and reduce the cost of operations of our new lasers as well as our lasers in the field. Under the program, extended lifetime warranties have been offered to Cymer customers for all major components of the ELS 5010 lasers. These lasers chamber expected lifetimes have increased from 3 to 5 billion pulses. Line [word that sounds like 'marrying''] module expected lifetimes have increased from 3 to 6 billion pulses. And the wavelength stabilization module expected lifetimes have increase from 5 to 10 billion pulses. Due to these improvements, the 5010 cost of operation has been reduced by 45% from that of the ELS 5000 levels. Cymer is also offering customers an opportunity to upgrade their 5000 lasers to a comparable cost of operation thru the purchase of upgrade kits. Finally, during the quarter, Cymer reached a major milestone in the history of the company: shipment of its 1000th laser. Cymer DUV excimer lasers are currently installed and used in semiconductor chip production at each of the world's top 20 chipmakers. Starting with the earliest R&D tools shipped, Cymer has focused on providing value-added products to the industry. We have an installed base in production at chipmakers that currently exceeds 600 systems, including customers in the United States, Taiwan, Europe, Japan, Korea, and Singapore. With this number of systems in production worldwide, our machine-dependent laser uptime in excess of 90% is a level of reliability that is clearly statistically relevant. I'd like to turn now the discussion over to Bill Angus for a more detailed financial review.
Angus: Thank you Bob. For the quarter, revenues decreased 15% on a sequential basis to 38 million compared to Q3 revenues of 44.5 million. 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 26% as compared to the third quarter. For the full year of 1998, Cymer shipped 337 lithography lasers versus 453 in 1997. Installs at chipmakers were 338 for 1998, as compared to 230 for 1997. Total installs increased by 11% in Q4 as compared to Q3 of 1998. Continued market acceptance of our 5010 laser again resulted in higher average selling prices for the quarter. Laser ASPs rose to 480,000 in Q4 as compared to 442,000 in Q3. On a currency-adjusted base - and remember, we hedge our foreign sales contracts - the ASPs rose to 472,000 in Q4, as compared to 469,000 in Q3. For the year, currency-adjusted ASPs have increased 14%. Also for the year, non-systems revenue - that is, spares, service, and contract R&D revenue - was 25% of total revenues. For 1998, ASM Lithography accounted for 37% of our sales. Nikon 31%. Canon 20%. And SVG Lithography 6%. Overall, gross margins decreased from 35% in Q3 to 15% in Q4, due primarily to the writeoff of 5.8 million in obsolete inventory as well as the lower sales volume. As discussed in the press release, the inventory adjustment was a result of a faster-than-anticipated shift in customer demand from the ELS 5000 to the ELS 5010. Discounting the effects of the writeoff, gross margins for the quarter and the year would have been 31% and 35% respectively. R&D totaled 6.5 million, or 17% of revenue in this quarter. On an absolute dollar basis, this was a 15% decrease from the prior quarter. The decrease was primarily related to reduced program costs during the quarter. Selling and marketing expense was 3.6 million, or 9.5% of revenue, a 21% increase in absolute terms from the previous quarter. This was a result of increased sales and marketing spending due to the expansion of our worldwide support operations. G&A for the quarter was 2.5 million, or approximately 6.5% of total revenues. The loss from operations was 6.7 million for the quarter, with the net loss totaling 3.3 million, or 12 cents per share, diluted, on 28,135,000 shares outstanding. For the full year, 1998, we recorded income from operations of 5.3 million, and net income of 2.5 million, or 9 cents per share, diluted, on 29,566,000 shares outstanding. We had a tax benefit for the year, resulting from tax credits and permanent differences between taxable income and book income which resulted in a negative effective tax rate for the year. Backlog at Dec 31, 1998, including both new systems and spare parts, was 37,316,000, as compared to Sep 30, 1998 backlog of 43,655,000. This calculates to a book-to-bill ratio of approximately 0.83. It is important to note that our systems b-t-b was 0.91, while our spares b-t-b was 0.63. We find this differential indicative of the evolving nature of our spares business. In the future, we expect this business to be characteristic of a book-and-ship business driven by chipmaker utilization of the consumable laser parts such as the discharge chambers. Cash, cash-equivalents, and short- and long-term investments totaled 162 million at Dec 31, 1998. The company's operating activities utilized approximately 5.2 million in cash during the quarter. Capital spending was approximately 4million for the quarter, compared to 5.3 million for the 3rd quarter of 1998. Depreciation for the quarter was 4.3 million, compared to 3.9 million for the 3rd quarter of 1998. For the full year, Cymer's operations generated 16.2 million in cash. Capital spending totaled 18.8 million, with depreciation of 15.3 million. During the quarter, the company purchased an additional 137,00 shares under its stock repurchase plan, bringing the total repurchased shares to 2 million shares, at a total cost of 24.9 million as of Dec 31, 998. 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 to continue for the near term. However, based on information currently available to us, we expect total revenues for the 1st quarter of 1999 to increase by 5 to 10 percent as compared to those of the 4th quarter. We expect that this will be comprised primarily of an increase in sales of laser systems, as our customers anticipate a pickup in demand for advanced lithography tools. With out operating break-even point currently based on approximately 46 million in revenues on a quarterly basis, we estimate a loss in Q1 of between 10 and 15 cents per share. Bob?
Akins: I want to caution you, as we have over the past 2 quarters, that forward visibility continues to be approximately 1 quarter. However, since the end of Q4, we have seen a modest pickup in demand, and anticipate that new orders will begin to climb in the upcoming quarters, driven by recovery of the industry and related demand for our new 5010 laser product and its improved capabilities. Over the course of the last year, we have announced a variety of cost-cutting measures that Cymer took to control our spending in response to worsening industry conditions. We did not however reduce our investments in R&D and new product development, as evidenced by the introduction of our ELS 5010 and 6000 series. Nor did we reduce our investment in the expansion of our worldwide support operations. Because we anticipate new orders will begin to climb, we have decided to begin investing in other areas of our business that were deliberately delayed until now. This increased investment will have an impact on our breakeven point as described by Bill earlier, beginning with the 1st quarter of 1999, in two primary an critical areas. First, we increase our worldwide sales and marketing staff to address growing lithography tools supplier's and chipmaker's requirements. With over 600 systems now in production, we have a responsibility as the market leader to both the lithography tool suppliers and the chipmakers to continue to be on the leading edge with respect to understanding and addressing the market requirements, as well as continuously increasing the quality of servicing our installed base. Second, we are also making significant investments in process infrastructure throughout our company worldwide. This effort encompasses process from strategic planning and market-analysis and forecasting, to product creation and change, to capacity planning, and will be a key in enabling our company going forward to deal more efficiently with the DUV market opportunity. We expect this process' focus will also improve our financial performance when the industry recovery accelerates. While we remain cautious about the timing of the recovery, we remain confident in Cymer's role to help enable the industry's commitment to continued geometry shrinks and enhanced productivity. This concludes our report, I would now like to open the session to questions and answers. |
