Cymer Q1 1999 Conference Call, Part 2 of 2, Q&A
Q&A session
Steve on behalf of Jay Deanha, Dean Witter: I'm wondering if you could spend a little time discussing the competitive landscape a little bit more. There seems to be a lot of concern about that. You mentioned a little bit maybe there's some issues relative to pricing pressures of competition. Have you lost business based on price, and maybe you can just give us an update on the whole competitive landscape breaking down Komatsu versus Lambda.
Akins: Let me start off with that one, Steve. I think that it's important to note the fact that we've had competitive, we've had competition here at Cymer now for many years. There's nothing new in that respect. We certainly are seeing increased activity by the competition. As I mentioned in the conference call, that activity is moving from issues of performance and productivity and the like now to also include price pressures. And I think that one could say that we're on the verge of the competition creating a price war with these particular products. And that definitely has an impact, it has an impact on some of our customers or that portion of the customers where indeed as we said earlier, the cheapest laser is the most attractive choice for them. Now, with that, I think I might turn this over to Pascal Didier, our Senior Vice President of Worldwide Customer Operations for perhaps a little bit more insight.
Didier: Your have to note also that DUV is moving now to what you would call second- and third-tier accounts in the semiconductor industry, where capital cost above and beyond anything else is the primary concerns when they go on capital equipment spending. For that reason, our competition may have access to a certain part of this kind of business. And that's what I think we've seen over the last couple of months developing is that kind of third-tier account of the semiconductor industry start investing into the quarter-micron technology. And their primary concern today is capital cost. Because as you are well-aware, the semiconductor industry's only on the beginning of the recovery process here. And our value-added base solutions may not be as attractive today for them that they may be in the future in six to nine months from now.
Steve: Can you get a little bit more specific relative to Komatsu vercus Lambda Physic. I'm especially concerned with in Japan in Komatsu's inroads through Nikon and Canon.
Didier: In Japan right now, it really illustrates my point as you have a corporation like Sony Corporation really focusing on developing quarter-micron technologies for consumer product. The Komatsu solution which is the cheapest light source than the Cymer light source today is more attractive to them. And in that case, what they end up doing is splitting the business between a more advanced value-based solution and a much cheaper cost too. And their ration today of steppers and scanners is in favor of the stepper, not the scanners, where you look at companies like NEC, for example, many DRAM suppliers in Japan as well as in Korea and advanced foundry in Taiwan, they are pushing for their scanner development, which in favor of our technology.
Steve: And my last question just relative to the inventory in the channel, I think you've been concerned about that in the past. We've talked about possibly 250-300 lasers out there. Do you have an estimate for that now?
Angus: Yeah. It went up I think maybe about ten percent this quarter, Steve. But when we looked at an analysis of where it was growing the most, it was growing the most in customers where inventory has not per se been a problem. And in fact, we're viewing that as a positioning for them expanding their business.
Robert Mayer, DLJ: A couple of questions. Nikon had a substantial amount of inventory in the last call, and there was some question as to upgrading those tools that were out in the field. Could you tell us where you are with that and what issues have been raised and where we are in that?
Angus: Nikon has not requested us to upgrade any of their lasers that are in inventory, Robert. And in fact, I believe that their actual inventory of our lasers went down slightly during the quarter.
Mayer: OK. So basically they're using lasers as-is?
Angus: Yes.
Mayer: Uh-huh. And about … can you give us any idea as to what percent of the lasers that are out in the field are at Nikon?
Angus: Uh ….
Mayer: Or I should say at Nikon or as the old style.
Angus: I have to be a little careful here because we are basic … I think the majority of the lasers now, if I remember my numbers correctly, are moving over to the 5010s. Because we actually … the 5010s haven't per se, they're just now starting to get into the chipmakers. And most of the vast majority of the installs through this point in time have been all 5000s. So the 5010 inventory has in fact been building at the integrators and the 5000 inventory has been bleeding off.
Akins: Furthermore, Robert, as I mentioned as part of the prepared comments, the 5005 as an upgrade kit, and its efficacy have been qualified by our direct customers. Expect to see us actually installing some of those 5005 kits at chipmakers in the second quarter, and it becoming more of a material issue from a revenue standpoint in the third quarter of this year.
Mayer: Realizing you don't have perfect visibility because you're selling to stepper manufacturers, what would your best guess be in terms of the end users that were buying steppers in the first quarter, by geography or by product type, DRAM versus processor versus U.S. versus Asia. Can you give us any sense of any changes there?
Angus: Yeah. In the first quarter, for us, the installs were almost evenly divided between the U.S. and Japan, with a few more elsewhere. I know that wasn't what you were expecting to hear, was it?
Mayer: Can you give us an idea why?
Angus: I think maybe it's the Japanese starting to get back in the game here a little bit, the Japanese chipmakers. Pascal, maybe you have an insight about that you could share?
Didier: The other thing you have to remember is also timing between bookings and installations. And recently, over the last ninety days, we've heard a lot about bookings picking up in Taiwan and Korea. And you're going to start seeing those installation toward the second half of the year, where what is installed today in the United States and Japan have been driving bookings in Q4 of 1998. So you always have the lag of about six to nine months between the bookings trend going from Asia to the United States, or the United States to Japan and the actual installations of lasers in the field.
Mayer: What would you say the current lag or lead time is from your shipping a laser to its being installed at a customer site?
Angus: Well that depends on the integrator. Some of them are still at six months. Others are down to sixty to ninety days.
Nikolai Tishenko (ph), AB and Amerault: Three short questions. First, the sales and market expenses that they were [sounds like SHAYpud] from the first quarter to the second, there will be increase in sales expenses? Is that correct?
Angus: That is correct.
[Silence]
Angus: Nick? Hello?
Akins: Did we lose him?
Mark Fitzgerald, Merrill Lynch: I just wanted to follow up. With bookings up so strong in the quarter, can you give us some sense when that's going to be shippable and booked as revenues?
Angus: We are already getting orders for the third quarter. And so we see things definitely starting to strengthen in the second half of the year.
Fitzgerald: Is it possible by the September quarter we'll be in, above fifty milion in terms of shipments? Is that what we can take from a backlog in bookings quarter here that's as strong as it is?
Angus: That is a possibility, Mark.
Fitzgerald: Ok. And I'm just curious on the decline in units here. Is spares and service going to just as a significant percentage next quarter?
Angus: Yeah, it will. But the five to ten percent reduction isn't that many units. And remember we're going to be booking and realizing revenue from the first of our upgrade kits for the 5005 upgrade in the field during Q2.
Fitzgerald: The ASPs, are we looking at 100K on that upgrade?
Angus: When you add in the upgrade kit itself and the associated additional spares that will go with it, yeah it'll most likely be in excess of that.
Fitzgerald: Ok. And on the, uh you said your shipments this quarter, the 5010 was sixty-five percent of the shipments? Are we to assume that the ELS6000 makes up the balance of that?
Angus: No, no. We had a lot of 5000s still. Carry-overs from the past. If they were 6000s the ASPs would have been a lot higher.
Akins: Let me just reiterate that 6000 being a new platform and going on a next-generation lithography tool, is currently going through the beta and integration phase on those new tools, and that's a longer lead time. Don't expect the 6000 series to start comprising a more-significant portion of our quarterly revenues until sometime perhaps late this year or the first part of 2000.
Fitzgerald: Ok. And the 5000, is that only used in the step-and-repeat tools, it's not used in scanners, is that what I could assume from your comments?
Angus: Basically. Basically, yes.
Fitzgerald: Ok. So the 5000 you expect to fall off here pretty quickly considering, if you talk to ASM and some of these other scanning tool manufacturers, they expect this to become a significant portion of the shipments by the fourth quarter here.
Akins: Yes. Remember that in our last quarterly conference call we remarked that the faster-than-anticipated catching-on of the 5010 and its sales is going to be putting an end to the 5000 series earlier than anticipated.
Fitzgerald: So, from a pricing pressure, I mean, when you look at the competitors out there, on your suggensting you're better positioned for the scanning systems with the 5010 … does that mean that … maybe you're being a little bit too conservative here on some of your market share assumptions?
Akins: Remember that some of our customers have already publicly released that they expect their scanner business to comprise more than seventy percent of their total revenues for the current fiscal years. So certainly the transition to scanners is a robust one, and it definitely plays to the fact that you need a higher-performance, higher-value-added light source to make those scanner really perform properly. So, it certainly plays to our strength and to our strategy. But I think that we've tried to accurately capture our strategy and our expectations as possible in this conference call.
Fitzgerald: And just one final question here. In looking at this whole strategy of investing in global infrastructure here to differentiate yourself from your competitors as you go forward. Number one, how do you get paid for that, and number two, is there any way to measure if in fact people value that relative to the two other competitors who really don't have that infrastructure?
Didier: The way we are getting paid for it is off of the last two quarters we had a significant increase in our service contract revenues and are continuing to see some bright future there. From a return on investment for our customers, to give you a very simple example: About a year and a half ago, in order to sustain a fab at eighty percent production, people had to order spares from me with a fourteen to twenty-five week lead time. And had to build a significant inventory in their local fabs to sustain their production. Today, by putting a worldwide logistic infrastructure, I am able to ship spares in less than six weeks. Which means I am reducing their local inventory in significant ways. And that is one example of the value added [untelligible] that you put in front of our customers. And as you very well know, fab capacity is now … in fact utilization is increasing over the last two quarters. And allowing chipmakers to have a reduced inventory, which is a reduced capital cost spending, is a very attractive proposal for them so far.
Fitzgerald: And just one final question here. Is there any reason in looking at the Japanese market that they may not see the same transition to scanning technology with the same aggressive adoption to scanning technology as the rest of the world?
Didier: No, I don't think so. In order for the DRAMs Japanese suppliers to stay competitive as well as for the advanced ASIC Japanese suppliers to stay competitive in the marketplace, they will have to follow the same train on scanners versus steppers investment. They don't really have a choice there.
Bret Hodess, NationsBank Montgomery Securities: Question on technology, Bob. You commented on the EUV development, and you're going after EUV in a little bit different way than some of the folks that are just looking at using high-power lasers and whatnot. Can you comment a little bit about that technology, what you expect to gain from that and maybe what the risks might be in taking a little bit different path than some of the other folks?
Akins: Certainly. The techniques that have been most discussed to date include the idea of one or a bank of high-power lasers, all focusing their outputs down onto different types of targets, such as frozen Xenon targets, or gas-jet targets made of Xenon. And then to in a very inefficient way convert the laser light into broadband EUV radiation, which then must be filtered to select the required output. Or, taking what are more commonly called constrained-discharge, or Z-pinch technologies to dump very significant amounts of energy into the gas in a constrained discharge in Xenon, and again generate broadband emission that has been filtered selectively to get the required radiation. Also very inefficient in its use of electrical power. At Cymer, if there's one thing we've learned about manufacturing -worthy lithography light sources, it's that efficiency is a key to manufacturing ruggedness and reliability. We've taken our solid-state pulsed power module technology that we've matured in our lasers and applied it to this new concept of dense plasma focus, where we heat a gas, which is rich with lithium, and directly convert the stored electrical energy in our system into the narrow-band 13.5 nm radiation optimal for EUV. Our efficiencies are a couple of orders of magnitude higher than the other discharge techniques. And we believe that that increased efficiency, together with the high pulse repetition rate of that technology offers it a very promising future as a candidate for use in EUV.
Hodess: Any development risks that you look at that, relative to when you think folks will be ready to start taking development units?
Akins: Absolutely yes. We have to stress the fact that this technology is certainly in its infancy in development. We have been very open with that. However, given the level of immaturity of the technology to date, we are certainly encouraged by the performance that we've achieved to date. Yes, the technology has received very high levels of interest in the industry. We got more attention than we had anticipated getting at that SPIE conference. And we're currently trying to deal with how we manage that level of attention here at Cymer, and how we would go forward. Properly developed, this certainly could have an impact on the direction that next generation of lithography could move in the ongoing competition between Scalpel and EUV. I want to emphasis again that part of our ace up our sleeve, if you will, in the manufacturing worthiness of our technology, we believe, is the fact that it leverages off our existing strengths in solid-state pulse-power technology, without which this kind of technique would not be a production reality, could not be a production reality.
Hodess: And one final question. Just to go back to your answer relative to the price pressures, you're specifically saying that where you're seeing the price pressures, where the customers are selling the lower-end steppers, basically, steppers that might be used still at .25 or whatnot, but not the more advanced .18 micron and below systems. Is that correct?
Dedier: That is correct, Bret. That is where we see most of the price pressure happening at this point in time.
Leonard Sanders, Needham and Company: Could you go over a little bit more of your service business and talk about why service was down and the effect of that on gross margins. I thought service business was actually lower margin.
Angus: Ok, Lenny, uh … uh boy. I'm going to have to think about that, Len, and talk to you after this conference call.
Sanders: Ok, let me ask a different question then. On employees, could you go over number of employees and what your targets are and where in your sales and marketing infrastructure they're going to be added?
Angus: Yeah, uh ok, uh are you asking about more than just sales and marketing, I take it?
Sanders: Right.
Angus: We were at 715 employees in total at the end of March. And by the end of uh … right now our current plans say that we are going to increase that by about ten percent by the end of Q2 here, as we position ourselves for the expected recovery. And then potentially another ten percent increase after that in Q3 and Q4. The additions in the area of sales and marketing specifically are in the account management area, and to deal with our direct customers and the chipmakers.
Sanders: And where have you been successful in adding and where are you still needing additional employees?
Didier: We have been extremely successful in [long gap in the recording. Not sure if there was any lost info or not] Asia and Southeast Asia, we still have ongoing effort in Europe, the United States and Japan.
Nikolai Tishenko (ph), AB and Amerault: I was disconnected. One question was about gross margin, but you didn't answer it, so I'll call directly. The second - would you have a tax benefit for the second quarter?
Angus: The effective tax rate right now for the year is twenty-five percent, so if there's a loss in Q2 there will be a tax benefit commensurate with that.
[silence]
Angus: Nick, are you there?
Tishenko: [crackle] Yes! Hello!
Angus: did you hear my answer, Nick?
[silence]
Angus: Hello, Nick?
Moderator: Mr. Tishenko, did you have any further questions for the speaker today?
Tishenko: Yes, I do. Hi, something is going [blank] the line, I'm sorry. Could you please highlight your financial as of the day after you announced last quarter the investments into the infrastructure?
Marie Burke: Could you repeat the question, Nick?
Tishenko: Yeah, sure. I'm just asking to highlight your financial model after last quarter announcements into the infrastructure. The customer and service infrastructure.
Angus: Nick, why don't you give us a call after the conference call. I'm not sure I'm understanding your question, and I think we'd better deal with it then.
Tishenko: Sure.
Sheesh Kishmore (ph), Credit Research and Trading: Just a couple of quick questions, one balance sheet, one a little bit more strategy related. Your accounts receivable and specifically DSOs have increased over the last couple of quarters. I was wondering if you could provide a little color on that. And the second question with regard to your strategy of partnering with the end user the chip manufacturer to kind of create a kind of pull-type demand, if you can just provide a little bit of color on how that is progressing, thanks.
Angus: Yeah, the DSOs are basically affected by when the sales hit relative to the quarter. We are, when you average, when you do an aging of our accounts receivable outstanding, we see no actual growth in that, but basically you've got a hocky stick you're dealing with here in the quarter.
Kishmore: and with regards to just the strategy of partnering with the chip manufacturer to create pull demand?
Dedier: On the arena we've done some significant progress if you look at our Q1 repair and service revenue, a significant portion of that was from direct purchase orders and bookings directly from the chipmakers. Some of the projections that we had for our Q2 is the 5005 upgrade starting to hit the field is also in direct business with the chipmakers. So our real progress on our pull strategy is really producing on upgrades of the installed base as well as increased service revenue with the chipmakers. And we are making good progress here in Asia and the states. But as I said earlier-on, we are continuing building infrastructure in Japan, continuing building infrastructure in Europe, and as infrastructure gets built, we are going to see more and more positive impact with it.
Mark Fitzgerald, Merrill Lynch: Just two quick questions. Your Nikon business, was that mostly the 5000, 5010, or 6000? And what are you looking for a tax rate in 2000 here?
Angus: 5010 is the answer. And the, uh, 2000 right now, Mark, the only thing I can think is thirty-eight and a half.
Fitzgerald: So there's no benefit from all this overseas investment that's going in?
Angus: Well that's what you're starting to see this year, with the twenty-five percent tax rate.
Angus: Thank you very much for joining us. |
