Cymer Q3 1999 Conference Call Transcript, Part 1 - Akins' and Angus' remarks
[Standard intro and caveats given by Bill Angus, Chief Financial Officer. He is joined by Bob Akins, President, and Pascal Didier, Senior VP of Worldwide Customer Operations]
Akins: Thank you Bill. Good afternoon everyone. I would like to briefly reflect on the rapidly changing state of the industry and how accelerating demand for advanced chips is, in turn, accelerating the demand for Cymer's most advanced light source solutions and services. Over the past several quarters, we have been carefully tracking the strengthening of the semiconductor industry, but all the while maintaining a cautiously optimistic attitude. After all, with the most recent downturn there has been significant and sustained under-investment in both production facilities and equipment worldwide. While increasing orders reported by a variety of tool manufacturers, including Cymer, over the past 2-3 quarters has been encouraging, we had seen few announcements of the most telling precursors to a true industry recovery - factory retooling and new factory construction. Now, here at the end of the third quarter, we are pleased to see a recent series of such factory announcements over the past few months. From our lithographic viewpoint, the recovery process began in the first and second quarters of this year, when we saw the utilization of our installed base of light sources significantly increase. Further evidenced by our corresponding increase in our sales volume of consumable parts and service. Light source utilization increased from a low of 20-25 percent this time last year to now nearly 100 percent utilization in many factories, as demand for sub-quarter-micron patterning has surged. In the most recent quarter, chip demand has begun to exceed supply, with reports of shortages emerging in many areas of DRAMs, SRAMs, flash, and DSPs, to name a few, and a clear lack of capacity at 0.18 micron and below. We have recently witnessed announcements of new or increased 0.18 and 0.15 micron factory capacity buys from a variety of chipmakers, including Samsung, TSMC, NEC, and several others. Not surprisingly, this in turn is driving strong demand for our most advanced light source products. In our opinion, this marks the first time that chipmakers have seriously ramped the utilization of their new and existing deep-UV Lithography lithography tools, and everyone is learning something new in the process. We at Cymer are learning that our light sources prefer to be run hard. By that, I mean with the production utilization of our light sources now near maximum, and as a benefit of our installation of upgrade kits and expanded field service capability, we are pleased to see product uptimes continue to rise, well in excess of 99 percent. And as a result, cost of operations continues to fall, now approaching $16,000 per billion pulses. In fact, key laser modules are performing to specification longer than expected in this aggressive production environment, and we have begun increasing our expected module lifetimes and warranties, and sharing these benefits with our customers.
Moving now to the activities of our third quarter, I will assume that you have all seen a copy of our financial results, and had a little time to review them. As you can see, our financial performance continued to improve, reflecting the growing transition to our leading-edge light sources. Revenues and bookings grew strongly and sequentially, and the bottom-line results were better than anticipated, due in part to higher sales volume as well as product mix. I would like to report on operational activities for the quarter, beginning with our order rate and new product acceptance. And then I will discuss the progress that we've made in the areas of technology and product development, manufacturing, and worldwide customer support activities. Bookings for the quarter were at $80.6M, and backlog increased to $81.7M as of September 30, compared to backlog of $59M for Q2, and $50 for Q1. Revenues continued a three quarter sequential rise, primarily driven by the shipments of our ELS 5010 model, which represented 60 percent of new systems, and our ELS-6000, which represented 20 percent of system shipments. As a result, only 20 percent of our systems business was comprised of something other than our two most recent model offerings. Our order rate for the 6000 increased significantly during the third quarter, driven largely by chipmaker and systems on 2 KHz KrFl light sources. In much the same way that our 5010 quickly became the laser of choice for enabling DUV steppers to achieve high resolution, and first-generation scanners to achieve more accurate dosage control, Cymer's 6000 is now gaining wide acceptance for use with advanced scanners. This new model offers compelling higher performance and increased productivity, while providing the lowest cost of operation to date. New orders for the ELS-6000 are ahead of our own schedule, and we continue to anticipate increased shipments of the 6000s in Q4, and ramping to higher volumes in the year 2000.
The number of our lasers installed at chipmakers declined to 79 in the third quarter, as compared to 98 in the second quarter. We believe this in now way reflects a decrease in demand for our tools, but rather is a result of our normal irregularity inherent in installs. The Taiwan earthquake also directly delayed the installation of 6 units that we expect will now be installed in Q4 instead. As an aside, other than recalibration due to the jostling of our equipment, there were no substantive issues to report with our light sources as a result of the quake. And I believe that it is very important to note that our people in Taiwan were very responsive to our Taiwanese customers situation. With no factory assistance, our organization there was able to get 75 percent of the light sources back to meeting customer requirements within one week, and 100 percent of the systems within 10 days.
On a cumulative basis, this translates to a total of 816 Cymer laser light sources at chipmakers at the end of September. These are located as follows: in the U.S. 246, in Europe 92, in Japan 197, in Korea 135, in Taiwan 116, and in Singapore 30. This distribution reflects the ongoing strength of demand, especially in the U.S. and Korea, and the rapidly growing installed base in Taiwan as a direct result of the increasingly successful foundry model. We estimate that the laser inventory at our direct customers is now about 245 systems. It is about where it should be, given our customer's integration times, as well as the 1- and 2-KHz product mix of scanners and steppers, and of course anticipated industry demand for DUV tools over the near term. As we detailed in our last two conference calls, we continue to drive our advanced light source development program spanning four wavelengths. The first of these wavelengths, Krypton Fluoride Lithography , continues to have momentum that looks likely to carry it through the 0.13 micron node, at least for the vast majority of chipmakers. And the long-anticipated transition to Argon-Fluoride Lithography is now expected to be pushed out to the 0.10 node. Our work on ArFl version product based on our 6000 platform is well underway, and we are convinced that ArFl excimer laser light sources will be robust future production tools, with ongoing challenges being those of reducing optical damage and cost of operation, and increasing pulse repetition rates. This is where we are currently focusing our ArFl development. We are also actively conducting research investigations aimed at understanding the behavior and scalability of F2 lasers, and expect to ship our first F2 lithography light source in the first half of next year. At the international workshop on Extreme Ultraviolet Lithography in Monterey two weeks ago, hosted by International Sematech and ASET , we presented our most recent developments in our ongoing dense-plasma focused 13.5 nm soft X-ray source, and received much attention from the advanced-lithography community, best described by our director of EUV lithography, Dr. Bill Partlow, as "now viewing our source technology as a viable solution path." As our research continues, we are progressively more enthusiastic about the potential for our EUV source to power lithography tools in the post-optical era.
In the area of manufacturing, we continue to demonstrate the ability to produce and test a variety of new models and spare parts concurrently. Our primary challenge in the quarters ahead is to successfully ramp the volume production of our ELS-6000, as we anticipate that this new model will comprise greater than 80 percent of our systems revenue by the middle of next year, as our customers insist on 2-KHz 20-watt performance. Given the rapidly growing demand for the 6000, we are applying the experience learned over the similar 5000-to-5010 transition that occurred last year. During the quarter, we also continued to invest in expanding our regional sales, marketing, and service capabilities, including the opening of a European headquarters in Maarssen, The Netherlands. Aimed at increasing the effectiveness of customer service and support, our new facility centralizes those functions, as well as sales, marketing, and administrative activities of our European operations.
As I have continuously stressed, expanding our worldwide service and support capability has been an ongoing focus for Cymer. I take pride in these efforts being in part recognized recently, when we received an Outstanding Equipment Supplier award from NEC Electronics. This award acknowledges excellence in product quality, continuous improvement, and comprehensive support of our lasers in production at NEC Roseville. We view the award from NEC Roseville as indicative of customer satisfaction with our products and services. Over the past year or more, you've heard Bill and I talking about Cymer's focus on basic business process improvement, beginning in 1999 and beyond, and the role that process will play in achieving greater customer satisfaction and improved financial performance. This year, a very significant number of Cymer's senior management in creating, piloting, and launching some of the most Cymer-critical initiatives, such as the idea-to-product process, and the product-to-market process. Our basic precept has been that process designers, once past the design phase, transition to process owners, responsible for managing the business more effectively through process. As we transition to these new ways of doing business, we are also realigning the organizational structure of the company where necessary. In the quarter, such reorganization has been carried out in the departmental areas of R&D, manufacturing, worldwide customer operations, and quality. There have also been changes in management roles, including senior management, with, for example, Scott Scholer (sp?), our Senior Vice President of Operations, transitioning to an advisory role, and Jim Coltrighter (sp?), our Vice President of Manufacturing, and order fulfillment process designer, overseeing day-to-day manufacturing activities. In another example, Pascal Didier, our Senior Vice President of Worldwide Customer Operations, is transitioning to a more strategic marketing role with John Shen, Vice President of Worldwide Customer Operations overseeing the day-to-day operations of that department. I will now turn this report over to Bill for the 3rd quarter financial review.
Angus: Before turning the call back to Bob, I'd like to mention that Marie Burke, our former director of investor relations for the past year and a half, has resigned to pursue other interests, and we wish her well. In Marie's absence, I'd ask you to address any investor questions to me. Bob?
Akins: Thank you Bill. As the recovering industry stimulates increased business opportunity and activity in the DUV lithography tool sector, we have - not surprisingly - seen an intensification of the reported activity among competing excimer light source suppliers. We take our competitors very seriously, track their activities as closely as is possible, and devise our company's future strategies based in part on the competitive landscape as one of many variables. Given that it is easy to be distracted by rumors, claims, and misinformation, I believe that it is important for all of us to keep five facts clearly in perspective. First, competition is not new to Cymer. Our two most active competitors were in this business well before Cymer, and we had to earn our market share using the following three strategies. Technology and product leadership, manufacturing excellence in volume, and a world-class field service organization. Second, demand for second-source critical suppliers is ultimately driven by the semiconductor industry in its ongoing drive to manage risks and costs. Clearly, Cymer's DUV light source business falls into this critical category. Going forward, no level of execution on our part will change the fundamental decision for second sources. However, our execution to the strategies I mentioned will strongly influence the division of business between ourselves and our competitors. As the business expands, so does both Cymer and competitive activity. But the ultimate winner is the supplier who provides not only product leadership, but also world-class service and infrastructure as demonstrated today by our market share. Third, in our pursuit of being the number one light source supplier, we have judged it critical to focus on helping to enable our customer's success and to be accepted by them as the technology leader. We believe we have enabled the DUV success of each of our customers, and are clearly successful in achieving the DUV light source technology leadership position, with the largest number of key excimer technologists in the business, and in the process have achieved high market share. Moving forward, we plan to extend this technology leadership to the chipmakers. We have strengthened our value at the wafer program with the addition of Dr. Nigel Ferrar, formerly of Hewlett Packard Palo Alto Research Labs, who is leading the Cymer applications group to better understand light source key value-adding differentiators to the chipmaker. Additionally, we have a proven track record of successfully obsoleting our own products, as is currently happening again with the introduction of our 6000 product. Cymer has uniquely and successfully ramped both the manufacturing and worldwide support for our new products, setting industry records for ramp rates in the process. Fourth, Cymer has earned an installed base at chipmakers of market share of greater than 90 percent worldwide. That installed base is an extremely valuable asset to us, as we are in a unique position to have learned statistically valid data on how our products are used, and how our products and services perform in the production environment. Having this installed base allows us to build a stronger relationship with the chipmakers, improving both our ability to compete and our business visibility. In the third quarter, 95 percent of all new light sources installed at chipmaker fabs worldwide were Cymer's. Our strategy is to compete on value, not price. As the total market grows, there will be some growth in the price-driven segment that we recognize will go to our competitors. In that sense, we expect to have a controlled loss of market share going forward. For example, we understand the largest domestic DRAM manufacturer will take delivery of some lithography tools with light sources from our German competitor over the course of the next few quarters. On the other hand, we are committed to maintaining our overall leadership position in the industry. And fifth, another key leading indicator of Cymer's market share performance is our rate of delivery to our direct customers, ASML, Canon, Nikon, SVGL, Ultratech, relative to the competition. Bill noted that our year-to-date percentages of systems revenue from Nikon increased from 16 percent to 21 percent last quarter. New orders from Nikon are strongly driven by our new 6000 series, and on a cumulative basis, year-to-date revenue from Nikon increased 120 percent during the past quarter. Additionally, Canon's newly-unveiled KrFl excimer stepper for 0.15 micron application, the EX6, uses Cymer's model 5010 light source. This comes at a time when we are witnessing the most aggressive push by our competition in Japan. Simply stated, our market position going forward depends most critically on how well we continue to manage the execution of our key strategies. This concludes our report. |
