Cymer Q4 1999 Conference Call transcript, part 3 of 3 Q&A
Q&A
Jay Deahna, Morgan Stanley Dean Witter: Good afternoon, nice quarter. Bill, I think you said that the WIP [work in progress] at the stepper manufacturing level in the 3rd quarter was in the two-fifty range, or something like that. Did you said that it was flat or something like that in the 4th quarter?
Angus: We didn't say specifically yet, so it's a good question. But in essence it was, it was around two-fortyfive, two-fifty.
Deahna: Ok, so flat with a ramp building in the lithography industry, so to speak, so does that say that they were getting a little more efficient with their new products?
Angus: I'll let Pascal comment on that.
Didier: Yeah, it's basically what it says. If you look at our direct customers, they have done significant improvement on their integration phases at 248 nm. And so it allows them to keep a lower level of inventory, and yet producing more steppers and scanners than they used to.
Deahna: And Pascal, or Bill, do you expect your service and spares - essentially your non-systems revenues - to increase sequentially each quarter this year?
Angus: Uhhh. Ohhhhhh. [Sigh] That's uh, ummm ...potentially, Jay. Potentially.
Deahna: Ok. And the last question is, Bill did you say the tax rate is 30% for 2000?
Angus: Yes it is. That's a revision from previous guidance based on more-extensive tax work by our tax department and our tax accountants.
Deahna: Is that sustainable into '01?
Angus: We think now that we're getting more history under our belt, and seeing the patterns, barring a major change in localities of where we make our actual revenue sales, we feel that we can maintain a tax rate that's in the low 30s.
Nicolai Tschenko (ph), AB&Amro (ph): Two questions, one is short; another is a little bit more complicated. The short one: what is the current manufacturing capacity of Cymer? Given the current product mix, do you have to increase your manufacturing capacity in order to meet demand? And the second question is a little bit more complicated. It's about manageability of [unintelligible. perhaps 'inventories'] of your customers. What can you do and what actually you are doing in order to not repeat the situation with 5000 series laser?
Angus: Let me address the capacity issue first, Nick. Obviously now we're dealing with a much more complicated capacity model than we had been previously, because we have multiple models that are in production now. Currently - and I will also say that we are taking steps in fact to, within the facilities that we currently have [to] further expand our production capabilities and bringing a few more test bays online. That being said, at the moment we feel we have and annual capacity, together with our manufacturing partner Seiko in Japan, of roughly around 580-600 units a year.
Tschenko: This is assuming the current product mix?
Angus: That's correct. And the current test time.
Didier: This is Pascal to cover your second question. I think the answer is in two-fold. One is as both us and our direct customers are now a little more mature on the DUV cycle, we have ongoing programs to not only share long-term forecasts but also short-term forecasts with our customers. And we have, by contract, established a number of milestones on a quarterly basis when it comes down to managing, booking shipments, and so on. On the other side, from a technical standpoint, we have now what we call 'site operations' [unintelligible. possibly 'boarding'] at every [one] of our direct customers, in Japan, in Europe, in the United States. And what we're doing with those site operations is really trying to continue to help our customers increase their efficiency of integration. We have, to give you an example, the average installation of one of our light sources at the integrators is now down to about a day. So in a day we can put the light source up on [unintelligible], get it qualified, and we have on-site technical support as well as 24-hours response time, with our headquarters here in the U.S., so if we have any downtime at any integrator, we are able to get quick response and quick turnaround on engineering fixes.
Sheriff (ph) Balderman (ph), Adams, Harkness, and Hill: Where do you see the margins headed n the next two to three quarters? I have a couple of questions, but that's my first question. And secondly, the percentage of ASML .. ASML as a percentage of your sales has been falling, at least that's my perception, over the past two to three quarters. Is it because of competitive factors, or are there any other issues at stake here?
Angus: The thing you have to remember, we report our sales to our customers cumulatively, so that was a year-to-date estimate, or not estimate, it was a year to date figure. In other words, for the whole year, ASML constituted 33% of our revenue. And I don't know how ... Pascal, do you want to comment? I think it's been fairly steady, as far as the percentage, hasn't it?
Didier: In reality, our market share of ASML hasn't changed since the beginning of the year. It's been absolutely at the same exact [unintelligible]. And there is no real competitive pressure at that specific customer at this point in time.
Angus: Was that an answer to your question, or were you concerned about ASML ... were you concerned about competitors of ours at ASML?
Bladerman: Yeah. I mean, but you don't think there's any issue there, right?
Angus, Didier: No.
Balderman. Ok. And also, could you please give a feel for where you can see the margins headed in the next few quarters.
Angus: Yeah, like what I said, I think putting aside the spares inventory write-off that we took here in Q4, we are at about the 40% gross margin level now. And I think you're going to see that trend up slowly here in the first half of the year, and then we'll see what the second half of the year holds as far as volumes are concerned.
Balderman: Is the 48%, is it a realistic target over the next 3 quarters? 3-4 quarters?
Angus: That's purely a volume-related issue, along with the effectiveness of our process development. So by the end of the year, if volumes were to be sufficiently high enough, and if we are successful in executing our process development and getting our new ERP system online, then it might be possible to hit 48%.
Balderman: Ok. And the last question is, the ASPs [average sales prices] ... it's a steep climb from the last quarter, it went from 480 to 528, can it go down or up? Or ...... based on the mix and the [unintelligible]?
Angus: Well, the absolute raw ASP could go either way. And that's why I called your attention to the 28 thousand dollars of the ASP of 528 that is purely attributable to foreign exchange gains. Setting that aside, you had an ASP of 500 thousand. And so I think you will see the trend continue up from that level.
Brett Hodess, Bank of America Securities: A quick followup on the ASP question, and congratulations on a quarter by the way. So the 28 thousand dollar one-time foreign exchange, you said in the prepared remarks, Bill, that a little bit of that went through to gross margin, but most of it didn't. Is that how that worked?
Angus: Yeah, cuz what happens, Brett, since we're not playing margins ...[corrects himself] uh uh or foreign exchange, that's not part of our business. We hedge our contracts, and at the moment, in Japan, since we hedge roughly 90% of our selling price, because that's what Cymer Japan remits back to the U.S. when they buy the laser from us, then in turn sell it to Canon or Nikon. So, 10% of it is not hedged, and therefore flows through to Cymer Japan, but then guess what happened Cymer Japan's expenses? It went up in a like amount as well. So ... but you've got a natural hedge on the expense side, so in the end results, that part just isn't going to play a big role in profitability.
Hodess: So should we, for modeling purposes, use something around 500 thousand for revenue projections and ...
Angus: Absolutely. That's what we do, and I've never been surprised doing that on that score yet.
Hodess: And a second question. Back to the installs in the quarter. The 207 installs in Japan now. I think last quarter you said that cumulative it was only 107. And so that seems like you had a huge ...
Angus: No, no. That can't be right, Brett. Cuz we only installed 89 systems worldwide in this last quarter. So there may be a disconnect there somewhere, or a misunderstanding.
Didier: Last quarter, installation in Japan was 197.
Hodess: 197. I'm sorry. Thanks. And then, final question. Relative to the rate of installs, with 89 installs this quarter. You mentioned what your capacity was for shipments. What kind of ... when you're talking about the customer base now, what kind of rate of installs are you looking for in the next few quarters? Growing at the same kind of rate you saw this quarter, or accelerating from that level?
Didier: I think it's going to be really regional. Because if you take Taiwan and Korea, I think we're going to continue to an acceleration. And at least we can see that all the way to the first half of the year. I think in Japan, it's going to be pretty much flat. There is no real key decisions that we made in Japan to continue to increase capital spending. And independent of the fact that Nikon Corporation's end of fiscal year ends up in Q1, you'll see a little surge in their shipments, I don' think there is any semiconductor-driven expansion of the install base. I think Europe is going to be pretty steady. The question mark is really in the U.S. It's really going to depend on the absorption of some of the DUV installs that took place this quarter, and some that are scheduled next quarter at most of the logic houses. So we can see also some uptick from the U.S. perspective. But if you cumulate all of that and look at a worldwide picture, there will be an increase in installations in Q1 and Q2 of r2000. And that's usually the kind of visibility we have. As part of managing these inventories, part of managing the flow of the product, we usually get a 6-month visibility from our direct customers from an installation perspective.
Hodess: And the final question. As the installs go up, this quarter you said about 21% of the business was direct to OEMs [original equipment manufacturers]. So I assume as the install rate goes up, the percentage of business direct to OEMs trends along with that?
Didier: Yeah. There is a natural growth that is driven by the gross of the install base and the gross utilizations. But now you also have to remember that to some extent we are offsetting that by continuous improvement on the lifetime of our module, as part of our driver for us to get the OEE performance up. So there is a compensation that takes place there. But as we said earlier on in the conference call, it's always going to be around between 25 to 30 percent of our revenue. In the short term we have a target of 20 to 25%.
Mark Fitzgerald, Merrill Lynch: I'm curious on the guidance that you talked about for revenue in the 35 to 45 percent year over year. Is that what you are going to do, or capable of doing in terms of manufacturing? The growth rate.
Angus: Yeah, I understand your question, Mark. I think the answer to that is both.
Fitzgerald: Ok. Have you guys changed your forecast for the units for the DUV lithography market for this year, 2000? And has it bumped up here from the last quarter?
Didier: No, it hasn't. With the kind of visibility we have so far, we haven't revised our forecast up, or down for that matter. I know there is a lot of discussions about what the second half of the year 2000 looks like, and we're watching closely, but we've haven't revised our forecast yet.
Fitzgerald: So you're still in kind of the, what is it, 550 to 600 range?
Didier: Yes. Yes.
Fitzgerald: And I'm just curious. When you talk about winning 80% of the installations, or getting 80% of the installed installation in the quarter, when we look at some of these other announcements, like Coherent and stuff, are some of those systems not getting installed in production at this point? Or not being counted in your numbers, or are you taking that into consideration?
Angus: Mark, first of all you're going to have to be specific as to exactly what statistic they're putting out that you're trying to compare against us.
Fitzgerald: Well, it's just the revenue statistic for the quarter. They claimed shipments of about 13 million and we had calculated that ...
Angus: Remember, shipments or revenue don't have anything to do with our installs.
Fitzgerald: Right, that's what I'm trying to understa ...
Angus (talking over him): Our installs are all after the revenue recognition event.
Fitzgerald: That's ... when you ... How do you define install, I guess is what I'm ...
Angus: At chipmakers. And first you have to ship to the lithography tool manufacturer.
Fitzgerald: Ok.
Angus: And we recognize the revenue, and I'm sure Lambda does too, when they ship to ASML, etc. When we both ship to ASML, we recognize that revenue. And then about three or four months later, it ends up as an install at a chipmaker. So you always ... I know it's a very tough thing, and it's confusing to a lot of people, but you always have that delay factor between revenue and then installs for the light source supplier.
Akins: And Mark, another issue to be aware of is the reason we focus so strictly on the difference between shipment to our direct customers, integrators, and the subsequent install at chipmakers is that it's a mistake to assume that any laser shipped to a manufacturer of steppers or scanners is going to automatically make its way through to the chipmaker. And indeed, that's not the case. There's not necessarily a one-to-one correspondence between what our competitors ship out of their factory and what ends up at the chipmaker. You know a large part of our strategy to continue to obsolete our products at a speed faster than anyone else can. If we're successful with that strategy going forward as we have been in the past, then lasers in inventory can become less valuable over time as the technology moves away from them.
Fitzgerald: Ok, that's the point I was trying to get at. Some of these competitive systems could be in fact ending up in R&DUV applications at an OEM, as opposed to ending up in a chip factory, or ...
Didier, Akins: That's correct.
Fitzgerald: Ok. And just last question here. What are you guys quoting for lead times at this point? What kind of visibility are you getting from the lithography manufacturers?
Didier: We're getting about six months visibility. And we're quoting four months lead time. And the reason we are quoting lead times lower than visibility is in order for us to manage any potential double-booking that could happen between our direct customers. Because especially in some of those emerging new fabs that you've seen announced in Malyasia and so on, the competition between our direct customers is still very well open. And as part of our managing the inventory at our direct customers, we try to get a lead-time which is under their visibility.
Fitzgerald: Ok. And could you also give some hint, some indication of how in places like Korea and Taiwan market share is holding up relative to Komatsu?
Didier: I can tell you two things. One is Korea and Taiwan are above our average cumulative worldwide market share, so we are above the 94%.
Fitzgerald: Ok. Is there any risk as some of the Japanese companies move outside of Japan in terms of using foundry, that lithography technology migrates with them here? Have you seen any trends in that direction?
Didier: Well interestingly enough, the only time you saw those trends was when Japanese manufacturers were trying to move their DRAM manufacturing outside of Japan. But as they are moving other type of devices, specifically logic devices, ASICs and DSPs, the foundries and especially people like TSMC (?) are developing their own process technology. And in fact what we've seen, specifically in Taiwan with the merger of TSMC with WSMC(?) and Asher(?) we see the exact reverse of that, where WSMC through their venture with Toshiba had a number of our competitors, Japanese competitors, licensed to install, we now have reverse situations. With our position at TSMC and the performance that we deliver to them, we have taken that back away from them. So, the only cases really we see the heat of the competition from that standpoint is only in DRAM manufacturing. And even then, specifically because the Taiwanese as well as Chartered in Singapore as the preeminence in the foundry business, they want to get the highest uptime and availability of equipment. And the demonstrated performance of Cymer with a greater than 70% OEE is a key factor of their decision to stay with us, and basically overrule or override transfer decisions.
Fitzgerald: Ok. Thank you. Congratulations.
Tommy Erk (sp), Lehman Brothers. Some lithography system manufacturers have talked about potential capacity constraints due to the lack of parts availability. If you had to, how quickly could you ramp the current capacity and at what cost? Also, if you could provide some insight as to some of the other key components that may be in short supply , if you have that information available.
Angus: I don't know that we ... Based on what we know now, Tommy, we don't have any issues on the supply side. But that could change rapidly, because of the technology and our need to move it forward. But at the moment , I think we're comfortable there. Our normal planning process is to respond on a ... I believe - Pascal, jump in if I've misstated this - on a six-month notice to increase capacity by about approximately 20%.
Didier: Yeah. Yeah. I mean, in fact it's 120 days visibility for a 20% increase of capacity. And what we've done is we've lined up our manufacturing capacity increase with the quotes on lead-time that we give to our customers. Since we're working an a four-month floating average, that allows us to give our manufacturing folks enough visibility to continue to ramp at the 20% rate.
Akins: And on the critical elements or components side of things: although I mentioned in our prepared comment the fact that calcium fluoride is not a production-proven material as yet, we do use calcium fluoride more and more in the optics of our lasers. Because of the relatively small size of the optics that we use, we don't see any constraints to date on that as well.
Erk: Fair enough. So in essence you could ramp capacity by 20% on an annual run rate if you needed to in the second half at this point?
Akins, Didier: Yes
Erk: Also, just as an aside. Can you tell us what the number of 5005 upgrade kits that you've sold cumulatively?
Angus: I think we've said we've booked orders for 70 of those to date, is that right?
Didier: Yes, 70 orders to date.
Angus: They haven't all been taken to revenue yet, but we've booked 70 orders for upgrade kits.
Dede Evachire (ph), Preferred Capital Markets: Hi guys. I was wondering if you could break out the gross margin between new units versus upgrades and spares?
Angus: We don't do that as a matter of public disclosure.
Evachire: So, in trying to model it going it forward, as the upgrades decline as a percentage of revenues, then how do we model that?
Angus: I've said in the past that the gross margin on spares and systems at the moment has been about on a par.
Evachire: And I assume then also that you won't break out 248 versus 193 unit shipments in the quarter?
Angus: No.
Evachire: Or whether any of the 193 ... were the 193s 2-KHz?
Angus: They were negligible as far as a revenue standpoint is concerned.
Evachire:Ok. And I'm also trying to understand when you said that you're the only one in the industry with the 1-KHz 157. That's contradictory to Lambda Physic's statement in December that they shipped 5 units that were 1-KHz. Can you help me understand what the difference is?
Didier: Sure. The significant difference is what is a light source for lithography, versus what could be a laser for enabling material testing or any of the core material development that needs to take place for 157. I mean, as we said at the last portion of our conference call today is, our purpose is to really go after what are the specifications for the lithography business. And they are significantly different than just a few laser-based equipment. And that is what we really meant by that. The equipment that we will ship this quarter to Ultratech stepper meets not only the beam requirements, but also a lot of other requirements that are necessary to make it a production-worthy tool into the semiconductor industry. And I think that's what makes the difference between our equipment and what could have shipped early on from our competitors.
Evachire:So you're saying that their shipments weren't for DUV lithography?
Didier: They were for DUV lithography, but for more on a material-testing side of the business. So it is not required some of the things like energy monitoring, which is a critical component of a light source for lithography to control dosage, for example. I think that what Lambda Physic has done so far is leveraging their experience in other applications of 157, and [have] customized a few of those machines for requirements of material testing, for the requirements of photo resist testing, for example, and that kind of an applications. But not for printing devices.
Evachire: Since they said they shipped to the consortium that included ASML, then you saying Ultratech that they had ASML at the 157 wavelength?
Didier: Uh, yep.
Evachire: Huh! Ok, thanks guys.
Alex Rosensweig (ph), Equitec: Congratulations for the quarter. Question on the manufacturing ramp, once again. When you built the facility, I think the target number of units from that facility was something like 800 to a thousand. Is that correct?
Angus: Yeah. We had talked back in 1997 and early 98 that we felt that between ourselves and Seiko in Japan that we had a capacity for building a thousand units a year. That was based on building the 5000-series by itself, nothing else, along with the attendant spare parts. Life's a lot more complicated now, because while we change models fairly rapidly now, going from the 5000 to 5010, now the 6000, and with future models coming this year, that has an impact on capacity, as well as the fact that you still have to make all the spares for all the older systems that are still in use at the chipmakers. So the production capacity model becomes much more complex. And also with the frequent model rolls now, our ability to get average test times down is not what it was when we were only doing the one unit, the 5000 several years ago. So all those factors weighing in, that's why we're saying today we estimate our capacity in the 580-600 range.
Rosensweig: And where I'm heading with the question obviously is, capital expenditures, say a year or two from now, if you indeed keep up this 35-45% growth rate, you ... it seems like you would be bumping into the capacity of the existing facility within two years. Do we have to look at additional facilities and capacity expansion at that point, or can you ramp up additional shipments?
Angus: We already have a building under construction right behind our two main buildings to solidify our campus here in San Diego. I will also say that at that point our current plan is to divorce ourselves of another building that is remote here in San Diego. But the overall square footage will be increased somewhat as a result of the current building plans underway. But I think as was noted, our cash reserves and available capital are more than adequate to handle that. Obviously depreciation would be a factor, but I think there's nothing that's going to distort in any way our future financial performance due to any planned or understood expansion at this point.
Rosensweig: Great, that's what I was hoping to hear. Thank you.
Akins: Let me just add to Bill's answer that we mentioned in our prepared comments that the foundation that we've established by virtue of putting in place a manufacturing capability for the 5000 series in1997 is key us moving forward with the ability to manufacture a more diverse set of products in the required volumes. I think all of you are aware and have been tracking comments or claims made by competitors about their manufacturing capacity. At the same time, building these lasers in quantity is no easy job technically. And part of the foundation that we've laid over time, in addition to building equipment and so on so forth, is the technology - establishment of the manufacturing technology to build these lasers in quantity, and in inherent design capability of designing light sources that lend themselves to manufacturing. And we've built on this as we go into the year 2000 as well. |
