part 2:
Brett Hodess, Merrill Lynch - Analyst [2]
--------------------
(inaudible). Just quickly on the operating expense line, it looks like R&D is
coming down more in line as you had planned, but the SG&A seems to be looking
back up here a bit. Do you think it's just a one quarter phenomenon, or is that
a structural change you are looking at?
--------------------
Nancy Baker, Cymer - Senior VP and CFO [3]
--------------------
Actually the SG&A is relatively flat. In Q3, it is up because of the facility
and tenant improvement write-off in Q3, but the SG&A is relatively flat to
previous quarters.
--------------------
Brett Hodess, Merrill Lynch - Analyst [4]
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I was thinking more of what we are looking at for the fourth quarter? It seems
like after we take out the onetime charge, it is going back up again.
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Nancy Baker, Cymer - Senior VP and CFO [5]
--------------------
No. It is still somewhere around that $10 million range. It is really not going
up very much. There is nothing really new in that number.
--------------------
Steven Pelayo, Morgan Stanley - Analyst [8]
--------------------
Let me follow-up his question before I get to my question. I think what he was
referring to, excluding that onetime charge, there was roughly about 8.9 million
in SG&A and 12 million in R&D. If you take the middle of the range for your
guidances for R&D and SG&A for the fourth quarter, it looks like they are up
about another 1.5 million on each of those, $3 million or so for the fourth
quarter. Can you give us a better explanation why operating expenses are going
up significantly and actually increasing as a percentage of revenues?
--------------------
Nancy Baker, Cymer - Senior VP and CFO [9]
--------------------
It's actually more. When we actually give you those ranges, it is dependent on
the types of activities that occurred in Q4 and how they impact the Q1 and Q2 of
2004. There really is not any onetime charges or anything like that in the
quarter. What you also have in the Q3 timeframe was also some other onetime
benefits that occurred that were pretty immaterial in the quarter that you don't
have in the Q4 timeframe. But from an activity prospective, there really is not
much of a difference.
--------------------
Steven Pelayo, Morgan Stanley - Analyst [10]
--------------------
Okay. That is fine. My questions are really relative to the bookings linearity
in the quarter. One of your largest customers -- I am surprised the industry
talked about receiving 50 percent of their bookings toward the last couple of
weeks of the quarter. It was a very large bookings (inaudible) holdings here. I
am curious about your own linearity. If you can help us qualify how your
bookings came in? Maybe did any of that spill into this quarter, and have you
started off this quarter on a pretty good base, if you will?
--------------------
Pascal Didier, Cymer - President and COO [11]
--------------------
The linearity of the quarter in the booking was about the same for us as it was
for our direct customers, which was heavily toward the end of the quarter. Also,
because of the cycle time reductions efforts that we have been driving with our
three direct customers, there is almost no time delay between the time they
receive the orders to the time we receive our others.
So a lot of the last week upside that I estimated, I experienced and maybe some
of the other direct customers have experienced also was exactly the same for us.
It is almost as straightforward as if I (inaudible) an order on Monday, we
usually get our orders on Tuesday. So most of this upside that our estimate had
is already loaded into our Q3 booking.
Now if you look at Q4, you can predict the same type of banana curve towards
the end of the quarter. A lot of the chipmakers that I visited over the last
four weeks are going to be very cautious to the last-minute. All the orders are
being placed in Q3 for Q1 deliveries and Q4 deliveries. They have to make some
decisions for the late Q1 '04 and early Q2 '04 deliveries, and they won't make
the decisions until November and December. So at this point in time, we are in
the same position as in Q4 that we were in Q3. We are not expecting a positive
book-to-bill ratio, but they are going to turnout differently, and they will
turnout differently again through the last two to three weeks of the quarter.
--------------------
Nancy Baker, Cymer - Senior VP and CFO [12]
--------------------
Actually, Steve, back to you and the previous question on the SG&A, maybe there
is some confusion. As Pascal pointed out in his prepared remarks, the $1 million
cost for the CSD-1 and 2 facilities starting in Q4 actually shows up on the G&A
line. But outside of that, there is nothing really different from the previous
quarter. So maybe that is where there was some confusion.
--------------------
Steven Pelayo, Morgan Stanley - Analyst [13]
--------------------
Fair enough. And just one quick product question for you. You talked about the
mix, the average ASPs coming down a little bit as you start to see some more KRS
going out the door. Do you still expect over the last year -- you have been
talking about shipping higher XLA units every quarter -- do you still expect XLA
units to grow quarter-over-quarter through the remainder of the year?
--------------------
Robert Akins, Cymer - Chairman and CEO [14]
--------------------
For the time being, that is what we expect.
--------------------
Shakar Pramanick, Prudential Securities - Analyst [16]
--------------------
Two questions if you could. You gave the OEM inventory numbers. If you could
give us a breakdown, what is the ARF and what is KRF? Also, where do you think
that number really bottoms? Do you think it's 196 is the bottom, or it is going
to still go down here, and then I have one more?
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Pascal Didier, Cymer - President and COO [17]
--------------------
The inventory at our end customers, I think, last quarter I was asked the same
question, and it's about 70 percent KRF and 30 percent argon fluoride, and that
has not already changed. Can we go below 196 units? Yes. We could. And the main
reason is as we are getting few orders in krypton fluoride, because it is
(inaudible) an inventory krypton fluoride floater, direct customers could still
be conservative going into Q1 and Q2 2004, especially as both sides now are
starting to get the benefits of a shorter cycle time and leadtime. So, yes, the
inventory could go below 196. Can it go far below that? No. Because if business
really picks up in the first half of 2004 and really in the second half of 2004,
the inventory will have to go back up to probably above the 200 to 220 level.
--------------------
Shakar Pramanick, Prudential Securities - Analyst [18]
--------------------
Okay. To answer Steve's question, you mentioned you also saw a big order bump
in the last weeks of the quarter. But are the trends from there as the cycle
time is now increasing by your OEM customers?
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Pascal Didier, Cymer - President and COO [19]
--------------------
Not really. In fact, it's probably the other way around. It is because the
cycle time has been decreasing between our two companies. One reason why the
cycle time reduction program works is because there is no real time delay
between the time they pick up their orders to the time we got ours from them, so
we can ship inside of a lead time.
The main reason of this banana curve is that the chipmakers tried to make their
decision as late as possible into a quarter knowing that our cycle time for
(inaudible) is between five to six months maximum. They placed an order as late
as possible to our direct customers, so we expect that to continue at least for
the next quarters and probably more likely until Q1 2004. The chipmaker
visibility is not there yet, and so they are being cautious on where there are
these orders.
Also, remember that every quarter, most of the booking is centralized into a
very small number of projects. If you look at last quarter, it was probably
three corporations having about 80 percent of the total booking for the industry
because of the size of the project. This quarter it has been about the same. It
is probably four or five big projects going on that are (inaudible) percent of
the bookings. So unless you're going to see more chipmakers going into an
investment mode, you will more likely have this kind of irregular booking
pattern that will continue for a while.
--------------------
Shakar Pramanick, Prudential Securities - Analyst [20]
--------------------
My last question on the service revenue, it went down Q3 over Q2 as overall the
utilization rates are up as well as I am sure your lead utilization rates are
significantly up. Any rationale?
--------------------
Robert Akins, Cymer - Chairman and CEO [21]
--------------------
It came down from the historically high level that it had achieved, but
remember that we are a company that has usually had our nonsystem's revenue be
in the 20 to 25 percent of total revenue range. So we are experiencing some
extremely high percentages of revenue right now because of the very nature of
our tools in the field, and yet our revenues are really relatively contained
because end demand is still moderate at best. It is down as Nancy had explained
primarily because there were some upgrade revenues on some older 5000 series
products that occurred in Q2 that did not reoccur in Q3. So overall that
installed base is very busy and consuming a lot of spare parts, service,
consumables and products.
--------------------
Cristina Osmena, Needham & Company - Analyst [23]
--------------------
Just a few questions here. I calculate that you shipped about 51 XLA systems so
far. I am just thinking (inaudible) in the prepared comments I think you said
that basically one (inaudible) so far. Is that the correct number, or maybe you
could update us on the number of XLA tools that have been installed? Also, how
does the mix of your revenue shift when these XLA integration designs come down?
Then I have a follow-up question.
--------------------
Robert Akins, Cymer - Chairman and CEO [24]
--------------------
The first part we had the first installation at a DRAM manufacturer in the
second quarter of this year. That has gone well, and as I mentioned in my script
portion, that installation is complete and ready to support first production
with that particular scanner. In Q3, we had an additional six or so
installations, not only at DRAM but also system on a ship and DSP manufacturers.
So there has been a significant pickup in the installation rate Q3 over Q2. We
expect further pickup obviously in the current quarter in that respect.
--------------------
Pascal Didier, Cymer - President and COO [25]
--------------------
Now on your questions about the product shipment shift. As our direct customers
decrease their cycle time for argon fluoride, you have to remember the XLA MOPA
system is not a light source that is going to power single generation of argon
fluoride scanners, but it is a light source that has the capability to generate
the current -- power the current product but also the Next Generation product.
So as our customers, as someone announced this morning, the production of the
new model, the 1250, which is also a MOPA-based productline, what you are going
to see is a shift of our direct customers from one generation of argon fluoride
to the next. As such, there is going to be increased demand for the MOPA system.
So the key decision we had made early on in the year was to not go after that
small niche market of single XLA machines which has a limited number of units.
It was a dead-end type of productline and focus on MOPA. One of the reasons is
the MOPA is part of an architecture, and with the XLA as the first generation
product allow you to power more than one generation or two or three generations.
So the (inaudible) customers are making cycle time reductions, but at the same
time, they are introducing new products that are MOPA required light sources.
Such that the demand is going to be fueled both ways by the increasing of the
market hopefully in 2004, but also at the same time by the MOPA being integrated
in more than just a singular (inaudible) platform with two platforms from each
one of our direct customers.
--------------------
Cristina Osmena, Needham & Company - Analyst [26]
--------------------
Baker: You touched on my follow-up question, Pascal. Now that ASML is shipping
or actually taking orders for the 1250, should we expect ASML's mix as a
percentage of revenues to start coming up again?
--------------------
Pascal Didier, Cymer - President and COO [27]
--------------------
It will by nature. Remember the XML assist on 2002 published numbers is the
market leaders in lithography, so they are holding a larger proportion of the
marketplace, and then being one of the best customers automatically as they
increase their product portfolio dramatically, their shares of Cymer's revenue
becomes larger.
--------------------
Cristina Osmena, Needham & Company - Analyst [28]
--------------------
And the 1250 is entirely MOPA-based? It uses nothing but the XLA; is that
correct?
--------------------
Pascal Didier, Cymer - President and COO [29]
--------------------
It requires the power and the bandwidth that a MOPA-based (inaudible).
--------------------
Patrick Ho, Moors & Cabot - Analyst [31]
--------------------
First, just a financial related question for Nancy. As you return back to
profitability, do you have an estimate what the tax rate might be next year?
--------------------
Nancy Baker, Cymer - Senior VP and CFO [32]
--------------------
Because I don't know exactly what all of 2004 looks like, I cannot give you a
definitive number. But when we look at the portion of Cymer's foreign sales tax
credit and our R&D investment tax credit, we always estimate if you are in a
fairly profitable environment, your tax rate is probably a few percentage points
below your statutory rate. So probably somewhere in the 30 percent range.
--------------------
Patrick Ho, Moors & Cabot - Analyst [33]
--------------------
That is fair enough. I guess this one can be for either Bob or Pascal. Just two
questions. The first is pretty much at a high-level. Can you just characterize
your customers I guess feelings and the level of confidence that this current
demand trend that we are starting to see right now is sustainable? I know you
mentioned that orders will likely -- could come in on the back-end of the
quarter. Is there any indication their confidence is increasing that they may
place it earlier than anticipated?
--------------------
Pascal Didier, Cymer - President and COO [34]
--------------------
I don't think so. I think our direct customers are like the chipmakers and like
we are. We are all very cautious on how we are approaching what could
potentially be the beginning of an upturn. I spent the last four weeks on hold
visiting both our direct customers, as well as chipmakers. For every single
person that you talk to is a lot more optimistic about what the future would
look like, everybody is also fairly cautious, and the chipmakers more than
probably anyone else.
They have time. They believe that their factories utilization is reaching a
point where they are maybe becoming capacity (inaudible) in some areas, but at
the same time, they want to see more (inaudible). They want to see their backlog
increasing before they make their long loss commitments, so I think for the
foreseeable future what we are going to see is big projects coming into maturity
maturity and being realized more timely than we saw in 2002, but none of us are
expecting the broad large increase in business activities until there are a lot
more firmer models.
--------------------
Robert Akins, Cymer - Chairman and CEO [35]
--------------------
It is our understanding that a few of the world's largest chipmakers, they are
still operating in that cautious mode of the President or the CEO having to
signoff on every single order for a new lithography tool. So even though those
tools they have are very busy and in some cases some (inaudible) would like to
go ahead and invest more heavily in tools, they are still overall concerned
enough about the future pickup of their business and their ability to remain
profitable that they are approaching each new order as an individual order and
have not even gotten into the real batch order mentality yet.
--------------------
Patrick Ho, Moors & Cabot - Analyst [36]
--------------------
A final question. I know, Bob, you touched on it at the beginning of your
presentation about motion lithography. Can you discuss how much that could
affect your R&D dollars in 2004 and whether if it should need to be accelerated
as I guess demand increases or things develop quicker than anticipated? Is that
something that could impact the R&D dollars for Cymer in 2004?
--------------------
Robert Akins, Cymer - Chairman and CEO [37]
--------------------
Certainly if that were to develop in an accelerated way, then that would become
a project that could be potentially funded in 2004, and it will take money and
people to accomplish that. But I want to put it into perspective. We have talked
in the past before that if you look at what it would take to field that tool
version of our XLA productline versus an argon fluoride immersion product,
certainly the argon fluoride is by far the more affordable from a development
standpoint and the fastest and the faster of those two.
Basically we did not know it at the time that we gave birth to the XLA platform
concept. We did not know that argon fluoride immersion was going to catch on as
a concept as significant as it has to date. But the XL platform and the MOPA
technology just naturally lends itself toward accomplishing arbitrarily narrow
bandwidth within reason at arbitrarily high alpha powers within reason. That
could not be better suited than to accomplish both super narrow bandwidth high
power for the high NA dry argon fluoride systems, which we know are coming; they
are already coming as evidenced by Pascal early by ASML's 1250 announcement
earlier today, as well as the immersion tools which we expect will require
bandwidth even narrower, potentially significantly narrower, than the superhigh
NA dry systems as well. So it is a relatively straightforward tweaking of the
optics in the system to produce the narrower bandwidth in a relatively
straightforward modification to the metrology in the laser to make sure that we
can measu
re and accurately stabilize that narrower bandwidth.
--------------------
John Pitzer, Credit Suisse First Boston - Analyst [39]
--------------------
When you look at the revenue guidance going into the December quarter, can you
help differentiate between system and nonsystem revenue, or is about the same
for both areas? Then I have some follow-up questions.
--------------------------------------------------------------------------------
Nancy Baker, Cymer - Senior VP and CFO [40]
--------------------
Basically right now, John, if you looked at what our Q3 run-rate has been, what
it was in Q2, if the utilization rates continue like they have been, I would
expect it to be at still relatively high levels. So expect the nonsystems to
grow in line with the guidance for overall revenue?
--------------------
Nancy Baker, Cymer - Senior VP and CFO [41]
--------------------------------------------------------------------------------
Well, yes. That is fair.
--------------------
John Pitzer, Credit Suisse First Boston - Analyst [42]
--------------------
Pascal, an earlier question, you talked about order rates in the calendar
fourth quarter with your expectation currently that book-to-bill is under 1.
Does that imply flattish bookings quarter on quarter, or are you actually
looking for bookings to come down? I know it is a little bit early and
visibility is not that great.
--------------------
Pascal Didier, Cymer - President and COO [43]
--------------------
With the current visibility, I would expect it to come down, not to be flat.
--------------------
John Pitzer, Credit Suisse First Boston - Analyst [44]
--------------------
When you think about ASP trends over the next several quarters, given how rich
the mix is toward the XLA 100, Nancy, as we model out next year, what would you
expect ASPs to do?
--------------------
Nancy Baker, Cymer - Senior VP and CFO [45]
--------------------
Well, as we have actually talked about for several quarters now, is our 2004
annual ASP we expected to be somewhere in the mid 900s because you expected
krypton fluoride to take on a larger role than it has in 2003 timeframe. So
right now I still would expect that.
--------------------
John Pitzer, Credit Suisse First Boston - Analyst [46]
--------------------
Nancy, on the breakeven, if you take the midpoint of your guidance for Q4,
you're not quite there. Is the goal to be at least there in Q1, and it sounds
like the move from 65 to 70 down to 60 is mainly a gross margin move. Is that
correct?
--------------------
Nancy Baker, Cymer - Senior VP and CFO [47]
--------------------
That is a portion of it, and some is also in the overall R&D spending area. If
you are familiar with our financial models and over the past few years, we have
been over that model in the R&D spending area, primarily because of the XLA
platform. We made significant improvement in the Q3 timeframe and will continue
to work that over the next couple of quarters as well. But the rest of it is
really in the gross margin area.
--------------------
John Pitzer, Credit Suisse First Boston - Analyst [48]
--------------------
So Q4 R&D goes up a bit, but you expect Q1 to trend back down on a dollar
basis?
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Nancy Baker, Cymer - Senior VP and CFO [49]
--------------------
That would be the intent, yes, to get us to that 60 million breakeven.
--------------------
John Pitzer, Credit Suisse First Boston - Analyst [50]
--------------------
Lastly, Pascal, going back to the inventory question and the idea that at some
point we are going to have to see an inventory reload, can you help me
understand what the cycle times are for you guys? What your maximum capacity is
as far as units you can ship within a quarter, and at what point would you
expect the inventories to have to build? I guess from my perspective you are
sitting almost on a year's worth of installed inventory if you're installing
about 50 systems a quarter. I am curious as to why you guys think that is a
low-level, and why it could not go lower here, especially as you bring down
cycle times on the light sources?
--------------------
Pascal Didier, Cymer - President and COO [51]
--------------------
Well, the cycle time that we have today with our customers went down
significantly over 2003. I mean we have now about a three-month cycle time with
our direct customers as a point of diminishing returns for Cymer to reduce its
cycle time because of the (inaudible) cycle time and the way the integration
process needs to get done and a few of the variables.
I think what is also to be noted is our three direct customers their factory
utilization is improving as their ordering intakes and shipments are improving,
but it is way below what you would expect to be if we had an upturn. I do
believe we will never get to the thousand a year anymore. Even if we get to the
500 tools a year at the peak of an upturn, you have to put a number of tooling
(inaudible) on an integration process, and you need at least more than a year --
you need about a year and a half worth of shipment in the current level. So you
had about 200. You will need about 250 to 260 units to sustain a 500 unit
shipment a year. That is why we keep saying that as we see business picking up
and the potential upturn in 2004, we expect inventories to go up.
You also have to remember that three of our direct customers have now a much
broader and richer product portfolio. Each one of them by the end of this year
will be sitting into one or two argon fluoride products, at least three
different TRS products, so there is an efficiency being built because we have a
larger product portfolio than the previous upturn. So that also drives to some
extent the limit of inventory because you have to be able to respond to that
product mix. You factor all that in, and you say, well, if we stay at 50 to 60
units installation a quarter, can the inventory go down further? Yes, it can, as
I said earlier. But if we see the trend going back up in installation rates and
you get to maybe the 70 to 80 units instead of installation rate a quarter, then
inventory would have to go back up to 200 to 220 units, and as such, you would
see another couple of quarters a replenishment of that inventory.
--------------------
John Pitzer, Credit Suisse First Boston - Analyst [52]
--------------------
As a follow-on, one of your larger direct customers instituted an option plan
to some of their larger customers to help reduce their cycle time in delivering
tools to those customers. Does that at all change your view on the potential
inventory cycle ahead for Cymer?
--------------------
Pascal Didier, Cymer - President and COO [53]
--------------------
Yes and remember the direct customer you are talking about is a customer of
ours and in the whole food chain works together. So when they are starting to
work on this, and they are starting to work with us on the same plan. So we are
pretty much in sync with that customer, and that took into account the kind of
ballpark figures I gave you. If I am not taking that into account, then the
numbers would have been a lot bigger than that.
--------------------
Robert Akins, Cymer - Chairman and CEO [54]
--------------------
By the way, John, I wanted to add this as a follow-up to Pascal's answer to you
that when you talk about the inventory at our direct customers being
approximately a year's worth since we are installing on the order of 50 units
per quarter, but, again, I want to reiterate that. Our product shipment mix,
which is heavily technology-oriented and heavily bias toward the XLA, is a time
advanced proxy for what the installation at chipmakers mix of products a quarter
or two downstream from that point in time. So the 50 or so installations that
are occurring are obviously technology-based installations, and as we pointed
out earlier in this Q&A session, something like 70 percent or 3/4 of that 196
inventory at our direct customers is krypton fluoride. So, again, a portion of
that inventory, especially argon fluoride, is a much more rapid turning point of
inventory. |
