Transcript Part II
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Timothy Arcuri: OK, thanks. And then I guess second question would be more for
Ed. Ed, when you talk about trying to procure parts in the OEM business,
are your customers actually helping you procure parts? In other words, you
know, are the big OEM's helping you go into kind of some of these smaller
parts suppliers and either you know finance it for you or help you procure
the parts?
Ed Grady: No. Tim, what we're really doing on the parts side is we're looking
at lower cost suppliers and the logical subassemblies that we can produce
outside, but no, our real focus on the costs side is for materials is our
own self driven cost reduction with materials.
Timothy Arcuri: Great, OK, thanks Ed and I guess lastly, (Michael), if I can ask
you a question, looking at the fab count differently, what's the number of
(fabs) that are currently running silicon? And has the company looked at if
you take you know just what the consensus is saying for demand, what's the
number of (fabs) we need over the next few years? So if you look at what
has been built versus what we need, have you done any work like that?
Michael Pippins: We don't do significant work on the capacity model. We
typically rely on other analysts for doing that, and the majority of the
work we do as we report is just tracking the number of fab projects that
are underway or taking expansions. So the number of (fabs) that are running
at least that some level, it's you know north of 15 at this point. And if
you just look at the significant data, and I think the important thing I
was trying to point out today was that the number of new projects is
incrementally up year over year, and that's not all front-end loaded.
I think maybe one of the things that's out there now is that this is a two
quarter thing and over, and if you look at the quarterly breakout for us,
there's certainly more new fab projects starting the second half then the
first half. And the other thing that I tried to emphasize today is that in
the call a lot of the software projects that were bidding on right now are
actually for the end of '04 and moving into `05. So we don't have the
capacity ramp, but we do significantly track what's going on in terms of
new projects activity.
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Bob Therrien: I think the other thing if you go to the analyst report you'll
see that in terms of capacity utilization in terms of wafer starts I think
was about 11 percent in `03 forecast to go to 14 percent in '04, so we have
a long way to go with 300 mm.
Timothy Arcuri: Thanks guys.
Operator: Thank you, next we'll hear from Stuart Muter, with Adams Harkness &
Hill.
Stuart Muter: Thank you, good morning. A couple of questions. First or
(Michael), you mentioned your bidding on for 300 mm AMHS projects, are they
all new (fabs) or us some expansions?
Michael Pippins: These are all new (fabs). You know the view we have on
expansions is there's a very high probability it goes to the original
supplier. Now when someone builds a fab that's attached, you may get a shot
at it, but all of the four projects were bidding on are new projects. I'll
also note that these are not all first time bad customers, and in calendar
year 2004 you're going to have about five companies build a 300 mm fab for
the first time, but a one fab system is driving interest from companies
that already have 300 mm (fabs) that are looking to build the next fab, and
about half of the activity with 300 mm AMHSs with companies that already
built a fab but are not satisfied with the performance that they're
getting.
Stuart Muter: Could you provide the, you know, rough feel for geography? Are
these all in Asia or some in Europe, some in U.S., some in Asia?
Michael Pippins: There's clearly a spread, clearly a project in Europe, project
in Korea, project in Singapore and a project elsewhere, so you know it's
spread out all over the world right now.
Stuart Muter: OK, and any interest in doing flat-panel AMHS?
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Michael Pippins: Not at this point. We have a pretty solid position on the
software side of that business, and the growth that we see near-term is
actually on the OEM side of the business. We actually had a very good OEM
quarter in flat-panel with our new cluster tool platform. If you look at
the size of the market and the competitiveness there, our assessment is the
margins are even lower in flat-panel AMHS than they are in wafer AMHS, so
the current view we have is you know we're not targeting that business at
least at this time.
Stuart Muter: OK and a quick question for Bob Woodbury. What kind of tax rate we
should be looking at going forward.
Bob Woodbury: Stuart, this year the tax, even go back on reference last year,
last year we spent about $5 billion in taxes, and you know, somewhere in
the 4 to $5 million this year is about the same, and that's principally,
again, the withholding taxes for some foreign jurisdictions. If the company
-- as the industry starts to rant and the company clearly sees its way
through profitability, what will happen is we will reinstate the deferred
tax asset, probably towards the September quarter I would think.
That being the case, what would happen next year is you get a more
effective rate, more normal effective rate being about a 38 percent tax
rate, but I'll caution you as you do your model, what would happen would be
that the tax -- 38 percent tax rate will calculate a tax provision. The tax
-- the cash taxes paid would only be about four to five million until we
earned our way out of the NOL position, which is fairly substantial.
Stuart Muter: OK, thank you.
Operator: Thank you, with Piper Jaffrey, we have Steve O'Rourke.
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Steve O'Rourke: Good morning. A couple of questions just on the orders frontier.
Could you give us an indication of how bookings were trending in January
versus December? And also, what kind of projected growth do you see for OEM
orders going into the March quarter? If you can break that out.
Michael Pippins: Yes, the tracking in the early part of January continued to be
very robust on the OEM side, so we see that as you know continuing steady
order growth and so that's solid. I think the challenge that we see in the
order guidance is clearly in the December quarter we won a few very big
deals on the factory hardware side, and as we mentioned in the prepared
notes, were bidding on a large number of other projects, both for AMHS
systems and factory hardware systems.
And what's really challenging in terms of forecasting is in some cases you
have a feeling whether you're going to win or lose but it's very difficult
to know when the orders actually going to be placed, so I think that gives
us some challenges in projecting guidance, but the situation we're in today
is that OEM momentum continues to be strong and the pipeline for factory
hardware deals and software deals is very robust. The exact timing of those
orders though, it's hard to predict.
Steve O'Rourke: So is it fair to say that the orders guidance of flat to may be
slightly up going into the March quarter is really not a reflection of any
anticipated weakness going forward?
Michael Pippins: No, I think the issue is if you look at our orders being up 50
plus percent last quarter, and you look at kind of the baseline guidance of
flat, it's we're not counting on any of these big deals coming, and you
know with three or four of these things in the pipe line and you think
about the size being 10 to $25 million each, they are very binary, as Bob
said in his notes, so we kind of see OEM continuing to be strong and the
exact timing of the lumps to be difficult to projects, so we did not take
those into the guidance.
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Steve O'Rourke: Fair enough, and one other question, just on - Bob, you made a
couple of comments on product cost reductions to help the second half of
'04. Can you give us some idea of quantification of that? I mean how should
that affect in the gross margin line maybe?
Bob Woodbury: You know, from a volume standpoint, I think of said before 45 to
50 will drop through.
Steve O'Rourke: OK.
Bob Woodbury: Maybe a good target -- you know, before I commit to it, I'd like
to see a little more traction. We clearly have plans in place, but I don't
want to throw out in it until we really see traction, but could you get you
know half a percent a quarter as you know, maybe a point to a point in a
half increase. You know, the last two quarters, something in that range I
think.
Steve O'Rourke: Fair enough, thank you.
Operator: Thank you. Next we'll hear from John Pitzer with CS First Boston.
John Pitzer: Yes, good morning guys. Congratulations. A couple of questions
here. Did you mention the split between the 200 mm and 300 mm in the
quarter?
Michael Pippins: John, the 300 mm business was about 43 percent of revenues and
about 65 percent of orders, so you know I think what we experienced when
this thing terms on in late November, a whole lot of that activity was 300
mm based, so that's why there's such a big gap between the orders and
revenue, and as we report revenue, certainly this quarter and in the
future, you'll see the 300 mm revenue go above 200.
John Pitzer: And then (Michael), if you look at the OEM business, what percent
is systems today versus just components?
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Michael Pippins: We really saw a major shift. I think if you look at the revenue
line it's still close to 50-50 for the December quarter, but we really had
as I commented in the notes, a very aggressive growth on the systems side
and I think what's triggering that is, you know, some of these big guys
actually buying systems from us and some of the big guys converting from
modules to systems, and so when we report revenue next quarter, you'll see
systems start to be a substantially larger percentage of the OEM business,
and you know as I said, I think we like that trend for lots of reasons.
More revenue and more product differentiation as compared to other
companies.
And in particular, Japanese companies that want to come in and dump modules
on the market at a low price, I think the transition to systems gives us a
great deal of security and competitive advantage compared to some of these
threats.
John Pitzer: Do you think you get to 50 percent of the units in systems by some
time in the first half of this year calendar year?
Michael Pippins: When you say units, I guess the complication is if you consider
a unit a robot or a load port or something else. Remember, one system may
have three load ports, one (aligner), one or two robots, so as measured by
units, you still have a lot of unit volume on the modules side, but in
terms of system count, that number is going to be way, way up in the
dollars are going to be more.
John Pitzer: And then on the AMHS side, when you look at the two orders you
received in December quarter for 300 mm, are these multi phased orders? And
when we expect to see follow-on? And then staying on AMHS, can you talk a
little bit about the profitability of that business? Is that breakeven?
When you expect it to be breakeven? And as that revenue sort of phases its
way into top line, what's the implications for overall blending gross
margins?
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Michael Pippins: Well, I'll talk about the (fabs) and then I'll let Bob
comments on the margin, but if you look at these, all 300 mm (fabs) are
multi phased. The new one will start out with the original plan was a
small pilot line and the first order actually came in with a small
pilot line in the first production phase. And there will be at least
one, if not to more production orders added onto this that we did not
book. Our philosophy is even if you get a very large commitment, we're
only booking what is shippable at the time, so you won't see us booking
$40 million orders spread out over three years, you'll see us look what
is shippable within 12 months. The second order that we got was just an
extension of a 300 mm (fabs), but it did have one fab component in its,
so it's serving to give us multiple reference sites in the marketplace.
John Pitzer: And then Bob, maybe just a breakeven in that business, and do
you ...
Bob Woodbury: Yes, it's -- the business today is still losing money,
principally because revenue is at a very low level. You know, we just have
one a couple of orders here, so from a revenue side, there's insignificant
dollars going out the door with infrastructures to support it. If you look
at when we introduced one fab, the targeted margins have been in the mid 30
percent range for those products when we start assembling them and putting
them into customers sites. And you know, I think as we've alluded to in the
past, we believe we can sell the product at that gross margin and still
displace competition because we think we have, you know, probably the most
intelligent AMHS system in the market today. And from a dollar -- customer
standpoint, he can pay just about the same price and get a better solution,
and we can actually turn into a profitable business.
John Pitzer: And Bob, I guess the question is if you look at the much guidance
for profitability, is it assumed that AMHS will still be losing money so
there's more leverage as that is this goes from a loss to breakeven?
Bob Woodbury: Yes, absolutely. There's virtually no AMHS revenue baked into the
much quarter.
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John Pitzer: And then lastly, just a follow-up I think to Steve's question, and
then I'll pass the baton, but if you look at -- I know you guys don't break
down orders by product group, but directionally speaking (Michael), you
just talked about Q1. It sounds like OEM orders are up, everything is up,
except AMHS, which you guys are in the conservative guidance giving sort of
a down guidance, is that the way to look at it?
Michael Pippins: Yes, just because the timing of these projects is it's really
hard to predict, so for example, let's say someone is going to do a 200 mm
expansion and it's a fab that we did, so we're very confident we're going
to win the order. The question is are you going to actually get it in March
or is it April. And so therefore we just have not baked these big AMHS
projects in there. Software orders will be up and to some extent that will
fill some of the (sludge) that factory hardware drove in the December
quarter.
John Pitzer: So I guess ex the factory hardware, is the rest of the business up
10 to 15 percent sequentially in the March quarter?
Michael Pippins: Well, certainly on the OEM side that's a reasonable number.
John Pitzer: OK, thanks guys.
Operator: Thank you, and from J.P. Morgan we will hear from (Joanne Lisowski).
Jay Deanna: Actually, it's Jay Deanna from J.P. Morgan. Congratulations on
continuing to execute to your business model reengineering strategy. A
couple of questions here. First of all, regarding OEM outsourcing are you
continuing to see evidence the that's happening? In particular, I'm curious
to know if you're making any more progress on getting vacuum robots
designed into new product is that potentially new customers -- Applied et
cetera. And then also, besides (LAN) other
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any other tier one customers that could potentially transition from buying
atmosphere components to buying (efemps) from you.
Michael Pippins: Yes, to comment on the vacuum robots activity we have been
successful in getting at least one vacuum robots, if not more into the
pipeline a very large equipment maker that used to be completely vertically
integrated. And again, to some extent you know we really were able to go
into this account after the acquisition of PRI who had a reasonable
footprint, and there's no question that when the product groups evaluate
the performance of our robotics they're not only more reliable but they're
significantly faster and so I think as time goes on you'll see a start to
get more and more meaningful design in wins with our vacuum robots, and you
know, that will mean that basically every equipment company in the world is
using our products, but it takes a while for that to go through the design
process and actually turn into revenue.
From a system perspective, we're already based on last quarter orders
booking systems with four tier 1 OEMs and this is not turned into
substantial revenue yet, but we'll all over the next few quarters. And
we're in negotiations with approximately three others in terms of
additional outsourcing of systems business and I think the way this works
is we are going to do extremely well in this quarter, ramping very
aggressively the systems business, and that will create a very significant
reference for us with multiple OEMs. And then as you have success, you
know, it takes some of the pressure off of these companies because when you
decide to outsource systems you have to be sure that your supplier can
ramp, and I think if we do that for these three or four companies, this
quarter, next quarter is going to serve us strong references for other
people. So the momentum is definitely there, and you know I think we're
very proud of our Ops group of what they've done in keeping up with this
ramp.
Jay Deanna: Just a follow-up on that, with the large customer that used to
primarily do vacuum in-house, are you guys in the running for any plasma
based tools from a vacuum robots perspective there?
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Michael Pippins: Yes, we are in the running for plasma based tools.
Jay Deanna: OK. Thank you.
Operator: Thank you, and next we'll hear from Jim Covello at Goldman Sachs.
Jim Covello: Good morning, thanks very much. Good morning, thanks very much. A
quick question. Cash flow from operations for the next several quarters, it
was slightly negative this quarter in part because of the interest payment.
Could you give us some guidance on that both quantitative and qualitative
be on that for the next couple of quarters?
Bob Woodbury: Yes, probably slightly negative in this current quarter because
of the ramp with working capital principally. When we look at our model
going out for the year, cash flow for this fiscal year we're targeting to
be virtually nil, breakeven. So as the business exits the year with an
increase in working capital and with the expense of you know the
restructuring the cash cost of restructuring, we think we'll actually be at
a breakeven.
Jim Covello: And that's for the full fiscal year 2004?
Bob Woodbury: Right. So you're starting out with what's called a negative 10,
the slightly negative this quarter and then it will start to pick up the
back half of the year.
Jim Covello: OK. On the gross margins for the ST Micro business, could you
remind us what the negative driver is there again and how concerned you may
be about those issues coming up and other projects that you negotiate going
forward?
Bob Woodbury: It's actually the accounting. What happens is the expenses --
that contract has a good amount of expenses related to it; travel expenses,
housing expenses for people on the contract.
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The way the accounting rules were -- and that's $3 million. The way the --
in the old days, the accounting used to be you'd have expense and you'd
have payment by the customer for that, so it would be effectively negative
expense. The new rules declare you put that into revenue and cost of sales.
So there's $3 million within the revenue that will be recognized on that
contract that has zero margin because it's just straight reimbursement of
cost.
Jim Covello: And I mean is that a phenomenon we're going to see in projects you
know going forward?
Michael Pippins: Jim, let me answer that one quickly. There are a couple of
outstanding projects that you will continue to see some of that, but in the
restructuring of the software solution delivery group we have restructured
how we're going to quote project, and taking into account the accounting
rules and it's changing the dynamics of how we quote projects on the
future, so our expectation is with new projects going up under the new
model we will take care of this problem.
Jim Covello: Terrific, that's helpful. Final housekeeping question, can I get
some she can guidance for March and then beyond?
Bob Woodbury: For the March quarter, about 44 5 for the quarter. And may be can
tick it up maybe 200,000 shares per quarter for the next couple of
quarters.
Jim Covello: Terrific, thanks so much.
Operator: Thank you, and next we'll hear from Mark Fitzgerald at Bank of America
securities.
Mark Fitzgerald: A couple of questions; can you give us the backlog for the
December quarter and the September quarter?
Bob Woodbury: Sure, it's 157 at the end of December and it was 113.
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