Transcript of 4Q Conference Call Part 1 - Remarks by Akins & Angus
Bill Angus, Senior Vice President and Chief Financial Officer:
Thank you for joining us for our fourth quarter and year-end conference call. This presentation will contain forward-looking statements that involve risks and uncertainties. Actual results may differ significantly from those indicated in such forward-looking statements. Factors that could cause such differences include those described under risk factors in our forms 10-K and 10-Q regularly filed with the SEC. And now I'd like to turn the presentation over to Bob.
Bob Akins, President and Chief Executive Officer
Thank you Bill, and hello everyone. Thank you for listening in today. I'd like to start with a brief overview of the year, and then following that, Bill will give a detailed discussion. Then we'll attempt to get some insight into 1998, especially in light of the recent economic developments in Asia, which began just after our third quarter conference call.
I'll start with a recap of the financial situation and the business overview. By now, of course, most of you or all of you will have received a copy of our press release. As you can see, by any measure fiscal 1997 was certainly a watershed year for Cymer. We met or exceeded all of our financial projections and expectations, with net income up 300 percent and revenue growth up 213 percent. Additionally we met our top business objectives for 1997, in accordance with our operating plan. And to be more specific in that area, I want to review a couple of key issues. First, we doubled our manufacturing capacity over the course of the year to meet the very strong demand. As a result, we were able to ship 460 lasers in 1997, compared to only 145 in 1996. Secondly, we began developing our global infrastructure to support the chip manufacturers and of course the growing number of chipmakers around the world using our products. This included increasing the number of Cymer offices from 4 at the beginning of the year to 9 at the end of the year. Additionally, we now have people located in 17 locations around the world. We more than tripled the number of people devoted to customer support and service over the course of the year. Third, we made very significant progress on our R&D programs. These include, first, improving the reliability and the overall robustness of our current generation laser systems (we call our 5000 laser systems), second, we also made considerable headway on the development of new Krypton-Fluoride products that are slated for introduction and shipment this year. And additionally we developed the technology for our next-next generation laser, which will use the Argon-Fluoride light source. This led to a shipment for process-development tool lasers to customers in the fourth quarter of 1997. These products will allow Cymer to offer a complete suite of advanced laser models, designed to further strengthen our technical and market leadership position. We believe the company's ability to achieve all of these accomplishments according to plan support our commitment to continued domination of the deep-UV laser market, where we currently hold greater than 80 percent market share. Now I'd like to turn things over to Bill for detailed financial review.
Bill Angus:
Before jumping into the earnings recap, I'd like to mention that on January 28, yesterday, our Board of Directors authorized the repurchase of up to 50 million dollars of the company's common stock. We believe this new program is further evidence of our strong belief in the intrinsic value of Cymer stock, which represents an attractive value at its current price, and is an excellent investment to make at this time. Now, for our fourth quarter, our revenues total 59 Million dollars. Our cost of product sales was 35 million 181 thousand dollars. That's 60 percent of revenue, therefore about 40 percent gross margin on those product sales. That's an improvement from where we were in the third quarter of this year. Research and development expenses totaled 7 million 619 thousand - 13 percent of revenues. Selling and marketing expense was 3.6 million, or 6 percent. And G&A was 2.7 million, or 5 percent. Income from operations totaled 9.9 million, or 17 percent of revenues. Net income totaled 7 million 173 thousand, or 12 percent of revenues, or 24 cents per share on 30 million 42 thousand shares outstanding. For the year., revenues totaled 203.6 million dollars, and cost of product sales totaled 123.6 million dollars. R&D was 24.9 million. Sales and marketing almost 12 million, and G&A expenses 5.6 million. Total operating income for the year was 34 million 444 thousand dollars. Our net income for the year was 26 million 58 thousand dollars, and earnings per share were 86 cents on 30 million 267 thousand shares outstanding. A couple of comments here: the margin improvement in the fourth quarter over the third quarter was due not only to the slightly increased revenue, but also the fact that there were no further reserves for our Continuous Improvement Program, or Big Five as we had had to take in previous quarters. That program has been very successful, and all reserves taken heretofore have been adequate and therefore no additional reserves were taken in the fourth quarter. We expect that program to be completely wrapped up in the early part of the first quarter of this year. Additionally, I'd like to point on the balance sheet that at the year end, cash and cash equivalents in short-term investments totaled 132 million 290 thousand. We had long-term investments in addition to that of 51 million dollars. Our backlog at 12/31 totaled 108 million 704 thousand dollars. Our capital spending for the quarter was 11 million 610 thousand dollars, and our total capital spending for the year of 1997 was 42.2 million dollars.
Now, going forward, we will be reporting in terms of revenue rather than system shipments. But to be consistent with the way we have reported so far this year: for the quarter, total laser systems shipped totaled 133 systems, 131 of which were produced in semiconductor photolithography applications. However, as I said, going forward, we will be reporting strictly on a revenue basis. We will have multiple product lines in the future, and an increasing percentage of service and spares revenue. Given this, and the need to limit our competitor's visibility into our business, we will follow the model most of our industry, and report in absolute revenue dollars rather than on units. It will be a better indicator.
Now that you've heard the details of our performance-to-plan, I'd like to delve into one other important initiative. As many of you know, despite the success of fiscal 97, we did not manage our investor programs as successfully as we had hoped. As a result, we left it up to others to interpret the status of our business based on inaccurate information, and - quite frankly - some rather wild speculation. If we learned one thing in our first full year as a public company it's this: don't let the rumor mill run amok. To ensure that this doesn't happen in the future, we are taking the following steps to enhance our investor communication program. Earlier this month we hired the professional firm of MCA to handle our communications. MCA specializes in the semiconductor industry and works with many of the leading equipment suppliers. Leveraging their expertise and resources, we plan to give our investors more visibility into our business through a consistent communications strategy. Now I'll turn things back to Bob for a look into the future.
Bob Akins:
I'd like to begin by focusing in on what's going on here in the near term. Obviously, the whole economic condition in Asia is one not to be taken lightly. It's even more significant given the continued DRAM supply and demand envelope that largely affects the Asian region of the globe. At the recent ISF conference that SEMI hosted in Monterey, California, most experts agreed that these and other economic factors would affect demand levels, slowing capacity purchases and delaying construction of new factories for semiconductor production. Anticipated result was a slowdown in the growth of the overall equipment industry. Although this impact will be lesser on today's most advanced equipment like deep-UV equipment and lasers, it will still have an impact. Like the rest of the industry, these issues cloud our visibility. What is clear is that it will likely have a near-term impact on demand for deep-UV lithography tools that rely on Cymer's advanced laser system. Already, many of the worlds leading lithography suppliers, all of which are Cymer's customers, indicate that earlier forecasts are now under revision. This is due to these changing market conditions, as well as shifts in market share among those suppliers of lithography tools themselves. As a result, we anticipate a reduction in our revenues by 10 to 15 percent in the first quarter compared to fourth quarter levels. We plan to closely monitor the situation going forward, consulting with customers to ensure their inventory levels of lasers are in line with the current demand scenario. In addition to working out the inventory imbalances, this period will allow us to assimilate the more than tenfold growth that was experienced over the last 2 years. We're going to be doing some very interesting things in 1998 as we continue our investment for the future success of Cymer. During this period, we will continue to invest in programs designed to further distance Cymer from the competition. These investments will fall under two primary categories. The first: aggressive R&D and manufacturing programs to develop and deliver higher performance products that will enable higher average sales prices for Cymer while meeting our customers' emerging requirements for new steppers and scanners. Secondly: further expansion of our global infrastructure to support a growing family of products for our worldwide customer base. This includes both the stepper manufacturers and chipmakers that have our deep-UV lasers now in production. Rather than contract our investments in these critical areas, we have elected to continue these investments despite the slowing in orders. In short, we're not going to trade our future for near-term short-term results. As many of you know, historically companies - especially in our industry - that invest during challenging industry conditions further distance themselves from their competitors as time goes by. We believe this will be especially true for Cymer given the potential of R&D programs underway. We believe that the new products we will introduce in 1998 will raise the competitive bar more in a single step than we have ever done before in Cymer's history. These new products will enable the next generation of steppers and scanners, enhancing performance for all key measures, including resolution, manufacturing latitude, dosage control, and wafer throughput. We will be introducing our new 5010 model during the second quarter of this year, and then introducing our new Orion series products in the third quarter of this year. These programs are designed to further our technical and market leadership so we can continue to capitalize on the long-term growth of the deep-UV market. They're also designed to further widen the gap between Cymer and competitors attempting to gain a foothold in this market. We currently expect that the investments needed to fund these critical future-oriented programs throughout the year, coupled with the anticipated revenue decline, will reduce our earnings by 10 to 15 cents per share in the first quarter of 1998. In the longer term, despite the near-term issues, deep-UV is ranked as one of the fastest-growing sectors in the global lithography marketplace. According to the independent market analysis firms, the deep-UV lithography market is currently projected to grow at a compound annual growth rate of approximately 28 percent, at least to the year 2000. As mentioned in previous calls, the adoption of deep-UV lithography by the semiconductor industry and the production rates of stepper manufacturers will determine the rate at which our laser capacity is brought online. Several factors could fuel this expansion and actually control the dynamics of the rollout of this expansion. The first is the production transition to quarter micron that we discussed many times in previous phone calls. This is the entry point for the first generation KrFl 240 nm tools. The second is the pushout of 300-mm technology. Chipmakers may elect to accelerate the transition to smaller design rules - smaller CDs - to achieve economies of scales through die strengths before moving to larger diameter wafers. This is the subject of much discussion at the conference I mentioned earlier, the ISF conference in Monterey, California. Third, yet another wave of growth will be driven by the production implementation of the next generation, 0.18-micron devices. Again, using KrFl based light source tools.
We remain confident that Cymer is uniquely positioned to capitalize on these trends. When you step bak and look at the big picture, we have the market share, we have the installed base, we're the only manufacturer of excimer lasers that has the demonstrated capacity to produce these lasers in volume with the consistency needed to meet this demand. We have a global support structure which is unmatched in our industry, and we are the only manufacturer of excimer lasers that has anything even closely approaching a global support structure designed to meet the need of the advanced chipmakers. And of course, we have the most advanced laser roadmap. We've discussed earlier in 1997 that our advanced roadmap has been so influential as to redirect the roadmaps of each of our customers, and we are now introducing product in 1998 as we execute to that roadmap. More importantly of course, it demonstrates our ability to deliver not only on roadmaps but against the plan to put the company in general in all areas. With that said, I'll now open this discussion up for questions and answers. |
