Cymer Q1 1998 Conference Call, Part 1, Opening Statements
Bill Angus, Senior VP and CFO of Cymer: Thank you Chris. Hello everyone. Thank you for joining us this afternoon. As you know statements in these conference call regarding the effects of Cymer's new products, on its competition, new product introduction schedules, market conditions and revenue, spending and earning projections are forward looking statements based on current expectations and involve a number of risks and uncertainties. Actual results may differ materially 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. Now I'd like to introduce Bob Akins, our president.
Akins: Hello everyone and thank you again for joining us today. I'd like to start with a brief operational review of the quarter. Following that, Bill will give a detailed financial report. And finally, we'll attempt to give some updated insight into the remainder of the year in light of the continuing economic problems in Asia and Japan. Bill and I have both spent some time over there in the past two weeks, and as a result feel that we have a pretty solid handle on the short-term impacts for Cymer. In addition, Pascal Didier [sp?], our Senior VP of worldwide customer operations, has been busy in Europe at SEMICON Europa as well as visiting Asia, assessing the current market conditions and their potential impact on Cymer. I'm assuming that you've already received a copy of the first quarter press release and have seen the first quarter financial results, in line with what we were anticipating. On the operational side, let me remind everyone that at our last conference call, we said that we are going to continue our investments in the following three categories, despite challenging industry conditions. First, we're going to continue with aggressive technology and product development to 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, we're going to continue to enhance the infrastructure to support a growing family or suite of products for our worldwide customer base. And third, we said that 1998 was the year during which is critical for Cymer to focus on process - everything from corporate-level process to manufacturing process control. This serves as a foundation for the company going forward. With respect to the first category of technology and product development, we are on schedule with execution of what we see as a smart, aggressive plan to continue to invest in new product development and continued improvement in order to remain the leader for KrFl light sources. We believe that the new products that we are introducing in 1998 will raise the competitive bar more in a single step than we have ever done in Cymer's history. I'm proud to report today that we began first shipment of our new product, the ELS-5010 excimer laser for advanced DUV stepper and scanner photolithography applications, in March, one month ahead of schedule. The 5010 is expected to play a vital role in leading the SIA roadmap while providing a more-sophisticated laser illumination source, enabling the manufacture of devices with design rules below the quarter-micron threshold. The 5010 has been designed for a highly-productive, reliable and lower-cost of operation, with the potential to enable chipmakers to achieve both higher resolution, while maintaining reasonable depth of focus and improved yields. In the first quarter, we also received bookings for additional 5010s for shipment starting in the second quarter. We continued to spend aggressively on research and new product development, not only for the 5010, but also for our next-generation laser, the Orion. I'm also pleased to report that we are on track to ship the Orion in the third quarter. We expect the Orion, which produces twice the power of the 5000 and the 5010, to redefine what constitutes the competitive, leading-edge excimer laser lithography light source. By combining twice the average power with further refinements in bandwidth, pulse energy stability, and additional cost-of-operations savings, the Orion is expected to effectively enable scanners to increase wafer throughput by approximately 15%. In other words, enabling six lithography tools to do the work of seven. Both the 5010 and the Orion are designed to further widen the gap between Cymer and competitors' attempting to gain a foothold in this market. Moving on to the second category of steadily enhancing our worldwide infrastructure, we've made some significant progress. This quarter, for example, we've signed a lease on a new facility in Japan, roughly doubling our office space and increasing our presence among our direct customers as well as chipmakers in Japan. This facility will house enhanced training, as well as improve logistics and technical support capabilities over the course of the year. In addition, we continue to improve the expertise of our field-service engineers to provide enhanced field support to our customers. We are taking advantage of our managed excess manufacturing capacity strategy by rotating our field-service engineers into manufacturing final-test, both here in San Diego and at our manufacturing partner, Seiko, in Japan. This highly concentrated, hands-on experience with the lasers is an extremely effective way to improve their level of expertise and thus enhance Cymer's worldwide support capabilities. The final category is improving processes throughout Cymer, capable of seeing the company through the next phase of our growth. I am most pleased to announce that our new Vice President of Process Quality reports to work at Cymer next week. He brings with him 17 years of semiconductor industry experience, 9 years of which focused on quality and corporate process. Reporting directly to me, he will build on the efforts already launched at Cymer, focusing first on facilitating improvements in the process families of market forecasting, product creation and change, and capacity planning. We probably won't see the true benefits of these efforts until 1999. But of course, that is precisely when we anticipate we will need them. At this time, Bill, why don't you review the first quarter financial results.
Angus: Thank you Bob. For the first quarter, revenues totaled 49.7 million, compared to 59.1 million in the fourth quarter of 1997. Cost of product sales was 30.6 million. Therefore the gross margin on those product sales was 38.3%. This compares with a gross margin in the fourth quarter of 1997 of 40%. The decline in revenues on a sequential basis was as expected, given the market conditions. The margin decrease was primarily caused by these reduced sales, which impacted capacity utilization of our plant. R&D totaled 7.8 million, or 16% of revenue in this quarter. On an absolute dollar basis, this was a 3% increase from the prior quarter. This planned increase was related to development expenses for the 5010 and the Orion, as part of our continuing strategy to move aggressively forward to develop and introduce new products. Selling and marketing expense was 3.9 million, or 8% of revenue, a 6% increase in absolute terms from the previous quarter. As planned, we are expanding our global sales organization and marketing infrastructure to support a multiple-suite of products and multiple end-user factories. We continue to focus on the need for growing customer support as we begin to provide direct support to chipmakers and as our worldwide base of installed lasers grows. G&A was 2.5 million, or approximately 5% of total revenues. This is right about where we expected it to be. Income from operations totaled 4.9 million, or 10% of revenues, with net income totaling 2.7 million, 9 cents per share, diluted, on 30,496,000 shares outstanding. Our tax rate for the quarter was 30%, and we expect this to be the rate for the whole year. Looking at the balance sheet, cash, cash equivalents, and short-term investments were 98 million on March 31, 1998., with additional long-term investments of 69 million. Backlog at March 31 totaled 90.9 million. This is down from the prior quarter end for a few reasons. First, the continued DRAM supply/demand imbalance in the industry, coupled with financial conditions in Japan and Asia, has caused some of our customers to have excess inventory, and we have been working with them to try and bring these levels down. Secondly, while pricing negotiations on the 5010 are going as planned, they all have not been settled. Therefore, customers are holding off on orders until the final agreements are reached. Lastly, customers have told us they are more comfortable with our ability to fill orders and therefore are reducing their advanced bookings. Given what's been going on in the industry, it's not surprising that the revenue split between our customers has shifted. For the quarter, ASML accounted for 34% of our sales, Nikon 28%, Canon 27%, and SVG 8% of our revenue. Capital spending and depreciation were 5.7 Million and 3.4 million for the quarter, respectively. Finally, it is our understanding that this particular day is the most crowded in our industry for reporting earnings. In an effort to more effectively communicate with our shareholders and analysts, we are planning on moving our earnings release and conference call to early in the fourth week of the month following the close of the quarter, starting next quarter. Bob?
Akins: In the near term, we expect the current DRAM supply imbalance and the Asian and Japanese economic conditions to continue. In addition, while recently we've seen some softness in the North American market. Clearly we will be impacted by current market conditions in the short term, and expect to continue to see relatively flat revenues for the next few quarters. On the competitive front, I'm sure many of you have seen the recent releases from our competitors. This is certainly not entirely unexpected. In this day and age, it is unreasonable to expect that any sole supplier to an industry will remain unchallenged. And at Cymer, we always take competition very seriously. That being said, let's look at Cymer's position. Two and a half years ago, our competition says their introduction of lasers comparable to our 5000-series laser was imminent. In fact, when we introduced the 5000-series in Q1 1996, we expected that the 5000 would provide Cymer with about 18 months lead on our competitors. If the recent announcements by competitors prove to be accurate, the 5000 will have provided up to a full 30-month lead. For two years while they were busy trying to qualify their 5000-equivalent lasers, we went through the rigor of a ramp-up of full-scale production. And we continue to be the only manufacturer of excimer lasers that has the demonstrated capacity and capability to produce these lasers in volume and with the consistency needed to meet demand. We put in place a worldwide support organization designed to support not only our lithography tool customers, but also chipmakers directly. We introduced the 5010, and we are now poised to bring online a completely new generation of product, the Orion. As we continue to introduce superior performance products and services, we continue build on our leadership position in our industry. Therefore, we will continue our aggressive levels of spending on research and product development, and associated sales and marketing. Our primary R&D focus will be on delivering the Orion, support new tool development in Q3, and in delivering production volumes in early 1999. In addition, we will continue aggressive advanced research for new product development with next-wavelength-generation ArFl lasers. In the short term, relatively flat revenues, coupled with this purposeful increased spending, and new product introductions, are expected to lower our earnings for the next few quarters. With turnaround inevitable, we want to be poised to seize the opportunity with maximum competitiveness. In the longer term, we see continued expansion of DUV lithography as it experiences preferential adoption in production. It is currently estimate that only a small fraction of the wafer layers produced today utilize 0.25 micron critical dimensions. DUV lithography is subsequently grow at a compound annual growth rate of approximately 28%, at least to the year 2000 or 2001. In addition, recent signs point to a delay in adoption of 300mm wafer sizes. In order to achieve the required economies of scale, chipmakers are focusing more interest on sub-0.25 micron capabilities. As for the specific future of KrFl-based DUV, recent advances suggest that its practical lifespan continues to increase. Cymer's KrFl laser was recently used in the achievement of 0.10 micron critical dimensions that was jointly announced last week by Sematech, Photronics, National Semiconductor, and MicroUnity. With billions to be invested in [`that' or `fast'] process, being able to attain ever-smaller critical dimensions with the KrFl process further entrenches its use as the light source of choice for DUV lithography. Concerning extendibility of ArFl, Cymer's next-generation ArFl laser was the DUV illumination source used to achieve the 0.08 micron critical dimensions as reported in the last few months as reported by the University of Texas at Austin. And the industry is now speculating that DUV will probably go even further. This completes our prepared statement. I would now like to open this session for questions and answers. |
