Cymer Q1 1999 Conference Call, Part 1 of 2
Maria Burke, Director of Investor Relations: [Standard disclaimer stuff given]
Bob Akins, President: Hello. I'd like to extend a warm welcome to everyone to this, our first quarterly conference call of 1999. Before beginning to discuss events of the first quarter of this year, I'll spend a few minutes to share with you some observations concerning the dynamics of the lithography business in 1998, and help put this new year in proper perspective.
The semiconductor business was impacted over the past two years by what we now understand to have been the most severe downturn in the history of the industry. As a result, 1998 was a very difficult year for us here at Cymer, although in fairness to others in the semiconductor business, not as difficult as experienced by many of our peers. This is due primarily to the intrinsic nature of our business being driven by a virtually unstoppable transition to the new generation of DUV lithography. While capital spending slowed in 1998, chipmakers nonetheless continued to demand delivery of advanced DUV tools, albeit at a lower volume than previously expected. This lithographic transition, driven by the accelerating drive by chipmakers to smaller and smaller critical dimensions has resulted in many semiconductor manufacturers actually pushing ahead of Moore's law. And interestingly, the explanation is tied largely to the industry slowdown. While moving down Moore's law has always been a path to reducing costs - principally by yielding more dice per wafer, it has traditionally been viewed primarily as a capability enabler for the earliest fabrication of more advanced chip prototypes. However, the principal driver is now the compelling economic advantages enabled by aggressive geometry shrinks. Advanced DUV processing not only achieves the patterning of more chips per wafer, but also results in higher die yield per wafer. Furthermore, fabs worldwide have found that with increased investment in advanced DUV tools, they can successfully leverage most of their existing factory toolsets to achieve production: First, with minimum tooling within the 0.25 to 0.20 micron generation, and now, with selective retooling, of the 0.18 to 0.15 micron generation. The result has been the adoption by chipmakers of an investment strategy to incorporate progressively more expensive but more capable advanced lithography tools. Said differently, investing in advanced lithography has now become the most viable way for fabs to do business.
Entering 1999, with over 600 Cymer KrFl lasers on DUV steppers and scanners in production use at fabs worldwide, 248 nm lithography is now indeed a production mainstay. Based in no small part on the success of Cymer and our customers in helping to achieve this, leading-edge chip manufacturers have recently embarked on an economically-driven race to further accelerate the reduction of critical feature size, as evidenced by the dramatic pull-ins of the SIA lithography roadmap in the past few months. This has also given rise to increased focus on even shorter-wavelength patterning tools and related light source technologies, including 193 nm, 157 nm, and of course the so-called next generation lithography, or NGL, technologies, which include 13.5 nm EUV. Over the past several years, we have experienced an extremely high market share, but based on our business plans we do not expect to maintain that level of market share going forward. The critical nature of DUV light source supply to the future of semiconductor manufacturing, is well understood by the industry. As a result, there is a requirement by chipmakers for a second source. No actions that Cymer can take will eliminate that requirement. Second-source requirements by the industry are commonly seen in all areas of critical equipment or material supply. Actions that are at least partially under our control can heavily influence the overall split of business between the first and second sources. These actions fall into three major categories. First, technology leadership requires, as you all know very significant and ongoing investments in advanced next-generation techniques, which at Cymer uniquely spans a four-wavelength spectrum, from 248 nm to 13.5 nm. The SIA roadmap acceleration I have just described serves to illustrate why this must be so. Of course, technology leadership also means leading the industry in productivity, uptime, and cost of ownership. Second, investment in volume production capability of these advanced tools is necessary to meet not only the industry's capacity requirements, but also the machine-to-machine consistency expectations of the industry. This encompasses the development of key-supplier capabilities as well as process control and measurement technologies. Third, supporting the tools once they are in production at chipmakers requires an extensively-deployed network of trained field-service engineers, technical support engineers, training specialists, and of course spare-parts logistics. Funding all this takes money, but the result is the ability to meet customer requirements with technology-based, value-added, whole-product solutions that provides with a majority of chipmakers the most compelling business solution. This is the business we want to be in. Our competitors, who have in the past competed with Cymer on parameters of performance, reliability, and productivity, are currently resorting to lowering their prices. And for some portion of the lithography tool manufacturing business, the cheapest laser may be the most attractive choice. Frankly speaking, we don't compete on price, we compete on value. In fact, over the course of the downturn last year, and faced with competition, we brought new product to market of substantially higher demonstratable [sic] value, especially in terms of improved resolution, higher throughput, and lower cost of operation. And then priced products in such a manner as to share that increased value with our customers, resulting in higher ASPs [average sales price] for Cymer. While we are certainly not immune to pricing pressure, especially in volume purchasing situations, we have found that our knowledgeable customers are accepting a price formula that will yield Cymer the appropriate margins for our necessary ongoing investment n R&D, manufacturing, and service, which supports their future product and manufacturing roadmaps. The portion of the market that we desire long-term is that value-driven and more profitable business.
I would now like to shift gears and talk about activity in the first quarter, beginning with our order situation and new-product acceptance, and then moving on to those three competitive fronts of technology leadership, production, and worldwide support and field activity. In the area of orders, with two sequential quarters of increased bookings under our belt, we are optimistic that a recovery is underway, as evidenced by our backlog increasing to fifty million dollars this quarter, as compared to thirty-seven million dollars for the fourth quarter of 1998, and we expect to see our revenue growth rate accelerate more strongly in the second half of this year. To put our system orders in perspective, by our estimate, they represent over ninety percent of the total available market for light sources in DUV lithography during the first quarter. The orders are being driven primarily by the growning demand for our ELS-5010 KrFl laser, which accounted for over sixty-five percent of total units shipped in the quarter. The 5010 is rapidly becoming the laser of choice for enabling DUV steppers to achieve higher resolutions, and first-generation scanners to achieve more accurate dosage control. During the quarter, we also continued to ship our new ELS-6000, a two-kilohertz twenty-watt laser, for beta-testing and integration at our customer's sites. The 6000, as you may recall, offers compelling higher performance and productivity with our lowest cost-of-operation to date. We expect orders for production systems beginning in the second half of 1999, ramping to higher volumes in the year 2000. We further plan to introduce the two-kilohertz ArFl version of this platform, the ELS-6000A, in the fourth quarter of this year. As we discussed in our Q4 of 1998 conference call, we will continue to invest over the course of this year and expanded regional sales, marketing, and service infrastructure, designed to support our efforts not only at our direct customers, but also to properly position Cymer with respect to our end-user customers. In the area of technology leadership, the best way to update our technology development is to review briefly the results of the SPIE International Symposium on Microlithography held in Santa Clara in March of this year. This has long since been recognized as the premier conference on advanced lithography worldwide. We presented six papers on advanced light source technology, spanning 248 nm, 193 nm, 157 nm, and 13.5 nm, and as I said earlier, have now positioned ourselves as the only light source supplier with demonstrated technological leadership in four separate wavelength generations. Highlights of our presentations include the following: In KrFl, detailed performance characteristics of our ELS-6000 two-kilohertz twenty-watt laser were presented, including the applicability of a higher-power and a higher repetition rate to achieve increased throughput. For example, when exposing contact-hole layers, a less-sensitive resist can be exposed in half the time than that needed with a one-kilohertz ten-watt laser. The higher pulse rate also improves energy dose stability, and therefore enhanced CD control. In addition, life tests at two-kilohertz showed the system's core module lifetimes far exceed present-day one-kilohertz lifetime. In addition, a new portable bandwidth measuring device was described that will allow high accuracy determination of spectral bandwidth of lasers in the field as part of normal maintenance. This technique allowed very-narrow-bandwidth lasers to operate consistently within the narrow limits of performance necessary for extremely high-NA [numerical aperture], high-resolution lenses. In the area of ArFl, a new optical cavity design that provides an ultra-narrow bandwidth for use with ArFl projection lenses that can greatly reduce the amount of calcium fluoride necessary for projection lenses was presented. This has a positive effect on potentially reducing the cost of ownership of the entire lithography tool. We are currently engineering a two-kilohertz ArFl laser, and expect to deliver a multiple-beta unit by the end of this year. In addition, we have demonstrated the feasibility of producing a three-kilohertz ArFl as well. In the area of F2, Cymer F2 laser performance was demonstrated at pulse rates of two kilohertz, and power levels of twenty watts. The energy stability and gas lifetime was comparable to ArFl, strongly supporting the viability of F2 as a potential lithography light source. Our F2 laser development work leverages strongly our excimer laser technology used in our KrFl and ArFl lasers. In EUV, Cymer's first public release of the results of our in-house EUV light source program also occurred at the same SPIE conference. As you know, Sematech has narrowed the choices for next-generation lithography to either Scalpel or EUV. Unlike other approaches that use complex high-power laser-based technologies, or [something that sounds like 'actually pinched'] Xenon plasma, our design converts stored electrical energy directly to narrow-band EUV radiation by compressing and heating a small volume of lithium plasma, and we're very encouraged by the initial results. The dense plasma focus, or DPF, device produces narrow-band radiation at 13.5 nm, has very high brightness, and is capable of high-repetition-rate operation, and leverages our existing SSPM, or solid-state pulse-power module technology. Cymer was granted a patent on this device last year and has filed several more claims since then. In fact, along with our increased level of R&D investment comes a growing investment in our overall intellectual property position. We currently have a patent portfolio of over fifty patents issued worldwide, with another two hundred patents pending. In the area of manufacturing, we have at Cymer, together with our manufacturing partner in Japan, Seiko Instruments, a demonstrated manufacturing capability of producing more than enough lasers to meet expected near-term demands of the industry. This includes the capacity to produce the necessary spare parts for maintenance of our growing installed base of lasers. To make the best use of our abilities during the slowdown of 1998, we turned our manufacturing focus to making improvements on the first-pass yield of our production and test processes, with special emphasis on yields of our core technology modules. As a result, those yields have increased significantly over the course of last year, and we expect to see that trend continue. For example, in the critical area of discharge chambers, we are now operating at the ninety percent plus level, and plan soon to be at the ninety-five perecnt level. Additionally, we have demonstrated an ability to produce and test a variety of laser models, at the same time and in the same factory. For example, we currently manufacture 5000s, 5000As which is the ArFl version, 5010s, the 5005 upgrade kit, and 6000-series lasers concurrently, and apply the learned improvements from one model to the next. Lastly, in the area of service and support, at the end of Q1 in the field we had 639 lasers in production at chipmakers worldwide. Machine-dependent uptime across a statistically-accurate number of our fielded units is now in excess of ninety-nine percent.
I will now turn the discussion to Bill for the detailed financial review.
Bill Angus:
[Angus' comments are essentially a verbal form of the financial statement, so I've omitted them]
Akins: I would like to summarize a few of the more salient points made today. We are implementing a value-added strategy, which at any point in time leverages our investments made previously in critical areas of technology, manufacturing, and field support. To illustrate this, consider our 5000-series value-based evolution. Following the heavy investment in 1997 to improve performance and reduce cost of operation, we introduced the model 5010 early in 1998. The 5010 lays the foundation for our average sales price increasing from $397,000 in January of 98 to $474,000 in January of 99. Now that model comprises over sixty-five percent of our total lasers shipped. 5010s are the primary driver for our systems orders increasing to over $50,000,000, and Cymer's book-to-bill ration growing to 1.33 for the first quarter of 1999. Remember that, by our estimate, our systems orders represent over ninety percent of the total available market for light sources in DUV lithography for the first quarter. Taking some of those same 5010 improvements to the field to substantially reduce cost of operations of the installed base is the value basis of our 5005 upgrade program, which has passed the qualification phase and started implementation at chipmakers in the second quarter. Next, Cymer's investment in 1998 in our two-kilohertz platform, the 6000 series, will begin to see significantly growing KrFl purchase activity later this year or early in the year 2000, with an expected volume sales price of the base configuration over $500,000. And we are investing today in the higher-resolution ArFl version of the 6000, higher pulse repetition rates and average power lasers for improved productivity, as well as an F2 and EUV for the future of lithography. This is coupled with the ongoing process of bringing to the industry improved manufacturing capabilities and a growing worldwide field support infrastructure. In conclusion, our strategy is to meet customer requirements with a technology-based, value-added whole-product solutions which provide for the majority of chipmakers the most compelling business solution. Before turing this to a Q&A session, I would like to add the following postscript. We have taken steps recently to enhance our board of directors. As you know, Mr. Jerry Tailor, the former CFO of Applied Materials, joined our board in September of last year. In addition, in our proxy statement mailed last week, you will see that Mr. John Tompkin, Chairman of the Board of KLA Tencor, has been nominated to serve on Cymer's board pending his election on May 20. Both of these gentlemen bring substantial depth of experience from successful semiconductor capital equipment companies and are assets to our organization. |
