Axcelis Technologies Inc (ACLS) 2002 Q3 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Axcelis Technologies third quarter earnings release conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open up the conference for questions-and-answers after the presentation. During the question-and-answer session, if you would like to ask a question, please press 1 followed by 4 on your pushbutton telephone. I will now turn the conference over to Mr. Namaroff. Please go ahead, sir.

Thank you. Good afternoon, I'm Mark Namaroff, Director of Investor Relations and welcome to the third quarter call for Axcelis Technologies. I am sure all of you have received a copy of our press release issued earlier today announcing our third quarter results. If not, you can download the release via our Website at www.axcelis.com. Discussing our third quarter results today are Mary Puma, President and Chief Executive Officer, and Neil Moses, Executive Vice President and Chief Financial Officer. Also joining us is Mike Luttati, Executive Vice President and Chief Operating Officer, and Lynnette Fallon, Senior Vice President and General Counsel. The prepared remarks will last for approximately 15 minutes after which there will be time for questions. Playback service will be available via our Website or by telephone at 1-800-428-6051 as described in our press release.

Under the SEC Safe Harbor provisions please note that comments made today about our expectations for future revenues, profits, and other achievements are forward-looking statements based on management's current expectations. We urge you to review our Form 10-K on file with the SEC, particularly Exhibit 99 entitled "Factors Affecting Future Operating Results." As you know, due to the inherent risks in our business, which are described in detail in the Form 10-K our actually results may differ materially from our current expectations. We do not assume any obligation to update these forward-looking statements.

And now I'd like to turn it over to Mary to begin today's discussions.

Thanks, Mark. Good afternoon and thank you for joining us today. Our performance in the third quarter met our expectations with revenue up 5 percent sequentially and breakeven profitability. We knew coming into this quarter that our revenues would be flat to only slightly up, as many of our major customers put the brakes on capital spending. Plain and simple, there is limited growth in important end markets, such as telecom and PCs. Even though chip unit volumes are up, ASPs continue to erode because of fierce competition in this environment. We indicated six months ago in our first quarter call that without significant end-market demand, this recovery would be protracted. Unfortunately, this prediction has come true.

As a result, our customers are still buying equipment, albeit at a slower rate. You would think by looking at the stock market that the buying has stopped altogether. We believe that the pessimism that exists today is as unwarranted as the optimism that existed several months ago. Things are difficult, but the world hasn't come to a halt. The facts are that, first, our quarterly revenues and orders are still higher than Q3 and Q4 of last year; second, while we have had some push outs and cancellations, several customers have asked for accelerated deliveries on some tools to meet their production schedules; and, third, the DRAM guys are continuing to invest, along with a couple of large IDMs that are on track with their 300 millimeter plans.

One customer I visited in Europe last week stated that he believes that they are close to the bottom in this double dip, a bottom that is not as low as the one we hit six to 12 months ago, and Mike Luttati just returned from a trip to Asia and reported the memory foundries continue to plan for expansion to keep shrinks going and position themselves for 300 millimeter.

So in anticipated of the next up tick, what are we focused on at Axcelis? Three things - one, managing our cost structure to improve our profitability; two, making sure that our products are stable and our market positions are solid; and, three, supporting our customers. These three things are must-dos for Axcelis.

From a cost standpoint, we recently took action again to reduce our cost structure. This is the fourth such action during this cycle. For the first time, we have lowered our R and D expenditures in addition to SG and A. Past actions have not included R and D because we continued to invest to complete critical programs and applications like our 300 millimeter products in High Current implant, Dry Strip, and RTP, and in Charge Erase we're utilizing our photostabilization technology. Since many of these development programs have transitioned into product shipments, this allows us to reduce R and D spending without compromising our technology leadership. Neil will go into more detail on the recent reductions.

We were also being asked about the possibility of further cost reductions. The answer to that question is, yes, there is always that possibility, as we are managing our business on a quarterly basis and making decisions based upon what we see in the marketplace. If business declines further, we will search harder to take additional costs out. If business gets better, we will add only a few necessary costs back, gaining tremendous productivity leverage on the upside.

On the product front, we are extremely pleased with the progress we have seen with our Ultra High Current, Low Energy systems as we are winning back customers at 200 and 300 millimeter. Our mixed platform strategy using both multi-wafer and single wafer ion implanters has been validated by every customer in the world. In addition, SEN continued to perform well during the quarter, as we expected. They made progress with the MC3 at a major Japanese account, and they remain a market leader, both in High Current and High Energy implantation in Japan.

In RTP and Dry Strip we made progress with new as well as repeat customer wins in North America, Europe, and Asia, putting us in a great position for when high volume purchasing resumes. Our emphasis on customer partnerships and providing superior customer support is unwavering. We completed the acquisition of the semiconductor equipment division of Tritek International in China during the quarter to better serve our customers there and, in fact, a large portion of our bookings this quarter came from China. We are clearly one of the best-positioned semi equipment suppliers in this promising, explosive market.

Now I'd like to turn the call over to Neil for the financial update.

Thanks, Mary. The bottom line in the third quarter is that we broke even on net revenues of 93 million and, in the process, met our earnings guidance for the 10th quarter in a row. This breakeven performance comes after absorbing 1.8 million in severance expense related to our recent cost reduction initiatives. We've reduced our quarterly revenue breakeven point by over 25 percent since the beginning of 2001, and we're driving this reduction towards 30 percent with our recently announced cost reduction initiatives. We're happy to be back in the black, but the fourth quarter will, once again, be challenging, given the apparent double-hump nature of the recovery that began earlier this year.

Worldwide revenues for the third quarter were 137 million, although Axcelis's revenues were up 5 percent sequentially, SEN's revenues were down 13 percent from 50 million to 44 million. This change in SEN's revenues was less a function of changes in end-user demand in the Japanese market than it was a function of very strong performance last quarter, which was SEN's fiscal year end.

Our implant business represented 85 percent of third quarter net revenues, and our complementary products, Dry Strip, Rapid Thermal Processing, and Photostabilization represented 15 percent of third quarter revenues. On a year-to-date basis, which is a more important metric, this split is 77 percent implant and 23-percent complementary products.

Seventy-four percent of our systems revenue was for 200-millimeter equipment in the third quarter, while 300-millimeter equipment revenues comprised the remaining 26 percent. In the second quarter this split was 66 percent versus 34 percent. So our revenue profile in the second and third quarter reflected the capacity-oriented nature of first and second quarter bookings. In the third quarter, bookings for 200-millimeter and 300-millimeter equipment were evenly split as capacity buying slowed. On a year-to-date basis, 200-millimeter equipment represents slightly more than 60 percent of both bookings and revenues. Overall bookings for the third quarter were 77 million, down 19 percent from the second quarter, and our systems book-to-bill ratio was 0.73. On a geographic basis, Europe and Asia led the way in systems bookings, comprising 40 percent and 36 percent of net bookings, respectively. China alone comprised 23 percent of net systems bookings, and, if you include SEN systems bookings, 62 percent of third quarter bookings came from Asia.

From a revenue perspective, Asia and North America led the way. Forty-four percent of our third quarter systems revenues came from Asia while 41 percent came from North America. Again, if you include SEN systems revenues, 65 percent of third quarter revenues came from Asia.

Our gross margin for the third quarter was 39 percent, up from 37.3 percent in the second quarter. This improvement was driven by higher factory absorption and a modest increase in our 200-millimeter product mix. We have previously indicated that the spread between 200- and 300-millimeter product margins is continuing to narrow as we work to close this gap. With third quarter bookings more evenly split between 200- and 300-millimeter equipment, however, margins will come under pressure in the fourth quarter.

Spending on research and development was 18.1 million in the third quarter, down 500,000 sequentially. SG and A spending came in at 21.7 million, a $1.7 million decrease from the 23.4 million we spent in the second quarter.

During the quarter we took action to further reduce our cost structure, our fourth such action in the past year. We eliminated 155 positions, which, together with other cost reduction initiatives, should save the company approximately $22 million annually. We took a charge in the third quarter associated with this headcount reduction. This charge impacted gross margin as well as R and D and SG and A spending. The actions that we took should drive our quarterly revenue breakeven point down to 87 million next year. As we have done in the past, we will continue to evaluate our cost structure on a quarterly basis and take action when warranted. Our overall headcount is down 21 percent since the beginning of 2001.

Our pretax profit for the third quarter was 500,000 compared to a loss of 4.4 million in the second quarter. A decrease in SEN's contribution of equity income and royalties from 6.4 million to 5.2 million was more than offset by higher net sales, improved gross margins, and lower SG and A and R and D spending. Our net profit for the third quarter was 200,000 compared to a net loss of 1.7 million in the second quarter. On a per-share basis, we broke even in the third quarter compared with a loss of 2 cents per share in the second quarter.

Our effective tax rate for the quarter remained at 62 percent. We recorded a tax provision of 36 percent in the first quarter of this year and had to change our effective tax rate for the second and third quarters based upon our revised forecast, which projected a 48-percent annual effective tax rate. This rate is higher than the federal rate, due to research and development credits and to the performance of SEN. As you may recall, SEN's income was undistributed, and therefore not subject to U.S. tax.

We ended the third quarter with 195 million of cash on our balance sheet, a decrease of 16 million from the second quarter. This was consistent with our guidance and was primarily attributable to a $9 million buildup in our accounts receivable during the quarter. We also recently renewed the 365-day, $15 million portion of our $45 million bank line of credit that had a one-year term. The remaining $30 million portion is in place for another two years. As part of this renewal, we did agree to modify our minimum quarterly quick-ratio covenant from 1.35 to 2.0. At the end of the third quarter, our quick ratio was 3.5:1. Including the bank line of credit, we had 240 million in total liquidity at the end of the third quarter.

Looking forward, for the fourth quarter we expect worldwide revenues, including SEN, to be in the range of 95 to 105 million and net revenues to be in the range of 60 to 70 million. This revenue decrease reflects continued softness in order rates, which has manifested itself in three system push outs by chip manufacturers from the fourth quarter of this year to the first quarter of next year. As far as cancellations are concerned, we had one cancellation in the third quarter and have had no cancellations thus far in the fourth quarter.

Our gross margin for the fourth quarter should be in the 30-percent range as product mix shifts and factory absorption, which drove significant margin improvement in the second and third quarters will put pressure on margins this quarter. Combined SG and A and R and D spending will continue to decline as a result of recent cost reduction initiatives. SEN's contribution is also projected to decline significantly by more than 50 percent due to lower revenues plus a shift in product mix.

We are currently forecasting a net loss for the fourth quarter of 8 to 10 cents per share. Although we are disappointed to forecast the loss after breaking even this past quarter, we are encouraged that we have been able to substantially improve gross margins and reduce our cost structure since the first quarter of this year.

Our effective tax rate is projected to remain at 62 percent although we will re-evaluate our ability to record tax benefits on operating losses pursuant to FAS 109 in the fourth quarter. This review will be based upon our revenue and earnings outlook in our 2003 business plan, which will be completed in the fourth quarter.

We expect to be cash-neutral in the fourth quarter as working capital reduction should offset operating losses. This would leave us with 195 million in cash and $240 million in total liquidity at the end of our 2002 fiscal year, sufficient not only to manage through an extended downturn but also to continue to make the investments that will enable us to strengthen our leadership position in the markets we serve.

Thanks for listening. I'll now turn the call back over to Mary for her closing remarks.

Thanks, Neil. Before I close, I'd like to make some comments about our corporate governance practices and disclosure. We want to let you know that our board formed a nominating and governance committee last May. This committee will put discipline around the director nomination processes and be the focus of our board's compliance with the new federal requirements under the Sarbanes-Oxley Act as well as the proposed NASDAQ listing requirements. At a meeting in September, the committee adopted a number of governance policies. While our actual board practices have been in line with much of the emerging recommendations on best-governance practices, we take pride in formalizing these practices through the adoption of written policies. We will be sharing our governance policies and committee charters with our stockholders in our year-end filings.

On disclosure - we have been listening to our analysts and investors and have taken a step in disclosing additional pertinent information about our business. In this market environment, we felt it was imperative to review our disclosure practices and give more, not less. We have formed a disclosure committee to monitor our disclosure controls and practices in accordance with SEC requirements. In addition, as I'm sure you have already seen, we have reformatted our press release giving more information on the business rather than having you rely solely on the conference call statements and Q and A. We have also decided to disclose our order information for the most recent quarter.

Finally, to summarize our key takeaways, I would like to re-emphasize the strength of our business and our ability to grow as the industry ramps. First, we are continuing to manage our cost structure on a quarterly basis with the objective of improving profitability while at the same time making sure that we have the right resources for the ramp. Second, our product positions are solid, as we continue to win critical design wins at both 200- and 300-millimeter and, third, we are strengthening customer partnerships through an increased organizational focus at all levels. We are doing the right things to win - we are ready.

I would now like to open the call up for questions that you might have.

Thank you. The question-and-answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press 1 followed by 4 on your pushbutton telephone at this time. If you would like to withdraw your question, please press 1 followed by 3. Your questions will be taken in the order they are received. Please stand by for your first question. Our first question comes from Jim Covello with Goldman Sachs.

Good afternoon, thanks very much. A couple of quick questions - could you provide a little bit of detail on the nature of the strength in Europe? The second question would be the sustainability of what you view as the sustainability of the strength or the relative strength in the memory segment? And the third question would be some detail on the three systems push outs. Thanks so much.

Hi, Jim, it's Mike Luttati. Both the Europe - well - let me comment first. Europe is driven heavily by the DRAM expansion, so that's one of the key contributors to that piece. I'm sorry - I didn't get the second question.

The sustainability of the strength in the memory segment.

Well, that's been a question mark since it started in the second quarter and, as Mary mentioned, I got back from a trip from Asia last week, and one of the things that I found very interesting is that the DRAM foundry supplier in Taiwan are continuing to say that they're going to invest for shrink and 300 millimeter preparations. So right now, you know, of the systems that were pushed out, by the way, they were primarily IDM's non-memory IDMs and of the systems that are being pulled in, they primarily are DRAM manufacturers. So they're continuing to tool for the appropriate shrinks.

Thanks very much.

You're welcome.

Our next question comes from Glen Yeung from Salomon Smith Barney. Please state your question.

Thanks. Did you guys give order guidance for next quarter?

No, Glen, it's Neil. We did not give order guidance for next quarter.

Can I ask you what it might be were you to give it?

That's something we are not going to disclose, going forward. We are going to disclose historical information as we did on the call.

All right, and can you just direct us to where breakeven is on the SEN business?

What the breakeven is on the SEN business?

Uh-huh.

That's a good question. It's certainly significantly lower than ours is. SEN has much higher percentage of temporary workforce than Axcelis does, and so therefore they have much more flexibility, if you will, adapting to changes and where we are in the cycle. Now, in the past quarter, they did $44 million in revenue, and they made money. So they're breakeven point is below that number. We have them forecasted to make money in the fourth quarter on revenues of 34 million. So their breakeven point is probably between 30 and 35 million in revenues.

Okay. And then looking at the push out that you talked about, it sounds like you had three push outs fourth quarter to first quarter, and I wonder if that gives you any visibility at this stage on what the first quarter may look like?

Oh, very uncertain. You know, as I mentioned, the cancellation we had in the third quarter was a foundry customer, and the push outs were from IDMs and the three systems that are being pushed from Q4 into Q1 are back to the foundry. So it's very interesting the cycling that's going on here. It's really, I think, too early to tell.

Okay. Also, you talked about gross margins coming under pressure, and I recognize that's on the 300 versus 200-millimeter margin shift. I wonder if you can just tell us what the margins are on 300-millimeter product versus 200 millimeter.

We don't disclose the difference, if you will, between 300 and 200 millimeter. I think what we said in the past is that's distinction that we think - we think that's an industry issue that will be out there, probably, for the next 12 to 18 months, and it really depends upon how much of the business, going forward, translates into 300-millimeter buying. What we saw in the first and second quarter is a pretty heavy percentage of 200-millimeter capacity buying, which didn't evaporate in the third quarter, but certainly the order rate declined in the third quarter. But, you know, ironically, Glen, the higher the percentage of 300 millimeter buying, the faster that difference will be eliminated.

Sure, and one other thought - you talked about 87 million breakeven for next year - do you have a sense as to when in the year you may reach that?

I think midyear is a reasonable estimate.

Okay, great, thanks.

Thank you, our next question comes from Ali Arani with CIBC World Markets. Please state your question.

Yes, good afternoon, gentlemen. I was hoping you could give us some more color on the China market, given that you have the strongest installed base there, and whether you're seeing continued trends of demand? And also, if you could elaborate on Korea, where you have a strong position and whether the 300-millimeter investments that are ramping there could be a cushion for you in the first half of next year? And, finally, not a question - I just wanted to congratulate you for getting design into the FT Crowell's facility at 300-millimeter - for the [inaudible].

I won't acknowledge or deny anything here. Thank you, though. The China market, I think, you know, as a percent of orders, you know, is a good thing, and we're excited about that on the one side. Obviously, the order rate was down, so it became a higher percentage of the total, but I think we're positioned well. As Mary mentioned, with Tritek we've got a great support base. I think the real question in China is going to be the mix, going forward, on used equipment versus new equipment buys, and we're assessing that now to see how we can maximize our participation there. It's unclear, you know, as the worldwide capacity situation continues to erode in terms of utilization whether or not they'll continue to spend at the rate they're spending at, but they clearly have been taking the equipment at the rates that they've been ordering. So I think that will continue, and we intend to participate fully there.

I'm not sure if I got the third part -

- Korea -

Yeah, as I said earlier, the DRAM suppliers are continuing to invest, and we're participating in that.

Could there be, as a result, a pretty significant order, given the timing of one of those 300-millimeter fabs, as I understand, slated for order activity in the December/January timeframe? Is that something that you've built into your expectations at this point or would that be something that would provide upside for you if it walks in a month early in December?

We're factoring that into our plan.

Into your plan - on the China side, do you think that the purchasing that they've been doing of secondhand equipment on the markets is a short-term effect? When they move to some of the more complex process technologies would you anticipate then that they would have to look at some of your newer Low Energy, in particular, platforms?

Yes, in fact, we're discussing that with them now. I think the real question is whether or not some of the, what I'll call, 130 nanometer-ready 200-millimeter tools will get moved from Taiwan. But you're right - the supply of - you know, we saw this in the last cycle. There was a big, big push for two or three quarters for used equipment as fabs were shutting down in Northern Europe and some other locations and then, you know, it sort of got very quickly consumed, and people started to buy new, and then they were faced with the technology churn. So you're right - there's some uncertainty in terms of where they're going to go and how quickly they'll adopt the more aggressive technologies.

Great, and I'll squeeze one last question in there - on solid state RTP, you seem to have the leadership in terms of installed base in the marketplace - Mary, I know you made some comments about the design wins and some repeat orders. Could you talk about some recent activity in what you're seeing your customers tell you in particular with respect to the 100-nanometer node?

I think maybe you misunderstood. We do not have the largest installed base on RTP.

On solid state RTP, the non-lamp based systems.

Yeah, well, what we're seeing is that there are some new applications, particularly in the areas of silicide formation, and the like, for low temperature applications in the nodes that you're referring to, and we're getting a lot of pull from customers there. We're seeing some competitive response, in fact, to that. You may have seen some announcements from some of our competitors on products to try and address that market segment, but the fact remains that the non-lamp-base solution offers pretty significant thermal performance capabilities and cost-of-ownership advantage. So we're hoping to participate with that. We have had some repeat buys for 300-millimeter tools, and we're continuing to chip away at this. We've said all along that we've had a fairly narrow focus on this. We're not trying to, you know, dive after all these various applications, so we're really looking at specific customers where we have good relationships that we can leverage from our implant business and also to really look at where we can be a viable second source to their mainstream RTP suppliers.

Great, thank you very much.

You're welcome.

Thank you, our next question comes from Mark Fitzgerald with Banc of America Securities. Please state your question.

Are you guys giving out your backlog number?

Sure, we'll give you our backlog number. It's 62 million at the end of the third quarter.

Okay, and can you tell us the mix of DRAM in the backlog at this point or some sense of it?

I don't have a sense of that offhand. Our sales in DRAM have been rough - I mean, if you look at the mix between logic and DRAM, it's been roughly two-thirds logic, one-third DRAM. I think that's about the same. It's not that substantially different.

Okay, and can you also give us some idea how long is it taking with this SAP 101 [Inaudible] to get your tools signed off at this point. Do you have some sort of average monthly figure?

Well, typically, the way our process works is that we're getting 80 to 90 percent of revenues upon once we ship. Acceptance testing is taking, on average, 30 to 35 days, and, on average, the balance of the revenue stream is collected in 60 to 90 days.

But in terms of revenue recognition is that the same pattern?

No, the revenue recognition - 100 percent of the revenue recognition for us is upon shipment.

Okay, and given where your stock price is, I was curious if you were going to do any buybacks here and also if the debt, if you're inclined to buy any of your debt back?

Those are both good questions. We've taken a close look at both of those issues. I think we are going to probably sit tight short-term, begin work on putting our business plan together for next year and take a closer look perhaps at the end of the year, but notwithstanding the fact that our stock has been certainly at an all-time low, I think people are putting a premium on balance sheet strength and cash on the balance sheet. So I think it's a balancing act here, Mark, in terms of what we do.

Okay, but when you look at it next year, 2003, is the goal to be in the free cash flow positive arena?

Yes.

Okay, so it's not inconceivable that this is a strategy you could implement.

That's true.

Okay, thank you.

Our next question comes from Ted Berg with Lehman Brothers. Please state your question.

Hi, thank you. I had a question on equipment reused. You know, every once in a while you hear about chip makers reusing equipment from generation to generation, and I was wondering if you'd give an example that I understand particularly for some of the leading-edge implant tools, how often - how many technology generations there are those can extend through and then how many technology generations can a High Energy or a Medium Current tool typically extend through.

Yeah, typically - this is Mike Luttati, Ted - typically, in our High Energy - let's say on a broad base, I guess, the rule of thumb is then three or four generations from an implant point of view. One of the encouraging pieces of the Ultra product line is that we are able to take the Ultra system and upgrade, or a GSD-installed base, and we give our customers a path for migration to sub-65 nanometer node. So there's a real benefit there.

So, you know, I guess, as a rule of thumb, just to close on that, it's three to four generations for implants, and it may be longer with High Energy, because the High Energy machine that we develop, you know, has a very broad energy range, up to 3 MeV and I think that will cover, certainly, any application - in fact, the energy levels may be declining somewhat as you go further into sub-65 nanometer.

On the strip tools, the issue there is, as you know, has been the complexity of the strip from the traditional bulb strip to the more precision non-damaging strip, both for front-end of line and back-end of line and so I think you're going to see - there's an opportunity for significant retooling there and, in addition to that, the number of photoresist layers that are being applied as the metal layers increase on the back end will increase the number of strip tools, and most of the people will be buying new - the most current generation for that.

What about with the High Current tool. Is that shortened in three to four generations, you know, for the very leading edge -

- Well, that's accelerating, as I said, because of the low energy requirements, and we have developed the Ultra to have an upgrade from our - and I want to just clarify - I said GSE but it's our LED-based machine, which is our first-generation low energy tool can be upgraded with Ultra performance. So those machines have some upgrade capability and, obviously, that, we believe, will take - that will at least cover us through, I would say, three more nodes.

Okay, and I had a question on the earlier topic on breakeven - I think the question was when would you get to breakeven? Was that when you would get to breakeven revenues by the second quarter or is that when you would have the cost structure rationalized so that the breakeven revenue, if you were there, it would be 87 million?

Let me just clarify that, Ted - this is Neil. The initiators that we implemented in September, some of them take effect immediately, and some of them take effect over time. So what we are saying is by mid-next year we think we ought to be breakeven profitability on quarterly revenues of 87 million. Now, if you look at our third quarter this year, we're pretty close to being there already. We did 93 million of revenue. We were breakeven, and we had a 1.8 million restructuring charge - or severance charge - baked into our numbers. So we're pretty close now. We're probably in the $90 million range, and we're going to push it down 3 or 4 more million over the course of the next six months or so.

Okay, and on the tool wins for High Current - were these tool wins the exclusive process tool of record, or do you share the business with that other competitor?

No, we had - let me split it up - the wins in Q3 were twofold - one were some second-round capacity buys for 300 millimeter, and that was at both the foundry and a major IDM, but we also had four High Current wins - two at 200 millimeter and two at 300 millimeter, and these were competitive break-ins. So for the 300-millimeter - in the 300 millimeter cases they had selected a competitors' tool for the first round and chose to switch, and the 200 millimeter, we shared the installed base, but the choice to go with our Low Energy tool was to unseat a competitive system.

Okay, and were these single-wafer or batch tools?

Actually in, both - one of each. By the way, we are starting to - initially, they were single wafer, as I mentioned in the last call, and you know, we've been taking them fairly well, but now we're heading up against the competitive batch machine, and we're starting to win those as well. I'm very excited about our position in High Current.

Okay, great. The last question I had was on the strip area - how much more of a competitor do you see, you know, Gasonics under Novellus today or - are they - you know, I've heard they've done pretty well in North America at some key accounts. What have you seen from them, either in North America or elsewhere?

Well, they're the market share leader. As we've said in the past, between Novellus/Gasonics and Matson, you know, they own somewhere around 40 percent or so of the market, and the rest of it's very fragmented, and our strategy, you know, has been to grow particularly by getting design wins at the - you know, on the advanced technology nodes, as I said earlier, for back-end of lines, strip-over locate, that I still think we have the only production-worthy solution, and we're getting a lot of pull from customers around the world for that. Our 300 millimeter position, in general, in market share, was much better than our 200 millimeter position, and, you know, we recognize that we were going to, like, we're trying to win back in High Current and implant that we were going to be under pressure in strip and, sure, we're seeing some of that occurring. So, you know, they're a very viable competitor, and we expect to battle them head-to-head.

Okay, thanks a lot.

You're welcome.

Our next question comes from John Pitzer with Credit Suisse First Boston. Please state your question.

Yeah, good afternoon, guys. Neil, can you talk a little bit about what gross margin you expect at the breakeven revenue level? And then can you also talk a little bit about what cash flow breakeven is and what kind of capex plans you have over the next several quarters? And I have some follow-up questions, thanks.

Sure, I'll try to keep all of those straight, John. I think the first question was what do we expect for gross margins at the $87 million breakeven revenue level? And the answer is 40 percent. Second question, I believe, is our cash flow breakeven pretty comparable to our P and L breakeven? And the answer is yes. I think the third question was what do we expect in terms of capex over the next couple of quarters? I can tell you that we plan to spend 13 or 14 million this year, the bulk of that has already been spent. It will be a couple of million dollars in the fourth quarter, and, you know, we spent $25 million to $30 million last year. We were building our Advanced Technology Center across the street. We've cut that number basically in half, and although we haven't prepared our capital plan for next year, I think it's safe to say that it will probably be closer to the range of what we spent this year than it was to what we spent the year prior.

And then as a follow-up, guys, just talk a little bit about the bookings environment. You've had a lot of your peer companies come out and say the calendar fourth quarter bookings would be anywhere from flat to down 15 percent, in that sort of range. Is there anything to make us believe that you guys should significantly out-perform or under-perform the rest of the companies? And can you help me understand, when you look at your fourth quarter order book on a region-by-region basis, where are you seeing relative strength? Where are you seeing relative weakness? With China strong in the third calendar quarter, what do you expect out of them? Thanks.

I think that what you should expect for, John - this is Neil again - on bookings relative to our competitors, we've talked about it in the past, that I think most people are familiar with the fact that the implant business, which is 75 to 80 percent of our overall business tends to be more capacity-oriented. So when we take a trend down like we're seeing in the fourth quarter, it's probably going to hit us on a relative basis a little bit harder than it hits most of our peers, and the converse is true on the up tick.

As far as color on bookings, the second part of your question, I'm going to turn it over to Mike.

I guess your question was regionally?

That's correct.

I think, you know, if history repeats itself, this thing was started by the DRAM guys, and then the foundries followed, and then the IDMs started to buy. I think that the likelihood of the foundries coming back before the IDMs is probably more viable, and therefore I think our Asia bookings will continue to out-perform the rest of the world, even going forward, particularly because 300 millimeter investments are continuing to progress. As I mentioned, some of the Asian memory foundries are going to be investing, and I think there's some technology node buying that's going to occur there that we are very well positioned to compete for. So I don't see any reason to think that's going to change.

And then just lastly on lead times, how much turns business can you guys do? What are the lead times that you're quoting currently on the ion implant tools?

I think we're quoting about 12 to 16 weeks on the implanters.

Great, thanks, guys.

You're welcome, John.

Our next question comes from Michael Roesler with CJS Securities. Please state your question.

Good afternoon. Mary, you mentioned that you guys are doing everything in your power to adjust the current market, and I looked back a year - your breakeven is a lot lower, you've got a lot more cash on your balance sheet - at what point do you start to look around, maybe, upstream, downstream and, you know, your competitors, what have you, to maybe put some of that cash to use?

Mike, we're always looking. I mean, where we are in the cycle really isn't the issue. What we're focused on is trying to understand strategically what might fit. As you know, our strategy is to first bulk up in the tool sets that we have, and that would be either through R and D investments, which we've been making heavily throughout the cycle as well as potentially looking at any acquisition candidates, and then the other piece, secondarily, what we'd be looking at is potentially adding any other complementary kinds of tools into the portfolio. So, again, you know, we've been actively doing our research and meeting with bankers and trying to understand if there's anything out there that makes sense.

And in the past you say you're trying to stay away from cutting into the bone of the company. Where do these latest rounds of cuts take you in terms of that?

I think, you know, I guess your definition of discretionary changes a little relative to where you revenues are, but, you know, we made some additional cuts in SG and A across the organization, and then, obviously, manufacturing, as our volume declines we can make some adjustments there on the production floor, which we did. And then, finally, as Neil and I both pointed out, we took a look at R and D, and this is the first time we really made any cuts in that area, and we really felt like we did not do anything to compromise our position. You know, we've introduced six new products over the last 12 months, and a lot of those programs essentially have been completed. You know, there's always CIP work that goes on, but those kinds of efforts require a lot less manpower than the initial technology and product development. So basically those are the things that we focused on.

I don't know if you mentioned it, so that would get us to what type of R and D on a quarterly basis?

Well, we'll probably end up in the $16 million to $17 million range as far as R&D on a quarterly basis beginning next year. If you look at, Mike, where we expect to end up for revenues this year, which is in the $310 million, $315 million range based on the guidance that we've given, we're going to spend slightly over $70 million on R and D this year. I think if you do that math on a percentage basis, that's still, certainly, either top quartile or close to top quartile in terms of what our peers are spending. So, as Mary said, pain is relative. We're still spending very strongly on R and D despite the cuts that we made, and we're comfortable we're making the right investments.

And then one quick question on the balance sheet - the warranty reserve has sort of been ticking down the last few quarters - what drives that?

That's a function of where our revenues are. So, obviously, as you're seeing the warranty reserve come down, it's a reflection of where our revenues have been.

Okay, thanks.

If there are any further questions at this time, please press 1 followed by 4 on your pushbutton telephone. Our next question comes from Steven Paleyo with Morgan Stanley. Please state your question.

Great. Neil, I'm sorry, I didn't catch you right - your backlog is currently at 62 million, was that correct?

That's right, Steve.

Sixty-two - so you - well, your guidance is roughly 60 to 70 million - do you have to do some turns business to kind of meet the higher end of that range then?

Well, that's pretty much - not really, because we don't really have a backlog, from a systems perspective - from a service perspective. So the backlog that you're hearing about is our systems backlog. Most of our service business is out the door in 30 days, and therefore there isn't a backlog, per se, associated with it.

Okay.

So I guess if you had a service backlog, you'd certainly be seeing a backlog that was in excess of our revenue guidance for the quarter. I think that's where you're headed.

Okay, and service right now is running about a third of revenues, is that correct?

Yes, it is.

Okay. And then your outlook for bookings, I know you didn't want to give specific guidance there, but you were suggesting that it's more volatile than what we're seeing in the broader industry, so that means you're probably going to eat backlog even some more. So what does that suggest, then, as we go into the March quarter for revenue guidance?

You know, I wish we had a handle on that, Steve. It's really a little bit premature to talk about that. Certainly the trend right now is not favorable but, you know, when we were sitting here on our call 90 days ago, we kind of had a different outlook at that point in time, too. So give us a little bit more time to put our plan together for next year, and we'll let you know.

All right. Maybe a little easier one here - revenues declining down to the $60 million, $70 million range - how much more can you pull out of the operating expenses? You just mentioned directionally they were down. I guess SG and A and R and D combined were down about 5 percent in the third quarter. Can you do, you know, down another 5 or maybe 10 percent in the fourth quarter with revenues declining perhaps 30 percent or so?

Well, I think that you'll see a decrease in our SG and A and our R and D, as I said. I think that you'll see, you know, comparable type of decrease on the R and D piece, because that's being phased down to the level that I mentioned for next year. On the G and A side, the real question is, you know, does the litigation with Applied Materials begin in earnest? That's something that has been kind of on the sidelines for quite some time, and that we were hopeful would get kick-started again this fall, although it hasn't happened yet, but if that doesn't happen, you should see if a kick-down in the SG and A side probably - you know, probably not quite as substantial as the third quarter but fairly significant.

Okay, and actually that was the segway to my last question - an update on the AM litigation. It sounds like nothing new, to date.

Yeah, that's right. We have some basis to think that we would get back in court in September, and that didn't happen - I'm sorry, this is Lynnette Fallon - unfortunately, our judge has conflicting commitments, and they know we're waiting, and we're ready to go on short notice.

Okay, fair enough. Thanks, guys.

Our next question comes from Mark Fitzgerald with Banc of America Securities. Please state your question.

Just looking for headcount at the end of the quarter?

1825.

Thank you.

Our next question comes from Phil Demoss with Wachovia Securities. Please state your question.

Mark, let me just clarify - that headcount is after the reduction in force that we just had.

Okay, can I go ahead with my question now?

Mr. Demoss, your line is live.

Neil, a couple of quick ones on the covenant. That version for the bank - is that just a normal quick ratio covenant?

Yes, it is.

Typical? So there's no differences for the banks?

No, there's not.

Just secondly, what was - when you guys were talking about the extension of the renewal, what led to the change on the covenant? I'm seeing we're in a tough environment here, but can you sort of describe the tone of the banks?

Conservative. Let me elaborate - I was kidding - but it's true. I think that, you know, we have three different bank group members, and without getting into the specific responses of each of them, let's just say that from a general perspective, I think the lending community has pulled in their horns a little bit recently, and so I won't tell you that it was - it's terribly difficult to get to do the renewal of this $15 million portion, but it certainly was not as straightforward as you might otherwise have expected in a different environment.

Okay, are there any other covenants we need to be aware of here at all?

Well, there are four covenants under the loan agreement, although we're not near any one of them. I'd be happy to, offline, go through with you each one of them and where we are, if you'd like.

But you're just not really close to any of them right now?

No, we're not.

Okay. Thanks, Neil.

Yeah.

We do have a follow-up question from Steven Paleyo with Morgan Stanley. Please state your question.

Yeah, just one quick one here - your outlook for service. You would expect that to remain somewhat steady at this kind of $30 million, 35 million quarter run rate?

Yeah, I think that the highest our service business has gotten in the past, Steve - this is Neil - is in the 40 to 45 percent of revenue run rate, and I would imagine we'd be approaching 40 percent with the kind of revenue guidance we gave for the fourth quarter.

Okay, thanks, Neil.

At this time I'd like to turn the conference back to Mr. Namaroff to conclude.

Okay. Thank you very much for joining us, and I guess we'll speak to you next quarter.

This concludes our conference call for today. Thank you all for participating and have a wonderful day. All parties may now disconnect.