Axcelis Technologies Inc (ACLS) 2003 Q1 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Axcelis Technologies first quarter 2003 earnings release. At this time I would like to inform that you this conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open the conference up for questions and answers after the presentation. If you are using a speaker-phone, please pick up the hand-set before pressing any numbers. Should you have a question, please press “*1” on your push button telephone. At this time I'll turn the conference over to Lynnette Fallon. Please go ahead.

Good afternoon. This is Lynnette Fallon and I'm Senior Vice President of Axcelis Technologies. I'm sitting in for [Mark Nameroff] our director of investor relations who is on vacation this week. Welcome to our conference call for the first quarter of 2003. I hope all of you have received a copy of our press release announcing our first quarter results. We apologize because there's been some delay in getting it on the wire. In addition, you'll be able to download the release via our web site at www. axcelis.com.

Discussing our results today are Mary Puma, president and Chief Executive Officer, and Neil Moses, executive vice president and Chief Financial Officer. Also joining us to answer your questions is Mike Luttati, executive vice president and Chief Operating Officer. The prepared remarks will last approximately 15 minutes, after which there will be time for Q and A. Playback service will be available via web site or telephone at 1 800-428 6051 as described in our press release. Under the SEC safe harbor provisions please note the comments made today about expectations for profits and revenues are forward-looking statements based on management's current expectations. We urge to review our most recent forms 10-K, and 10 -Q, on file with the SEC, particularly the exhibit entitled factors affecting future operating results. As you know, due to risks inherent in our business, which are described in detail in the exhibit, our actual results may differ materially from our current expectations. We do not assume any obligation to update these forward-looking statements.

Before I turn it over to Mary to begin today's discussion, I'd like to briefly comment on remarks that both Mary and Neil will make regarding our revenue performance and projections. When we speak of worldwide revenue, we are referring to the aggregate revenues of Axcelis and those of SEN, our 50% owned unconsolidated subsidiary in Japan. Please understand we do not currently consolidate SEN’s revenues under GAAP we use the term net revenues to mean Axcelis only revenues, determined in accordance with GAAP. We provide this data on worldwide revenues with SEN, because we believe it's useful for investors. Their ion Implant products are covered by a license from us and therefore the combined sales of the two companies indicates the full market penetration of our technology.

And now I'd like to turn the presentation over to Mary.

Thanks, Lynnette. Good afternoon and thank you for joining us today. As we entered this year, many of us were hopeful that this would be the year that fundamental market conditions would begin to improve. Despite the fact that it is too early to tell what 2003 will bring, we remain committed to our strategic priorities and are pleased with the results and positioning that we have achieved. Our focus continues to be on driving technology leadership and operational excellence and enhancing our customer partnerships. We believe that our first quarter financials and recently reported market share results from 2002 confirms that the balance we have struck between investments in the future and cost reduction measures have put us on the right path to be successful in the long-term. In this vein we are pleased that our first quarter has shown sequential improvement from the revenue and bookings levels we experienced in our fourth quarter.

Our first quarter revenues have increased 26% on a net basis, and SEN's first quarter revenues have shown a 36% improvement. Our bookings have also increased by 27% in the first quarter, with SEN's bookings up over 50%. While future visibility is unclear, we are encouraged that we are on the right track, that we are doing the right things. We are heartened by the fact that several major customers are continuing to spend.

The major memory manufacturers and a few logic IDMs make up the bulk of our order book. Japan is especially strong on a relative basis with companies like [Alpita], Toshiba and Sony spending for .13 micron technology. Europe is becoming more active as well, with (inaudible) and ST, plan to purchase at 200 and 300 millimeter. While world events have clearly put a damper on the overall mood of the industry, we have not yet seen a direct effect of SARS on any of our Asian customers' plans. We are hopeful SARS will not become a catalyst for deterioration in our business.

The brightest spot for us at this point are the recently published Gardner data quest market share reports. As you can imagine, we are very proud of the 2002 market share gains we achieved across all of our product lines. As expected, we have regained the number one position in ion implantation, gaining share in all major regions of the world. As you know, we have held the leadership position in implant six of the last eight years. So while we are pleased to be back on top, we are even more excited about the strategic design wins that we achieved during this down cycle. We believe that the worldwide success we have had at both 200 and 300 millimeter, with our highly productive multi-wafer, high current, low-energy ultra platform and SEN's success with our single-wafer medium-current ion implanter in Japan, bodes well for continued share gains.

We are very confident that we have the most competitive implant portfolio in the world, and we intend to continue to build on this leadership position. We are also pleased to say that we have more than doubled our market share in the very competitive dry strip segment from 7% share in 2001 to 15% in 2002. Securing us the number 3 position.

This is the result of early 300 millimeter market penetration and a strong competitive position in back end of line strips. Our focus is on strengthening the competitiveness of our tool across the application space in order to further drive our share gains in this market. We also gained market share in RTP, growing our share of this market from 1.5% in 2001, to 4% in 2002.

The doubling of our share in RTP puts us in a number 3 position and is a testimonial that our non-lamp base system has advantages over lamp-based technology for leading edge devices. We believe that this technology conversion will pick up additional momentum over the next few years, and we fully intend to become the number 2 player in this market.

Lastly, in the curing market, which is not tracked by data quest, we believe we held our share at 85%. We are confident that we are making progress in growing the market through new charger (inaudible) applications. To sum it up, we very pleased that our strategy is working working. First, to invest in R&D to secure strong market position in the downturn, and then capitalizing on this during the up turn, second to drive productivity through the business, through operational excellence. And third, to enhance our customer relationships and support. Now I would like to turn the call over to Neil who will provide the details of our financial results.

Thanks, Mary. Our first quarter revenue growth was driven primarily by customer purchases of 200 millimeter high energy and high current ion implant equipment. 62% of our equipment sales were for 200 millimeter equipment, compared with 47% in the fourth quarter. Capacity buys of 200 millimeter equipment typically increased in conjunction with increase in overall demand for our products. Systems and service bookings for the first quarter increased 27% to 81m.

Our systems book-to-bill ratio improved from.95 in the fourth quarter to.98, which was in-line with industry performance. We ended the quarter with 58 million of systems backlog, compared with 60 million at the end of the fourth quarter.

Our implant business represented 79 % of first quarter revenues and our complimentary products, dry-strip, rapid thermal processing and photo stabilization represented 21% of first quarter revenues.

On a geographic basis, including SEN, Asia represented 75% of worldwide system revenues, and 45% of worldwide systems bookings in the first quarter. The U.S. was next, representing 17% of systems revenue, and 21% of systems bookings. Europe represented only 9% of system revenues, but 33% of system bookings, due to the recently announced European win for our multi-wafer ultra high current ion implant product line.

Our gross margins for the first quarter were 33.6%, and almost 500 basis point improvement over the fourth quarter. This improvement was driven by outsourcing driven cost reductions, improved factory absorption and high percentage of 200 millimeter shipments. As we mentioned last quarter we have been experiencing increased competitive pressure at strategic accounts and this pressure will likely continue into the second quarter as customer buying remains very concentrated. As an example of this, two-thirds of both revenues and bookings in the first quarter came from memory manufacturers and our top five customers in the first quarter represented 88% of system revenues.

Spending on research and development was 16.2 million in the first quarter, a decrease of $1.5m or 9% from the fourth quarter. As you know, we have been protecting our R&D investment during the downturn and believe this strategy has helped to drive our significant market share gains. We did mention last quarter that we were committed to reducing R&D spending now that all of our 300 millimeter products have been introduced and process has shifted to new process technology development, reliability improvements and cost-out activity. Our first quarter reduction in R&D spending is clear evidence of this commitment.

SG&A spending was $22.5m in the first quarter, an increase of $2.1 million, or 10% from the fourth quarter. Excuse me. The primary reasons for this increase were increased spending on our patent litigation lawsuit as we prepare for trial, and also severance expenses associated with additional headcount reductions implemented in the first quarter. As of March 31st, our headcount stood at 1,785 employees, down 500 from the last cyclical peak.

We continue to work hard at reducing expenses as evidenced by the $10m reduction we have achieved in quarterly SG&A spending over the past two years. Our pre-tax loss was $7.6mfor the first quarter compared to pretax loss of $18m in the fourth quarter of 2002. We are very pleased with this 58% improvement in operating results on a 26% increase in net sales. Our net loss for the first quarter was $6.3m, compared with a net loss of $6.8m for the fourth quarter of last year. The reason for the significant improvement in pre-tax performance, but comparable bottom line performance was a change in our effective tax rate from 62% in the fourth quarter, to 16% in the first quarter. Our tax rate changed because our revenues are beginning to approach a level which would enable us to achieve break break-even profitability, and therefore we have decided not to record federal tax rate related benefits on our pre-tax loss.

As a result, we are currently recording only tax credits associated with research and development activity and tax benefits on undistributed income from SEN. We ended the quarter with $157m of cash, and $207m of total liquidity. Cash decreased by $29m, due to our pre-tax loss and a $19m increase in receivables. The increase in receivables was higher than anticipated, and was driven not only by the sequential increase in revenues, but also by the timing of shipments and related collection activity. In other words, we had a very heavy shipment month in March, and collection on these receivables won't take place until the second quarter.

Before I get to our second quarter guidance, let me just mention that our press release did hit the wire several minutes ago, so all of you should have that to be able to refer to at this point. Now, for the second quarter of 2003, we expect worldwide revenues to be consistent with the first quarter, ranging from 120 to 1 30 million. And net revenues are projected to be consistent with the first quarter as well, ranging from 75 to 85 million. Given the second quarter guidance that we've heard from others in our industry, we're happy to be able to project flat revenue performance. Our gross margin in the second quarter is expected to be approximately 30%.

The decrease from the first quarter is attributable to strategic account penetrations and product mix issues. Research and development spending for the second quarter is expected to be flat, and SG&A spending should decline by approximately $1m, due to the nonrecurring nature of certain first quarter SG&A expenses.

We expect SEN's income and royalty contribution to be approximately $3m in the second quarter, compared with $4.9m in the first quarter. This decline is primarily related to product mix and the resulting impact on both income and royalties.

We're currently forecasting a pre-tax loss of 10 to $12m, and a net loss of 10 to 12 cents per share. Compared with the first quarter reduced expenses will be more than offset by lower gross margins and lower income and royalty contribution from SEN. We do expect to achieve cash neutrality or better in the second quarter, as reductions in working capital primarily inventory and accounts receivable more than offset our projected pretax loss. So, to summarize our second quarter outlook, we're pleased to be projecting flat revenues in a difficult industry environment and we're working hard on improving gross margins, but significant improvement is dependent upon more broad-based customer buying, in addition to our internal cost-out initiatives. And we're pleased to be projecting --excuse me, we're --we think we're striking the right balance between making the investments necessary to make our strategy and taking cost out of the business. Thank you very much. I'll turn it back over to Mary now for closing remarks and then we'll open it up for questions.

Thanks, Neil. I would like to make a couple of additional comments before taking your questions. On the legal front, our patent litigation trial with Applied Materials has been delayed one month. Our new court date is now June 16th. This delay was requested by Applied Materials due to a last-minute scheduling conflict.

The issues surrounding the litigation have not changed. We are proceeding as planned and we continue to be optimistic about the outcome. I would also like to remind our analysts and investors that we are holding our second annual analyst day may 22nd in Beverly, Massachusetts. This year we're coordinating our analyst day with Brooks Automation, LTX, and MICROLIS to minimize expense and make the most of your time.

In addition to an update on our business, we will have(inaudible) corporate vice president of manufacturing and chairman of the board ST Micro Electronic Americas as our keynote speaker. If you have not signed up yet, please do so as space is limited. You can call or e-mail Mark Namaroff, our director of investor relations for additional information. We hope to see you there. Okay. Thank you very much, and we would be happy to take your questions now.

Thank you. The question-and-answer session will begin at this time. If you're using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press star -1 on your push button telephone If you wish to withdraw your question, press star-2. Your question will be taken in the order that it is received. Please stand by for your first question. Our first question is from [LIN YEUNG] of Smith Barney.

Thank you, nice job on the quarter.

Wanted to ask about orders in the second quarter. You normally don't give guidance but I wonder if you can give us a sense directionally where you think that might go.

Thanks, Glen.

This is Mike. We had a pretty strong 1st quarter bookings rate. It slowed down toward the end of the quarter as did the quota activity but I can tell that the April numbers for the quotes are about double what we saw in March.

Who knows. The mix is very heavily tilted toward 200 millimeter versus 300 millimeter, but there does appear to be some quote activity sparring some potential orders in the second quarter.

So, at this stage, how does the first month compare to the first month of last quarter?

It's up. From a quotation point of view.

Right. And that's usually a relatively good indicator on orders?

Keep our fingers crossed.

and I think I heard someone mention that the shipment rate in March was very strong. I wonder if you can explain that trend, and whether or not there's any extrapolation into the (inaudible) quarter.

No. Lin it’s Neil.

That just had to do with the movement of some shipments that were expected to ship earlier in the quarter to the month of March and that's really the reason why our receiveables went as high as they did as well.

and then I guess one thought here on gross margins, particularly, as they're coming down. It sounds like they could also be coming down in the SEN business. I wonder if you give us a little more (inaudible) as to what exactly is bringing that down, and I guess any thoughts you have on what you can’t control with respect to stemming that tide and perhaps turning that around.

There are two issues.

I think both us and SEN are seeing, you know, certainly increased pricing competition on a global basis. In their case, they're also seeing a mix shift to 300 millimeter, which is, you know, a big part of their shipments.

You know, that's pretty much the issue we're dealing with, you know, intense competition, we've had some strategic penetration that we've been focusing on, we're obviously being very selective about holding our existing critical customers and penetrating strategic new customers.

But, I want to also make the point that from pricing point of view, what we have been --, you know, obviously the market sets the price point, but we have, I think, done a very good job of not leading the pricing, and instead working aggressively to differentiate our products because we do believe we have levels of differentiation clearly high energy and high current.

And we're starting to see areas, in 300 millimeter particuarly with the complementary products and back end of line, and some of the RTP areas.So just tremendous price pressure. We're trying to preserve that as much as we can. We've been very aggressive in cost-out reductions, but frankly the gains we've gotten in margin improvement are being offset by the pricing issues.

Any further plans for future cost reductions?

We're continually looking at them.

You know, we've --you know, as you saw from the press release we announced a reduction in force this past quarter.

We're looking at some of the things that we implemented last year to carry forward in terms of shut-downs and the like. But we're at the point, I think, where any major structural change, we think would be strategically Put the business in a strategically bad position and we don't want to do that. We are doing some things in terms of out outsourcing, we're accelerating some of our supply chain, for instance finding sources of supply outside of the U.S., our traditional suppliers, qualifying suppliers in China, trying to get our material costs down. Obviously, a lot of activity in cycle time reduction, labor productivity and the like, but those are the kinds of efforts we've got going on.

Okay, thanks.

Thank you. Our next question is from [Steve Paleyo] of Morgan Stanley.

Please go ahead, sir.

Great, thanks. I don't know, Neil or Mike here. You mentioned revenues, the 200, 300 millimeter mix, but I guess I didn't catch the bookings perspective.

Was the mix on a bookings 300 millimeter related which also speaks to why gross margins may go down? You mentioned the mix goes back to 300 millimeter in Japan. I was wondering if that's for the whole company in general.

No, the bookings mix and revenue mix are

pretty comparable between 200 and 300 millimeter that's not an explanation of second quarter decrease in margin. It has to do with the items we mentioned before on the competitive side.

Sure, understand. And then Mike, you were talking about the bookings activity, I guess, kind of falling off as you went through the quarter but April being a better from quote activity perspective than March. I guess you look at the at the concentration issues that you were talking about, the top five, 90% of revenues, two-thirds of revenues and bookings from memory makers how is that concentration shift in the second quarter for both revenues and bookings?

the memory guys are still driving a lot of the quote activity, but we are starting to see, as Mary mentioned earlier, some of the IDMs, particularly ST, some of the facilities, the non-foundry, non-memory

foundries, outside of Taiwan, there's some activity there and in Taiwan, unfortunately, they're not spending yet.

There's a lot of quote activity.

And I think they're trying to manage this very carefully as well. So it's still very heavily memory concentrated.

and Steve, it's Neil. Just to put that top five customers representing 88% of systems revenues in perspective. Normally in a given year or in a given quarter, we'll see the top 10 customers represent maybe 75% of revenues.

All right.

So that gives you an example of the concentration of buying that's going on.

and Neil, do you think that concentration of that 88% declines in the second quarter or does it stay at that level?

At this point we're looking for it to stay pretty comparable to what it was in the first quarter.

Okay and last question, Mary, you talked about market share gains.

Data quest mentioning the company gaining market share. Congratulations there. I wonder if we could get more granular and talk about medium current there. Any more progress there in share gains?

Yeah, we --you want to talk specifically about medium currency?

Let's go through each of the areas but medium current is what I was interested in.

In medium current the share gains came specifically from SEN sales in Japan.

They gained four new customers over the last year, which is going to over time yield some pretty significant share for us, those were the design wins and we believe that when capacity picks up, that will expand into some additional share. So, that's really where we are in the medium current front. You know, if you take a look at the rest of the market, from what we understand, (inaudible) was under extreme pressure from (inaudible) in Asia -pacific and SEN actually was head to head against both of them in those accounts they won but yet they were successful, so pretty tough competitive environment, but, you know, making some progress.

On the high current front, while we didn't show tremendous share gain in that specific segment, we did pick up a little, and what we really did was we seeded the future.

We got a number of design-in wins which we told but over the last year through press release, et cetera. In fact it was particular specifically eight customers we won back, that we believe will position us again as capacity buying ramps up to take some significant share back from Applied. Most of the accounts where we went head to head, we went head to head with Applied and VARION, but they were the incumbent in those particular cases. So, we think that we will increase our share, as time goes on.

And then in high energy, I mean, in our mind I think we lost like a couple of points, but it was essentially flat,

given the size of that market, I think maybe two or three machines actually swung those couple of points one way or the other. So we're feeling very good about the fact that we're going to continue to maintain our leadership. There's nothing fundamentally shifted in that area.

Just to add to that. This is Mike. You know, the thing we're very encouraged by, when we were doing our back of the envelope prediction s of how we were --we were sort of hoping that we would be flat to 2001, because we knew that many of the wins we had were strategic design wins and not a lot of volume. It turned out that there was a fair amount of --that buying was a big part of the buying for last year, so it did have an impact on share gains.

We're very, very bullish on the fact that we've set a -- the seeding in place in these critical areas, so that when there's ramps, we're going to be able to widen the gap. The other thing we're really pleased about, Mary mentioned mentioned, on a regional basis we gained share in each of the four major regions of the world, Japan, North America, Europe and all of Asia, less Japan. And in big ways.

You know, five to nine points, depending on the region. So we strengthened our global presence, we've really secured up our critical areas of high energy and high current and we're making good progress and momentum in medium current.

Okay. And if I could just sneak in one more for you, Neil. Just an up date on the break-even levels, what kinds of market assuming s assumptions are we assuming at those levels?

Obviously, Steve that's a good question. In the second quarter, with our 30% margin, with 75 to $85m of revenue, we're not projecting break-even performance. So our target is still 85 to $90m revenue level on a quarterly basis in order to achieve break-even performance, but we've got to get our margins at that level up into the upper 30s in order to be able to do that that. And you know, we talked about where they're going to be in the second quarter and we talked, I think, about some of the things that have to happen for that to improve.

So it's still our objective to get there by the end of this year, but certainly margin is the wild card there, in terms of allowing us to deliver on that.

Okay, fair enough, great, thanks, guys.

Thank you, our next question is from Ali Arani from CIBC world markets.

This is Peter Wright sitting in for Ali as he's in Europe at the moment. First group of questions is your revenue base. Obviously experience great momentum in Asia, if you could comment specifically on an order basis, if you're seeing any pickup in Taiwan. And then secondly, on your non-implant revenue, if you can comment on the number of customers that you now have in both RTP, and strip.

I'll take the first one on the revenue mix. We're not --take Taiwan business has slowed dramatically from a shipment and from an order point of view.

But there is a --you know, part of what I mentioned in terms of quote activity is there’s a pretty substantial

amount of it coming out of Taiwan. This is mostly for new 300 millimeter fab, quotation activity.

The second point again, I'm sorry?

Is on your non-implant customers.

If you gained any new customers in either RTP, or dry strip.

Yeah, I'm glad you brought up that. This is an interesting period. You know, the big effort that we've got both in RTP, and dry strip are on the emerging markets. Back end of line, strip over low K, primarily the 65 nanometer porous [inaudible] materials and then in RTP for many of the low temperature applications, and what we're finding is, as you know when you're trying to penetrate in a new emerging technology, typically you get, you know, a R&D buy by a customer, what we're find something customers are very content to send their wafers to us to do demos. So we're spending a time of actually the demo rate that we're seeing on these products is sort of gone up by an order of magnitude over the last six months. But the buying hasn't followed yet. So we're optimistic that we're getting a lot of interest and generating a lot of excitement, but nobody's writing checks yet.

Great. And one last one.

The learning curve for 300 millimeter to get the margins in line with 200 millimeter, I'm assuming as 200 millimeter has represented the lion's share of activity recently, are you still on target to bring 300 millimeter margin up to 200 by 3Q?

I don't think so.

We have made progress, though. We've had cycle time improvements, we've got pretty dramatic material costs, a lot of those across the dock savings won't take place until the third quarter or fourth quarter. A big part of our learning curve is going to be when we're able to ship from sell on the 300 millimeter tools. Unfortunately, based on volume, customers are very content to have us build, test and disassemble and reassemble at site. So we probably won't see that until the first half of next year.

Hey, Peter?

Yes.

Just to correct one thing.

We did not have a target of third quarter this year, to have that crossover point. It was actually early next year. What Mike's saying, he expects it to take place the first half of next year, not necessarily in the first quarter of next year.

Great, thank you, and congratulations.

Thank you.

Our next question is from Jim Covello of Goldman Sachs. Please go ahead, sir.

Good afternoon, this [Amanda Hingley] on behalf of Jim Covello.

Two questions, First, were there any cancellations during the quarter, and the second question is, what should we be thinking about in terms of a tax rate in the second quarter? Thank you.

I'll answer the cancellations, I'll let Neil answer the tax rate one. This is Mike.

We had one push-out in the quarter from Q1 to Q2, but it's going to be taken, it was a timing issue. We did have two cancellations, one was relatively minor, small system. The other one, which is being negotiated as an upgrade, basically, to a more capable system.

So, it's currently a cancellation but it will get rebooked at some point over the next six months. Nothing substantial there.

Great, thank you.

on the tax rate, Amanda, it's probably going to be in the 10 to 15% range.

Great.

Thank you.

Our next question is John Pitzer with CSFB.

Thank you. Neil, quick question. On the gross margin for the June quarter. What percentage of the decline is due to product shift, what percentage is due to some of the competitive pressures you were talking about?

Did you say product mix, was that your first

Product mix, yes.

It's probably about half and half. I would say, we're down about 360 basis points in terms of the guidance we've given, and it's pretty equally weighted, John.

Did pricing pressures accelerate in Q1 or were they about where they were in Q4?

No, there was a definite acceleration in Q1 and we don't see signs of relief right now in Q2.

Does it bother you guys that the business from a bookings perspective and a revenue perspective were up dramatically in the March quarter and despite the pickup in business, pricing pressure accelerated? I'm trying to reconcile the disconnect there.

Well, a lot of it had to do with the customer concentration, I mean, if that had been spread over a larger base, I don't know that we necessarily would have seen the same kind of pressure that we in fact experienced.

You just basically have the situation where few are buying more with a lot of purchasing leverage, and in addition to that, in Asia, particularly, we're seeing many of the 200 millimeter buys that are being driven based on used equipment pricing levels, and so that's complicating the factors.

Is it fair to say, then, guys, that if break-even is dependent on rising gross margins, that rising gross margins are dependent on the broadening out of the customer base?

I think that's absolutely true, John and we don't see any evidence of that in the first half of this year. Whether we're going to see it in the second half of the year is a question mark at this point.

and Neil, good segue for my next question. The first shaf very D-ram dominant for you guys. Do you expect them to carry through to the second half of the year, or do you expect other areas like the foundries to pick up the slack? What I'm really trying to understand is why not take the break-even level lower than you currently have given that it looks like Q2 bookings, though you're not giving guidance, doesn't necessarily --doesn't sound to me like it's pointing up significantly up sequential. I wonder why you think it's better to keep break-even at current levels and invest strategically in some of our other businesses rather than take another whack at bringing break-even down.

Well, the --to answer the answer the first question, I

mentioned the quote activity had picked up.

It is more broad-based, we're seeing quotation activity beyond, you know, the couple of customers that have been buying, so we're encouraged by that. Again, whether or not they end up executing on the capital spends, we'll see.

And I think to Neil's point. You know, if you look at our --it's interesting, because if you look at our three products, the --clearly the implant products we think we're holding our own. If we look at competitive margins and, you know, what our competitors are doing relative to margins, we believe we're comparable, and we're doing that with what we consider to be a much more diversified platform because we support both a multi and a single wafer platform to support the application range. There's cost associated with that and advancing the pieces of that. You know, I think everyone here knows that, you know, with the complimentary product certainly well under the 20% market share mark it's going to be very difficult for those businesses to become more profitable with the current volume rates we're at. And so a big part of this is also associated with that.

I might just add that we're seeing a greater percentage of 300 millimeter buying in our complimentary products than our implant products which obviously puts pressure on margins for those segments.

and Neil, can you help me understand, - break-down profitability by product line?

Well.

Well, John we don't --

Which is closest, which is furthest?

(inaudible) magnitude wise.

Orders of magazine magnitude, sure.

I think at least the way we think about it is, in order to make money in the semiconductor capital equipment cycle you have to have 20% market share in order to do that and we're in the down part of the cycle right now and sometimes it's even difficult to make money in the down part if you have 20% market share. Mary talked about market share earlier and talked about the fact that we're at 37% in implant, 15% strip and 4% in RTP.

So you can imagine that from a profitability perspective, our performance is in proportion to those market share numbers, and although we had significant improvements in both strip and RTP last quarter, we're not yet at the point, certainly at this part of the cycle where we can make those businesses profitable.

I would add that the dry strip business was profit able with 14% market share back in 2000, but 2000 was a long time ago.

Understood. One last question, Mary, for you guys. You guys did a great job gaining market share. Can you point to the one or two areas this year that you guys are most optimistic as far as further market share gain?

I think you know, the story re mains the same same. On high current we said we got a number of design in wins and this is the year we hope capacity will pick up and we'll some additional share gains from, that as well as make penetration into some additional accounts, by the way way. There's a lot of activity going on right now in the demo area for the ultra, both at 200 and 300 millimeter, so I think that's going to continue to be a big win for us. I guess the other area is probably RTP, where we think we can maybe, you know, accelerate the gains that we have made there. You know, to get up to 20%, we're going to have to continue to double our market share there every year, basically, to make it over a 5 to 10-year period. So I think that's the other area where we're concentrating very hard on getting additional customers and hopefully making some progress there as well.

and the other area is of course, the meeting medium current with SEN. They've got continued buying picked up I think close to 3 points of market share last year in medium current. And we're going to try to leverage that, springboard that as those Japanese companies transfer that technology into the foundries.

Great, thanks, guys, I appreciate it.

Again, ladies and gentlemen, should you have a question, please press star -1 on your push button phone. Our next question is from Mark Fitzgerald of Bank of America. Please go ahead, sir.

Thank you. Given the trends going on in the industry, why would you expect the concentration issue to change going forward?

Well, Mark, it's Neil. You know, I'm not sure it will change going forward.

I think what Mike was referring to, when we look at quotation activity, recent quotation activity, it is more broad-based than what we saw in the first quarter. Does that necessarily mean it will translate into broader base buying? It does not. But what we're seeing, there's not much activity at all in the foundries, there has been significant activity among the major membrane manufacturers and we're beginning to see more activity from a quotation perspective on the logic IDMs.

It's too early to tell about broad-based buying but at least it’s an indication that some of the folks that had been out of the game for a while are at least potentially looking at getting back in.

to expand on, that there's one piece which is --which has been heavily memory-focused and getting something other than memory is certainly a plus. The second thing is I really believe that we're going to see another cycle of 200 millimeter spends, even into the 130 and 90 nanometer mode, and that's going to be not only the big players but some of the smaller players, now what the timing of that obviously is not clear. But I really am pretty sure that we're going to see that happen.

Partly because one of the things that I think as you may know from talking with the foundries, they're struggling with the (inaudible) challenges and I think a lot of IDM s and some of the smaller IDMs that have been out sourcing, are pulling some of that back in. Now, will that change over time?

I think we all believe that it's going to be, you know, a heavy foundry model going forward. But I think there's going to be another round here where there's going to be some what I'll called blurred spending.

and did you comment that 200 millimeter was the a bigger part of the mix into the June quarter?

I think what we said is the booking activity activity.

Yeah, quotation activity is higher --(inaudible).

That would be our expectation.

and is that what you're suggesting, IDMs coming back, that hadn't been in the marketplace?

Yes, the sum.

Smaller ones?

Yeah.

Okay. I kinds of understand that concentration argument, but when you look at some of your customers in the profit profitability of the your customers, I have a tough time believing that's not a factor in terms of how tough they are in terms of negotiation.

Right.

I mean

Absolutely.

So, is it really a concentration issue or is it an industry profitability issue?

I think it's probably both. I mean, it just stands to reason when you have five customers buying and four or five companies trying to sell to them, that you've got a pretty competitive pricing environment.

So, if we're in fact in some sort of modest recovery scenario, I'd suspect that profitability thing isn't going to change quickly so we may be living with an of it pricing environment for some period of time and I was curious if that were the case, can you address your own operations to get the cost out to be more profitable?

the answer to that question is yes. You know, I think what we said in the past, Mark, we've looked at our business on a quarter to quarter basis and we'll continue to do so and that hasn't changed.

If we get to the end of the second quarter and we're look looking at continuation of the same trends we saw in the first quarter, I think you should be surprised if you don't see us looking at other actions to take.

Okay. One last question. On the R&D side, is there a certain threshold level you have to have just to support your product portfolio out there? That you just can't take it below?

Yeah, and we cut R&D about million and a half a quarter, something like that. Primarily because many of the 300 millimeter product at least come to the completion point and getting them shipped but there's still a lot. CIP and reliability improvement work we want to do and have committed to do for our customers so there's a sustaining level. We're close to that. If you look across all three product lines and the kinds of --and not only that, but to keep some of the advanced application work going, we're clearly there.

Okay, thank you.

We may be able to trim some more out.

And I want to make it clear, we're not pleased to be at this margin level. We're driving, you know, very hard to try and get more

improvement.

So don't want you to take this the wrong way. We're not taking this pricing pressure sort of nonchalant. We're concerned about it and we're focusing our efforts on it.

Thank you.

Thank you.

Our final question is again from [Steve Paleyo] from Morgan Stanley.

Thank you. Neil back to the break even at the high 30s gross margin.

You mentioned you have it's kind of dependent on the broad broadening out of the customer base and it, looks like you're talking about the quote activity for second quarter is broadening out a bit but looks 200 millimeter centric. When I look at the third quarter gross margins, even if we assumed revenues were flat, because you have a favorable mix of 200mm (inaudible) and broader base of customers who would expect gross margins to improve on a flat revenues in the third quarter, wouldn't you think?

Yeah, if we see broader -based customer buying, obviously we're continuing our cost-out initiatives that's going to help. We see broader based customer buying that will help. Pickup obviously in the top line, that will help because it will be driven by 200 millimeter buying. But, you know, that is our target for the end of year, Steve. If we're sitting here today, 90 days from now and we haven't seen any change in the outlook in terms of the industry, you know, I think we'll tell you that it's probably going to be difficult to achieve. But we're not willing to go there yet. Today we are focused on achieving break-even at that level, and we see some signs that broader-based buying, coupled with those cost-out initiatives will allow us to make that happen.

and do you think your mix from a mix side, 3 300 millimeter, will be the majority of it in let's say the third or fourth quarter of revenues? Will that end up hurting you?

Who knows. It really depends where revenues go.

I think that we have seen a pretty is that right uptick in 200 millimeter buying in the first quarter and if the direction of revenues in the third and fourth quarters is up again, my best guess today it will be driven by 200 millimeter activity.

Okay, fair enough. Thank you.

Uh-huh.

We have one final question from Martin Teng.

I'd like to find out from you, in terms of D-ram manufacturer rate what is the mix of equipment they use. High current and high energy, or a high current and the medium current? Kind of a mix?

They use all three.

Blended, different approaches, based on the different customers, but they use medium current, high energy, and high current. Typically, you know, you'll see for let's say, 20,000 wafer start, 2 high energy, 4 to 5 high current and maybe 4 to 5 medium current tool.

Okay.

And you didn't really give guidance for the second quarter orders, but I'd like to know, the uptick in April, are they mostly from D-ram manufacturers also, same as the first quarter.

Just so you know, the uptick for April was for orders, not -for quotes, not orders. We wish they were for orders. It was more blended. Still a heavy concentration of D-ram but we're starting to see other quotes that are more broad-based.

and historically, is Axcelis, I mean most of your customers, are they mostly D-rams or large or (inaudible).

We have a blend, across the board.

It's typically relatively reasonably evenly split. Not even simply split today. As we said it's almost 70% memory today but typically a third memory, a third logic a third foundry or thereabouts.

So basically, the memory guys are buying mostly 200 millimeter system; is that right?

That's correct.

Okay.

What about 300 millimeter?

Are they requests for quotes for 300 millimeter?

Oh, sure. We're seeing the big memory manufacturers are --it's a blend. Samsung has invested in 2 and 300, infinity at this, micron

in 2 and 300.

Okay.

and the foundries in Taiwan, the memory

foundries, primarily, will be spending at 300 millimeter.

Okay.

And one last question about the Japanese customers that you have. What kind of a product do they generally use? You know, are they using mostly --are they using a lot of high current systems or, you know, I'm thinking if there are like mixed signals they'll probably be using more medium current, right?

Not necessarily. I mean, the --I think the way to think about this is that there's two really two segments. There's, what I would call a high tilt segment, which is implants that require very high angle implantation, and then there's the low tilt, which is say 7 degrees or under.

And probably about 85% of the implant steps are done with the low tilt implant, which are typically done on either a high energy or a high current multi-wafer system.

And but the same is true in Japan as we see in the rest of the world.

It's, you know, every customer has a pretty consistent recipe flow for their implant steps and they buy in those patterns, so you'll see medium current, high energy and high current systems old sold there.

Okay, thank you very much.

You're welcome.

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