Axcelis Technologies Inc (ACLS) 2004 Q2 法說會逐字稿

Good day, everyone, welcome to the Axcelis 2nd quarter 2004 earnings release conference. A sa reminder, today's call is being recorded. Later we will conduct a question-and-answer session. Instructions will follow at that time. For opening remarks and introductions I would now like to turn the conference over to Mr. Mark Namaroff Director Relations- Director of Investor Relations at Axcelis. Please go ahead sir.

Hi. Good afternoon. This is Mark Namaroff, DIrector of Investor Relations and Corporate Development for Axcelis Technologies. Welcome to our conference call to discuss our results for the 2nd quarter of 2004. I'm sure all of you received a copy of our press release issued earlier today, announcing our 2nd quarter results. If not, can you download the release via our website at www.axcelis,.com. With us today are Mary Puma, President and Chief Executive Officer; and Stephen Bassett, our Senior Vice President and Chief Financial Officer. Also joining us is Mike Luttati, Executive VIce President and CHief Operating Officer; Lynnette Fallon, Senior Vice President of Human Resources and Legal; and Don Palette, Vice President of Finance and Controller. The prepared remarks will last for approximately 15 minutes, after which there will be time for questions. Play back service will be available via our website as described in our press release.

I would like to take a moment to remind everyone of our Safe Harbor Statement. 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 most recent form 10K and 10Q on file with the SEC, particularly the exhibit entitled factors affecting future operating results. As you know, due to the risks inherent in our business, which are described in detail on the exhibit, our actual results may differ materially from our current expectations. We do not assume any obligation to update these forward-looking statements.

In addition, I would like to briefly comment on remarks that both Mary and Steve will make regarding our revenue performance and projections. When we speak of world wide revenue, we are referring to the aggregate revenues of Axcelis and those of SEN, our 50% owned, unconsolidated subsidiary in Japan. Please understand that we do not currently consolidate SEN's revenues under generally accepted accounting principles. We use the term net revenues to mean Axcelis only revenues determined in accordance with GAAP. We provide data on world wide revenues with SEN believe it is useful to investors. SEN's iron implant products are covered by a license from us, and therefore, the combined sales of the two companies indicate the full market penetration of our technology. Now I'd like to turn the call over to Mary.

Thanks, Mark. Good afternoon and thank you for joining us today. I'm very pleased to report that Axcelis delivered near-record quarterly results. We met or exceeded our guidance on all levels and our performance during the quarter approached peeked level when's comparing it to the 4th quarter of 2000. I'm especially pleased with our gross margin performance at 45% of sales. And our pretax profit at 22% of sales. We generated close to $37 million in cash during the quarter. Far better than the 15 to 20 million we expected in April. Our efforts to strengthen the business are working. We are satisfying our customers product and support requirements during the ramp. We are securing critical design wins for next generation technology notes, and we have successfully improved our business model, generating higher returns on a lower revenue base.

I'll turn the call over to Steve in a few minutes to review the financials in more detail. But first, I want to make a few comments on the quarter. On the product front let's start with implant. First, let me remind you that our strategy as market share leader is to provide both multiwafer and single wafer tools to satisfy all high-volume applications. As you heard during our analyst day and at SemicCon West, we announced a new single wafer implant platform to augment our highly successful multiwafer tool set. Product development is in the final stages of completion and our first tool will be ready to ship in the 4th quarter of this year. We are already working with a very large logic customer to take delivery for a 90 nanometer and 65 nanometer production. We will be giving you more specific information on the product line in the coming months. During SemiCon West this year we also announced further productivity enhancements to our multiwafer ultra high current product line. We can now deliver over a 20% increase in throughput, an improvement over our own industry leading performance. This level of performance further extends the ultra's lead as the most productive implanter on the market today. So competitively, we have the most complete product offering in the ion implantation market with both multiwafer and single wafer tools to optimize coverage of all segments. With this strategy, we expect Axcelis to remain the market share leader in 2004.

In the cleaning and curing market, our recently introduced radiant strips 320 LK is at 3 customer sites, including 2 in Asia. Where they are developing advanced low K processes. In addition, our demo lab is bustling with activity on low K evaluations for several other customers. The radiance strip 320 LK is proving to be the only zero damage cleaning solution for stripping over low K. Also in the low K arena, we are working with material suppliers and customers on curing of low K materials. Here again, Axcelis' UV technology is providing the technology leaders with an enabling solution to a materials adoption challenge. These products play an important role in our strategic growth.

Operationally, we continue to show improvement, driving gross margins, working capital and supply chain initiatives. The financial results are only one measure of our progress in this area. Cycle time, on time delivery and product quality have improved significantly since the peak of 2000. For example, year-to-date we have a 99% ontime delivery of all tools. All of our 300 millimeter tools are shipped from sell qualified and we have successfully completed shipped from sell install for all of them. In fact, Ship from sell has been more dominant than we had anticipated with 75% of all implanters shipping from sell in the 2nd quarter. Our lean manufacturing efforts are significantly contributing to our overall success. And now I'd like to turn the call over to Steve who will review our financial results.

Thanks, Mary. As Mary mentioned, today we reported earnings for the quarter of 34 1/2 million or 33 cents per diluted share. And positive cash flow of 37 million. These results reflected significant enhancements we have made to improve operating leverage over the past few years. Our earnings results were impacted positively by the adjustment of 4 million or 4 cents per share to leave us income tax accruals pertaining to tax matters dating back to 2000, that were resolved favorably during the quarter. Revenues for the quarter of 151.3 million were in line with our expectations. Service revenues representing 27% of the total increased by approximately 5% over Q1. Reflecting continuing high fab utilization rates. Revenue from system sales at 106.8 million, 74% 200 millimeter and 26% 300 millimeter were up 16% over the 1st quarter.

From a product perspective, our implant business accounted for 82% of total revenue. For all of 2004, we expect revenues from implant products and services to approximate 80% of the total as the implant market has expanded at a more rapid rate than the markets for our complimentary markets. Systems and service bookings for the quarter grew 11% to 163 million with system orders increasing to 122 million, an increase of 12% sequentially. Marking our 4th successive quarter of double-digit order growth fueled by capacity expansion. Our book to bill ratio for the quarter was 1.07, and we ended the quarter with a system's backlog of 108 million. World wide orders including SEN were 253 million, an increase of 13% sequentially, as the market in Japan maintains the strength we have seen over the past 12 months.

Based on the geographic location of the fab, Asia accounted for 66% of systems orders, with 26% coming from the U.S. And 8% from Europe. The increase in order volume in the U.S. was driven by a major 300 millimeter fab design win. Including SEN, approximately 79% of new systems orders were from Asia. New orders were divided between logic manufacturers at 32% and memory manufacturers at 68%. The increase in memory orders is attributable to 2nd round buying by the world's leading D-RAM manufacturers. On a product basis, approximately 43% of bookings were for 300 millimeter products and 57% were for 200 millimeter, evidencing the ongoing high demand for 200 millimeter systems.

Gross margins were better than expected at 45.2% as we realized benefits from improvements in manufacturing efficiencies and product cost-out initiatives. Approximately 38 million of systems revenue has been deferred at the end of Q2. Gross margin on the deferred portion of system's revenue, which will be recognized in future periods is approximately 60%. Operating expenses were slightly higher than forecast, up approximately 6% sequentially. Due to costs associated with evaluation tools sport and accruals for variable compensation expense. The contribution from SEN for the quarter, royalties in Axcelis' 50% share of their net income was approximately 11 million as SEN continued to maintain its leadership position in the strong Japanese market. Income taxes were reduced by the adjustment of $4 million I referred to earlier. Excluding this adjustment, income taxes would have approximated $3.1 million for the quarter, substantially all of which is attributable to operations in Asia. We generated positive cash flow in the quarter of 37 million. This better than expected cash performance is a result of significant increases in customer collections and the Company's continuing focus on its working capital management program. Inventory balances, despite significant increases in volume have declined since the close of 2003, and DSO and accounts receivable is at a near record low.

Looking forward to the 3rd quarter of 2004, we expect world wide revenues to be in the range of 250 to 260 million. Net revenues excluding SEN are projected at 155 to 165 million. Our gross margin in Q3 is forecast at the same level as the second quarter, approximately 45%. Research and development spending is expected to increase by approximately 9%. This projected increase is related to costs associated with the timing of certain development projects. We estimate that SG and A spending will increase by about 2 to 3% over Q2 levels, due principally to increased accruals to variable compensation expense associated with performance.

SEN's income and royalty contribution for the 3rd quarter is expected to remain strong based on their Q2 bookings and backlog. We're forecasting a total contribution of 11 to 12 million, about a third of which will be from royalties. We revised our income tax estimates for the year, because of the high level of earnings generated in Asia where the company is taxable. Going-forward, we have projected an effective tax rate at 9% of pretax earnings. We are currently forecasting net income of 31 to 35 million for the 3rd quarter, which equates to 30 to 34 cents per diluted share. We expect to generate positive cash flow in the range of 10 to 15 million reflecting the timing of scheduled shipments weighted to the back end of the quarter. I'll now turn it back to Mary for closing remarks, and then we'll open it up for questions.

Thanks, Steve. Let's wrap up by turning to our view of the market. We believe that the semiequipment market during the second half of 2004 will remain at high levels as customers continue to ramp their fabs for 130 and 90 nanometer processes. Although we're hearing all the same reports that you are, about the industry weakening, our customers have not notified us of any pushouts or cancellations. In fact, we are continuing to accelerate deliveries for several of them. We are still tracking well over 50 fab projects, many of which are 300 millimeter and are due to place orders for 2nd round expansions toward the end of this year. Our joint venture in Japan, SEN, also remains optimistic about its prospects, believing that the Japanese market will continue to be robust through 2004. Our internal analysis of the industry shows that despite a strong year, semiequipment and ion implantation buy rates are well below the historical trend line, indicating that we are not yet in danger of overcapacity. In fact capacity utilization is still high at 94 to 95% overall. If capacity utilization stays at high levels through the 2nd and 3rd quarters, we remain confident that these projects will move forward providing continued momentum into 2005. Thank you and we would be happy to take your questions now.

We'll take our first question today from Ali Irani from CIBC World Markets.

Good afternoon and congratulations on great results. Mary, you're clearly ahead of your own plans to restructure the business for better margins. I'm hoping you can give us an idea now that you are at 75% shipments from sell, where your margins could go and whether in the mix of your business you're seeing favorable impact from geographic trends such as greater growth in Japan and/or ship to the new platform types? Thank you.

Ali we've been talking now for quite a long time about the fact that we think that at the peak of this cycle we can get our margins to about 46 1/2%. So that's consistent with where we've been and we still think that that's where we're headed for this. 200 millimeter is still strong at this point in time. And, you know, from a mixed standpoint for us, that still is important because we are still working very hard to close the gap between our 200 and 300 millimeter products. We continued to make progress during the 2nd quarter and we're still on track to have that gap essentially closed the 1st quarter of 2005. So in that regard, I think that that's a positive thing for us.

Great. Looking at the mix of orders between 200 and 300 millimeter. It seems there's still a lot of 300 millimeter orders still to come for the number that have been announced. Given that only 43% of your bookings levels were at 300 millimeter, and when you look at the difference in ASP between your 200 and 300 millimeter, it seems that there's still, in particular, a lot of unit growth and bookings growth still there. Do you see the same trends that I'm seeing in these numbers?

Yeah, as you said our 300 millimeter bookings did increase from the 2nd quarter, they're up to about 43%. And what I want to clarify on that is that 200 millimeter is still strong. The issue is not, for us at least, that 200 millimeters falling off, the issue is, as you pointed out, that 300 millimeter is in fact picking up. If you look at this mix of products that we have out there, the 50-plus fab projects that we've been talking about. I think it's about 70% of those projects are 300 millimeter, and as we move into the 2nd half of this year, we believe that the 300 millimeter will pick up. From an ASP standpoint. We've got about a 20 to 30% premium on our 300 millimeter product versus our 200 millimeter product. So again, that's a positive thing for us at this point.

Great. Thank you very much.

From Credit Suisse First Boston, John Pitzer.

Yeah, good afternoon, Mary, just a couple quick questions. I think in the last conference call you guys gave guidance of between 240 and 250 million for the June quarter. It looks like you were a little bit light on that. Can you help me understand, if I'm correct, what happen there? And than secondly, I know you guys don't give order guidance, you continue to do better than your peer group on a quarterly basis, can you give us a sense directionally, as you look into September which way you would expect orders to go? Thanks.

Yeah, let me have Steve answer the first question, then I'll take the second one.

Yeah, the order gui -- the revenue guidance you're talking about relates specifically to SEN and it was a timing of some shipments at SEN and some acceptances, and the forecast that we have for the 3rd quarter is that differential's going to be made up. What they had originally forecast moved out. It wasn't pushed out, it was just the timing of shipments and the timing of acceptance on some of the shipments in Japan. And that would -- that's to be made up in Q3.

So, Steve, your view still is that SEN stays at that pretty high operating levels for the rest of this year?

Yes.

Okay.

The information we have from SEN and the feedback we have their management team is that they're expecting their operations to stay at these high levels, through 2004.

Okay. For the second part of the question, you're right, we don't give order guidance. Again, we have no more visibility than anybody else in terms of what's going to happen out there, but I know the big question is, because there's a lot of noise out there, you know, directionally, what is going to happen. And I guess, you know, we've heard about all the potential fab delays just as you have, we know that some customers are having difficulty transitioning the 90 nanometer, there are yield problems and other challenges that could cause technology push-ups. We also know with all the facility buildups that are in process, that there have been some construction delays. So with everything that's going on in the industry right now, we think that it's too early to say that the rumbling that we're hearing out there is related to over capacity. And as I just mentioned, the data that we're looking at indicates that there isn't an excess in capacity and this is based on the fact that utilization rates are still high, and buying rates are not out of control. So that leads us to believe that without giving you directional information, we still think that our order rates are going to stay at the very high levels that you see them at now.

Mary, just out of curiosity, the rumblings you're hearing, is that coming from guys like us on Wall Street or are you hearing those rumblings out of the industry itself?

I think it's more coming out of what you guys are writing out there.

Thank you.

Our next question will come from Jim Cavello of Goldman Sachs.

Good afternoon. Thanks so much. A couple quick questions, Mary you referenced the idea that you guys have done -- you've referenced the idea that we're not above, kind of, normalized buy rates for ion implanters, your revenues are about 10% off the previous peak. I think we would all agree the previous peak was above the normalized levels, could you help me understand that a little better?

Well, I think what's happening right now, Jim, is from an order standpoint, things are -- you know we've talked about this before -- things are what I'll call, quote unquote, lumpy. You take the 50 projects and these projects are falling out, and the chips are where they may in terms of where we are from an order standpoint. We've had four quarters of double-digit sequential growth. I mean, we we're up in Q3 '03, 50%. 44% in the 4th quarter of '03, 20% the 1st quarter of this year, and now another 12%. So, I mean, I think we've shown some incredible growth here, and the question is, what will we see in the future. The answer is we don't know, but our peak in the last quarter was about -- I think it was between 180 and $190 million in orders. So at this point in time, could we get there? I think the answer is, yes, essentially we could. We're not giving that as guidance, but we don't see any reason that we shouldn't stay at these high levels and personally even go higher.

Okay. That's helpful. Maybe one question for Steven. Could you help me out with the EPS calculation, was there anything associated with the add back of [inaudible] or subtraction of interest expense due to the convertible -- the as-if convertible calculation?

Yes, when our earnings were over about 22 cents, the convertible diventure -- the convertible diventure becomes dilutive. It's not at these levels, it's not very dilutive, about a penny. We have about 1.4 million of interest expense that gets added back to the -- to earnings, and is about 6.2 million -- 6 million 250 thousand shares that are considered common stock equivalent. The details of the calculation is actually outlined in the 10-Q which is going to be filed at the end of August. You do add it back about 1.4 million of interest expense. And then you take into account 6 million 250 thousand shares attributable to the conversion of the diventures.

And the 1.8 million share count going-forward is the -- you know, roughly the right number to be using? or I'm sorry, the 108 million?

When our earnings are above about 22, 23 cents, that's when it becomes dilutive, and you'll see that will go into the shares that we'll have outstanding, correct.

Thank you very much.

Jim, if I could just comment on the buy rate trend announcement. This is Mike Luttati. One of the things we track is the -- the semiconductor weight per fab equipment revenue in the numerator, over the total semiconductor unit sales. As well as the ion implant over the unit sales. It gives us some buy rate analysis overtime. Clearly, as you have eroding ASP's in the semiconductor market, that has a factor on that. It tends to be a little lumpy. If you look historically at the trend rates for these by-cycles. They tend to fall within a pretty good and even range, and the reason that we're not too concerned about potential overbuying is that we've been below the trend line for the last three years and we just recently, in this year started to move above it. And if you look at previous cycles, the period of '95 through '98, we were well above the trend line, the period of end of '99 and into sort of the second half of 2000, we're slightly above it. We think there's plenty of room for capacity here.

Thanks.

You're welcome.

Once again, to ask a question, please press star one on your telephone keypad. If you find your question has been answered, you may remove yourself from the cue by pressing the pound key. We'll take our next question from [Ken Schultz Melance] with Morgan Stanley.

Hi, guys.

Hello.

Just a quick question, maybe just following up. You talked about the fact you haven't seen any pushouts from your customers right now. Can you maybe just give us some, sort of, sense of flavor, you discussed that your customers are looking for accelerated delivery. Can you give us a sense as to where, absent of the geography or by other device types, you may be seeing just some, kind of, slowing in terms of PO receipts, where maybe you would have expected to already have the PO right now but it seems to be slow in coming. And then I have a follow-up.

I think in terms of where we're seeing some acceleration right now versus deceleration, because we're not seeing a deceleration its more of an acceleration, is in D-RAM and in flash in particular, that's where we've had some requests from our customers to pull some things in and those guys are around the world, so there's not one particular part of the world where we're seeing that happen.

What would those D-RAM and Flash pullins be predominately at 200 millimeter?

No, I think we're seeing it in both 200 and 300 millimeter.

Okay, great, and just to follow up, I mean, you talked about Japan and obviously you have some pretty good insight there with the SEN business, you talked about it remaining robust through, I think, the second half of this year. Do you have any, kind of, early sense that you could share with us for the outlook for '05?

We were just with the SEN folks a couple weeks ago and we did the review. There's not necessarily -- no, I mean, they don't have any better visibility than we do, but Mike has a little bit of color to add here.

Yeah, the demand there for the digital consumer products is still quite strong. Most of the demand that we're seeing interestingly enough in Japan is for 300 millimeter lines. They're beginning to accelerate 100 nanometer technology into their main stream production by year-end at most of the critical ones. The other interesting phenomenon that's occurring in Japan is they're doing less outsourcing to the foundries now then they did 12 to 18 months ago to protect their IP on these high-end components, so I think that's likely to continue through certainly the middle part of next year which is about the best visibility from SEN on that. In fact SEN's unit shipments from 2004 calendar year will exceed their unit shipments in 2000. They will actually hit a record number of shipments in Japan. And a significant number of those shipments at 300 millimeters.

Great, and maybe just one final one if I may. Just talking about the tax rate, did you say we should be -- that you were guiding for 9% for the 3rd and 4th quarter, or that we should be using 9% for the full year.

We're using 9% going-forward for the 3rd and 4th quarter.

Great. Thanks.

We'll take our next question from Bill Lu from Piper Jaffray.

Hi there, can you guys hear me?

Yes, Bill.

Hi there. Mary, I know you don't talk about bookings going-forward, but can you give us some guidance on the shipments in the 3rd quarter, what it's going to be up sequentially?

Hold on a second. Let's take a look at that.

Yeah, shipments will be up, Bill, shipments are going to be up sequentially for both on a net basis Axcelis only, and on a Worldwide basis.

Is the magnitude about the same as your revenue growth?

It's going to be in line with our revenue growth.

Okay, Great. Thanks. And then one other question. Can you just give us an update on RTP, number of customers and such?

I can tell that you we did secure another design win for a 300 millimeter D-RAM customer in the 2nd quarter, we have three design wins to date for the year. So we're running at 9 sites, 10 sites Worldwide.

Okay. Great, thanks a lot.

You're welcome.

We'll take our next question from Mark Fitzgerald from Banc of America.

Thank you. A couple questions here. Samsung on their conference call said they thought the D-RAM cycle would end by mid 2005. I mean, in terms of how long it takes to bring capacity on, if that time line's correct would it be the last hoorah for the D-RAM companies in terms of ordering capital equipment?

Boy -- that's a tough one, I guess you have to ask Samsung and Micron that question, but I don't see that -- as anything as a last hoorah.

Well, it's impossible to tell. It really is. We've got a lot of activity with all of our D-RAM customers, we don't see it slowing down right now, maybe when we get closer to that prediction of the middle of 2005, we'll e able have better visibility and we can answer the question.

But I guess, all I'm interested in is the time line for you, if you get an order at this point and ship it and they have to install it. That would be really coming online I would assume at this point sometimes toward the end of the year, the beginning of next year?

Yeah you're right, by the time they qualify [inaudible] production it will be some time in that time frame. Keep in mind that the technology upgrade cycle and the D-RAM segment is so fast, I think you just saw the recent announcement of market share shifts in the D-RAM sector. I just think that's going to continue at a pretty feverish pace. Now, will it slow from a capacity absorption point of view? Potentially, but I mean -- we have no way of predicting that now.

Okay. And then another question in terms of, kind of, your optimism about the 2nd half based on utilization rates at this point. I'm a bit curious, because I mean, what we all distrust on our side from Wall Street's point of view about utilization rates is that your customers are now starting to build inventories, so utilization rates are a bit meaningless at this point. I'm curious if they've ever been predictive at this point in the cycle?

The're still at high levels. We said we need to watch to see what happens in the 2nd quarter and then moving out into the 3rd quarter. If it stays high, then we're feeling good. Capacity utilization is one of the best predictors for us since implant has historically been a capacity buy. We just --you know, again, we just don't have enough information to understand exactly what's going to happen moving forward, but, you know, all we can do is keep saying to you from a bottoms up standpoint our customers -- the story hasn't changed. We talked to you guys all a couple weeks ago, there's been a lot of noise consent about things getting softer. Quite frankly we haven't seen it and our story hasn't changed. We still feel the same way now that we did two weeks ago.

But you don't look at the chip inventory build as a risk to utilization rates, going-forward here?

Yeah, it is. But, I mean, you can read differing stories on that as well. Some of you say that they're building, some of you say -- you do different analysis and take a different cut at it and say there's nothing really significant about the buildup that's out there. So you essentially can pick whichever theory you want to look at. All we can do -- you know, the best thing we can do is essentially just looking to our customers and trying to understand where they're going to take us.

Okay. Fair enough. Thank you.

Moving on to Timothy Arcarey, Smith Barney.

Yeah, hi guys. This is Dan Barenbaum for Tim. COngratulations on a great quarter. On your single wafer you had mentioned -- single wafer implanter you'd mentioned that you're looking at shipping to a logic customer for the 90 65 nanometer nodes, kind of in the Q4 time frame. I'm curious, are they already in production at 90 nanometer, at R and D for 65 nanometer, or is this something still there's still a slot to get in for R and D at 90 nanometer?

Yeah Tim this is Mike -- or I'm sorry who is this?

Dan, Tim, whoever.

Yes, Dan sorry. I apologize. We're really not in a position to describe too much about the details of that arrangement at this point. I will say that we are on track for a 4th quarter product release, and we're working with that customer right now on a delivery plan. It will likely not -- obviously, their development is at 65 nano-- it will likely start at 90.

So they're still.

We can't tell you much more beyond that at this point.

Okay. And then moving back to gross margin real quick. Can you maybe give us a little more color on why gross margins only guided flat. What's going to affect that as opposed to maybe expectations to see a little bit of an improvement there.

The revenue levels are up sequentially. We are -- our product mix, the percentage at 200 millimeter shipments is actually going to decline a little bit in the quarter. We're getting some benefits still from the high percentage of 200 millimeter shipments in the 2nd quarter. 200 millimeter shipments as a percent of the total shipments will decline in Q3, and the margins are going to stay about the same. We still have a little bit of a ways to go, as Mary mentioned earlier, with respect to 300 millimeter margins, but we are making up that difference. But we don't expect much of an increase in the 3rd quarter in the overall market.

Okay. Great, thanks.

From Lehman Brothers, Ted Berg.

Hi. Thanks. A few questions, I was wondering first of all if you could talk about production sliding in the 4th quarter, how that's filling out. And what lead times are?

We have -- we're tracking as you know, as Mary mentioned over 50 projects. We have most of the 4th quarter with names identified and some orders booked. We can tell based on our backlog that we have some room there to fill in deliveries.

Yeah, lead time. The lead times are right at about 5 to 6 months still.

Yeah, cycle times have improved as a matter of material pipeline right now, and, you know, we can book into the September/October period if we needed to accelerate a delivery for a customer.

Okay. And on the gross margin, was there -- there was some upside to that. Was that all due entirely to the mixed shift that favored more 200 millimeter than you previously thought. Looked like warranty accruals were a little bit lower, did that contribute to some of the upside? Was there anything else that added to the gross margin upside?

The increase in gross margin as compared to the first quarter, most of that increase is due to -- is due to the mix in products 200 versus 300 millimeter shipments, very high percentage of 200 millimeter shipments in Q2. Some of that is a benefit in the improvements that we're seeing in warranty and installation costs which we talked about before as being one of the initiatives that we've had to reduce warranty and installation, and we are seeing some improvements there, yes. Other improvements that we talked about ship from sell, that's a manufacturing efficiency that's positively affected our margins, and also a number of the other product cost out initiatives and sourcing initiatives that we had was starting to see some benefits. The margins were a little bit better than expected as we went into quarter at 45%. I think that we estimated a little bit lower than that as we entered the quarter.

Okay. And Steve, what was the R&D forecast that you gave for 3Q.

It's going to be up about 9% over the Q2 spending levels.

And then a last question on what areas do you see relative strength? You noted a shift in the regional mix to the U.S. in the 2nd quarter, what do you see for the 3rd quarter in terms of each of the major geographic regions for orders, or whatever you feel comfortable on discussing revenues or orders.

Hold on.

You're talking about looking at Q3, but geographically.

I don't, I mean I just don't think there's going to be any significant shift. [inaudible] is still going to be, you know the majority by far. I figure the business --

If you look at the projects, we are continuing to track over 50 projects. A very large proportion of those are in Asia. And we expect the business in Asia to continue at the levels that we've seen over the last couple of quarters. We just tried to explain that the U.S. was up because of a major 300 millimeter design win that we received orders for in Q2, but I expect going into -- for the 3rd quarter that we're going to see significant order levels in Asia to continue strong.

Is the U.S. one for all your suite of implanters and what node is that for?

It is for the 110 and 90 nanometer. And it is -- we have most of the suite of implants.

Okay. Thank you.

We'll take our next question from -- Michael O'Brien, Bear Stearns.

Yeah, hi [inaudible]. Couple quick questions again on the market. Japan -- you mentioned about Japan remaining strong. Is it the same group of customers or are you seeing other customers step up with their 300 millimeter projects to keep it strong and with buildout there. Also on the -- could you give a little commentary on the foundries and if you've seen -- I guess the biggest worry out there is the foundries pulling back on some of their spending as we go back in the 4th quarter, any thought there? Thanks.

Let me answer the second question first then I'll turn it over to Mike to talk about Japan. No, we have not seen any pull backs on the foundry side, again, we haven't seen any push-ups, we haven't seen any cancellations, at this point. It's business as usual.

Yeah, in Japan it's primarily broadening out. You know, the big guys are still going in for second phase expansions, particularly at 300 millimeter and a couple new 300 millimeter fabs, but we are starting to see a broadening much like we are in the U.S. to what I would say is the 2nd tier of customers.

And these are 300 millimeter, the broadening?

300 millimeter.

Thank you.

You're welcome.

Moving on to Martin Teng with SG Cowan.

Yes, thank you. Just two quick questions. The gross margins, could you remind us what the difference is between the 300 millimeter and 200 millimeter cross margins alike.

When we entered the year, we had a margin difference we were talking about depending on a product between 6 and 8%. We're narrowing that differential now. We believe that with the product -- with the initiatives that we have in place, that we'll have the margins in parity by the 1st quarter of 2005.

Great. And just the second question. You said there was a lot of pull-ins due to D-RAMS and flash. With regard to flash, do you see that -- an increase in orders for high energy implanters?

Yeah. The flash business clearly drives the high-energy applications.

Okay. Thank you very much.

You're welcome.

We'll take our final question today from Nick Poshenko with Fulcrum Global Partners.

God afternoon and thank you. My question was answered. Thank you.

And Mr. Namaroff, I'll turn the conference back over to you for any additional and closing comments.

There might be one more question I see on the -- we could take one more question -- that would be good.

Okay. We'll take our final question from Mark Bachman with Pacific Press Securities

Yes, hi. Just three quick questions. Regarding the shortfall in SEN revenues, cany you give -- Steve, can you give me the value of the miss that is attributed the timing of shipments and acceptances, is it closer to the 15 million or closer to the top end of the range at 25 million.

It's closer to the bottom end of the range.

Okay, and on that note, Can you give me the value of SEN's inventory at the end of June ?

I do not have that, but it has not changed dramatically from the March 31 levels, which I think were around 70 million, I believe.

Yeah, I think it was 70.3.

Yeah.

And then finally, your customer that you talked about with the single wafer tool, Is this a new customer for you a previous batch customer? I'm just trying to determine here if this is a market share win for you with this new tool.

This is a new customer for us.

Okay. Thank you.

Mr. Namaroff back over to you.

Okay. Well thank you very much. Thanks for joining us today. And we'll speak to you soon.

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