Axcelis Technologies Inc (ACLS) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Axcelis fourth quarter of 2004 earnings release conference call. [OPERATOR INSTRUCTIONS] For opening remarks and introductions, I would now like to turn the conference over to Mr. Jim Kawski, director of Investor Relations at Axcelis. Please go ahead, sir.

Good afternoon, this is Jim Kawski, director of Investor Relations and Corporate Development for Axcelis Technologies. Welcome to our conference call to discuss our results for the fourth quarter of 2004.

I'm sure all of you have received a copy of our press release issued earlier today announcing our fourth quarter results. If not, you can download the release via our website at www.axcelis.com.

Discussing our results 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.

The prepared remarks will last for approximately 20 minutes, after which there will be time for questions. Playback service will be available via our website as described in our press release.

Under 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 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 the 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.

In addition, I'd like to briefly comment on remarks that Steve 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 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 worldwide revenues with SEN, because we believe that it is useful to investors. SEN's Ion 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 would like to turn the call over to Steve.

Thank you, Jim. Today we reported earnings for the fourth quarter of $7m, or 7 cents per diluted share on net revenues of $94.5m. Worldwide revenues, including SEN were approximately $185m. Axcelis' results continue to reflect the significant enhancements we have made to improve operating leverage over the past few years and reaffirm what we have been saying about our business fundamentals and our ability to sustain profitability at lower revenue levels.

Our service business continued to show strong performance with revenues of $42m, representing 44 percent of the total. We have concentrated on growing our global customer service business through expansion of our fab-wide service presence, and our service operations continue to be accretive to our overall gross margins.

Revenue from system sales came in at approximately $49m, which was in line with our expectations. System shipments consisted of 61% 300 mm and 39% 200 mm. From a product perspective, our implant business accounted for 81% of total system revenue.

Systems and service bookings for the quarter were $87m compared to $126m in Q3, reflecting the declining market conditions and delays in the placement of orders. We do expect our order rate to improve in the first quarter of 2005. On a worldwide basis, total bookings were $123m compared to $234m in Q3 as we started to experience a softening of business in Japan after a two-year period of growth.

We ended the quarter with a systems backlog of $78m and deferred revenue of approximately $40m. Gross margins on deferred systems revenue, which will be recognized in future periods, is approximately 65%. Based on the geographic location of the fab, Asia accounted for 70% of systems orders with 21% coming from the U.S. and 9% from Europe. Including SEN, approximately 78% of new systems orders were from Asia.

Orders for the quarter were divided between logic manufacturers at 48% and memory manufacturers at 47% with foundry orders at 5%. On a product basis, approximately 58% of systems bookings were for 300 mm.

Gross margins, at 41%, were in line with what we would expect at this revenue level. We continue to realize benefits from improvements in manufacturing efficiencies and significant decreases in manufacturing cycle times. Nearly three-quarters of implant systems are now shipped from cell. We have seen substantial improvement in warranty costs and are realizing reductions in material costs from ongoing sourcing initiatives.

As we committed in 2004, we have closed the gap between 200 mm and 300 mm margins. Margins on our 200 and 300 mm products are now essentially the same.

Operating expenses for the quarter were slightly lower than forecast due principally to the timing of material usage for R&D projects and a reduction in variable compensation expense. Over the past few months, we've undertaken some fairly significant initiatives to continue to reduce spending levels. In November we announced the consolidation of our Rockville, Maryland, operations into our headquarters and manufacturing facility in Beverly, Massachusetts. This is progressing as planned, and we expect the consolidation to be completed early in Q3 of 2005. In December we had a small reduction in force resulting in recognition of restructuring expense of approximately $1m in the fourth quarter.

Recently we reorganized internally and eliminated a divisional structure within Axcelis to manage the business across functional lines. This will provide for full integration of all of our product lines into one business, eliminating redundancy and improving productivity. Overall, these actions will result in an estimated annual savings of approximately $13.5m. For much of 2005, these savings will be offset by restructuring and other costs associated with the Rockville consolidation, and we won't start to realize the full benefit until late in the year or early 2006.

Back to the fourth quarter results -- the contribution from SEN for the quarter, royalties, and Axcelis's 50% share of their net income was approximately $12m as SEN continued to maintain its leadership position in the Japanese market. Cash flow for the quarter was positive at $26m. Since the beginning of 2004 we've generated nearly $79m in positive cash flow from continued focus on working capital management.

Looking forward to the first quarter of 2005, we expect worldwide revenues to be in the range of $155m to $170m. Net revenues, excluding SEN are projected at $95m to $105m. Our gross margin in Q1 is forecast in the range of 42% to 43%.

Research and development spending is expected to increase to approximately $16m. For the year, we expect R&D spending to be in the range of $15.5m to $16.5m per quarter. Quarter-to-quarter fluctuations are caused principally by the timing and material usage.

We estimate that SG&A spending will increase approximately 5% over Q4 levels due to relocation costs associated with the Rockville consolidation, and restructuring costs for the first quarter are forecast at $2m. Overall, we estimate the total cost of the Rockville move, SG&A expense, and restructuring combined to be in the range of $7m to $8m, most of which will be incurred over the first three quarters of 2005.

SEN's income and royalty contribution for the first quarter is expected in the range of $4m to $5m, about half of which will be from royalties. Our effective income tax rate for 2005 is estimated at 7.5%. Because of several large cash commitments in Q1, cash generation in our first quarter is typically low, and we expect cash flow to be negative by approximately $15m. For the year we do expect cash flow to be positive.

We are currently forecasting earnings for the first quarter of 1 cent to 5 cents per diluted share. As I mentioned previously, results for the quarter will be impacted by restructuring and relocation costs, which will negatively affect earnings by 2 cents to 3 cents per diluted share.

I will now turn the call over to Mary.

Thanks, Steve. As Steve discussed, Axcelis continued to deliver stable operating results in the fourth quarter despite a marked slowdown in the industry and our business. Like everyone else, our visibility remains murky at best. While we are hopeful that industry fundamentals have bottomed out, it is not clear to us what trajectory the market will take in 2005.

Recent discussions with customers indicate that some will continue investing despite the current correction. Others remain more cautious and are closely watching their customers for directional indicators that will impact their level and rate of capital spending. It is this second set of customers, mostly in the foundry segment, that have accounted for much of the slowdown Axcelis has seen.

After two years of strong demand, Japan has not surprisingly experienced a softening in business. At the December SEN board meeting, SEN indicated that spending is down across the board except for two major customers. The new fiscal year begins in Japan on April 1st, and SEN expects to have better visibility on 2005 spending at that time.

As Steve noted in his remarks, the impact of the market downturn caused Axcelis and SEN to experience some delays in bookings leading to a lower-than-expected order rate. Despite this, we believe that when the 2004 market share numbers are released in April, they will show that Axcelis has maintained its leading market share in ion implantation.

As we proceed through 2005 and into 2006, the implant industry will experience a transitionary period where customers will select and evaluate a number of new implant tools that are becoming available to them for 65-nanometer process technology development. For example, we are finding that customers are selecting multiple tool suppliers for their high- and medium-dose needs. This could lead to some minor share shift as this sorts itself out. As we have done in the past, we expect to emerge from this transitionary period as the leader in ion implant.

I'd like to expand on this thought for a moment, and give you our perspective of what's occurring in the implant market. You all know that device scaling is driving process changes across all toolsets in the fab. In ion implant, we continue to see lower implant energy levels, higher doses, and an increased emphasis on process control, specifically implant angle accuracy and particle and energy contamination control. As a result, we are seeing a blurring of the application space between all of the traditional implanter segments. We have always anticipated that a transition to single-wafer implantation would occur with emerging applications for tilted implants. The question was when and how fast.

The fact is that none of the single-wafer tools in production today have systems optimized for emerging scaling trends. This is forcing our customers to select a patchwork of solutions to cover the full application space, and our customers tell us that this is not a viable production strategy for the future.

We have leveraged our close working relationships with our technology-leading customers to gain insight into the critical implant applications for sub-65-nanometer. This has enabled us to improve our existing multi-wafer products and to develop a new single-wafer platform optimized to address these scaling challenges.

The timing of the availability of this platform is aligned to converge with our customers' roadmaps. In Japan, SEN is also aligned with the key Japanese customers' roadmap and is developing a new single-wafer tool based on Axcelis's technology to address their customers' needs. We remain confident that customers will continue to use a combination of multi-wafer and single-wafer implant tools at least through 65-nanometer. In fact, we believe that at least 50% of all types of implanters will continue to be multi-wafer for the foreseeable future. Axcelis is committed to being the leading supplier of both multi-wafer and single-wafer products.

Hopefully, you have seen our recent press releases announcing the selection by two leading chip manufacturers of our new single-wafer platforms. The announcement we just made on Tuesday validates the acceptance of Axcelis's product strategy by a second customer in a second industry segment. This customer has added Axcelis's new single-wafer tool to complement its existing Axcelis multi-wafer, high-energy and high-current portfolio.

In addition, as you know, the first tool shipment of our new single-wafer platform will be made in March to AMD's Fab 36 in Dresden, Germany. Our tool was selected because of its productivity advantage for 65-nanometer logic flows. This first tool selection will lead to follow-on tool orders that will be shipped later this year.

The other real significance of these wins is in the fan-out potential internal to these two companies as well as among their technology partners. It's apparent that joint development partnerships among the leading technology companies will impact equipment decisions, going forward. The recent announcement by IBM for a $1.9b expansion of their 300 mm in East Fishkill in partnership with Sony, Ifineon, AMD, Charter, Toshiba, and Samsung, provides further evidence of this point.

Shifting gears here a bit, another exciting area of growth opportunity for Axcelis is the field of low-k film curing and cleaning. Axcelis has demonstrated technology leadership in this set of applications and the technology options are narrowing on the process space defined by Axcelis over the past several years. Our progress has been measured in terms of process demo activity, which has increased sharply over the past six months, by expanded joint development activity with multiple low-k material suppliers and, most importantly, by placement of tools at early adopters of advanced low-k materials.

In 2004, we placed advanced cleaning tools for ultra low-k at three customers. In the first half of 2005, we will place additional low-k cleaning equipment as well as the first tools for UV film curing designed for advanced interconnect stacks and emerging transistor formation applications. With the critical technology issues essentially resolved, our development focus will shift to improving the productivity of those tools for high-volume manufacturing.

Finally, I'd like to invite you to attend a special webcast on February 16th where we will unveil and discuss our implant marketing strategy and product positioning. Details of this event are in today's press release.

I want to close by simply saying that we are committed to continuing to improve our financial results and to delivering the most cost-effective, leading-edge technologies to our customers when they need them. Are there any questions?

[OPERATOR INSTRUCTIONS] Our first question will come from Ali Irani with CIBC World Markets.

Yes, good afternoon. Congratulations on the cost structure. It seems that you have finally the business back to a good degree of variability. Mary, I'm hoping you could give us some color as to the first quarter demand patterns. Your guidance is surprisingly positive, given the trends in the industry for an uptick. And I'm wondering, also, how much visibility you have beyond the first quarter into the second quarter as well. Thank you.

Well, Ali, as you know, we don't give bookings guidance, but we have said that we anticipate an increase in orders in the first quarter versus the fourth quarter. Some of this is due to delays in booking some tools, which we alluded to earlier. Unfortunately, with the visibility we have, it's impossible to know what will happen to bookings through the remainder of 2005.

But I think, just to give you some more color on why we feel so positive about the first quarter is I need to talk about what happened to orders in the fourth quarter. So let me give you a little bit more detail on that.

For the fourth quarter, we had zero pushouts, and when I say that, a pushout means a booked order, which the customer moved out the ship date for, okay? There were none of those -- nothing pushed out. We had 14 tools canceled but, just to let you know, all but one was canceled by the same customer, and that customer has assured us that those tools will be rebooked in the second half of '05, and we feel very confident about that.

Eight tools were actually delayed in booking, and this is the part where we get some confidence about the first quarter because -- by the way, when I say a delay, it means that we expected the orders in Q4, but they didn't happen in Q4 -- so out of those eight tool orders that were delayed, six, or 75% of them, will be booked in the first quarter and then the rest, the other two, will book in the second quarter.

So it sounds like there is really one customer impact here to the business. And, if I look at your mix of bookings, it would be fair to say this is a foundry impact to your business, is that correct?

Yes, that is correct.

Great -- so mostly timing issues at this point?

At this point, that's right.

And just a quick follow-up for Steve -- looking at the business and the cost structure, your gross margin performance here, with your revenue decline, is substantially above what we've seen from Axcelis in prior downturns. I'm just wondering, at this point, what this means about the upside when volume comes back, especially with the new cost programs. Thanks, Steve.

Well, I think that we saw some of the real upside potential in the second quarter of 2004, Ali, when our margins approached 46%, and we expect that with the cost initiatives that we had in place, and the manufacturing efficiencies that we've been able to gain, that we'll be able to drive them higher when the volume returns in the next cycle.

Sounds great, thank you.

We will now hear a question from Timothy Arcuri with Smith Barney.

Hi, actually, I had several questions. The first question is on the 203/100 mm split that you talked about in terms of orders. If I look at other companies in this space, hearing about 85%, in some cases 90%, that's now moved to 300 mm, yes, you're down at 58%. So can you help me understand -- are there some share issues at 300? Who is supplying most of the 300 mm implanters if it's not Axcelis?

I think that through the course of the year, Axcelis has always had a very strong 200 mm order and shipment base. We're tool-of-record at a number of fabs, both large and small. So I think that the percentage right now where we are is just reflective of the fact that 200 mm is still strong, not that 300 mm is weak. I think the other thing you need to note here is these orders don't include SEN orders in Japan, and I think perhaps there would be a little bit of an increase in the 300 mm percentage if, in fact, you included SEN.

So I think, basically -- there are no market share numbers out there that split out 200 mm and 300 mm, but I think we feel very confident that we're getting our fair share of 300 mm tool orders.

Okay, Mary. Maybe if I can dig at that in kind of a different way -- if I look, then, from a customer perspective -- so if I look at foundry orders, and I look at DRAM orders, most other equipment companies' memory orders are still kind of flat-ish at high levels, and yours are down 50% off of their peak. So I'm wondering if there is something going on that's specific to Axcelis in the DRAM world or how should I read that relative to what I'm seeing elsewhere?

Tim, this is Steve. I think that they are down 50% off our peak in Q2, but if you look at the way we accelerated our growth in orders through the first half of each year, a significant amount of that was capacity buying in 200 mm. When the business turned down, that capacity buying in 200 mm dried up. We haven't seen, with respect to the ongoing 300 mm products, they've stayed fairly constant in DRAM.

We're hearing elsewhere -- there's a DRAM customer that canceled a couple of tools at another big vendor. Would it be safe to say that those tools that got canceled and that are going to get rebooked were from a DRAM customer?

No, it's not fair to say that at all. Tim, if you take a look at where we are for DRAM in the quarter, it's pretty consistent with where we are for the year, on average, and even looking back into 2003, where we've been historically.

I guess I'm just looking at it relative to the other companies -- DRAM spending is still at a high level and yet your bookings have come off 50% from the peak, but -- understood, thanks.

You will now hear from Jim Covello with Goldman Sachs.

[no response]

Mr. Covello, your line is open, please proceed with your question.

Amanda, it sounds like you.

can you hear me now?

Yes, now we can.

Okay, there we go. Sorry, we've been having phone problems. Two questions for you -- the first question is the quarterly revenue breakeven level has been around $90m. Is that where it is today?

Depending if the margin levels that we have in the 41 to 43% range, we would be driving breakeven levels at $90m, right.

And so there are no plans to bring that --

Oh, yes, we're reducing costs. As I said in the call, we have undertaken three fairly significant initiatives to take about $13.5m of costs permanently out of the business. That will affect the breakeven. Now, we're not going to get the full benefit of that, as I said, until, really, beginning late 2005 or beginning in 2006. You'll have cost increases associated with general inflation that will creep in. So it won't bring it down dollar-for-dollar, but we do believe this will lower our breakeven level.

Okay, that's all. And then the second question is, given the expected cash burn in Q1 and the $125m you have in convertible debt on the balance sheet, what are your contingency plans in the event that the downturn does continue?

As I said, the cash flow in Q1 is abnormal, and it is seasonal. Typically, we have large expenditures in the first quarter. We do expect cash flow to be positive for the year, and we do believe that, based on our forecast, even with the downturn, or our projections, even with the downturn, that we'll be able to exit the year with cash in excess of $200m. We will continue to evaluate alternatives relative to options surrounding the convertible debentures -- either refinancing or what we would have to do to pay them off, and that evaluation will take place throughout 2005.

Okay, and then just one final question -- we talked a little bit about the direction of orders in the first quarter, and you said you expect to see some improvement and some of its pushout. Does that systems bookings that are improving or does that include services?

I was specifically referring to systems bookings.

Okay, thank you.

Our next question will come from CS First Boston. John Pitzer, please go ahead.

Yes, hi, this is actually Subya Kumar [ph] for John Pitzer. A quick question for you -- you mentioned that SEN is developing a new single-wafer system. Is that different than the one that you are making and will it have an effect on your royalty income from SEN?

Yes, the technology -- this is Mike Luttati -- the technology that they are basing their new development on is Axcelis technology, so it is compatible with our product platform that we'll be talking more about on the 16th of February.

Okay, from a modeling perspective, royalty income should not be affected by that, right?

That's correct.

It will not have any material effect on how you would model royalties from SEN.

Okay, and a couple of things on -- your 200 mm bookings were down a little bit more than overall. I guess they're now around $25m. Is this the trough level for 200 and what part of this is system bookings?

Is this a trough level?

Yes.

It's impossible to tell. If the market picks back up and there's more capacity buying, we could, in fact, see 200 mm picking up, but it's very difficult to tell.

So there are some system bookings in the 200 mm as well, right?

Oh, yes.

And typically, December tends to be a strong month for Japan from a bookings perspective. At least one of your peers have reported pretty strong bookings from Japan. Is this something that's specific to wafer capacity investments than other areas in process control where they still appear to be pretty strong in terms of bookings perspective?

It's hard to tell -- one of the things you need to remember about the information we get from SEN is that there is a one-month delay. So December is actually not included in the bookings for SEN. So we'll have to see what happens when that comes in our next quarterly call.

Okay, and then when you look at the different segments, you said bookings will be directionally up. Can you talk a little bit about what you're hearing specifically from memory, foundry, logic customers -- that will be the last question.

The memory customers are still spending very heavily, and we think they're going to continue on the path that they have been on and perhaps even increased their spending. The foundries, at this point, are flat to potentially down. We don't really know. And the logic guys are maybe flat to a little bit up. There are some potential rays of hope there that we're going to see some increases over the next couple of quarters from them potentially.

Moving on, we'll hear from Peter Kim with Deutsche Bank.

Hi, I wanted to ask about when SEN would be ready to ship the single-wafer tool? Is this like a 2005 or 2006 event?

They plan to ship this year. We'll give you more specifics on that, again, on the 16th.

I know you talked about SEN's bookings, but their bookings numbers looked substantially low this quarter relative to prior quarters, and I was wondering if you have a sense for the direction that it would move in the next question?

No, we don't have that kind of visibility at this point from them but, again, remember how their orders have been extremely high for the last two years and, as I mentioned, they had seen a slowdown potentially settling in and many of the customers in Japan have actually cut back and delayed some of their projects. So it's not unexpected. They've had a great run. They had a record year in 2004, both in terms of bookings and in revenues, and royalties for Axcelis. So we're very pleased with the performance that they had, and we'll just have to see what the market brings.

One last question -- this low-k curing product that you're talking about -- that sounds very similar to what a competitor of yours had announced not too long ago, and I was wondering -- is this an area that there is a lot of activity in? That a lot of people are interested in -- a low-k curing solution?

Yes, it's a significant area of interest. Over the last several years, both the low-k material suppliers, as well as customers, have been experimenting with various technologies. It's pretty clear, as we see it, that the UV curing technology will emerge as a winning technology for its advantages. We have a significant amount of IP and intellectual knowledge in this area with the bolt design and the bolt manufacturing, which is a critical competency in this area, and I feel very well positioned in doing that.

The issue that we have here is whether or not the market will go with stand-alone curing tools or whether they will look at clustered tools, integrated tools. We believe, like we do with many of the existing processes, that the stand-alone tools offer better cost of ownership, and our initial customer placements this year and the high-volume manufacturing platform we have under development is validating that.

We will now hear from Mark Fitzgerald of Banc of America.

Thank you. The new single-wafer platform -- how much of the engineering is done at this point and are there any R&D savings going forward if you're not through those programs yet?

Well, there are several products in the portfolio that we'll talk about again on the 16th. Obviously, we're shipping one in March so it's pretty close to being completed. And the other ones we'll talk more about. But I don't anticipate to see R&D spending decline. I think, as Steve indicated, we'll see it running at $16.5m on average per quarter through the balance of the year, and that will vary based on timing of materials.

Okay, and then on the $13.5m in reduction in costs by the end of the year, can you segment that out for us -- where those are coming from? I didn't catch those, if you mentioned them.

That's mostly operating expenses -- some in R&D and a big piece in SG&A. Some of the bigger savings that we're getting, to give you the point, are just facility costs. We don't have duplicate facilities related to our Rockville operation. That facility is actually going to be closed. All of the infrastructure, telephone, IT infrastructure costs, will go away. So a lot of it, a significant amount of it, is support cost, and there are some headcount reductions that are taking place also.

And you said the Rockville close is basically behind you by the third quarter?

We'll have the move completed essentially by the beginning of the third quarter. That's what our plan is, and our plan is progressing in step with what we thought would happen. So we're looking at the beginning of Q3 to have Rockville behind us. All of the relocation costs for Rockville won't be behind us at the beginning of Q3 because a big piece of those costs are relocation costs for relocation of employees, and the timing of that will depend upon whether the employees actually, physically do move or move their families, and we're forecasting that that spending will go out through the end of Q3 and some of it, a little bit, perhaps, even into early Q4.

Or be behind you by '06?

Oh, yes, yes, we'll have all of the costs -- all of the restructuring costs, and that's the severance for the people, the retentions will be behind us -- and the relocation costs will be behind us, also.

Now we hear from Bill Liu with Piper Jaffray.

This is Dennis Kump [ph] for Bill Liu. I'm not sure if you talked about this before -- what's your service gross margin relatively comparing to your system gross margin? Because your service revenue has been holding up pretty well. I just want to get a sense of how that may impact your overall gross margin, going forward?

We don't actually break down our service margins and our product margins by product line or by component like that, but I will say that our service margins are accretive to our overall gross margin. So they are higher than our product margins, in general.

And also I think another company commented that they believe all the 65-nanometer high turn tools [ph] will be single-wafer tools, and apparently you have your customer evaluating your single-wafer and batch wafer tools. Do you agree with that? Is there any reason that a customer would choose a batch versus a single wafer?

This is Mike Luttati. I think it's dangerous to polarize on either extreme, that 100% [indiscernible]. In fact, we know that we have customers of ours that are using our tool for 65-nanometer development and using multi-wafer tools. We also know that several of our Japanese customers are using multi-wafer tools for 65-nanometer development.

We will now take a follow-up question from Ali Irani.

I was hoping you could give us an update on your RTPF and just a couple of housekeeping questions -- headcount as well as your capex and depreciation in the quarter? Thank you.

Ali, on the RTP, we had no new design wins, but we do have one pending for the first quarter, it's acting quite exciting, and it's also in the same application of nickel silicide that we've talked about in the past. We're starting to get some significant validation of the tool in that application space. But I also don't want to mis-set expectations on any significant revenue generation, at least through the first half of the year.

And in terms of the headcount, the headcount at year-end is around 1,650 employees.

Great, so it sounds, if I look at your mix of business outside of implant, really, the momentum is coming from the strip and cleaning applications. I know you've had a couple of important market share wins over the last 12 to 18 months. Is it those design wins specifically at 300 mm that are now going into volume buys or is there something specific in your business, your customer mix, that's holding up the business? Thank you.

On stripping curing, the big effort that we've put on has been in the back-end of line, low-k cleaning and curing. We've had very good progress on the design-win front. The volume really is going to be associated with the adoption rate of low-k materials, which has continued to slide, unfortunately. So we still do a significant amount of front end of line and back end of line strip at several major customers and proceeding very well there. We're really excited about the back end of line position because we think we have a pretty significant differentiation and technology, and providing a good cost-of-ownership platform, which we're working on. We think we'll be able to wrap that. And probably, again, it depends on when the low-k materials come to full adoption, and that could be -- I don't anticipate that's going to happen until '06 or '07.

Great, thank you.

Ali, you had asked about the depreciation and the capital spending. Depreciation for the quarter was just over $6m and capex was just over $2m. And we have no significant capital expenditure requirements, looking out into 2005.

So you would say budget somewhere south of $5m?

That's reasonable.

You will now hear from Ted Berg with Lehman Brothers.

Thanks. I had a few questions, one of them is on -- I heard a number of $7m to $8m at the beginning of the prepared remarks. I wasn't certain if that was for restructuring and relocation costs. Is that the total cost that you expect to incur for the full year this year and $2m to $3m of that is in the first quarter?

That's correct. That's -- $7m to $8m is the total cost that we estimate for the Rockville move, and that will be incurred -- most of it over the first three quarters of this year, of which $2m to $3m is in Q1.

Okay, and is the -- I haven't worked through the numbers, the guidance, yet, but is the $2m to $3m -- is that factored into guidance already of 1 to 5 cents per share or that's excluding that?

It's factored into that guidance. So the guidance of 1 to 5 cents includes the impact of the restructuring and relocation costs.

Okay, and then of that $7m to $8m, is most of that cash outflows or I assume some of that is noncash?

A minor part of it is noncash. Most of it is cash.

Okay.

Most of it is -- a big piece of it is relocation costs for employees that are relocating from Rockville to Beverly.

Okay, and in terms of the order outlook, you said orders would be up. Is it safe to assume that orders are still going to be below the sales levels? So book-to-sales ratio would be below 1? Or do you anticipate that reaching parity at some point in the first half?

I think at the revenue levels that we're forecasting, I think that you'd be looking at right around 1, I would think. I wouldn't think -- it wouldn't be significantly below 1 or significantly above.

So that would imply a pretty good pickup, then, in orders. We're looking at the $87.4m in orders is what I'm referring to, and the $100m midpoint of revenue guidance -- are those the two numbers that you would look at to assume a book-to-bill of 1?

That would be about right. I'm measuring this on systems.

Okay, systems.

We measure our book-to-bill on systems -- shipments and orders.

Okay, so book-to-bill around 1 for systems. Okay, and on the single-wafer discussion, you mentioned that '05 and '06 is a transition period, and customers are buying implanters from multiple different tool suppliers. How long do you think it will take itself to work out before it's clear whose tool is showing the best results here? Is there going to be a lot of confusion in terms of market share and the high current segment over the next several quarters?

Ted, this is Mike. I think there's actually going to be confusion in the overall segment, and the reason I say that -- Mary talked about it before -- one of the things that's clear with the scaling is that the space -- the typical neatly packaged, divine spaces of implant segments are no longer where they were. I'll give you one example of that. The Halo implant, which has been traditionally a medium current implant, is increasing significantly at the scale geometries, and the way that's been addressed -- and it happens to be a high-tilt implant, which is the reason it's not a medium current tool today. The way that has been addressed, because of no other solution, is to adopt a single-wafer, high-current tool to address it. And we think that's a sub-optimal approach, and that a better solution would be to provide a single tool that could cover that application along with all the traditional medium current applications. So that's one example.

In the extension implant, for instance, and high current is another good example. You know, we see lower and lower energy levels, a blend of -- obviously, different customers are approaching this different ways. Some have low-tilt applications for extensions; some will implement high-tilt for extensions. We think that approaching that with a traditional implant architecture is the right way to do that, and not to introduce risky technologies. You know, you're hearing about diffusion-type technologies like plasma emersion to address that. It just doesn't make sense. You can't, first of all, do any angular implants with that kind of an architecture, and it's extremely risky, because it's not mass analyzed.

So I think what we're going to see over the next two years, and we're pretty confident about the way we're positioning our future product, to be able to offer our customers a much more rational, simplified set of products to cover the full application space with traditional implant technologies.

Okay, you've issued two press releases recently with two customers that are buying your -- or plan to take delivery of your 65-nanometer single-wafer high-current tool. Can you say how many you're currently working with in demo activity and do you anticipate a number of announcements here in the first half of '05 to follow on the two announcements that you've already made?

We're hopeful. We have a number we're working on. I think once we talk on the 16th, you'll get a much more optimistic view of what we're doing and also a better perspective of why we're so bullish about our positioning. But we have a lot of interest, and I think these first couple of wins that we've announced really validate the momentum that we think we're going to get as we roll this out further toward the second half of the year to other customers.

Martin Tang with SG Cowen will have our next question.

Yes, thank you. A quick question on the service business -- revenue is pretty stable. If I were to model revenues, should I think of it in terms of utilization to your customers?

Yes, the revenue -- service revenues will fluctuate with utilization. As utilization rates decline, service revenues will decline slightly. What we experience is that the service revenues do not decline or accelerate as steeply as systems revenues, either in a downturn or in an upturn.

So the fact that it's pretty stable, even though utilization should be logically down in the last few quarters, should I read that as being that you are growing the business?

We have a focus on continuing to grow the business. The installed base continued to grow, which creates a larger base under which the service revenues are generated. And we saw a slight decline in absolute dollars in the quarter in service revenues, but, again, the decline is not as steep as what we experienced with respect to our systems revenues in system shipments.

My second question is related to the two press releases for your single-wafer. They both mention the use for Halo and high-tilt applications. Those systems -- can they also be used for high-current, soft-strain extensions?

Well, as I said earlier, the application space is -- actually, it can, for some applications, but we'll talk more about this on the 16th, because we don't think that defining the space as a medium-current or high-current tool is the right way to approach it based on the application demands, going forward, and so the tool will be able to do all the high-dose implants for Haloes, as I mentioned, plus all the traditional implants, and reach -- at energies that are much lower than what you're seeing today on traditional -- on the tools that are available on the market.

But it would be accurate to say that for those two customers, at least, it will be used mostly for the Halo and high-end angle applications, right?

Yes, that's fair.

We will now hear from Mark Bachman with Pacific Crest Securities.

Hi, Mike. If we can just go back to that real quick -- given the energy range of the tool that you actually put in the press release, it doesn't appear that they are capable of doing all of the high-current implants, and I think that you've been pretty careful in saying that it's a low-energy tool rather than a high current. Can this tool actually compete head-to-head with Applied and Varian's latest high-current tools?

Well, as I said, we're going to talk about multiple tools on the 16th. So you'll hear more about that, and we believe that the product family that we're going to talk about will compete very effectively against all of the alternatives that are available. And in terms of which tools, I think the question is there are -- the problem right now is there's a smorgasbord of tools out there, so it's very difficult to determine which product or which configuration you're talking about.

Okay, so I think a previous caller, two times before, actually, referred to it as your "high-current tool." It might not be accurate to call it your high-current tool. Is that what you're saying?

Yes, we're calling it our mid-dose, low-energy tool.

Okay, and then also on here, the one that you just released on Tuesday, you talked about placing it in Europe. Is this slated for production or is it sitting in a 65-nanometer development fab?

It will go into a development fab.

Okay, and then were you actually able to sell the tool, or is it there on evaluation?

An evaluation tool.

Okay, and then, finally, I think that this question here is for Steve. Steve, did I hear you correctly -- I think you said that the contribution from SEN was going to be $4m to $5m this quarter, and half of it will come from royalties, meaning that the other half will come below the line?

That's correct.

And then is that included in your 1 to 5-cent EPS?

Yes, it is.

And now we'll have a follow-up question from Timothy Arcuri.

Hi, I'm still trying to work some of these market-share issues for 300 mm, and I looked back, and your main competitor there in the Boston area shipped about 50%, 300 mm, in this most recent quarter. So I guess what I look at kind of who is shipping all the 300 mm implanters, can you help me understand who actually is shipping those implanters? Might it be that it is the company in California gaining market share? Or is implant as a percentage of the total fab budget going down? How should I think about that?

I'm not sure, Tim -- this is Mike. I think you said you quoted the local competitor as shipping 50% 300 mm. I believe our number was 61%. So I don't know how that would translate. I would assume we have gained share based on that.

Okay, but it's still just so far -- the implant companies are shipping so much less 300 mm as a percentage of their total relative to the other front-end companies, and I'm wondering if there is some dynamic there that's happening in the fab?

Well, I think we said in the third quarter call that we saw a strong amount -- actually, I think all of the implant companies reported that there was strong buying for 200 mm expansion in the first half of last year of '04, and some of those orders that were booked in the first half shipped out through the fourth quarter. So that could be part of the issue. Obviously, because implant is such a capacity-driven component, it could be that that's the difference between the implant percentage versus some of the other tools in the fab. I would expect that would normalize in this next couple of quarters.

Okay, that's really helpful. I guess this is my last question -- do you have, perhaps, the percentage of your orders that have been 300 mm going back the last several quarters? It was 58 this quarter, but do you know what it was the last couple of quarters?

Yes, we do.

Let's see, in the third quarter, it was 60% -- do you have prior to that? I only go back to Q4 '03. If you go back to Q4 '03, it was 40%. I think we've been seeing steady increase through the first half of last year and then into the second half.

I don't have the detail of the first half of the year in front of me. I think that 200 mm was strong in the first half of the year. I think it was 60% in Q3 and 58% in Q4.

Okay, so it was probably linear between that 40 and the 60 in the first half of the year?

It spiked a little bit because the 200 mm range was so high. I just don't have the details in front of me.

Call us offline, Tim.

At this time there are no further questions. Ms. Puma, I'll turn the conference back over to you for final and closing remarks.

Okay, well, I'd like to thank everybody for joining us this afternoon, and we hope that you will all join us on February 16th to learn more about our new implant platform. Thank you.

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