Axcelis Technologies Inc (ACLS) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Axcelis second quarter of 2005 earnings release conference call. As a 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 will turn the conference over to Mr. Jim Kawski. Please go ahead.

Good afternoon. This is Jim Kawski, Director of Investor Relations for Axcelis Technologies. Welcome to our conference call to discuss our results for second quarter of 2005.

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

Discussing our results today are Mary Puma, Chairman and Chief Executive Officer, and Stephen Bassett, our Executive Vice President and Chief Financial Officer. Also joining us is Mark Namaroff, our Senior Vice President of Marketing.

The prepared remarks will last for approximately 15 minutes, after which there will be time for questions. Playback service will be available via our website as described in our press release.

Under the FCC Safe Harbor provisions, please note that comments made today about our expectations for our 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 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'd like to turn the call over to Steve.

Thank you, Jim. Overall, our results for the quarter were in line with our expectations. We reported earnings of 749,000, or $0.1 per diluted share. Our second quarter net income was negatively affected by restructuring and related costs associated with the move of our Rockville, Maryland operations.

This added approximately 3.8 million to expense and reduced income by $0.04 per share. Net revenues were 92 million and worldwide revenues, which include SEN, increased by 23%, to approximately 191 million. The sequential decrease in worldwide revenues, was primarily related to the timing of shipments in Japan, around the close of SEN's fiscal year.

Our global customer service business continued to show strong performance with revenues of 39 million. Our service business continues to grow through the expansion of our fab-wide service products. In addition, our service operations continue to be accretive to our overall gross margins.

Revenue from system sales came in at approximately 49 million, which was inline with our expectations. Systems shipments consisted of 63% - 300 millimeter and 37% - 200 millimeter. From a product perspective, our implant business accounted for 78% of total. Systems and service bookings for the quarter were 90 million, compared to 82 million in Q1.

On a worldwide basis, total bookings were 149 million, up 6% quarter-to-quarter. Worldwide systems bookings increased 10%. We ended the quarter with a systems backlog of 59 million, and deferred revenue of approximately 46 million. Our book to bill ratio for the quarter was 0.95.

Based on the geographic location of the fab, Asia accounted for 65% of systems orders, with 14% coming from the US, and 21% from Europe. Including SEN, approximately 76% of new systems orders were from Asia.

Memory manufacturers accounted for 46% of new systems bookings, with logic at 31% and foundries at 21%. The percentage of foundry orders has increased from what we've experienced over the past several quarters. This actually appears to be more a matter of timing than an indicator that foundry business is picking up.

On a product basis, approximately 27% of systems bookings were for 300 millimeter. Over the past 12-months, 300 millimeter has accounted for approximately 50% of our total systems orders.

Gross margins, at 42.2%, were in line with expectations and in line with our target at these lower revenue levels. Operating expenses for the quarter, including restructuring and related costs, were approximately 44 million. This was slightly higher than forecast, due primarily to higher restructuring costs related to the acceleration of employee and equipment relocation efforts from Rockville.

R&D spending, at 17.5 million was also higher than originally planned, due mainly to the timing of material usage. We do expect R&D costs to remain at this level throughout the remainder of 2005.

The contribution from SEN for the quarter, which includes royalties in Axcelis' 50% share of their net income, was approximately 12 million. This compares with 4 million in Q1.

As we remarked last quarter, the significant increase in the Q2 contribution from SEN is due to increased business activity associated with close of SEN's fiscal year. While we expect SEN to continue to show strong operating performance and continue to dominate the Japanese implant market, we expect SEN's average quarterly contribution to range from 4 to 5 million, as the market in Japan has declined somewhat, from the very high 2004 spending levels.

Income taxes were higher than planned, due to a higher proportion of earnings shifting to Asia, where the Company is taxable. Going forward, we expect income tax expense to approximate 500,000 per quarter for the remainder of 2005.

Cash flow was better than expected, at 3.9 million positive, due primarily to accelerated collections from customers.

Now, I will turn to our third quarter guidance, which assumes no material change in the semiconductor spending environment. Net revenues, excluding SEN, are projected to be 80 million to 90 million. Worldwide revenues are forecasted in the range of 110 to 125 million.

Gross margins, even at the reduced revenue levels, should be in its low 40s. Research and development spending will be approximately 17 to 17.5 million. SG&A spending, including approximately 1 million of relocation cost associated with the Rockville move, is estimated to be the same as it was in Q2. In addition, restructuring costs associated with Rockville are forecast at 1 million.

SEN's income and royalty contribution for the third quarter is expected to be 2 million. As I mentioned earlier, we expect SEN's quarterly contribution to average 4 to 5 million, but it can fluctuate quarter to quarter, based on the timing of product delivery and acceptance.

We are currently forecasting a loss for the fourth quarter, ranging from $0.06 to $0.10 per share. This is in line with our breakeven model, at 90 million per quarter, taking into account the reduced revenue level and the related effect on gross margins, the lower than normal contribution from SEN, lowering results by approximately $0.03 per share, and Rockville restructuring and relocation costs, the effect of which is approximately $0.02 per share.

We expect cash flow to be negative, by approximately 15 million, due to the forecast operating loss and increased investments in demo and evaluation tools to support the Optima platform.

When we look at the year 2005 as a whole, we still do expect to be profitable overall and to generate positive cash flow. I will now turn the call over to Mary.

Thanks, Steve. In the second quarter, Axcelis met guidance and made significant progress in meeting milestones associated with the introduction of our new Optima single wafer implant platform. Our second quarter financial performance reflects the trends we've been seeing in the market. DRAM and logic customers have continued for the most part, investing in projects as planned. Foundries, despite initial signs of increased utilization, have not yet begun to place orders for new equipment.

Taken together, this has created generally flat market conditions. And as we have been saying, we don't see any significant changes on the horizon. After attending a SEN Board meeting two weeks ago, we believe that the Japanese market has not dropped off as sharply as other parts of the world. We expect that SEN will continue to enjoy robust business as a result of continued purchasing by several key customers. As in the past, we expect SEN will continue to be successful in competitive situations and will maintain their dominant market position in Japan.

The industry is in a transition period to 65-nanometer technology and upon emergence, we are going to see a change in the ion implant landscape. Success in implant will hinge on low-energy productivity, driven by device scaling, flexibility provided by overlap in each tool's application space and process extendibility to below 65-nanometer. Our new Optima product platform provides us with competitive advantages in each of these areas.

The flagship of the Optima platform, the Optima MD, continues to generate broad customer interest. As validated by AMD at our recent technology seminar at Semicon West, the Optima MD is differentiated by superior low energy productivity and process performance. Its broad application coverage for doses used for advanced scaled halo implants provides the flexibility required for 65 and 45-nanometer manufacturing requirements.

While traditional medium-current tools cannot compete in terms of productivity for this application, due to lower beam current, existing single-wafer high-current tools cannot compete due to poor process controls. Addressing these challenges is a real need today for leading edge customers and will become a critical need in the future for all customers.

Customers who attended our seminar also highlighted the increasing need for controlled, accurate Dokan profiles as energies decrease. The Optima MD's patented angular energy filter results in virtually zero energy contamination, protecting devices from yield loss. This will put more of an emphasis on implant precision. This is a change from the 130 and 90-nanometer nodes, where implant precision was not as critical. At 65-nanometer and below, implant precision is very critical and the Optima platform excels at this.

The Optima MD provides a significant growth opportunity, as it allows Axcelis to strengthen its position in the mid-dose market. We expect to capture additional market share in the $340 million mid-dose segment, as revenue from the new Optima MD tool shipments are recognized, beginning in 2006.

The second tool in the Optima platform to be released at the end of 2005, will be the Optima HD. We have had several large customers visit our factory this quarter to work with our first tool on our engineering floor. Many customers have expressed positive opinions of the Optima HD. They have been very impressed with three key, critical benefits. First, simplicity of design. Second, the small footprint. And third, good process control and low energy productivity.

The first benefit of the Optima HD, simplicity of design, is derived from two main features; the spot beam, beam line and the proprietary two-dimensional scan end station. Spot beams are superior because of their simplicity. A spot beam requires less manipulation, less focusing and fewer magnets and electrostatic systems. This allows for a shorter beam line, resulting in better beam transport and the more consistent process performance.

Shorter beam lines result in faster recipe transitions, which are particularly critical to foundry production. This equals greater productivity across the board.

A compact spot beam will also result in the most uniform processing of the wafer, since every chip on the wafer sees the exact same beam characteristics. The design approach yields superior beam angle control and uniformity across the entire wafer. These fundamental advantages, coupled with our patented electron confinement technology, results in optimized, high-dose performance.

The other component associated with simplicity of the Optima HD is the end station. The end station utilizes a two-dimensional pendulum scan system. This scan system provides a broader applications coverage, with better process control than similar competitive systems.

The second benefit customers have been very impressed by is the overall size of the Optima HD tools. Because of the very short beam line and the unique scanning system, the tool is approximately 20% smaller than competitive systems. This is clearly an area which customers are concerned about when looking at adding capacity into existing fabs or building new fabs.

And finally, but certainly not least important, the Optima HD's low energy productivity and process performance has also impressed customers. The new beam line utilizes our proprietary electron confinement technology, as well as additional new technology to ensure the highest level of contamination control, without any degradation in low-energy productivity.

Bottom line, the Optima HD will allow Axcelis to successfully compete in the emerging single wafer high-dose segment. As we have said, there will be a transition in the market as customers sort through their technology choices for these applications. We are confident that the Optima HD will allow Axcelis to maintain its leadership in this important segment, through improved productivity and process performance.

So, how is customer acceptance for the Optima platform going? Well, we have just won two additional mid-dose customers in Asia, one a logic manufacturer, the other a foundry. This brings us up to a total of six Optima-based wins, including Axcelis' three previously announced Optima MD customers and SEN's first order and shipment of their single wafer high-dose tool. These six design wins put us well on our way to our 2005 target of 10 Optima design wins for the year. We also expect follow on orders from many of these customers later this year.

UV curing was another technology we highlighted at Semicon West. Customer interest in our UV technology is extremely high. Leveraging our 25-year technical expertise in customized UV bulb development and manufacturing, we are poised to capitalize on emerging markets.

For emerging markets in low-k curing and silicon nitride curing for strained silicon, UV had become the industry standard that everyone, including our competitors recognizes as the optimum technology. For established markets such as charge erasure, Axcelis' UV technology is the de facto choice.

UV treatment is a very inexpensive way to modify critical properties of materials without detrimentally heating the wafer. Validation of our technology was recently revealed with the announcement of a joint development program with a major Asian device manufacturer. This JDP will utilize Axcelis' flagship 300-millimeter UV curing platform, the RapidCure 320 FC. This platform is suitable for both thin arm and CVD based low-k film, now under consideration by all device makers worldwide.

So, in closing, it appears that the market will continue to be soft in the near term. However, we plan to use this lull in the market to improve business fundamentals and introduce innovative next generation tools.

We look forward to the opportunities that the shift to 65-nanometer high-volume production will afford Axcelis. We plan to capitalize on the need for better process performance related to smaller geometries and the integration of new materials. We believe that we are well positioned to meet these customer needs.

We are now ready to take your questions.

[OPERATOR INSTRUCTIONS] Timothy [Archuri], Smith Barney.

This is Dan Birnbaum for Tim. Question on the guidance. You talked about your guidance assumed a flattish spending environment, but it looks to me like the mid point of the guidance is down about 8% from this quarter. So, can you help me understand that a little bit and maybe break it out. Is it service that's flattish and product is down a little bit or how does that break out? And then does that flattish environment also speak to orders as well?

The midpoint of the guidance revenue wise--let me clear something before I answer that, Dan. I think I misspoke when I was giving the guidance. I referred to the fourth quarter. I was actually referencing the third quarter, of course. I apologize if that caused any confusion.

Our SG&A spending, actually on a comparative basis to a year ago, would be down if we didn't have the relocation costs from Rockville. Most of our cost on the infrastructure is fixed. We continue to work on cost-out initiatives. The biggest one we have going on right now is to reduce the cost from Rockville. We have consciously increased our R&D spend a little bit towards the end of the year, some of which you saw in Q2 and some of which we said is going to continue at these levels through the remainder of the year.

The midpoint of our guidance, revenue wise, we gave guidance of 80 to 90 million, with relatively flat expense base and relatively flat margins, even at the lower revenue levels.

So did I misunderstand that? I thought you were talking about a relatively flattish chip maker spending environment. Did I misunderstand that?

No, you didn't misunderstand that. I think the answer to your question is that it's a timing issue. If you take a look over the quarters, I think what you'll see is that we'll average out at a relatively flat rate throughout 2005.

And even though we don't give bookings guidance, I will tell you that our orders have been in the range of $45 to $50 million in new systems orders over the last several quarters. And based on the comments that we made about the spending environment and based on the fact that we don't really have great visibility, we don't expect to see any significant change even to the orders range throughout the remainder of 2005.

CJ Muse, Lehman Brothers.

I guess I'm a little confused. At one point in your prepared remarks you talked about Japan continuing to spend, yet in your guidance for SEN you talked a drop off to only 2 million in contributions in the third quarter. Can you help reconcile those two different data points?

The spending in Q3 is timing related. We expect SEN, at the levels that we see in Japan, to average a contribution of 4 to 5 million and we would expect that by the end of the year you would see that average. We would expect SEN's contribution to increase in Q4. It truly is timing, relative to product delivery and acceptance in Japan. This third quarter guidance is not indicative of a significant drop-off in the Japanese market.

Their end of year March is in our second quarter. Remember there's always a one-month lag. And so, this is typical, where they tend to ship a lot and have a lot of customer acceptance in their last month of their fiscal year. And again, that falls into our April, which is our second quarter. So, it really truly is a timing issue.

Okay. But if I'm hearing you right, you're looking for 4 to 5 million on average over the next two quarters. Giving guidance of 2 million, that would suggest 6 to 8 million SEN contribution in December.

That would be realistic.

Okay. I was hoping you could talk a little bit more about your Optima platform and when you expect customers to truly make the decisions and ramp 65-nanometer production and whether you feel like you're laid at tier 1 and tier 2 is available to you or your thoughts around that?

I think from the Optima perspective, customers are putting the tools, specifically the AMD perspective, putting the tool into production now for 65-nanometer. So I think from customers that we have talked to already, some customers have already made the decision on the 65 for sort of their early buys, their low-volume buys, but I think there's opportunities for us for the next round of buys, particularly for high-volume manufacturing.

AMD is a case where they're moving forward pretty quickly for high volume. The tool's going to be in production. Actually, it's in production now and we expect additional tool orders towards the end of the year. We're really satisfied with the progress that we're making there.

As far as lateness to market, the comments about that, it's hard to really gauge timing from our customers' perspective. They know what they need for next generation tool buys. They're looking for [unintelligible] productivity and [unintelligible] control, energy contamination control and some of these things that Mary spoke about in our comments. And I think that's something that we're going to continue to work with customers on over the coming months. And I think that will help us position ourselves well for when they need to make high volume decisions. That's what's really critical. We don't want the onesie-twosie orders, we want the high-volume orders.

Jim Covello, Goldman Sachs.

I've got a bunch of questions. Mary, first one, this is something that you and I had talked about on the last call. In reference to this sort of commentary about the flattish spending environment, as it relates to shipments at least, your customers have significantly front-half loaded the CapEx. And so, again, this is the same issue we talked about last quarter. But, if they front-half loaded the CapEx, unless they raise the CapEx budgets pretty meaningfully, wouldn't that mean shipments are going to continue to come down a little bit here, just as we think about the model into the out quarters?

Well, again, we gave you our guidance for the third quarter. We don't have a lot of visibility into the fourth quarter, but based on what we know today, what I'd have to say is that I don't think that that's true. You and I have talked about this several times and I can give you the same answer I gave you before.

What we're doing is we're talking to our customers on a daily basis to try to understand where things are going and we believe that at this point things are going to be relatively flat. Really it's a timing issue right now in terms of our third quarter. But there is a possibility that things would improve somewhat in the fourth quarter, which overall, would make the year relatively flat for us, at around $90-95 million of revenue.

I guess another way to ask it, I mean, you sort of had characterized the forward-looking environment on the last call as kind of flattish and now we're guiding to down 8% or so at the midpoint. I mean, that may just be a semantic issue. It isn't down that much. And I guess the way to ask it is, would you consider Q3 kind of flattish relative to the guidance or did something change that you got it down 8% or is 8% just kind of generally considered flattish, which I wouldn't disagree with that much?

I would consider it, at these revenue levels and given our ASPs, the timing of a tool can almost affect us by the percentages that we're talking about. So we really do believe it's more of a timing issue than an indication of a deterioration in the overall market.

Okay, so that's helpful. Now, if I could ask you a couple of other ones. Relative to the commentary on the foundry, so it sounds like the foundry orders have picked up, but you're saying it doesn't sound like it's indicative of anything sustainable. Can you give a little granularity there? That would be a little unusual. Once they start to order they would generally continue to order.

No, again, we're reading everything you are about utilization increasing somewhat, especially, for example, at TSMC, but we don't see it as a general need. The orders that we've gotten from the foundries basically are for specific tools that they need for specific projects that they have. We, at this point, do not read into it that it's a general turn on of foundry business.

Okay, that's helpful. And then if I could sneak in one or two other quick ones. First, just an accounting issue. The press release talks about a $3.8 million charge in Q2, and on the tables I see a $2 million charge broken out. But where's that other 1.8 or 1.7 million, where's that baked into the P&L for the Q2 numbers?

It sits in SG&A cost, allocated between--some of it's in selling, some of it's in general and administrative. There are specific accounting rules relative to what you can classify as restructuring expense. So certain costs, like the relocation of equipment and the relocation of employees we cannot classify as restructurings. It sits in SG&A. What we tried to do is highlight the total cost inherent in the Rockville move.

Okay, that's terrific. My final question is on the balance sheet and the cash burn this quarter around the evaluation tools. How do you think about an MPV decision on that cash, that $15 million or so cash that you'll burn in the third quarter, relative to your balance sheet and the convert you have coming due at the beginning of 2007? What is the MPV thought process that goes through that?

Well, a lot of the investment in the tools are in eval tools, which we expect are going to convert to revenues and cash flow in subsequent quarters. So, that is a timing issue. With respect to our cash position and the positioning of our debt that comes due in January, we still believe that to 2006, as we've stated before and as I said at our analyst day, that we'll be in a cash position by the end of 2006 that if we're forced to liquidate the debt, and that would mean that the market conditions aren't favorable so that we could attractively refinance in some way, that we could liquidate the debt and not create any type of liquidity problem for the Company.

What's the minimum cash position that you would be comfortable with after converting the debt?

We haven't said that. But we typically haven't been much below 100 to 90 million, somewhere like that, which we think that we have a reasonable strike at.

Robert Mayer, Needham & Company.

Yes, I'd just like to get a little bit more detail on the six wins of Optima. You had described them as wins. Would it be correct to assume then that they were competitive head to head, sort of showdowns, versus other equipment, where your equipment was chosen and the other was sort of removed? And, does that mean that some or all or part of these are being used for production currently, could you give us some more of that detail?

Well, the tools haven't been shipped yet, so they're not in production. But yes, they were competitive situations. I don't know that tools were taken out to make room for these tools. I don't think that's the case.

I guess, is this in lieu of another tool being selected? Because I guess the question is, a lot of times you can ship a tool into a fab, a customer will take it and play with it, but whether that's truly a competitive win or a displacement of another tool is--that's I guess what I'm getting at. Were these wins as in displacing other tools?

These wins were as in displacing other competitors. It was a competitive situation.

And I know these cases where we are going head to head with our competitors. These are not just capacity adds for customers that already are using our tool sets. They're looking for new tools for next generation technology and in these cases we've been able to place our Optima platform.

Okay, so none of the six have been shipped. And, what kind of shipping schedule are we looking at?

We've actually shipped two tools today and one of them at AMD is actually in production. We will ship another in the third quarter. Through the year we expect that we're going to ship 10 tools between us and SEM, some of which will be follow-on orders to existing customers.

Okay, so the six wins you've got out there will account for roughly 10 tools by the end of the year?

We're expecting 10 wins by the end of the year and similarly, expect 10 tool shipments. All of the wins we won't ship this year though.

If they come in the fourth quarter, they may not ship this year.

Understood. Okay, and one other question. You didn't mention anything particularly about the strip side of the business. Was that flat, up, down or otherwise?

I think things are pretty stable in strip right now. There's some good news we've also received out of Asia, particularly with our L-K tool on the low-k strip side. A big foundry has selected that tool for production, as tool of record. We haven't specifically announced that customer, but we're really, really excited about that situation.

So, would it be accurate to say that strip is flat, while ion implant is down slightly or marginally, in terms of forward guidance? Or is that forward guidance just generally across the board?

I would envision it more across the board. And again, like they say, at these revenue levels you're talking up and down by just one tool. I mean, we're very close. So, given our ASPs. But I would think that across the board, everything would be directionally the same. We're not seeing implant react one way and strip react another.

Okay, that's what I was looking for.

John Pitzer, CS First Boston.

This is Satya Kumar for John. You guys were pretty adamant during your analyst day that you're not losing market share. Looking at sort of your flattish environment outlook for the second half, your revenues will be down roughly about 20 to 25% [unintelligible - highly accented] flat to down. Can you help me reconcile that and should we be worried about market share loss here [unintelligible - highly accented]?

When you look at it, don't forget that you need to add SEN in to get a true picture of revenues that will, in fact, factor into 2005 market share. So, just to reiterate, at this point we don't expect any significant share shift. And based on our belief that the Optima product will be very competitive, we expect that this platform will allow us to actually grow share in the long-run, especially in the mid-dose market segment.

Okay. And in terms of the cash burn, you talked about for the Optima MD, when you come up with a new Optima product, should we expect similar cash outlays for new system placements?

No, I think we highlight it here, because of the timing of what is sitting in the third quarter. And again, that would be timing of what we would want to commit to. But I wouldn't be necessarily forecasting any significant cash burn in a given quarter because of a commitment to the platform. It's just that this was an unusually high quarter of commitment to eval and demo tools. And like I said, a number of those eval tools will convert to revenue and will convert to cash before the end of the year.

One last question on the Rockville consolidation. I think you talked about in your press release that it's getting [pulled] in. What is the last quarter of the restructuring expenses and in fourth quarter should we expect no restructuring?

And also just a quick question following up Jim's comment earlier. For you to get to breakeven here in 2005, given that your cumulative earnings through the third quarter will probably be negative, do we have to expect bit bigger than the fourth quarter? I'm just trying to understand what's moving to get you to full-year breakeven in the fourth quarter?

I think, given our guidance, if you added the three quarters up together, that we would have a marginal loss through the first three quarters. So I think you could anticipate, based on my comments, that yes, we would expect to pick up a little bit in the fourth quarter, because we still do expect to be profitable for the year as a whole. Although it's not significant through that period, I think if you add up the first two quarters and then look at the guidance for the third. We're relatively breakeven.

With respect to the Rockville move, we will have some restructuring cost in the third quarter. We will have some more restructuring cost in the fourth quarter. We don't expect that the restructuring cost will be quite as much as we've seen in the last couple of quarters however.

Bill Lu, Piper Jaffray.

Just a clarification on Rockville facilities here. I think you said in the past that when it's all said and done, it'll save you about $13.5 million in cost. Where are we right now in that? In other words, what of that is already in the third quarter guidance?

Well, we're still operating the Rockville facility, so a very big piece of that is with respect to the facilities in Rockville and all of the infrastructure that's related to that, travel back and forth, some headcount. And not much of the savings is built into the third quarter guidance. We'll start to see some of it come through in the fourth quarter perhaps, but it's not offsetting the relocation costs and the restructuring expenses that we have to date.

Restructuring expenses are basically retention and severance payments, along with some facilities cost for ongoing lease commitments that we will have to accrue.

Okay, so maybe it starts really in the first quarter of next year--.

I think that's what I've said in the past, that we won't really start seeing much of a benefit until we really get into 2006.

Okay, I'm sorry if I missed it earlier. And when do you fully realize all the benefits?

We're starting in 2006, the full benefits of the move, we should be pretty much there. We should have almost all of the restructuring cost behind us then or at least accrued.

Okay, so in the first quarter basically is what you're saying.

Yes.

Okay. And secondly, on the Optima--again, I'm sorry if I missed it before, but have you recognized revenues on that yet?

We have not. We have shipped tools, but respect to our revenue recognition policy on new products we do not recognize until final acceptance. That's a consistent policy with all new products. It's relatively conservative. But we do not recognize any revenue until final acceptance.

We expect to recognize some revenue before the end of the year.

Okay, so I'm assuming with AMD already in production [unintelligible - highly accented] that that will be, the first come, probably the fourth quarter then, right?

Well, it's based on all of the milestones and what has to happen in production. But, it's either late 2005 or in 2006.

George [Nusan], Merrill Lynch.

I have a couple of questions regarding cost in a challenging economy such as this. A lot of your competitors over the last year have been implementing some new initiatives to reduce their raw material costs, by opening up their line of communication with their supplier base. Mary, if you could find some color, or possibly Steve as well, as to what you guys are planning on doing from here on to reduce your raw material costs by establishing better lines of communication with your suppliers?

I don't know if it has to do with establishing a better line of communication, but it certainly it has to do with working with our suppliers to try to reduce cost. One of the things that we've been working very significantly on is international sourcing. We've actually been moving the sourcing of a number of parts overseas to reduce cost. That's one piece.

We've been doing significant outsourcing as well, and not just subsystems, but some major portions of the tools, especially some of the new tools that are under development. So, there are a number of things that we've been working on. We've said consistently that material cost is about 75 to 80% of the cost of our tools. And so, that's probably the most critical thing that we've been focused on to try to take cost out.

In terms of working with suppliers, one thing over the last couple of years I've been following the Company, sales has always been measured on quality. How are you making sure your suppliers are meeting your quality standard? Are you score carding them on a regular basis? Are you working with them through supplier forums? What are you guys doing to make sure they're meeting your standards?

We have a very rigorous quality assessment that we go through at part of re-qualifying or qualifying a new supplier. So, that's something that we work very closely on. We do inspections upon incoming carts or whatever it is, so it's a sub-assembly or whatever it is coming in through the door, for anything new that we're bringing in. So, I feel very comfortable with what we're doing.

We've made it very clear to the business that it's not just cost-out equation, it's also understanding that quality is going to be good, it's understanding that there's going to be an adequate timely supply of the materials, whether it's an upturn or a downturn. So, there are many things that we look at when we go to move the parts.

Steve, just kind of looking offshore, what are some areas that you're looking at? Are you looking at China, some of those areas--?

We've looked at China, Vietnam, South Korea is a big area; there are a number of areas in the Southeast Asia part of the world that we've looked at.

Okay, final question. Do your suppliers feels like they're [beginning] to squeeze? What's in their feedback? Are they more inclined to work with you guys on these types of initiatives or do they feel like you're telling them we have other alternatives, do this or go away. What are they feeling like?

I'm sorry, the suppliers that we're currently working with?

Yes.

Our strategy for that is to actually consolidate. So, what we're doing is, with the suppliers that we're maintaining here in the US, what we're doing is we're trying to pull more parts that are left and give them to them, so that we still have some very strong suppliers here locally. So what we're doing is not only are we reducing our costs, but we're reducing the number of suppliers that we have.

Okay. And good luck down the road.

Matt Petkun, DA Davidson & Company.

Steve, just wanted to clarify, that 27% number that you attributed to 300-millimeter, that was for system bookings this quarter?

Yes, that is bookings in Q2.

Okay. Can you help us understand maybe your view of why that varies? And obviously, some of this has to do with timing for implant-related orders, but the rest of the industry is running at much higher rates than that right now. What's going on?

Actually, Matt, we do think it's timing. If you go back over the last several quarters and actually, the last 12-months, we're approximately 50% 300-millimeter. We think we'll be over 50% 300-millimeter for the year. So, again, we do attribute it to timing.

Do you expect to be over 50% 300-millimeter for the year, so with the last quarter being roughly 46%, your visibility looking forward is primarily 300-millimeter system orders?

Well, you look at what we're planning on, we would think that orders for the second half of the year will put us over 50% 300-millimeter, yes.

Okay. And then, kind of just another quick balance sheet question. And this is not that big a deal, but in long-term deferred revenue, is that primarily Ultra tools or Optima tools, the MD?

No, it is not Optima tools, no.

What's responsible for the jump in long-term deferred?

It can be a number of things. Any extended warranty terms result in a deferred revenue and if those go out, if those obligations go out beyond a year, then those are classified as long-term. It can be commitments for cost of ownership reductions that could be classified that go out beyond our year, that could be classified as long-term. There are a number of different items. It's not one specific thing. But it is not related to the Optima.

Okay. And then Mary, a question for you. I understand you aren't really seeing anything in terms of clear visibility from the foundries yet. Is there anything in any of your services businesses, be it spares or consumables ordering that leads you to believe that you're seeing some of the things that you would normally see as a precursor to new orders?

No, not yet.

So, next quarter--and this is I guess maybe again a question for Steve. Should we see services business being roughly flattish?

I wouldn't think that there would be much of a change, quite frankly. I don't think that we would look for much change in the service business. The service business has been very, very stable throughout this last downturn. It hasn't fluctuated down anywhere near what the systems revenue has, so I would expect that it wouldn't vary significantly quarter to quarter.

Martin Chang, SG Cowen.

I didn't quite catch the percentage of [unintelligible] orders. Was it 27% for Q2?

27% for Q2.

Right. So, back to the original question from the earlier caller, when you say it should revert back to a 50% or 70% level going forward, is that based on mainly Optima coming back?

No. This is just on a mix of the general product that we sell.

Okay. Then my second question is regards to the UV curing market, how big is the market in your opinion when curing for low-k becomes more prevalent?

The projection for low-k curing, you can do it a couple of different ways. You can make some assumptions that anyone buying low-k materials is going to have to do some sort of curing process. And whether it's a standalone cure or an integrated cure, we're assuming that's going to happen out at 65-nanometer. And that's not specific to spin-on, it's specific to CVD materials as well as porous low-k materials.

So, in our estimates, we have done some estimates. It's Axcelis' estimate, because there's not a third party really estimating the size of the market. But the low-k curing market could be over $150 million in the next two to three years. And that's based on, like I said before, based on a percentage of the [deposition] market.

Ben Pang, Prudential.

This is [Asif] for Ben Pang. I have a couple of questions. First, it seems like the slight decline in revenues your gross margins are sustaining around 40% mark and I just wanted to get your comments on the pricing environment right now. I heard you mentioned the cost control is one of the drivers, but can you comment on the pricing environment, especially with three [competitors] [unintelligible]?

Pricing is very competitive, as it usually is. But we don't think that it's any worse than what we've seen in previous downturns.

Okay, so you think that it's holding then?

Yes.

Okay. My second question, on the foundry order pick up, so if I'm hearing it correctly, these are not expansion orders, [it was basically line sales] or upgrades or 130 or 90-nanometer conversion type orders, am I correct?

Right.

Okay. And lastly, Flash memory market, do you see it cooling off in the second half of '05, versus first half '05, especially in Japan?

I don't think so. Again, we know the memory guys were spending more heavily in the front end of the year. So I think things, again, are going as planned. I don't think there's any falloff in memory. I know there's been a lot of talk about that, but I don't think we have any indications that that's happening.

But the Flash component of the memory, that should stay strong or--?

I think that should stay strong. I think we might see increases in Samsung, I think, for their [S] project, for instance, they're looking at ramping that up towards the end of the year 2006. So, that's something that's new that we have to watch.

[Ari Chanda], Deutsche Bank.

Regarding the Optima MD product, if you meet your goal of say 10 customers by the end of '05, what is the revenue potential that you see for the product in 2006?

Actually, I think that what we've positioned is that we think that we can make revenue gains with the Optima MD in 2006 and that we think that we will see revenue gains from the Optima MD in 2006. It's really too early to try to quantify the amount of the gains, but we are optimistic the way the tool is performing that we will start to see good penetration in 2006.

The HD itself is not going to be released until the end of 2005. So the revenue penetration for the HD will not be as great and we won't see much in the way of revenue from that product until really the end of 2006.

And the other component of that is we just don't know what the market is going to look like. It's always good to get design ins in the downturn and then when capacity comes back you get the follow on orders. But we just don't know if that's going to happen.

Okay. This is for MD product, right, you are just talking about? This part of the 10-customer wins, you're not sure, okay.

Right.

And how much will Optima HD product will cost you in terms of in demonstration and evaluation tools? Like you have [unintelligible] [50 million] in the coming quarter, right?

No. That's a portion of the cash burn in the upcoming quarter is for the investment in evaluation and demo tools. Some of the cash burn is attributable to--is quite frankly, attributable to the operating loss.

But we are investing in evaluation and demo tools. We need the demo tools and that demo lab. Some of the eval tools that we are putting in place in the third quarter though, we expect are going to convert to revenue and to cash in the latter part of 2005 and into 2006.

Can you quantify cost outline for the launch in general, for the HD product?

No, because it's variable. It's not really an [outlay]. Some of the tools we're shipping on an eval basis. Some of the tools we've already shipped on an open order basis. But we don't think it's a negative cash flow situation over any extended period of time. We expect to productize the product and to be selling it on a regular basis going forward.

And also regarding the breakeven level for the Company, how much lower do you think it can go by the time Optima product line starts to generate revenue?

I think that we've said that with the cost out initiatives that we have from the consolidation of our Rockville facility, that we're trying to target into 2006 driving the breakeven level below $90 million. Now, there are so many variables. We have to maintain our gross margins at a level of 41.5 to 42% and we have to control our cost infrastructure. But we're trying to drive it with the cost-out initiatives that we have in place. We're trying to drive it below 90 million in 2006.

Patrick Ho, Legg Mason.

Just one quick housekeeping. Can you repeat the percentage of memory in the June quarter?

In terms of shipments?

Yes.

69%.

Okay, great. And this is also another clarification on the Japanese revenue recognition policies that you guys do. With SEN's contribution in Q3 being guided down, would it be fair for me to assume that Q2 shipments to--since Q2 shipments will be down and that Q3 shipments will be up where you'll see that bigger up tick in Q4?

Yes. That would be fair to think of it that way. Japan itself does not recognize revenue until final acceptance, because of their customer contracts. So it's not necessarily what they shipped, it's what's going to be accepted. And that's based on the timing of the shipments during the quarter. But yes, you would look at Q2 shipment levels being down a little bit, Q3 shipment levels being up a little bit.

Okay, that was helpful. And just a final question. I know you don't want to give a lot of details on the Optima HD, but from a very high level, can you characterize which customers may be seeing greater interest right now in the HD? Do you see more memory guys or is it more logic founded? Where are you seeing the greatest interest right now?

I have to say that all the customers we've had discussions with, with memory customers as well as logic customers, as well as the foundries. So, all the customers across the board we've talked to. We've entertained several customer visits to the factory, specifically to look, at the tool on our engineering floor, as Mary mentioned. And we talked a little bit about sort of what they like about the machine. So, I think a lot of the customers that we're talking with--you really can't specifically put it into one segment or another.

Tim [Shoals Ellender], Morgan Stanley.

Three quick ones, if I may. The first was, can you share with us, if you compare the Optima with your existing products, could you just give us some sense as to how that product compares or will compare from a manufacturing perspective, by the number of sub-modules that go into its assembly or your estimated assembly times? Just something that gives us a sense as to what it might mean from a manufacturing perspective?

Second question was, where are the Optima tools on the balance sheet? Are they still in inventory or is there a deferred profit balance somewhere on the balance sheet? And then the third question, and I think I just misheard it, because my line was crackling. On the bookings, I think the breakdown you gave, 200 and 300-millimeter, didn't seem to add up to 100%. I think I may have misheard it. So, if you could clarify that, that'd be great.

Okay. You're talking about Q2 orders, 200 and 300-millimeter split?

Yes.

It was 73% 200-millimeter, 27% 300-millimeter. And then I'm going to do the balance sheet and then we'll end up with the--.

The totals that we've shipped, we haven't recognized any revenue, so if we've shipped a tool pursuant to a purchase order, it's going to be sitting in deferred revenue. If we've shipped a tool pursuant to an evaluation agreement, it would be sitting in other assets as part of our eval tools. But there has been no revenue recognized.

I understand that. I just wondered, does that mean there's going to be a little bit in deferred revenue and a little bit in other assets?

There would be some in deferred revenue. When we ship a tool relative to an eval contract it, does go into other assets, yes.

On the manufacturing of the Optima, we are using the same manufacturing philosophy that we have employed on our Ultra and our multi-wafer high-energy tools. And in fact, now we're starting from the ground up in designing both the Optima MD and HD and eventually the Optima HE, in a modular design fashion, so that these tools can be assembled at our customers' sites much easier than we can from using the previous products.

So, the concept of [ship from sell] would be a standard way of manufacturing now the Optima, rather than having it as a special way of building these machines.

Also, the degree of outsourcing too, is a little bit higher on the Optima tool set. We're working with several key suppliers now to do more outsourcing of assemblies, not just component level, but subassemblies and almost at the module level, we're working on. So, those modules will be coming in from several suppliers in a more completed form.

So, overall, our cycle time should be a lot less on the Optima tool set than on the existing multi-wafer tool sets.

Okay. And I'm guessing that would be primarily something that will kick in as the volumes start to pick up?

Yes, that's correct. We're obviously coming up a learning curve now, so that's a good estimate.

And that does conclude our conference call. Thank you very much for joining us today.