Axcelis Technologies Inc (ACLS) 2005 Q4 法說會逐字稿

Good day, everyone. And welcome to the Axcelis fourth quarter 2005 earnings release and yearend conference call. As a reminder, today’s call is being recorded. Later, we will conduct a question and answer session and instructions will follow at that time.

For opening remarks and introductions I would now like to turn the call over to Mr. James Kawski. Please go ahead, sir.

Good afternoon. This is Jim Kawski, Director of Investor Relations for Axcelis Technologies. Welcome to our conference call to discuss our results for the fourth quarter. If you have not received a copy of our press release issued earlier today it is available on our web site 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.

After the prepared remarks there will be time for questions. The playback service will be available via our web site as described in our press release.

Under the SEC Safe Harbor Provisions please note that comments made today about our expectations for future revenues, profits, and other achievements are forward-looking statements based on Management’s current expectations. We urge you to review our 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 the 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 Sumitomo Eaton Nova Corporation, known as 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 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. Effective April 1st SEN’s legal name will change to SEN Corporation, an SHI and Axcelis Company.

Now, I would like to turn the call over to Mary.

Thanks, Jim.

We were very pleased to finish the year by exceeding our operating results guidance and reporting strong orders. In fact, fourth quarter systems orders were up 96% sequentially. We achieved this order growth through a broad base of drivers. First, foundry bookings took a strong turn upwards as utilization rates crossed the 90% level. Second, while memory customers continued their strong ongoing capitalization there was, in fact, a shift within this segment. Memory makers are making strategic transitions in their product lines from DRAM to the higher demand and profitability of [nan flash].

As recently reported by the market research firm IC Insights 2006 could likely represent the fourth consecutive year of double-digit growth for flash memory. This will likely set the stage for flash surpassing DRAM for memory market share in 2007.

This leads me to the next set of drivers for our orders growth. Flash processes require more high energy implants than other process flow. We saw a measurable increase in high energy booking activity in Q4. This increase in demand for high energy equipment coupled with the up tick in orders from second tier customers that we saw in Q4 have in the past sent signals for Axcelis that broad based buying has begun.

We do not know if these signs are indicative of a sustainable upturn during 2006, but with improving market conditions and the traction we are gaining with our new equipment we are confident about the year ahead. Much of our enthusiasm for 2006 stems from the work we did in 2005 to strengthen Axcelis for the future. During the year we continued to streamline our business model and we launched our next generation Optima platform.

In 2005 we successfully completed the consolidation of our Rockville Facility, reducing our annual expense base by approximately $10 million. As a result, our 2005 profitability was impacted by more than $11 million in restructuring related expenses, taking the business from a profit position to a loss of $4 million. The restructuring efforts will allow us to maintain our quarterly breakeven at around $90 million in 2006 despite stock option expense, inflationary increases, and other investments we are making in the business.

Additionally, results from our ongoing efforts to reduce product costs enabled us to maintain our 2005 margins at 2004 levels despite a 27% reduction in revenues. Although the learning curve associated with our new Optima products will affect margins in 2006 we have plans in place that should allow us to close this gap as we enter 2007.

Let’s turn to the most exciting development of last year, the launch of our new Optima platform. With the Optima we are now the only implant supplier that can offer a total solution of both multiwafer and single wafer tools that meet all of our customers’ needs for today and tomorrow at 65 nanometer and beyond.

We rolled out the Optima MD as the first tool in the Optima family to meet the emerging need for mid dose halo implant. And just last month we introduced the Optima HD which will address the growing demand for high dose implants. During 2005 we set a target of securing 10 design-in wins for tools based on Optima technology. We are happy to report that we met that goal.

Our Optima wins validate the breadth of the platform’s acceptance. 60% are for mid dose tools, with 40% for high dose. Optima customers represent all three major types of chip manufacturers located in Europe, the U.S., Japan, Korea, China, and Taiwan plus a research facility, [IMEC]. The majority of these customers have already taken or committed to multiple shipments, and we expect additional follow-on orders this year.

Customer interest in these two tools has been tremendous because customers are actively looking for alternatives. Customers are attracted to the Optima platform because it provides flexible process performance to meet existing and emerging chip manufacturing requirements. In fact, the Optima platform provides the widest application coverage with fewer tool types, offers precise process control through a patented [inaudible] technology, and delivers the highest capital efficiency through maximum tool utilization.

Optima opportunities exist for both 200 and 300 millimeter tool sets and encompass geometry’s from a quarter micron to 32 nanometer. Customers will design-in tools for existing and new lines if they provide the best performance at the lowest cost. Also, in most cases, they want multiple suppliers for a given tool set to protect themselves technically, as well as commercially.

In 2006 we have ambitious but realistic goals for both the Optima MD and the Optima HD. Our momentum with the Optima MD will continue, and we expect our mid dose market share in 2006 to be at the highest point Axcelis has reached in this segment since the early ‘90’s.

We also expect to begin shipping Optima HD tools in the second quarter of this year. As we penetrate the market in 2006 with these new tools we believe that we will gain high dose market share.

Bottom line, the wins we have already achieved and intend to secure for the Optima MD and the Optima HD, combined with the continuing strength of our multiwafer portfolio make us confident in our long-term leadership in implants.

I’ll now turn it over to Steve who will take you through more details on our financial results.

Overall, we achieved operating results for the quarter that were better than guidance. We reported a net loss of $1.3 million or $0.01 per share. Results of operations were impacted negatively by restructuring and other costs associated with the final phases of the relocation of our Rockville, Maryland operation.

Also, in November, Axcelis acquired the intellectual property and certain other assets of Diamond Semiconductor Group, an engineering design firm specializing in ion implant design and technology development. This acquisition adds an experienced implant development team to our world class technical organization as well as expands and strengthens Axcelis’ technology portfolio. Substantially all of the costs associated with this acquisition which adds to expense is in-process R&D.

The total affect of these two transactions, the Rockville move and the acquisition of Diamond Semiconductor reduced earnings by approximately 3 million or $0.03 per share.

Revenues for the quarter were 93 million and worldwide revenues which includes SEN were 155 million, in line with our expectations.

Our service business continued to show strong performance with revenues of 41 million. Our service operations continue to be accretive to our overall gross margins. Revenue from system sales came in at approximately 50 million. Shipments of 300 millimeter products constituted 57% of the total for the quarter and 60% of total shipments for the year.

From a product perspective our implant business accounted for 81% of total shipments for the quarter and 78% for the year. Shipment bookings increased 96% to 58 billion of which 55% was 300 millimeter. Systems and service bookings for the quarter were 99 million compared to 69 million in Q3. On a worldwide basis total bookings were 151 million, up from 118 million in the previous quarter.

Based on the geographic location of the fab Asia accounted for 70% of systems orders with 17% coming from the U.S. and 13% from Europe. Including SEN approximately 82% of new systems orders were from Asia.

Memory manufacturers accounted for 35% of new systems bookings, with foundries at 38% and logic at 28%.

The gross margins at approximately 41% were higher than we forecast at the beginning of the quarter. Improved performance is attributable to reductions in warranty costs, accelerated retention payments and tool acceptance, and higher than forecast service revenues.

Operating expenses for the quarter including restructuring and related costs and the charge for in-process R&D I discussed earlier were approximately 42 million, slightly less than forecast.

The contribution from SEN for the quarter which includes royalties and Axcelis’ 50% share of their net income was approximately 6 million. Cash flow was negative at 7.8 million caused by the timing of system shipments weighted to December.

Looking forward to the first quarter of 2006 revenues excluding SEN are projected to be 90 to 100 million. Worldwide revenues are forecast in the range of 160 to 175 million.

Gross margins are expected to approximate 40% as efficiencies built into our manufacturing process substantially offset margin pressure from new products.

Operating expense levels are expected to be approximately the same as Q4 of 2005. Costs associated with stock based compensation are estimated at 1 million, of which approximately 15% will affect cost of sales, 25% will be charged to R&D, and 60% will be included in SG&A expense.

SEN’s income and royalty contribution for the first quarter is forecasted to be $6 million. We expect SEN’s quarterly contribution to average 4 to 6 million but it can fluctuate quarter to quarter based on the timing of product delivery and acceptance.

Income taxes are forecast at 300,000. And results of operations for the quarter are projected at breakeven.

With the introduction of our new products, I would like to provide some insight about how to think about modeling Axcelis going forward. While we don’t give specific guidance for the year I will provide a summary of what we expect in 2006.

We anticipate revenues to increase 15 to 20% over 2005 levels, with revenues from sales of Optima products to exceed 10% of total systems revenues. Shipments of Optima products, not all of which will be recognized as revenue in ’06, should be in the range of 60 to 70 million as we begin to gain market share.

Gross margins despite downward pressure from new product sales are expected to remain at approximately 40%. Expense levels should remain comparable with 2005. As Mary mentioned, savings from the Rockville move will be offset by stock based compensation expense and other inflationary increases. Stock based compensation expense is estimated at 4 million for the year. And we expect to be cash flow positive in 2006.

Overall, our business model remains strong, as we continue to take actions to improve margins and control spending. Looking further ahead, we are targeting quarterly revenue breakeven in 2007 at 86 million.

I will now turn the call back to Mary.

Thanks, Steve.

Our priorities for implants in 2006 have not changed since our last call. First, we will penetrate the market with the Optima HD. Based on what our customers are telling us there is significant opportunity for Axcelis. In fact, the Optima HD is changing the playing field in the single way for high dose segment. Watch for a series of press releases throughout the year signaling our wins. Second, we will continue taking mid dose market share with the Optima MD. Third, we will ensure that SEN continues to dominate the implant market in Japan because of their cost effective, high quality products and their unrelenting focus on customer satisfaction. And, finally, we will capitalize on the high demand for our market leading multiwafer implant products.

Demand for our high energy tools remains very strong, and we are currently projecting that as customers add capacity in 2006 we will sell a large number of multiwafer high [current] tools since they are the process tool of record at numerous fabs around the world.

So, as I said earlier, we are very positive about this year. We are well positioned in the market, and we look forward to an exciting 2006.

I’ll open it up now for questions.

[CALLER INSTRUCTIONS.]

And our first question will come from Raj Sasha with SG Cowen.

Hi, thank you. Mary, you mentioned in your opening remarks that flash in particular is an opportunity as it means more high energy implant [sales]. Can you remind me when it is your new single wafer high energy tool comes out?

Yes, at this point we are scheduling the Optima AG to come out to meet customer needs, and that will be likely sometime the end of this year, early 2007.

And when do you think the critical decisions are sort of made at 65 in the high dose medium, chronic space? I mean is it over the next six months that all of the more important decisions made, or do you have longer than that to get design done with the new Optima tools?

Hi, Raj. This is Mark Namaroff. I’ll take that question. There are decisions being made now for 65 nonometer, and we still think that we have a great opportunity ahead to even get designs in at 65. So, not only do customers have made all of their decisions for high volume manufacturing. A lot of the fabs are at low volume and they’re still ramping, so I think we have an opportunity to get designed in for future ramp plans.

Okay, a couple more quick ones, if I might? Steve, you mentioned flattish OpEx going forward, is the mix between R&D, SG&A expected to be around the same or can we expect that you’ll see some R&D dollars coming out as some of this development finishes?

Well, the R&D dollars in Q4 are inflated by the costs associated with the acquisition of Diamond Semiconductor Group, as I addressed in my remarks.

Okay, yes.

But I think that you’ll see the R&D spending coming down slightly but you won’t see that until the second half of the year, really, and it won’t come down dramatically, we still have a number of major products. That’ll be offset by a slight up tick in SG&A spending, a lot of what will be attributable to stock compensation expense.

Okay, thanks. Final question for me. You’ve got a convert due at the beginning of ’07. Not a lot of net cash. I understand you’re generating some this year, but what’s the strategy there?

Well, we have cash at the end of this year, about 100, just in excess of 175 million. We anticipate that we’ll generate cash in 2006. We also have an outstanding credit facility that would be available to us to use to liquidate a portion of the debt. I’ve said this before and I’ll repeat it, we have absolutely no intention of raising equity capital or of issuing another convertible debenture, particularly with our share price at these levels.

Okay, that’s helpful. And what would you think at this point you’d generate across ’06?

We’re not going to give a full year cash generation, but we think it’s going to be, it’ll be reasonable. If you model out our year we like to think that our net earnings will result in about the same level of cash generation.

Okay, that’s helpful. Thanks.

Your next question will come from Jim Covello with Goldman Sachs.

Good afternoon. Thanks so much. Can you hear me okay?

Yes.

Yes, Jim.

Great. A couple of quick questions. The non-implant businesses or non-core businesses, if you will, can you talk about them a little bit? You know, on a P&L basis each of those businesses, or there’s some that are losing money, and any plans to maybe focus the business around the core implant platform anytime in the near future?

Actually, we have our business structured so that none of our businesses are losing money. We’ve said before, RTP we’ve got sized correctly, we consider it a niche product now, and going forward it’s not consuming resources. And the businesses and the resources they’re consuming are sized appropriately.

I also think that we’ve clearly stated that we understand that our main franchise, our core business is implant, so we have absolutely assured that we’re making all of the investments that we need to make to be successful in that part of the business.

And on the product side, Jim, we’re quite excited about some of those things that we’re doing on strip and procuring, in particular. I mean we are, we will be talking more substantially throughout the year about development of a new strip platform, and we’ll probably spend some more time during our Analyst Day talking about this is a high volume strip platform that we’re developing.

Also, in the curing front for UV curing applications we’re seeing a lot of pull from the market. There’s a lot of interest now for curing DVD as well as spin-on dialetric materials. And then also an RTP. So, we’re actually quite happy with what’s happening on the non-implant product side.

Okay. And then I mean is there an update for short and longer term target revenues among the different segments? Your implant and non-implant, like we used to get pretty regularly?

It’s not going to, through 2006 the mix won’t change dramatically, Jim. We’ve been, over the last few years we’ve been between 75 and 80%, and I would think that you would see that in 2006.

Okay. And then, you know, a final question for me, just relative to the pricing environment. I mean what does it look like now that you guys are in the market with the single wafer platform in a bigger way? Are you seeing any changes in the pricing environment? And, you know, how is it all working with each of the two competitors?

Well, it’s based on the HD, if you’re asking about that specifically. We don’t expect to have to do anything out of the ordinary with price to win Optima HD orders because the Optima HD brings value to our customers, that’s what they’re telling us right now.

You know, there’s tremendous customer interest in the Optima HD, and we believe that the momentum will shift toward Axcelis this year. From an overall pricing standpoint, although pricing is very competitive, we don’t believe that it’s any different from what we’ve seen in previous downturns. The only exception may be in Japan where one of our competitors has used some very low pricing to try to penetrate the market.

And do you see that changing at all, in Japan, or do you think that’s just a new steady state in that region?

I think SEN from what we’ve heard from them feel very confident that they’re going to be able to continue selling their tools to their customers at pricing that is reasonable. I think that they’re very confident about that. So, you know, we’ll have to wait and see what the competition does, but at this point we don’t expect to see anything else.

Terrific. Thanks so much.

And John Pitzer with Credit Suisse has our next question.

Yes, hi. This is actually [Sasha Comat] for John. Your [inaudible] % outlook for ’06 for revenues, what’s baked in in terms of CapEx and wafer fabric spending and specifically for implant? And can you talk whether there’s sort of [inaudible] loaded?

Want to talk about the financials first?

Yes, we’ll – I think that we’re going to see an increase throughout the year but some of the increase for us is going to be weighted more to the second half of the year because our Optima revenue will be recognized, will be weighted towards the second half of the year, Sasha.

Okay.

And I think in terms of CapEx I think we’re feeling pretty much like everybody else that a 4 to 8% growth in CapEx for the year seems reasonable, but because we believe that we will gain share in 2006 we expect to grow faster than that, and that’s what’s leading to the 15 to 20% increase that we’ve given you.

Okay, that’s good. And in terms of the new Optima platform how much commonality is there between the different Optima HD, MD, and can you sort of leverage the Optima ramp with the MD, to drive the margins higher? And of the 60 million Optima shipments for this year can you perhaps give an idea as to how big HD and MD will be?

Sasha, this is Mark. I’ll just take the commonality question at the product level. You know, commonality is very important to us and we’re trying to drive commonality wherever we see feasible in the platforms. You know, from the [beam line] perspective the tools all have different beam lines, so we’re also trying to leverage common parts and subsystems, you know, for the ion sources, for the gas boxes, for the wafer handling systems. So, they’re not 100% common across the board but there are a lot of common subsystems across the products. And, of course, that’s going to help drive margins for us in the future.

Sasha, I think we’ve said before that we expect the overall margins from the new Optima products because of the efforts that we put in in the design phase to be accretive to our overall product margins. So, we’re expecting as those tools mature that the margins will actually be better than what we realize today.

With respect to a split between HD and MD, I think you can look for it to be pretty much 50, 50. Of the 60 to 70 million, about half of it will MD and half should be HD.

Okay. And maybe if I can quickly come back to the first comment that you made, that you would gain share this year. When I look at your bookings by segment it looks like memory was up the least sequentially and foundry was up a lot more. And I also look at 200 millimeter a bit more than 300.

Is your sense in bookings coming from 200 millimeter foundry in the December quarter? And how well do you think your position in the memory market is in ’06, and do you think you can gain share across all three segments in ‘06? Or what’s your outlook for that?

Well, we did – I mentioned we did have a pick-up in the foundry segment, but I have to tell you that it was not just at 200 millimeter. In fact, it was mainly at 300 millimeter. So, there was some mix in there, but I feel like we’ve got a strong 300 millimeter position at the foundry.

And then in terms of memory because the foundry piece of it went up, if you’re just looking at percentages, yes, in fact, it looks like our memory percentage declined, but if you look at it in terms of total dollars our actual total absolute dollars that went into memory increased from Q3 to Q4.

So, we’ve got a very strong position with the memory manufacturers. And I think as you see some of the announcements that we’ll make moving forward in 2006 with some of our new tools, that will actually, you know, confirm the fact that we have a strong position and we’re going to be getting even stronger.

Very good. Thank you very much.

And now we’ll move to CJ Muse with Lehman Brothers.

Yes, good evening. A couple of questions here, I guess. First, Steve, you talked about breakeven at 90 million, yet you gave us breakeven guidance on 90 to 100 million. Can you help me understand that? Does that mean that you’re not at 90 million breakeven today but it’s going to have current in ’06?

Yes, I think that you’re going to see that the R&D spending is a little bit higher in the first half of the year, so our expense levels are a little bit higher, but when we get through the year we should average about 90 million breakeven.

Great. And I guess could you size the high energy market for me in ’05 and what kind of growth do you expect in ’06?

Typically, the high energy is about maybe 17 to 18% of the total high end implant market, and I think the latest projections from [Data Quest], CJ, is somewhere around 1.2 billion for the implant market in ’06. You can do the math, you’d have the high energy market.

And right now, I mean that’s pretty stable. It hasn’t changed that much over the last several years. And then my expectation is that it will stay the same into 2007.

Okay. So, you’re looking for flat in ’06?

As a percent of the – I mean in ’06 it’s definitely up from ‘05 because ’05 the total market was about a billion.

Okay, the 1.2, okay.

Yes, so that’s driven by a lot, Mary mentioned before, a lot of it is due to nan flash demand. I mean a lot of the flash customers are going to require more high energy tools in the future, and that’s where we’re seeing a lot of the growth.

Great. And then one last question, in terms of how customers are reacting and beta testing and purchasing your new Optima platforms, Mary, you said that your customers committed to multiple shipments, and with the exception of MD my impression was that we’re still pretty early in the learning curve in beta testing for your other customers that are using Optima tools. And I just kind of would like to understand why they would commit to multiple tools initially as opposed to testing out a tool and then committing afterwards? And so if you could help me with that, that would be great.

Well, I think the first issue with what you said is that AMD is a beta test. AMD is not a beta test, they have multiple tools that have been qualified and are in production, and, you know, we’re very hopeful that we’re going to get follow-on orders from them. In fact, a number of follow orders from them in 2006.

In terms of other customers, there are other tools that are going into production, as well. So, once we get those tools up and running, and, in fact, we have done that at a foundry in China, we fully expect to have the additional follow-on orders.

So, I think the misconception is the fact that this is a beta tool. It is not a beta tool, it’s a tool that’s being used in production.

Okay, thank you.

Our next question comes from Steve O’Rourke with Deutsche Bank.

Steve O’Rourke: Hi, thanks for taking my call. If I have my numbers right here, I think SEN revenue was up about 70% quarter over quarter. Axcelis system revenue was up about 10%. And next quarter you’re projecting Axcelis to be roughly flat, SEN up about another 24%, that’s using the midpoint of guidance. What’s driving the SEN revenue growth? How much of SEN revenue is single wafer tools, how much is 200 millimeter? If you could help us to understand that dynamic it would be very helpful?

No, SEN’s revenue growth is driven by, all by multiwafer tools, and they have very strong 300 millimeter penetration. In the first quarter looking forward, though, we’re looking at about 53% of their business to be, in the first quarter we’re looking at 53% of their business to be 300 millimeter. But last year for the year 71% of their business was 300 millimeter.

SEN’s yearend is March 31st, so they usually have a very strong first quarter, which is the end of their fiscal year is March 31, so our first quarter is their fourth quarter, and that usually historically has been a very strong quarter for SEN as they get all of the tools out in the field accepted and into revenue.

Steve O’Rourke: Okay, when you talk about $60 million in shipments of Optima product in 2006 is that exclusive of SEN?

That’s exclusive of SEN. That’s Axcelis, alone.

Steve O’Rourke: What will SEN ship in single wafer tools? Is there any kind of a metric you can give us in 2006?

No, we don’t have a forecast on that at this time.

Steve O’Rourke: Okay, and one other question? On the 200 millimeter business in 2006 can you give sort of a geographic distribution? Is that possible?

I don’t have the details on that, Steve, but I don’t think it would be dramatically different than our overall distribution, quite frankly. I think you’d see it about the same as the distribution we’ve seen in orders for all of our products.

Steve O’Rourke: Okay, fair enough. Thank you.

Hey, Steve. One other thing, though. If what you’re trying to get at in terms of SEN in Japan is this whole idea of has Japan shifted to single wafer, is SEN in the game, I guess what I need to say about that is that SEN offers products that meets their customers needs. They continue to be very successful with their multiwafer tools, and are also successfully penetrating with the [SHX] which is their single wafer high dose tool and customers that are using single wafer tools. So, we don’t expect to see any shift in SEN’s market leading position based on changes in types of tools that their customers may decide to use.

Steve O’Rourke: So, is it fair to say that the SHX has got some significant momentum? And I guess what I’m really trying to understand is the single wafer positioning because obviously there’s a fair amount of talk out there about single wafer positioning in Japan.

Well, I think a lot of it is talk at this point in time. SEN has had success at multiple customers with the SHX. They’ve shipped multiple tools to some of those customers, and they fully expect to be successful going forward in 2006.

Steve O’Rourke: Okay, thank you.

And moving on to Timothy Arcuri with Citigroup.

Yes, hi. This is [Arthur Smaleck] for Timothy Arcuri. I have a couple of quick questions. So your breakeven guidance for the next quarter, does that include stock based compensation, or is that excluding stock based compensation?

No, it includes stock based compensation, it is included in the operating expense level.

Okay. And the next, can you break-out the percentage of memory in the [fourth] quarter in flash and DRAM? And kind of comment on how do you see the break-out in the next quarter?

I can tell you in the fourth quarter of ’05, foundry accounted for 38% of our bookings, logic 28%, and memory 35%. And I don’t really have that forecast going forward. But I expect that, yes, because of the pickup in flash we’ll probably see the memory number increase in the first quarter.

Okay. And one last question, you said a large number of multi-research tools will be shipping in 2006 because of existing PTORs, are these mostly high energy tools or are you expecting contribution from like from [inaudible] tools, as well?

well, remember our medium [inaudible] tools and mid dose tools are single wafer, so we won’t be shipping any multiwafer mid dose tools. But if you take a look at the rest of the multiwafer tools we fully expect to sell, as we said, a large number of high energy tools, but also a large number of our multiwafer high current or high dose tools.

Okay. And can you kind of highlight what customer segment these tools are going to be mostly memory, or is this all, is it kind of broadly distributed?

It’s broadly distributed.

All right. Thanks.

And our next question will come from Bill Lu with Piper Jaffray.

Hi, thanks. This is actually [Dennis Kwan] calling for Bill Lu. First question, you had 10 design wins in 2005. What’s your target for design wins in 2006?

Well, we don’t have it split out by design wins, but if you look at the HD we said that we would ship over 10 Optima HDs during 2006 and over 10 Optima MBs in 2006. So, you know, again, we haven’t really split it up. I can tell you, though, that for some of those tools there will be multiple units going to the same customer.

Okay. And just a clarification. Your 15 to 20% revenue growth forecast for 2006, what’s your estimation or assumption on your service revenue? You think it’s going to be pretty, fairly flat or it’s going to grow at a similar rate?

Well, service revenue, if you look back for several years has grown at a compound annual growth rate of about 8%, and we think the service revenue will continue to grow in the future as our install base is increased.

Okay. My last question is I’m not sure if you have an estimation of what percentage of total implant market in 2005 that’s coming from single wafer?

I think that’s kind of us. This is Mark. I think that’s kind of hard to estimate at this juncture. The market share numbers are still being tabulated and won’t come out until April. Even though they do come out in April we probably won’t know for sure what percentage is wafer and what is multiwafer. So, it’s hard to guess right now.

Okay, thanks.

And Mark Fitzgerald with Banc of America has our next question.

Guidance for expenses is that flat versus the ’05 total year, or is it flat from the fourth quarter? Can you give me some help there?

Flat for the ’05 total year.

Okay. And if revenues are going up, does that mean R&D at some point rolls over here as SG&A comes up? Because I assume SG&A is going to track higher as revenues climb?

SG&A won ‘t move very dramatically throughout the year, Mark, we don’t believe. You should see a slight reduction in R&D spending. We’re spending at quite a high level now because of the number of projects we have associated, particularly with the Optima platform. But you won’t see a sharp increase in SG&A spending.

Okay. Then just one last question then, the flash part of the business at this point strengthened first quarter, are you, do you view that as a seasonal trend? Or do you think that rolls up through the year?

I don’t know, Mark, I think we’re seeing strong demand for flash across the board, and I think it’s in more just the beginning of this year. Driven by, you know, we know a lot of iPod sales, are driving a lot of flash memory right now, and there’s some big orders being shelled out for flash manufacturers. So I know that’s going to benefit us as well as the whole industry throughout 2006.

So, do you have visibility on projects in the second half at this point, flash?

We have some visibility. I think things that customers haven’t made public yet, so we’re not going to really give the details on those. But I think some of those you might already know about.

Okay, thank you.

And [Ben Payne] with Prudential has our next question.

Hi, I just want to get a clarification on the design wins, when do you guys consider a design win? That’s the first question.

And the second question, I think you mentioned on your prepared comments on an answer to one of the questions that even though there are some 65 nanometer decisions that are already complete you think that you can win I guess the second phase or I guess the high volume phase of those projects. Could you take me through the scenario on the timeline for how, what happened for somebody who has already made a decision, let’s say, in the fourth quarter of ’05?

Well, the first thing is in terms of a design win it means that our tool becomes the process tool of record at the customer. The customer will take multiple tools based on the capacity that they’re going to lay into their fab.

It doesn’t imply, though, that they couldn’t use somebody else’s tool for the same application?

No, it does not. And, in fact, in some cases we will be the only supplier, and in other cases which is common practice today there will be more than one supplier whose equipment is used at that customer.

And are you talking about implant as a whole segment or even one specific segment of let’s say you’re the high dose? Do you really foresee a situation where chip companies use multiple supplier for high dose specifically?

Absolutely! Stay tuned!

Okay. And the second question, just the timeline, you know, how quickly would you be able to – how long does it take for customers to get your HD to the design win phase?

Actually, in some cases the customers are moving quite quickly. I’m actually thinking about a couple of sort of more short-term situations right now, where our customers are making decisions the next month or so for tool shipments in Q2. So, these are quite quick. Based on sort of current needs for production ramps. They’re looking for, like Mary mentioned before, they’re looking for second sources, dual suppliers, looking for new technology advances, they see benefits in spot beam and ribbon beam systems. And they want to get our tool [majeure] to make those comparisons right away before they go to high volume ramps.

So, I think there’s critical time right now and it will benefit Axcelis, sort of the middle of this year where we’re going to get designed in and it will enable customers to start to make some comparisons between our tools and the competitive tools.

So, I mean the reason I’m a little confused is I think a lot of the activity that we see right now, at least based on the comments from the other equipment companies is already you’re starting to see some volume purchases right now. The capacity buying is I guess more earnest right now, right? So, like by the middle of the year is that when you would have to win some or turnaround some of the 65 nanometer businesses that are already gone?

I don’t think that’s required. I think that we’re going to get designed in for applications in the second quarter. And I think that will benefit us for additional ramp, sort of later on in the year.

You know, keep in mind the tool set is new, so we’re looking for, Mary said, at least 10 shipments this year. And a lot of them, a couple of them are going to be multiple shipments and then a lot of them are going to be new customers and new fabs. So, that’s our first step and then we’ll get the high volume manufacturing sort of ramp into 2007. I mean that’s where the bulk of the tool shipments will occur.

Okay. And the last question is on the other businesses. Kind of a follow-up on an earlier question. You mentioned that supporting the other businesses won’t impact the R&D spending for the implant, right?

That’s correct.

And on other businesses, exactly, you know, I guess we switched technology nodes a couple of times, and a lot of those products were slated for like 65 nanometer, 90 nanometer. You know, what, do all of those products then just really go into a niche scenario where you don’t need much investment anymore?

No, not at all. I mean we are continuing to invest. Mark alluded to the fact that we’ve got a next generation strip platform that we’re working on right now, and you’ll hear more about that at our Analyst Day.

We’ve got some technology in the area of [UB hearing] that we are working with a number of customers right now to understand exactly what their needs are moving forward. So, there are a lot of exciting things going on from a technology and an R&D and a product development standpoint even in those areas.

For 65 nanometer?

For 65 nanometer.

Okay. Thank you very much.

Can I just add one other thing?

Sure.

Because I think that it’s important for when we talk about 65 nanometer, we’re using that term very generally. And the technology node of 65 nanometer, at first, it’s really a logic technology node. A technology node equivalent in DRAM is not 65 nanometer, it’s something bigger, right? It’s something like, you know, 70, maybe 80 nanometers, okay.

So, you can’t make the same equivalent when you’re talking about memory devices versus leading edge logic devices, and the requirements for memory from logic are much different. So, I think it’s important when you say, when everyone uses the term 65 nanometer you really are referring to the next technology node migration, and whether it’s going from 90 to 70 for DRAM or from 70 to 65 in logic, I think that’s important to understand. And particularly in memory where customers are using multiwafer tools as well as single wafer tools, these are technologies that are in let’s say, the 90 to 70 nanometer range, they’re not at 65 yet.

But, you know, isn’t the flash memory technology roadmap progressing much faster, and I guess on a half pitch basis they’re doing development for 55 nanometer, half pitched?

They are doing development, but they’re not there yet. And, you know, they’re definitely moving faster than the DRAM development, but they’re about a step, or one technology node behind leading edge logic.

Okay, all right. Thank you.

[CALLER INSTRUCTIONS.]

And we’ll take our next question from Matt Petkun with DA Davidson & Company.

Hi, good afternoon. Mary, I just wanted to double-check in some of your responses in q and a, did you say that you expected to ship both 10 HDs and 10 MDs in 2006?

Right, that’s how you get the $60 to $70 million of shipments in 2006, of Optima shipments in 2006.

Okay. So, we can use that to kind of back into an average ASP for those tools is?

That’s a good way to do it.

Okay. And then kind of looking at the timing of these tools, Stephen, towards the back half of the year you said, how should we think about gross margin then as we see the tools come into the mix? I know that you have done a lot to improve operations and helped the gross margin as you did in the most recent quarter, but should we see even though the revenue is going to be maybe improving the back half of the year margins flat, down, up?

Margins will be around 40%. I think that it’ll – we’re going to get some downward pressure from the Optima, the first part of the Optima revenue streams that we see, but we’ve got good margins on the other products and very good margins on our service business. So, we’re going to – we’re targeting to maintain our margins at around 40%. And, hopefully, we wouldn’t expect to see significant fluctuations quarter to quarter off that.

Okay. And then you had mentioned a 15% to 20% sales growth kind of guideline, not specifically guidance, mind you. I’m assuming that’s just for Axcelis and given your commentary of about kind of a $4 to $6 million contribution on a quarterly basis from SEN, do you expect SEN to be flat YOY?

Well, we don’t have a forecast for SEN at this point in time, but we expect that the Japanese market will continue to be relatively strong, at least through the first half of 2006. So, as a result of that, SEN’s performance should continue to be strong and they should continue to command a leading position in implant.

Okay. But the 15 to 20 then did just apply to Axcelis?

Axcelis only.

Okay. And then one final question, Mary, you know, we’re talking a lot now about the 65 nanometer node, or the variety of different technologies being launched today. Can you talk a little bit about what we should be following when we’re looking at 45 nanometers and beyond, you know, [pulse plasma], and maybe the extendibility of the tools you’ve just released today into the market for not just winning today’s business but also positioning you guys so you don’t potentially end up late in the next cycle?

Yes, I’ll have Mark talk about the extendibility of the tools, because the Optima platform is very extendable and that’s one of the things that’s extremely attractive to customers.

Yes, when we actually were doing that Optima HD launch, Matt, we spent a lot of time talking about some of the beam line technology and scanning system technology that went into the Optima HD design. We did it specifically with future technology nodes in mind. We know that customers are going to require the pure angle control capability, energy contamination control, as well as particle control. All of that is designed into the Optima HD.

So, we believe that not only can we satisfy today’s requirements but we can go down to probably behind 45 nanometer, down to 32 nanometer. One of the things that we think is also really exciting for us is the strategic placement of the MD at [IMAC] is going to have significance with, because we’re going to have access to 32 nanometer device technology. That will give us insight into what devices are going to be and requirements are going to be required for 32 nanometer, and then we can roll that back into our product portfolio for production.

So, I think we’re trying to cover a large spectrum of technologies, both memory and logic technologies, and then be ready for the future.

When might we see new source technologies kind of incorporated into the tool?

It’s happening now. We talk a lot about, you know, the molecular implant technology that we’re developing. We’ve talked about hydrogen technology that we’re developing. Those two technologies specifically are sort of plug-and-play technologies with the HD platform and can be used for advance low energy as well as high dose applications that are going to be required for, you know, again, it’s not only 65 but potentially 45 and beyond.

Okay, thank you.

And Gavin Duffy with AG Edwards has our next question.

Yes, thanks. Just wondering, get a quick clarification. I know you said you’re going to ship the 10 HDs this year, so you do expect to see, you’re actually going to ship for revenues for all of those since that’s going to contribute to that $60 million?

The HD tools will not all convert to revenue in 2006. The actual revenue forecast for Optima products in 2006 is less than the value of the tools that we’ll ship. We’re going to ship 60 to 70 million in Optima tools but you have to go through your model, but if you look at 10% of our systems revenue it will be Optima revenue. You can see that our Optima revenues will lag our shipments. Some of our shipments will actually be evals which won’t convert to revenue until 2007.

Okay, thank you very much.

Moving on to [Tim Lash] with [Third Point Management].

Hi, everybody. I just wanted to get your thoughts on SEN. In particular, you’re renaming the company on April 1st. I don’t know if there’s any significance to that? But, more importantly, you have an asset that people tend to take into tangible book value when they do tangible book value multiples, it’s on the book sat 110 million, so runoff about 20 million of proportionate net income a year.

With Japanese capital equipment companies trading in the mid-20s on ’06 earnings is there any way to unlock value or to sort of crystallize the value of that asset, either like a listing in Japan or anything strategically to highlight the value the SEN takes?

Let me answer the name part of it, and then I’ll turn it over to Steve for the second piece. When we had our IPO in 2000 Eaton had contractual agreements with both Axcelis and Sumitomo Eaton Nova Industries, who was the other 50% owner of SEN, that we would have a certain period of time – for a certain period of time we would be allowed to use the Eaton name as part of SEN’s name, Sumitomo Eaton Nova. That time period has now passed, and as a result we have renamed the company. So, SEN Corporation and SHI and Axcelis Company is the new name.

Tim, we’ve talked to you before. We don’t have any specific plans at this time but we continue to look at ways to expose the true value of SEN, but at this point in time we don’t have any specific plans going forward. When we would have a plan we would announce it, but it would take coordination with our partner in Japan.

Yes, it seems like an interesting opportunity for them, as well. It could be accretive to Sumitomo Eaton Nova given where they trade, so it’s probably worth looking into. Thank you.

And now we’ll have a follow-up question from CJ Muse with Lehman Brothers.

Yes, just to ask Steve a question. Steve, what should we think about for a tax rate for ’06, as well as share count once you return to profitable results?

Share count won’t vary significantly, CJ. I think that for a tax rate you’ve got to – tax rate declines as our earnings increase because of our NOL carry forward position here in the U.S. So, as earnings actually increase our overall tax rate will decline, but I think that if you look at a tax rate of 5% to 7.5% you won’t be too far out of line.

Great, thank you.

And that’s all the questions we have. Ms. Puma, I’d like to turn the call back over to you for any closing or additional remarks.

I would like to thank you for joining us this afternoon, and if you have any additional follow-up questions please give us a call.

And that does conclude today’s conference call. Thank you for participating. There will be a replay available beginning at 8:00 p.m. EST tonight and ending on the 15th of February at midnight EST.

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