Photronics Inc (PLAB) 2003 Q1 法說會逐字稿

Good morning. My name is Jeff and I will be your conference facilitator today. At this time I would like to welcome everyone to the Photronics’ first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to Michael McCarthy, Vice President of Investor Relations, please go ahead sir.

Good morning, everybody. My name is Mike McCarthy, vice president of investor relations and corporate communications here at Photronics. I would like to thank everyone for participating in this morning's conference call during which we'll discuss the results of our fiscal first quarter, which we reported last night.

Before we begin, I'd like to remind all participants about the safe harbor statement provision under the Private Securities Litigation Reform Act of 1995 and thus accept the historical events the information we’ll cover during this call may be considered forward looking and may be subject to certain risks and uncertainties that could cause actual events to differ materially from those projected, including uncertainties in the market, pricing, competition, procurement and manufacturing efficiencies, and other risks detailed from time to time in the company's SEC reports.

This call will remain archived on our website until we report our fiscal 2003 second quarter results after the market closes the week of May 19.

Additionally I would like to remind everyone that Photronics will be hosting its fifth annual analyst’s meeting in New York on Wednesday, March 26 at 8:30 A.M. at the Hotel Intercontinental. You can RSVP to me directly, either by phone, e-mail or through our website. For those unable to join us in person the event will also be web cast. Our call this morning will begin with Sean Smith, our CFO, providing a detailed review of our income statement and balance sheet after which Dan Del Rosario, our CEO, will share some brief comments and then moderate the Q and A session. Joining Dan and Sean in the Q&A will be the senior management team, Sean.

Good morning everyone, I’ll provide a brief analysis of our financial results for the first quarter of fiscal 2003. I will also review our balance sheet and cash flows during the period as well as review our outlook going forward. For purposes of this discussion, I will be referring to our operating results excluding the impact of two fourth quarter items which related to the closure of our manufacturing facility in Mopedus (ph) and related North American workforce reductions and a net after tax gain related to the repurchase of $41m of our 6% convertible subordinated notes.

Net sales in our first quarter amounted to $81.4m, compared with the $95.7m in the first quarter of last year. Total sales outside North America accounted for approximately 61% of first quarter 2003 revenues compared with 42% in the first quarter of the prior year and 59% sequentially. Our strategic investments in Asia and Europe are enabling us to continue to gain share in these growing international markets. As a percent of total sales for the first quarter, sales were approximately 43% in Asia, 39% in North America and 18% in Europe. Sequentially, first quarter sales decreased $8.7m or 9.7%. The sequential decrease resulted primarily from the impact of the significant number of FAB (ph) closures during the December holidays and Asian New Years.

Shipments of photo masks (ph), devices utilizing .18 micron design [inaudible] and below, accounted for 28% of our first quarter revenue. Up from 23% in the fourth quarter of 2002. This represented a 10% sequential increase in .18 micron and below revenue.

The first quarter gross margin was 21.7% as compared to last year's first quarter level of 29.2%. Sequentially, first quarter gross margins decreased 350 basis points primarily as a result of the impact of the holidays which led to lower utilization of our fixed equipment cost base. The lower utilization, however, was partially offset by the improved high end mix.

Depreciation and amortization for the first quarter was $22.6m as compared to $20.1m for the first quarter of '02 and $21.4m sequentially.

SG&A expenses of $14.4m for the first quarter increased 3.8% year over year. Sequentially SG&A was essentially flat. SG&A as a percent of sales was 17.7% during the first quarter of `03, as compared to 14.5% in 2002 and 16% sequentially.

R&D expenses of $7.6m the first quarter were approximately 7% or $500,000 higher than last year, reflecting continued development for 90 nanometer and 65 nanometer process technologies. Sequentially, R&D expenses decreased by approximately $300,000. R&D representing 9.4% of sales in the first quarter of '03 compared with 7.5% last year and 8.7% of sales sequentially.

The loss from operations during the first quarter was $4.4m as compared to operating income of $7m in 2002 and $400,000 sequentially. While we are not pleased to report a loss from continuing operations, we have as a result of our cost containment programs effectively reduced our break even point from operations to approximately $88 to $89m.

Net other expense was $3m for the first quarter of '03 as compared to $3.1m in 2002. Sequentially net other expenses decreased $1.6m due primarily to our reduced outstanding debt and interest savings associated with a swap agreement we entered into late in the fourth quarter of `02.

During the first quarter we recorded a tax benefit of $500,000 which amounted to a 5.6% overall tax rate. The net loss for the first quarter of '03 was $8.5m as compared to net income of $1.7m in the first quarter last year and a net loss of $2m sequentially.

Our loss per share for the first quarter was 26 cents as compared with 6 cents diluted earnings per share in the first quarter of 2002. Our loss per share for the quarter was slightly ahead of our high end guidance as a result of the improved high end mix and additional savings associated with our cost containment programs.

As we exited the first quarter we had an average of approximately 1600 employees equating to sales of $203,000 per employee on an annualized basis.

Taking a look at the balance sheet, from a liquidity position our balance sheet at the end of the quarter was quite strong with working capital in excess of $145m, a $3m sequential improvement. Cash and short term investments were $107m as compared to $129m at the end of last year with a decrease resulting from the timing of progress payments made on advanced pool sets installed in 2002. Additionally, accounts payable and accruals decreased by $25m.

The company's current ratio at the end of the first quarter improved to 2.8 to 1 as compared to 2.3 to 1 at the end of 2002, primarily as a result of our ability to aggressively manage our assets in such a way as to maximize our liquidity.

Total debt decreased $6m during the first quarter of '03 to $302m. The interest -- the minority interest in PSMC and PKL amount to $47.6m at the end of the quarter. Shareholder's equity aggregated $341m, which amounts to a book value per share of $10.52.

Cash used in operations in the first quarter of '03 was approximately $6.8m, primarily as a result of the progress payments on the advanced tool sets purchased in 2002. Cash flow using investing activities amounted to $9.4m of which $9.3m represented Cap Ex during the first quarter of `03. Free cash flow from operations net of capital expenditures was a negative $16.1m during the first quarter. Cash used by financing activities amounted to $7.5m which relates primarily to the pay down of outstanding debt.

Taking a look ahead, our short-term visibility continues to be limited however, we are encouraged by our improved high end mix, our reduced operating cost and current booking level and market share gains. Our guidance for revenue for the second quarter is projected to be in the range of $81 to $86m. Capital expenditures for tools and equipment in fiscal 2003 continue to track in the range of $40 to $45m down significantly from fiscal `02's level of $126m. Our tool sets are largely in place and we are clearly in a maintenance mode. Cap Ex for facilities will be in the range of $12 to $17m. Although our 2002 Cap Ex of $126m did increase our fixed cost base, the impact on margins will be somewhat mitigated by savings from our consolidation, our reduced debt level, our continued cost containment programs and the improved level of the high end tool utilization we're experiencing today. Accordingly, based upon our current operating model, we estimate that the loss per share for the second quarter will be in the range of 27 cents to 18 cents.

That wraps up an overview of our financial performance and our short-term outlook. Now I'd like to turn the call over to Dan for comments before we open up the call for questions, Dan.

Thank you, Sean, and good morning. One of the biggest challenging facing the Photronics’ team in fiscal 2003 will be our ability to effectively manage the growth in our business outside of what has historically been our largest market, North America. It is no secret that Asia's capability as a manufacturing center for advanced technology and high performance silicon improves with the transition to each new process node. However, we believe that North America and Europe will continue to dominate the global semiconductor industry as the center of design and technology innovation. Accordingly, we have structured and will continue to fine tune our manufacturing operations and service infrastructure to align our regional capabilities with those of the industry we serve. For the first time, a customer outside of North America accounted for more than 10% of our sales in a single reporting period.

Our strategy to enter the Asian market, the timing, and how we structured the various transactions giving Photronics’ critical mass in this region have been an unparalleled success. More importantly, our Asian investments position us for strong growth in the future, particularly in the market in China or particularly as a market in China begins to flex its muscle. Europe and North America will remain a strategically important to Photronics but their focus will be more on device design and how we interface with those teams in order to optimize the device fabrication process. At this time we'll open the call to questions.

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone key pad. Please limit yourself to one question and one follow-up question. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Sameer Desai with Merrill Lynch.

Good morning.

Good morning Sameer.

First question is in the quarter, you know, based on the top line, and obviously on the bottom line were a little bit better than you guys thought. Were the shut downs not as bad as you thought. What else was going on in the quarter that kind of ended up a little bit better in your forecast.?

Going into January, you know, we were kind of waiting to see how the shutdown schedule did go. We did see a little extra push by some of the designs coming in prior to the shutdown than we expected. It was a pleasant upside for us but the shut down schedule maintained schedule. We saw a little more activity in certain regions than we were expecting.

Was a lot of the activity more toward January or more in the early part of the quarter.

It was actually in the January window.

You know, I don't know if you've heard this, but some people believe you get pull-ins because of the Chinese new year shutdown in February so some of that gets pulled in into January, do you think that's what is happening? Does that reflect some of your cautious guidance for the next quarter?

One of the difference from last year was the Chinese new year fell in January. This time the Chinese new year came at the end starting on January 31 and because it came at the end of the week it was a shorter period of time ending the following Wednesday. So we did see some designs get pushed out into January prior to the shutdown in Asia.

Okay. And then the rebound that you're seeing in revenues in the April quarter, in line with the seasonal type of trend is that pretty much typical? Is this growth about mid single digits or so or has it been greater or less historically?

Again, as Sean eluded to, the economic picture is clouded not only in the semiconductor industry but with the other factors that are hanging over the entire global economy. So, however, you're right, historically we have always had a very good quarter following our first quarter that's -- where the sales are somewhat mitigated by the holiday season.

: Last question I had, Dan, you made a comment in the press release regarding the metric that you're going to be watching this year as yields rather than utilization. Can you give some color on what you were thinking behind that? Also, where does end demand fit in into that comment?

The yield front we definitely changed our focus. It seems that many of the FAB’s around the world have been quoting very high utilization rates so what we are finding out is it's been a lot of repetitious starts because the yields are so low. We are driven by designs, and that generates new designs for the end market that we're after, we are watching very closely with our marketing team. We decided the yields seem to be the major indicator that throws things into full gear instead of utilization rates.

I would like to add that yields and utilization are always the focus by our management team. We are committed to returning to profitability in the third quarter. Part of that commitment is to managing our yields, managing our utilization, our capacity worldwide, amongst a host of other cost cutting measures that we are taking.

Okay. Great, thanks a lot.

Your next question comes from Jerry Fleming (ph) with Fahnestock (ph).

A couple of questions. You just mentioned a goal of returning to profitability in Q3. Is that on an operating earnings basis given the guidance you gave us earlier of break even of $88 to $89 or Sean gave us of break even at $88 to $89? Is that the kind of number we're looking at for --

Jerry, we have been -- this is Sean, good morning. We've been on record as stating that we will scale our infrastructure to ensure that we return to profitability. Our goal is to return to profitability on the bottom line during the third quarter. We're not that far away at the $88 or $89m range. Obviously we need to look at any and all options should the revenue levels not materialize. But suffice it so say we will act quickly and decisively in scaling our organization to meet end market demand.

Okay. Sean, could you give us a little bit of a read on you know where the cash position is going to go going forward? Are there any more deferred payments on equipment?

Jerry, at the end of the year going back to November 3, we did have a quite high substantial amount of accrued payables and liabilities almost $57m of payables. We've made the lion share of those payments during the first quarter. They were projected and anticipated. We expect our cash for the second quarter to be about the same, maybe slightly higher as we end the quarter so we don't expect to have a significant cash burn at all.

Okay. Thank you.

Your next question comes from Brett Hodess with Merrill Lynch.

Good morning. Can you give us some color on the breadth of the pick-up in the .18 micron and below technology and comment on at .13 if the activity has picked up there or is it more in the .18 to .15 range?

Good morning, Brett. As far as the .18 is concerned, we have definitely seen some pick-up in designs and that was alluded to just last week in Germany -- not in Germany, in Europe at the ISS conference. So we have seen a pick-up across the board in Europe, North America, and Asia and also during this period of downtime, aside from focusing on controlling our costs we have focused on qualifying and repositioning our customer base and so we've seen some pick-up there as well. On the .13 side of the market, our sales increased or revenue increased substantially from 5% of sales last quarter to 7% this quarter. We are hearing that yields are improving at the .13 and we're encouraged by that and hoping that customers will start to release designs as they scale to the 130 nanometer node and as you know we have the four NTL lines in operations. They have been released to manufacturing. We're shipping .13 product to numerous customers and additionally I think eight customers, Paul maybe you want to add some color to that?

Yeah, if you look at our top three customers right now globally they are within the top five of the IT manufacturers in the world so we are definitely servicing the right guys. We are the primary supplier for them and therefore when their business is turning up as we see, globally we're taking advantage and obviously some of the market share gains we've been talking about.

That's great. My follow up question would be, the customer that was a non US customer that was over 10% in the quarter was that an IBM or a foundry.

That was an IBM.

Great, thank you.

Your next question comes from Suresh Balaraman (ph) with ThinkEquity Partners.

Yes, I'm trying to get a gauge on how much the [inaudible] of demand is for .13 micron design. Let’s say if yields were not an issue and everybody had good yields on .13, what kind of demand would you have for .13 mask sets in 2003 in terms of the number of mask sets sold or something along those lines?

We can't really quantify that number. However I must refer to a study that was done by one of the major EDA companies where in the study of their 1400 customers, 26% back in September said they were actively designing at the 130 nanometer node, so as the yields increase for silicon and more importantly as the end markets develop, we are confident and encouraged that 130 nanometer will roll into full production.

And also, can you, I think -- can you comment on the pricing and the different market segments like Asia and North America and Europe, what kind of trends [inaudible] in the past few weeks specifically?

Well, this is Paul, what we said last conference call is that we felt that the overall environment, you know, regionally in all three parts of the world were in a good environment to keep pricing stable. We have actually increased pricing at some customers. We have -- we've seen opportunity to take advantage of situation and we have. We have not seen a whole lot of degradation going on, on the high end. We've seen a very consistent pricing there. There has been some spot buying but that’s historically the way things work but overall we're very encouraged by the pricing environment. We feel that it's prime for what we want to do and we've taken advantage of it.

Is the pricing improving or changing at the .13 or sub .18 mask set categories.

I think we said before, pricing at [inaudible] .18 and .13 have been very stable. Sporadically you'll get a set at a lower price based on a short-term bid. That’s ongoing in the history of photo masks business. We've done that before but we are probably as much upbeat about things as we were in the last conference call. Like I said we have increased pricing in some customers.

Thank you.

Your next question comes from Byron Walker with UBS Warburg.

Good morning. Can you give us an indication of the scalability or extendibility of your current 130 nanometer tool set into the 90 nanometer range.

We chose the platform for the NTL lines specifically for its scalability and a little bit of that is reflected in the maintenance node of the Cap Ex. The 130 node that's starting to ramp into production now in our customer base can be serviced with the NTL lines very effectively but also more importantly the 90 nanometer node which is in many places in the prototype phase in our customer base is also manufactured on our same line. So the 90 nanometer essentially is the scaling but it's very important that you have the right process and you chose the right equipment set and we've done that.

So going forward, it's more about dialing in your process than additional capital --

There are some complexities, OPC scales and there's some difficulties there but we've been working hard on the process area, as well, and those process platforms will be ported to the same equipment set.

Thanks.

Your next question comes from Steven Pelayo from Morgan Stanley.

I’m curious on your operating expenses. It looks like over the last year they ran between $22 and $23m though they have been coming down the last couple quarters. How key are those to getting to break even by the third quarter in this $88 to $89m level? Actually into the April quarter? Do you have some room to actually bring down some of this -- I would assume, more on the SG&A level or is the break evening assumption assume that it really comes from the gross margins?

Steven, good morning. The break even assumption or there is room in the gross margin level and in the SG&A area, obviously to pull more costs out. We do have active cost containments, cost savings initiatives across the board with respect to material, equipment, and other fixed costs as well as SG&A costs. We are committed to pulling those costs down to return to profitability in the third quarter. And we have as you noted scaled down. The part of the upside to our earnings for the first quarter did relate to some other cost saving initiatives better than anticipated that actually came through during the quarter.

I guess it just seems like it's a pretty big incremental jump to get to profitability from this level either in the gross margin level and combined with operating expenses going down. Can you quantify for us what type of gross margin range you're talking about at break even as well as what kind of operating expenses?

If we're talking about break even from operations, you have -- I'm sure you have models just as we have models but obviously our gross margin would be significantly higher than 21.7%.

Actually probably something more in the high 20s, I guess, 26, 27?

May not have to be that high.

Okay. And then your expectations for the leading edge it looked like it did grow by a couple million this quarter. I'm trying to figure out if that's a noise level or what your expectations are going forward, do you expect the same type of magnitude, if not more?

Hi, Steve this, is Dan. We fully expect with the deployment again of our NTL lines that we're going to see sequential growth on the high end, the 180 nanometer and 130 nanometer.

Do you think it will surpass the previous [inaudible] you had there, about $25m in the next quarter?

This is Paul, obviously we're -- our growth came from [inaudible] qualifications being completed and the ramp of some of our high end customers and some new production lines. Basically on the product, you know, we hope that some of these things get rolled into production. Things are going to go well. I give you an example, we have John Smith here who is our senior vice president of the European division, can give you a little flavor on the Europe side.

Hi, this is John Smith. First of all, on this -- the high end at 180 nanometer what we've seen is a very consistent and progressive growth of our business in the year 2002. When we closed the year we were operating about 30% of our revenue coming from 180 and below. The qualifications as we move sub 180 and 150 and 120 are right with us at this moment. What we have seen in front of us in 2003 is our entry into the 150 and 130 nanometer activity. I think things are looking positive in that sense in terms of continuous growth in this area.

Thanks John, Barry, could you add some color from North America?

North America is certainly one of our bright spots, has been enjoying this continued ramp of high technology production and qualification. We have several customers now in production on 130, 110 kind of nodes and three or four more in the [inaudible] for qualifications right now that we anticipate continued growth in 130 in North America.

Maybe going forward we can expect it to represent perhaps more than 30% next quarter?

Yes, we would expect that metric to continue to rise.

All right. Fair enough. Last question, Sean, in your previous conference call you talked about an effective tax rate in 2003 of 10% to 15%, will that change [inaudible].

We actually came in at 5.6% to be quite honest with everyone we were a little more conservative in recording a tax benefit based upon the certain uncertainties in certain geographic areas where we are taxpayers. We don't want to get into a position where we record tax benefits and we're not able to realize them. So I think a range of 5% to 10% going forward would be sufficient.

Okay, fair enough. Thanks.

Your next question comes from Ted Berg with Lehman Brothers.

All right. Thanks. I was wondering if you could talk about design cycle times and, you know, how quickly you can get the most critical layers to your customers. How many days does it normally take?

Well it also depends on the designs. It can range anywhere from, you know, we've done some in 36 hours, 48 hour windows on the very critical layers up to three or four days depending on the design cycle. We have the capability because of the process platform we use. We are using a car process which enhances the right time speed. We have automated front end that provides us quick data conversion such as CyberMask and mask pilot which we consider a major competitive edge for us in preparation. As I said before, that process which will take 15 to 20 hours on an average, we have it down to sub three hours which means automatically better deliveries for our customers. We think because of our delivery schedule at 130 with our automation and our car process we've been able to gain some market share on the last quarter. We were pretty excited where we're going from two of our regions in the world.

Typically the extra critical layers don’t start off the set, even with the most complex photo mask requirements we're typically able to keep up very easily with the wafer process times.

So the customer normally orders some of the last critical layers first and you deliver those first and the critical layers later?

Normally they are sequential in the same order that the wafer flow. So the critical time windows are hitting wafer starts and we're able to successfully do that across the board.

Okay. So that that's not an area you see that you need to make improvements in. You're already operating at a fair level relative to your competitors there?

I think the key point really is consistency and predictability and that comes from having robust process platforms and stable equipment. So as long as we can predict very accurately the delivery cycles regardless of the technology, we're easily able to meet the customer requirements.

Okay. And I had one other question on pricing. I didn't hear if you specifically commented on pricing on the trailing or mature edge product. Is that still declining, can you quantify what type of environment is there?

I don't know, as we said in the last conference call and I'll say it again this call here for you, I don't know where that input is coming from because we do not see the mature end declining at a rate that's being quoted out there. We've said before that the mature end .18, .13 pricing has been stable. We have actually increased pricing at some customers and the market seems to be bearing it right now and that's what we want to do. As capacity can start to saturate, you know. We believe utilization rates, our yields will impact our delivery and we feel good about the environment where we're at.

Okay. Thanks a lot.

Your next question comes from Mike O'Brien with SoundView Technology.

Hi, good morning. Just a couple questions. First, April guidance seems a little bit more muted. I know you talked a little bit in that. Is that conservatism from a macro nature or is there something in the early part of the quarter that is saying it's not starting off as strong as you'd like.

Well, first of all, as Paul -- I mean as Sean said in his opening statements, that we're seeing strong bookings as we enter this quarter. However, there are concerns out there, again, our visibility is very limited at the present time. And other than that, there's other economic factors that are hanging over us. With regards to Iraq, terrorism and everything else out there. So it's not only affecting us but it's affecting the entire global economy and, hence, our caution.

Okay. So it's more of a big picture stuff than anything you guys are seeing from your business?

Absolutely. It's a macro thing.

Can you just go into a little detail on how Taiwan is shaping up? Do we see Taiwan still pretty, you no, not seeing any kind of positive acceleration, kind of just muddling along?

As far as the foundry business in Taiwan, and I assume that's what you're alluding to, the two big foundries at the present time, you've seen the reports from both of them, but as we said in the past, and as other people expect, when we see a significant ramp in business, the business typically starts out at the foundries. And we're uniquely located from a global perspective in those areas that would see that growth. And so when that happens, we'll be there. I think we are smarter than we were from last year where we had a significant inventory build in the first six months of the year and there was a head fake. We believe from what we're hearing from some people that there might be an inventory build in the second quarter. If that happens, it's positive for us.

Okay. Thanks.

Your next question comes from Kevin Vassily with Thomas Weisel Partners.

Hi, a couple questions. First, can you venture a guess at what you think your market share is at .13? On a global basis?

Kevin, we don't typically disclose what our market share is at certain [inaudible], but obviously we're seeing an increase in business at .13 and .18 and below. And we would expect that trend to continue.

Well, let me ask you a slightly different way. Do you think it's above or below your kind of all inclusive market share level at this point?

No. One of the things we can say, we can talk about -- as far as the customer that we alluded to that is now more than 10% of our sales, we believe they are one of the strongest customers in scaling and ramping 130 nanometers and that is where we have seen a significant amount of shipments in the 130 nanometer nodes, both on the logic side and now qualifying that their most advanced memory side and then we're doing a number of new [inaudible] with customers both in North America, Europe, and Asia.

Okay. Then a second question, back on the pricing side, when you guys talk about a stable pricing environment, particularly on some of the more advanced nodes, over what period are you referring to? We're hearing comments from your Japanese competitors of price declines as much as 40% on the leading edge. So I'm just trying to get a sense of what period you believe stability has set in as in the last month? The last three months? Over the course of the last year? Just help me with that time frame.

This is Paul. You know, the situation there is that the -- I don't know your source in Japan, but from a global perspective, which is what we serve, we are the global supplier in the industry. That we said at the end of our quarter last time that we started to see -- we said that this quarter. We have not seen I'll call it rational behavior patterns of people dropping ridiculous pricing. I have not seen a 40%. There are some spot buys and bidding one-time that people will make special deals to try to get in customer's doors but on an overall day to day order rate, we do not see that kind of pattern going on. And you know, if they are, then they clearly won't last long in the business for sure.

Let me add a point from the technology side. Early in the cycle typically some of the early adopters of technology will put together mass sets that are significantly more complex than will be in the mass production. So it is possible that they may be referring to testing out some options early in the life cycle and narrowing down to a more manufacture able set as the products come on line.

I would also like to add that as far as the two Japanese competitors that you're alluding to, our information on one customer is that their pricing is very, very stable. On the other hand, there is one customer that is very aggressive in spot pricing. But that customer -- I'm sorry, that one competitor that's very aggressive in spot pricing but that competitor is also the most vociferous about complaining about pricing.

Okay. Thank you.

Your next question comes from Tim Arkuri (ph) from Deutsch Banc.

Can you kind of go through geographically or characterize by application or end market the customers where you are seeing a pick-up in .13, just broadly say leading edge design activity or tape outs? Is it D-Ram, is it IDM, is it Fadlice (ph), is it Europe, is it the U.S.?

I think we're -- again, we're still early in the ramp of 130 nanometers. It is somewhat still mitigated by yields and then also end market demand and the need to scale certain products to 130 nanometer but as I said, we can comment on the fact that we're seeing it both in logic as well as memory side. Also in micro processors but in an effort to be much more intelligent about end market demands we have started a very strong marketing effort so that not only can we be intelligent about marketing demands but also feed that information into our technology group so that we can be aligned with our customers as we develop technology.

Okay. I guess let me ask it kind of a different way then. Are there any of your customers broadly speaking by geography or by kind of end application that are not increasing tape outs at the leading edge? That are kind of lagging behind?

This is Paul. I can tell you that that is not the case. Our top accounts there's nobody sitting in a room saying that they are holding back. They are starting to cut some things loose and that is why we've seen the percent increase in our end of the business and we're encouraged by what we see on the table but, yeah, as their product goes, we go with them. There's been some, you know, some of our customers have stated that they have seen some short-term buys on some quick needs which has helped in turning some new designs out but no one has really sat in a room with us saying they are holding back.

Because I'm just trying to juxtapose your comments relative to some other guys selling equipment who are indicating that there seems to be a widening gap between the haves and the have nots and it sound like you're not seeing that?

No, I don't know where the source on the equipment side is but we're tied in the bloodstream of design. That's how we live and die. The equipment guys are on a capacity buys [inaudible] technology. We’re seeing two [inaudible], ours is not that.

Also, I think from a broader view, the dynamics in the semiconductor industry are changing and the number of players that can play at the leading edge are certainly not everyone in the world. It's more the first tier semiconductor companies and foundries, in those cases a lot of those companies made those investments two years ago or a year ago and so that would affect the bookings by the equipment companies.

Okay. Thanks, guys.

Your next question comes from Chip Bonnett (ph) from FN Global.

First of all I wanted to know if you've done a lot of restructuring if you've seen the full effects from your restructuring actions this past quarter or should we see levels fall further in terms of the expenses that you're taking out?

Well, Chip, this is Sean. We have seen the full effect from the restructuring that we took place -- that we announced at the beginning of the fourth quarter. However, we do operate in a continuous cost containment cost reduction mode. We obviously as a result of market conditions are continuing to evaluate our infrastructure. There are ways to our global supply chain management group where we can work with our vendors to cutback our cost. We obviously are keeping a close look at our discretionary spending in this difficult environment so I would say that you'll see going forward continued cost being pulled out of the system.

Okay. So the break even level that you gave I think $88 to $89m, that may edge lower sequentially but no step function?

That is correct.

Okay. And then secondly, how does that square then with your revenue guidance that you gave at the high end of revenue? You said $86m. Which seems pretty close to, you know, the $88 to $89m break even level but yet the best case scenario for earnings per share was something more like 17 cents, 18 cents loss?

The $88 to $89m break even related to operations. What we said was we're committed to returning to profitability all in the third quarter.

Okay. And then just lastly, you alluded to paying down debt and you paid down some debt this last quarter. Can you elaborate on your plans going forward there?

Obviously, we are, you know, we do -- when you are looking at our balance sheet we are somewhat leveraged. We do have a $62m convertible note due in June of 2004 which is, you know, 13-14 months away. We have the luxury, if we want to [inaudible], to pay that off. However, we have -- we're looking at any and all options with respect to our debt structure. We have additional borrowing capacity on our line of credit and sufficient cash. So anything that we do will be market driven.

Okay. Thank you.

Your next question many comes from Richard Tortoriello with Standard & Poors.

Good morning. I apologize I missed the first portion of the call and I wonder if you could repeat your guidance for April?

Richard, this is Sean, our guidance was to have revenue in the range of $81 to $86m and a loss per share of 27 cents to 18 cents.

Thanks. Did you make any comments with regard to what you're seeing at your customers with yields at 130 nanometers?

We can't comment to specific yields other than to say that the yields have been improving across the board and it looks as if it's improving exponentially in the last few months.

Okay. Great, thank you.

At this time I would like to once again remind everyone in order to ask a question, please press star then the number one on your telephone key pad. Your next question comes from Christina Osmena from Needham & Company.

Sean, you were just beginning to answer this question. Could you give us the break down of the debt by the different components of the two converts and the other lines of credit and the respective interest rates on the line of credit. You said $62m for the first convert.

I'm sorry, Christina, I didn't hear the last part of what you just said.

I just wanted a break down of the debt, please, and the interest rates.

Okay. For a full description of our debt, I'll go through it in high level, you can take a look at our 10-K which breaks it down but I’ll just give you a high level overview. We have $200m convertible offering, convertible notes that are due in December of 2006 that are outstanding. We have $62m of a 6% convert that are due in June of 2004. And our -- on our $100m revolving line of credit which is -- matures in July of 2005 we have about $10.6m outstanding. The remaining debt approximately $31m or $28m relates to secured notes for equipment purchased in the past from our Asian subsidiaries.

Okay. What are the interest rates on the line of credit and on the secured notes?

They vary. The line of credit is -- we have you know, if you read the description in the 10-K we entered into a swap agreement for a portion of our outstanding indebtedness but on the line of credit we're essentially at [inaudible], I'm trying to read this right now -- our unsecured notes payable range from 6.3% to 6.5% and our secured notes range from 2.5% to 6.7%.

Okay. And also I'd like to revisit the question on your operating expenses. You said that your cost cuts were down -- I mean your cost cuts have already been fully implemented but your operating expenses aren't so far down from their peak of $23m. What's -- what's going on there and where else -- what else can you do to take that SG&A number in particular down lower?

What -- to reiterate, the question that I answered -- I thought directly, related to the consolidation in the fourth quarter. Have we realized everything from there. That answer is yes. However we are continuing to evaluate our infrastructure. Our SG&A, our cost, materials to pull additional costs out of the network.

So your fourth quarter consolidation. Could you give us an update on how many customers now have you qualified at 130 nanometer and how that compares to the end of last quarter?

This is Paul. You know, we'd have to go back and look. We have never done a real count of all the accounts. Like we said earlier, that in our top 10 accounts we have at least 8 of them already qualified and through the process already or we have some other lingering things. Of course I need to make sure you understand. We're not just at 130, we qualified at 110 and we qualified at 120 and 150 with some other people so it's a variety of things that go on there. Quarter to quarter, I have not gone back and looked at it but clearly in our mix gain and clearly in our percent of activity going on there, also we have a lot of activity going on at 90 and 65 with some of our also key partnerships that we have going on right now.

Okay. Wonderful. Quarter ending head count, please?

1600 employees.

Thank you.

Your next comes from Jerry Fleming with Fahnestock.

Sean, could you take me through the minority interest calculation? What are the major components there? Is it primarily the two Asian partnerships and when you're subtracting out a fairly large number, does that mean that those operations are profitable?

Jerry, you are correct in your analysis, that the minority interest on the balance sheet represents the portions of PSMC and PKL that we do not own to the extent that number increases on a quarterly basis would indicate that they are generating profits.

Profits at the operating income level?

The bottom line.

At the bottom line. Okay. Thank you.

At this time there are no further questions.

I'd like to thank you everyone for joining us on this call today. And wish you a good day and we'll wrap the call at this time.

Thank you for joining today's conference call. You may now disconnect.