Photronics Inc (PLAB) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Photronics first-quarter fiscal year 2008 earnings call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded, Thursday, February 14, 2008.

I would now like to turn the conference over to Mr. Mike Luttati, Chief Executive Officer. Please go ahead, sir.

Thank you and good morning. This is Mike Luttati, Chief Executive Officer for Photronics. I would like to thank everyone for joining our fiscal 2008 first-quarter earnings conference call.

Before we begin, I would like to remind all participants about the Safe Harbor statement provision under the Private Securities Litigation Reform Act of 1995. Thus, except for historical events, the information we will 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. This call will remain archived on our website until we report our fiscal 2008 second-quarter results after the market closes on Tuesday, May 13, 2008.

I will open the call with some brief comments about the Company's performance and strategic positioning. Following my opening Sean Smith, our Chief Financial Officer, will provide a comprehensive overview of Photronics first-quarter results. After Sean provides an update on our second quarter guidance, I will then moderate the Q&A.

Joining Sean and me during the Q&A will be Dr. Chris Progler, our Chief Technology Officer. Overall our first-quarter results were in line with our projections and consistent with our annual plan. While we are pleased with the progress that we made toward our objectives in the quarter and the sequential improvement in revenues, we were obviously disappointed to have moved into a loss position.

Europe and Asia improved quarter-over-quarter, while North America declined. While season effects did come into play, the North American region was also affected by a decline in unit volumes, which we believe to be attributed to a shift of capacity to the foundries. That factor, coupled with average selling price erosion over the past 12 months, has also contributed to a reduction of the total available market size, particularly in the mainstream segment.

On a positive note, average selling prices have improved sequentially. Our Asian IC business also improved, especially in Taiwan, where we had a strong sequential increase in revenues aided by the start of 90 nanometer foundry shipments and continued foundry outsource business.

In Korea we begin shipments of 65 nanometer sets and are working on 50 nanometer Flash memory and 45 nanometer logic qualifications. Flat-panel sales also improved slightly during the quarter.

Sean will review the rest of the specifics for the quarter shortly. Before closing, I would like to emphasize the priorities that we have set for 2008 and report on some of the actions that we took during Q1.

First and foremost on the priority list is to monetize the investments we have made during 2006 and 2007. This includes successfully loading and ramping the US NanoFab, our IC China facility and our flat-panel display facility in Taiwan. We're making good progress on all three fronts.

In flat-panel display, we have qualified all the major Taiwan FPD panel makers and recently installed a second writing tool that gives us both additional capability and capacity which will provide further revenue momentum as the year progresses.

In China we continue to improve operationally and have started receiving orders from some of the top local customers. While there is much more work to be done, we still plan on a modest yet consistent ramp through 2008.

At the US NanoFab we continue to execute to our plan. We're nearing completion of both DRAM and Flash qualifications with Micron and IM Flash, and have initiated our first 45 nanometer logic qualification with a top 10 IC producer.

As I mentioned in our last call, we have six customers, excluding Micron, lined up for qualification in 2008. We're also working with additional global customers who have expressed interest in our unique capabilities with respect to double patterning technology and high transmission phase shift masks. We expect to begin revenue production at the NanoFab in March.

Our other priority is to expand our successful mainstream business. This has two perspectives. The first is to grow our market share position inside our core customer base and to capture new customers for this service-oriented business, a key strength of Photronics. We have several well-defined objectives in 2008 for accomplishing this.

Second is to lean out the business model to maximize profitability and cash generation. During the first quarter, in addition to ongoing cost reduction initiatives, we implemented a reduction in force in Europe and the US, reducing headcount by about 6% overall. We will continue to evaluate and act responsibly as business conditions dictate to further reduce our cost structure.

In the short-term, we remain cautious as both macroeconomic and semiconductor industry specific indicators raise concerns on prospects for at least the next six months, maybe longer. While these factors will clearly impact our performance, we remain optimistic that the sources of revenue generated from our new investments will support our plan for a growth year in 2008.

I will now turn the call over to Sean to review our Q1 financial results and our Q2 guidance, after which I will moderate the Q&A session of the call. Sean?

Thanks, Mike, and good morning, everyone. I will provide a brief analysis of our financial results for the first quarter of fiscal year 2008, and I will also review our balance sheet and cash flows during the period and discuss our outlook going forward.

Net sales in the first quarter amounted to $103.2 million as compared to $106 million for the first quarter of last year. Revenues for IC Photomask declined $5.2 million principally in the US to $80.4 million in Q1 2008 as compared to Q1 '07. The decline in IC revenues was mitigated to some extent by an increased FPD revenues of $2.4 million to $22.8 million in Q1 '08 as compared to Q1 '07. The decline in IC revenues was attributable to reduced unit demand in the US and decreased ASPs year-over-year.

Sequentially sales increased $1.6 million due principally to increased FPD sales of $1.4 million. Sales of advanced FPD and IC Photomask were 15% and 8% respectively of total sales for the quarter. Included in this percentage are mask sets for semiconductor designs at and below 90 nanometers and FPD sets used to fabricate flat-panel products using G6 in higher technology.

As a percent of total sales for the first quarter, sales were approximately 62% in Asia, 21% in North America and 17% in Europe. The gross margin for the first quarter was 20% as compared to 28% in 2007. Sequentially gross margin increased 40 basis points primarily as a result of increased volume.

Selling, general and administrative expenses for the first quarter were $16.3 million as compared to $16.4 million last year. Sequentially SG&A increased $1.7 million, primarily related to incremental NanoFab ramp and severance costs related to headcount reductions Mike discussed in North America and Europe.

R&D expenses, which consist principally of continued development for advanced process technologies, were $4.2 million in the first quarter. Sequentially R&D increased by $200,000.

During the first quarter, operating income was essentially breakeven as compared to operating income of $1.4 million for the fourth quarter of 2007. The next few quarters will likely experience some fluctuations in the operating margin line as we continue to work to monetize our new IC and FPD facilities in Asia and startup the NanoFab in the US. The incremental costs in the second quarter related to the NanoFab are projected to be in the range of 3 to $4 million.

Even as we work through this expansion, I assure you that we're continuously working to reduce our costs. We have active cost containment and cost avoidance programs in place and have accelerated and continue to work on several initiatives which position us to better address our current operating environment.

Additionally we continued to assess our global manufacturing strategy as our customer base continues to evolve and migrate. If this ongoing assessment warrants the management team to decide that there's a need to evaluate future facility closures, asset redeployment and further workforce reductions, we will do so. However, all of these actions would be predicated by market conditions and customer requirements.

Net other expense for the first quarter was $600,000 as compared to $300,000 in the first quarter of 2007. And during the first quarter, we recorded a tax provision of $1.9 million, which was slightly higher than our projection as a result of increased income from taxpaying entities.

Minority interest expense for Q1 '08 amounted to $950,000 and represents the share of income related to our minority shareholders of our majority held subsidiaries. The net loss for the first quarter was $3.3 million, and the loss per share was $0.08.

At the end of Q1 2008, we had approximately 1510 employees, down from 1544 at year-end. During the quarter US and European headcounts were reduced by 7% and 6% respectively.

Now turning to the balance sheet, cash and short-term investments at the end of the first quarter amounted to $95 million, and working capital amounted to $62 million. Accounts receivable increased $3.8 million since the end of the year due to the increased sales during Q1 2008. Accounts payable and accrued liabilities at January 27, 2008 amounted to $115 million as compared to $146 million at the end of last year with the difference primarily related to payments associated with accrued capital expenditures at the end of 2007.

Total debt at the end of Q1 was $258 million. The principal components of outstanding debt include $150 million 2 1/4 convert which is due in April, and approximately $27 million in foreign term loans and approximately $81 million in capital lease obligations, including the US NanoFab. Our 2 1/4 bonds, as I said, mature in April of 2008, and we intend to pay them with cash on hand, the use of our revolving credit facility and potential other financing vehicles to the extent we need to do so. In reviewing our 2008 cash flow and capital needs, we will continue to explore various options should we determine we need additional financial flexibility. We remain confident that our access to capital will not inhibit our growth plans.

Minority interest at the end of the fourth quarter amounted to $49.9 million, which primarily relates to the minority interest in the equity of our 57% majority-owned subsidiary, PSMC.

Taking a look at our cash flows, cash flow provided by operations for the first quarter was approximately $12 million as compared to $19 million for the first quarter of '07. Cash flows used in investing activities during Q1 '08 amounted to approximately $69 million, of which $66 million represents cash payments for capital expenditures.

Total CapEx for 2008 for the first quarter on an accrual basis was approximately $103 million, the majority of which consists of the capitalized NanoFab lease obligation.

Taking a look ahead, our short-term visibility as always continues to be somewhat limited as our backlog is typically one to two weeks. We believe, however, that in 2008 we will continue to see increased design activity, especially at the advanced nodes. We're also encouraged by a number of strategic opportunities created by our improved global technology capability, increased penetration and capacity support 90 nanometer and below customers. We believe it is prudent to take a conservative view in forecasting revenues and earnings for Q2 '08, and based upon our current operating model, projected outlook for revenue in the second quarter of 2008 is in the range of 106 to $112 million.

Capital expenditures for 2008 on a cash basis are forecasted to be approximately 120 to $140 million as we complete our investment cycle for advanced IC lines in the US and in Asia.

During 2008 our tax rate will continue to be impacted by the flow of income from jurisdictions for which we may have tax holidays or a credit and upon our limited ability to recognize tax benefits in areas in which we are taxable.

Accordingly, we are estimating income taxes for 2008 to be in the range of 6 to $10 million. For the second quarter of '08, this will equate to a range of 1.3 to $1.9 million in whole dollar terms.

As a result, based upon our current operating model, we estimate that earnings per share for the second quarter of fiscal 2008 to be in the range of a loss of $0.12 per share to breakeven.

In summary, I again will emphasize that although our visibility is short, customer sentiment remains positive. The continued global demand for the full range of photomask technology, services and products should continue to grow as should Photronics' ability to service a larger share of the worldwide market.

That concludes my remarks. Now I would like to turn the call back over to Mike. Mike?

Thanks, Sean. We will be happy to take your questions.

(OPERATOR INSTRUCTIONS). Suresh Balaraman, ThinkEquity.

I'm just looking at the top end of your guidance at 112, and achieving a breakeven means that your expenses will be probably up substantially. And is it primarily all the 3 to $4 million kind of expense you talked about NanoFab, or your depreciation also goes up meaningfully?

Our depreciation is projected to -- depreciation and amortization during Q2 is projected to increase in the range of 3 to $4 million as a result of tools coming online, and the majority of that is related, yes, to the NanoFab.

And you guys are still looking at maybe $15 million-ish run-rate for NanoFab once it is up and running, let's say, by the end of the year, $15 million a quarter kind of run-rate?

I'm sorry, can you repeat that?

Yes. Is the run-rate of $15 million a quarter for the NanoFab, is it still realistic?

Yes, it is. We do believe that.

Okay. And you also talked about ASPs improving modestly. Is that a mix issue, or do you think the ASPs have bottomed at the mainstream notch?

It is a combination. I think that clearly the mix for us you saw we had an increase in IC high-end during the quarter. That helped. We also saw some improvement in the FPD business. But overall the ASPs appear to have bottomed out even in the mainstream area starting to see a little bit of recovery there.

And then you look at the utilization rate of the mask shops, would you say that the utilization will built up, which is reflected in the ASPs? Is that the right away to read it?

Industrywide you mean?

Yes.

I think it has improved. There's probably pockets of capacity demand offsets in different regions of the world. But overall, you know, we're seeing strength certainly in Asia, a little softness in the US this particular quarter. We saw strength in Europe, which was very good because we saw a decline in our fourth quarter. So it has been moving around a little bit.

Tim Arcuri, Citigroup.

This is actually Brian Lee calling in for Tim. I had a few quick things. Sort of a follow-up on the last caller's question. But how should we be thinking about the linearity of revenues from the NanoFab as that business kind of ramps capacity here in the next couple of quarters?

I guess what we have said has been pretty consistent with our plan. We have no real change to that. We expect to continue to see revenue starting in March and ramping through the balance of the year to a run-rate that we said would be about $15 million a quarter.

So there is nothing today that I would say that would change our view of that. The qualification process is going smoothingly well, and we have got lots of external customer interest beyond Micron and IM Flash which we hope will build into that. That could have -- we're being -- I don't want to say we are not necessarily being conservative, but we have good visibility certainly from Micron and IM. Assuming we can get the other quals done, we believe we can execute on getting orders toward the back end of the year from those additional customers. So we see a nice progression through the year, and that has not changed.

Okay. Great. I guess the six customers that you are referring to in terms of having them lined up for qualifications, are these customers all at various stages in the qualification process, or is this a situation in which all of these could kind of get qualed at once and so you have a huge kind of spike in one quarter as all of these customers come online all at once?

Yes, I may let Chris expand this, but what I would say is we have -- obviously we are ramping a new facility, so we don't want to force too much in as we're ramping the facility. But it has been timed so that we have the ability to satisfy our first customer's production while we bring in qualifications during the course of the year.

So it is not all at once. It will be timed. We have got schedules with each of those customers, so they are all in different phases.

I also would just like to say that all of the high-end growth is just not in the NanoFab. As we lined up at our Analyst Day, if you remember the building block slide, we talked about NanoFab, Korea and Taiwan, and we have made good progress. We started booking and shipping 90 nanometer technology in Taiwan during the quarter, Q1. We expect that to continue during Q2 and beyond. We have done a good job of getting qualification at 65 nanometer in Korea, and we are moving down to 50 and 45 as I mentioned in my prepared remarks. So all of that should contribute to high-end penetration through the balance of the year.

Great. That is helpful. Maybe a quick one for Sean. Where is breakeven currently, and where do you think it would be kind of exiting the year?

Brian, breakeven from the operating income line, we were at 103 obviously in Q1. As we project Q2, it's going to obviously increase with the tools coming onboard. As we look to extract other costs out, that should be in the range of from operating income of 108 or so, and it's going to increase slightly as we get into Q3 when we're fully ramped.

If you remember, Mike referred to the analysts our projections we talked about them in December. We projected Q1 to be a trough quarter with respect to our operating margin, and we continue to feel that is the case, and we will see it go up modestly. And the real big impact on our leverage in the model once these costs all come on is in Q3 and Q4. So our breakeven will continue to go up, and as we work on some certain cost saving initiatives plans, we will try to minimize the impact on our operating margin.

Okay. Great. And then finally, when I look at the flat-panel market, it looks like we're seeing a big ramp in order activity across the supply chain, especially at the equipment and OEMs. And so I'm wondering what is the typical lag between when orders see a pickup at the equipment guys and when you guys start to see -- start to ship out masks for your flat-panel customers? Is there a way to kind of correlate that or has (multiple speakers) correlation?

It is hard to say, but the order rate is strong now. You have got to figure there is some leadtime not only for the shipment but the installation and bring up with those tools.

You know, our guys in Asia have indicated that they feel we should see a continued ramp of FPD business throughout the year. We saw an improvement from Q4 to Q1, which, frankly, we did not anticipate. We expect that maybe it would have been flat to down and then a pickup in the current calendar Q1. And so we think that the year will progress probably more toward the back end second -- our calendar -- our fiscal Q3 and Q4. But we do expect continued progress into Q2 as well.

Matt Petkun, D.A. Davidson & Co.

So just to clarify, I think you said that 8% of the Semi Sales were at the high-end nodes?

Correct.

Okay. And then the other question I had for you, Sean, the incremental costs that you're talking about are primarily in depreciation, or will we also see some on the R&D line?

Primarily in the non-cash item in depreciation. There will be a few service contracts that will come on, but it is primarily noncash.

Okay. And then bringing on the new right tool for your larger end mask facility, Mike, can you help us understand a little bit more why you're bringing that on now? Do you see a real uptick in demand out of that business in the back half of this year?

We do, and there is two reasons for it. One is, it gives the writer is a little more technologically capable. So it pushes us into a 7.5 and 8 technologies. The second is many of our customers want to be assured that we have redundancy in the site to load more orders in in the event that the machine goes down, etc.

So there's two pieces to that. So we decided while we have been investing significantly, we felt this was a good strategic move. We have seen good customer interest in Taiwan. It is clearly the growth area next year, so it is really those two things. One primarily capability to handle the advanced technologies, but more importantly to give redundancy and confidence to our customers that we can have confidence and a backup for them.

Okay. And are you anticipating within your Q2 guidance a bigger sequential uptick in the semiconductor market or in the flat-panel market? Or do you want to go that far?

No, I can give you some view. I mean I believe that we will see both.

Okay.

(multiple speakers) -- as I said, we will see some revenue increase. We're seeing very good strength in the Taiwan IC business. Korea has been bumpy mostly because of Samsung's IC business, but we think that will improve during the course of the year. And FPD, as I said, we should see some good strength.

(OPERATOR INSTRUCTIONS). Brett Hodess, Merrill Lynch.

I'm wondering if you can talk a little bit about the impact you see in your opening remarks, Mike, on the mature market. You talked about the fact that the ASP declines and the volume declines there as well. Do you see that -- is that something that is continuing to affect the year as we roll through it, or is that something that is a stepdown? Can you give a little color on that?

Also, you talked about some of the US customers now going out to foundry. Does that just shift the business into Taiwan, and do you still get that business, or do you lose a piece of that, or how do you see that playing out as well?

Yes, I think for the most part we will see -- we get that business. It just shifts geographically to us. I think, as I commented, the positive thing we saw from Q4 to Q1 was that ASPs actually improved overall. And, during the course of the year, they declined quite a bit. My point was that if you take just the number of units times the ASP, there clearly was -- the total market would have declined.

The other thing is we did see some share shifts during the year and during the quarter. As I have talked about in the past, most of our customers have at least two, sometimes three less qualified, particularly at these mainstream nodes. So it becomes fairly competitive, especially in periods where there is capacity available, etc.

So we have got that under control. We feel confident that we will be able to improve our mainstream business in our existing base, as well as growing during the course of the year.

So I think it is troughed in my opinion.

Patrick Ho, Stifel Nicolaus.

Just one housekeeping question first. Sean, in terms of the stock options expensing, was it the usual about $0.01 to $0.02 worth during the quarter?

Yes. It was approximately $0.5 million or so.

Great. You know, I think you guys have done a really good job in the cost-cutting efforts the last few quarters. What have you taken in terms of the logistics and the global supply chain given some of the changing customer landscapes that you are experiencing right now? You know you are qualifying new customers. A lot of them are coming from Asia. What are you doing on that front to help reduce costs?

Well, what we have done, and it is a little bit of a competitive intelligence, Patrick, so we have to tread delicately. During the quarter and in the fourth quarter of Q1, we redeployed certain assets in the network as the capacity has shifted -- the demand has shifted, and we capitalized on that quietly, and that has really helped us especially in Q1 with respect to not seeing the typical seasonal decline. So that should continue to build.

We have also continued to redeploy or reengineer certain functions -- backroom functions within our network to lower-cost areas. As you know, we consider ourselves a pretty lean company. There is not a day or a week go by that we do not continue to look and challenge each other on our cost structure. So a lot of it is nickels and dimes, but we will continue to do it. Perhaps, Mike, if you want to add something?

No, I agree. It is, as Sean said, we continually turn over every rock. From a supply chain point of view, as you know, on what I would consider the materials we use in our production, we can continue to work our supply base there with blanks and pellicles and compacts and those kinds of things year-over-year. We have seen nice improvements from the supply chain, and we continue to work that.

On the equipment side, obviously there is limited equipment suppliers as you know. So we have a little less leverage, but I would have to say that our suppliers have been reasonably responsive on service contracts and those kinds of things that we do on an annual basis. So we are continuing to squeeze every piece of the lemon that we can, and we will continue to do that.

Great. And one final question. In terms of the qualification process in the NanoFab, you mentioned last quarter the six new customers that you're working with on the qualification process there. What is the usual timing of the qualification process? Is it somewhat dependent on their product rollouts, or is it something that you can qualify now, and just once you qualify, you can also then just wait for them to rollout their respective products? Can you kind of give a little color on that front?

Chris, would you mind?

Sure, I can answer that one. It varies. The timing I would say the quickest we are going to find is about a month, which is what we're seeing, and that is Micron, IM Flash. I mean customers who were just moving directly over from the JV. So we really can take advantage of the process copy model.

The typical is probably three to four months if customers want final wafer yields as the determination for qualification can take six months. So I think you're looking at one month for aligned customers and up to six months for kind of first in new customers that are looking to go all the way to final yield before they will issue a qualification.

And, as Mike said, we have about three or four that are in various stages of the qualification now, and then a few more coming on in the next quarter, coming up to six or seven, and they are pretty well staggered over that time period, one month to six or odd months.

[Dan Berkery], [O'Connor].

Two-part question. The cash and cash equivalents of about $95 million, is that roughly in the same percentages as the cash and cash equivalents were at year-end? So with the majority of that in cash as opposed to short-term investments?

Yes.

Okay. A second follow-up question along those lines. What is sort of the turmoils in the money markets currently, and do you have any concern that any of that $95 million might not be available either through liquidity risk of auctions or credit risks or some other reason why that might not be available at the April maturity of the bond?

None whatsoever.

(OPERATOR INSTRUCTIONS). [Chip Bonnet], FM Global.

A couple of question if I could. Mike, just to follow up on your comments about the addressable market getting smaller, was that comment specific to North America as you mentioned you are seeing a shift to foundries in Asia?

Yes, exactly. That is why I wanted to be clear. Obviously the unit volumes, as I have talked about in the past, were masks. While they go up and down year-over-year, if you look over the last 10 years, about 700,000 units a year. And that will vary. The actual revenue dollars that are generated by that vary by mix and everything else.

What we've seen obviously is a transition of that total available market move from Europe and the US into Asia as customers have migrated to the foundries. It does not mean that the actual [TAM] goes away; it just means it shifts.

Now there is some impact of that on ASP erosion as well, and that has been factored in. So we still see looking out over the next several years roughly a 3% compound annual growth rate for the overall market with a very high CAGR for the 90 nanometer and below, which is why we made the investments we made to be able to position ourselves into that high-growth segment.

Okay. And how were you -- given this share shift, how are you positioned over at the foundries?

Well, we have seen tremendous growth as I mentioned earlier in Taiwan during the course of the year. I think the last call I talked about the fact that coming in late took a long time to get us qualified for 90 nanometer. We got that under our belt now. We're accelerating, ramping that capacity so that we have the ability to take advantage of that. It still seems to be the sweet spot right now, 90 nanometer.

There is a lot of talk about 65, but I was just looking at what TSMC, UMC chartered shipped during their last quarter. I think the high-end was probably TSMC at about 8% of sales and below end was about 3%. So the 90 and up is still a pretty significant sweet spot, and we're participating there in Taiwan, and we will participate near Korea, and soon we will be participating there in the US.

Okay. So kind of the story on this is that maybe you lost a little share in the past year as this shift occurred, but you have been working to get qualified at the foundries and hopefully gain some of that back. Is that a right characterization?

Yes, that is a good way to look at it. It is not that we lost anything. We did not really have it to begin with.

Okay. Well, you had some share in North America companies that kind of went away.

Right, exactly.

Okay. And then if I could ask a couple on the NanoFab. Originally, maybe it was last call, I'm not sure when you might have stated it, but wasn't there some expectation that you would actually be shipping out of the NanoFab as early as late January?

No, we had originally felt we could get the quals done and start shipping at the end of February is what I believe we talked about. We're very close to that. It is going to be early March.

Okay. So you do not see much change in the timeline then?

This is Sean. I believe what we said was we would have that producing revenue in calendar quarter Q1, which would be by the end of March. I think looking back on our plans, we're basically on target. We're talking literally within a week or so.

Okay, that is probably it. I remembered Q1. I thought maybe that was fiscal, so it is calendar Q1 is what your prior comment was.

Okay. Can you talk about how much contribution you are expecting from that facility?

For competitive purposes, we don't want to get into that as we ramp it up. But we talked about the startup facility we expect to have it generate revenue during our fiscal Q2 quarter and continue to ramp through Q3 and Q4. Our plans for that facility have not changed from even as far back as last summer. We're still very confident about our ability to ramp it. Of course, we need to execute and deliver the technology and performance that we are confident that we can do.

And I think Mike spoke about on the last call and at our Analyst Day really Q3 should be a breakout quarter for us as we get this facility up and running. And I think we still remain very confident about it.

Okay. So we are kind of looking at a linear ramp here. I guess early in the call you said $50 million run-rate by the end of your fiscal year? Correct?

That is correct. (multiple speakers)

And we will see a linear ramp to that basically is what you are saying?

Yes, it will probably step up from Q2 into Q1 because we have lost a month already in Q2 of revenue.

Okay.

Our fiscal, right?

And step up into Q3 is what you're saying?

Right, exactly.

Okay. And then in terms of depreciation, you mentioned there is about 3 to $4 million increase in cost this quarter. Are we likely to see a similar jump in the July quarter?

No, it is going to go up more modestly into Q3. If we come in at the low-end of that range, say, $3 million increase, that means that the depreciation and amortization can be anywhere from 27.5 to $28.5 million. The following quarter should go up another $1 million or so, and then it should cap out. It is all contingent upon the timing of these tools as they get installed. As we put new tools on, we do get the benefit of certain other tools coming off our depreciation roles.

Suresh Balaraman, ThinkEquity.

Just a question on the comment you made about the market about 700 -- did you say 700,000 units, the masks, the number of masks sold every year?

That has been historically about the average. Obviously it has gone up, it has gone down, but if you look at it on average, that is about the number.

Roughly about $3000 a mask, is that the right kind of math?

Well, we estimated -- I don't know -- it is really hard now because we are the only one that sort of would publicly report. So we do some back of the envelope and some other sources, but the market for calendar year 2007 was probably around 2.8, something like that. It could be $3 billion. So that includes captives, as well as merchant.

Chip Bonnet, FM Global.

I just wanted to jump back in here. You talked about the qualification of potentially six or seven new customers throughout the year. I guess I am just wondering the revenue potential there. Is it a potential that you are a second or third kind of source here on some of these companies or customers so that you never eventually end up ramping much revenue out of them? Or could you be the primary customer, or would that take time to evolve to that?

What we have learned in this business is you have got to start to get confidence, and then as soon as you have the capability, it is all about service.

So in most of them obviously we're not the first supplier. There are already doing business with our competition. So we're getting -- we are very excited by the fact that they are in a few cases pushing us for the qualification. In a few cases we have had to do some pulling, but they are interested.

And so I think the way I would answer it is that we're going to start probably as the number two and number three and build our momentum as we service the accounts.

Okay, fair enough. Great. Thanks, Mike.

There are no further questions at this time. I would like to turn the conference back over to Mr. Luttati for any additional or closing remarks.

Well, thank you all for your attention and participation in this morning's call. We very much look forward to speaking with you again during the end of our second quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.