Novellus Systems, Inc. Q3 2008 Earnings Call Transcript

Oct.15.08 | About: Novellus Systems, (NVLS-OLD)

Novellus Systems, Inc. (NASDAQ:NVLS-OLD)

Q3 2008 Earnings Call

October 15, 2008 4:30 pm ET

Executives

Robin Yim – Investor Relations

Jeff Benzing - Chief Administrative Officer

Rick Hill – Chief Executive Officer

Analysts

Weston Twigg - Pacific Crest Securities

Brett Hodess - Merrill Lynch

Steve O'Rourke - Deutsche Bank Securities

Patrick Ho - Stifel Nicolaus & Company, Inc.

[Steve Deneau] - Barclays Capital

Steven Pelayo - HSBC

Gary Hsueh - Oppenheimer & Co.

James Covello - Goldman Sachs

Timothy Arcuri - Citigroup

Edwin Mok - Needham & Company

Stephen Chin - UBS

Mahesh Sanganeria - RBC Capital Markets

Jay Deahna - J.P. Morgan

Krish Sankar - Banc of America Securities

Atif Malik - Morgan Stanley

Satya Kumar - Credit Suisse

Suresh Balaraman - ThinkEquity

Bill Ong - American Technology Research

[Ganesh Royal] - CREF

Benedict Pang - Caris & Company

Operator

Welcome to Novellus third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Robin Yim of Novellus Systems.

Robin Yim

With me today on the call here in San Jose is Rick Hill, Chairman and Chief Executive Officer, and joining us from off site is Jeff Benzing, Chief Administrative Officer.

Financial results for our third quarter were released on PR Newswire shortly after 1:00 p.m. Pacific Daylight Time. You can obtain a copy of the news release in the Investor Relations section of our website at www.Novellus.com.

Today's earnings call contains forward-looking statements about Novellus' business outlook, the future performance of Novellus, and our products and forecast of key metrics for the fourth quarter of 2008. Specific forward-looking statements include but are not limited to our plan to continue lowering our cash breakeven level until business conditions improve, the forecasted bookings and shipment volume, revenues, gross margin, operating expense, tax rate and earnings per share, both on a U.S. GAAP and pro forma basis, our expectation that we will continue to maintain our market position to maximize our position within the semiconductor industry, the effect of the current economic climate on our performance over the next several quarters, and other anticipated future events.

We caution you that forward-looking statements are projections and expectations regarding future events. They involve risks and uncertainties that could cause actual results to differ materially from the results contemplated, including an inaccurate basis for our financial forecast. Information concerning risks that could cause actual results to differ materially is contained in today's press release and our filings with the Securities and Exchange Commission, including our Form 10-K for fiscal 2007, our Form 10-Q for the first and second quarter of fiscal 2008 and our current report on Form 8-K. Forward-looking statements are based on information as of today and we assume no obligation to update any such statements.

Jeff Benzing will being today's call with a review of the financial results for the third quarter. Rick Hill will then discuss the state of the business, followed by guidance for the fourth quarter of 2008, and then we'll open up the conference call for the Q&A session.

Now I'll turn the call over to Jeff.

Jeff Benzing

I'll start by reviewing our third quarter 2008 operating results. Bookings for the third quarter were $202.8 million, down 13.6% from the second quarter of 2008 and at the low end of our guidance range of up 5% to down 15% as the weakening macroeconomic environment continued to adversely impact our customers' business.

Shipments for the third quarter were $230.2 million, down $10.2 million or 4.2% from the second quarter and within the guidance range of $225 million to $250 million.

Revenues for the third quarter were $250.1 million, down $7.6 million or 3.0% from the second quarter and at the high end of the guidance range of $240 to $252 million.

Third quarter revenues by geographic region are as follows: United States, 29%; Greater China, 26%; Korea, 19%; Japan, 13%, and Europe, 13%.

Gross margin for the third quarter 2008 came in at 44.6% and was slightly below the low end of guidance range of 45% to 46%. This represented a 1% decline from the second quarter of 45.6%, which excludes $6.5 million in charges related to our decision to curtail certain business activities. The decline from our second quarter gross margin without charges was due to product mix in our Industrial business and lower absorption of fixed overhead costs on reduced shipment levels.

Total operating expenses for the third quarter were $105.5 million, well below our stated target of $110 million and down $9.7 million or 8.5% from the prior quarter, excluding $7.1 million in charges taken in the second quarter related to cutbacks in certain business activities. This further reduction in operating expenses yielded an operating profit of $6 million in the third quarter 2008 compared to $2.2 million in the second quarter, excluding the previously discussed charges. While we have made significant progress in reducing our ongoing operating costs, we will continue our progress on lowering our cash breakeven level until business conditions improve.

Other income was $3.1 million for the third quarter, down from $4.9 million in Q2. This decline was primarily due to marked-to-market adjustments on certain hedging contracts.

Our expected 2008 effective annual tax rate increased to 50.8% from 36.7% last quarter before discrete items due to a decrease in forecasted year end profit in our [four] entities. The increase in the 2008 effective annual tax rate, combined with a true-up effect of that increase for prior quarters, resulted in a third quarter tax rate of 84.6%. Pre-tax profit for the third quarter of $9.1 million was eroded by the 84.6% tax rate discussed above, resulting in a third quarter net income of $1.4 million or $0.01 per share, which was at the low end of our guidance range of $0.01 to $0.05.

Turning to the balance sheet, we ended the third quarter with $702.6 million in cash, short-term and restricted cash and long-term, which is down $6.1 million from $708.7 million in the second quarter. Cash remained relatively flat quarter to quarter despite generating $46.7 million in cash flow from operations. We used $44.3 million of cash to repurchase $28.8 million of stock and repay approximately $15.6 million of debt.

In the third quarter we purchased approximately 1.4 million shares at an average price of $21.01. Year-to-date, we have purchased 7.6 million shares at an average price of $22.74, for a total spend of $173.8 million. We have $846 million left under our buyback authorization, which expires in October 2011.

Net accounts receivable decreased in the quarter by $7.9 million or 3.6% to $210.4 million, which was approximately the same rate as the decrease in revenues. As a result, third quarter DSOs remained flat with Quarter Two at 76 days.

Inventory decreased $17.3 million sequentially due to tighter controls of materials in light of declining bookings quarter-over-quarter.

That concludes my comments on the third quarter 2008 results. Now I would like to turn the conversation over to Rick, who will comment on the state of our business and provide guidance for the fourth quarter.

Rick Hill

Since our mid-quarter update on August 28th, the market for semiconductors and semiconductor capital equipment has steadily accelerated its decline. Tight credit markets, declining consumer demand, political uncertainty and increasing unemployment are all affecting technology spending. While the semiconductor equipment business is notoriously cyclical, this is quite different.

On a bookings front, all our regions are down. On a customer basis, there remain only three with the economic power to buy and less than three with the will to buy. The outlook right now is totally unpredictable to us. The rapid decline in demand for high tech gadgets, whether that decline is real or perceived, is causing our customers to continue a cautious stance.

On a bright note, investment in advanced technology, the transition of aluminum to copper in memory, is continuing, but capacity expansions are virtually nonexistent.

Operationally, we continue to drive down our breakeven as our OPEX hit 105.5, down from a $125 million per quarter run rate in 2007. Given the uncertainty in the market, we're driving our cash breakeven level to approximately the $187 million level for quarterly revenues.

As Jeff reported, during the quarter we remained strong on the balance sheet relative to our cash position. We continued to manage our assets, accounts receivable very carefully, with the lowest level of delinquencies that we've actually ever had, and we're focused on this given the climate that we're in today.

We do have a slight increase in the inventory number, due largely to some late pushouts of shipments that caused finished goods to rise. We did buyback 1.4 million shares, $28 million worth in the quarter, and yet our cash balance remains relatively unchanged.

Now with that, I'd like to give you what we - the best we can give you at this time for the fourth quarter is bookings will be up 5% to down 15%. There's a lot of uncertainty in those numbers based on changing customer plans almost on a daily basis. Shipments are expected to be between $220 million and $245 million; revenues, tracking with the shipments, about $230 million to $243 million. Our gross margins are expected to be in the 43% to 44% range. The decline is due primarily to customer and product mix. And our earnings per share is expected to be at a breakeven basis, between minus $0.03 a share to plus $0.03 a share.

So with that, I'll open it up for what I would assume will be many, many questions, of which -- will probably be difficult to answer these days. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Weston Twigg - Pacific Crest Securities.

Weston Twigg - Pacific Crest Securities

On the cost control side, I'm wondering, I know you have a really nice facility up here in Tualatin. I was wondering if there's any chance you're going to do some consolidation in this down environment?

Rick Hill

Yes, we don't discuss the operational details of what we're doing over these calls because they are, in fact, public calls. But we're looking at everything we can do in order to make sure that we can operate as efficiently as possible in these very uncertain markets.

Weston Twigg - Pacific Crest Securities

Would you have enough capacity in Tualatin to meet all your manufacturing needs?

Rick Hill

We have enough capacity in Tualatin and we have enough capacity in San Jose.

Weston Twigg - Pacific Crest Securities

Also, just curious on the logic side, your logic customers, are you seeing any pushouts from the logic customers right now?

Rick Hill

We see pushouts from both logic and memory customers.

Operator

Your next question comes from Brett Hodess - Merrill Lynch.

Brett Hodess - Merrill Lynch

Rick, I'm wondering, when you commented on the fact that the technology changes were still going on in your customer base but no capacity additions, can you give us a feel for what customers are doing with these technology buys? Is it onesie, twosies to try out the copper instead of aluminum at the memory guys and similarly some of the guys there trying to shrink into the 5X node on DRAM or the 4X node on NAND? Is it just a small amount of equipment to try it out or, you know, how does that really play out in this kind of environment?

Rick Hill

I would more classify it as building of small lines with moderate volumes.

Brett Hodess - Merrill Lynch

So it's not necessarily upgrading their existing line, it's actually adding another small line?

Rick Hill

In the case of the backend for copper in memory, that's more an accurate description.

Brett Hodess - Merrill Lynch

And the second question is: This year you introduced a number of new products within CVD, like ashable hard mask, and some of the other segments. So what's happening with new product acceptance, then, at this stage of the game? Are customers at a standstill or are they still moving forward and giving you the kind of acceptances that you'll need when business comes back?

Rick Hill

I think that the new produce acceptances are actually pretty good, as can be seen by the relative revenues and shipments that we have been continuing to make. I think that the real big question is when do we get capacity purchases again, and unlike historically, we haven't had the great economic uncertainty in front of us that we have today. So that's what makes it very, very difficult to predict.

With the shrinking in the financial markets, as all of you guys are well aware, there are not certainly documented reports but certainly conjecture of dramatic shrinkages in IT spending, which I'm sure ripples into the planning of our customers and also their confidence level to commit capital to expand facilities if they believe there could be a potential for a shrinking market.

I don't think we know that for sure yet, but as you all know, the environment that we're in is being driven more by emotions than by necessarily facts.

Operator

Your next question comes from Steve O'Rourke - Deutsche Bank Securities.

Steve O'Rourke - Deutsche Bank Securities

Rick, can you kind of give us an idea based upon everything you're seeing now, how are you looking at 2009, and do you have some maybe more specific ideas on what you think industry spending could be in 2009?

Rick Hill

Based on the limited concrete data that we have and more on the notional data that we have, we are tending to be pessimistic on 2009. What would change that pessimism would be a substantial change in the front end of this engine which would include consumer spending in the financial markets. Short of that, it doesn't bode well for 2009 at our current level. Bringing our cash breakeven expenses down even further than they currently are, we tend to think that, at best case 2009 is flat.

Steve O'Rourke - Deutsche Bank Securities

If we get a lot of this consolidation that's either been kind of proposed or thought about in the memory sector in 2009, what does that mean for spending when you look out over the next 12, 18 months?

Rick Hill

Well, one of the factors in the consolidation within the markets, of course, is that there are two types of capacity out there - obsolete capacity and less efficient capacity. So to the extent there's consolidation in 300 millimeter, which is a very, very viable technology, and depending upon who does the consolidation, you actually create more capacity, you create the ability to operate that facility more efficiently, depending upon who picks up those facilities, and you also have the potential for increased capacity by taking somebody's more advanced technology and using that equipment.

Having said that, there will be opportunities for upgrades for some of that equipment because those that are being swallowed up have typically underinvested and are not operating at the same levels as those that are doing the consolidating. But there's no question that it will basically make the capital deployment more efficient.

Operator

Your next question comes from Patrick Ho - Stifel Nicolaus & Company, Inc.

Patrick Ho - Stifel Nicolaus & Company, Inc.

Rick, in terms of the bookings range for the December quarter towards the high end, what would swing it towards the high end - is it memory or is it, I guess, a broader base of customers?

Rick Hill

It basically is a combination of both memory and IDM players, depending upon what they do with their plans.

Patrick Ho - Stifel Nicolaus & Company, Inc.

Secondly, in terms of your Services and Spare Parts business, what type of effect are you seeing in the near term on that and has the decline in that area been larger than you've anticipated?

Rick Hill

No, Services and Spares is a relatively predictable and steady revenue stream, although as utilizations come off there is some falloff of it. But it isn't as dramatic as it is from the standpoint of capacity expansion purchases.

Operator

Your next question comes from [Steve Deneau] - Barclays Capital.

Steve Deneau - Barclays Capital

Rick, I guess the first question, you talked about $187 million cash breakeven. I guess can you help me understand what kind of gross margin OPEX and what mix you're assuming there from Industrial and what's the timeline of achieving that target.

Rick Hill

That assumption is our ongoing normal mix, no change in mix, no fundamental change in mix. And our timeframe for that will be by the end of the fourth quarter.

Steve Deneau - Barclays Capital

And I guess just to go back to the previous question on the $41 million delta in the low and the high end of the order range, you alluded to memory and IDM. Is that one or two type customers or more than that driving that larger range?

Rick Hill

I think it's more than that.

Steve Deneau - Barclays Capital

And then I guess last question for me, in terms of a tax rate for 2009, I know there's a lot of uncertainty in what the revenue run rate and geographically what it will look like, but what's the best guess today?

Rick Hill

Jeff, why don't you take that question?

Jeff Benzing

The best guess for 2009 will be provided when we go through our 2009 planning session this quarter and when we have our earnings release in January we'll have that '09 rate for you.

Rick Hill

I guess at this juncture, given the uncertainty in the markets, we're not going to forecast it.

Jeff Benzing

It'd be too difficult.

Operator

Your next question comes from Steven Pelayo - HSBC.

Steven Pelayo - HSBC

Hey, Rick, I was just curious if you can comment on the ability to get credit, either from - are your customers struggling or potentially within your own supply chain, any suppliers to you struggling at all?

Rick Hill

Well, I think obviously credit has been hard to come by for anyone, period. And you only have to look at what GE's just paid for credit. And if you can imagine what they paid for credit what it would cost entities in the semiconductor industry or our supplier base, you can understand why people might be reluctant to go to that particular bank.

Steven Pelayo - HSBC

Okay, but as far as you - there hasn't been any significant struggle where your supply chain can't buy working capital?

Rick Hill

There have been no significant defaults that I have seen.

Operator

Your next question comes from Gary Hsueh - Oppenheimer & Co.

Gary Hsueh - Oppenheimer & Co.

Hey, Rick, I'm just trying to make sense of some of these comments here and your actions in reducing cash breakeven further. You know, you talked about a steady accelerated decline in fundamentals, yet you're really only guiding revenue and bookings kind of down single digits. And shipments are kind of flattish, so it really doesn't sound that bad. Is it actually something that we will see in sort of the timing post the fourth quarter? Is that sort of the, you know, sudden need here to reduce cash breakeven?

Rick Hill

When I look at how far we've already fallen, I mean, obviously we've been ahead of the curve in January when we announced how far we were going to take it down, and now we're taking it down an additional amount. I'm giving you my best estimate of where I think it's going to come out.

And our attempt, this is an abnormally low level for what historically has been a high growth industry, which we have always seen slowing to about 7%, to going to where we see some contraction. Now the question is how long it will last. And if it lasts for a longer duration, then we may have to cut deeper.

Gary Hsueh - Oppenheimer & Co.

Okay, so just let me clarify, Rick. I mean, you're cutting cash breakeven down to $187 million per quarter to basically maintain breakeven results or maybe slightly better in Q4 and not necessarily an indication that there's a steeper, deeper trough beyond Q4?

Rick Hill

That's correct.

Gary Hsueh - Oppenheimer & Co.

My second question is, you know, I think we understand pretty well what's going on in semiconductor land. I was wondering if you could help parse your guidance for Q4 and just your overall general market commentary, specifically in terms of industrial applications? What are we seeing there and what's the downside risk in that business if conditions in the credit markets and the macroeconomic environment persist?

Rick Hill

Our Industrial Applications group largely is revenue based in Europe and outside of the United States, and up until three weeks ago had not seen the type of pressure that the semiconductor business had seen. But as of recent, we are seeing a weakening, not as dramatic as the semiconductor industry, but clearly there's a global weakening going on right now.

Operator

Your next question comes from James Covello - Goldman Sachs.

James Covello - Goldman Sachs

Just two questions. First, how many customers did you have this quarter? You referenced it a little, but you said there were three customers that can afford to spend and less than that that are willing to spend. But how many big customers did you have this quarter as defined maybe by kind of $20 million orders - one, two, none?

Rick Hill

Okay, we don't break it down to that level. We actually have had, you know, when you count Spares and Services, a large number across the spectrum of customers. But when we're talking about committing large amounts of capital, there's been only about a handful committing large amounts of capital.

James Covello - Goldman Sachs

You know, maybe, if I - and you referenced a little bit of this too, earlier, but maybe a little more granularity  how in your mind is this different from other equipment downturns? The numbers, you know, if you look at the year-over-year decline in Capex this year and the likely year-over-year decline in Capex next year, it looks pretty similar to what we've seen in the other five industry downturns. Does this feel any different to you other than just it being a bad downturn?

Rick Hill

Well, it feels differently because I don't see what drives it out of the downturn. I've always seen the opportunity for strong IT and strong computer spending, and as I've said in almost every conference call, that's the number one leading indicator that's going to sustain the industry as a whole. Everything else is just icing on the cake.

With what's happened in the financial markets, which are one of the largest consumers of IT investment, we need to see where that falls out and how that's going to drive really the server industry, the computer industry, and that would be my major worry and the thing that's significantly different than previous cycles that I've seen in my 15 years. We've not had this.

Operator

Your next question comes from Timothy Arcuri - Citigroup.

Timothy Arcuri - Citigroup

First of all, I'm just trying to figure out how much of your current revenue is actually Service. I guess if I go back to 2006 and 2007, I seem to recall that may 15% to 20% of revenue when you were doing something in the mid to, low to mid 4 - you know, $100 million - was Service. So that'll put your Service business at maybe $80 to $100 million. So is that the right kind of general ballpark to think of your base of service revenue right now?

Rick Hill

I don't think that the base of service has changed much historically, and we don't break it out because it's not a separate business. It's all part of the semiconductor business as a whole. And when you're talking Service, are you talking just labor, because if you're talking just labor as service, that certainly would be too high a number.

Timothy Arcuri - Citigroup

I guess maybe my second question is kind of a bigger picture question, then. If you look at the total enterprise value right now of the company, it's about $700 million, and it's tangible book is about $1 billion. So relative to the commitment that you have to being in all these different product lines, it would seem that at some point, given the current stock price, that if even one business is attractive to some company, that the company at this level would be a very good acquisition candidate. So I guess I'm wondering, does this downturn and does this level make you think that maybe - and beyond even CMP - does it make you rethink why you're in all these different businesses?

Rick Hill

Well, we're only going to be in businesses we can make money at. And if we don't think we can make money at a business, then we'll kill the business, okay? But what it does do is it gives us a lot of knobs from where we are and, with the balance sheet that we have, the ability to be able to, if we feel products are going to be successful, stick with those products.

And we try to run the company not only from a standpoint of positive cash flow, but we try to continually earn money, even if it might not be at the level that our model is due to the economic times. The reality is we have plenty of flexibility. We're constantly looking at businesses. And we haven't gotten ourselves in the shape of the banks, thank goodness.

Operator

Your next question comes from Edwin Mok - Needham & Company.

Edwin Mok - Needham & Company

I'm curious about your comment about your driver. You have - before, you were quite positive on the SSD markets. Has your view changed on that space?

Rick Hill

I'm still very hot on the SSD marketplace. I still think it'll be a hot product when the right product hits the marketplace. But right now, given the climate across the globe, it's very, very difficult to focus on a hot product and expect it to take off like a rocket ship.

Edwin Mok - Needham & Company

I see. So your view is macro impacting that. And then just a question on the operating expense there and the tie to new products, given that you guys have cut back on the OPEX, any thought about cutting back on any of your new product programs, like CMP?

Rick Hill

You know, we are constantly reviewing all programs. We obviously cutback dramatically on where we were, focusing a lot of our dollars in trying to win business into various customers. And we've cut that back dramatically. We're constantly looking at products and refocusing our R&D. It's part of our everyday job.

Operator

Your next question comes from Stephen Chin - UBS.

Stephen Chin - UBS

Just a couple of clarifications, Rick. In terms of trying to track it on the balance sheet, will you consider temporarily suspending the company's stock buyback here?

Rick Hill

Well, we look at the cash on the balance sheet as our vehicle to be able to invest. We're constantly looking at what investment opportunities we have, from products internally to companies externally, plus our own. As someone pointed out, our economic value of $700 million we clearly don't think represents the fair value of the technology and the potential cash flows from these businesses. And so to the extent that cash continues to be positive, we continue with our buyback.

Stephen Chin - UBS

Two clarifications - given what you know about the industry right now, Rick, do you get the sense that during this down cycle the company will actually drop down to this breakeven level, the $187 million? Is that the message you're conveying?

Rick Hill

Well, I'm not conveying that message. I just told you where I'm brining the breakeven down to.

Stephen Chin - UBS

And the last question I had is I wanted to make sure I understood your comments about there being three customers that don't have the will to buy the equipment. Is that because they don't have the cash or is that simply that they don't have the [customers] to buy?

Rick Hill

No, I said three customers have the economic power right now to continue to invest. But I said even of those three customers, there's some question of their will to invest at this juncture given the uncertainty in the market.

Operator

Your next question comes from Mahesh Sanganeria - RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets

Rick, the question on the cash flow, I mean, cash breakeven, what tax rate assumption is there in that? And [inaudible], I want to make it clear that, when you say cash, you're taking out the stock option, which is close to $8 million, and depreciation and amortization - that is $17 million - so $25 million is the item you're excluding from being EPS breakeven. Is that correct?

Rick Hill

That's correct.

Mahesh Sanganeria - RBC Capital Markets

And what is the tax rate assumption in that?

Rick Hill

Our normal corporate on a normalized basis, with normal business levels in the regions is running around 35%.

Mahesh Sanganeria - RBC Capital Markets

Okay, so that assumes 35% tax rate?

Rick Hill

That's right.

Operator

Your next question comes from Jay Deahna - J.P. Morgan.

Jay Deahna - J.P. Morgan

Rick, do you believe that there is such a thing as a maintenance level of orders that would be a sustainable level pretty much no matter what's going on out there? And if so, where do you think you are relative to that?

Rick Hill

I would say we're near the maintenance level, slightly above it due to the transition of copper in memory.

Jay Deahna - J.P. Morgan

And then the other question that I had is at the SEMICON West analysts meeting that you guys did this year you threw out some fairly specific market share targets by product line. I'm just wondering if you could give us an update on where you think you stand towards those.

Rick Hill

I think in the case of PECVD, we've made progress. In the case of HDP, we've made progress. In the case of Electrofill, we've made progress or exceed. In the case of Tungsten, again, we meet or exceed our goals. In the case of CMP, we've not made progress at this juncture. In the case of PVD, we're making progress but not as quickly as I'd like to make progress. And in the case of strip, of course, we've made progress.

Jay Deahna - J.P. Morgan

And then lastly, in the last call or two you sort of threw out the idea of potentially being a little bit more willing to do acquisitions, and I'm just wondering, given how nasty it is out there, do you see opportunities getting more attractive and is your will to do that increasing as a result?

Rick Hill

I think the determination on the ability to do that is going to be dependent upon the financial markets. I think the ability to be able to jump in front of a - you know, grab a falling knife or jump in front of a freight train isn't highly likely. Depending upon what it takes to see the credit markets become more normalized, we'll determine how big a chunk - if a chunk - is we would want to take.

Operator

Your next question comes from Krish Sankar - Banc of America Securities.

Krish Sankar - Banc of America Securities

If in the best case scenario '09 is flattish, who do you think will lead us out of the downturn? Is it going to be the logic guys or the foundry guys or maybe the memory guys who will turn around in terms of bookings?

Rick Hill

It'll be memory first.

Krish Sankar - Banc of America Securities

And [inaudible] logical foundry customers, do you think they're being more cautious due to the macro or is it more direct sales related? I mean, do you think they're actually hedging on the side of caution?

Rick Hill

I think everyone at this juncture is paying more attention to the macro than what's actually happening in front of them. That's what I commented earlier. There's more of a perceived falloff in demand than I think is actually being experienced right this minute, and I think that's causing everybody to become cautious. And it's, you know, it isn't unpredictable given the market condition, and you guys probably know it better than anyone and are experiencing it firsthand. So that's the current situation.

Krish Sankar - Banc of America Securities

And just a last housekeeping question for Jeff. Did you say anything on '09 tax rate?

Jeff Benzing

We didn't give a rate for '09. What we gave was our forecast rate for '08 and we will be providing that estimate and a forecast for our '09 tax rate in our call in January.

Operator

Your next question comes from Atif Malik - Morgan Stanley.

Atif Malik - Morgan Stanley

Rick, given the depressed level of Capex next year, let's take your best case flat, is it fair to assume that your top line growth is going to be better than the industry if you layer the copper migration, the market shares and the industrial exposure?

Rick Hill

That's our intent.

Atif Malik - Morgan Stanley

And then a question on tool reuse. I know one big logic MPU maker is moving to 30 nanometer next year, and you guys have been some victims of movings. When that guy moved from 65 to 45, there was a lot of tool reuse. How would you look at your tool reuse rate when that logic maker moves to 30 nanometer?

Rick Hill

Well, reuse is definitely not as ideal as totally new tools, but in making these transitions in these advanced technologies, there's still business associated with these reuses in the form of upgrades and things that are able to improve power, performance and other things. But clearly reuse isn't what we love to see. We like to see new innovative technology.

We've basically positioned our products such that a lot of the new products have such productivity advantages it really behooves the customer to look at going new in a lot of instances because of the ability to get greater throughput. Obviously reuse has a zero capital cost, but when we look at some of the progress we've made relative to energy consumption, gas consumption, through put, the payback can be a pretty short period of time for some of the large customers and it's one of the things we're working on.

Atif Malik - Morgan Stanley

And one last thing, the three guys you said who have the power to spend, I assume you mean Samsung, TSMC and Intel. How would you compare your market share or average market share at these three spenders relative to the universe?

Rick Hill

These are our three favorite customers.

Operator

Your next question comes from Satya Kumar - Credit Suisse.

Satya Kumar - Credit Suisse

You know, the [inaudible] time you gave guidance, the mid-quarter update, and it appeared that maybe bookings were up 30% to 40% in the fourth quarter. Much of the three segments, right - microprocessor, foundry, logic  was closest to plan, as you know, look at bookings down 10%. Which was farthest away from plan?

Rick Hill

Well, I don't have that number right in front of me, but I would tell you that none of them made plan.

Satya Kumar - Credit Suisse

You're guiding Q4 bookings to roughly $180 million. Shipments are a good $50 million above that. If I go back and look at your cumulative bookings and shipments, it seems like shipments are running sustainably over bookings. Is there a catch-up quarter or a couple of quarters there that needs to happen in the first half of next year?

Rick Hill

It has to catch up and therefore you make sure your breakeven, we're down at those levels.

Satya Kumar - Credit Suisse

How does it meet that? I'm just kind of [inaudible] understanding how the breakeven can go so low, I mean, $50 million lower breakeven level in just a quarter from Q4 to Q1.

Rick Hill

It's the cash breakeven, which is very, very different. Obviously, you know, there's not much you can do with depreciation and buildings, especially in this climate. So we've been very explicit to focus on cash breakeven.

Operator

Your next question comes from Suresh Balaraman - ThinkEquity.

Suresh Balaraman - ThinkEquity

In terms of the unraveling of the financial markets, it just happened in the last four weeks and most of your purchase orders must have happened well before then. And I'm wondering, is the net change in your outlook, is it primarily due to actual cancellations and - for [inaudible] is there a level of caution that you're adding onto your guidance?

Rick Hill

Well, while the crash in the financial markets occurred over the last four weeks or three weeks, I think the anticipation of that crash has been building for some period of time. Our bookings and everything is published on a quarterly basis. You always hope you won't go into disaster, you'd avoid disaster, but unfortunately in this case we haven't avoided disaster. Disaster has occurred, and that disaster that's occurred on Wall Street is now affecting consumer demand, corporate Capex expenditure, all of which ultimately ripple down to semiconductor companies and capital equipment companies.

And all we can do it try to give you a picture of what we're dealing with and how we're trying to respond to it to make sure that A) we're solvent, okay, without having to take in money to loot our shareholders and other activities, really try to run a financially solid business, and, you know, navigate our way through these very difficult times. I don't want to have to go to the government for a bailout.

Suresh Balaraman - ThinkEquity

Also, do you see some customer segments more pessimistic than others in your recent conversations with them?

Rick Hill

No, I don't see any segment more than the other. I think everybody's prudent. We're running businesses with products. We have real customers, real demands. I think everyone's concern is the consumer, what's going to happen with the consumer, what's going to happen with corporate spending. Because certainly, in our business, that's the very front end of the train. And there is a high level of caution on all of us, and our intent is to preserve the most precious thing we have, which is cash, and continue to try to stay on our technology programs to improve our efficiencies, make our products more competitive, and hope that we come out of this.

But we can't come out of it without stronger consumer demand and stronger Capex from corporations. I mean, I couldn't sit on this call and tell you that without those two things we'll just blow right through this. It just won't happen for anybody.

Operator

Your next question comes from Bill Ong - American Technology Research.

Bill Ong - American Technology Research

Can you qualitatively classify how you measure orders that will likely occur, like you're up 5% bookings guidance versus a little bit more speculative, your two end points? Is it a function of delivery dates or quality customer or market share win-loss? Maybe you can sort of rank those variables?

Rick Hill

Well, one, we have an intricate sales network that deals with customers on a daily basis. And we get their input on a weekly basis, and then we do a risk assessment based on looking at what their availability of cash is and we compare that to what we analyze is the overall macroeconomic trends going on from the standpoint of computer growth, which dipped below the 10% in the last month, annualized growth rate of greater than 10%, which is not a bullish sign for the semiconductor industry.

And we measure those things and then we come to a conclusion on which bookings and capacity purchases are most likely to occur. Some of them are R&D, and we know those customers are going to follow through with their R&D because, like us, we're trying to extend our technology in a downturn so we're better prepared in the upturn. That's the reason why we just don't cut all the R&D in a downturn immediately.

And so we weigh all of those factors and we say look, if things keep going, knowing the customers we have, we believe these are going to come in and here are the ones that we think are doubtful and that gets us down to our low end.

Bill Ong - American Technology Research

And then my last question is: What's your current cost of capital and how does that compare to what you were paying earlier in the year?

Rick Hill

You know, right now I don't have that right at hand, our current cost of capital. But, I mean, if we had to go out to the market today, I'm not quite sure what you could get it for. But historically it's been around 12% to 13%.

Operator

Your next question comes from [Ganesh Royal] - CREF.

Ganesh Royal - CREF

Your view for 2009, even your best guess scenario is calling for flat. I'm sure your realistic scenario is probably less than that. I wonder why keep the breakeven at $210 or higher? Why not take breakeven down lower further when you are only booking for $180 million?

Rick Hill

Well, I think the reason is based on what you want to do to keep your products in a more competitive position coming out, whether it's three products, four products or five products. And it's not a stagnant number.

Ganesh Royal - CREF

Well, based on my understanding with - and again, this is based on our prior conversations; I understand you are trying to invest in some of the products which are not part of our revenues today and which one could classify a little bit as speculative - why not take actions today and, you know, have a cost structure which can produce enough leverage if things do recover in 2009?

Rick Hill

Well, there's always that opportunity for us to utilize that lever. When we do it, you'll know about it when we announce it.

Ganesh Royal - CREF

Can you just at least help me understand what are the variables that you need to see? Do you just need to see further deterioration in bookings to be convinced that we should cut more or what, besides booking, what else is there that you would like to see?

Rick Hill

Well, actually it's the customers we're dealing with with those products, okay? And to the extent that those customers we're dealing with, who also know this situation, commit to us to make those products successful, then we'll stay in those businesses. To the extent they don't commit to us, then we won't stay in the businesses. It's quite simple.

Operator

Your next question comes from Benedict Pang - Caris & Company.

Benedict Pang - Caris & Company

In regards to the copper transition for the DRAM industry, where do you think that is right now and are you seeing that the customers are having a problem to finance that transition? And do you expect that they'll ask for money from the equipment companies in order to complete the migration there?

Rick Hill

Well, I think that the strongest positioned companies are continuing with the transition. There are some that are falling behind. You will know there's all sorts of trading of who's partnering with who going on in the industry, so you have to sort of see where that falls out first.

I think that those that don't have the cash to finance it themselves are looking at any mechanism possible in order to be able to finance purchases. The reality is we're not of the size to be a bank, and it's very difficult for an equipment company to go out and preferentially loan money to a competitor. We have an array of customers that we've tried to treat evenhandedly, so we try not to treat a competitor of our customer's who's also our customer, we try not to give one preferential treatment. And if you were to go out and loan money to one company at favorable terms, you in essence subsidize that company and therefore you have another customer who has a legitimate beef against you.

And so we don't see us as a viable source of funding for our customers. I mean, our cash is there to be deployed to solve R&D problems that hopefully enable our customers to sell value. We're not here to be a bank. And I think to the extent there are large companies with really large cash reserves and they choose to preferentially deploy capital to competitors in different regions, that's a decision they make. We try to treat all our customers evenhandedly.

Operator

Your next question comes from Timothy Arcuri - Citigroup.

Timothy Arcuri - Citigroup

Relative to the M&A activity that seems like it has to really happen in this space, given your long history in the business, in prior cycles, when does M&A activity usually begin from a cyclical point of view? As I recall it's kind of one or two quarters into the upturn, so people want to see things getting better before they would begin to go out and acquire assets. Is that right?

Rick Hill

I think that's probably an accurate description of what historically has happened. I think that one could reasonably expect to see some players in this industry, due to their cash position and the inability to secure financing, I think you could see people go out of business this time around. And that's something that's not happened in the last 30 years in the industry. And so there is somewhat of a change, so the timing may not be the same.

Operator

And ladies and gentlemen, that is all the time we do have for questions today. At this time I would like to turn the conference back over to Rick Hill for any additional or closing remarks.

Rick Hill

Thank you very much for joining us in this third quarter conference call. We hope that the end of the fourth quarter will show renewed sunshine in the technology sector and in the overall economy. And I hope all of you who are probably suffering a lot worse than we are, I hope things improve for all of you. Thanks very much. Take care.

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