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Ultratech, Inc. (NASDAQ:UTEK)

Q4 2008 Earnings Call

January 29, 2009 11:00 am ET

Executives

Laura Rebouche – Vice President of Investor Relations

Arthur W. Zafiropoulo – Chairman & Chief Executive Officer

Bruce R. Wright - Senior Vice President of Finance & Chief Financial Officer

Analysts

Brett Hodess – Merrill Lynch

Nahol Choksy – Thomas Weisel Partners

Matt Petkun – D. A. Davidson

Operator

Good morning. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to Ultratech's fourth quarter and year-end 2008 results call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the call over to Ms. Laura Rebouche, Vice President of Investor Relations. Ma'am you may begin your call.

Laura Rebouche

Thank you, Rachel. Hello everyone and thank you for joining us this morning for Ultratech's fourth quarter and year-end 2008 results conference call. A press release detailing our financial results were distributed by Business Wire this morning at approximately 5.15 am Pacific and is available on our website at www.ultratech.com. A webcast replay will be available on the website for approximately 60 days after the call.

Joining me on today’s call are Art Zafiropoulo, Chairman and Chief Executive Officer and Bruce Wright, Senior Vice President of Finance and Chief Financial Officer. After management’s opening remarks, we will open the call for your questions. And in preparing your questions, we ask that you focus on one or two questions and any follow-ups on those questions so that management is able to respond to as many of you as possible. And with that I’ll turn the call over to Art.

Arthur W. Zafiropoulo

Thank you, Laura. Good morning and welcome to our fourth quarter and fiscal 2008 conference call. During the course of this presentation, we will be making predictions, projections, and forward-looking statements regarding future events and the financial performance of the company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to the documents that the company files from time to time with the Securities and Exchange Commission, specifically the company’s annual report filed on Form 10-K for the period ending December 31, 2007, and our quarterly report on Form 10-Q for the quarter ending September 27, 2008. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

The fourth quarter of 2008 continued our momentum in profit, improvement in gross margin, increased backlog and generation of cash flow. The fourth quarter earnings increased more than 20% from the third quarter with earnings per share up $0.17. Revenue for the quarter was greater in the advanced packaging product with all AP tools inserted in 300-millimeter fabs.

Second, in revenue was our LSA systems, and the nanotechnology a distant third. New systems book-to-bill for the fourth quarter, was a little bit more than 1.1 to 1. With the LSA 100A representing the greatest portion by about 55% of the total bookings with all these orders from the Pacific Rim. These orders are expected to ship in the second half of 2009 the balance worth of lithography products with the AP systems accounting for 39% and the balance or 6% for the nanotechnology steppers. For the lithography products 80% were North America region and the balance or 20% in the Pacific Rim. Reviewing the full year for 2008, we made very good progress in penetrating the remaining very few companies that have not yet purchased our LSA systems. The remaining two companies are now fully engaged in carefully studying our superb technology and we expect to add them to our list in 2009.

In 2008, we have repeat and multiple system orders from three foundry fabs, two in the Pacific Rim and a repeat order from a European foundry. We have been established as a Tool of Record and a large IDM for the 32-nanometer node including gate-first high-k metal gate. We are also the leading potential supplier for laser microsecond anneal system for major foundry in Asia for their 32-nanometer needs. We believe that one of a junction annealing applications for 2009 will be gambling console sales for 45-nanometer devices.

We also believe that current low fab utilization in the first half of 2009 will delay adding LSA capacity for the 65-nanometer node devices. We also feel that the 45-nanometer low-power mobile applications will be somewhat flat, and delay the LSA ramp in the first half of 2009 due to the current economic crisis. We are very encouraged and that we have more than doubled the number of LSA wafer passes form the same period last year.

We have seen an increase every quarter for the past two years in a number of wafer passes at virtually every fab. Also very encouraging is statistically when that the utilization and virtually all fabs was decreasing in the fourth quarter of 2008. Our adoption of LSA utilization increased in that quarter. An excellent indicator all of these are as we will be adopted in a more significant way by virtually all of our installed base. Currently, we have 10 systems at the 65-nanometer node and 12 systems in the 45-nanometer node in production. It might be helpful that several of these systems at the 45-nanometer node are using up to four passes per wafer and others are close to implementing multiple LSA steps.

We expect to offer our new LSA 101 to specific customers later in 2009. We currently have completed this new system, and is currently in the process of extensive testing before shipping. This system will provide an increased throughput of 35 wafers per hour or a 59% increase. As we had earlier mentioned that our focus is to reduce the cost of ownership making this tool not only the most advanced low stress tool in the market, but having the lowest cost of ownership by a significant amount.

We are also currently working at adding additional capability for LSA 100 system with modifications allowing for the new middle of the line application low temperature annealing of nickel silicide. Initial tests are very encouraging and a large number of our customers are planning to send wafers at the end of this quarter. We have already provided some of these customers with data on our research, which has exhibited excellent characteristics. This application could be added to our existing LSA 100 platform as an upgrade or as a new LSA tool with this option.

However, due to the possible metal contamination the system cannot be used for both junction and formation and nickel silicide together. We believe that this new application provides some upside potential for the second half of 2009. We will keep you updated as to our progress. Regarding how we are stacking up with our competition I can say that this technology that we have today we are widening our gap. Wafer stress and breakage continues to play the flash and other low wavelength concepts.

We’re learning that as the fabs ramp up they will experience greater number of wafer breakage. In some cases it may take more than 24 hours to clean the reactor from these tiny particles. Also we have not been able to fingerprint stress and the impact to yield and there was a direct relationship that increasing stress increases junction leakage and likely reduces yield. We have estimated that the lower stress with the LSA over flash can improve leakage by an order of magnitude. We also believe that at the more advanced note the LSA technology will become the tool and process of choice.

Now moving to our advanced packaging products, we had a very good quarter and an excellent year. For the fiscal year, our advanced packaging bump lithography systems represent the largest percent of bookings totaling 57%. This was an increase from 2007 in new AP system bookings by 68%, LSA increased in new system bookings by 52% and the nano products were about the same as 2007.

Overall all new system bookings had a book-to-bill of more than 1.1 to 1 for 2008. Our ending backlog as of December 31, 2009 was approximately $62 million up about 20% from the end of 2007. During 2008, we developed a new high-throughput bump lithography stepper utilizing a widefield optical lens, which was integrated into our field proven Unity Platform, which provides for more than 30% increase in productivity, substantially lowering the cost of ownership for bump processing. We have also been engaged in a new packaging technology, eWLB Embedded Wafer Level Ball Grid Array also called fan-out, which was developed by Infineon and licensed to STATS-ChipPAC and ASE. We delivered those capability for this application on second half of 2008 and we will ship an AP stepper early in 2009 to the second account.

We expect that this new technology will over the next few years provide a need for dozens of systems. We also believe that our TSV dual-side alignment system is capable of providing advanced technology for this Through-Silicon Via, and we began delivering this technology about three years ago. It is now been installed in three major semiconductor-manufacturing facilities. All systems are in production and we also believe that over the next several years, we will enjoy excellent growth with our AP tools for imaging sensors and 3D packaging. We have also continued to maintain our market bump leadership with over 85% world market share. In our nanotechnology series of low cost steppers, we are focused on the use of our 1X stepper for manufacturing automation and increase shields in the high brightness LED market.

We have delivered over 15 of these tools in the past few years and we've had added another important customer SemiLEDs to our list in 2008. We will provide the worlds lowest cost production steppers at under $1 million, which we believe is essential to reduce manufacturing cost in the price sensitive HBLEDs and other LED applications. This new stepper will have a high throughput with over 80 wafers per hour. Also we have developed a super soft handling system capable of processing full and partial three five compound wafers. This system is capable of conversion from wafers from 2-inches in diameter to 6-inches at the customer side.

So, as the wafer sizes are increased and the number of LEDs are increased the same system can accomplish this with a simple conversion kit, and can be [cut the] change extending the useful life of this low cost projection stepper. We believe that in the next 10 years more than 250 of these low cost steppers will be needed. We are currently completing our market study and expect to introduce this product in the next few quarters. We had a very good year and we believe that the challenges in 2009 will be considerable, but we are up to the task. We had mentioned on our last call that the first half of 2009 would be lower compared to the second half in sales. As you have seen that during the past several weeks, we have made a number of operational changes, which we continue in the fourth quarter and the beginning of 2009.

This has reduced our break-even by more than $3 million per quarter from the fourth quarter of 2008. Some of the actions taken include a salary cut from 20% to 5% for most of the workforce. Reduction of material and subassembly cost from our suppliers, reduction of air travel and a reduction of about 9% of our current workforce. This will not impact our ability to implement and develop our new identified projects or to support our important customers and to bring new products to the marketplace in a timely fashion. With these actions we have significantly lowered our cash flow break-even to a little bit more than $20 million per quarter and our sales break-even a little over $25 million per quarter. Difficulty in determining when the semiconductor capital equipment industry where we cover and we better shape than most and with a superb balance sheet, exceptional leading-edge technology, which will, we will, we believe will be in demand for the next three generations of technology 45, 32 and the 22-nanometer node.

CapEx spending does not go to zero even in the severe down turn, and much of the spending will be for leading edge technology including laser thermal processing and our projection bump lithography systems. 2009 marks the 30th anniversary of Ultratech. And over this period we have shipped more than 2000 steppers. Our company was founded with the focus objective to provide low cost of ownership solutions and our DNA has not changed. We will continue to focus on providing leading technology solutions in our served markets at the lowest possible cost of ownership. At this time I would like to have Bruce provide more financial details for the fourth quarter, and fiscal 2008 with some guidance for 2009.

Bruce R. Wright

Thanks Art. I would now like to go through a brief analysis of our income statement and balance sheet for the quarter, and for the full year, and summarize how we did this. Then we will have the teleconference operator open it up for your questions.

As you have heard from Art's comments the fourth quarter was a strong one for Ultratech although it saw a very slight quarterly sequential decrease in revenue of less than 1%. Geographically, the sequential quarterly decrease in revenue stand principally from Asia-Pacific almost entirely offset by an increase in revenue from North America. Advanced packaging systems in the fourth quarter of 2008 accounted for about 56% of revenue and about 39% of new systems orders. Laser processing systems in the fourth quarter of 2008 accounted for about 25% of revenue, and about 55% of new systems orders. Gross margin in the fourth quarter of 2008 was approximately 50% up from about 49% in the third quarter of 2008. The company ended the year with a total backlog of approximately $62 million up from about $53 million on December 31, 2007.

Turning now to a comparison of the fourth quarter of 2008 to the fourth quarter of 2007. Revenue for the fourth quarter was $34.1 million up about 15% from $29.7 million for the same period a year ago. The company had net income for the fourth quarter of $3.9 million, which represented earnings per share diluted of $0.17. This net income compares with net income of $2.1 million or $0.09 per share diluted for the same quarter a year ago. For the 12 months ended December 31, 2008 revenue totaled $131.7 million, an increase of about 17% from $112.3 million for the total year in 2007. Net income for 2008 totaled $11.8 million or $0.50 per share diluted. These figures compared to a net loss of $1 million or $0.04 per share for 2007.

Turning to the fourth quarter of 2008 versus fourth quarter 2007 comparison of our revenue mix. Systems revenue was up about 21%, and service revenue was down about 7%. For the fourth quarter of 2008 systems revenue accounted for about 81% of the total and service revenue for approximately 19%. Also for the fourth quarter of 2008 about 95% of the business came from the semiconductor industry, and approximately 5% from the nanotechnology sector. For the entire year of 2008, systems revenue accounted for about 78% of the total, and service revenue for approximately 22%. Also for the entire year about 91% of the business came from the semiconductor industry, and approximately 9% from the nanotechnology sector.

Geographically, revenue from North America for the fourth quarter of 2008 was $15.5 million up about 94% from the fourth quarter of 2007 and represented 45% of the company’s total fourth quarter 2008 revenue. Asia-Pacific had revenue of $10.3 million down about 22% from the fourth quarter of 2007 and represented 30% of the total. And Europe had revenue of the $8.3 million down about 2% and represented 24% of the total. Our top five customers for the quarter were advanced packaging customers from North America and Europe and laser processing customers from Asia-Pacific. Overall, the company’s top five customers accounted for 100% of systems revenue. For the entire year revenue from Asia-Pacific was $57.1 million up about 3% from 2007 and represented 43% of the company's total 2008 revenue.

North American revenue was $50.4 million up about 30% from 2007, and represented 38% of the total, and European revenue was $24.3 million up about 35% and represented 18% of the total. The companies top five customers for the entire year were primarily advanced packaging customers form North America, Europe, and Asia-Pacific and laser processing customers from Asia-Pacific. For the entire year the top five customers accounted for about 62% of systems revenue.

Gross margin was approximately 50% in the fourth quarter of 2008, compared with about 49% in the fourth quarter of 2007. For the entire year gross margin increased to about 49%, compared with about 43.5% in 2007. All the increases were due primarily to a favorable product mix shift, lower warranty and installation cost per LSA system and the effects of cost cutting efforts. Looking at operating expenses in the fourth quarter of 2008, compared to the fourth quarter of 2007, R&D as a percentage of revenue decreased to about 17% down from about 19%. SG&A expenses decreased to about 22.5% of revenue, down from about 24.5%. These percentage decreases were due primarily to the 15% increase in revenue along with cost cutting efforts undertaken in the fourth quarter of 2008.

Total operating expenses for the fourth quarter of 2008 decreased to about 39.5% of revenue from approximately 43.5% in the fourth quarter of 2007. For the entire year R&D expenses decreased as a percentage of revenue to about 17.5% from approximately 21% in 2007. And SG&A expenses decreased to about 24% from approximately 28%. Total operating expenses for the year as a percentage of revenue decreased to about 42% from 48.5% in 2007. Operating margin for the fourth quarter of 2008 was about 11% of revenue, compared with about 5.5% for the fourth quarter of 2007, we dropped our operating revenue break-even to a quarterly run rate of about $28 million. For the entire year operating margin was about 7% of revenue, compared to about negative 5% for 2007.

Interest and other income net decreased to $300,000 in the fourth quarter of 2008 from $800,000 in the fourth quarter of 2007. For the entire year interest and other income net decreased to $3 million, compared to $5 million for 2007. Both decreases were due primarily to lower interest rates. The company booked an income tax provision of $100,000 in the fourth quarter of 2008. During the year, quarterly income tax provisions are determined using an estimated effective tax rate for the year. This rate is based on the jurisdictional mix of earnings and have potential to fluctuate as business moves from one geographic region to another. For the entire year the company's income tax provision was $400,000.

Turning now to the fourth quarter of 2008 versus third quarter 2008 comparison of the balance sheet. Cash, cash equivalents and short-term investments increased during the fourth quarter to total about $158 million at December 31, 2008. That means we added over $26 million to the balance sheet in the year of 2008, a record year for Ultratech. Cash is being incurred for any healthy balance sheet and especially in this environment cash is king.

Accounts receivable decreased about 11% during the fourth quarter to approximately $18 million on a shipment decrease of about 28%, compared to the third quarter of 2008. Accounts receivable are a great proxy for two metrics, how well your systems are working in the field, customers don’t pay for systems, which don’t work, and how hard you work to collect cash. Ultratech’s internal goal for DSOs is 50 to 60 days, which is by far the best in the semiconductor capital equipment sector. Our fourth quarter 2008 DSO was 51 days. Even in the current environment we are not extending our standard payment terms of net 30 days.

Moving on with the balance sheet. Inventories decreased during the fourth quarter of 2008 by about 1% to approximately $32 million. Working capital increased to about $184 million at December 31, 2008 up from about $181 million on September 30. Book value per share at December 31 was $8.23 up from $7.99 on September 30. Now let’s take a few minutes to look at the future from a financial perspective. At this point it is very important to recall and underscore the Safe Harbor comments Art made at the beginning of the call. Ultratech’s markets and industry are notoriously cyclical and fully subject to the risks enumerated in the company’s 10-Qs and 10-K. As a result, any forward-looking statements are highly vulnerable to very sudden and dramatic changes.

In addition, the company undertakes no obligations to update information presented in forward-looking statements. Consistent with the comment I just made about high vulnerability to very sudden and dramatic changes, we can all certainly testify to the significantly altered economic situation we find ourselves in, compared to our last earnings release teleconference call three months ago. So, many things are changing so quickly that it is extremely difficult to have any clarity of looking out into the future. As Art mentioned we have approximately six months of business in our year-ending backlog a number, which was up about 20% from year-end 2007. The percentage of laser processing orders and system backlog increased from 47% at December 31, 2007 to 56% at the year-end 2008.

Our book-to-bill ratio in the fourth quarter of 2008 was about 1.1 to 1. Orders in the fourth quarter of 2008 increased about 7% sequentially, compared to the third quarter of 2008. We have seen no order cancellations today and only one delivery push-out, which we expect we will still be able to take into revenue in 2009. So, given what’s happening to everybody else in our sector, our business is holding up pretty well. Looking at the advanced packaging area, our customers are experiencing fab utilization rates of 30% to 50%. The story is simple, global recession leads to decreased consumer spending, which leads to low or high-end consumer electronic sales, which leads to lower fab utilizations rates, which leads to less advance packaging needs.

As a result we are expecting order activity and revenue to be relatively steady across all four quarters of 2009, but down somewhat compared to 2008. In the laser processing area, we expect order and revenue activity throughout the year. However, it will probably be back-end loaded into the second half of 2009 reflecting the six-month push-out of 45-nanometer second-generation ramp. Overall laser-processing revenue in 2009 should be about the same as 2008. Nanotechnology revenue on the other hand should be greater in 2009 than 2008 due to increased sales from high brightness LEDs. For the company as a whole in 2009, revenue could be about 10% to 20% less than 2008. This range could be conservative since it assumes no revenue in 2009 from potential new product applications such as nickel silicide for laser processing as Art spoke to earlier.

Given the projected product mix for 2009, gross margins could see a slight increase. We will remain aggressive in continuing to pull costs out of the organization, which could see a decrease in the operating margin break-even to quarterly revenue run rate of around $25 million to $26 million. Our goal for 2009 is to remain profitable in every quarter and cash flow positive. We are shooting for an EPS number in the $0.30 to $0.40 range. As I mentioned earlier, our current visibility indicates the second half of the year will be much stronger than the first half. What this means for the first quarter of 2009 is that revenue could be down sequentially by about 15% to 25% given the expected product mix, gross margin should improve slightly, compared to the fourth quarter of 2008.

Operating expenses are expected to decrease with the emphasis on SG&A. We anticipate being slightly profitable in the first quarter of 2009 and being cash flow positive. Finally, we would like to wrap up our formal remarks by reminding you of the Reg FD restrictions. In Ultratech, the only three people authorized to talk to you about the company are Art Zafiropoulo, Chairman and Chief Executive Officer, me Bruce Wright, the Chief Financial Officer, and Laura Rebouche, Vice President of Investor Relations. For any calls or questions after the teleconference call dealing with quantitative matters we will refer you back to the comments made during the teleconference call.

That concludes our formal remarks, and now we would like to open it up for your questions. Operator would you please begin the polling.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Brett Hodess with Merrill Lynch. Mr. Hodess your line is open.

Brett Hodess - Merrill Lynch

Hello.

Arthur Zafiropoulo

Hello.

Brett Hodess - Merrill Lynch

Hello can you hear me.

Arthur Zafiropoulo

Yes, we can Brett.

Brett Hodess - Merrill Lynch

Okay, thanks. Two questions Art, first the LSA product line, you mentioned in the press release I think based on the orders, say it looks like you probably booked three units or so in the quarter so does that mean you are going to enter the year with about. I think it's either 5 or 6 units based on the percentages Bruce gave in backlog for revenue recognition this year?

Arthur Zafiropoulo

That sounds about right Brett.

Brett Hodess - Merrill Lynch

Okay.

Bruce Wright

What you can do Brett is it’s a manufacture size with a commentary about the total revenue of $62 million. What I can say as far as 60 - as far as systems backlog and I made the comment about 56% being in LP in addition, about a third is in advanced packaging and you already know the ASPs and so with that information I think you can turn the crank and the number of units will fall out pretty easily for you.

Brett Hodess - Merrill Lynch

Great excellent. Like you said 32% was in advanced packaging Bruce?

Bruce Wright

Yeah.

Brett Hodess - Merrill Lynch

Okay all right. Secondly if you look at the cost structure, obviously it’s much better than we anticipated in the fourth quarter. So, the mix as you roll into this year given the backlog it sounds in the short-term, mix will be largely AP and nano, which has very high margin. But, if the, LSA is the largest portion of the mix as you roll through the year, you must be expecting the LSA margins to be improving quite a bit in the second half when you start to recognize those revenues?

Bruce Wright

That’s a good assumption now, I don’t know how close I want to get to improve a great amount they are - the LSA margins are continually improving that our operating model for the company is for gross margins of 50% or greater in operating margins a 15% or greater and you’ve seen how we kept that this in the fourth quarter from a gross margin standpoint and are approaching very closely that in the operating margin standpoint with operating margins of a 11%. With the margins as you stated being better than the operating model in both nanotechnology and advanced packaging we are seeing continuous increase in the margins for LSA. And they are just getting better and better they are not yet at the operating model level, but we are getting close.

Brett Hodess - Merrill Lynch

And then just you know I know the visibility is pretty low, but if you look at the first half of the year, it sounds like you pretty much vetted out things that could be pushed out or canceled and sort of discounted anything new its really based on. It sounds like things that you have very much in hand, is that a good way to look at it at this point?

Bruce Wright

Yeah, it is Brett however its so unpredictable with some of these people are doing out there and what’s happening say there are companies and they are making decisions on a daily basis. So, that's the best information we have as of right now from the inputs they are giving us. So, we can only share that this information is as good as what they are giving us.

Brett Hodess - Merrill Lynch

Okay, great thanks a lot and congratulations again on a strong finish to the year.

Bruce Wright

Thank you Brett.

Operator

Your next question comes from the line of Doug Reid with Thomas Weisel Partners.

Nahol Choksy - Thomas Weisel Partners

Hi this is Nahol Choksy for Doug Reid. I just wanted to go a little bit deeper into your gross margin in the current quarter. The products went up about 200 basis points, but the services went down almost 800 basis points. Can you just talk a little bit about those two segments sir?

Bruce Wright

Yes what we are seeing is that in this kind of a marketplace and I am referring to the service that companies are trying to watch their pennies and so they are carrying back in both purchase of spare parts, and in field upgrades that’s where we saw the decrease, and I think that the run rates of the fourth quarter in service is a good metric to be able to look at that for the year-end 2009. It's just kind of reflective of the tough times out there.

Arthur W. Zafiropoulo

Yeah, if I can add to that what we are finding at these fabs that are running at lower utilizations they have got a lot of machines that are idle, and they are cannibalizing those machines and putting those parts into the machines that are running and that require the part. So, at some point may be a leading indicator is going to be when the parts business begins to increase when they start going back to these machines it cannibalize to get them operational for the ramp up.

Nahol Choksy - Thomas Weisel Partners

Okay that's helpful. And then with respect to advanced packaging, are you seeing any reduction in interest due to the decline in oil and commodity prices, as may be you are reducing the total cost of ownership attractiveness or is that total cost of ownership attractiveness still very solid?

Arthur W. Zafiropoulo

It's still very solid we think that’s going to be the oil will certainly, we think will increase in time, but at this moment the gold and the oil prices will have a morbid impact longer term than short-term. Short-term is driven these price have been driven by technology so as it moves from the 13% of our wafers being process to a much larger number I think that’s when the gold and the oil will have a bigger bearing on it but today the major drivers for the packaging is technology and not the price of oil.

Nahol Choksy - Thomas Weisel Partners

Okay thank you that’s all I have. Good quarter by the way.

Bruce Wright

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Matt Petkun with D. A. Davidson.

Matt Petkun - D. A. Davidson

Hi, good morning. Art, just a little clarity, what are your expectations obviously you’re expecting more bookings in the back half of the year for the LSA but of the backlog what is – it’s going to be lumpy but what are your expectations as far as linearity through the year for LSA?

Arthur W. Zafiropoulo

Well I think Bruce has covered that fairly well that the first half is going to be less than the second half and the second half we’re expecting to see an increase in shipments and we think that’s primarily due to the 45-nanometer delay in ramping up that we will expect to see in the second half and the increased utilization of the current tools so, [virtually] now in some case utilization well over 80% some cases over 90%. So, we think that in a reasonable timeframe, they will have to purchase more machines because of the additional use of our systems. So, but we think that they will work harder to try push that as far as possible, but we think that the second half based on what we know today looks, looks significantly stronger than the first half in LSA.

Matt Petkun - D. A. Davidson

Okay, great. And then Bruce if you gave it I missed it. What you saw total backlog up from year-over-year what percentage of it is up, but to what degree?

Bruce Wright

Yeah. About 20%.

Matt Petkun - D. A. Davidson

Okay. So, in that, there maybe one or two small cancellations this quarter?

Bruce Wright

No, no cancellations. And in fact the comment I made was zero cancellations and only one system push out, which we still expect to be able to take into revenue in 2009.

Matt Petkun - D. A. Davidson

And so, historically there has been challenges more assessing individual customer's strength, you feel like you have scrubbed that backlog pretty well, I assume at this point?

Bruce Wright

Yeah. What we do because we only publish backlog numbers at the end of the year, as we have a very explicit exercise at that time and the time is now, where we go in and if we see any kind of comps at all about something in the backlog it comes out. So, this is a stringently scrubbed number and you also know that we have a conservative bent on how we do projections and look at guidance. And as I indicated in a comment, our guidance statements are not only based on a very stringently scrubbed backlog going into the year, but we don’t have any of the potential upsides that are kind of new or kind of the [FE] that we don’t have our hands around and one are the ones that I referenced specifically was nickel silicide applications for LSA.

Matt Petkun - D. A. Davidson

Great. And then Art you gave a comment about bright LED being an area of relative strengths and in the upcoming year was that from a revenue or bookings perspective I need some clarity on that comment?

Arthur W. Zafiropoulo

More of a trend, we have been in this business for a couple three years now and delivered products into the Pacific Rim and have been in production at several sites and we believe based on everything we know today that the high brightness LED area is going to grow substantially and its going to be a significant program to reduce energy consumption, but today more than 20% of the energy is consumed by light and the applications like traffic lights et cetera, PCs is a very small fraction of the potential. So, we believe that this market is going to grow considerably at a compound annual growth rate of more than 35% a year at which time they will need to drive the cost down from home lighting and to do that CapEx equipment got to be reduced and that’s why we are focusing on our steppers to lower the price of these steppers, so that they can improve their cost numbers in terms of depreciation for the next generation of commercial and industrial and home use of high brightness LEDs. This is a very exciting market. We think the potential is larger for this company than the thin-film head industry that we captioned have shipped more than 250 machines over the last 15 years. We think the potential here is larger, but we are back studying it to make sure that we understand it thoroughly and so that we believe that this is a great opportunity for a low cost projection stepper and this particular model, this variation of it we have shipped about 1,500 systems, but not on the cost basis that we are talking about today. So, the people are trying, the manufacturing bill cycle is very short, the margins are very good. So, we believe that we can offer a great solution at a very low cost and have a decent margin for this company going forward.

Matt Petkun - D. A. Davidson

Okay, great thanks.

Bruce R. Wright

And Matt. Additionally, to reference one of the comments I made in this area, the real message on nanotechnology and high brightness LEDs were that over the years, our nanotechnology percent of revenue has decreased following the thin-film head market down to around 10% of total revenue. What was really behind my comment for 2009 is, now we are seeing in this high brightness LED market start to come in, in our revenue stream. It's not going to be tremendous in '09, but the sector is going to be up and we are going to be seeing revenue from that and it’s kind of the start of this trend that Art just referenced.

Matt Petkun - D. A. Davidson

Okay. I guess my question on that is from a bookings perspective, the high brightness LED hasn't been a huge driver for 2008?

Arthur W. Zafiropoulo

And it won't be a big driver for 2009.

Matt Petkun - D. A. Davidson

Okay, it's just a more. I mean I completely agree with the long-term assessment. I just know that some of the other vendors of deposition equipment in this market are still seeing their customers experiencing oversupply. And that’s more related to the things like backlighting unless interior elimination.

Arthur W. Zafiropoulo

That’s a different application. We talked about high intensity commercial lighting and so backlighting is a very small fraction and those are typically I hate to use the word garage operation, but these are not big operations that are investing huge amounts of money in CapEx spending to expand their capacity. So, we believe that this is a beginning and looking at the straight bookings aspect, my feelings are that the laser technology should really begin to show some booking strength this year hopefully far greater than we’ve seen in last two or three years. And if this nickel silicide takes hold likely believe it will, than we don't see a very strong second half in bookings on LSA.

Matt Petkun - D. A. Davidson

Okay, fantastic. Thanks so much.

Operator

There are no further questions at this time. I’d now like to turn the call back over to management for closing remarks.

Arthur W. Zafiropoulo

Thank you very much. During the fourth quarter of 2008 and the first quarter of 2009, we’ve focused on reducing our break-even cost. We have significantly improved operational efficiencies and had exceeded $500,000 in sales per employee in the past quarter. We will continue to examine all ways to further reduce our operational cost during the year and to further add shareholder value. On the product side, we will introduce our new LSA 101 high throughput laser anneal tool, increasing productivity by 59%. We will introduce a new AP300 wide field tool reducing cost of ownership and increasing throughput by more than 30%. We will also introduce a new capability for LSA 100 to process at low temperatures virtually stress free annealing of nickel silicide films. We will also introduce a new sub $1 million low cost projection stepper for the high brightness LED market. We are very focused and we will continue to drive to further improve our balance sheet, improve margins, and provide significant value for investors, customers, and employees. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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