Executives
Robert Halliday – EVP & CFO
Gary Dickerson – CEO
Analysts
C.J. Muse – Barclays Capital
Patrick J. Ho – Stifel Nicolaus
Edwin Mok – Needham
Ben Pang – Caris & Company
Jenny Wu [ph] – JPMorgan
Stephen Chin – UBS
Varian Semiconductor Equipment Associates, Inc. (VSEA) F1Q09 (Qtr End 01/02/09) Earnings Call Transcript January 29, 2009 5:30 PM ET
Operator
Good day, ladies and gentleman, and welcome to the first quarter 2009 Varian Semiconductor Equipment Associates Incorporated earnings conference call. My name is Amiti and I will be your coordinator for today.
At this time, all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference. (Operator instructions) I would now like to turn the presentation over to your host today’s call, Mr. Robert Halliday, Executive Vice President and Chief Financial Officer. Please proceed, sir.
Robert Halliday
Good afternoon. I’m Bob Halliday, Varian Semiconductor’s Chief Financial Officer. I want to thank you for joining us for our fiscal 2009 first quarter conference call and web cast.
With me on the call this afternoon is Gary Dickerson, our Chief Executive Officer. Before getting into our financial results, we want to remind you that during the course of this call, we may make various comments about the company’s future expectations, plans, and prospects. These forward-looking statements are subject to various risks, including those detailed in the company’s public filings including our most recent 10K filing. The company cannot guarantee that these forward-looking statements will actually occur and we assume no obligation to update these forward-looking statements.
Our prepared remarks today will include the overall business outlook, the continuing actions that we are taking in response to the external environment, and our internal initiatives to grow faster and more profitable.
Now I will review the results for our first quarter ended January 2, 2009.
First quarter 2009 revenue at $107 million dollars approximated revised guidance and declined 24% sequentially from the fourth quarter of 2008.
Lower first quarter revenues were due mainly to the continuing fall in memory and foundry spending including a substantial drop in spare parts sales.
During the quarter, sales to 2 major logic companies including one customer in Japan, each accounted for 10% or more of our total revenue.
Let me give you some additional color on our recent customer mix. In the first quarter of 2009, unit shipments were approximately 23% memory, 65% logic, and 12% foundry. This compares with a year ago when our customer mix was 82% memory, 9% logic, and 9% foundry in the first quarter of fiscal 2008. In absolute terms logic sales in the quarter approximated our quarterly run rate over the last two years. These customer mixes and statistics continue to underscore that Varian has a much stronger position with logic customers than it did just a few years ago.
First quarter 2009 net loss of $14 million or $0.19 per share was in line with our revised guidance. This loss includes about $6 million in restructuring charges and $0.08 [ph] loss in EPS. This loss also reflects $900,000 of charges related to a recently insolvent memory customer.
The geographic breakdown of our revenue this quarter based on fab location was Asia 52%, North America 37%, and Europe 11%. During the first quarter, we recognized revenue for two PLAD tools at two different customers, including the first PLAD revenue tool in Taiwan. Our installed base of PLAD tools has now reached 37. This installed base includes five customers that have bought multiple tools. A major memory manufacturer has placed multiple tools into production at four different fabs. Three other customers have either bought single PLAD tools or currently have them under evaluation.
First quarter 2009 gross margin was 37.1% in line with our revised guidance. First quarter margins declined from the fourth quarter of 2008 due to a 32% drop in our aftermarket business as customers struggled with the downturn, factory variances including inventory write-downs, and an unfavorable product mix, namely more high-energy and less PLAD sales.
R&D expenses of $22.1 million were lower than our guidance of approximately $23.5 million due to cost reduction actions. R&D reductions have been primarily focused on our sustaining engineering projects in order to maintain our investment in growth projects and key product development.
Marketing, general and administrative expenses decreased by about $6 million from the fourth quarter of 2008 to approximately $26.8 million due to cost reduction actions.
Operating expenses also included approximately $6 million dollars in restructuring charges primarily for personnel reductions and a facility closure.
Our first quarter tax rate decreased to 0% from 54.9% in the fourth quarter of 2008.
At the end of the first quarter, our full-time equivalent headcount was 1,393 down from 1,739 at the end of the fourth quarter of fiscal 2008. This decrease was due to headcount reductions made in all functions and regions including the closure of a sales office in Europe. Our headcount was 2006 at September 2007.
Our cash and investment balance increased $6 million in the first quarter to $283 million.
First quarter 2009 capital spending was $2.4 million and approximated guidance.
Depreciation expense for the quarter was $4 million.
The sum of our quarterly R&D and MG&A expenses was $59.9 million in the fourth quarter of 2008. This quarter these expenses will be about $17 million and less than the fourth quarter of 2008 or 28% reduction in two quarters.
I will now provide an update of what we've done to reduce our breakeven point and the strategy that guides our actions. On the cost side by March 31, 2009, we will have had nine shutdowns or complete holiday weeks over the previous nine months, reduced headcount by approximately 36% from the end of fiscal 2007, implemented a salary freeze, enacted salary cuts for all executives and higher paid employees, eliminated bonuses, suspended our employee stock purchase plan, eliminated our 401(k) match, closed a sales office in Europe, severely curtailed all discretionary spending, including travel, and given notice to landlords on leased properties.
Strategically this downturn and our reaction to it is different than past industry downturns. Our industry shipments peaked around June or September of 2007. We had already been running leaner for about a year when the widespread financial and economic collapse hit in September of 2008. Because these economic problems have been so widespread across the economy and prolonged we have reacted differently. We cut our spending even faster and harder starting in the September 2008 quarter. We have used techniques like shutdowns, salary freezes, and set to play eliminations, pay cuts, four-day work weeks and no 401(k) contributions much more aggressively than in the past. These actions are unpleasant and hard on the organization but they have allowed us to keep the organization much more intact for the future, a future about which we are ultimately quite optimistic at Varian.
It will probably be helpful to give you some insight into our limited current visibility and how it compares to past trends. In past downturns, spare parts sales exclusive of upgrades and contracts have been an indicator of where the business is heading. Our customers are obviously consuming significantly less parts than they were several quarters ago but we also suspect that customers are purchasing even less than they consume as they have conserved cash by drawing down their inventories and sometimes even taking parts off of shutdown tools.
Customers cannot indefinitely consume more than they purchase. We are hopeful that spare parts sales bottom early in the year perhaps in the March or June quarter. Some people believe that wafer starts bottom in March and that would certainly be helpful for part sales. In 2001, 2002 parts sales dropped to about 44% of the peak approximately three quarters after the peak of parts sales. Although the data can be volatile our model indicates that part sales might hit 42% of the peak in this quarter which would be four quarters after the peak.
We volunteer this information in response to questions we get from investors about visibility. The large disclaimers are our visibility still remains almost non-existent. The macro conditions including financing options for our customers remain very tough. And we are yet to see many positive signs on capital spending.
In the second quarter of fiscal year 2009, we anticipate revenues of between $60 and $70 million dollars. Included in the revenue guidance is the expected sign-off of our first VIISta HE. As all the other semi companies have already told you, the decline is pretty much across the board at memory, logic, and foundry companies. The largest percentage declines are generally being seen at the smaller customers and those customers with a more immediate need to access the capital markets.
In the second quarter, we anticipate that tool shipments and units will be approximately 22% memory, 56% logic, and 22% foundry. We anticipate that gross margins will decrease to between 32.5% and 33.5% in the first quarter of fiscal 2009. This will approximate 4-point gross margin reduction for the first quarter is due to lower overall volumes and generally unfavorable tool and customer mix. We project part sales to decline but this may not have an adverse impact on overall margins as nonsystem sales as a percentage of the overall may actually increase with the significant decline in system traverse [ph].
In terms of operating costs, we continue to address cost reduction issues aggressively. These efforts translate into the following reduced expense targets. We expect that R&D expense will decline by more than $3.5 million dollars to approximately $18.5 million in the second quarter. We anticipate that marketing, general, and administrative expenses will be cut by over $2 million to $24.5 million in the second quarter.
As a result, in the second quarter of 2009, we expect to lose between $21 million and $25 million pre-tax, including almost $2 million dollars in restructuring charges. Included in the expenses for the second quarter will be non-cash charges related to depreciation and equity compensation expense of approximately $10 million.
We will have a tax benefit of about $800,000 for the quarter. Expected EPS will be a loss of between $0.28 and $0.32 per share. Included in this loss is about $0.01 from restructuring charges.
We expect CapEx expenditures in the first quarter to be approximately $2.5 million, mostly for marketing and IT improvements. In the second quarter we expect to generate approximately $48 million in cash. Just in the first few weeks of this quarter we have collected over $50 million in accounts receivable.
Now I’ll turn the call over to Gary for his remarks.
Gary Dickerson
Thanks Bob. There are four major areas of focus for us in this downturn. We will manage our cost structure and increase our organizational productivity and effectiveness to ensure that we will remain in a strong financial and competitive position. We will drive adoption of new applications that will improve device performance and yield to increase overall implant TAM. We will widen the market share gap with competition and drive growth into new markets inside and outside the semiconductor business.
Bob had discussed many of the specific actions that we are taking to drive cost reductions across the company. These actions ensure that we will continue to be in a strong financial position regardless of the length of this downturn. We also continue to drive improvement in effectiveness and productivity in all areas of the company. Virtually every senior manager is driving a project to either grow the existing business, develop new markets or products or to improve operating margins.
In engineering, we have implemented initiatives that have resulted in a 30% reduction in the engineering cost to produce new components. And in a significant increase in the reliability of our new products as evidenced by the success of our first new VIISta HE system that was qualified in running volume production in approximately one month after installation.
This cultural commitment to drive continuous improvement in engineering productivity combined with our common Vista platform helps to further widen the gap with our competitors. In addition to the improvement in engineering productivity we are also using the downturn to drive operating margin improvement programs in manufacturing, supply chain, and customer service.
In manufacturing and supply chain we have many lean teams on programs that reduce cycle times, expand the use of smart chip across the majority of our shipments to enable us to do final assembly at the customer sites, develop critical suppliers and implement alternate materials and sources and improve the speed of our product development process and the reliability and cost of our new products.
In customer service we are developing new upgrade products offering new service products including 200 mm conversion programs and developing alternate materials and sources for parts.
We also have people working seven days a week on new products that widen the market share gap, adoption of new implant applications and growth in new (inaudible) especially disruptive growth has actually increased a significant amount during the downturn. A lot of the new markets, new applications, product development and disruptive technology efforts are some of the most exciting things on which we are working but they are also the most highly differentiated and confidential. We will provide more details into these opportunities as we begin to penetrate these new markets later in 2009.
I will now discuss progress we are making with new market opportunities. Our new recent addition to the VIISta product portfolio, the VIISta HE has hit the ground running. In fact after being in the market for a little over six months we will receive formal acceptance of the product this quarter at a major Korean memory manufacturer. The tool was up and running in 10 days after it arrived. It is run more than 1 million production wafers since May 2008 and achieved up times greater than 98%.
The VIISta HE enables true zero degree high-energy applications. True zero degree implants enable increased packing density through eliminations of area consuming shadowing, thereby increasing our customer's bottom line. True zero implants also reduce well leakage, which can result in longer battery lives and faster devices.
Even in this tough market, our VIISta PLAD product continues to break new ground. The first tool shipped to a Taiwanese DRAM manufacturer has been signed off and achieved production status. We expect the same customer to take additional tools in 2009 and negotiations with another Taiwanese customer are close to completion. Another area of emerging opportunity is in Japan. We have one production high current business at a major NAND flash company and we were recently selected for their advanced pilot line for development of next-generation devices.
Unfortunately the market conditions are not resulting in high-volume production orders at this time but we are in a great position when the market picks up again. We are also seeing good progress in Japan with the CMOS image sensor market. We are pursuing four distinct opportunities with three different products which will enable improved device performance and image quality. With our VIISta PLAD product we have shown that we can provide conformal doping across shallow trench isolation structures achieving a 40% reduction in dark current. That provides an improvement in the signal to noise ratio and image quality.
Our VIISta 900 XP median current implant provides superior micro-uniformity performance resulting in additional reduction in dark current variation across the chip. Our better micro-uniformity comes from higher frequency electrostatic scanning of our ion beam which reduces variation of the implanted species.
Finally our single wafer VIISta high-energy tool enables lower leakage in higher performance devices. The CMOS image sensor market is a great example of how we have designed products that have the ability to penetrate new markets and grow our business.
Varian has a unique position in providing enabling technology for transistor engineering and interface engineering for new devices. We continue to make progress on several new applications. We have seen device validation at several customers of the value of damage engineering to improve contact resistance, drive current and device leakage. We installed our first damage engineering upgrade in the field this quarter and in 2009 we will expand this out to other key memory and logic sites. Additional implant steps to create strain and improve device performance for NMOS transistor will move into production for 32 nm devices.
Also at the 32 nm logic node we will see implant in production to improve the (inaudible) silicon interface, perform a multi step halo median current plans to improve device leakage and new implants to improve contact resistance. For DRAM devices there is a trend towards a significant increase in data exchange speed. This drives the transition at the 3x node from low dose LDD implants to high-dose logic-like source/drain extension implants and co-implants. This is a significant opportunity for TAM expansion.
Other opportunities including additional steps in litho, etch, and back-end applications are in various stages of adoption with large logic and memory customers. We have a very strong technical team that is fully engaged with customer R&D and device engineers to drive these applications into production. In 2008, we forecast that our market share increased to about 68% and we anticipate that we will continue to drive higher market share in 2009 and beyond.
The current market situation is very challenging and I want to thank all of our employees for their passion and driving initiatives that will widen the gap with competition, drive adoption of new implant applications, and enable penetration into new markets that provide significant growth opportunities for our company.
We are now happy to take your questions.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of C.J. Muse of Barclays Capital. Please proceed.
C.J. Muse - Barclays Capital
Hi, good evening. Thank you for taking my question. I guess first, first question on the cost-cutting side, can you talk about your plans I guess beyond this 43 million OpEx level and where you see that getting to by the second half of calendar 09 and what kind of breakeven we should anticipate for revenues.
Robert Halliday
Sure, we have cut really hard and fast C.J. I think we have cut as hard as everyone. We will be at 43 this quarter. I think as of now we are trying to turn down just a little bit more in Q3, Q4 but we would like to see a little bit more visibility before we commit to cut a lot more.
C.J. Muse - Barclays Capital
Okay.
Robert Halliday
Breakeven, if you say we can get back to -- so cash breakeven right, so it is got $43 million of expenses. We've got like $2 million of interest income is 41 and we've got about $10 million of non-cash stuff but if you're saying we're spending too on CapEx that is 33 of sort of cash burn right. We think the gross margins are low this quarter. So if you just multiply by 37.5 we are in the high 80s in terms of breakeven.
C.J. Muse - Barclays Capital
Okay helpful. In terms of your single wafer high-energy tool in the true zero implant is there a node where you could see technology bias there as supposed to just pure capacity.
Robert Halliday
We're making good progress with some additional large customers. So I think that we will see in 2009 the opportunity to penetrate high-energy with some of these customers. So I would say in 2009 we've got a great chance to penetrate some large customers and also even more as time goes on but I think this year and next year is the timeframe where we will see that transition.
C.J. Muse - Barclays Capital
Okay and then last question for me on the PLAD side of things considering to-date that is really a DRAM application, are you still saying new orders there and I guess how should we think about that business for calendar ‘09 relative to calendar ‘08?
Robert Halliday
Yes we are seeing -- we will try and get some new orders. We have I guess one eval tool out there -- we are optimistic that. So I think we will get new orders but I think it'll be under the ’08 numbers in 09 just because DRAM is so soft this year.
C.J. Muse - Barclays Capital
And what was the -- at the end of the calendar year what was that number?
Robert Halliday
I don't know -- the fiscal year which was September 30th was at 88 or 80, it was about 80. So, it will be down from that.
C.J. Muse - Barclays Capital
Thank you.
Robert Halliday
Yes.
Operator
Your next question comes from the line of Patrick J. Ho with Stifel Nicolaus. Please proceed.
Patrick J. Ho - Stifel Nicolaus
Thanks, one housekeeping question Bob. Do you have the stock options breakdown?
Robert Halliday
Yes, sure, I have it right here. We have, let us see, cost of -- well we have cost of product revenue and cost of service revenue both COGS, the two of them together about 548,000. Research and development is 1274, MGA is 4027 and then it is a credit to the tax line at 214. So the total cost of net income is 5635.
Patrick J. Ho - Stifel Nicolaus
Great thanks a lot. In terms of the cash run rate obviously you guys, it looks like you're still going to be generating cash. How long do you think that is sustainable just based off the inventories reduction as well as your AR?
Robert Halliday
We think all this fiscal year and possibly -- we modeled ’10 yet, but it looks like all this year okay.
Patrick J. Ho - Stifel Nicolaus
Okay, so you still think you'll be cash flow positive for fiscal ‘09.
Robert Halliday
Yes.
Patrick J. Ho - Stifel Nicolaus
Gary maybe this question is for you in terms of just the cycles and technology buys given your background at KLA-Tencor, what has been your take or how far have technology buys been paired back on your end today versus say previous cycles.
Gary Dickerson
Well obviously your capacity buys are almost non-existent at this point and I would say right now there is a reasonable degree of uncertainty even with our customers to the point that even technology buys are being cut back more than I've seen in past cycles.
Patrick J. Ho - Stifel Nicolaus
Is it a magnitude you have never seen before; is it quite significant where even some of your larger customers are the ones also cutting back in terms of technology buys?
Robert Halliday
Yes, I think -- certainly we have seen the -- even the large customers significantly slow down spending even on technology buys and of course you've got a whole group of customers out there. They are still trying to figure out what their business model will look at -- look like going forward. So I think in both cases we see technology buys maybe not being at where there were at in previous downturns.
Patrick J. Ho - Stifel Nicolaus
Great and final question from me, in terms of the DRAM market you know we are hearing a lot of talk about potential consolidation, how do you feel you guys have positioned yourselves in terms of who the winners might be on a technology basis, do you feel you're well positioned with the guys who are likely going to merge coming out of consolidation.
Robert Halliday
Yes I think if you look at the potential consolidators that actually could be very positive for us because we have a very strong position across all of our product lines with those customers. So nobody knows exactly how that is all going to turn out but I would say for the most part again the consolidators were in a very strong position with those customers.
Patrick J. Ho - Stifel Nicolaus
Great thanks a lot guys.
Robert Halliday
Welcome.
Operator
Your next question comes from the line of Edwin Mok with Needham. Please proceed.
Edwin Mok – Needham
Hi thanks to take my question. So first as we got into a flat market I guess, Bob I was just curious based on my calculation you have three tools that you have not recognized revenue yet, when do we expect that do you expect to ship any PLAD tools for the coming quarter?
Robert Halliday
I don't think we have three. I think we've just one or two. And I think we will get a couple of PLAD tools roughly every quarter.
Gary Dickerson
I think the one thing on the PLAD market today is it's mostly DRAM focused and unfortunately again there is not a lot of capacity buying for those DRAM customers.
Edwin Mok – Needham
I see, great. And I have a question regarding the logic market, you know Gary talk a little bit about how in the 32 nm logic applications, our new applications for (inaudible) strain engineering, can you quantify that may be saying how many more additional implant steps there will be from 45 to 32 if a customer wants to convert a fab from 45 to 32 and what kind of opportunity can you get out of that?
Gary Dickerson
So strain engineering is actually a fair amount of capacity. I think we had estimated that it could be up to 30% additional capacity just for the strain engineering type of application. I don't have a number off of the top of my head in terms of the 45 to 32 nm exact transition. It also depends on the device integration scheme for each customer. The customer that is farthest ahead in terms of the transition again is the strain application for NMOS transistors will ramp into production. The (inaudible) silicon interface that will also ramp into production, the multi-step halo implant, all of them are incrementally positive for us. Again other customers, it really depends on what their final integration scheme is but in all of those different cases they are all positive for us.
Edwin Mok – Needham
Is it fair to say that even if a customer just converts from 45 to 32 and you will get some incremental business from that side?
Robert Halliday
I think that is correct, yes.
Edwin Mok – Needham
Great and then a question regarding kind of upgrade opportunity. I think during the analyst day or earlier in the year you guys talked about there is some potential upgrade opportunity in the coming year which means 2009. You know, given the environment do you still believe that you can get some upgrade opportunity here for this year and see growth in upgrade and have a follow-up on that.
Robert Halliday
Sure, we actually are getting upgrades still every quarter and there are pretty healthy amount. There are in our non-systems number but we don't think they will be as big as last year. Especially the -- obviously the productivity upgrades will the fabulization where it is at right now definitely those upgrades are not selling anywhere near what they were say a year ago. We have device performance and yield upgrades that we are still focused on with customers but the productivity upgrades were a fair percentage of the upgrade business and those are obviously off quite a bit with the low capacity utilization.
Gary Dickerson
I think we have some 200 mm upgrades buried in there where you can take a 200 mm tool by numbers and (inaudible) 300.
Edwin Mok – Needham
Great and then my follow-up is regarding kind of the (inaudible) business, you know, obviously has fallen because of low utilization but given your guidance of $60 million to $70 million is it fair to say that that piece of -- that combined piece of business potentially giving more than half of that guidance range or half of the guidance revenue.
Robert Halliday
It's pretty -- you are in the ballpark -- you're pretty close.
Edwin Mok – Needham
Great thanks.
Gary Dickerson
I think just one more comment on the -- on the spares as Bob said basically people are -- with many tools shutdown you are seeing customers even in a non-consumable business we have seen that fall off and people are cannibalizing some of those systems. So that cannot continue to for ever. One thing that we have seen, we track parts sales on a weekly basis and for the first time in a long time we have seen that actually tick up for a couple of weeks. So who knows whether they were actually at the bottom or not but it can’t continue where people are consuming more than they are purchasing.
Operator
Your next question comes from the line of Ben Pang with Caris & Company. Please proceed.
Ben Pang - Caris & Company
Thanks for taking my question first to follow up on the PLAD, given your expectations for the volumes do you still expect to see an impact on the gross margin between the mix of PLAD and the other tools?
Robert Halliday
There is a slow -- a little bit of a down drop to gross margins in the March quarter in the mix of tools. High-energy is pretty strong in the quarter, hurts a little bit. Medium kind of little bit weak in the quarter (inaudible). PLAD in absolute dollars is down in our call, as a percentage of tools it is pretty healthy but as a percentage of overall revenue it is down. So yes, fundamentally you are right.
Ben Pang - Caris & Company
Okay and in terms of the spare parts situation, I guess I was little bit confused by the last comment that Gary made, if you are starting to see the up tick right now on a weekly basis on the spare parts is that an indication actually that that the tool utilization rates are getting back up to a healthier level.
Robert Halliday
Well this -- go ahead.
Gary Dickerson
Yes I think again as Bob said before people were conserving cash and consuming more than they were buying. So at some point they obviously can’t keep doing that and that certainly we have seen here over the last quarter or so.
Ben Pang - Caris & Company
I mean do you guys have a view on what the industry utilization rate is in the second quarter, calendar?
Gary Dickerson
Well, we are not experts on it. Our take is utilization softened in the March quarter and we hope that is the bottom. What it translates most directly to us is the spare products and let me give you some more color on that Ben. We project that our spare part sales and service, non-system sales are going to be down somewhat this quarter, but we are seeing -- we saw a couple of weeks in a row that were pretty good and we think we are bordering on that. Now what hurt you a little this quarter too is you get the Chinese New Year and everything in terms of spare parts sales? Now are we thinking of spare parts sales because they are getting high utilization or they just don't have any inventories use up. We are a little bit more in the camp but right now they are just -- they don't have any inventories or parts they can use up or tools they can cannibalize. We are hopeful that later in the quarter it is driven more by utilization.
Ben Pang - Caris & Company
Fair enough last question. If you look at the percentage of implant equipment versus total WFE, do you believe that that percentage will be the same in 2009 versus 2008?
Robert Halliday
There is a bunch of stuff that goes into that. I will tell you what I'm a little worried about. Some of you guys have heard this but an implant is a very flexible tool. So the good part of being a flexible tool is that frankly we are pursuing new applications in new markets where we don't have to do huge amounts of engineering because you can do a lot of different things with that tool without a hold on whole new tool redesign. The bad thing about flexible tools is it is flexible. So you can transition between nodes, you can even do a 200 mm, 300 mm upgrade we talked about without buying a whole new tool. It is a very profitable upgrade for us but it is still an upgrade rather than a whole new tool. So my take is that in a hard capacity downturn we're getting hit on capacity and some of the incremental TAM opportunities and sales that we have from a flexible tool are farther out, you know, 1.5 or 2 years out. We may actually ship some tools this year for some of those new markets, but they are not going to move the revenue needle. So I'm a little worried that we are a little bit off because of big time capacity downturn this year. Because we are not getting the big technology buys this year.
Ben Pang - Caris & Company
Fair enough. Thank you very much.
Robert Halliday
Welcome.
Operator
Your next question comes from the line of Jenny Wu [ph] with JPMorgan. Please proceed.
Jenny Wu – JPMorgan
Hi, good afternoon. Can you talk about your competitive positioning, how are you capitalizing on Axcelis’ weaker position and do you think there will be a ramp this time next year?
Gary Dickerson
We for the last several years what has driven our competitive position whether it is via -- versus Axcelis (inaudible), who has got the best products and we have made a hell of a lot of traction on having just better products and support for our customers such that even before this downturn in the financial challenges we all including Axcelis have had, we just had a lot of momentum on the product side. I think my inference is that their competitive position has been hurt incrementally by their financial challenges. But frankly when we shipped our new high-energy tool last year and it ramped so well that gave us a pretty good position even in high energy where they had historically been strong and we're gaining a fair amount of progress in Japan. Also where I have seen they have been strong. So I think we are in pretty good shape regardless of this sort of additive.
Robert Halliday
I think one other thing is that this market is very, very tough on small companies, even tougher on those companies from a survival standpoint because there is not that much business out there. We gained share last year and again we believe our market share increased to about 68%. We forecast that we will continue to increase market share this year and again the business is just not that big. So it is much, much harder on smaller companies.
Jenny Wu – JPMorgan
Your -- how do your customers feel though about like second sourcing, do you think they are going to come in and try to help which fellow survives or they kind of having to deal with their own problems right now?
Robert Halliday
I think there was more of a customer's consideration a couple of years ago. I mean there aren't -- I think the better product wins and I think they have now become incrementally concerned about the environment of these small companies.
Gary Dickerson
And I think the other thing is that the volume that is coming from any one company is not going to make or break any supplier. So I think that if anything the downturn makes them more concerned from buying from a small company that may not be around.
Jenny Wu – JPMorgan
Right, okay fair enough. And then just -- just one last one do think you are at a maintenance level of shipments in the March quarter or what could happen to make it go down even more?
Robert Halliday
Maintenance level I will give my opinion. Maintenance level of shipments is an interesting concept and some people give a statistical number on it. I think when you can pretty quickly you have to go from the general to the specific and reasons are so few customers. So that made you have to look at specific customer buying patterns. We are hopeful we are near the bottom on systems but we are not at all sure because there is only so few customers buying in a base [ph] delivery or they don't buy anything you could keep going down.
Jenny Wu – JPMorgan
I see. So it is still a pretty concentrated level of maintenance shipments.
Robert Halliday
Only a few people are spending money right now.
Jenny Wu – JPMorgan
Got you. Okay great, thank you.
Robert Halliday
Thank you.
Operator
(Operator instructions) And your next question comes from the line of Stephen Chin with UBS. Please proceed.
Stephen Chin – UBS
Great thanks. Hi Bob, hi Gary. Just following up on the cost-cutting programs do you think there is still more room to lower the cost of goods line even further? I mean you have been able to flex that down to about $45 million -- into the $45 million range but quickly just wondering I think there is more room to drive costs out in the factory?
Robert Halliday
Yes we have actually cut costs really, really hard in the factory, very hard. Probably now just there is no volume. So I think we continue to reduce cost and there are a couple of costs there. One reduce our material costs per unit and we're, we're doing more outsourcing, more cost reduction and it is pretty successful actually, we are doing more outsourcing opportunities in Asia. So material costs I think will continue to downhill and in terms of the second one which is sort of overhead costs. We have cut those pretty hard. I'm not sure how much more room there is in there. So I think what we need now is little bit of volume frankly.
Stephen Chin – UBS
And then the second question on the balance sheet I think Bob you called out that about $50 million of receivables were collected so far in January. Were those recent collections mostly from memory customers and would you expect to the DSOs to track back down to the 80 day range in this March quarter?
Robert Halliday
We collected from everybody and the $50 million. DSO I think will improve somewhat in Q2 but I don't think they will get down to that level because sales are down. So if you do a trailing indicator you just have a lousy denominator or whatever it is. So, we expect to reduce the receivable balance by a pretty fair amount but the DSO calculations get hammered by the sales volume.
Stephen Chin – UBS
And maybe just a follow-up to that so are the remaining receivables, are those mostly from DRAM customers, are they spread across the gamut of customers, and also what you are think your shipments will be?
Robert Halliday
Well, that is spread out all over.
Stephen Chin – UBS
Okay, thanks then, nice job on the cash flow.
Robert Halliday
Thank you.
Operator
I would now like to turn the call back over to Mr. Robert Halliday for closing remarks.
Robert Halliday
I want to thank everyone for joining us today. We know this is a difficult time for our industry, difficult time for investors, difficult time for analysts who cover it. We are very mindful of our responsibility frankly to all of you folks and we try to be very responsive to all of you and to our customers and employees who are listening in a tough time. I will reinforce even though businesses is terrible and the weather is terrible here in Gloucester also, you all are welcome to visit us in Gloucester and see some of the exciting stuff we are doing, have a tour, talk to us personally because we do have an open door policy here and we appreciate your support in this environment. So thanks very much for joining us on the call tonight.
Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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