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Executives

Geoff High - Pfeiffer High, IR

Ray Thompson - Chairman and CEO

Larry Murphy - President and COO

Larry Viano - VP and CFO

Analysts

Matt Petkun - Davidson and Company

Edwin Mok - Needham & Company

Graham Tanaka - Tanaka Capital

Neil Gagnon - Gagnon Securities

Bill Frerichs - Radnorwood Capital

Semitool Inc. (SMTL) F1Q09 (Qtr End 12/31/08) Earnings Call January 29, 2009 5:00 PM ET

Operator

Good afternoon, my name is Tasha and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings for Semitool Conference 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).

I would now like to turn the call over to Geoff High of Pfeiffer High Investor Relations. You may begin your conference.

Geoff High

Thank you, Tasha. Good afternoon and welcome to Semitool's first fiscal quarter conference call. Presenting on behalf of the company will be Chairman and Chief Executive Officer, Ray Thompson; President and Chief Operating Officer, Larry Murphy and Vice President and Chief Financial Officer, Larry Viano.

I would like to remind everyone that matters discussed during this call may include forward-looking statements that are based on management's estimates, projections and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in Semitool's filings with the Securities and Exchange Commission.

The company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements. Semitool assumes no obligation to update forward-looking statements that become untrue because of subsequent events. A webcast replay of today's call will be available at semitool.com for 90 days after the call. In addition, a telephone replay will be made available for 48 hours beginning approximately two hours after the conclusion of this call. Details for listening to today's call or webcast are available in today's news release.

With that I will now turn the call over to Ray Thompson. Ray?

Ray Thompson

Thank you, Geoff. As the economic storm continues to buffer our industry, we return to the fundamentals of managing the big issues, some of which are unique to the industry which we serve. There are even in this environment, opportunities. In the process of reducing our cost structure, lowering our breakeven point and managing our cash, we still continue to pursue those product development activities that will deliver financially compelling results for our customers and entice them to move forward, again even in hard times.

Our new tools are demonstrating a significant productivity improvement scenario such as through-silicon via, for chip stacking, for silicon, for solar and mems, wafer-level packaging, copper interconnect and critical claims to name just a few. These initiatives are solidifying our value proposition with existing customers and opening doors to new ones. We believe that all of this is positioning Semitool to be amongst the lead group of companies that benefits from the outset of the next spending cycle.

I would like to now turn things over to Larry Viano for some color on our financial results and then Larry Murphy. He will tell you more about our recent operational performance, Larry.

Larry Viano

Thanks Ray. I will start with a look at our revenue composition for the past 12 months. At a price level approximately 79% of our revenue from Raider sales -- came from Raider sales while 21% came from batch tools. Geographically, 29% of sales came from North America, 27% came from Europe, and 44% were generated in Asia. Our earnings came in below our pre-announcement due to the insolvency filing last week by one of our customers. We have taken the $3.5 million write down of receivables associated with this customer. Our first quarter loss also included restructuring cost of $900,000 or $0.02 per share.

We have taken a number of additional steps to ensure the financial health of the company and line our cost structure with anticipated revenue. Through additional companywide expense reductions, we have lowered our break even point to approximately $33 million. Cost reductions we have made during the third quarter include $5.1 million from SG&A, $3.2 million from production, and $1.3 million from research and development. And combined with the $6 million in Q1 cost reduction we’ve reduced quarterly expenses by more than $50 million or $60 million per year. Our cash position increased to $26.6 million at the end of the quarter, and we believe we will – we believe that will be adequate to meet our needs through the remainder of fiscal 2009.

Turning to guidance, we expect second quarter revenue to be in the range of $31 million to $35 million and a anticipated second quarter loss of between $0.72 per share, which includes an estimated $0.03 per share of restructuring costs.

Second quarter shipments are expected to range from $33 million to $36 million. I will now turn the call over to Larry Murphy. Larry?

Larry Murphy

Thanks Larry. In addition to our expense reductions, we are maintaining our work with customers and joint development partners on a number of next generation wafer processing applications. Wafer level packaging and through-silicon via remained very promising segments. Even in the current market climate, we continue to see signs that we could generate meaningful bookings this year. You are hearing of our consolidation [entirely] in the memory sector and we think we are well-positioned to take advantage of these market shifts as they unfold.

On the advanced copper front, our customers are seeing significant yield advantages at [sub 4x] copper interconnect nodes that are utilizing in our technology. This obviously bodes well for Semitool as customer’s transition these nodes to manufacturing. As we have mentioned previously, we are seeing compelling prospects from the solar sector and are shipping out first pilot production tool this quarter. We’ve identified several near term new business opportunities in which we will – in which we could incorporate our existing technologies and drive down cost for our potential customers.

Our relationship with Applied Materials continued to deliver synergies and mutual benefits will progress and we remain encouraged about the near and long range opportunities this association will deliver to both companies. It obviously has been a tough environment for the capital equipment sector, but we are effectively managing our costs and cash and are aggressively pursuing a number of new business prospects. Just as we were one of the last in our space to be impacted by the decline in capital spending, we believe Semitool will be one of the first to benefit from a rebound in activity. We are now ready to take your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Matt Petkun with Davidson and Company.

Matt Petkun - Davidson and Company

Good afternoon. It looks like you guys are doing your best to weather the storm, so I congratulate you for your efforts. One question maybe Larry Viano, on the bookings in the backlog, did you see no incremental cancellations in the quarter or is that $22.1 million bookings number net of incremental cancellations?

Larry Viano

That is the net number.

Matt Petkun -Davidson and Company

Okay.

Larry Viano

And there was a slight cancellation in the quarter.

Matt Petkun - Davidson and Company

I guess I was wondering if there is any key amount of business in the backlog.

Larry Viano

Not enough.

Matt Petkun - Davidson and Company

Okay. And then just to be clear because you answered some of the cost reduction numbers pretty quickly for me, on a quarterly basis you are expecting generally what I suppose is cost of sales and operating expenses?

Larry Viano

Yeah, let me go through that again, $5.1 million from SG&A. These are on an ongoing basis.

Matt Petkun - Davidson and Company

Right.

Larry Viano

$3.2 million from production and $1.3 million from research and development.

Matt Petkun - Davidson and Company

That's relative to the September quarter Q4?

Larry Viano

Yes. Those are in addition to the $6 million that we announced in Q4.

Matt Petkun - Davidson and Company

Okay. So you should be at roughly

on a operating expense basis less than $20 million run rate quarterly?

Larry Viano

Yes.

Matt Petkun - Davidson and Company

Okay. And then the balance sheet, I would have expected that you guys might have -- can you go through what you have available in terms of line of credit. You guys, looks like you did a great job in collecting receivables this quarter, but can you go through what your opportunities are on the bank line of credit?

Larry Viano

Well, bank line of credit we are currently talking [it out over] with the bank right now, because we will be looking at hitting into our covenant shares. So we are going to have to re-negotiate with the bank. We have already started those negotiations.

Matt Petkun - Davidson and Company

But the existing line of credit, it doesn’t -- I thought it was more than, it was closer to $20 million?

Larry Viano

No, its $30 million.

Matt Petkun - Davidson and Company

Okay.

Larry Viano

But it's the amount that you can borrow –

Matt Petkun - Davidson and Company

Is based on covenants.

Larry Viano

Covenants. That's correct.

Matt Petkun - Davidson and Company

Right. Okay. I think that's probably all from me now. I guess my biggest question is, I know, there are some number of things for you guys to track, but in terms of order visibility, are your -- the bulky opportunities primarily on the packing side?

Larry Viano

Yes, I would say that’s fair as well TSV, which we developed in the packing.

Matt Petkun - Davidson and Company

Yes, I do too.

Larry Viano

And yes absolutely.

Matt Petkun - Davidson and Company

Okay and I know that you guys are working on some new products there that may be also a little bit higher throughput compared to your more traditional plating tools, have you shipped any of those types of tools yet?

Larry Viano

Not yet, most of those customers are doing just development at this stage Matt, but we expect when the first customers move into volume production we will start shipping those tools, which should happen -- will definitely happen sometime this fiscal year for us.

Matt Petkun - Davidson and Company

Okay, thanks so much.

Larry Viano

Yes you are welcome.

Operator

Your next question comes from the line of Edwin Mok with Needham & Company

Edwin Mok - Needham & Company

Actually congratulations for a pretty decent guidance (inaudible). But let me start with some housekeeping questions for Mr. Viano. From tax rate, how should we model that, the tax benefit for last quarter was quite high?

Larry Viano

It was Edwin, because we got a double benefit from our R&D credit because that was not passed until after our fiscal year, but it applied to calendar year '08; so, we got a double benefit there. I think you model it about 39%.

Edwin Mok - Needham & Company

You mean 39% of benefit to --

Larry Viano

Benefit, yes.

Edwin Mok - Needham & Company

I see great, that was helpful. Just maybe talk a little bit about the guidance, guidance was relative flattish sequentially from December through the March quarter, which actually is better than all of what it appears you are talking about. Cash which area that you are seeing if you will relative strength or maybe stabilization compared to other areas?

Larry Viano

Well, I think like Larry just mentioned its wafer level packaging and it is an area of relative strength.

Larry Murphy

And like the sub-setting and there is the through-silicon via that seems to be – so its the market, we didn’t really expect to accelerate for another year to 18 months and it appears to then pulled in quite a bit because of the advantages it gives our customers. So, we have a dominant position in that space and so the – there is limited business that's available there and we are getting the lion share of it.

Edwin Mok - Needham & Company

Great, maybe talk a little bit of our experience over this. A few companies has reported that there seemed quite a bit of headwind on that experience over this because of low utilization of their customer. Are you guys seeing that – did that sequentially decline in December quarter? And are you expecting more decline in March quarter?

Larry Viano

It did decline sequentially, I think it’s probably bottom down, I am not predicting that it's going to go up, but I don’t think it’s going to go down much.

Edwin Mok - Needham & Company

Great. That's the color I was looking for. I forget to actually ask one more housekeeping question, how much was your debt on Capital at the end of last quarter?

Larry Viano

At the end of last quarter, long-term debt was around $10 million.

Edwin Mok - Needham & Company

Okay. And then I have one more question related to the balance sheet. The inventory level —is a part of that inventory evolved to a [door] customer side? And if so I was wondering, do you see any risk with those involving some of your customer businesses either (inaudible) or maybe not showing any purchases or any activity at this time?

Larry Viano

Well, we definitely have evaluation tools at customers. Is there a risk, yes there is always risk, and I suppose there's some more risk at this point. We do for the most part Edwin make sure that we reserve for those tools, so especially the longer they are in the field but, yes there is risk. We are getting some very good feedback Edwin on just about every tool that we have out there from our customers, either we’ve given them better yield, meeting their technology [requirement] to have lower cost. And so we constantly monitor our position with every tool we have out there and find all the feedbacks very positive. So I expect most of it to turn the revenue this year.

Larry Murphy

And let me make it clear Edwin that the risk we see out there we have reserved for, so we feel that the financial statements are in good shape from that point of view.

Edwin Mok - Needham & Company

Great and one more question I guess looking beyond the March quarter, how do you guys feel the rest of the year maybe Mr. Murphy all some call on that?

Larry Murphy

Yeah, I would be glad to Edwin. I am not sure I have any better vision than anybody else out there in the industry. But from what we are seeing you know the activity we are talking to our customers about, we see – obviously we are going to see a better second half when we see the first half. And I think there are not too many people that are just not predicting that. But from an [ionic] growth we are unique in that. I know there's, a couple of reasons for particularly for us.

The technology momentum won’t stop. There will be still movement in the technology sector driving down the final nodes and the memory space as they get below 50 nanometer, that's aluminum powered they have to switch to copper. We are well positioned about it – with everybody that we believe will do that this year. And, so we think that time will probably start next quarter sometime when we receive some orders starting to free up the -- for a technology place in the memory sector.

Along with the fact, we think there will be, – there continue to be more products wafer level packaged and that we think that looks [solid] in the second half of the year. We are talking to some other customers there as well. So we do think that as year goes on, things will improve particularly in the next step it places. We (inaudible) the other place at. We just -- we spent the last six to nine months really doing an in-depth look at the solar market where our technologies could play out. And talking to some other customers, we have some stepping with the market very quickly with and there is still money being spent in that space if you can offer a cost advantage. And so that will take about three to six months in the selling cycle to penetrate some of those opportunities and we think we will see benefits of that in the second half of the year.

Edwin Mok - Needham & Company

Great. Sorry, I have one more question. Just on the OpEx saving there maybe I got confused a little bit that's $5.1 million in SG&A and $1.3 million R&D, that’s incremental to what you guys have announced before and if so can you remind us of what you have announced before?

Larry Murphy

Yes, it is incremental and what we announced before was $6 million in the previous quarter.

Edwin Mok - Needham & Company

Right, the $6 million is all in OpEx or is that partially?

Larry Murphy

No, it's spread out, let’s see if I can get it for you quickly. Okay, in production, operations of it was $1.7 million, R&D $1.2 million and SG&A $3.1 million.

Edwin Mok - Needham & Company

Great, that was very, very helpful. Thank you.

Operator

Your next question comes from the line of Graham Tanaka with Tanaka Capital.

Graham Tanaka - Tanaka Capital

Guys you are moving quickly to cut costs that’s great. Just wondering what’s happening on the price cost relationship side in terms of our cost of materials and in sales and [technique] gross margin, how is that spread? Is it narrowing or you getting economies in the cost reductions? Not economies, but cost reductions?

Larry Viano

As far as individual components, we don’t see – we don’t see much pricing pressure at this point of course. But as far as economies, our economies on a scale are going to decrease. So that's going to affect our margins downward.

Graham Tanaka - Tanaka Capital

Then I guess, what I am wondering is that you are getting a few reductions and the cost per component are going down fast enough to offset the diseconomies to scale?

Larry Viano

No, no not at this point.

Graham Tanaka - Tanaka Capital

What’s the outlook for recovery of any kind on that tool that was written off for that customer that filed?

Larry Viano

Well from what I understand is that when they go into insolvency the journey is similar to our Chapter 11 and so in a few months they will start negotiating with vendors and so there is a chance of some recovery on it.

Graham Tanaka - Tanaka Capital

You slowly recovered – and recovery would have to be from what from an insurance company or from what?

Larry Viano

No, it would be from the customer. The customer to get out of insolvency would have to pay some of their debts. From what I understand they just can't walk away from it unless they are totally insolvent and so they have to negotiate with their vendors and provide some cost on the dollar and as you know its a wide range from what I have been told so far.

Graham Tanaka - Tanaka Capital

Okay. And Larry Murphy on the (inaudible). It looks like demand is coming a little faster, which is nice to hear. I am just wondering what kind of payback you are seeing now versus what you re looking for a few months back when you are starting to hit the market?

Larry Murphy

Well we shipped two tools last quarter to (inaudible) memory manufacturers and it is still too early to say, but there is so much energy and calories being spent to develop this technology from a wide variety of customers around the world. So, every month it’s accelerating more than I thought the month before. So, I would say, what I see now in that market space its going to happen even sooner than last time I talked to you so. So, all right so that’s encouraging from my standpoint. We will see how that's – by now it's only in development for the most part around the word and the real opportunity is going to switch this to manufacturing so that, that’s we are all ready for the most part.

Graham Tanaka - Tanaka Capital

That so, you haven’t heard. Have you heard any – got any data points on payback. You know how much costs they are getting out of performance?

Larry Murphy

No I haven't.

Ray Thompson

Graham.

Graham Tanaka - Tanaka Capital

Yes.

Ray Thompson

This is Ray. We have a new tool it's just got out of engineering and its in the shop to address that market and make it still much more competitive.

Graham Tanaka - Tanaka Capital

That’s fabulous. I am glad to hear you are still working on new solutions, new tools.

Ray Thompson

These were the only guys working here, a small group through their shut down time and got a new machine coming.

Graham Tanaka - Tanaka Capital

Okay. That’s fabulous. Now you alluded to new markets, you did just say it might be three to six months sell cycle. What kid of customers are these folks and what size of potential are you talking about, in terms of these new market applications?

Ray Thompson

The solar applications you are taking about Graham?

Graham Tanaka - Tanaka Capital

But you said you had some new – current new applications that you were developing and selling too?

Ray Thompson

Yes, I think, I was specifically talking about solar there, but basically crystalline based solar manufactures and anything from a high volume production set to develop a line we could support, you know, basically all that from the direction we are going here with the current technology we have available for them.

Graham Tanaka - Tanaka Capital

And is that a retrofit to an existing line for them or do you have to wait for them to add new capacities?

Ray Thompson

It could be either, but more likely it’s going to be a capacity driven event.

Graham Tanaka - Tanaka Capital

Thank you.

Ray Thompson

You are welcome.

Operator

Your next question comes from the line of Neil Gagnon with Gagnon Securities.

Neil Gagnon - Gagnon Securities

Good afternoon everyone. On the efforts that it takes do the cut backs that you have done, my congratulations for the management, I know, that’s not easy. On the question front, I am wondering of these new tools, can you talk a little bit about through-silicon via and also on memory. Where are the points where they (inaudible) to stay in business? Nobody heard me.

Ray Thompson

No we have heard you.

Neil Gagnon - Gagnon Securities

Began to worry about that, I couldn't hear a word.

Larry Murphy

No, no. That is the great question. I am not sure if there is a definitive answer. On the through-silicon via side – I mean on the port-silicon side – did I just say port-silicon or –

Ray Thompson

Through-silicon via.

Larry Murphy

Through-silicon via.

Ray Thompson

Through-silicon via side.

Neil Gagnon - Gagnon Securities

Sounds very right.

Ray Thompson

Boy. That's a good part.

Larry Murphy

Well here is the way I would put it. When the guys doing it are delivering a device, a package that their competitor can’t for a price and apparently for a price, not necessarily just technology. But in the long run from a cost standpoint, TSV is going to deliver – its just going to deliver a whole new line of gadgets or whatever capabilities and those without are going to know that they have to have. And that is one of the reasons I theorized just the way we are seeing an acceleration on already.

They are understanding that you know wire-bonding when you have got and, my gosh, the number of contacts they have these days and the stacking and all that and the size of the package and the [capital] and you add all those things up. There is a lot of competitiveness in terms of the drive. Our response to their need is to build a tool that will give them the throughput that they need in what really is a quite lengthy at this point at least, single [wave through] process. And actually we are building that first tool now and we expect it – I expect it to go under R&D, of course my expectations are always pretty aggressive., But if not next month certainly early in the next month.

Neil Gagnon - Gagnon Securities

Okay, how about on the memory side? Is it 50 nanometers and they got to go.

Larry Murphy

From a ballpark standpoint, yes, that's pretty accurate Neil. I think the – it’s got happen this year. I look at 2009 as the year of memory to copper. If you don't do it this year I think you are pretty much out of the business. So from a – I can't tell you if it's August or if its September but this is the year you have to make that transition or you are left behind in the memory sector.

Neil Gagnon - Gagnon Securities

Larry will that be the same for both DRAM and flash?

Larry Murphy

Yeah. I believe so.

Neil Gagnon - Gagnon Securities

Good. Again congratulations on the work you are getting done. Thank you

Larry Murphy

Thank you. Next.

Operator

Your next question is a follow-up from the line of Matt Petkun with D. A. Davidson and Company.

Matt Petkun - Davidson and Company

Hi, a couple of questions Larry Murphy, you had said hopefully we see a recovery in the back half. Are you basing that statement on any hopes from the pickups from a microprocessor customer or is that just kind of across the board you are seeing that you might see that?

Larry Murphy

It is across the board Matt, but I certainly hope a pickup from a major microprocessor or manufacturer as well. So that would be a nice thing to see and there is some real evidence that may happen.

Matt Petkun - Davidson and Company

Okay. And then on the balance sheet side of things Larry Viano, in the other current liabilities other than the differed revenues what were some of the major components of the current liabilities?

Larry Viano

Well you know you get accruals for – you get your payables and then you get your accruals for payroll and commissions and warranty.

Matt Petkun - Davidson and Company

So it’s mostly basic operating costs?

Larry Viano

Yeah.

Matt Petkun - Davidson and Company

Okay. That’s all from me. Thanks guys.

Larry Murphy

Thanks Matt.

Operator

(Operator Instructions). Your next question comes from the line of Bill Frerichs with Radnorwood Capital.

Bill Frerichs - Radnorwood Capital

A couple of quick questions. One is when do you anticipate seeing orders from the foundry company venture and the second question is one of the analysts wrote I think that might have been Matt Petkun wrote in one of his reports that you had an opportunity to do some contract manufacturing and I was wondering if what the scale of that might be?

Ray Thompson

On the first one, can you repeat your name again please?

Bill Frerichs - Radnorwood Capital

Bill Frerichs, Radnorwood Capital.

Ray Thompson

Okay. Thanks for your questions. On the first question, the foundry co. – I'm assuming you mean the Dresden as the company. We don't really see anything as far as coming out of that from a purchase standpoint, probably towards the end of our fiscal year. Obviously that can accelerate both directions. But our best case scenario would be something in that neighborhood.

On the neighborhood of contract manufacturing, yes we have a vertical integration model in our manufacturing. And we're trying to leverage that for other opportunities out in the market space. As far as – we're just in the early phases to see what that may look like right now.

Bill Frerichs - Radnorwood Capital

Okay. Thanks very much.

Ray Thompson

Sure.

Operator

(Operator Instructions).

Geoff High

Tasha, I think we are ready to wrap it up.

Operator

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

Geoff High

Tasha?

Operator

I'm sorry. Yes sir.

Geoff High

I'm sorry. We do have a couple of closing remarks. I meant the Q&A. Thanks.

Operator

Okay, I'm sorry.

Ray Thompson

Okay for those who are left, I'll close it up here for us. And you've heard me say this before, and I'll say it again. Tough markets bring certain advantages to the structure of Semitool. And our investment in vertical integration brings us capability for fast opportunity-driven response to our market prospects. And we are leveraging that and expect to continue to do so. So as always, we expect this downturn to strengthen the business and position us to prosper when demand improves. Stay tuned.

Geoff High

That's it Tasha.

Operator

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

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