Executives
Paul Bowman – Chief Financial Officer
Robert Akins – Chairman, Chief Executive Officer
Edward Brown – President, Chief Operating Officer
Analysts
Satya Kumar – Credit Suisse
C. J. Muse – Barclays Capital
Jay Deahna – J. P. Morgan
Brett Hodess – Bank of America
Weston Twigg – Pacific Crest
Ben Pang – Caris & Company
Mary for Patrick Ho – Stifel Nicolaus
[Jeanine – J.P. Morgan]
Cymer, Inc. (CYMI) Q4 2008 Earnings Call February 11, 2008 5:00 PM ET
Operator
Welcome to the fourth quarter 2008 Cymer earnings conference call. (Operator Instructions) I will now turn the conference over to Mr. Paul Bowman.
Paul Bowman
Thank you for joining us today. With me on today's call are Bob Akins, our Chairman and CEO and Ed Brown our President and Chief Operating Officer.
Financial results for our fourth quarter and full year 2009 were released to the wire services today shortly after the market closed. A copy of the press release, company presentation slides and webcast link can be found in the investor relations section of our web site at www.cymer.com where they will be available for the next 15 days.
On today's call, Bob will discuss our fourth quarter and full year business highlights and our market and business outlook. I will follow with an analysis of the company's quarterly and full year financial results as well as guidance for the first quarter of 2009.
During our prepared remarks, we will refer to non-GAAP gross margins which includes our reported GAAP gross margin plus gross margin associated with additional field inventory charges. A reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure can be found in today's press release in the investor relations section of our web site. After our prepared remarks, we will open up the call for questions.
Please be advised that the results we are disclosing during this call are preliminary. The final results will be included in our annual report on Form 10-K which we anticipate will be filed with the SEC on February 27, 2009.
Our comments today will include forward-looking statements including but not limited to statements concerning industry and technology trends, new products and technologies, semi-conductor demand, demand for utilization of lithography tools and our products, orders and shipments and our anticipated financial performance.
Our actual results may differ materially from those projected on this call. There are a number of risks and uncertainties that may affect our business and future results as well as other factors including those set forth in our SEC filings. Please do not place undue reliance on these forward-looking statements which speak only as of today.
We undertake no obligation to update any forward-looking statements to reflect events after today. With that, I'll now turn the call over to Bob.
Robert Akins
I'd like to welcome all of you to today's call. The fourth quarter of 2009 turned out to be a very volatile economic period as reduced consumer spending negatively affect demand for consumer electronics and in turn semiconductor equipment. In early November, we took actions to lower our cost structure in response to reduced capital spending and declining chip maker factory utilization levels.
Throughout December, business conditions continued to deteriorate and in January we took additional actions to significantly lower our global cost structure. These actions are never easy, but we are committed to maintaining our corporate financial health while preserving our competitive lead by continuing to invest appropriately in advanced Argon Ford Immersion, next generation EUV and TCZ technologies.
I want to thank Cymer employees for their hard work and significant achievements in 2008. It's been a challenging year, but our employees has made the XLR the industry's emergent light source of choice. We've helped our customers increase throughput and lower cost of operations with our install base products led by On-pulse and advanced our leadership in EUV. I appreciate our employees' dedication and focus on enabling our customer's success.
Fourth quarter revenue was $104 million and gross margin came in at 44.5%. Gross margin would have been 46.8% were it not for the certain increased field inventory reserves taken in response to lower chip maker utilization. Our operating expenses of $40.3 million included $1.9 million of costs associated with our November 14, 2008 reduction of work force as well as $1.9 million of allowances for doubtful accounts receivable related to certain customers' deteriorating financial condition.
During 2008 we shipped a total of 100 light sources including 48 XLR's. Cymer full year revenue of $459 million was down 12% from 2207. Our higher average selling price of $1.6 million was driven by the strong adoption of the XL series of products. Additionally, an approximate 10% growth in our install base products helped offset the decline in lithography light source demand.
Through increased operational efficiency and XL platform liability improvements, our gross margin of 47.3% was achieved for the full year 2008.
During the fourth quarter we shipped 19 light sources including 15 XLR's. This higher mix of XLR shipments resulted in a fourth quarter ASP of approximately $1.9 million. In the fourth quarter we installed 15 light sources at chip makers.
Our XLR series of products now supports a variety of models for wet and dry patterning applications, all leveraging the inherent CD uniformity, stability and higher throughput capability of the XLR design. Our focus on overall XLR reliability and productivity resulted in an increased mean time between service events in 2008 that improved customer realized performance by approximately 40%.
In fact, the overall reliability of our dual chamber Argon immersion light sources has approached industry standard performance levels of our work horse single chamber krypton immersion light services. The XLR's differentiated performance coupled with our global field service and our remote tool monitoring capability has contributed to the stronger customer adoption and positions the XLR as the advanced Argon immersion tool of choice.
Our continued focus on providing customers with the most productive, cost effective light source technology recently culminated with our announcement of the XLR 600 IX. The X stands for extendable as the XLR 600 IX is a 90 watt capable light source that can operate from any output power from 60 watts to 90 watts.
Selected by the scanner or tool operator, up to this time two chamber XL technology hasn't been capable of offering such a large dynamic range of power flexibly while maintaining all optical specifications. By utilizing the enhanced stability of XLR architecture combine with new hardware and control algorithms, the XLR 600 IX is the first to break this paradigm.
The recipe driven flexible operation of the 600 IX provides for unmatched performance improvements and versatility for double patterning application at 32 nn and below.
As we highlighted last quarter, we expected that our light sources would account for the majority of the industry's four quarter installations at chip makers. Driven by the strength of the XL platform, our fourth quarter 2008 installed base unit market share was approximately 65% which compares favorably to our rolling four quarter unit share of 62% that we reported in the third quarter.
Led by the strength of XLR product offerings including the XLR 600 IX we believe that Cymer is well positioned to continue to gain market share in 2009. In the fourth quarter utilization dropped to levels not seen in many years. Memory utilization which accounts for the majority of our pulse usage dropped at a faster rate than what we saw in the previous quarter, and logic utilization which rose slightly in the third quarter, declined in the fourth quarter.
The components of the pulse utilization decrease we saw in Q4 was attributable to krypton fluoride. Argon fluoride dry experienced a smaller decrease. Argon fluoride immersiOn-pulse usage actually grew in Q4 as chip makers continued to employ XL light sources in support of their more advanced manufacturing applications.
Note that Argon fluoride average pulse usage is approximately twice the level of krypton average pulse usage. As a result of this bias towards Argon fluoride and immersion, pulse driven IBP revenue decreased 17% in the fourth quarter on a total average pulse utilization decrease of 22%.
We made solid progress in Q4 on our laser produced class EUV source development and commercialization. During the quarter we continued to achieve new energy and duration milestones building on our Q3 record setting results.
We believe we are in a unique leadership position with our LPP technology and our ability to product EVU power for extended periods of time while keeping the collector clean of debris. As part of our multi-year, multi-unit agreement with ASML, we expect to ship several commercial systems throughout 2009.
The current business environment is quite uncertain characterized by shrinking lithography tool demand and decreased chip maker factory utilization in the second half of 2008. In response to rapidly changing business conditions, we took additional actions in early January to reduce our cost structure by approximately $50 million to $55 million annually.
These actions taken include a 10% reduction in personnel or an approximate 100 head count reduction as well as significant reductions in other operating expenses including global salary and benefit reductions. We believe that the combined actions taken in the fourth quarter 2008 and in the first quarter of this year will position the company's quarterly operating break even level in the range of $65 million to $70 million and our cash break even at approximately $60 million.
Since our mid January preliminary revenue estimate in which we forecasted revenue could decrease 30% to 35%, demand for new light sources and install base products has declined further. It is noteworthy however that utilization of our light sources held steady for the month of January in all three chip sectors.
We have included in our web cast presentation slides a graph of actual pulse count by sector for the months of December and January which displays this information.
Visibility into 2009 is extremely limited and with many manufacturers having stopped receipt of new tools, we expect that the total available light source market will be considerably lower in 2009 and that demand will be dominated by the logic sector. Our expectation for the year is for advanced Argon fluoride immersion orders to continue to represent the vast majority of scanner and light source demand.
We're focusing on new and innovative ways to lower the cost of ownership and increase the efficiencies of our customers' install base of tools, and we will complement these objectives with lean and efficient business operations to maintain the strength of Cymer's balance sheet. We feel Cymer is well positioned for the future with our strong DVD, DUV and PC2 portfolio and our install base products.
We believe that by excelling at these endeavors, our company will be well positioned to realize the benefits when the world wide economic conditions improve and the semiconductor industry recovers.
In summary, our DVD product portfolio strengthened considerably in 2008. We're well positioned in all sectors with the XL series of products for advanced immersion and dry applications. Overall product reliability and quality continue to increase generating very positive customer adoption of the XLR series which is driving market share increase.
Our install base products are helping customers maximize light source productivity and reduce their cost of operations during these financially challenging times while on-pulse and our tactic operations remote system monitoring capability provide customers with value added preemptive support capability.
As utilization stabilized and eventually rises, we expect that our install base products revenue will respond accordingly and be a leading indicator of chip factory utilization and recovery. Cymer is in a leadership position with our XLR 600 IX and our next generation laser produced plasma EV light source technology, and we're taking actions to keep the company's cost structure in line with changing business conditions.
Thank you, I'll turn the call over to Paul
Paul Bowman
I would like to recap our fourth quarter and full year financial results and share with you key areas of financial focus and provide guidance for the first quarter of 2009.
Fourth quarter 2008 revenue was $100.4 million, down approximately 10% from the prior quarter with install base products contributing $63.2 million or 63% of the total revenue.
Gross margin at 44.5% included approximately $1.1 million of costs related to our November 14 reduction in work force as well as approximately $2.3 million of additional field inventory reserves in response to lower chip maker utilization.
Operating expenses were $40.3 million and as Bob mentioned earlier, this amount included the costs associated with our November reduction in work force and allowance for doubtful accounts receivable. Operating income totaled $4.4 million and our fourth quarter effective tax rate was approximately 5% primarily due to the recent passage of the Federal Research and Development credit in October of 2008 which was effective retroactively to January 1, 2008. Net income totaled $4 million or $0.13 on a fully diluted earnings per share basis.
Full year 2008 revenue was $459 million or 12% lower than last year with install base products growing approximately 10% as compared to 2007. Gross margin at 47.3% benefited from a higher average annual selling price which was driven by demand for ArF immersion light sources and higher XL product quality and reliability as well as increased install base productivity.
The full year effective tax rate was 33% and net income for 2008 was $36.5 million while fully diluted earnings per share was $1.22.
During the year, we bought back 803,500 shares and ended 2008 with 29.6 million shares of common stock outstanding.
In the fourth quarter, DUV bookings totaled $83.7 million resulting in a book to bill ratio of .83. All of the light source systems bookings were XLR. We ended the quarter with DUV backlog of $33.7 million with ArF immersion comprising 84% of the value of systems in backlog.
Turning to the balance sheet, during the fourth quarter net cash and investments increased by $16 million and at December 31, 2008 cash and investment totaled $293 million. Improved account receivable collections contributed to the increase in cash.
DUV field inventory decreased slightly as compared to the prior quarter while our investment in EUV and TCZ inventory increased slightly and significant movement in foreign currencies in December resulted in an approximate $7 million non cash increase in our inventory valuation.
As a closing note to my balance sheet commentary, we plan on repaying our $141 million convertible note when it matures next week on February 15, 2009.
The current business environment is unprecedented and visibility into customer demand is limited. As such we are providing a wider range of revenue and gross margin guidance. We anticipate a lower gross margin in the first quarter due to decreased sales and a corresponding reduction in fixed cost absorption.
We are focuses on tightly managing our cash position through reductions in spending, inventory and capital purchases. Our balance sheet remains strong and we believe it is an asset that will help us navigate through the current business environment.
Turning to our guidance for the first quarter of 2009, we anticipate revenue to decrease approximately 45% plus or minus 5% compared to the revenue reported for the fourth quarter of 2008. Our foreign currency adjusted ASP to be approximately $1.6 million to $1.7 million due to the anticipated inclusion of some KRF shipment.
Gross margin should be approximately 40% plus or minus 3% depending on revenue levels. R&D expenses to be approximately $18.5 million to $19 million. SG&A to be approximately $11.5 million to $12 million.
And we estimate the charges related to the previously announced January 15, 2009 cost reduction actions to be approximately $4.5 million with approximately 25% associated with cost of revenues and 75% attributable to operating expenses.
Our estimated first quarter effective tax rate to be approximately 30% although this rate may vary significantly depending on the actual expense of loss before tax.
The current business environment is challenging, but we believe Cymer is in a strong position to navigate through this period and extend our leadership as business improves. And with that, this concludes our prepared remarks.
At this time I'll ask Nikita to open the lines and we'll begin the question and answer period.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Satya Kumar – Credit Suisse.
Satya Kumar – Credit Suisse
A question on the inventories. It's pretty high levels on an absolute basis and on dollars. Could you give us some color on the composition of inventories between systems and how do you think about the possibility of monetizing that asset?
Paul Bowman
Good question on the inventory. It's an area where we are clearly focused given the current business conditions. We carry inventory as you know in support of our field service organization and during 2008 we made the strategic investment along the lines of customer support and customer service as well as ensuring that we had the part support there in place for the XLR product line.
So we did make an investment in 2008 which represents a good portion of our inventory. We also have an inventory support really driven by demand for EUV and PCZ which is again, a smaller portion of that.
The actions that we're taking as we look ahead here given that the drop in demand is really to try to further optimize now our field inventory. We did have a slight decrease here in the fourth quarter in our field inventory. There's obviously a lead time that we have there and we're responding to that especially as we go into the current quarter here.
My forecast would be for inventory going forward that I think you can expect to see some continued drop in our field inventory. I would expect that driven by the demand for EUV that we will have some increase in EUV inventory but we're going to do everything on our end here to try to optimize the overall field inventory levels and start to drive those down in relation to demand.
Satya Kumar – Credit Suisse
In terms of your balance sheet, after you repay this convertible next week any potential charges you may have for restructuring? How comfortable are you with the cash? Is any of this cash tied up in foreign jurisdictions? Are you essentially liquid to run the business? What is the minimum cash you need to continue investing and supporting the shipment in EUV end of the business?
Paul Bowman
As we repay the convert next week, that puts the company in a position where we'll have just over $150 million in cash. The bulk of that is here in the U.S. We do have some regent cash that we're able to repatriate back at a very efficient tax rate if not tax rate. So I think from an overall cash position and availability or access to cash, we're in a good position there.
As a company when we look at the level of cash that we have, we do believe that it's sufficient for funding our business. We're focused on keeping our cost structure aligned with it seems like ever changing business conditions, so we're going to one, manage our spending. As I just mentioned, we're going to keep our focus on driving down inventory and then also from a capital perspective what we're really targeting here is about a 50% reduction in overall capital spend versus what we had in 2008.
So in terms of our overall cash, we believe that our balance sheet is strong. We do have sufficient cash. We have access to that cash here in the U.S., but on the other hand, as a prudent measure we'll continue to review where we stand and it's always prudent to look at additional financing alternatives if they're needed.
Satya Kumar – Credit Suisse
Does the Q1 guidance reflect the ongoing OpEx if business conditions continue at this current level or is there any future saving or any more savings that you're going to get in Q2 from this action that you're taking?
Robert Akins
I think what we're seeing here and we specifically broke that out for you to show you sort of the run rate levels of R&D, MRS. and SG&A. We broke out the restructuring charge so that you can see the level that we're targeting.
With the change as Bob mentioned from our January forecast that we gave, our preliminary revenue estimate, demand has dropped further since that time as reflected in our current guidance. So as a management team we're going to be looking at what additional cost reductions we can take to really size the business with the new level of demand that we see.
Operator
Your next question comes from C. J. Muse – Barclays Capital.
C. J. Muse – Barclays Capital
In terms of the new revenue guidance relative to the early read on Q1, it looks to be about $10 million to $20 million lower. Is the lion's share of that coming straight from the DVU units or is some that weakness coming from the consumable side?
Robert Akins
The lion's share is coming exactly from DVU units. Roughly 70% of the decrease that has occurred just recently is a reduction in laser unit demand and about 30% due to lower chip maker utilization driving lower IVP revenue.
C. J. Muse – Barclays Capital
I guess that translates into five to seven maybe emerging tools? Is that math right and if so, where are you seeing that impacting most? Can you tell looking through your OEM customers where you're seeing those push outs?
Robert Akins
Your math is about right and looking at what's going on out there in the chip maker world, we're seeing that the memory business as I said has basically closed the door with very few exceptions to any tools at all going into their factories or their R&D laboratories. So that business is kind of turned off for the time being.
In the foundry area, there's a very small number of select demand for the most advanced tools which leaves logic being the primary driver for this.
C. J. Muse – Barclays Capital
Thinking about for 2009, the OEM's are talking anywhere from 50 to 70 total tools, and I guess the question is, do you see the market at that size, and then considering where inventory levels are for immersion lasers, do you think you'll grow in line below or faster than that number?
Robert Akins
I would agree that the demand for DVD tools to be installed at chip makers in 2009 is probably going to be down roughly by a factor of two from the 2008, so yes, everything that we see, which is limited, would concur with what you just said.
Interesting on the book side, our lasers in our inventories of our direct customers actually increased in Q4. We exited Q3 by about 76 lasers in that inventory and in Q4 we closed with about 85, and the proponent of increase was XLR. So our direct customers didn't have enough XLR to meet the XLR demand from their customers. So that increased that whip but for the right reasons.
That whip is comprised currently of about 72% Argon fluoride, 58% is Argon fluoride immersion so no surprise, immersion is the big item there. Going forward, it's very difficult for us to forecast exactly what our direct customers' strategies are going to be. We've had these conversations concerning what they're going to do with their work in process and a lot of that depends upon what capacity they plan to maintain for any pick up in the business that may occur in Q3 or Q4 of the year.
I would anticipate that whip of 85 will come down over the course of the year but it's very difficult to estimate how much so to you point to the amount of delay if you will, it really depends upon that decision across all three chip makers plus the ongoing rate of demand for Argon fluoride.
When business does pick up our anticipation is going to be that while you will see new capacity orders, you're going to see principally a significant increase in Argon fluoride immersion orders to help make up for the lack of delivery that's occurring between now and then. If that occurs, I think we'll see strong demand for XLR and with higher SP. That could to mitigate that lag.
C. J. Muse – Barclays Capital
On the consumables side, if I were to hair cut your latest shipments by 50% or more, that would still mean consumables were still down 30% to 40% Q on Q, and I guess first, am I in the right ball park and two, if that's true, how much of that is related to decreased pulse rates at your customers and how much of that is due to lower contract reset on those contracts?
Robert Akins
Your number is approximately right. I think that we have a couple of different things happening. One, certainly decrease in pulse as you can see from the data we provide you, but the actual amount of course is greater than that. One of the things that we're seeing that is only a short term behavior possibility is customers trying to get all they can out of the existing utilization even in tools, even if that means perhaps pushing systems beyond normal maintenance and perhaps even taking parts off of other systems in the short run.
These are very short term kind of responses, but it amplifies the effect in the short term. So we actually see, if you notice in our pulse data including January, we actually are now seeing it level off, so we're expecting a return to more normal behaviors where the dollars will match closer to the actual pulse rate changes.
C. J. Muse – Barclays Capital
And you see that normalizing in Q2 or hard to tell?
Robert Akins
We only have a month, the month of January. We're not providing you data you don't normally see. Now that we're able to look at it on a daily basis, what you're seeing is basically from the December time frame where you had about a week shut down or more, essentially in every plant across the globe, then going into January, we're seeing that flat.
Many of Asian customers in that time frame also took the lunar year week off as well. So what that says is that we're not seeing any decrease of the reduction of the amount of pulses and so we're of course watching this in real time. There are some indicators of some of the markets beginning to get some more orders, in which case we'll begin to see that very quickly in their actual pulse usage on a daily basis.
So it's a little early to talk about the second quarter at this point, but at least it does not look like its getting worse.
Relative to that December/January transition in the slope of utilization, as I said one month a trend makes, but the data is interesting and I will say in the February to data that we're still in the process of processing tends to indicate that that flat steady trend has been continuing. And it's interesting to us, fascinating actually, that that trend is happening so consistently even across all three sectors.
And of course there are some reasons that you're reading about in the last few days with D-RAM pricing and the memory sector in TSMC's order surge being talked about, the foundry sector, Intel's commitment to spend for 32 nn across factories for the next two years and so forth, and these are seemingly adding up to have a temporary at least dampening effect if not something longer.
Operator
Your next question comes from Jay Deahna – J. P. Morgan.
Jay Deahna – J. P. Morgan
First of all, $33 million backlog and $83 million in orders, you have short lead times, you do a lot of turns, have you ever seen that scenario before?
Robert Akins
That load, no. We haven't' seen that before but again, the last time we had a significant slowdown as you know was 2001 and back then lead times were substantially longer so this is, the benefits of the shorter lead time but at times like this lower backlog and bookings are part and parcel.
Jay Deahna – J. P. Morgan
What are you looking for as a leading indicator for turn's business to start picking up or orders in general, maybe a turn up in your spares business or something?
Robert Akins
Exactly. I mean our IP business is as I said earlier, it's probably the most leading of any external indicator outside of a chip factory and of course since an individual chip factory can't look into other chip factories that they compete with, in some ways it may be even a better indicator than that.
So we would anticipate that the first thing that's going to happen is chip makers are going to run their existing tools harder and harder and given the lesson that will have been learned by all in this downturn, I think we'll find factory managers again, reticent to purchase new equipment requiring very high authorization to do as we saw after 2001.
And then that will lead eventually to the cutting of orders for Argon fluoride immersion since that's the highest utilization and then ultimately the additional capacity buys for dry.
Jay Deahna – J. P. Morgan
I talked about [apply] yesterday. They see some cannibalization for spares of their offline tools due to decreases in utilization rates at some of the chip makers and they're sort of thinking when utilization rates start coming up, that you'll see sort of a return to the normal procurement of spares for tools that are online where maybe they're kind of trying to slow that down a little bit right now, and they've got to buy spares to basically rebuild the tools they've cannibalized which could give you a little bit of sling shot effect in services as a leading indicator in the systems business. Do you see it that way? Do you see cannibalization? If that scenario is right, when would that start to happen most likely?
Robert Akins
I think there's a couple of different answers. Obviously for systems that are on on-pulse, you wouldn't have that behavior at all. If you remember that our downside coverage on that has to do with minimum thresholds that we have in our contracts for pulses so that means that at least on about 1,000 systems of our approximately 2,800, that are in production daily.
The second would be that I don't see that behavior at all on the advanced Argon fluoride products because there aren't enough of them out there and their utilizing most of their utilization space. So that doesn't really open up that opportunity. And then it really probably is most prevalent on some of the dry art in Krypton fluoride.
But it is correct that we would see something. It probably wouldn't be of the magnitude that you might see at some of the other equipment manufacturers, but on the other hand we also probably won't be hurt as bad in the short run by the behavior.
Jay Deahna – J. P. Morgan
In the fourth quarter '06 Cymer's operating margin was 26.6% which was the peak for the last cycle and also in that quarter I believe R&D was 12.8% of sales which was a cyclical low as a percentage of sales. As you look out into the next cycle, let's say two or three years out when volumes hopefully return to pretty compelling levels, do you think that you can replicate that 26.5% operating margin or will commercialization activities at that point which could be hot and heavy potentially prevent that from happening?
Paul Bowman
I think there's a couple of dynamics there. Obviously it depends on the size of this cycle and what revenue contribution that's built on. I think what we've done as a company here is we're trying to respond to the ever changing business condition.
You can see what we've done through November and January here to better size our OpEx, and I think that the company has had some pretty good progress in terms of what we've done in the DUV side of the business. I believe that our spending in DUV is really getting optimized pretty nicely so that we have some nice leverage as we go into the next cycle.
DUV as you pointed out, EUV again is a new dynamic there. Our goal there is going to try to be to deliver a pretty nice margin and that will be the challenge of the company. So I think you've got those dynamics. It's going to depend on the revenue.
I think that we're well positioned when it comes to the DUV R&D investment that we've made and that we can optimize as we go forward here so we get a lot of leverage off of that and then it'll depend on our ability here to really deliver that profit on EUV.
Robert Akins
Let me add that part of that performance that you just cited was due in part to the efficiency of R&D achieved through the move to common platform design which before that time we had not employed that.
So when you think out two or three years, you've already seen of course whether it's XLA or the XLR we're demonstrating the ability to bring out rapidly and cost effectively models of significantly improved performance and I think you'll see that the incremental investment dollars that we had to put into DBV to make that newest XLR model that much better and that much cheaper to operate will be decreasing significantly and investment going into EUV.
We're not repeating the same mistake. We're going with a platform based approach to that light source technology from the beginning. You can argue that in some respects, laser produced plasma is a more platform based EUV technology since once you get a system that runs at the first level of pilot production, to increase the power to higher levels doesn't require a complete redesign, but it requires focusing on improving the conversion efficiency and maybe popping up the laser power somewhat.
We believe that after our initial investment in EUV, we'll see some of the same benefits that we saw by moving to a platform based for utility for DPV.
Jay Deahna – J. P. Morgan
So pulling all that together, if you can put down $140 million revenue in a quarter two or three years from now can you do a 26.5% operating margin?
Robert Akins
I think the opportunity is there.
Jay Deahna – J. P. Morgan
But you're not advertising something materially higher.
Robert Akins
Not at this point in time.
Jay Deahna – J. P. Morgan
Your market share in the '04 to '06 time frame was sort of up there in that 80% plus range. Given that it looks like you hit a cyclical inflection with your trailing four quarter market share here in the fourth quarter, I know you're talking about that trending back up, are you talking about that trending back up into the 80% plus range or something in the 70's?
Robert Akins
Remember at one point in time we talked about gross margins in the 55% range publicly? In a similar way I think it makes good sense for us to just be grateful for every percentage point of market share increase that we get and it goes to what it goes to but without putting out big target numbers.
Operator
Your next question comes from Brett Hodess – Bank of America.
Brett Hodess – Bank of America
You commented that since January 15 when you lowered the guidance, the difference between then and now was largely the unit drop but you said about 30% of the cut came from the consumable side, but since then you know that January pulse rates were pretty stable so I'm wondering at this stage of the game, is that a conservative pass at the consumable side of the business?
Robert Akins
First off, remember that the trend of utilization will change before we ever see it reflected in revenue. There's a time lag there. So if those tools start to be operated at a more steady rate, then over a set period of time, then we'll see that reflected in revenue, but on a one month kind of basis you can't see that.
Brett Hodess – Bank of America
Did you mention that you also had some bad debt reserves in the quarter or some of that was built into the numbers?
Paul Bowman
We had a handful of customers that we had receivables with that, customers that are at risk and they've been in the news lately, so we took additional reserves, about $1.9 million of additional AR reserves.
Brett Hodess – Bank of America
So that was basically consumables to end customers rather than your main systems customers?
Paul Bowman
That's correct.
Brett Hodess – Bank of America
If you look at the market, the mix in the market predominantly going to immersion and ArF, and I know you don't want to give a specific share target, but overall you have about 60% units last year, can you give us an idea?
Robert Akins
We believe that as I said before that the XLR, and everything that we're seeing about its adoption is very promising and we feel that's actually going to be driving our market share throughout 2009.
Brett Hodess – Bank of America
But it's safe to say its well above your average here at this point? Is that correct?
Robert Akins
I would say that it's heading above our average. I think you saw that reflected in our fourth quarter shipment numbers that we provided where 15 of the 19 were XLR, so I think you can sort of trend that forward that it's on the rise.
Paul Bowman
From a units market share installed basis, it's still going to take some time for the units that we're selling now to make their way into chip makers and be counted in our fourth quarter market share.
Brett Hodess – Bank of America
But as those go in, because you've pointed out that the immersion ArF tools are running at higher pulse rates, as those go in even if we don't see much of a pick up in the business for awhile, those should start to drive a better consumables business?
Robert Akins
That's correct. Two dynamics really on the installed market share; the fact that Argon fluoride products of the business we have higher market share on that sector as Paul just said, and of course that logic is the primary receptive use where we have historically high market share. We'll drive that market share more, and as you said, yes we'll start to see the effect positively in IDP as well because of the high pulse count.
Operator
Your next question comes from Weston Twigg – Pacific Crest
Weston Twigg – Pacific Crest
I was wondering if you could give us an idea on the timing of revenue for the EUV lasers.
Paul Bowman
We will recognize revenue and that will be triggered by installation and acceptance. We're not currently forecasting revenue in 2009. We are forecasting as Bob said a handful of shipments here in 2009, but the installation and acceptance period is a bit longer for EUV and we'll recognize it once we've cleared that hurdle.
Weston Twigg – Pacific Crest
Also a question on KRF's. It looks like there were a couple of KRF shipments in this quarter. The ASP guidance for next quarter says there are several. Is it a couple, is it more in this quarter, is there an increase in KRF shipments this quarter?
Robert Akins
It's actually on a quarter over quarter basis since we're dealing with a lower base in Q1 in the number of shipments. I think we said rather than several, we said there is some KRF in there just to give you some visibility that that's what's taking the average ASP from $1.9 million in the fourth quarter down to a range of $1.6 million to $1.7 million. It's a much smaller base of total shipments. There are some KRF in there. That's what trends it to about $1.6 million to $1.7 million range.
Weston Twigg – Pacific Crest
I though I heard you mention about the 2,800 systems installed. I guess that would be including systems taken off line, is that right?
Robert Akins
No actually that was, I think Ed quoted that number when he was referring to production systems. Our overall install base as we've reported in the past is upwards of 3,400, but really trying to give a feel for the number of systems that are On-pulse in the production base.
Operator
Your next question comes from Ben Pang – Caris & Company.
Ben Pang – Caris & Company
On the adoption of the on-pulse, are you seeing slower adoption right now because of the economic conditions your customers are in?
Robert Akins
Actually, as you know we had very good adoption in 2008, approaching 1,000 systems. I reported earlier that the major area of continued opportunity is memory where we have penetration in a couple of the accounts but there's two other large accounts that don't yet have on-pulse and they are still using more local optimization methodologies for their systems, but I would expect that that is going to change as time goes on.
I believe that the reliability of the tools and other things have drawn a much better picture and we have a significant install base that's showing very good performance in on-pulse. The other thing is, one of the two largest memory makers which is of course a big install base is also going through a major restructuring and in that there are still some 2009 plans I don't think have been set, and what we're trying to do is create a multi step plan to allow them to adopt it.
We do believe that we will get them the majority of all systems that are in production will be on on-pulse contracts in 2009.
Ben Pang – Caris & Company
When I look at your pulse usage data, the flight 12, are you able to see an impact of people take your install base lasers off line?
Robert Akins
Absolutely. For the systems that are online which are the majority of systems installed in the field, particularly Argon fluoride systems, we can see absolutely when they're taken off line.
Ben Pang – Caris & Company
What would be the read into the utilization rate for the factories here? Can you actually make the determination that if February is at the same trending flat that the utilization rate is going to be higher then?
Robert Akins
We can deduce from what we know from past behavior and what new behavior of actual pulses look like and make some sort of adjustment, but we certainly don't absolutely know what the utilization numbers are for the tools. So it's really a relative number. Processes do change particularly where they may run multiple processes. It isn't an absolute measure.
But we do know what the tools are capable of for utilization. We usually measure from what we can potentially provide with the recipes that are being used and from that we can determine a utilization range.
Ben Pang – Caris & Company
Your new product, the IX is that already at the Stepford companies and what's the lead time on that product?
Robert Akins
We already have several units at the Stepford companies. We believe one of those will be installed sometime soon in an actual chip maker and we have actually been working on this product for a number of months. Yes, it's already in and the adoption opportunity looks like its going to be quite strong.
This provides really an awful lot of flexibility not only for the litho tool makers but also for the chip makers to utilize their tools more efficiently by being able to dial in if you will the absolute need of light for layers even at the layer level if necessary.
Ben Pang – Caris & Company
Is that one of the reasons why the whip might be higher?
Robert Akins
No, I don't think there's a direct correlation of this product and the whip because it's just been introduced, but there certainly is a high interest for us to convert potentially what is in whip to this configuration.
It should also be pointed out that the XLR laser whether it's an XLR 500I or 600I can be field converted by a simple module swap to the XLR 600 IX, so we can do it either at our direct customers or at the chip makers at their preference.
Operator
Your next question comes from Mary for Patrick Ho – Stifel Nicolaus.
Mary for Patrick Ho – Stifel Nicolaus
With the memory consolidation starting to happen, do you feel that the company is well positioned with the potential consolidators when all is said and done?
Robert Akins
Well I think the primary players in this business in that whole consolidation will be [Elpida], and Micron and [Lexchip] driving the conversion and I think we have a good market share with those players, so I think it's not going to be really healthy for the industry from a capacity standpoint but I think it would benefit us as well.
Mary for Patrick Ho – Stifel Nicolaus
Given the near term challenges in both A/R and inventory management, what does Cymer see out there as your expected cash flow or cash burn in 2009?
Paul Bowman
We talked about our break even point on cash at $60 million and given the change that we've seen here in the level of business, we're obviously focused on how do we lower that even further, really looking at one, from a spending standpoint, two, as I talked about previously on reducing inventory as a means as well as just really containing the amount of capital that we purchase.
So that's where our focus will be. We know where we're at today with the $60 million break even. We're going to work to lower that level and as I said earlier, I believe that we have a very solid balance sheet position as we go throughout 2009 with the cash that we have, even after we pay back the convertible debt.
Mary for Patrick Ho – Stifel Nicolaus
Did you say that your total number of customers for on-pulse is about 1,000?
Robert Akins
That's correct.
Operator
Your next question comes from C. J. Muse – Barclays Capital.
C. J. Muse – Barclays Capital
The $1.9 million in terms of the accounts receivable write down, what did that flow through the income statement?
Paul Bowman
It's under bad debt expense. It actually shows up down in the SG&A number.
C. J. Muse – Barclays Capital
In terms of your gross margin guide, does that include the $4.5 million one time item?
Paul Bowman
No, and that's why I purposely split that out down below, to say of the $4.5 million, you've got roughly about 25% that will go against gross margin, so the 40% plus or minus 3% that we gave did not include the January 15 restructure. But I think I split it out for you so you can calculate it.
Operator
Your next question comes from [Jeanine – J.P. Morgan]
[Jeanine – J.P. Morgan]
Did you give your rolling four quarter market share in dollars or units?
Robert Akins
Actually we didn't specifically give the rolling four quarter market share in our prepared remarks but it is in the materials that we handed out and we showed that it was 65% for rolling four quarter value and 60% rolling four quarter units.
Operator
Your next question comes from Jay Deahna – J. P. Morgan.
Jay Deahna – J. P. Morgan
In your $33 million systems backlog, is there any other either EUV or TCZ products included in that?
Robert Akins
They are not.
Jay Deahna – J. P. Morgan
I don't know that anybody asked about TCZ yet. What's happening with that? This has been gestating for quite some time, and I'm just wondering over the next couple of years is this ultimately or finally going to become a material portion of Cymer's revenue stream?
Robert Akins
It may seem like its been gestating for quite some time from an outside perspective, but inside it's been a very active response as we've been developing the tool, running panels for customers, and then improving the tool to achieve new levels of performance for displays for panel manufacturers.
We're pleased that we've made some very substantial and significant improvements in the inherent capability of the tool and that we have customers that are now running samples for production displays on the tool
The difficulty that we're facing with TCZ right now is that you know that the display market is being hit very, very hard and so the CapEx budgets for developing new tools has been hit hard as well, and we're working with customers as they sort out their budgets and their new buy plans which is in no better condition that semiconductor buy plans.
Jay Deahna – J. P. Morgan
If you look at over this year, it's pretty clear that at least ASML is planning on shipping some EUV beta tools so do you actually plan on shipping to revenue some EUV and/or TCZ tools and if so, can you quantify is it a handful or a couple or what?
Robert Akins
The ASML tools are actually a pilot production generation of tool and we do anticipate shipping about a handful of those tools in 2009 to meet that. As far as revenue recognition addressed that earlier. These tools are brand new technology, branded generation product, we anticipate a lengthier installation and a substantially lengthier acceptance testing for this, so we're not including in 2009 any revenues for either EUV.
On the TCZ side of things we're still anticipating delivery of the first tool sometime in 2009. That would also go through the same process of installation and acceptance towards revenue in 2009 and it's possible it won't be until 2010.
Jay Deahna – J. P. Morgan
So on those EUV tools will the cost of goods sold be factored into the income statement but not the revenue recognition?
Robert Akins
No, we'll match those up. The material portion of it today we hope will hold in inventory. We do have some deferred revenue on our balance sheet currently associated with that and when we recognize revenue we'll match the material cost with the revenue.
Jay Deahna – J. P. Morgan
Do you see any of your other lithography customers shipping and bid or pilot line EUV tools this year or next.
Robert Akins
Certainly one other customer could ship a unit in 2009.
Operator
At this time there are no additional questions.
Robert Akins
Since there are no further questions, I'd like to thank everyone for joining us on today's call, and this does conclude our fourth quarter and full year 2009 earnings call. Thank you.
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