Rudolph Technologies, Inc. Q4 2008 Earnings Call Transcript

Rudolph Technologies, Inc. (RTEC)

Q4 2008 Earnings Call

February 5, 2009 4:45 pm ET

Executives

[Eric Lehman]

Paul F. McLaughlin - Chairman of the Board & Chief Executive Officer

Steven R. Roth - Chief Financial Officer & Senior Vice President, Finance & Administration

Analysts

Gary Hsueh – CIBC

Patrick Ho – Stifel Nicolaus

Peter Kim – Deutsche Bank

Gus Richard – Piper Jaffray

Presentation

Operator

Welcome to the fourth quarter earnings release 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) Mr. Lehman you may begin.

Eric Lehman

Rudolph issued its fourth quarter 2008 earnings release this afternoon shortly after the close. If you have not received a copy of the release please call my office at 973-448-4306 and a copy will be faxed or emailed to you. Joining us on the call today are Paul McLaughlin, Chairman and Chief Executive Officer and Steven Roth, Chief Financial Officer.

As is always the case I need to remind you of the Safe Harbor regulations. Any matters today that are not historical facts particularly comments regarding the company's future plans, objectives, forecasts and expected performance consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such estimates whether expressed or implied are being made based on currently available information and the company's best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that the statements are subject to a range of uncertainty that can cause the actual results to vary materially.

Thus the company cautions that these statements are no guarantees of future performance. Risk factors that may impact Rudolph’s results are described in the company's latest Form 10K as well as other periodic filings with the SEC. Rudolph Technologies does not update forward-looking statements and expressly disclaims any obligation to do so. I will now turn the call over to Paul McLaughlin.

Paul F. McLaughlin

Thank you for joining us for Rudolph Technologies fourth quarter 2008 conference call. Today in our prepared remarks I will be focusing on giving investors reasons to be positive about their investment in our tech despite the cacophony of doom and gloom forecast. I am not going to tell you that business is heading North but rather I will hope to describe what your company has done and what your company is doing to be worthy of your investment dollars.

So my message has two components, one where are we now and what have we done and two what we believe will differentiate us and make us a desired investment by customers and shareholders alike. First we are where we are and what have we done to respond to the current catharsis in the industry.

The bottom line is we are through restructuring ourselves at least for the first half of the year. We are prepared to weather a protracted downturn at current levels while executing our strategy for accelerated recovery. We were early responders to the troubles in our markets as can be seen by the positive cash flow in Q4 despite the wheels coming off the bus as cancellations, push outs and an essential stopping of order flow caused a 58% drop in revenues quarter over quarter.

We ended 2008 with sales of $131 million down 18% from the $160 million in 2007. This less than industry drop of 18% in part reflects the fact that for the first three quarters of 2008 revenues rose for us primarily because of our broad product line and exposure to the back end of the semiconductor equipment business. However that strength in our back end business came to a screeching halt in Q4 as economic fear spread across the world sparing few.

As I mentioned our response was quick as Q3 came to an end and as Q4 unfolded we continued our restructuring. We did many of the expected actions and some quite unique ones. On the expected front we had two reductions in force, multiple plant shutdowns, a hiring freeze, a capital freeze, a salary freeze and mandatory reductions in nonessential spending.

However we did our actions with a scalpel rather than a paintbrush with the long term health of the company in our uppermost mind. To that end we gave selected people options to take a severance package or to go on an unpaid furlough for specified periods of time wherein Rudolph would pay benefits and an employee would be able to collect unemployment benefits.

We felt that it was in the best interest of the employee and in the best interest of the company to be able to bring these furloughed people back to work as soon as order flow returned. Obviously the heavy burden of these extended time periods off fell on our manufacturing people although not exclusively.

I am pleased to say that the furlough program was very well received by those affected and by others in the company as they recognized that their management was actively seeking ways to minimize the number of people terminated in part because of the obviously difficult job market for laid off people. I am happy to report that 75% of the employees offered furloughs accepted them.

It makes sense to have a trained workforce ready to return to give us a competitive advantage of potentially shorter delivery times for our customers. Now component two of our strategy, a look at what we believe will differentiate Rudolph and make us a desired partner with our customers and a desired investment by our stakeholders.

We believe there are a few key strategies that if executed correctly will allow us to meet our Main Street and our Wall Street goals. First we place a high priority on fiscal discipline and this has been a staple of R Tech management since Rudolph went public in 1999. Even with the well documented order delays, cancellations and push outs that reached epic proportions in Q4 we were able once again to add to our cash bucket.

We believe this will give us adequate financial cushion in the event the current downturn is protracted. However I do want to make clear that we are not in the camp that says this is a lights out economic collapse in the semiconductor industry and it will not continue for two years. That is our opinion. We will give you our thinking later in these prepared remarks about where we believe we are in the current cycle and where we see the industry going.

The take away here is Rudolph will continue its focus on fiscal discipline. Second we have the resources and our planning to continue to invest in organic growth that supports our mission of offering best of breed solutions in our chosen niches. This translates into focused R&D spending on the five core areas where we enjoy global brand recognition from metrology and inspection excellence and leading market share position.

In fact in four of our five core competencies we enjoy the number one share position. Our spending on R&D is forecast to be between $6.6 million and $6.9 million in Q1 down only slightly from the Q4 spend at $7.1 million. Fundamentally we continue to take advantage of technology innovation in areas where we enjoy leading customer mind share and a strategic competitive advantage.

A measure of our success in development in core areas can be seen from three announcements in the past couple of months. In December a new all surface explorer inspection cluster shipped to a Japanese fab where it is used to correlate backside foreign material to front side [inaudible] a critical factor for enabling 45 nanometer and 32 nanometer processes.

This was quickly followed by an announcement of the installation of our flagship NSX system for a European customer to support one of the first applications of TSV that’s through silica via in volume production for CMOS imaging sensors. This is the first announcement for R Tech in TSV and you can expect to hear more as that enabling technology is on the critical path for extending [inaudible].

With our broad product offerings you can expect to hear how new Rudolph solutions are being positioned as manufacturers decide which TSV approach via first or via last works best for them. Obviously our strong front end presence will help with the via first option and our strong presence with OSAT the outsource assembly and test community will make us a player in the via last solution.

We believe that both via first and via last approaches will be used as each has inherent strengths for selected applications. We expect technology buys in both areas in the coming quarters as device engineers vet this enabling technology before the next upturn.

These tools and applications are designed to further enhance our number one market share position in front end macro defect inspection and our number one market share position in back end macro defect inspection. We intend to continue to release new products designed to accelerate our exit from this downturn.

To that point in January our data analysis and review business units our R Tech’s first software product Discover Solar designed specifically to help solar cell manufacturers improve energy conversion efficiency and process yield.

Also to that point you can expect to hear what I refer to as a milestone enhancement within the next few days about a new product which we believe will set a new performance standard for probing process analysis thereby enhancing our number one position in that market. Continuing my discussion about our strategy of how we believe differentiate Rudolph during this part of the cycle we are actively involved in balancing our portfolio of risks through collaborations.

These times demand new and creative business models and in the coming months we expect to be announcing collaborative relationships that support three important areas of opportunity. One revenue growth through joint ventures, partnerships, licenses, etc.; two margin improvement with continued outsourcing of non-core competency tasks; and three operating expense improvements through things like consortia, distribution agreements and joint development programs.

Finally our strategy includes inorganic growth through M&A. We are actively looking at consolidating our opportunities and I’m sure it comes as no surprise that many assets have recently become available. You may recall that I mentioned during our last conference call that you may be hearing about M&A from us shortly.

What we were expecting to announce before year end did not pass our stringent financial due diligence criteria and we have since moved on to other opportunities. The temptation is to bulk up with properties that have recently come on to the market for the first time. However I can assure you our investors that we will be painstakingly selective and will only acquire properties that have been thoroughly vetted as in the best interest of our stakeholders.

We plan not to compromise on our mission of delivering planned profitable growth which in turn makes R Tech a desired equity investment. With that I will now turn the call over to Steve and after Steve discusses financials I will return with our outlook.

Steven R. Roth

Let me start by first talking about revenue. Revenue for the 2008 fourth quarter totaled $16.4 million compared to $39 million for the 2008 third quarter and was within our revised guidance range. In the quarter we saw constant deterioration of our sales forecast with push outs and cancellations as well as planned shipments that never materialized.

As Paul mentioned for the full year 2008 we ended the year with total revenue of $131 million down 18% over the prior year. Looking at some of the revenue statistics for the quarter back end revenue was 39% of total revenue but down $13 million compared to the 2008 third quarter. International sales represented approximately 63% of revenue of which 41% of the revenue came from Asia and domestic sales accounted for the remaining 37%.

From a product perspective the revenue breakdown was inspection products 38%, metrology products 5% and software products and parts and service 57%. There was no tool revenue for memory customers in the quarter down from 39% of our revenue just two quarters ago and 300 millimeter sales accounted for 48% of the revenue.

Switching gears as previously announced the downturn in the industry as well as the decline in our stock price resulted in us recording significant impairment and write off charges in the quarter. As I stated on our last conference call annually in the fourth quarter of each year we are required to perform a detailed impairment test.

Our low market GAAP compared to the book value of our assets resulted in a $227.1 million accounting impairment charge to write off all of our goodwill and write down the value of our intangibles. In addition as a result of the slowdown in the industry we reevaluated product line versus our inventory balances and recorded a $10.6 million write down for excess and obsolete inventory.

These two items significantly affected our reported GAAP results the latter affecting the above the line margins. Fourth quarter gross margin was a negative 36% driven principally by the inventory write off but also impacted by acquisition inventory written up to fair value as a result of recent acquisitions. Adjusting for these items our gross margin would have been 30% compared to an adjusted gross margin of 46% in the third quarter of 2008.

Excluding inventory step up adjustments and any nonrecurring charges we expect gross margins will continue to be in the low to mid 30% range in the first quarter of 2009 primarily due to the low sales levels. Total operating expenses for the quarter excluding the $227 million impairment charge were $14.3 million compared to $18 million in the 2008 third quarter and included the following.

First research and development expenses totaling $7.1 million for the fourth quarter compared to $8.3 million in the 2008 third quarter the decrease primarily the result of cost restructuring in the third quarter which reduced compensation and project costs in the fourth quarter as well as fourth quarter planned shutdowns.

Second selling, general and administrative expenses of $6.4 million compared to $7.9 million in the 2008 third quarter the decrease there was primarily due to the third quarter restructuring and fourth quarter planned shutdowns offset by a reduction in foreign currency exchange gains and our international operations. Third amortization expense of $762,000 down from $1.7 million in the third quarter due to reduced amortizable intangibles as a result of the impairment charge.

As Paul has mentioned we are continuing to restructure our operations for the lower revenue levels that we are experiencing. Those efforts include headcount reductions, furloughs, plant shutdowns and project reprioritization all with the goal of reducing operating expenses. Those reductions we believe will result in total operating expenses excluding unusual charges to be in the range of $13 million to $14 million n the 2009 first quarter.

Our provision for income taxes in the fourth quarter was a benefit of $1.4 million against a pretax loss of $247 million or an effective tax rate of less than 1%. The reason for the low effective rate is primarily due to the non-deductibility of a significant portion of the goodwill impairment charge for tax purposes offset by valuation allowances established on our deferred tax balances and loss tax deduction.

For the fourth quarter we reported a net loss under Generally Accepted Accounting Principles of $245.6 million or $7.96 per share compared to a net loss of $448,000 or $0.01 per share in the 2008 third quarter.

Excluding the impact of impairment and inventory and asset write off charges, acquisition charges and amortization and share based compensation our fourth quarter non-GAAP net loss was $2.5 million or $0.08 per share and was in our guidance range of $0.07 to $0.11 per share. Looking at our balance sheet our continued focus on reducing both accounts receivable and inventory balances yielded significant rewards in the fourth quarter.

Accounts receivable decreased $17.7 million and excluding write offs inventory decreased $4.4 million from their third quarter balances. Those reductions contributed to the $4.1 million increase in cash for the quarter. As we have stated many times we are fortunate to have a strong cash position and balance sheet to weather industry downturns.

The restructuring and downsizes that we have implemented over the past several quarters are designed to lower our cost structure and reduce the use of cash while positioning us for the industry recovery when it occurs. We believe that the results of current restructuring efforts have reduced our cash breakevens to quarterly revenue levels of between $19 million and $21 million depending on product mix.

With that I’d like to turn the call back over to Paul who will discuss our guidance.

Paul F. McLaughlin

As we try to determine meaningful guidance for Q1 we see continued customer uncertainty, market volatility and very limited visibility. Consequently we do not feel comfortable and therefore we will not be giving specific revenue nor earnings guidance at this time. Nonetheless it is important to let you know that we believe in this first quarter Rudolph will be at or very near a cycle bottom.

It is very unlikely that order delays, push outs and cancellations will stop soon enough in this quarter so that we would reach Q4 revenue levels. Steve did give you operating perimeters for Q1 and that should allow you to size our expense rate.

On a positive note we believe that many of our customers with mandatory cap ex freezes in place have pent up demand for technology buys that could make the recovery which we believe could start as early as the third quarter have more upside for companies like Rudolph than most forecasters are projecting. Thank you and now let me open the call for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Gary Hsueh – CIBC.

Gary Hsueh – CIBC

First question looking at your positive cash flow, I think it’s a good job in light of such a low revenue level, my question is how much room do you have to continue to drive down your inventory and accounts receivable to actually remain cash flow positive in the coming quarters?

Paul F. McLaughlin

Obviously when the top line is a suspect you cannot make meaningful dents in the inventory. However and I caution right now the receiving docs are essentially closed so we would not be adding much, we will be able to make some headway but very limited because of the fact that the inventory itself, cost of goods is so small because our top line revenue is so small.

We will make some progress. In terms of receivables, Steve, what are you thinking?

Steven R. Roth

I think we’ll still continue to work down our receivables obviously at a lot slower place than we have been, it’s getting down to low levels and the sales are lower so there’s not a lot to go after. We are obviously cleaning up any older balances as best we can and of course you can imagine this environment is getting tougher to collect balances from a lot of our customers.

I do believe we have some room to come down a little bit in the receivable bucket.

Paul F. McLaughlin

I think we were fortunate when we saw this coming on we worked over the receivable list pretty heavily and we were fortunate to go after some particular accounts that have since exhibited some significant financial problem, in fact insolvency in one case, such that our exposure there has been very, very limited.

I’m pleased that we were on the front end of that, not pleased that we weren’t getting the orders but pleased that we did respond and get receivables in the door and in think that’s a reflection of a good job done by our finance team. Does that answer your question?

Gary Hsueh – CIBC

Paul you mentioned about the possibility of seeing some technology buys in the Q3 quarter. In which area do you see recovery to happen first if it ever comes?

Paul F. McLaughlin

I think we’re hearing out there in the world through silicon vias, as I tried to mention in my prepared remarks, that is a hot area, lots of people trying it that we’re getting wafers here where we know that in better times our customers are saying we’re just on a cap ex freeze so we can’t get anything but when it comes we’re going to get a tool to work on this in our labs.

I think the fact that the industry has come to a complete stop with companies saying don’t spend anything, it has made the situation, exacerbated it, made it more difficult in things like through silicon via where we have a very, very strong possibility of participating in multiple facets of that.

Picture, obviously if you’re familiar with this which I’m sure you are, that through silicon vias is a very hot area to extend Moore’s Law and you can do it in one of two ways, the via first or the via last. Since the via first that will be done on the wafer that’s where our front end activity really comes into play particularly our front end inspection areas as well as some of the measurement areas.

In the back end the outsourced assembly in test houses, obviously they’d like to see the vias done vias last because they wouldn’t participate if it was done on via first. It’s obvious that it’s going to be a decision made by customers. Picture a foundry, they can either decide that we’re going to do it before we ship it out to the outsourced assembly and test house or we’re going to ship it out and have them do it.

So the question is where’s is it going to be more cost effective? I think the jury is out but those are the areas that we will see our activity come back first. I also think we’re going to see some activity in some of the very thin film areas and you will be hearing from us in the next coming months about some new products in that area that are out in the beta area right now that we expect will bring revenue from a technology buy point of view within the next couple quarters.

Operator

Your next question comes from Patrick Ho – Stifel Nicolaus.

Patrick Ho – Stifel Nicolaus

Just a couple of housekeeping questions first. Steve, I know you gave limited guidance in terms of the March quarter. Do you have any idea of what your tax expense or your tax benefit might be?

Steven R. Roth

I would say for the quarter with the level we’re at we’re going to be posting losses. We’re going to have no tax expense for the quarter.

Patrick Ho – Stifel Nicolaus

In terms of the quarter just completed, I just wanted to make sure I understood the numbers correctly. You mentioned you had a quiet inventory that was in that cost of good lines. Do you have a number for that?

Steven R. Roth

It was relatively small, close to $300,000, just short of $300,000.

Patrick Ho – Stifel Nicolaus

Paul, given the current challenges that this industry is going through right now, can you just characterize how your customers are assessing technology buys because that obviously has been a strength of Rudolph’s that’s kept a level of support for you guys in the past. I think we now know that most chip makers have pared back technology buys. Can you just characterize what you’re seeing, how and when that will come back down the road?

Paul F. McLaughlin

From our perspective I think the memory people are having the most difficult time as we speak because they’re more interested in how who’s going to bail them out and who’s going to be left as they play a little bit of musical chairs in this business. From their point of view I think almost 100% of their technology work is being done at our sites.

Confidentiality agreements are flowing in here and we get the confidentiality and they bring the wafers here and they bring them to Minnesota and they bring them to our various operations so that I think they have gone that approach. It surely is not as effective and when we deal with them we talk about that and we try to structure the development work that we do for them at our site as a prelude to them getting technology buy tools in their site.

I think that actually holds in all logic as well as memory and foundry. But I’ll be very honest with you, people like Intel continue to act very responsibly and continue to put very good development activities together and continue down their path. They will surely be in the 32 nanometer production by the end of the year I believe they have announced. Judging by our look it will happen.

There are the big guys that do it and continue on their path. I hope I’m answering your question. Am I?

Patrick Ho – Stifel Nicolaus

Yes, it does. It sounds like they’re just bringing it in house with you guys and when the time comes that’s when the tools will resume I guess at normal technology buying patterns we’ve seen in the past. Final question for me, in terms of you brought up the memory market and the potential consolidation that might occur down the road.

Do you feel Rudolph, as a company’s position, with the right “consolidators” because I guess the worst case scenario is if you’re not in the right customers or not in the right companies that could leave you hanging especially once they get taken out.

Paul F. McLaughlin

In the memory side, I’m very comfortable. I think if you read our 10-K you will know that a major Korean manufacturer has been and continues to be our number one memory customer. We fully expect that to continue. They are one of those companies that has planned development activities and continues on and continues to spend despite all of the things that you hear about and continues to put engineering resources behind new development programs.

We will be with the right guy there, it’s who else wins the battle and I think in Japan it’s obvious they’re resourcing in real time right now. Things are not good in Japan as you can imagine because the consumer market has collapsed worldwide. Ergo the memory market has collapsed and I think it’s Toshiba who has always been the leader there is reviewing strategic alternatives as we speak about how to pull this package together.

Obviously we would like to see them succeed. I actually like to see anybody succeed but we’re trying to pick those who we think will succeed. When it comes to the consortia in the foundry business in Taiwan that’s a little bit harder pick. We’re open and right now I don’t think we have any unique sense of where we’ll land in that process other than the fact that we try to maintain relationships with all of them.

Operator

Your next question comes from Peter Kim – Deutsche Bank.

Peter Kim – Deutsche Bank

First I just wanted to get a clarification on your guidance. I know in your prepared remarks you said that you are not able to give guidance but potentially that this quarter’s revenue could be above Q4 levels. Did I hear that correctly?

Paul F. McLaughlin

No, I think we phrased it with the current number of push outs we’ve already experienced, cancellations and things that may very well continue between now and the end of the quarter. We don’t think we can get to Q4 run rates. We will be below Q4 run rates in all probability.

Peter Kim – Deutsche Bank

You provided a specific guidance of low to mid 30% gross margin range. I assume that you are able to achieve this on lower revenue because you have ongoing cost reduction efforts.

Steven R. Roth

Yes, that and a little bit of tool mixes that we see for the first quarter versus the fourth quarter.

Peter Kim – Deutsche Bank

On the SG&A do you have a guidance for SG&A, what your spending is going to be like? Is it going to be flat roughly or is there additional costs being taken out of there?

Steven R. Roth

I think if you go over the press release we had given numbers out of $6.2 million to $6.8 million for the first quarter.

Peter Kim – Deutsche Bank

Lastly, regarding your M&A efforts, Paul when you look at these M&A opportunities and there are a lot of them I’m sure, but when you look at them, are you looking to expand into new served markets or are you trying to grow in existing markets?

Paul F. McLaughlin

Both, but we’re trying to expand the total addressable market, try to get things that bolt on to what we already have so that we can leverage our network. We have a global network that we think is among the best. We’re very well trained and we have not cut in that area much at all over the last 10 years.

We’ve built great relationships with customers and what we need is more product that goes through that network. It’s important for us to find opportunities that can leverage that. As we have in the last couple acquisitions that we’ve done that’s been the real success is being able to leverage our global infrastructure.

We do have the parts depots and the service centers and the application specialists and the sales specialists all around the world that are dealing with the customers, we just need more product to go through to those customers. That dictates a strategy of M&A for things that bolt on and go to the same customers.

Peter Kim – Deutsche Bank

If I may just one more quick one, since it was your fiscal year end do you have the list of greater than 10% customers, how many there are?

Paul F. McLaughlin

For the quarter there were four.

Peter Kim – Deutsche Bank

Actually I was looking for the full year numbers.

Paul F. McLaughlin

For the full year there were five greater than 5%.

Peter Kim – Deutsche Bank

You don’t name them?

Paul F. McLaughlin

We don’t disclose their names.

Operator

Your next question comes from Gus Richard – Piper Jaffray.

Gus Richard – Piper Jaffray

I missed it, what was the spares and service revenue in the quarter?

Steven R. Roth

It was 57% of the spares including a little bit of software, it worked out to 57% of total revenue.

Gus Richard – Piper Jaffray

I’m assuming that revenue line is pretty stable, correct?

Paul F. McLaughlin

Within reason, Gus, you can imagine some of these fabs where we had service contracts at the 200 millimeter, they’re closing down so you’re going to lose a little bit and since the utilization rates aren’t quite as high and there’s some cannibalization going on, there is a little dent in that as these fabs try in any way they can to minimize their cash out flow because most of these guys as you know live on credit and that’s hard to come by these days.

So they’re very being very, very careful but you’re right, it’s rather stable. I think it too is subject to the vagaries of this global economic crisis.

Gus Richard – Piper Jaffray

In the fourth quarter you had zero memory revenue in terms of new shipments, correct?

Paul F. McLaughlin

That is correct.

Gus Richard – Piper Jaffray

Could you just give me a sense of the split between just tools but shipment between back end and front end backing out spares and service?

Steven R. Roth

Back end was 39% of revenue I think I said in my prepared remarks and the front end, the rest of this was front end.

Gus Richard – Piper Jaffray

I’m assuming the bulk of the spares and service came out of the front end revenue, is that correct?

Paul F. McLaughlin

A bigger chunk.

Steven R. Roth

A bigger chunk but there’s still a good portion that is a back end [inaudible].

Paul F. McLaughlin

Gus, you know some of the accounts that you follow pretty well have service contracts that we’ve had for years and most of those are front end. A bigger chunk is in place all the time kind of thing but the back end, there is more service and there has been more service over the past year. We’ve seen that grow.

We’ve also seen a very good job done by our team in the training department. Revenue in that bucket has increased rather nicely. They offer small numbers but in reality what has happened is instead of us doing training at our classrooms at the various sites, we’ve taken training on the road as many of our customers have gone to a policy of no travel so they’re not sending people to classes.

We bring the class to them and they end up funding more people through the classes when we bring them to them. I think that has worked out pretty well. There are some pockets for opportunity there. In reality it’s a stable business, up and down in certain spots, but relatively stable.

Gus Richard – Piper Jaffray

Just beyond working through the math it seems like there was basically little to no front end tool shift in the quarter?

Steven R. Roth

It was small.

Gus Richard – Piper Jaffray

We’re talking I would assume like single digits, low single digits?

Steven R. Roth

Yes.

Paul F. McLaughlin

Cancellations and push outs, Gus, that’s why we’re nervous right now is we’ve got stuff on the books and we’re scared to death that what happened in the fourth quarter could happen this quarter, people could keep pushing. We scrub that backlog every day.

Gus Richard – Piper Jaffray

In that backlog, can you give me a sense of the split between memory and logic in tools, just tools?

Steven R. Roth

I don’t have that in front of me, Gus.

Gus Richard – Piper Jaffray

The number can’t be real high.

Steven R. Roth

No, it’s just I don’t have the list in front of me of what makes up the.

Gus Richard – Piper Jaffray

I’ll follow up with that. Switching gears on you guys, through wafer vias, it looks like an interesting market. The CMOS image sensor looks like the easiest way or the first application for this technology because it’s relatively simple to implement. Could you talk about some of the other markets and how you see that technology proliferating and what I mean by that, I would imagine server memory is next and memory stacks and that sort of thing.

Could you walk me through what sort of devices you think are closest to implementing the technology?

Paul F. McLaughlin

I think that’s what we’re seeing. It’s across the board but you’re right, logic seems to be an area of opportunity early on. I think there’s more work being done in that because it offers a tremendous amount of opportunity. Having said that I think you’re seeing some things in the back end in terms of any kind of device.

They don’t want to be caught short without a solution for through silicon vias, that these things take off like people expect them to do, in all devices not just logic but in anything. Consequently they want to be there to offer their solution of via last versus via first and if you’re in the OSAT business you don’t have a chance to do a via first, you only the via last approach so you better have a good ne.

You can see them if you talk as I have talked with a couple people about it. Their sales pitch is if you can do it afterwards, you know that it’s a known good die that you’re stacking on top of a known good die. Whereon if you do wafers, you may well have yield issues that could mean you’ve stacked a few things and at the end of the day one of the stacks could give you bad die and consequently ruin the stack.

There are things that can be done and that’s where we come in and that’s what we’re doing on a regular basis. I can’t answer exactly your question because I’m not as familiar with all the devices but I’m familiar with the different approaches.

Operator

You have a follow up question from Gary Hsueh – CIBC.

Gary Hsueh – CIBC

Regarding the cash position, obviously in this downturn cash is probably one of the most important things everyone’s looking at. Judging from the low visibility for any recovery, what do you think is the baseline need for Rudolph on the cash level to maintain your ongoing business?

Steven R. Roth

The baseline cash level?

Gary Hsueh – CIBC

Yes, what kind of cash do you want to maintain to feel pretty safe during this downturn?

Steven R. Roth

I think things have changed dramatically so I think it’s a little tough to answer that question. I gave you the guidance of where we now have gotten our cash breakeven down to, a revenue level we believe of $19 million to $21 million. We look at it as what’s the time period in which we think we can get back into that level and obviously the lower we can get that level the better we are.

Paul F. McLaughlin

That is not really done but I think we gave you one time before roughly one and a half quarters of that would be typically, if you were running in the $19 million to $21 million one and a half times that rounded up to say $35 million would be a base thing you’d like to have in the pocket all the time as the safety factor and above that would fluctuate. Does that make sense to you?

Gary Hsueh – CIBC

Yes, so you mentioned about the M&A activities, is that safe to assume that with your current cash levels you’re going to look at some kind of deals in the $30 million to $40 million level or below that?

Paul F. McLaughlin

That’s surely the option and it’ll depend on how we see cash flows coming and where we see the market turning, but you’re absolutely right. That’s correct and if we can get back into cash flow that puts more availability in that bucket. Obviously we’re looking at both cash M&A and stock M&A and even though our price is low we’re not only the prices that are very, very low so in proportion exchange ratios still continue to make sense of the transactions make sense.

I caution you, there was a chunk of money in the fourth quarter that will go unnoticed as to how much we spent and we thought we were coming to an agreement with another company but it just couldn’t pass financial due diligence.

Half of our board is from Wall Street and half of them from Main Street and the Wall Street put some pretty strong criteria on our financial diligence and we are very happy in one way to say that it’s so strict but in other ways you don’t know all of the things that we do look at and then pass on. This was one of those cases in the fourth quarter.

Gary Hsueh – CIBC

Just a quick follow up, I look at this downturn compared to the downturn in ‘01/’02. At the same revenue level your growth margin is in the low 30s compared to the last downturn which was in the low 40s and operating expenses is about double the amount in the previous downturn. Could you just explain what’s the difference?

One thing I can think of is definitely you’re carrying more product lines but the cost structure is also much higher, right?

Paul F. McLaughlin

Let me give you part of this, when you’re down at these low volume levels and you end up having some revenues in the quarter that are tool based but yet are more used equipment, we take it back from one person and send it to the next person, those things tend to have lower margins. Normally it’s in the noise level when we’re talking $35 million, $40 million, $50 million a quarter.

When we’re back running at $59 million a quarter we probably had just as many used tool sales back then than we have now expect now they need a lot and they’re low margin items. I think that’s what helps bring that down rather dramatically because we have got a pretty good installed base of a lot of equipment out there.

Steven R. Roth

Plus obviously back then we had not done the August technology merger at the time, so yes we’ve got two manufacturing facilities, our infrastructure is a lot larger than it was back in that timeframe.

Operator

You have no further questions at this time.

Paul F. McLaughlin

Thank you very much everyone and I’ll look forward to talking to you after the first quarter. Thank you and good night.

Operator

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

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