Mattson Technology Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Mattson Technology, (MTSN)

Mattson Technology (NASDAQ:MTSN)

Q4 2012 Earnings Call

February 27, 2013 5:00 pm ET

Executives

J. Michael Dodson - Chief Operating Officer, Chief Financial Officer, Executive Vice President of Finance and Secretary

Fusen Ernie Chen - Chief Executive Officer, President and Member of The Board of Directors

Analysts

Edwin Mok - Needham & Company, LLC, Research Division

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Benedict Pang - B. Riley & Co., LLC, Research Division

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

Larry Chlebina

Operator

Good day, ladies and gentlemen and welcome to the Mattson Fourth Quarter and Year-End Financial Results. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Mike Dodson. Please go ahead.

J. Michael Dodson

Thank you, and good afternoon, everyone. Thank you for joining us today to discuss Mattson Technology's financial results for the 2012 fourth quarter and year end, which ended December 31, 2012. Fusen will give you an overview of the business, then I will provide the financial results and progress on our cost-reduction program and last, Fusen will close with our business outlook and guidance for the first quarter of 2013.

Before going into the specifics of the call, I'd like to remind everyone that information provided in today's conference call contains forward-looking statements regarding the company's future prospects, including but not limited to, anticipated market position, revenue, margins, operating expenses, earnings per share, tax rate, fully diluted shares outstanding for future periods, the company's ability to secure asset-based financing and address working capital needs. Forward-looking statements address matters that are subject to a number of risks and uncertainties that can cause actual results to differ materially. Such risks and uncertainties include, but are not limited to, those described in today's news release and in the company's Forms 10-K, 10-Q and other filings with the SEC. The company assumes no obligation to update this information provided in the conference call.

And now, I would like to turn the call over to Fusen Chen. Fusen?

Fusen Ernie Chen

Thank you, Mike. Good afternoon, everyone and welcome to our fourth quarter earnings conference call. Before getting started, I would like to acknowledge that this is just my second week with Mattson. I would also like to take this opportunity and on behalf of the Mattson team, to thank David Dutton for his tireless effort and the significant contributions to the company over many years. Dave's assistance in a smooth transition is greatly appreciated. Although I have spoken with many of you in the past, it is a pleasure to reengage with the investment community and that together, with the rest of the Mattson team, I look forward to working with you prospectively.

I'm very excited about the company and the opportunities that we have. We have a great team and great possibilities. First, I want to thank the entire Mattson team for their hard work and accomplishment during this management transition. Immediately, I'm emerging myself in the company and are meeting with employees to understand all aspect of all products in the business. I will then engage with our customers to better understand their ideas, suggestions, issues and concerns about the direction that we are taking. In addition to a great team, I'm very encouraged with the product portfolio that we offer. Mattson's products are competitive. So with the right focus, challenge and executions, we believe we can create more value for our customers and generate market share gains. One particular area that we will focus is to improve our technical capabilities and more importantly, a closer collaboration with our customer at all appropriate levels.

So now, I would like to take a look at our early view on 2013. Global demand for the mobile device remains strong and that we believe this will drive demand for more investment by our customer, particularly the foundry and the NAND flash memory producers. Wafer equipment demand for the year looks to remain relatively flat with the prior years. DRAM market is still tight; however, price are on the rise. This is good indication of an inflection of memory market. And that is on the rise due to the introduction of the new hybrid ultra book and the significant growth of the mobile device. During the first half of 2013, we are seeing faster innovation and a higher demand of application processors. That is driving foundry to a greater review of their 28-nanometer capacity, which will then lead to additional investment at the 20-nanometer node in the back half of 2013.

So let me now provide an update for each of our product areas, starting with our Etch products. In Etch, our paradigmE is expanding further into the Etch application space as we add capabilities that improve on-wafer performance, while keeping costs low. Our systems provide wide and a stable process window, as well as a low cost of ownership. Our paradigmE continue to engage in new applications in advanced 3D demand. In addition, we are seeing our foundry in larger customers becoming more and more cost sensitive, which is driving increased engagement across multiple applications. Our Etch system are installed at multiple customers and that we are engaged with several new customers. We have now over 50 Etch system in production and this number continue to grow. The emergence of 3D structures in both memory and the larger increase of total number of Etch applications in this forbidding plus market. Our paradigmE's low cost of ownerships and advanced Etch capability are expected to be a significant growth driver for Mattson.

To strip product. The strip is our most proliferate products and we have solid market share positions across foundry, logic, NAND and the DRAM. Our Suprema system deliver a broad capability to our customers from bulk strip to [indiscernible] strip for high-k metal gate and the 3D NAND. This broad and advanced technological capability based on our flexible, low-cost platform is the reason why Mattson strip products have the lowest established customer base in the industries.

In RTP, our Helios XP system are in volume production at a major memory customer's site. The Helios XP system's temperature control architecture specially address advanced logic processing requirement through its precise low-temperature capability and the improved pattern independent processing at higher temperatures. Today, 3 major logic and foundry customer purchased and accept the Helios XP, for 20-nanometer technology node and an additional evaluation is ongoing at another customer.

Millios, which feature our patent arc lamp technology, is designed to enable our customer to meet advanced gate anneal and activation processing requirement at the 20-nanometer technology node and beyond. To date, 2 major large foundry customer purchased and accepted our Millios tool and additional evaluation is on-going at the customer site.

Now let's turn into our results. We finished this year continuing our strong execution against our cost reduction and the gross margin improvement programs year-over-year. Despite a decrease in industry demand in the second half of 2012, we improved our gross margin by 5 percentage point and excluding restructuring charges, reduced our operating expense by $11.8 million. From the financial performance perspective, the result for the first quarter was better than expected. We exceeded the top end of our guidance range with net sales of $20.7 million, gross margin of 34% and excluding restructuring charge, a net loss per share of $0.10. Cash come in at the midpoint of our guidance at $16.2 million.

Now let me hand the call over to Mike for further detail on our financial performance. Mike?

J. Michael Dodson

Thank you, Fusen. Before I discuss the details of the financial results for the fourth quarter and full year, I would like to summarize a few key highlights. We continue to see progress in our cost reduction and gross margin improvement programs that reduces the cash flow breakeven, which is important during down cycles to conserve cash and provide significant leverage to drive profitability and cash generation during the up cycles.

For example, our gross margin for 2012 was 35.5%, which is at the high end of our targeted improvement of 4 to 5 percentage points for 2012 over the gross margin of 30.4% in 2011. This aggressive target was achieved despite the decreased industry demand in the back half of 2012. The reduction in our operating expenses continues to make progress with operating expenses before restructuring charges coming in at $12.7 million the fourth quarter of 2012, representing a 25% decrease from the same period of the prior year and an annualized savings of $17 million.

Looking forward, with the completion of the Phase IV of the cost-reduction program, we expect operating expenses to continue to decline to $11.5 million in the first quarter of 2013 and leave the first quarter at an approximate $10 million quarterly run rate. Since commencing the cost-reduction program in the fourth quarter of 2011, the projected run rate, leaving the first quarter of 2013, represents a 44% decrease from the third quarter of 2011 and an annualized cost savings in excess of $30 million. To date, our efforts to improve gross margins and reduce operating expenses have lowered the cash flow breakeven point from over $50 million to the mid- to high-$20 million quarterly sales run rate as we leave the first quarter of 2013.

I would now like to discuss the detailed financial results for the fourth quarter and full year of 2012. Net sales for 2012 were $126.5 million, representing a decrease of $58.4 million or 31.6% compared to $184.9 million in the prior year. This decrease is primarily due to lower industry demand in the back half of 2012 and primarily represented lower sales of Etch and strip systems into memory applications. For 2012, approximately 1/2 of the system sales were strip, just over 1/4 of the system sales were Etch and just under 1/4 were RTP.

Similar to the prior year, sales to our largest 2 customers, 1 in Korea and 1 in Taiwan, represented just over half of total net sales. Net sales in the fourth quarter were $20.7 million, approximately flat with the prior quarter. The mix of system sales was more heavily weighted towards Etch and strip in the fourth quarter, representing approximately 3/4 of the system shipments compared to approximately 1/2 in the prior quarter. The gross margin in 2012 was 35.5%, which is an increase of 5 percentage points from 30.4% in 2011. This increase is primarily due to improved system margins due to improved mix of higher-margin systems over the prior year, as well as the cost benefit of manufacturing all systems in-house. These factors were partially offset by an increase of unabsorbed overhead and fixed costs as a result of lower production levels, especially the back half of 2012.

The gross margin in the fourth quarter was 34%, which is down from 38% in the prior quarter. The decrease in gross margin is primarily due to a less favorable mix of net deferred sales and lower system margins. The current quarter included an increase in deferred sales resulting from a back-end loaded timing of shipments in the fourth quarter. The lower system margin is primarily due to a sale in the prior quarter of an evaluation system for which the costs have been previously fully amortized. The unfavorable mix during the fourth quarter was partially offset by lower inventory and retrofit reserve requirements compared to the prior quarter.

Fusen will discuss later in our call our forward-looking guidance, but I wanted to specifically address our expectations for gross margins in the first quarter of 2013. Due to an unfavorable mix of system sales, we expect our gross margins to be 20%, plus or minus 2%, in the first quarter. This unfavorable mix is due to sales of Aspen IIIs that represent nearly 3/4 of our system sales in the first quarter. As we have discussed on previous calls, the Aspen III is an older legacy strip system, with our lowest gross margin, and we continue to sell to one of our largest customers.

We've worked very hard to improve our gross margins and beyond the first quarter of 2013, we do not expect this same mix and we expect our margins to return to the mid-30% range. In addition, we expect to build upon our gross margin improvement in 2012, and we will continue our efforts to improve gross margin throughout 2013. Excluding restructuring charges, operating expenses in 2012 were $59.1 million, an $11.8 million reduction from $70.9 million in 2011. In the fourth quarter, operating expenses, excluding restructuring charges, were $12.7 million, which represented a decrease of $700,000 from $13.4 million incurred in the prior quarter.

We have outlined in the prior quarterly calls the details of our first 3 phases of the cost-reduction program. In January of 2013, we announced Phase 4 of our cost-reduction program that consisted primarily of a broad-based reduction in force. The estimated one-time restructuring cost resulting from the first 3 phases of the cost-reduction program is $6.9 million, of which all was incurred through the end of 2012. The estimated one-time restructuring cost for Phase 4 is a range of $2 million to $3 million, for which the majority is expected to be incurred in the first quarter of 2013. This estimate may vary as certain plans are finalized and updated cost information becomes available. Interest and other income and expense, netted to an expense of $449,000 in 2012, and $270,000 in 2011, and primarily represented a net foreign exchange loss related to our foreign-denominated balances at our U.S. operations.

Related to income taxes, the provision for income taxes was $500,000 in 2012, which consisted of a deferred tax expense related to an accrual of $500,000 deferred tax liability on a -- on foreign earnings not permanently reinvested and foreign taxes of $400,000, partially offset by a $500,000 benefit from the release of various reserves. The provision for income taxes of $315,000 in the fourth quarter is higher than the forecasted $100,000 benefit, primarily due to the $500,000 deferred tax expense mentioned earlier.

Net loss for the year was $19.3 million or $0.33 loss per share compared to a net loss of $18 million or $0.32 loss per share in 2011. Excluding restructuring charges, the net loss per share was $0.24 in 2012 as compared to $0.29 for 2011. Net loss for the fourth quarter of 2012 was $8.8 million, or a $0.15 net loss per share. This compares with a net loss of $6 million, or a $0.10 net loss per share in the third quarter of 2012 and a net loss of $4.2 million or a $0.07 net loss per share reported in the fourth quarter of 2011. Excluding restructuring charges, the net loss per share in the fourth quarter of 2012 was $0.10, as compared to a net loss per share of $0.10 in the third quarter of 2012. Our weighted average share count for the fourth quarter was 58.6 million shares.

Now looking at our balance sheet. We ended the fourth quarter with working capital of $42 million, which is down $7.6 million from $49.6 million at the end of the prior quarter. This decrease is primarily due to a decrease in our cash balances during the quarter. Cash balances at the end of the fourth quarter were $16.2 million and represented a decrease of $8.8 million from the prior quarter. The decrease in our cash balances was primarily driven by the net loss for the quarter. Including advanced billings in the calculation, the DSO for the fourth quarter was 69 days, compared to 51 days in the prior quarter. The increase in DSOs during the quarter is primarily due to the back-end loaded timing of the shipments in the fourth quarter.

In summary, from a financial performance perspective, the results for the fourth quarter were better than expected. Our revenues came in just above the top end of our guidance range, our gross margins were lower than the prior quarter but better than we expected and we finished the quarter ahead of our plan for cost reductions. The net effect, excluding restructuring charges, was that our net loss per share of $0.10 was better than the range of guidance at the beginning of the quarter. We have made good progress during the quarter and continue to actively pursue other sources of liquidity, which include considering solutions that are not dilutive to our current shareholders. We need to ensure our liquidity requirements are met and we have enough flexibility to meet the working capital requirements when the industry rebounds.

Now, I will turn the call over to Fusen, who will provide the first quarter guidance and elaborate further on our business results and prospects. Fusen?

Fusen Ernie Chen

Thanks, Mike. Looking ahead, we will remain focused and vigilant on cost reduction and on gross margin improvement. Overall, we are seeing foundry continue to increase leading edge capacity to meet the mobile electronic demand. Starting in the first half and with the current investment cycle, we expect our result to improve in beyond the first quarter of 2013.

Now let's turn to our guidance. Our guidance for the first quarter of 2013 is as follows: We expect first quarter revenue to be flat with the first quarter of 2012. We expect margin to be in the range of 20%, plus or minus 2%. As indicated by Mike, the first quarter's gross margin is low due to an unfavorable system sale mix. We said earnings will be in the range of a loss per share of $0.12 to $0.14, and the cash will be $13 million, plus or minus $2 million.

In addition, within the first quarter of 2013, with the completion of Phase 4 of our cost-reduction program, we expect our quarterly operating expenses run rate to approximate $10 million and our quarterly net sale cash flow breakeven level to be at the mid- to high-$20 million.

In summary, although the worldwide demand for semiconductor equipment has declined in the second half of 2012, we believe as the business demand returns, we are well positioned to grow net sales through key product penetrations and to leverage our streamlined operation for strong profitability and cash generation. Our focus in 2013 will be on execution and a stronger customer collaboration with a strengthened technical capability.

And with that, I would like to thank you very much for listening to our business and financial update. We are now open for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Edwin Mok from Needham & Company.

Edwin Mok - Needham & Company, LLC, Research Division

Fusen, welcome to the team. So I guess, first question I have for you is, what attracted you to come to Mattson at this point?

Fusen Ernie Chen

The growth area for Mattson is really Etch and RTP. I'm excited about the product. And these 2 products was -- are products that I wish I had a chance to work on in my previous career. And now I get a chance to grow it, so it's exciting. And for a personal point of view, I think at this stage of my career, I feel like I can afford and looking for more challenge. And as you know, Mattson, this will not be a very easy life for me, but I'm looking forward to make sure to do a good job for the company and for the shareholder.

Edwin Mok - Needham & Company, LLC, Research Division

Great, it sounds like you're up for the challenge. So I guess focusing on the 2 areas that you just mentioned, Etch and RTP. For Etch, you mentioned that you have several engagement with customer right now. Can you clarify a little bit are those engagement mostly in memory, mostly in foundry, logic, or how the kind of mix of those engagements are. And of those engagements, which ones do you think will actually materialize either to a shipment or to a sell in this year?

Fusen Ernie Chen

Okay, as you know, we actually established a good policy in memory. And memory actually is more, in past 18 months, investment was not so high. Therefore, we start to engage multiple engagement with foundry and logic. So your first question is the customer base?

Edwin Mok - Needham & Company, LLC, Research Division

Yes.

Fusen Ernie Chen

So the new engagement actually is probably more on logic and foundries.

Edwin Mok - Needham & Company, LLC, Research Division

And then regarding on the timing of potential shipment or revenue for those engagement, where do you think you're at in those activities?

Fusen Ernie Chen

To change your position in foundry/logic is a little bit more difficult. But actually, we see a little bit change in customer size because of the cost is a more sensitive trend. So we hope to have a better result by end of year or beginning of next year, that's what's hoping.

Edwin Mok - Needham & Company, LLC, Research Division

Okay. Great. That was helpful. And then kind of switching to RTP quickly, I think you mentioned on the prepared remarks you are engaged with -- both your Helios as well as your Millios is engaged with a few foundry logic customer at the 20-nanometer. I was wondering, if we listen to the foundry/logic customer, with the exception of Intel, right, everyone else is saying back half they will start to have some investment in 20-nanometer. But it sounds more just the technology development heavy investment rather than an actual large capacity ramp. I was wondering how you guys are positioned on those customer and you think that there could be more meaningful volume coming in on RTP on the back half of the year or is that more like 2014 time horizon?

Fusen Ernie Chen

Okay. So our RTP is 2 product, actually one is a Helios, one is Millios, right? Millios are kind of new. For Helios, we actually have 3, 4 customers. It's not only at the 20-nanometer node. Some company actually start from 28-nanometer. So the volume buy, we believe a lot of 20-nanometer can be a shorter node compared to 28 nanometer. We see actually, the Helios will bring quite healthy revenue to us on top of just 20-nanometers. And thus, within the second half of this year, the RTP revenue should go up coming to the first half for Mattson.

Edwin Mok - Needham & Company, LLC, Research Division

I see. Great. And then, I guess, Mike, you mentioned in your prepared remarks that in 2012 around 1/2 your business will be strip and then the other two area are around 1/4 each. I was wondering is that number of shipment, the number of tool shipments that you're referring to? Or is it just revenue? I just want to make sure I got that baseline correct. And as you look into 2013, do you see that mix changing this year or is it going to be on a similar level?

J. Michael Dodson

Yes, it was our systems -- those breakouts were systems revenue. So when we look at the breakout of system revenues, those are the numbers I give you. And as we look out into 2013, I think we would expect that strip would be more. When we look back in 2011, strip was more than 1/3 of our business. So we would expect that to go north of where it was in 2012 as a percentage of our business. And we also expect RTP to be a higher percentage because really, Etch and RTP are our 2 growth drivers, and Etch is a pretty -- a stable client base end market.

Edwin Mok - Needham & Company, LLC, Research Division

Great. Just to be really clear, so you said strip in 2012 will be less than half, which is what it was in -- through 2013 will be less than 1/2, which is what you referred to. Overall, is that correct?

J. Michael Dodson

Right. I would expect that when we're in these seats 1 year from now, that we will see Etch and RTP higher and strip less as a percentage.

Edwin Mok - Needham & Company, LLC, Research Division

Okay. Great. Very helpful. And then the last question I have is, in terms of kind of breakeven level that you guys have mentioned, mid- to high-$20 million breakeven, what is your baseline OpEx and gross margin? And assuming this -- your guidance -- this growth strategy and on top of that memory guys come back to help drive the top line and let's say, that brings your top line back to closer to your historical levels of $50 million or so, right, after a quarter or so. Does that mean that you need to have a higher OpEx to support that comparable? Can you give us a sense in terms of how OpEx can change?

J. Michael Dodson

Yes, I can answer the first part and then Fusen can add in afterwards, but the assumptions of our breakeven model is our margins are in the mid-30s and I believe, in Q1, our OpEx is at the $10 million run rate. We would expect that as -- when the up cycle does come and our revenues do increase, that our OpEx would increase as well, some variable costs like sales commissions and those types of things are included in the OpEx. So we wouldn't expect it to stay at that level. Plus, we have certain cost savings measures in place that are not sustainable or not permanent. Things like furlough programs, things like shutdowns that once we -- our revenues do grow, we become generating profits and cash, we will discontinue those types of programs. So we would expect the OpEx to go up, but we will really keep a very tight handle on that and grow it just very measurably and just what is required.

Fusen Ernie Chen

So, Edwin, maybe I can make comment. Profitability is very high priority for our company and we will try very hard to achieve that. I do believe we are at the right sizing of the company. We have a proper resource to get our goal done. As we return to profitability, we might want to look at our key area like R&D and field support selectively at the resource, but we don't expect the OpEx is going to increase dramatically from here.

Operator

Our next question comes from Christian Schwab from Craig-Hallum.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Just a couple of other quick questions. Where do you think gross margins bounce to in Q2?

J. Michael Dodson

We would expect Q2 margins to get back to the range that they were in Q4.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay, great. Can you remind us just on gross margin, or target gross margin, x legacy sales and what your targeted gross margins are now for strip, Etch and RTP?

J. Michael Dodson

Well, we don't break out specifically the gross margins by product. But qualitatively, the RTP product is our highest margin product. In the middle, is our strip -- I mean, is our Etch product and then our lowest margin is our strip.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Great. And then, I missed it, 2/3 of your product sales for the most -- for the upcoming quarter, you expect to be -- 3/4 of the sales you expect to be legacy strip sales, is that right? Did I get that correctly?

J. Michael Dodson

Yes, that's correct, and that's what is putting the significant pressure on our margins in Q1.

Operator

Our next question comes from Ben Pang from B. Riley.

Benedict Pang - B. Riley & Co., LLC, Research Division

First, in terms of the fourth quarter gross margin, what was the reason that you exceeded the guidance?

J. Michael Dodson

We had -- our mix was a little better than what we expected from the guidance.

Benedict Pang - B. Riley & Co., LLC, Research Division

And was that excluding strip or there was a strip component to the mix as well? Meaning the Aspen issue.

J. Michael Dodson

Yes, the Aspen issue, we didn't have in our Q4 forecast, so that wasn't an issue in Q4.

Benedict Pang - B. Riley & Co., LLC, Research Division

Okay, so that is just the mix between RTP, strip and Etch that created that beating?

J. Michael Dodson

Yes.

Benedict Pang - B. Riley & Co., LLC, Research Division

Okay. And then the next question is, in terms of the capital spending being flat for the year, what's your expectation for the strip market in that environment? Does the year-over-year spending at strip go up or down?

Fusen Ernie Chen

And actually, the strip is a very mature product for us. So every quarter, big or small, we always have a steady strip business for us. So your question is to what you -- the stock of the strip?

Benedict Pang - B. Riley & Co., LLC, Research Division

-

I'm talking about the overall market because typically, Mattson's revenue doesn't follow the overall trend. Industry is flat; that doesn't always mean that Mattson is flat. But I want to get specifically your view on strip. Does the -- there was a lot of reuse on strip tools, strip was lagging in the rebound, sometimes they [indiscernible]. I just want to get your feel for what's your expectation on that market.

Fusen Ernie Chen

Well, I think our strip alone, a lot of people feel is non-critical. But as I just mentioned, there are some critical strip started coming in, in the high-k metal gate. You know, ones you should not put a stress on the gate, your observation, so on and so forth. And this really is more technical critical so I do believe capacity like a lot will coming in. So we believe our second half on strip, we will continue to have a healthy business.

Benedict Pang - B. Riley & Co., LLC, Research Division

Okay. And then this is a question for Mike. In terms of the headcount reductions over the last year, and you include the Phase 4, I'm assuming your manufacturing headcount actually went up. Is that correct? If I look at the end of 2011 to what you guys project after Phase 4, the manufacturing headcounts goes up?

J. Michael Dodson

Not really. For a couple of reasons. First, we've consolidated the manufacturing in Fremont. So our manufacturing headcount in Germany has gone down. We did bring everything in-house, but again, manufacturing is not very labor-intensive. And for the most part, our manufacturing floor is contractors, so they're not actually even part of our headcount.

Benedict Pang - B. Riley & Co., LLC, Research Division

So when I look at your headcount, at post Phase 4, what area will see the biggest decrease? Or is it pretty much all are evenly cut in terms of the possibility [ph]?

J. Michael Dodson

Yes, it was really across the company. I think we -- you always go after the administrative-type areas and areas that don't touch the customer and that type of thing. But we have -- really, what we've done is work very hard to size the company at a level that we don't burn significant cash during the downturn. So it's something that we've worked at very hard over the whole year. So these weren't rash decisions and jumping in and they're very well thought of -- thought out decisions and the process that we went through to arrive at the by the end of Phase 4, our ending headcount.

Benedict Pang - B. Riley & Co., LLC, Research Division

Okay. And the last question for me. Fusen, you talked about NAND spending. When you look at a flat capital spending year, assuming NAND is up, what area is down? Because the biggest foundry is also up and Intel was up.

Fusen Ernie Chen

Yes, so I think a lot of people are hoping the second half we'll have a new capacity coming up for the NAND. And also, NAND transitioned to a 3D power production so we also believe that will add some capacity.

Benedict Pang - B. Riley & Co., LLC, Research Division

But do you think the NAND spending year-over-year is higher?

Fusen Ernie Chen

Year-over-year, this, because of our past year, probably investment was not high, so we do believe this year it will be higher.

Benedict Pang - B. Riley & Co., LLC, Research Division

Okay. And the final question, just can you repeat the guidance for the cash, the 1Q cash?

Fusen Ernie Chen

I think it's $16.2 million.

J. Michael Dodson

Yes. The ending cash was $16.2 million and the guidance was $13 million, plus or minus $2 million.

Operator

Our next question comes from Graham Tanaka from Tanaka Capital.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

Just wondering what -- if you could sort of help us out with certain general market share indications on what you think is possible this year and next year with these new customer engagements.

Fusen Ernie Chen

Okay. We do believe RTP will go up because RTP was heavily concentrated with a memory customer, and we start to penetrate maturity of our foundry and logic customer at the 28-nanometer and below. So that should bring healthy revenue for us. And also, the Millios, and we're not saying this is the one -- I probably did not have a chance to answer your questions. We see a shift in our below 20-nanometer. Our customers are moving in to the flash anneal for ultra junction activation and the high-k/metal gate anneal. We do have a very good position among in all our logic and our foundry customers. So that should bring market share in the revenue in the latter part of the year. So RTP, in summary, market share will be up. And Etch, we have a good position in memory customer and we will try very hard in the year to get the position in our foundry and the logic and that will bring the market share up. I think our strip probably is flat. I wish I answered your questions.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

That's very good guidance. The other is, I just was wondering, as industry comes back and as you gain share, how many dollars -- or what would be the ratio of working capital requirement for an incremental dollar of sales growth?

J. Michael Dodson

Well, from a working capital perspective, what we're looking at is -- and we're working very, very diligently on setting up an asset-backed financing in the range of $25 million. We believe at that level, we would be afforded the liquidity, the flexibility to address what would be the next upturn. Knowing that our DSOs are relatively short; I mean, they average of 50 days. But we always have that initial build that requires heavy cash purchasing of inventory. So from that standpoint, we believe we'll be positioned well to be able to take advantage of the next upturn and have the working capital to do that.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

So the $25 million of incremental borrowing capacity could provide good finance or fund, what amount of sales growth? $50 million? $20 million? $25 million? What kind of sales growth are you targeting?

J. Michael Dodson

Well, when we look at it, and again, if you look at our history, in Q1, we were $50 million, coming into the downturn. We went $35 million in Q2, and we've been at $20 million in the last 2 quarters, and we've guided to $20 million in Q1. So as the industry comes back and we start building up and whether that build is 30, 40, 50, that build is 40, 50, 60, we believe that $35 million would be adequate.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

Is that $35 million? Or $25 million?

J. Michael Dodson

$25 million. Excuse me, $25 million.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

So you're saying at $40 million, $50 million or $60 million of revs per quarter?

J. Michael Dodson

Yes, as we build up, sequentially.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

And I'm just wondering if there's -- there are -- what kind of potential additional cost reduction is there? Or are you pretty much through with that phase?

J. Michael Dodson

We feel that we have worked very hard at this for the better part of 5 quarters now. We believe we've sized the company appropriately for, call it, the trough level that we won't burn significant cash at this level. So in the next up cycle, we generate cash, we shore up our balance sheet, in the next down cycle, we'll be better -- I think, better situated to weather that storm and then ready for the cycle after that.

Operator

[Operator Instructions] Our next question comes from Larry Chlebina from Chlebina Capital.

Larry Chlebina

I noticed your inventories were still fairly elevated. Any of that Aspen parts or equipment coming out of inventory?

J. Michael Dodson

Yes, that's a good question. I mean, we're working very hard as you can imagine to work our -- to get cash out of our working capital. And if you're doing that, you don't like to see inventories go up and you'd like to see inventories go down more rapidly, in the last quarter. And with Aspen IIIs, as we had said, 3/4 of our system revenues in Q1 were Aspen IIIs. That's not something that we make a lot of long lead time buys for; that's not something we really carry stock for. And what it means, though, is when our mix shifts that way, we have to go out and purchase that inventory. So that's really been, in this quarter, a drag in our working capital to build those systems, because we really didn't have any in our inventory. We have to go out and buy it.

Larry Chlebina

If I remember correctly, I think you had some strip tools that were almost done or in completion and got delayed and you were going to ship them in the first quarter. Is that something we should expect?

J. Michael Dodson

Yes, the -- when the downturn started, and for us, that was in Q2, we had a lot of strip tools on our floor being built that we carry in our inventory. Now we've moved some of that out, but as our mix shifts and we ship more of the strip tools, we do anticipate to be able to use our inventory on hand and it'll help generate cash going forward.

Larry Chlebina

On Etch, I didn't quite catch you, Fusen, did you say the tools shipped so far in Etch is, was it 50 or 60 systems?

Fusen Ernie Chen

I said we have 50 systems at this moment.

Larry Chlebina

50?

J. Michael Dodson

50, yes.

Fusen Ernie Chen

5-0, yes.

Larry Chlebina

And is it -- do I have this right, that there's a considerable aftermarket or consumable with Etch that should start -- I've heard anywhere from 10% to 20%, which I guess, would be something like $400,000 a machine. Is that in the ballpark and should we start seeing some of that?

J. Michael Dodson

Yes, when you look at our spares and service business, just qualitatively, the thermal business is our best business from a spares and service standpoint. And then the strip business is good volume-wise, just because of our significant installed base. And then, the Etch business is a business that we'll be growing, like you've outlined. It is typically a higher consumable type of a system. I guess one of the disadvantages of having a low-cost machine such as ours is, it's a little easier usage and has lower consumable cost than some of our competitors. So our customers like it, but we don't get as much revenue as some of our competitors do from a consumable and spare part usage, but we do expect as our installed base grows, as these systems come off warranty, to get more revenue out of those per system.

Larry Chlebina

Fusen, your contacts in the industry, should we think that maybe your most -- the biggest benefit in terms of helping in penetrating markets, will that -- will we -- should we see better progress maybe on the foundry side? Do you think?

Fusen Ernie Chen

So Larry, I think the contact is very important. The most important thing is we provide the value to customer. So that will be something, I think, we will try very hard. So let me tell you how I think about our status. Number 1, I think cost cutting is done. And in the short-term, the new initiative probably will be very difficult for us to invest in some new area and all this. This also take time, resource; it is not critical for us. So the biggest question I have, and that will be my first priority, is with this multiple engagement with customer, is there any way we can realize the opportunity or part of the opportunity as part of this? So that will be really my first priority and I would focus the whole company going after this goal. I think the important thing is we've got to prioritize all the engagement, and understand what customers need and understand to get all the product. And then we've got to realize some of the opportunities faster than other opportunities because we really don't have 100% resource to again, to go after everything. So I believe a focused strategy is the most important things. And of course I go to the customer sites. I try all of that to establish a relationship and a line with them. And we also need to provide the best value and the product to them so we can be in a win-win situation.

Operator

Our next question comes from Edwin Mok from Needham & Company.

Edwin Mok - Needham & Company, LLC, Research Division

So first question, Mike, just want to be clear. In terms of inventory, how much, if any, do you think you might need just to write down at this [indiscernible]? And if everything goes well, how much inventory do need you will have in your balance sheet by the end of this year, let's say?

J. Michael Dodson

Well the inventory that we reported at end of the year, we don't expect to write that down anymore. We always go through the process of establishing what reserves, based on looking back 2 years on spares usage, looking 1 year out on what we'd expect to ship from a systems standpoint. So we feel very comfortable with what we reported from a valuation standpoint. As far as what will our inventory be at the end of the year, that's a very difficult question. We will strive to be as efficient as we can and use that resources as well as we can. But it's really going to be a factor of what are our revenue levels and where are we from a business perspective.

Edwin Mok - Needham & Company, LLC, Research Division

I see. Maybe, is it possible for you to tell us roughly how much of your inventory is in strip versus RTP versus Etch?

Fusen Ernie Chen

Edwin, could you repeat that?

Edwin Mok - Needham & Company, LLC, Research Division

Is it possible to tell us what percentage of revenue is of hardware for RTP versus strip versus Etch?

J. Michael Dodson

For what period?

Edwin Mok - Needham & Company, LLC, Research Division

No, for right now in the current inventory that you have on your balance sheet.

J. Michael Dodson

No, we don't break that level of detail out, but it's something that we buy based on 1 year looking out. At first, just long lead time-type items and as we get orders, then we build. So it would -- for no better description, it would mirror what our revenue breakouts or distribution is.

Edwin Mok - Needham & Company, LLC, Research Division

Okay. That's helpful. And last question, Fusen, I guess I have for you is on the RTP side, I think you have mentioned that you guys have already qualified on some 28-nanometer foundry opportunities and obviously your Helios and Millios are targeting 20 or beyond right? Is there any way you can quantify how much is your opportunity in -- for RTP at 28 versus 20? Is it 20-nanometer, you're going to have 50% more opportunity? Is it double? I'm just trying to get a sense in terms of how much potential revenue you can generate if customers has 20-nanometer ramp?

Fusen Ernie Chen

Oh, you're talking about specific for 20-nanometer, right?

Edwin Mok - Needham & Company, LLC, Research Division

Yes, 20-nanometer in terms of added number of steps or a number of tool opportunity you see versus 28-nanometer.

Fusen Ernie Chen

Right. RTP has a many, many steps. And Helios, I think we participate in a spike anneal SoC, and also CD citation [ph]. But the Millios specifically, I think at this moment, is a unique electrical characteristic that customer really like. So what's actually quite adopted by major foundry and logic customer. That alone, I see a lot of potential because it is a unique replacement for ultra junction anneal and also high-k anneal. That part actually, we will see initial volume by -- maybe by end of the year and the price is probably more healthy than Helios. I don't know if I answered your question.

Edwin Mok - Needham & Company, LLC, Research Division

If I back into what you just said, so it sounds like with Millios start -- you start to see and sell some Millios, you expect your RTP to double from 28- to 20-nanometer? Did I get that correct or is that not realistic to think like that?

Fusen Ernie Chen

Edwin, I think I've been with the company for 1 week. So I probably, need to do a little more study. Probably, I hope I can answer your questions next time. I probably don't have a full perspective to answer your questions at this moment. We do believe RTP is -- will be a good business for us in the second half of the year.

Operator

[Operator Instructions] And we show no further questions. Our Q&A session will end for today. I will turn it back over to Mr. Chen for closing remarks.

Fusen Ernie Chen

Okay, thank you. And once again, thank you for joining our first quarter and the year end 2012 conference call. We look forward to updating you on our progress in the next quarter's conference call. Thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!