Mattson Technology, Inc. Q1 2009 Earnings Call Transcript

| About: Mattson Technology, (MTSN)

Mattson Technology, Inc. (NASDAQ:MTSN)

Q1 2009 Earnings Call Transcript

April 29, 2009 5:00 pm ET

Executives

Laura Guerrant – IR Counsel

Andy Moring – CFO

Dave Dutton – President and CEO

Analysts

Gary Hsueh – Oppenheimer & Co.

Mary Lee – Stifel, Nicolaus & Co.

Hari Chandra – Deutsche Bank

Edwin Mok – Needham & Company

Ben Pang – Caris & Company

Operator

Good day and welcome to the Mattson Technology, Inc. first quarter financial results conference call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Laura Guerrant, Mattson Technology’s Investor Relations Counsel. Please go ahead.

Laura Guerrant

Thank you and good afternoon everyone. Thank you for joining us today to discuss Mattson Technology’s financial results for the first quarter of fiscal 2009, which ended March 29.

In addition to outlining the company’s financial results for the quarter, we will also provide guidance for the second quarter of fiscal 2009. On today’s call are Dave Dutton, Mattson Technology’s President and Chief Executive Officer and Andy Moring, the company’s Chief Financial Officer.

Before turning the call over to Andy, 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, bookings, revenue, margins, earnings per share, tax rate and fully diluted shares outstanding for future periods.

Forward-looking statements address matters that are subject to a number of risks and uncertainties that could 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 the information provided in this conference call.

And in addition, Dave and Andy will be marketing with the investor community next week, the week of May 4. And if you are interested in meeting with management, please contact me at 808-882-1467.

And with that, I would like to turn the conference over to Andy. Andy?

Andy Moring

Thank you, Laura, and welcome to our first quarter 2009 conference call. With me today is our president and CEO, Dave Dutton. After I review the financial performance and give guidance, Dave will comment on the business and then we will open up the call for Q&A.

During the first quarter, end markets have continued to be severely impacted by global financial conditions. Accordingly, Mattson has continued to focus on cash preservation, cost reduction and protecting the investment in our new products. Since the middle of 2008, we have implemented strict cost control initiatives, including reductions of our global headcount by over a third and salary reductions for all employees.

While the resulting operating expenses and cash position for the first quarter are in line with our goals, I can assure you that we will continue to drive costs down until the market recovers. Most importantly, despite the reduction in spending we have been able to continue the investment in our new product initiatives and have achieved important milestones that Dave will elaborate on.

Here are the key points relative to our financial performance for the first quarter. The ongoing implementation of our cost reduction initiatives enabled us to reduce our operating expenses to levels not seen since 2004, and has lowered our breakeven level below $40 million. Ending cash balances of $91.6 million was better than our guidance. Among our peers, our cash position at $1.84 per share remains one of the strongest in our industry, and we continue to have no debt. And in line with our strict financial discipline, we took additional reserves to maintain the conservative valuation of our balance sheet.

Now to a more detailed look at our financial results for the first quarter, which as anticipated reflects the severity of the continued downturn and the industry’s reduced capital spending. Net sales of $5.6 million were down $7.5 million when compared to the fourth quarter. Fab utilization due to excess capacity remained low seriously impacting not only shipments of new tools but also reducing our normally steady spares and service activity.

Gross margin for this quarter was negative $7.9 million compared to a positive $600,000 in the fourth quarter. This unfavorably gross margin is attributable to manufacturing under absorption at these low revenue volumes and $9.3 million of additional reserves for excess inventory and vendor commitments.

Per company policy, the inventory reserve adjustments represent excess to one-year demand for our equipment and two years for our spares inventory, but is not necessarily indicative of obsolete inventory. We believe that much of this inventory will be consumed when the market recovers.

Operating expenses for the first quarter excluding restructuring and impairment charges, and other significant items were $19.5 million compared to $23.7 million in the fourth quarter. We also had incremental charges of $9,000 related to prior year restructuring plans in the first quarter as compared to $36.4 million of incremental charges in the fourth quarter related to significant items, restructuring charges, and the impairment of goodwill, intangibles, and long-lived assets.

The last time that our operating expenses were at these levels was about five years ago. We are pleased that our ongoing operating expenses have shown such dramatic decreases, but also believe that the full impact of the initiatives will result in further savings in the second quarter.

First quarter GAAP net loss was $27.2 million or $0.55 loss per share compared with a net loss of $60.5 million or $1.22 loss per share for the fourth quarter. The first quarter net loss included restructuring charges of $900,000 or $0.02 loss per share compared to restructuring and impairment charges totaling $30.9 million or $0.62 loss per share in the fourth quarter.

Turning now to the balance sheet. Cash, cash equivalents and short-term investments at the end of the first quarter were $91.6 million, which exceeded our guidance. The restructuring activities we have initiated over the past several quarters are showing results and we are clearly reducing our cash burn rate, while maintaining our investments in new products. Consistent with the fourth quarter, the decrease in cash for the quarter is considerably lower than the operating loss as we continue to use our existing inventories and payments of receivables to minimize the cash impact to our operating results.

We have been steadily reducing our rate of cash consumption. Despite exceedingly low revenue levels our cash decreased by $11.8 million in first quarter compared to a decrease of $14.3 million in the fourth quarter 2008 and a decrease of $18 million in the third quarter of 2008. Our cash has high liquidity and we continue to have no offsetting debt. Due to the low receivables balances we expect the rate of our cash consumption to increase slightly in Q2. However, we are intending to manage our cash burn to less than $14 million, which is within the target of six quarters to eight quarters of cash reserves that we have previously set for the company. Mattson's management continues to monitor our cash situation closely and will continue to take the steps necessary to achieve the six-quarter to eight-quarter target.

Inventories decreased by $8.6 million during the quarter primarily due to reserve adjustments. Because of the conservative inventory adjustments taken in the last two quarters, over 35% of our gross inventory has been reserved. Approximately 45% of our net inventory is for evaluation tools already delivered or new product inventories being built for shipment to our customers’ production sites. Another 23% of net inventory is for worldwide spare part support requirements.

I will now turn to our guidance for the second quarter of 2009. Our guidance is predicated on our customers’ cautious capital expenditures, which are directly tied to the macroeconomic situation and the oversupply conditions in the semiconductor market. Our guidance is as follows. Q2 revenues in the range of $7 million to $14 million. Gross margins will be less than 10%, reflecting manufacturing under absorption at these very low volumes. And earnings will be in the range of loss per share of $0.50 to loss per share of $0.40.

We anticipate that the decrease in cash for the quarter will once again be considerably below operating losses and expect that we will end the second quarter with the cash position of approximately $78 million. We have sufficient inventory units on hand to effectively handle most tool demand for the next several quarters.

So let me summarize. While we are guiding for revenues to be up sequentially we would caution investors that the economic environment is still uncertain and the industry remains volatile. Despite signs of improved business conditions, we remain cautious with prudent cost containment programs that have enabled us to maintain a significant amount of cash. This cash allows us to continue to invest in our future, while maintaining our 1.5 to two-year margin of safety. We will continue to manage costs going forward, but we reiterate that we will not jeopardize our growth initiatives.

Now I’d turn the call over to Dave who will elaborate further on Mattson's business results and prospects. Dave?

Dave Dutton

Thanks, Andy, and good afternoon everyone. As Andy noted, the semiconductor industry continued to decline in the first quarter. And our operating results directly reflect the widespread weak economic conditions. During these difficult times, we have continued to fund our product portfolio and have strategically invested in major growth markets that position Mattson Technology for advancement as the market recovers.

We are seeing a return on this investment, and last week we announced a significant milestone securing two follow on orders for our Nexion etch system. This follow-on order from our long-term customer highlights the technologically superior and differentiated solutions that we provide to our global customer base and further validates our etch technology is at the leading edge.

We have been able to maintain our investment in etch and drive of a leading edge product forward, which is key to our long term growth even while cutting costs. Over the past six months, our strict cost containment measures have resulted in reduced operating expenses of approximately 30%, and we have continued to achieve our cash targets.

While we expect to continue to be affected by the global economic recession, over the last month and a half, we have been encouraged by increased activity of our customers. While visibility is limited on the timing of capacity expansions, semiconductor companies are carefully pursuing essential technology buys, which is driving the early stages of improved market condition. Business activity has improved for us, including our new products. And we are optimistic that our low spending remains at relatively leverage reduced levels, we believe that we have reached a trough. However, resurgent and spending from here is clearly dependent upon in a recovery in global IC demand, the timing and intensity of which remains unclear at the moment.

Turning to our product portfolio, there have been a number of highlights during the quarter. In etch, in addition to the Nexion order I mentioned earlier, we are working closely with leading memory and logic customers serving a number of different dielectric etch applications, and we expect tool placement by some of these customers as we move through 2009. Beyond Nexion, our Alpine etch back system is undergoing device qualification at a leading foundry customer. This system is demonstrated a significant cost of ownership advantage against a leading etch competitor. We are using this cycle to aggressively extend our etch into new applications and customers, increasing our positioning to outperform in the next cycle.

As further evidence of our strong positioning for the future, our millisecond annealing RTP system, the Millios, addresses one of the fastest growing market segments and we are currently in qualification at a leading memory customer. In parallel, we are working with a number of logic and foundry customers for 32-nanometer and below technology nodes. Our unique and differentiated millisecond anneal solution provides production worthy on-wafer results as customers migrate to advance technology nodes.

In our core products, we remain a leader in the dry strip and RTP segments. According to the latest industry reports, Mattson’s strip has regained a leading market share position in dry strip. In fact, according to these reports Mattson was the only major strip supplier to gain significant market share in this difficult economic environment. In addition, in RTP, we are seeing new activity around our Helios in the logic area, which offers unique low temperature and yield capability enabling the sub 45-nanometer transistor formation. As technology-driven buy [ph] activity recovers, this broader set of applications expands our market opportunities.

Before we take your questions, let me close with saying that Mattson Technology has the requisite experience to manage through tough times and emerge even stronger in the next growth cycle. We remain intensely focused on our customers’ top priorities, enhancing their productivity and superior technology to migrate to the next generation. Finally, we remain committed to investing in research and development to remain at the forefront of technology as evidenced by our etch announcement.

We continue to maintain a strong financial position to support the company’s growth strategy and future business objectives. Our cash reserves have been built with a cyclical nature of this industry firmly in mind. And we have one of the strongest cash positions in our industry, which we will judiciously use to position Mattson Technology for the future.

And with that I’d like to thank you for listening and we are now open for your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) We’ll go first to Gary Hsueh with Oppenheimer & Co.

Gary Hsueh – Oppenheimer & Co.

Hi, Dave. Thanks for taking my question. Just in terms of an update on the Nexion etch tool at this Korean memory customer, can you give us an update now that you’ve gotten these two follow-on orders, the status in terms of revenues recognition on the tool that have been placed there previously.

Dave Dutton

Yes. Hi, Gary, and thanks for listening. Just real quick, it’s an Asian customer. I don’t want to get into specifics on which customer it is. As you know from our previous statement they have multiple tools there. And this order represents now revenue recognition on about 75% of the tools that are there. We have another tool that’s working in advance to R&D with this customer to further expand into more memory and more applications.

Gary Hsueh – Oppenheimer & Co.

Okay. So it’s a legit tool. But is that revenue recognition on 75% of the installed base, was that in Q1 or is that in your Q2 guidance?

Dave Dutton

We are expecting that in Q2.

Gary Hsueh – Oppenheimer & Co.

Okay, great. And Andy, just got a quick question here on gross margin. If I heard this correctly, you took basically $9.3 million in inventory reserves and that impacted gross margin. So, if I go back and strip that out I get gross margin somewhere in the 24.9% range?

Andy Moring

Yes, that’s exactly right.

Gary Hsueh – Oppenheimer & Co.

But in moving forward on higher revenue number, you are still guiding gross margin to less than 10% so – I mean we are obviously taking more reserves in Q2. Is that right?

Andy Moring

Well, we will be very cautious with that. We don’t have any specific plans to do so. But we always put a little bit of cushion in there to cover that type of contingency. So that is the case. And of course we still have the absorption issues as we’ve stated before. Our factory costs are approximately $2 million to $2.5 million per quarter that we will have an absorption issue, which is a very large amount obviously at lower volumes.

Gary Hsueh – Oppenheimer & Co.

Okay. But I just wanted to make sure that $9.3 million, that was all reserves. That didn’t include fixed costs or underutilization?

Andy Moring

No, that was all reserves.

Gary Hsueh – Oppenheimer & Co.

Okay. And so if we don’t take any reserves further in the Q2, Q3 – I mean that 25% gross margin on roughly $5 million or $6 million in revenue, I mean that’s a clean number?

Andy Moring

Yes, that’s a clean number.

Gary Hsueh – Oppenheimer & Co.

Okay, great. Thank you.

Operator

And we’ll go next to Mary Lee with Stifel, Nicolaus & Co.

Mary Lee – Stifel, Nicolaus & Co.

Hi, thank you for taking my question. Do you have the stock option expense for the quarter?

Andy Moring

Yes, you can model that at approximately $900,000.

Mary Lee – Stifel, Nicolaus & Co.

Okay. So you mentioned that your breakeven now is below $40 million. What do you anticipate it to be as we exit 2009?

Andy Moring

I think our plans are to be at that level if not lower by the end of 2009.

Mary Lee – Stifel, Nicolaus & Co.

Okay.

Andy Moring

We don’t have any plans to make that number higher. Certainly, we’re waiting for the revenue to hit that number as well.

Mary Lee – Stifel, Nicolaus & Co.

Okay. And in terms of your cost cutting measures, you know, do you think, you know, are there any left or do you think you’ve essentially tapped out in that area?

Andy Moring

No, as we discussed in the commentary, we do believe that in the second quarter that the operating expense numbers will come down slightly. So we will see the full impact of all of the cost cutting that we've done will be seen by the second quarter.

Mary Lee – Stifel, Nicolaus & Co.

Okay, great. Thank you very much.

Operator

And we'll go next to Hari Chandra with Deutsche Bank.

Hari Chandra – Deutsche Bank

Thank you. You talked about customer activity increasing, but do you have the visibility in terms of order for the next couple of quarters or so?

Dave Dutton

Yes, that’s a good question. So when I talked in our comments, we have seen customer activity increasing. Pretty typical in the early stages of starting to see the market recover. And we have seen previous to that utilization level start to come up off a floor of sub 40%, 50% range into, you know the 60% to 70% range. And with that, customers have started to look more out towards the future. We feel we have a good finger on the type of business that's there and the amount. I wouldn't say we have a (inaudible) convicted confidence on exactly the timing because I think that still relates to the overall global economic condition and as they continue to see strengthening. So I would say essentially our customers, you know, have the gun loaded, but it's not clear when they are going to choose to pull the trigger.

Hari Chandra – Deutsche Bank

Then (inaudible) comfort level in terms of putting the inventory back as the orders come back.

Dave Dutton

What we have is we have confidence in specific – small amount of buys that we think will happen and we have a higher confidence as our customers are moving, especially on our newer products where they need these to move forward in some of their initial work. That's what's giving us confidence to guide more positive forward. It's not a large jump. And from an inventory basis, I think Andy pointed out, we aren't adding inventory. We still have inventory to satisfy our near term levels.

Hari Chandra – Deutsche Bank

Thank you.

Operator

And we will go next to Edwin Mok with Needham & Company.

Edwin Mok – Needham & Company

Hi, thanks for taking my question. Just clarification on Gary's question. Are you saying you recognize two of the three Nexion to that customer? Did I get that correctly? I'm sorry three of the four Nexion do you have that customer?

Dave Dutton

Yes, that's correct. I said that we will be recognizing three of the four.

Edwin Mok – Needham & Company

I see. So if I back that out, it seems like you don’t expect to get much to sales in the strip (inaudible). Can I ask, is that just kind of being conservative or is it because those products are more tied to capacity expansion? Can you give some color of that?

Dave Dutton

Yes, I think the main thing is those products, especially the strip, is tied almost wholly to capacity expansions. RTP does have some technology component to it and we do have some RTP tools in position that, you know, we think as the next round of confidence builds, we'll see some of that activity.

Edwin Mok – Needham & Company

Great, and then actually Andy, I just have a quick – two quick housekeeping. One is on – what was your depreciation and capital expenditures for the last quarter?

Andy Moring

Depreciation and capital expense is approximately $2 million.

Edwin Mok – Needham & Company

(inaudible).

Andy Moring

Yes.

Edwin Mok – Needham & Company

Okay, great. And then – and just curious in terms of what you guys are seeing out there. I think last caller, he asked some question around that, but it seems like there's some chatter right now that maybe some of the memory companies are starting to come back and maybe do some upgrades and, Dave, you just mentioned on the RTP side maybe the – you guys may get some benefit on that side of business. Just curious what you are hearing from your customer and while you’re cautious any kind of good outlook on the coming quarters would be helpful.

Dave Dutton

Yes, sure. I think, Edwin, and this is – I think it's pretty much in line with what most of us [ph] talked about or we’ve seen our customers talk about. Our customers some of them have called the bottom feel that’s moving forward. We are seeing inventories in the channel fairly low. We are hearing especially NAND flash demand seems to be improving from the feedback we are getting and that’s giving some confidence in getting them prepared to do some movement forward. And our customers are really at the precipice are moving toward the next technology and they are trying to do it as capital intensive smart as they could, which means they are working to try and upgrade tools, utilize the assets they have as much as they can. So, that why we’re saying that we remain cautious. We're expecting that we past the worst and the worst is behind us. But the rate of growth is still unclear depending on how strong the economic recovery is.

Edwin Mok – Needham & Company

I see. One more question and then I'll go away. Just in terms of spare and service side of the business. Obviously they have been declining because utilization has been coming down quite aggressively on your customer. What are you seeing there? Have you seen stabilization? Do you expect the June quarter to be up? Any color will be helpful.

Dave Dutton

Yes, we certainly have see stabilization and right now we are planning to see the spares and service start to move up in the quarter.

Edwin Mok – Needham & Company

Great. That’s all I have. Thanks.

Operator

(Operator instructions) We will go next to Ben Pang with Caris & Company.

Ben Pang – Caris & Company

Thanks for taking my question. First question on the Nexion, how many applications do you have at that customer now?

Dave Dutton

In general, we’ve got about four applications that are already moving in volume and then there is a handful of others that are being added.

Ben Pang – Caris & Company

So in terms of the applications that you got, were those the ones that you expected?

Dave Dutton

Yes.

Ben Pang – Caris & Company

Okay. Second question, follow-up on the service, at this point, are your tools in the field seeing the same type of utilization rates that's been reported like the 70% or is there still more overcapacity on the dry strip tools?

Dave Dutton

It depends on the case. But I think we are seeing for the most part, our utilization seems to be in line in some areas and again it depends. In some areas, we're actually seeing our strip tools slightly higher capacity where they are doing more the critical layer which is classic for our strip positions and so they get utilized more aggressively in that case. And just back on the Nexion, just were they the layers we expected? Yes. And the other thing to realize with the Nexion is when we first penetrated the market with Nexion, which was right when the DRAM crash started to happen a little over 12 months ago the Nexion was on about three nodes earlier than it actually went into production at. So not only the Nexion performed, but we've qualified multiple nodes very quickly, kept the confidence with the customer and been able to drive that to production and we really appreciate the close work we've had with that customer.

Ben Pang – Caris & Company

Are you able to, I guess, give us any color on the nodes – or the four applications that you have?

Dave Dutton

No. I prefer not. The customer really prefers we don’t talk about that.

Ben Pang – Caris & Company

Fair enough. Thank you very much.

Operator

And at this time, we have no further questions in the question queue. So I would like to turn the call back over to Mr. Dutton for any additional or closing remarks.

Dave Dutton

Great. Thank you, Operator. And once again, thank you for joining our Q1 2009 conference call. And we look forward to updating you as we progress through the year. Thank you.

Operator

That does conclude today's teleconference. Thank you for your participation.

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