Ultratech's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.18.13 | About: Ultratech, Inc. (UTEK)

Ultratech, Inc. (NASDAQ:UTEK)

Q1 2013 Earnings Call

April 18, 2013 11:00 AM ET

Executives

Suzanne Craig – IR

Arthur Zafiropoulo – Chairman, CEO and President

Bruce Wright – SVP-Finance, CFO, Secretary and Treasurer

Analysts

Krish Sankar – Bank of America Merrill Lynch

Jed Dorsheimer – Canaccord

Mark Miller – Noble Financial Capital Markets

Jai Nathan – Sidoti & Company

Tom Diffely – DA Davidson

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Ultratech First Quarter 2013 Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions) This conference is being recorded today, April 18, 2013.

I would now like to turn the conference over to Suzanne Craig, Investor Relations. Please go ahead.

Suzanne Craig

Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss Ultratech’s financial results for the first quarter of 2013. A press release detailing our financial results was distributed this morning by Business Wire at approximately 5:30 a.m. Pacific Time and is available on Ultratech’s website. A webcast replay will be available on the website for approximately 60 days after the call.

Joining me on today’s call are Art Zafiropoulo, Chairman and Chief Executive Officer; and Bruce Wright, Senior Vice President of Finance and Chief Financial Officer. After M=management’s opening remarks, we will open the call for your questions.

And with that, I will turn the call over to Art.

Arthur Zafiropoulo

Thank you, Suzanne. Good morning and welcome to our first quarter 2013 conference call. During the course of this presentation, we will make projections or forward-looking statements regarding future events and the financial performance of the company. We wish to caution you that such statements are just predictions and actual events can differ materially. We refer you to the documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company’s Annual Report filed on Form 10-K for the period ending December 31, 2012, filed as of March 1, 2013. These documents contain and identify important factors that could cause the actual results to differ materially.

The first quarter results were top-line sales of $60.6 million with operating income of $13 million, which was 22% of sales. Net income was $13.7 million, 22.6% of sales and $0.48 per share. Cash flow for the quarter was positive and new systems book-to-bill was greater than one-to-one. 53% of bookings were for our laser anneal products; 36% of bookings for the advanced packaging systems; and 11% for our nanotechnology products, which now includes our atomic layer deposition systems. The ALD products contributed about 10% of the nanotechnology bookings, which we expect will increase in future quarters. Geographically, new systems bookings were: North America, 33%; Asia, 66%; Europe and Japan, 1%.

In the fourth quarter of 2012, we shared our concern with the many headwinds facing our industry, which range from the macro economy and sovereign debt, consumer confidence and increased chip inventory. Also, it’s well known that the semiconductor and logic foundries are moving from one generation technology to another, driving down chip costs and to add performance features needed for the mobility market.

The foundry logic manufacturers, we believe, are faced with the challenges in moving to the new advanced nodes with increasing risk. These risks and opportunities include, should they expand at an accelerated rate their current 28-nanometer factories, invest heavily in the 20-nanometer metal gate nodes or do they move into the same cost benefits as other customers as previous generations.

Currently, the historic planar transistors maybe moving to a new vertical structure referred to as FinFETs or 3D transistor devices. The FinFETs can offer lower cost per transistor with increasing density, where the planar transistor costs are no longer able to offer the previous cost-scaling benefits. Further compounding the problem is these new FinFET devices are quite difficult to produce with reliable yields.

Virtually every leading logic foundry in the world has active programs for 14-nanometer or 16-nanometer FinFET devices. Progress has been slower than most had expected due to the learning curve in dealing with a totally new transistor structure. This has and will be a difficult transition and many may select to move to a hybrid FinFET design to lessen the risk.

In addition, the library of chip designs are limited and with each new generation of devices, costs almost double from the previous node. We’ve been told by a reputable source that Intel spent about $5 billion last year in developing five new FinFET chip designs. A new 300-millimeter fab today can cost $3 billion to $4 billion and the toolset is different between each node. For a 20-nanometer metal gate logic device, it can require double patterning, while a 14-nanometer FinFET can require additional critical lithography steps, different inspection products and new laser annealing tools.

The company who attains good and consistent yields on FinFETs, will have an excellent chance to win a major market share position from manufacturers of advanced smartphones and tablets. Compounding the dilemma of the logic foundry is who will get Apple and Qualcomm business. There is a great deal of speculation but, obviously, the risk in making the correct decision is critical. If a mistake is made in the decision of which device node to make and the toolset needed, the effects in business for those involved could be significant. I believe this will all be much clearer in the next few quarters.

We believe based on our current information that our business will be in a pause mode for the next couple of quarters. Bruce will provide guidance in his prepared presentation. It is also important to note that regardless of which node is selected, that our LSA systems will be utilized. Two of the four leading logic foundries have given us 18 LSA basic system orders which can be configured based on a technology node they select.

Our system architecture allows for the selection of proven options and in the event of FinFET selection, we believe they’ll move to our LSA200 micro-chamber ambient control model. About one-third of these systems are currently scheduled for shipment this year and the balance in 2014.

Our LSA roadmap for new applications per node increases with FinFET devices and have the greatest list of potential process steps using FinFETs. I also believe that these companies will add to their initial commitments and the other logic manufacturer will also place a significant quantity to meet their future needs. The industry has accepted laser anneal technology and it is not if but when additional volume system orders with firm releases will occur.

Recent information with Gartner indicates an uptick in the overall inventory levels, which has increased over the past three quarters and may also be contributing to a reduction in the utilization for both the laser anneal tools and advanced patching steppers. This situation is customer specific in that some are having greater factory utilization issues than others. We believe this is occurring in both the analog and logic space.

In the last quarter PC sales also decreased 14% and possibly is having some short-term impact in the food chain. During the end of the first quarter, we saw some pull-ins, but we also had a greater number of push-outs. We did not have any cancellations. We have taken immediate action to resize our production plan for the next two quarters, reducing operating costs wherever possible and reducing executive salaries.

We’ll continue to invest in our new products to fuel our future growth. We have recently learnt from a major logic technology leader that they are developing several potentially significant new applications which could be implemented as early as the end of this year with our LSA product. This will improve device yield and electrical parameters. If the semiconductor industry and any customer changes their objectives and accelerates their plans regarding laser anneal or advanced packaging systems, we will be able to meet all their needs as we have the past. We have not decreased our potential manufacturing capacity.

We shipped our first memory LSA tool to a leading Asian memory company in the fourth quarter of last year and it is in final testing phase. We expect device development activities to begin shortly for both DRAMs and NAND flash devices. Our Superfast 3G Inspection program is progressing and we have delivered another of our 2G systems to a major NAND flash company who received the first Superfast 3G Inspection System. This NAND flash company has identified at least 11 steps in a device structure for evaluation with our Superfast Inspection tool. This product launch and its initial performance is exceeding my expectations, which we believe will result in a substantial number of orders in the second half of this year.

Our ALD asset acquisition in December is progressing very well. And as I previously mentioned, I expect this product to increase bookings and revenue in the second quarter. This pause is only temporary and with our great product portfolio, coupled with our strong balance sheet, we expect to resume our business modeling growth. You may have read today of an award given to Ultratech by Texas Instruments for Supplier Excellence. For 2012, Texas Instruments selected 12 of their 12,000 vendors/companies for this excellence award.

Ultratech has a large number of advanced packaging AP200 and AP300 systems, as well as laser anneal tools at TI’s global sites. Today, three senior executives from TI have traveled to Ultratech to present this prestigious award. We’d like to thank all of our employees, our suppliers and most of all, the Texas Instruments’ employees who work side by side, 7/24 with our people.

And with that, I’ll turn the call over to Bruce Wright.

Bruce Wright

Thanks, Art. I would now like to go through a brief analysis of our income statement and balance sheet for the quarter. Then we will have the teleconference operator open it up for your questions.

As you’ve heard from Art’s comments, the first quarter saw a sequential decrease in revenue of about 8% compared to the fourth quarter of 2012, primarily reflecting decreased revenue from laser processing, partially offset by increased revenue from advanced packaging and the high brightness LED.

Geographically, revenue decreased sequentially from the fourth quarter of 2012 in North America and Europe and increased in Asia-Pacific. Demand for advanced packaging systems in the first quarter of 2013 accounted for about 44% of revenue and about 40% of new systems orders. Laser processing systems in the first quarter of 2013 accounted for about 27% of revenue and about 48% of new systems orders. High brightness LED systems in the first quarter of 2013 accounted for about 11% of revenue and about 9% of new systems orders.

Gross margin in the first quarter of 2013 decreased to approximately 55% from approximately 56.5% in the fourth quarter of 2012, primarily due to product mix and lower volume of production.

Turning now to a comparison of the first quarter of 2013 to the first quarter of 2012, revenue for the first quarter was $60.6 million, up about 22% from $49.6 million for the same period a year ago. The company had net income for the first quarter of $13.7 million, which represented earnings per share of $0.48 diluted. This net income compares with a net income of $10.2 million or $0.38 per share diluted for the same quarter a year ago. For the first quarter of 2013 versus first quarter of 2012 comparison of revenue mix, systems revenue was up about 24% in the first quarter of 2013, and license and service revenue was up about 17%. For the first quarter of 2013 systems, revenue accounted for approximately 83% of the total, and license and service revenue for about 17%.

Geographically, revenue from Asia-Pacific for the first quarter of 2013 was $52.2 million, up about 110% from the first quarter of 2012 and represented 86% of Ultratech’s total first quarter 2013 revenue; North America had revenue of $5.2 million, down about 75% and represented 9% of the total; and Europe had revenue of $3.2 million, down about 10% and represented 5% of the total.

Our top five customers for the quarter were primarily advanced packaging and laser processing customers from Asia-Pacific. Overall, the top five customers accounted for about 76% of systems revenue. Gross margin decreased to about 55% in the first quarter of 2013 compared with 57.5% in the first quarter of 2012. This decrease was due primarily to a product mix shift.

Looking at operating expenses in the first quarter of 2013, R&D as a percentage of revenue increased slightly to approximately 14% from approximately 13.5% a year ago. SG&A expenses decreased to 19.5% of revenue, down from about 21% a year ago. Total operating expenses for the quarter decreased to approximately 33.5% of revenue from approximately 34.5% of revenue a year ago. Operating margin for the first quarter of 2013 was about 21.5% of revenue compared with approximately 22.5% for the first quarter of 2012.

Interest and other income net was essentially flat at about $100,000 in the first quarter 2013 compared to the first quarter of 2012.

The company booked an income tax benefit of $0.5 million in the first quarter of 2013. Ultratech’s tax rate is based on its jurisdictional mix of earnings and has the potential to fluctuate as business moves from one geographic region to another.

Turning now to a first quarter 2013 versus fourth quarter 2012 comparison of the balance sheet, cash, cash equivalents and short-term investments increased by about $5 million during the first quarter to total about $307 million at March 31, 2013. Accounts receivable decreased about 4% during the first quarter to approximately $41 million on a shipment decrease of about 22% compared to the fourth quarter of 2012. Inventories increased during the first quarter by about 14% to approximately $53 million. Working capital increased to about $373 million at March 31, 2013, up from about $349 million at December 31, 2012. Book value per share at March 31, 2013, was $14.44, up from $13.88 at December 31, 2012.

Now let’s take a few minutes to look at the future from a financial perspective. At this point, it’s very important to recall and underscore the Safe Harbor comments Art made at the beginning of the call. Ultratech’s markets and the industry are notoriously cyclical and fully subject to the risks enumerated in the company’s 10-Qs and 10-K. As a result, any forward-looking statements are highly vulnerable to very sudden and dramatic changes. In addition, the company undertakes no obligations to update information presented in forward-looking statements.

In looking at the future, Art has already described, in some detail, the pause that our customers are going through. Although we had some idea of this when we talked to you three months ago at last quarter’s earnings teleconference call, it turned out to be more sudden than we had anticipated.

The current state of affairs in the sector is one of general confusion, with extremely limited visibility. Based on the information we have today, we believe that this customer pause will last a couple of quarters. However, we can attach a high level of confidence to this belief since the situation is very fluid and is changing almost on a daily basis. As an example, our second quarter revenue forecast last week varied by 50% from the prior week.

As Art mentioned, this confusion is driven by the industry trying to figure out with which foundries Apple and Qualcomm will be placing their future chip orders and at which node the industry will start manufacturing FinFETs. When those decisions are finally made, the visibility should clear up substantially, but until then, the capital equipment makers will all remain in the dark and the business pause will continue. Simply stated, our customers just don’t know what their near-term future looks like and so we don’t know when or what we need to build for them.

Art told you that our first quarter 2013 book-to-bill was greater than one-to-one and that remains our goal for the second quarter of 2013. To date we have not had any order cancellations, but reflecting the confusion and uncertainty in this sector, we have recently had both delivery push-outs and pull-ins.

In response to this pause, Ultratech has moved aggressively to take mitigating steps. We have initiated a hiring freeze across the company. We have reduced our build plan and taken steps to rationalize inventory. We are taking an additional shutdown week during the Memorial Day holiday week. We are monitoring closely travel and entertainment costs and other expenses, and the senior management staff has taken a salary cut, with the company officers’ reductions being 20% to 25%.

However, we are continuing efforts to ensure that our service department fully supports our customers and enables their success. Also, we are maintaining our R&D spending plans. These projects are key to our delivering new features in existing products or entirely new products which our customers require.

Important to note is that while the near-term visibility is extremely poor, the long-term trends are actually quite clear. The industry is moving inexorably to 450 millimeters, high silicide, smaller nodes, FinFETs, 3D stacking and more critical and stress overlay specifications, all of which fit exactly into the capabilities of Ultratech’s products in a manner which results in compelling, competitive cost of ownership advantages. The industry recognizes this fact and, in spite of the pause, we’re shipping our first ambient control LSA system and first Superfast 3G system. As you know, we have already shipped our first LSA system to a memory manufacturer. This system has just completed installation.

Finally, in the first quarter of 2013, we received multisystem LSA orders from two repeat customers for 18 systems to be delivered over the next seven quarters. So, while riding out the pause period is likely to be somewhat painful, we are very pleased with where Ultratech is positioned in all its product areas. Our customers have told us Ultratech has the products they need to be successful. The immediate question is how quickly and how strongly Ultratech comes out of the pause period.

So, with that, let’s turn the discussion to financial guidance. At this point in time, we are unable to give guidance for the 2013 full year. There just is no visibility that far out from our customers. Any estimate would be a total guess, something we don’t want to do. What we can commit to is as soon as our customers provide us sufficient visibility, we will communicate to you a full-year update, either in the next quarter earnings release teleconference or, if we receive sufficient visibility earlier, through a special conference call.

Even providing any guidance on the second quarter of 2013 is questionable, as my earlier comment on the revenue forecast fluctuation pointed out. However, with the information we have today, it looks like revenue could be down sequentially about 25% compared to the first quarter of 2013. Our targets for the second quarter of 2013 are a book-to-bill greater than one-to-one and for EPS and cash flow to be breakeven.

Finally, we would like to wrap up our formal remarks by reminding you of the Reg FD restrictions. In Ultratech, the only three people authorized to talk to you about the company are: Art Zafiropoulo, the Chairman and Chief Executive Officer; me, Bruce Wright, Chief Financial Officer; and Suzanne Craig of The Blueshirt Group. For any calls or questions after the teleconference call dealing with quantitative matters, we will refer you back to the comments made during the teleconference call.

That concludes our formal remarks and now we would like to open it up for your questions. Operator, would you please begin the polling.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Krish Sankar with Bank of America Merrill Lynch. Please go ahead.

Krish Sankar – Bank of America Merrill Lynch

Yeah, hi. Thanks for taking my question. Art, I had a few of them. First and foremost, if when the industry moves to either planar or FinFET at the 20 nanometer and 60 nanometer node, I thought the number of LSAs, that should increase. If that is the case, why would it matter whether or not decided to go to planar or FinFET; shouldn’t they still be buying the tools?

Arthur Zafiropoulo

Well, the people that have already placed those orders we mentioned earlier, those 18 systems, have the basic model. And what they can do is they can upgrade those systems to the micro-chamber ambient control system. We believe that will be the configuration if they go to FinFETs. So the real question is do they expand the 28 nanometer and buy more of the current LSA, do they go to 20 nanometer, which we think is an interim step; we don’t think the benefits are there that’s going to drive that market, although we hear from TSMC they’re going to build 100,000 wafer starts, that most companies are just dabbling a few thousand wafer starts.

We don’t know anyone who is looking at that node. There are a few designs for that node right now, and there are even fewer designs for FinFETs. And so, with FinFETs, the option is in excess of $1 million. So they place the basic system to reserve slots and they have the option now to provide whatever features they need to meet whatever that node demand is.

So they got in line, they know they’re going to buy the systems, they just don’t know what configuration. These two machines are quite different. We cannot upgrade the micro-chamber ambient control system, so it’s a different system and frame and configuration. So it’s not something that we can easily manufacture and move it to either one direction or the other based on their node selection. So, at this time, they have a slot in place. The basic system price is for the normal LSA101 and they have the option to take that with the proper lead time to the 200 series.

Krish Sankar – Bank of America Merrill Lynch

All right. Let me ask it another way then. I mean ASML and many of the other companies are shipping too for 20 nanometer today, and expectations are you can get anywhere from like 40,000 to 50,000 wafer starts exiting this year on 20 nanometer at the foundries. So I’m just kind of curious, like so what kind of a laser you guys are using for that if the other equipment guys are already shipping for 20 nanometer today?

Arthur Zafiropoulo

Again, depending on the application, it’s an interim node. They could purchase the 201 and then use that to transfer over to the FinFETs. However, they are looking at the cost because the benefits are not there at 20 compared to 28. There’s just not the performance versus cost benefits. And I’m not aware of any other than one company who’s ramping up more than 50,000 wafer starts. Every other company that I’m aware of, it’s a much smaller volume, in the 5K range.

And so they’re saying essentially, hey we have capacity, if you give us orders, we’ll ramp it up. So I don’t see that right now and I think ASML this year will be shipping many more of their EUV systems and those EUV systems have a solid impact in their top-line sales. I don’t know whether they’re producing the same number of immersion steppers as they did last year. So I don’t know if those numbers, in terms of the 20 nanometer node. That node really is not being endorsed by anybody. The Qualcomms and Apples, Apple may want the 20, but they typically lag by about one generation. I know Qualcomm is pushing very hard for FinFET. So it’s a very difficult situation and the issues with yield and stress are enormous at the 14 nanometer to 16 nanometer node.

We know of two companies that have already pushed out the FinFETs at least one quarter. One major company has pushed it out between two and three quarters and one company that’s trying to enter this business has pushed it out at least one quarter and we know another company that’s now talking 2015 or 2016 to go into volume production of FinFETs. So something has to happen between now and then. And I don’t think anyone really understands what’s going to happen.

Krish Sankar – Bank of America Merrill Lynch

All right, and then a question for Bruce. Bruce, your guidance for Q2 was down about 25% in revenues. That would probably put you around $45 million of – somewhere in the mid-40s revenue run rate. When you’re saying EPS is break-even, I’m kind of curious because the last time you were at those levels, you guys were still earning like almost $0.25, $0.30 in earnings. What is going on this time?

Bruce Wright

Well, we have a much different product mix. We are continuing with our R&D efforts to get the new products out. As I indicated, we’re ramping up the Superfast product over in Singapore. We are integrating and expanding the ALD production in Massachusetts. So all of those things kind of factor in to this regard, plus we need to look also at a different jurisdiction from tax standpoint, so all of those things factor into it. It’s a different world for us than it was to compare to the last time we were at that level.

Krish Sankar – Bank of America Merrill Lynch

Got it. And then just a final question, I mean you guys are still very confident on the future outlook and like the industry trends. And if this is a near-term hiccup, do you have any plans to put your cash to use, given the share price, or some other ways of giving back cash?

Bruce Wright

We think the best use of cash at this point is to continue to use it for those great opportunities that we have in the future. As you know, we’ve been having an expansion of our facility over in Singapore. We have been looking at opportunities to increase acquisition of patent portfolios. You know what we did last year with the IBM acquisition of 200 patents. So we like those kinds of opportunities.

We are going to continue to look for situations, as we did with the ALD acquisition, for technologies that we think are in their infancy that might not even be in our historical sweet spot of products that we produce. And with everything that we’ve got going for the future, we’re going to use the cash to continue to grow the company in that regard.

Arthur Zafiropoulo

And the other thing is that we’re still moving forward in the rental program that we talked about earlier, that we’ve talked about in the next 18 months of allocating up to $50 million for that and to scale up production for Superfast in Singapore. So we are putting our cash to use right now and we will to grow this business faster. And then we’ll need that cash as we get bigger for other strategic possible acquisitions. So we’re looking at growing this business organically as well as inorganically. So we’re looking at both sides of the equation right now to accelerate the growth, top-line growth and profitability of this company.

Krish Sankar – Bank of America Merrill Lynch

Got it. Thanks, guys. Thank you.

Operator

Our next question is from the line of Jed Dorsheimer with Canaccord. Please go ahead.

Jed Dorsheimer – Canaccord

Hi, thanks Art, I just wanted to ask more directed question. Are your tools in the 20 nanometer pilot line that’s out there right now?

Arthur Zafiropoulo

We have sold tools in all including 14 nanometer, 16 nanometer, 20 nanometer and 28 nanometer. So we have tools right across the board in all those nodes.

Jed Dorsheimer – Canaccord

Okay. And so if you sold basically the spots to – those 18 tools are with one customer I presume.

Arthur Zafiropoulo

No, they’re with two. No, they’re with two of the four major larger companies, two.

Jed Dorsheimer – Canaccord

Okay. And in terms of the third, are you having the same discussions with selling system spots when once they decide to go ahead with either the 100 or 200?

Arthur Zafiropoulo

We have talked to all the four top companies and some are more cautious than others. But I think that they’ll move forward when they feel more comfortable with their balance sheet and the economic environment.

Jed Dorsheimer – Canaccord

Okay. And then could you update on timing of sort of the – if the industry moves to FinFET, how does that position you vis-à-vis getting into the operating layers versus on planar?

Arthur Zafiropoulo

Well, there are many more steps in the FinFETs than there are in the planar transistors. And the configuration of the system is quite different, so that the ASPs will move up. And so they’ll move up in excess of $1 million per system when we go to the micro-chamber configuration and I believe that’s what will be used for the FinFETs. We also are seeing this now, some breakthroughs in using this particular chamber with some special processes for the existing devices at 28 nanometers and 20 nanometers as well FinFETs, and some of the work we’re doing is down to the 10-nanometer structures. So that we think that this configuration will be the preferable one.

As I mentioned earlier, this does not feel retrofitable and it’s a major, major job. So if they were to send the tool back here for a factory conversion, it would be somewhere in excess of $4 million. It’s a big deal between these two configurations. So it’s not something that we can easily just divert one model to another in our production floor. It’s a totally new system.

Jed Dorsheimer – Canaccord

Okay. And, Bruce, the $7 million inventory build this quarter, could you just update on – and I jumped on the call late, so I may have missed this, but is that on finished goods? Was this to LSA tools or was it raw materials? How should we look at that?

Bruce Wright

Yeah. Actually, the breakout is interesting because as we have moved into some of these new areas such as Superfast, such as selling an LSA into memory, we’re in a position where we’re putting more eval units out there in the field than we have historically. And clearly, eval units are picked up under inventory until they’re accepted by the customer. So that’s actually about half of this increase is due to increasing eval units out in the field.

The other half is in raw materials and WIP and is fairly typical of situations where you have a sudden downdraft in revenue. That’s, at least in my experience, always taken out roughly about a one quarter lag for companies to get inventories in line with a revenue shift like that. And that’s what we’re looking at in this situation. So raw material and WIP went up a little bit in this quarter; we’re all over that. It should be topping out about now for us. And then we’ll be bringing that back down, just as we have in similar situations in the past.

Jed Dorsheimer – Canaccord

Okay. That’s it from me. I’ll jump back in the queue. Thanks, guys.

Operator

Our next question is from the line of Mark Miller with Noble Financial Capital Markets. Please go ahead.

Mark Miller – Noble Financial Capital Markets

Just trying to get my arms around your revenue guidance for the next quarter. At the end of the year, you had $149 million backlog, you had a book-to-bill greater than one and your book-to-bill’s greater than one this quarter. That, at least on the surface to me, looks like you’ve had very substantial push-outs. I’m just trying to understand why inventories are down when you’ve had strong backlog and strong book-to-bills, why your sales are going to be down $25 million, is it push-outs?

Arthur Zafiropoulo

Yeah, it’s push-outs. In push-outs, some of the push-outs exceeded the one-year criteria we have. I’m guessing of the backlog around 12% was pushed out more than one year and then probably another 20% to 25% which is pushed out in the next couple of quarters. And even that’s not clear as to when the real dates will be. So we’ve gotten some guidance, but not hard numbers, so that we saw, toward the end of this particular quarter, as I mentioned, a very sharp transition and had good bookings in LSA and advanced packaging, but we saw the shift in the backlog and as I said, about 12% was pushed out of the 12-month window that we scheduled for manufacturing, one of the criterias that we use. And so that’s about the story of the backlog.

Bruce Wright

Well, there’s another aspect to that, Mark, which, as you may recall, when we, in the fourth quarter of last year, were talking about orders, we were talking about multisystem orders that were coming in from repeat customers. These multisystem orders are spaced for delivery throughout the 12-month time period that we have when we can take them into backlog, so that when the orders come in, they’re not essentially immediately turnable by and large to where we’re going to get a large slug in the succeeding quarter from a multisystem order.

And that is what we’re seeing also as a part of this to where with multisystem orders coming in, they can tend to have more of a end of the 12-month period waiting than we’ve seen historically. And that’s a large part of what’s going on here.

Arthur Zafiropoulo

Yeah. I think in the last quarter, I also mentioned that even in Q4 that I felt that the first half backlog was weaker than the first half backlog of 2012, that the second half was stronger in the backlog than it was last year. And that’s what I had concerns about our visibility and a little concerned about the first half but less concerned about the second half. And I think really most industry analysts out there are really looking for a slower first half and an accelerating second half and a barn burner in 2014. So I think that they’re looking at acceleration of the second half leading into a terrific 2014, but, again, some doubts, some weakness, some concern over the first half.

Mark Miller – Noble Financial Capital Markets

I just wanted to confirm, you said 20% to 25% were pushed out a couple of quarters of the backlog, is that correct?

Arthur Zafiropoulo

Yeah, that’s about right. And about 12% was pushed out of the four quarters, right.

Mark Miller – Noble Financial Capital Markets

Last quarter, I guess you were estimating that the book-to-bill for the year would be greater than one. Are you backing off from that now?

Bruce Wright

No. What we said was that it was going to be our goal for the entire year and for each quarter in the year of getting at least a one-to-one book-to-bill ratio. And that’s still what we’re shooting for.

Mark Miller – Noble Financial Capital Markets

Okay. The last two questions were did you receive any or are you expecting any follow-on orders from memory for laser? And then Taiwan Semiconductor last night indicated they were increasing their CapEx spending by $1 million. I assume that’s a positive for you. I’m wondering if you could give us some color on that?

Arthur Zafiropoulo

Well, yeah, I can give you some color. I don’t know if they’ve identified that. What I do know is in Q1, compared to Q4 last year, being a public Taiwanese company, they have to publish their CapEx spending by customer. Their actual orders in Q1 for ASML were down 47%; for KLA, I believe, was down 27%; I believe Lam was up 13%. And so, this is published in Taiwan and so that this data indicated to us that they didn’t place the same level of orders that they did in Q4. If they are increasing their spending, that’s good news for the industry. We just wonder what it’s going to be spent on and what node.

Mark Miller – Noble Financial Capital Markets

And then finally, any follow-on orders from memory for LSA or expectations thereof?

Arthur Zafiropoulo

We still have more work to do in terms of the – we don’t expect anything to occur until the earliest, the end of this year, second half. And the same with the Superfast will insert midyear, our production system in this memory factory in Asia. And we believe the work that we’re doing now is seeding into this. We believe it’s going to go into production rather quickly, and we’re expecting several orders in the second half of this year, for delivery in 2014. We said we had a handful of systems that we expect to revenue in the second half with Superfast, and we still expect to revenue a few systems in the second half.

Mark Miller – Noble Financial Capital Markets

Thank you.

Operator

Thank you. Your next question’s from the line of Jairam Nathan with Sidoti & Co. Please go ahead.

Jai Nathan – Sidoti & Company

Hi, thanks for taking my question. The pause that you articulated in the call, is that mostly related to laser annealing or are you seeing a similar kind of impact on the AP tools as well?

Arthur Zafiropoulo

Yes, we’re seeing in both product areas. We’re not just seeing in one, we’re seeing in both. And we’re seeing it both in logic and analog.

Jai Nathan – Sidoti & Company

Okay. And can you just, on the AP front, how does it impact? I’m sorry, no, how does it impact, how does this, the FinFET option impact that?

Arthur Zafiropoulo

I don’t understand the question.

Jai Nathan – Sidoti & Company

Okay, no. Okay, just let me move on. Just on – what I was trying to get was as outsiders, what kind of goalpost should we kind of look at to kind of see this pause kind of going away? Like is there any – what would you say that we look at?

Arthur Zafiropoulo

Well, I think when we find out what’s going on, we’re going to clearly communicate it to the investment community through a conference call.

Bruce Wright

Yeah, but we tried to explicitly lay that out. The real fundamentals on the confusion that’s resulting in the pause stem from the disposition of where Apple and Qualcomm will be placing their new chip orders, plus decisions in the FinFET world as to what node the industry’s going to need to move to and when. So those are the drivers that you need to be focused on, Jai, as far as dispelling this cloud that’s leading to real limited visibility.

Jai Nathan – Sidoti & Company

Okay. And...

Arthur Zafiropoulo

And also, there’s really a selection of which vendor. There’s discussions of what percent does Samsung get, what percent does TSMC get, what does GLOBALFOUNDRIES get, do they to go UMC. There’s a lot of questions coming up right now in terms of who gets the volume of the businesses and who gets second and third sourcing. So these questions haven’t been clearly – at least we’re not aware of that information being clearly disseminated.

We can speculate, but again, these customers like Samsung and TSMC aren’t going to buy capital equipment and start new fabs on speculation. There’s fab 3, which has been delayed one quarter at Samsung, which is geared for FinFETs. That’s now moved to Q4; that was in Q3. I don’t know if it’s going to be in Q4. They’ll start buying equipment for it, but very small numbers of machines.

They’re not going to ramp this thing up because these FinFETs are extremely difficult to manufacture and maintain consistent yields. The stress issues are enormous. Intel has five years’ experience in FinFETs and I think, in some cases, they still struggle with some of their yield issues at their 14 nanometer, 16 nanometer node, not so simple. And they’ve had five years’ experience running 22 nanometer. And so this is not a simple thing transitioning from a planar transistor to a vertical transistor.

The other part of it’s the design cost. If you look at the design chipset for 28-nanometer silicon gate, it’s between $100 million and $200 million. If you move to a metal gate, say 20 nanometer, you’re talking now maybe $300 million to $400 million, and you move to a FinFET, one single design may run you $800 million, Intel’s about $1 billion. So the question is, this is a huge amount of money designing these chipsets and not everyone can afford spending that kind of money on chipset.

So it’s going to limit the number of chipsets available and who can do it, and how fast they can generate the designs. This is a whole new area in vertical transistors. So we may find that some of these people sort of morph into a hybrid, trying to combine a FinFET, maybe a shallow or shorter FinFET with some of the planar technology to reduce the risk. Maybe that will be a partial FinFET and not a full blown FinFET that Intel has today.

Jai Nathan – Sidoti & Company

Okay. Okay. Thanks.

Operator

Thank you. The next question’s from the line of Tom Diffely with DA Davidson. Please go ahead.

Tom Diffely – DA Davidson

Yeah, good morning. Art, I was curious, at what point during the quarter did you start to see more of the negative or the push-outs start to occur? I mean obviously, you gave full year guidance last time and at some point during the quarter, things had to change. I was kind of curious when that happened?

Arthur Zafiropoulo

Yeah, it was the second half of the quarter.

Tom Diffely – DA Davidson

Okay. And was it one after another or just kind of – was there some certain event that caused several customers to get more negative all at one time?

Arthur Zafiropoulo

It was gradual, then it accelerated.

Tom Diffely – DA Davidson

Yeah. Okay.

Arthur Zafiropoulo

I mean we didn’t really look at this really hard until the beginning of March really. It was March first week, second week of March, just toward the end of the quarter that we saw this thing changing very quickly.

Tom Diffely – DA Davidson

Okay.

Arthur Zafiropoulo

And obviously we notified the Board at that time what we saw.

Tom Diffely – DA Davidson

Yeah. Okay. And then if you look at – it sounds like your technology positions are still pretty strong. Have you seen any changes as far as market share goes for advanced packaging with Rudolph now getting into that game?

Arthur Zafiropoulo

Yeah, they’re not really a competitor so far. We look at all the serious competitors and there are companies out there that we are more concerned about. We’re concerned about everybody, but they haven’t really gained any momentum in the space so far and, far as we know, we haven’t lost any market share. Just the whole market has dropped. So we don’t see the same size.

The OSATs right now that were very strong last year are running at capacity of 60%, 70%. And so they were expected to get some fallout from the foundries and the foundries right now aren’t shipping that much off. I mean we see right now that the OSATs typically are weaker than they were this time last year.

Tom Diffely – DA Davidson

Interesting. Yeah. No, we’ve heard that post-Chinese New Year, there wasn’t quite the uptick in a lot of the capacity-related business, but it’s still a lot of the guys we talk to expect to see some seasonality in the second and third quarter from the OSAT players who this year seem to be more focused on advanced packaging than they are on wire bonding?

Arthur Zafiropoulo

Yeah. We agree with that. We think that there’ll be increase in the OSAT in the second and third quarter, but we think they’ll fill their existing capacity and probably won’t resume spending on CapEx probably until later this year.

Tom Diffely – DA Davidson

Okay.

Arthur Zafiropoulo

We agree with that.

Tom Diffely – DA Davidson

Okay. And then, Bruce, when you look at kind of the longer-term model, once we get back to the profitable times, the tax rate, I think previously you mentioned that it may go down to 10% this year. Was that kind of a going forward rate? Or was it a one-off at the time?

Bruce Wright

That was an estimate at the time of our outlook and both from a general market standpoint and from a jurisdictional standpoint as to what income would be work coming through our Singapore plant versus what income through our San Jose plant. But I think that that’s probably in addition to the fact that we really gave that as a 2013 estimate at the time.

That’s probably the best estimate that we have on a go-forward basis. Things, obviously, can change just depending on products and ramps and what areas come back sooner rather than later out of this pause. But I think that’s as good as any of it we have right now to give you.

Tom Diffely – DA Davidson

Okay. And so it comes down to the lasers in San Jose’s a much higher tax rate than Singapore in the advanced packaging side and so it’s kind of product mix?

Bruce Wright

Sure is. Unless our friend Obama in Washington helps us out, that’s absolutely right.

Tom Diffely – DA Davidson

Okay, all right. Thank you for your time this morning.

Operator

And we have time for one last question, that’s a follow-up from the line of Mark Miller with Noble Financial Capital Markets. Please go ahead.

Mark Miller – Noble Financial Capital Markets

As you mention, the big issue in FinFETs is stress, but that seems to play right into your strength in terms of your equipment, and I’m just wondering if you concur with that and – or can provide some more color on that?

Arthur Zafiropoulo

Mark, we totally agree with you. We think that the stress both in the laser processing, 450 millimeters and our new inspection technology, it’s right – we’re lining up big time in the FinFET area. We think this is going to be a huge opportunity for Ultratech. And we’re hoping that they solve these problems rapidly, because when they do, this company is going to grow significantly.

Mark Miller – Noble Financial Capital Markets

Thank you.

Operator

And that’s now all the time that we have for questions. At this time, I’d like to turn the call back over to management for closing remarks.

Arthur Zafiropoulo

Thank you. Our industry is historically cyclical and this pause will not in any way alter our long-term objectives. With our strong balance sheet and aggressive new product roadmap and exceptional product portfolio, we expect to continue our mission to add value for our investors. As Bruce had mentioned, we’ll communicate with you once we have better visibility.

We’d like to thank you very much for your participation today.

Operator

And, ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or 800-406-7325 and enter the access code 461-2680. We’d like to thank you for your participation, and you may now disconnect.

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