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Executives

Suzanne Schmidt - IR, The Blueshirt Group

Art Zafiropoulo - Chairman & CEO

Bruce Wright - SVP, Finance & CFO

Analysts

Krish Sankar - Bank of America/Merrill Lynch

Josh Baribeau - Canaccord Genuity

Jairam Nathan - Sidoti & Company

Mark Miller - Noble Financial Capital Markets

Tom Diffely - D. A. Davidson

Carr Lanphier - Morningstar

Ultratech, Inc. (UTEK) Q2 2013 Earnings Call July 17, 2013 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by and welcome to the Ultratech Second Quarter 2013 Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder, this call is being recorded today, July 18th, 2013.

I would now like to turn the call over to Suzanne Schmidt. Please go ahead ma'am.

Suzanne Schmidt

Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss Ultratech's financial results for the second quarter of 2013. A press release detailing our financial results was distributed this morning by Business Wire at approximately 6:00 a.m. Pacific Time and is available on Ultratech's website. A website replay will be available on the website for approximately one week.

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 management's opening remarks, we will open the call for your questions.

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

Art Zafiropoulo

Thank you, Suzanne. Good morning and welcome to our second 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 31st, 2012, as amended filed as of March 1st, 2013, and a Quarterly Report filed on Form 10-Q for the quarter ending March 30th, 2013. These documents contain and identify important factors that could cause the actual results to differ materially for those contained in our projections or forward-looking statements.

The second quarter results were top-line sales of $42.9 million with operating income approximately $1.1 million. Earnings per share was $0.03. The book-to-bill on new system orders was slightly greater than one-to-one. 35% of the bookings were for the laser anneal products, 45% bookings were for advanced packaging systems, 12% for the nanotechnology products, which includes the atomic layer deposition systems, as well as HB LED steppers, and 8% for inspection.

Geographically, new booking orders were approximately, North America 36%, Asia 53%, Europe 5%, and Japan approximately 6%. We discussed with you in the past two quarters our concern with the many headwinds facing the logic device segment of the semiconductor chip market. The memory portion specifically, the NAND flash business continued to show substantial demand and several chip makers are planning or currently expanding their capacity. We are primarily a logic centric capital equipment manufacturer of laser spike anneal and lithography packaging steppers, serving the logic device manufacturing needs.

As we had discussed during our last conference call on April 18th, the challenge of moving from a planar transistor structure, currently in mass production at the 28 nanometer node to a vertical 3D FinFET device at the 14 nanometer node is proving to be more difficult than was earlier expected. There have been delays in ramping the 14 nanometer FinFET device to manufacturing due to yield and other technical challenges, which needs to be solved. So what we thought would be a two quarter process, now expected to continue into next year. Significant progress has been made and expectations are that production manufacturing orders are expected to begin to be placed in the beginning of 2014. We are continuing to develop new advanced capabilities for both our Advanced Packing Steppers and our Laser Anneal Systems. I believe that also might be helpful to provide some historical information regarding the millisecond anneal market.

Ultratech began developing laser technology systems and processes in 1994. Our first program was to develop and build a system, which could form transistors without ion implantation, this technology was named P-GILD, which stood for projection-gas immersion laser doping. This can reduce the chip cost significantly, and we shipped a P-GILD system in 1996.

The Gel industry suggested that we move back to a less complex technology and we did by using a short wavelength laser to reach the melting point of silicon. We succeeded and built systems in the late 1990's and shipped systems in 2000. The industry again guided us to simplify the laser process even further and work at the submicron region. We did and in the mid 2000s began shipping the first generation of the technology we currently offer.

DNS Dainippon Screen with their flash system began shipping their tool about two years earlier than Ultratech, so they had virtually 100% of the millisecond anneal market with their flash tool. Although, we were two years later than the DNS flash, we have over the past several years continued to increase our market share in the millisecond anneal market with the LSA system and today we have reached a market leadership position.

A few of the [original] [ph] chip adopters of the flash DNS tool continue to use this method despite significant pattern effects, which alter the transistor performance, and wafer breakage caused by excessive stresses created by this technology. To this date DNS continues to be the only formidable flash millisecond anneal competitor that we have.

We believe that our market share will continue to increase with the advent of the FinFET devices due to superior technical advantages, lower cost of ownership, and easily extendable to the next generation of 450 millimeter diameter wafers. We will ship our first 450 millimeter LSA tool in the fourth quarter of this year.

We've continued to invest heavily in developing new system configurations including the recently shipped micro chamber ambient control system. We believe this will be very important in several respects for the manufacture of FinFETs. We have several annealing processes qualified at several logic manufacturers. We will also ship in the next two to three quarters our second generation spike melt configuration to a major logic company. Earlier in this presentation, I had mentioned that we invented and shipped the first generation system in the 2000 time period.

It is very important that logic chip manufacturers of mobile related logic chips move the FinFET technology into manufacturing as rapidly as possible. If not, then the ripple effect growth of food chain will be significant. The 20 nanometer node will not provide the cost savings and performance related gains as previous nodes slowing the addition of significant features and functions to fuel the growth of the mobile market.

Although we are now in a relatively short pause in the logic portion of our business, I'm more optimistic than I was and now feel that their added focus and a sense of urgency exhibited by both the chip companies and their customers. It won't be much longer before the logic equipment market will again accelerate and more than likely exceed the growth we had obtained in the previous cycle. Due to the complexity of each new node with the cost for the equipment has tended to increase, equipment manufacturers have attempted to develop hardware that will be useful for several generations of use. However, most often new processes are much more sophisticated leading to significant R&D expenditures from equipment companies that provide these leading edge technologies. We will continue to spend as needed to maintain our leadership and grow our market share.

As we had discussed at the last conference call, the Superfast 3G Inspection tool is generating considerable interest. We will ship the first production system capable of producing 75 12-inch diameters wafers per hour with each wafer measuring over 800,000 points of data. We are now on target to produce and ship a few 3G Superfast tools this year and transfer manufacturing to our Singapore facility early in 2014.

The Ultratech advanced packaging stepper market is expected to grow substantially in the near future, driven by 3D TSV packaging. The 3D stacking of thin semiconductor devices will be connected by producing patterns of small precise holes with lithography steppers followed by etching processes. The holes in the chip are then electrically connected. This technology has been predicted to grow for the past few years and now appears that it will be finally materialize due to the technology advancements and lower related costs.

With the introduction of the 3D packaging and a continued market growth of advanced consumer devices requiring flip-chip bump packaging; we expect that this growth will continue for several more years. We remain the market leader in lithography bump steppers and will continue to add to our intellectual property by purchasing critical enabling patents and in parallel with our internal development programs.

We recently purchased another portfolio of enabling bump pillar technology and laser processing patents from IBM in the past quarter. We will continue to strategically add IP to our portfolio of patents and applications, which now has reached about 875. We believe that with this combined strategy we can better serve our valued customers.

Also during the quarter we moved our ALD organization to a new site in Waltham, Massachusetts, and the development and applications laboratory are now fully functioning. We expect them to introduce the second generation of the most popular ALD systems, which have been sold and produced over the past few years.

Regarding our high-brightness LED stepper market, we've seen that leading high-brightness LED manufacturers are operating at virtually 100% capacity and we expect bookings to increase over the second half of 2013. We have also fully characterized our sapphire high stepper with every lithography layer at a major LED manufacturer in Asia. Our expectation is to provide a 100% stepper solution to improve yields and customer profitability.

At this time, Bruce will provide additional financial information and future guidance.

Bruce Wright

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

The second quarter saw a sequential decrease in revenue of about 29%, compared to the first quarter of 2013, primarily reflecting decreased revenue from advanced packaging and high-brightness LED, partially offset by increased revenue from atomic layer deposition. Geographically, revenue increased sequentially from the first quarter of 2013 in North America and decreased in Asia Pacific.

Demand for laser processing systems in the second quarter of 2013 accounted for about 37% of revenue and about 35% of new systems orders. Advanced packaging systems in the second quarter of 2013 accounted for about 29% of revenue and about 45% of new systems orders. High-brightness LED systems in the second quarter of 2013 accounted for 0% of revenue and about 7% of new systems orders.

Gross margin in the second quarter of 2013 decreased to approximately 47% from about 55% in the first quarter of 2013, primarily due to product mix and lower volume of production.

Turning now to a comparison of second quarter of 2013 to the second quarter of 2012, revenue for the second quarter was $42.9 million, down about 27% from $59.1 million for the same period a year ago. The company had net income for the second quarter of 2013 of $900,000, which represented earnings per share of $0.03 diluted. This net income compares with a net income of $11.2 million or $0.41 per share diluted for the same quarter a year ago.

For the second quarter of 2013 versus second quarter of 2012 comparison of revenue mix, systems revenue was down about 35% in the second quarter of 2013, and service, spares and license revenue was up about 7%. For the second quarter of 2013, systems revenue accounted for approximately 73% of the total, broken out by 66% from semiconductor and 6% from nanotechnology, and service, spares and license revenue were about 27%.

Geographically, revenue from North America for the second quarter of 2013 was $20.5 million, up about 58% from the second quarter of 2012, and represented about 48% of Ultratech's total second quarter 2013 revenue. Asia-Pacific had revenue of $18.2 million down about 43%, and represented about 42% of the total, and Europe had revenue of $3.9 million, down about 72%, and represented about 9% of the total.

Our top five customers for the quarter were laser processing and advanced packaging customers from North America and Asia-Pacific. Overall, the top five customers accounted for about 76% of systems revenue.

Gross margin decreased to about 47% in the second quarter of 2013 compared with about 54% in the second quarter of 2012. This decrease was due primarily to product mix and lower volume.

Looking at operating expenses in the second quarter of 2013, R&D expenses increased to approximately 18% from approximately 13% a year ago. SG&A increased to about 26% of revenue, up from about 19% from the same period a year ago. Both percentage increases were due primarily to the approximately 27% decrease in sales for the period. Total operating expenses for the quarter increased to about 45% of revenue from approximately 32% in the second quarter 2012.

Operating margin for the second quarter of 2013 was about 3% of revenue compared with about 22% for the second quarter of 2012.

Interest and other income net decreased to negative $200,000 in the second quarter of 2013 from $0 in the second quarter of 2012.

The company booked an income tax provision of $100,000 in the second quarter of 2013. During the year quarterly income tax provisions are determined using an estimated effective tax rate for the entire year. This rate is based on the jurisdictional mix of earnings and has the potential to fluctuate as business moves from one geographic region to another.

Turning now to the second quarter 2013 versus first quarter 2013 comparison of the balance sheet. Cash, cash equivalents, and short-term investments decreased by about $8 million during the second quarter to total about $300 million at June 30, 2013. This $8 million decrease in cash is primarily due to another acquisition of multiple IBM patents primarily in the laser processing area, which Art discussed earlier.

Accounts receivable increased about 12% during the second quarter to approximately $46 million on a shipment decrease of about 2% compared to the first quarter of 2013.

Inventories increased during the second quarter by about 5% to approximately $56 million. Working capital increased slightly to about $374 million at June 30, 2013, up from about $373 million at March 31, 2013. Book value per share at June 30, 2013 was $14.59, up from $14.44 at March 31, 2013.

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.

You may recall that in last quarter's earnings teleconference call we commented that we believe Ultratech was entering a two-quarter pause period where our customers were waiting to make any capital expenditures decisions until Apple announced where it would be placing its 20 nanometer microprocessor manufacturing requirements and if the industry could meet Qualcomm's desire for FinFET production of 14 nanometer.

Both of these questions were answered in the second quarter of 2013. So, one might think that our visibility for the near term would have cleared up as a result. Unfortunately, this is not the case both because the industry is pushing out spending plans in logic and focusing on the current strength in memory, and our customers are now grappling with the issue of how much they want to spend on the 20 nanometer logic node.

This situation means that 2014 and 2015 still look to be very good years for both the industry and especially Ultratech when logic spending kicks in. The near-term, however, continues to suffer from a lack of clarity and remains very dynamic with the changing outlook occurring almost on a weekly basis.

Our guidance at this point for the remaining quarters of 2013 is for both to be about flat in revenue with the second quarter of 2013. Our EPS target for both quarters is to achieve at least break even and remain profitable. Cash flow looks to be positive for both quarters.

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 Schmidt 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 does come from the line of Krish Sankar with Bank of America/Merrill Lynch.

Krish Sankar - Bank of America/Merrill Lynch

Yeah, hi. Thanks for taking my question. Art, I had a few of them. Number one, some of your peers like KLA seem to be saying that foundry should start recovering in calendar Q4. So, I'm kind of wondering that why you guys are not seeing it? Is it a timing issue or is there something else going on?

Art Zafiropoulo

Yeah, I think that KLA being a inspection company probably comes a little bit earlier, and TSMC certainly is looking at the 20 nanometer node and probably looking to buy more inspection equipment. When you have yield issues as they're having especially in the FinFET node they tend to buy more advanced inspection tools to try to resolve those problems quicker. So, I think that the inspection is sort of a leading indicator of what's going to happen.

Krish Sankar - Bank of America/Merrill Lynch

Can you help us understand what is your market share at the foundry at 28 nanometers and what do you think it is at 20 nanometers of planar node for LSA?

Art Zafiropoulo

Krish, I don't have that number offhand. I can go back and calculate and maybe present it at the next meeting. I would be guessing at this stage. So, I don't know. What I can share with you is that the 28 nanometer has been our strongest node in LSA. And so, that's been very clear that it grew substantially over the 40 nanometer node. And the 20 is an interim node and some companies are trying to extend some of the 28 to 20, and some earlier are extending their early designs which were three, four years ago to the 20 nanometer node. So, it's very difficult, but right now all I can share with you is that the 28 nanometer node is substantially greater LSA than the 40 nanometer node.

And my recollection, and we published this information and I don't have it in my fingertips, but we published charts on previous conferences and as recently I think this week but we published information regarding our market share compared to us and Dainippon Screen in the junction formation, and we’ve published the information on the entire laser area, which includes our licensee Applied Materials as the total served market. And so, we have published that information and any of those that don't have access, so we can surely make that available. But the exact numbers I don't have at my fingertips.

The other important thing is that the LSA 101 and 201 system but specifically the 101, I should add that the early adaptors bought a great deal of the 100A, which was the low throughput system. The later adaptors, which were primarily Dainippon Screen initial major companies have purchased more of the later systems, the 101 than the other companies have. So we see the late adaptors of laser, again previously the leaders in the DNS flash, if you will, have actually bought more of the more recent tools and are ramping those tools up in production. I hope that helps a little bit.

Krish Sankar - Bank of America/Merrill Lynch

Yeah, it does a lot. And then, just a couple of questions more. In the past, you had kind of sized the market where you said that the 28 nanometer node for a logic factory, which outputs about 40,000 or 45,000 wafer starts a month, the number of LSA tools needed is about 8 to 10 roughly. So I'm kind of trying to figure out if you use a analogy, what do you think is the number of LSA tools needed at the 16/14 FinFET node for a foundry for like 40,000 to 45,000 wafer starts?

Art Zafiropoulo

Let me give a little bit more color to the 16 nanometer node. The 16 as far as I understand is an extension of the 20, it's a hybrid node and so that particular device is a planar designed with vertical fins. The 14 nanometer node as I understand it is a pure FinFET and what we see is an increase depending upon the design of the devices that could increase to three to four times that of the current 28 nanometer node. So it all depends on the designs of a particular foundry, but it could reach numbers like three to four times so that, if we assume that there are 8 or 10 needs per major fab 30,000 wafer starts, we could begin to extend that to say that the potential could be in a range of three to four times that number for the 14 nanometer FinFET.

Krish Sankar - Bank of America/Merrill Lynch

That's very helpful. And then, the final question for Bruce. I got the guidance you said it's going to be flattish for the September quarter from June level. Did you say that what Q4 would be, would it be flattish to September or am I reading too much into it?

Bruce Wright

Yes. What I said was that both quarters, in other words, the third and fourth calendar quarter of 2013 would be flattish from a revenue comparison to the second quarter of '13.

Operator

And our next question does from the line of Josh Baribeau with Canaccord Genuity.

Josh Baribeau - Canaccord Genuity

Just a question in terms of may be the ramp of your customers and when you see the actual revenue. Do you tend to let's say you see a foundry report their CapEx plans, would you tend to see your revenues in that same quarter or would you maybe be a quarter before that or a quarter after that?

Art Zafiropoulo

Hi, Josh. Help me again with the question about the revenues. Usually, the revenues typically lag the equipment insertion point. So that could lag as much as two quarters and so typically depending on the staff there some then actually lag three quarters. So the equipment usually is inserted and then it's ramped up on a new fab it's longer that could be three quarters, may be slightly longer on an existing fab when they're just adding capacity it's going to be shorter. So when a new node that typically I'd say that it will be at least two quarters before you see the ramp from the chip companies.

Josh Baribeau - Canaccord Genuity

And then we talked a little bit about inspection how that seems to be front-end loaded or at least the traditional inspection from your competitors. But where does the laser tool fall in terms of that linearity, if the fab is spending let's say a billion dollars or something over the course of 12 to 18 months where do you generally within that time period get inserted?

Art Zafiropoulo

Yeah, currently our deliveries are forecast four to six months. And so typically those companies that have that delivery schedule, they may include some of the implant PVD areas, but some of the lithography, advance lithography will be longer. So you may see a company like ASML have a longer lead item because of the optics they make unless they have committed orders with upfront money.

And then inspection again usually is leading before that because again when you're ramping up a new technology node the one thing you got to do is increase your yield and one thing you have to learn is where the defects are and where the yield loss is so you go back and fix it and so that you don't ramp up a low-yielding product. So, typically at KLA, we will begin any advanced node on KLA competitor sooner than others, and then probably [ride] [ph] around it depending on the lithography commitment say to ASML. That would be a long lead item. We would follow the category with may be Implant and PVD and companies like that.

Josh Baribeau - Canaccord Genuity

Okay. Switching gears to the inspection business, looks like that's getting a little bit of momentum. Is that still, if I remember correctly, when that tool was first introduced, I think you were going after the overlay market, is that where that's going or is it going for another process?

Art Zafiropoulo

No, no that's exactly where it's being focused on and I'm glad you raised that because it's really at this time the amount of activity is increasing rather dramatically. We are really extending a lot of our talent at company sites to do analysis on that the correlation between this technology and other technology that are out there, which have much lower throughput and much lower number of data point.

So, at this time, we are really selecting those companies we're working with. We've had about 15 companies come to us asking for information and samples et cetera and we are doing that but we're not focusing on all the companies. We just don't own the resources to do that this time. So we're really focusing at this time on just a few of those companies and we hope on the next quarter to make some announcements as to the success. But we are seeing and as I mentioned earlier shipping our first Superfast system within the next month and we built a few machines that will be fully committed this year and it's on target to revenue a couple or so two or three of these systems this year. So it's not going to be material but much more important is that what's going to happen for next year and that still remains a little bit unclear but all the indications are it could be an interesting surprise for us.

Josh Baribeau - Canaccord Genuity

Okay, great. Just sort of a housekeeping question. Bruce, I may have missed the actual bookings figure or at least the book-to-bill this quarter?

Bruce Wright

Yes. We don't give actual bookings figures but Art mentioned that the book-to-bill was slightly greater than one-to-one.

Josh Baribeau - Canaccord Genuity

Great. Thank you. I'll pass it on.

Operator

And our next question does from the line of Jairam Nathan with Sidoti & Company.

Jairam Nathan - Sidoti & Company

Thanks for taking my question. Just following up on the bookings number can you give us an idea of what your backlog is and what's the breakup in your backlog between advanced packaging, laser anneal and so?

Bruce Wright

What I can do, we don't again give specific backlog numbers other than once a year at the end of the calendar year. But we told you last quarter that book-to-bill was slightly greater than one-to-one, again this quarter slightly greater than one-to-one. So backlog is increasing. You can kind of take those book-to-bill qualitative comments that we made and work off of the number, the hard number that we gave you at the end of the year last year. The other comment that I can make on backlog is that the bulk of it by far about 90% is split almost evenly between advanced packaging and laser processing with the rest made up, primarily of LED.

Jairam Nathan - Sidoti & Company

And on your inspection business, I know you said 8% of your orders were inspection. When should -- is there -- do you have any timing on revenue generation, is that going to be like 4Q kind of timeframe or later?

Art Zafiropoulo

Just right now we're expecting to revenue the shipment we're making next month, this year.

Jairam Nathan - Sidoti & Company

Okay. And my -- just last question to Bruce. On -- given the flattish revenue kind of expectation for the rest of the year, are there any cost measures that you're trying to take or how should we think about the OpEx structure?

Bruce Wright

Well, I think that we've already announced cost control measures that we've taken in the second quarter and the third quarter. We think those are the appropriate levels to take at this point. We don't want to do anything that's going to hamstring our ability to participate in the ramp when we start to see that coming. As a result, there's probably not going to be a whole lot of change in OpEx. We are going to be seeing the R&D numbers move into the percent of revenue a statistical process control bandwidth that I like to see them in, which is roughly between 15% to 20%. We're going to continue to do what we need to do in those areas to have the enhancements to existing products and will come out with the new products that the industry is going to need in the areas that we serve.

On SG&A, those are going to continue to see a little bit of absolute dollar increase, so that's principally from the stock compensation cost. We're not adding head count as you know we've been very selective in where we participate in that area. And the only other things that I can see from an SG&A standpoint are that, we do have some costs in the third quarter, which go toward having our annual shareholdings meeting in that order and the cost of the annual report but nothing significant in OpEx.

Operator

And our next question does come from line of Mark Miller with Noble Financial Capital Markets.

Mark Miller - Noble Financial Capital Markets

You have a substantial backlog because you ended last year directly what the record backlog is, you noted you had a book-to-bill of over 1.1 last two quarters, but there was some thought and I just wanted to see it appears now that a lot of this backlog had been pushed out. You thought it was going to be a two quarter push out but now it seems like the backlog besides the orders not coming on in the first quarter this year, is the backlog now getting pushed out further, the shipment of the backlog?

Art Zafiropoulo

It seems to shift every quarter out of quarter. So that generally we haven't taken any backlog out of a 12 month period based on what we know today. So it seems to be shifting quarter-by-quarter and I might want to add Mark that we've had no cancellations at all during this period.

Mark Miller - Noble Financial Capital Markets

So there's no substantial backlog but now it looks like the ramp of that backlog going at the door is primarily pushed out some more from the last time you talked about this?

Art Zafiropoulo

Correct.

Mark Miller - Noble Financial Capital Markets

I'm just wondering, you had advertised certainly FinFETs is a big part of your future. I believe you had said that up to six process steps would be employing laser anneal FinFETs. I'm just wondering, are all these steps like, they're still likely equal or three steps higher probability and the other three moderate probability or I'm just wondering, has there been any change in which you believe will be the penetration in terms of increased process steps?

Art Zafiropoulo

Yeah. Actually Mark, there were three to four different process steps that we've identified for FinFETs. And we've been qualified at a number of companies, these processes have already been qualified, and that's an important transition to make. Now, within each of these steps, each customer may chose to do one pass or two passes. We are not including that in our numbers and so there are some companies who do a double pass to get a further improvement of the junction itself.

So, depending upon the device specifications they may chose to do two passes. In some cases they even do three. But in all our numbers that we shared we're looking just that three steps to four steps and some companies actually do two steps, so we average about three steps with the general industry at 14 nanometer FinFETs at this time assuming that they don't introduce any additional steps.

We have been working with the customers on additional process steps for FinFETs but of the ones that are currently qualified it's averaging about three with more that we see but they haven't been qualified as of yet.

Mark Miller - Noble Financial Capital Markets

Okay. So let me just make sure I understand it. So from where you were at three, four months ago, it looks like there's the same interest in using laser anneal in the FinFETs, there hasn't been any change or any thoughts that may be they're going go to a different process?

Art Zafiropoulo

Actually, from three months ago, it's increased. There is a change in the silicide formation. The silicide formation currently is using nickel silicide for the planar devices. That moves into a refractory silicide. And with that refractory silicide it tends to have oxidation issues and changes electrical properties. So, that is being operated now with our ambient micro chamber system.

We have system here with only a second one to our facility because of the backlog of customers bringing their FinFET products wafers into our facility, we have backlog now about three months and that's running 7X24. And so we don't, we're adding capacity to suit the requirements of these customers with FinFETs for an additional application. So, we are now in the process of attempting to qualify the new refractory silicide with our current micro chamber annealing system.

Mark Miller - Noble Financial Capital Markets

And finally, micron surprised some people in the NAND flash saying they're now sampling 60 nanometer, they've been able to extend high-k metal gates to 60 nanometer NAND flash, which gives them a real competitive edge in terms of cost. And I'm just wondering there how that affects maybe your firm and also the industry because that was a surprise because a lot of people are moving to three dimensional flash?

Art Zafiropoulo

All right. That certainly was an interesting report last week. I don't know what the effects are. It doesn't affect us because we're not memory-centric at this time. We hope to be in the future. We think that question should be addressed to Samsung may be.

Mark Miller - Noble Financial Capital Markets

Okay. And finally you're under a qualification of major memory manufacturer. Anything new that to add on what's going on there?

Art Zafiropoulo

No, we're just continuing to work with them and working and developing the processes that we worked on here. So, nothing new to report there. The work is continuing.

Operator

(Operator Instructions) And our next question does come from the line of Tom Diffely with D. A. Davidson.

Tom Diffely - D. A. Davidson

I was hoping to focus a little bit on the advanced packaging and litho market this morning. So, I guess first question is, when you look at the business today the main driver, is it the kind of the big guys adding capacity for the flip-chip, are you really starting to see a nice acceleration of the 3D packaging applications, the new applications?

Art Zafiropoulo

No, the 3D application hasn't really surfaced yet. We, Tom as we talked to you earlier, we began shipping the TSV systems about eight years ago. We have them located at virtually every major semiconductor company that with a interest in doing 3D. We've actually produced 3D that was volume production a few years ago by Samsung using our technology.

But we have it all over the world and including research sites in Europe. And so we've a lots of experience in that area and have defined really how the alignment mark should be placed within the wafer etcetera. We haven't seen that yet. We continue to hear and we continue to see reports by Gartner and other companies indicating that they expect the growth to really ratchet it up next year. We sure hope so. We've been expecting that to happen for several years right now.

What we see in the general market that we deal with is that the growth is now seems to be in the OSAT market. It occurred last year and it's occurring this year. It doesn't mean that foundries or IBMs aren't buying it. It just means that the OSATs are lower prices. So, they were offloading some of these parts to the OSATs to drive down costs for the customer.

Tom Diffely - D. A. Davidson

Okay. Is it someway to determine like what percentage of your business on the flip-chip side was kind of PC related versus mobile consumer related?

Art Zafiropoulo

No. It's one choice so much every quarter that it would confuse everybody including me. So, we don’t really do that. But we just look at general trends and we do forecast for the year and I think it's fair to say that the growth last year and this year was OSATs and I think that's probably enough information because anything more than that really could chop it up. There is so many different applications for packaging. It would really confuse everyone.

Tom Diffely - D. A. Davidson

Okay. Have you seen any changes in the competitive environment in this space I know Rudolph earlier this year acquired a company; they just released a new product. And then they were scheduled by SEMICON West that Canon might be entering the space for the two step as well?

Art Zafiropoulo

Well, we don't really -- we consider everybody a competitor. That's in the packaging field with lithography and they're competitors that I think we're more seriously concerned about than another's and Rudolph is not one of those at this moment.

Regarding Canon, Canon entered this business sometime ago. That wasn't just recently. They entered this market two or three years and so they certainly are more formidable. And we look at them as a real competitor, but you have the smaller companies who go out and buy business and they buy an order here, they buy an order there. So, they're still like necks attacking you and giving your bites. But the fact is that the real trump or the shock out there that we look at the most is Canon. And we've done a good job maintaining our market share and every few years the major companies do take a stab at us including Nikon and then at sometime ASML just considering it. But when they realize the size of the market and they realize the custom nature of it. It doesn't make a lot of sense for them to do that. So, the real companies in lithography really don't go after this niche market.

So, we're -- it's been a very small market. The market size is $80 million to $100 million. So, we're not talking about like gigantic market and then when TSV comes in it may grow 40%, so may get to 240 someday may reach couple of hundred million. So, but this is not a market, where the major serious competitors like ASML or Nikon would really look at us very hard or this market very hard.

Tom Diffely - D. A. Davidson

And then, Bruce, I think one of you mentioned that you need to increase some capacity on the laser side first and runs for their clients. Are we going to see an increase in the capital spending over the next couple quarters for that?

Bruce Wright

No, what we've really done is we've already taken into our capital program this year, an ambient control system to put down in our labs for engineering and applications to work with. So that's pretty much behind this at this point. We're in great shape from a bricks and motors standpoint. You'll recall that we have more than enough capacity here in San Jose for the future outlook for laser systems. We completed a second round of expansions in the first quarter of 2013 in Singapore and we're in great shape from a capacity standpoint to meet the needs going forward.

Operator

And our final question does come from line of Carr Lanphier with Morningstar.

Carr Lanphier - Morningstar

Great. Thanks for taking my call. First a housekeeping question. The sales breakout in terms of systems laser processing, advanced packaging, could you repeat that please?

Bruce Wright

Sure. In the first quarter for laser processing -- well, I'll do it two ways for you because you asked about systems. Systems was 73% and of that 73%, 66% was from semiconductor, and 6% from nanotechnology, and then the remainder 27% was made up of service, spares and license revenue. Now, specifically, from a product standpoint laser processing was 37% of revenue, advanced packaging was 29% of revenue, and high-brightness LED was 0%.

Carr Lanphier - Morningstar

And then with the increased spending in concentration on memory, is there any anticipation that the pickup or adoption of the LSA systems in memory is going to be sooner rather than later?

Art Zafiropoulo

No, I don't think so. I think it's going to be at the earliest some point next year. We may get a revenue this year but I -- it's up in the year, so I would say not anything material. The only place that we could see again next year more next year than this year, a penetration of this company into more memory orders within the inspection space, the Superfast 3J.

Operator

And at this time, I would like to turn the call back over to management for any closing comments.

Art Zafiropoulo

Thank you. Ultratech continues as a strong technology company with a excellent diversified portfolio of growth products. We expect to resume our growth in the near future and appreciate your participation in our call. The future remains very bright and we look forward to meeting with each of you in the next near future. Thank you and hope each of you have a wonderful summer.

Operator

Thank you very much. Well, ladies and gentlemen that will conclude the conference for today. If you would like to listen to a replay of this conference, you may do so by dialing either 303-590-3030 or 1800-406-7325. You will need to enter the access code of 462-8425. The cell phone numbers once again are 303-590-3030 or 1800-406-7325 with the access code of 462-8425. The replay will be available for one week following this conference. We thank you for your participation. You may now disconnect your lines at this time.

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