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Executives

Art Zafiropoulo - Chairman & Chief Executive Officer

Bruce Wright - Senior Vice President of Finance & Chief Financial Officer

Laura Rebouche - Vice President of Investor Relations

Analysts

Krish Sankar - Bank of America/Merrill Lynch

Matt Petkun - D.A. Davidson & Co.

Ultratech Inc. (UTEK) Q3 2009 Earnings Call October 15, 2009 11:00 AM ET

Operator

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2009, Ultratech earnings conference call. (Operator Instructions)

I will now turn today’s conference over to Ms. Laura Rebouche, Vice President of Investor Relations.

Laura Rebouche

Thank you, operator; hello everyone and thank you for joining us this morning for Ultratech’s third quarter 2009 results conference call. A press release detailing our financial results was distributed by Business Wire this morning at approximately 5.15 am Pacific Time and is available on our website at www.ultratech.com. A webcast replay will be available on our website for approximately 30 days after the call.

Joining me today 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 in preparing your questions; we ask that you focus on one or two issues and any follow-ups on those issues. So that management is able to respond to as many of you as possible.

With that, I’ll turn the call over to Art.

Art Zafiropoulo

Thank you, Laura. Good morning and welcome to our third quarter conference call. During the course of this presentation, we will be making 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 or results may differ materially.

We refer you to the documents that 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, 2008 filed as of February 27, 2009, and our Quarterly Report on Form 10-Q for the quarter ending July 4, 2009 filed as of August 6, 2009. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

The third quarter was a more successful one at that end, and our second quarter conference call, we indicated that our poor visibility was causing great difficulty and providing more quantitative guidance. This quarter’s excellent performance has demonstrated how effective, our policies and programs are in that 100% of all systems sales returns business in the quarter. This challenging result was due to our outstanding employee base resulting in a net income of $0.04 per share.

As we entered the fourth quarter, we have much better visibility due to our record-breaking bookings for the advanced packaging lithography products, which produced a book-to-bill on new systems bookings of about 2.2 to 1. We entered the fourth quarter with virtually all the systems revenue booked and a small risk regarding turns business in the fourth quarter.

We were still need to execute in order to revenue, the ship systems in the quarter. Looking at the systems bookings in the third quarter, AP bookings were actually much greater than expected were the demand for advanced packaging bump tools exceeded our internal forecast. We have learned that both front end and packaging foundries have moved very quickly to increase the capacity for strategic and increase projected sales.

More than 80% of our new systems AP orders were from Asia and remaining 20% from the United States. Europe and Japan did not contribute to new systems booking in the third quarter. However, we are currently forecasting systems business from Japan and Europe in its fourth quarter. Our current new systems bookings for the fourth quarter and look to be very strong and I expect the ratio to be well over to one-to-one book-to-bill.

Again the Pacific Rim will contingent to be very strong and we are currently forecasting not only strong AP bookings to continue, but to obtain several LSA laser system tools in the fourth quarter bookings. Our Unity Platform AP and LSA systems are running extremely well and we have continued to reduce the percentage of our warranty cost of sales, which now reflects in 3%. In the advanced packaging market, our marketing executives have indicated that we have a 92% market share.

In the third quarter, all systems book for 300-millimeter diameter wafers. We are providing comments in a last quarter conference call that are AP lithography products, which see a sharp increase followed in Q4 with LSA laser anneal tools. We are currently forecasting several LSA bookings in the fourth quarter along with strong AP bookings.

In the laser anneal portion of our business, we are now testing our dual beam laser technology, which we believe we’ll provide for reduced wafer, device stress resulting a lower device leakage and increase yields. We are also testing this exclusive technology for annealing direct causing defect are currently performed by separate RTP system. So therefore this system will allow us to eliminate RTP and provide and inset to a process.

The added cost for additional RTP tool will be innovated by the use of a single LSA dual beam tool. This will low even further the cost of ownership by utilizing a single laser tool. We are engaged with leading semiconductor companies and will keep you posted on our progress. More technical details will be presented at our analyst conference next week. Once this process has been perfected we believe the serve market we are involved in or grow an additional $100 million.

We also plan to ship our first LSA101 to a major foundry in Asia in the fourth quarter. To remind everyone, the LSA101 increases throughput by more than 60% over the current LSA100. It also provides for improved process uniformity, reduce hedge exclusion and improve system diagnostics.

We will continue to offer both models, so that we can provide a copy of that strategy for those customers will preferred that manufacturing strategy. In the memory market, we have seen increase interest from several large companies for both DRAMS and FLASH memory devices. For DRAMS, the current interest is in pure full logic region located outside the memory portion of the chip. In the FLASH memory devices, activity selected and reduction of cell leakage.

Looking a little detail into future bookings, the fourth quarter potential bookings opportunities didn’t show strong strength primarily from Asia. For the past several quarters, we have experienced a shop increase in a number of wafer passes for the LSA100 system in production. However, due to the decrease in fab utilization and device leakage issues those companies selected to delay purchasing additional tools and to increase the tool utilization. The bad news for us, that new LSA orders were delayed and the good news is that the LA systems ran extremely well 7/24.

Looking into next year is a little more challenging due to a number of global economic and employment issues. We will continue to operate on a conservative basis, so that we will plan and have projected stronger profitability in 2010. We expect, unless we have some unusual event, a minimum of a 20% increase in top line sales.

We will provide more guidance at our analyst meeting next week in New York. We have seen an increasing portion of our business in the Pacific Rim, as witnessed by the third quarter new systems bookings in Asia of more than 80%. This trend we expect to continue and we plan to invest in this area more substantially.

We are now planning to build a facility in Singapore, which will completed in the first half of 2010 and start production in the second half. We will begin with our high brightness LED projection lithography steppers. This stepper will have a price under $1 million to serve the cost-sensitive growth market.

We’ve installed about 20 of our stepper tools to date with leading edge, high brightness LED manufacturers in Asia and expect to maintain our leadership in this expanding market. Once we have digested this product transition, we’ll move to the AP bump tools and initially produce them in both the San Jose and Singapore facility. We will produce the LSA products when the volume justifies this addition to the Singapore site. We expect our SG&A costs will increase in the first half of 2010 and taper off.

During the second half due to start up costs for the Singapore facility, beginning in 2011, we expect gross margins to increase a minimum of 2% and grow over the following three years by about 5%. It is essential that we get closer to our customers and this decision we expect will increase our served market and market share and to better serve, they needs of our Asian customer base.

We believe that 2010 will be driven by the foundry business, both front end and packaging. We are very well prepared to grow up to 40% in top line sales with minimal additional personnel. Also due to our products’ performance in both lithography and laser tools, we expect to participate with a greater percent company growth than most others in our sector.

With that, I will turn the call over to Bruce Wright, who’ll provide more financial details for the quarter.

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 third quarter saw a sequential increase in revenue of about 34% compared to the second quarter of 2009, primarily reflecting more revenue from advanced packaging, partially offset by less revenue from laser processing.

Geographically, revenue increased sequentially from the second quarter of 2009 in Asia-Pacific and Europe and remained essentially flat in North America. Demand for advanced packaging systems in the third quarter of 2009 accounted for about 99% of revenue and 100% of new systems orders.

Laser processing systems in the third quarter of 2009 accounted for about 1% of revenue. Gross margin in the third quarter of 2009 increased to about 50% from approximately 38% in the second quarter of 2009, primarily due to product mix and higher capacity utilization.

Turning now to a comparison of the third quarter of 2009 to the third quarter of 2008, revenue for the third quarter was $24.9 million, down about 28% from $34.4 million for the same period a year ago. The company had net income for the third quarter of $1 million or $0.04 per share diluted. This net income compares with net income of $3.3 million or $0.14 per share diluted for the same quarter a year ago.

For the third quarter of 2009 versus third quarter of 2008 comparison of revenue mix, systems revenue was down about 34% in the third quarter of 2009, and services and spares revenue was down about 1%. For the third quarter of 2009, systems revenue accounted for approximately for 72% of the total broken out of 72% from semiconductor and 0% from nanotechnology, and service and spares revenue for about 28%.

Geographically, revenue from Asia-Pacific for the third quarter of 2009 was $20.5 million, up about 1% from the third quarter of 2008, and represented 82% of the company’s total third quarter 2009 revenue. North America had revenue of $3.3 million, down about 42% from the third quarter of 2008 and represented 13% of the total and Europe had revenue of $1.2 million, down about 86% and represented 5% of the total.

Our top five customers for the quarter were essentially all advanced packaging customers from Asia-Pacific. Overall, the top five customers accounted for 100% of systems revenue. Gross margin increased to about 50% in the third quarter of 2009, compared with approximately 48% in the third quarter of 2008. This increase was due primarily to a favorable product mix shift at lower warranty and install costs.

Looking at operating expenses in the third quarter of 2009, R&D as a percentage of revenue increased to about 18% from approximately 17% a year ago, primarily due to the approximately 28% decrease in revenue for the period. On an absolute dollar basis, third quarter 2009 R&D expenses decreased by about $1.3 million compared to the third quarter of 2008.

SG&A expenses increased to approximately 29% of revenue, up from about 23% a year ago, also primarily due to the approximately 28% decrease in revenue for the period. On an absolute dollar basis, third quarter 2009 SG&A expenses decreased by about $800,000 compared to the third quarter of 2008. Total operating expenses for the quarter, increased to about 47% of revenue from approximately 40% in the third quarter of 2008, but dropped by about $2 million on an absolute dollar basis.

Operating margin for the third quarter of 2009 was about 3% of revenue, down from 8% in the third quarter of 2008. Interest and other income net decreased to $300,000 in the third quarter of 2009 from $400,000 in the third quarter of 2008. The company had essentially no income tax impact in the third quarter of 2009.

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 a third quarter 2009 versus second quarter 2009 comparison of the balance sheet, cash equivalents and short term investments decreased by about $3 million during the third quarter to total about $152 million at September 30, 2009. Accounts Receivable increased about 35% during the third quarter to approximately $26 million on a shipment increase of about 41% compared to the second quarter of 2009.

Inventories increased during the third quarter by about 2% to approximately $29 million. Working capital increased to about $187 million or $7.89 per share at September 30, 2009. Book value per share at September 30, 2009 was $8.27, up from $8.21 at June 30, 2009.

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 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. Three months ago, we told you that utilization rates for our customers were up and on an increasing trend led by the fab back end.

We expected that second half 2009 order rates would be much more robust than first half 2009. We saw the back end of the fab leading the way, followed by the front end resulting in the second half of 2009 order mix being weighted toward advanced packaging in the third quarter of 2009 with laser processing picking up in the fourth quarter of 2009. All of these comments are proving out to be accurate.

The heightened order activity, which led us to have a book-to-bill greater than two to one in the third quarter of 2009, is continuing in the fourth quarter of 2009. We ended the third quarter of 2009 with a greater than six month’s backlog. We are now booking orders for delivery in the first half of 2010, which means we will not need any turns business in the fourth quarter of 2009.

In fact, our customers are coming to us with requests for expedited delivery and order pull-ins. Our factory build plan is full for the fourth quarter of 2009. As a result of the above, we’re expecting to see sequential growth in both revenue and profits in the fourth quarter of 2009 compared to the third quarter of 2009.

Overall, we anticipate revenue growth in the second half of 2009 to be about 10% to 15% higher than the first half of 2009. Gross margin should be around our operating model target of 50%. Operating expenses for the fourth quarter of 2009 looked to be about flat with the third quarter of 2009. We now anticipate cash flow to be positive in the second half of 2009.

Taking a look at 2010, we believe revenue could grow about 20% compared to 2009. Gross margin could improve slightly. Operating expenses in 2009 look to decrease as a percentage of revenue compared to 2009. Let me restate that, because operating expenses in 2010 looked to decrease as a percentage of revenue compared to 2009, but will likely increase in absolute dollars due to our ramping up activities in Singapore. Cash flow is anticipated to be positive.

Finally, we would like to wrap up our formal remarks by reminding you to 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, the Chief Financial Officer; and Laura Rebouche, the Vice President of Investor Relations. 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) Your first question comes from Krish Sankar - Bank of America/Merrill Lynch.

Krish Sankar - Bank of America/Merrill Lynch

I had a couple of questions, Art. The first one on the advanced packaging side, are you seeing most of these orders are related to the traditional flip chip application adoption or is it more you’re seeing like new applications like through silicon via for your flip chip steppers?

Art Zafiropoulo

Most of them are for the existing AP applications and bump. However, there is lots of interest for TSC that we expect to grow next year and the year after, but TSC probably won’t reach a peak until 2011, but it will see growth next year in that area, but this quarter, primarily they were in the bump area, wafer level CSP.

Krish Sankar - Bank of America/Merrill Lynch

Then on the LSA side, the technology leaders today are making decisions for 22 nanometers. Can you talk a little bit about how you are positioned in those spaces given that there has been recent speculation that there has been some lack of penetration at some of the leading chipmakers?

Art Zafiropoulo

I think it’s awful early. We certainly are in facilities that are currently using our tool at 32 and 28 and they’re doing advanced research at 22, but it’s a little bit early on 22 at this moment, but I think there we’re very strong at 32 and 28, both in metal gate and in silicon gate. So we feel very comfortable that we will get more than our fair share at 22. This technology, as you go to smaller nodes, gets stronger and stronger due to reduced stresses and uniformity and edge exclusion as I outlined in our new LSA101.

Competitive tools have serious edge exclusion problems and uniformity thermal issues on the outside of the wafer and had very high stresses, which cause for dislocations and slip, which allows for poor yield in lithography. So that we think that as it moves to 22 and sub 22, that our technology will become more preferred than any other competing technology.

Krish Sankar - Bank of America/Merrill Lynch

The final question for Bruce, you guided to about 10% to 15% improvement in the second half. That essentially is kind of like flattish revenue from Q3 to Q4. Given the strength in the bookings, couldn’t that revenue be much higher in Q4, are most of those bookings going to taper off into Q1 revenues at this point?

Bruce Wright

We may differ on some of your definitions there, but I’d recommend that you go back and recheck the math. 10% to 15% growth for the second half of ‘09 versus the first half of ‘09 definitely should result in a sequential increase in revenue for the fourth quarter.

Operator

Your final question comes from Matt Petkun - D.A. Davidson & Co.

Matt Petkun - D.A. Davidson & Co.

My math was kind of similar there, flattish revenues. I assume it’s up a little bit more, but maybe more specifically, Bruce, I think you were talking about sort of your build rates and capacity in the quarter. Let’s say that AP is up, but somewhat slightly sequentially. Are you looking at really just an ability to only do $20 million on a quarterly basis in AP? Or do you guys need to continue to ramp to do more than that?

Bruce Wright

We don’t really talk specifically about revenues by product line because, we don’t do product segmentation. So, I really don’t know how to respond exactly to the question on AP. Even though as we said, AP was essentially all of the systems revenue in the quarter, what we’re looking at is definitely getting sequential revenue growth. It will clearly be driven by the advanced packaging sector in the fourth quarter. We’re looking for LSA activity in the fourth quarter more based on orders than revenue.

Art Zafiropoulo

If I could add to that, in my comments that I made, I had mentioned that we could grow top line sales at least 20% without any additional manpower and that’s primarily due to currently, the past year we’ve been shutting down our factory one week per quarter.

We’ve been really holding back on overtime only when absolutely necessary so that we can easily increase our capacity by going back to full load of work and eliminate the one week per quarter and add more overtime so that we can get up to we believe a higher than 20% by just looking at the current workforce and then slightly increasing the employee base to get the 40%. So the materials are long lead items, the facilities etc. can sustain a much higher growth if the bookings do come into support that growth potential.

Matt Petkun - D. A. Davidson & Co.

Then Bruce, you commented, you do expect hopefully some LSA order activity. When I look at least my math on your backlog, it looks like more than half of your existing backlog today is LSA systems. Is that still true?

Bruce Wright

No, but it’s closed. At this point in time, about 55% of the existing backlog is AP and 45% is LSA of the system’s backlog.

Matt Petkun - D. A. Davidson & Co.

Some of those LSA tools have been in backlog for a little while. So if we don’t expect revenue next quarter, is there any visibility on when some of that 45% could start to translate to revenues in the first half of 2010 maybe?

Bruce Wright

Sure, because our backlog policy is we only put systems into backlog, if they’re going to be shippable in the next 12 months and so you’re exactly right. Those that have been in the backlog for a while, if they’re adhering and they are to our backlog policy, we’ll need to be shipping out and the revenue activities sometime in the first half of 2010.

Matt Petkun - D. A. Davidson & Co.

Then just my last question on the LED market, obviously that’s a market that’s starting to take off for some folks in the MOCVD business. What opportunities do you guys see there maybe in the next 12 months?

Art Zafiropoulo

Again, we think it’s going to accelerate in the projection lithography area starting in ‘10. We think probably less than 10 units and accelerating sharply in 2011, 2012. As I mentioned earlier in some other calls that, we expect this market to be in the range of three to 400 tools over the next 10 years and to building momentum up to about the fifth or sixth year from now.

So then they’ve been tapering off much like the thin film head industry was. So that’s one of the reasons we’re moving to Singapore, to reduce our manufacturing costs and so we can drive the margins at lower manufacturing and lower selling prices. So we think this is going to be a very good business and it should replicate the kind of market that we served in the thin film area head area and in that area, if you remember, new system orders, we were well over 90% of the market share.

Operator

(Operator Instructions) There are no further questions at this time. I will now turn the conference back over to management for any closing remarks.

Art Zafiropoulo

Thank you very much. We’ve had added a new member to our Board of Directors, Dr. Ben Tsai, who currently serves as Executive Vice President and CTO of KLA-Tencor. Ben has been an active member on our Technical Advisory Board and will provide great value to our shareholders. Ben will also serve on our compensation committee.

Just a final reminder that we’ll hold our sixth annual Analyst Day meeting next Wednesday, October 21 at the NASDAQ market site in New York City. This timely event will provide a great deal more information on our high brightest LED stepper opportunity, our advanced packaging market and our laser anneal products and future served markets.

I strongly suggest that if you have the time, it’ll provide valuable information for you and your company. Please contact Laura Rebouche, and she’ll add your name to the attendee list. Ultratech has developed a strong technology portfolio, our products having the potential to provide exceptional shareholder value. I want to thank you very much for your time this morning and hope to see you next week in New York.

Operator

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

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