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Cymer, Inc. (NASDAQ:CYMI)

Q3 2009 Earnings Call Transcript

October 20, 2009 at 5:00 pm ET

Executives

Paul B. Bowman - Interim CFO, Treasurer, Secretary and VP of Investor Relations

Robert Akins - Co-Founder, Chairman, and CEO

Edward J. Brown, Jr. - President and Chief Operating Officer

Analysts

CJ Muse - Barclays Capital

Satya Kumar - Credit Suisse

Krish Sankar - Merrill Lynch

Peter Wright - GC Research

Patrick Ho - Stifel Nicolaus

Ben Pang - Caris & Company

Weston Twigg - Pacific Crest

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 3 Cymer Incorporated earnings conference call. My name is Peggy and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Paul Bowman, Interim CFO and Vice President of Investor Relations. Please proceed.

Paul B. Bowman

Thank you, Peggy. Good afternoon everyone and welcome to Cymer’s third quarter earnings call. Joining me on the call today via teleconference from Asia are Bob Akins our Chairman and CEO, and Ed Brown our President and COO. Bob and Ed are participating in customer meetings this week and I realize it is very early in the morning where they are but hopefully nothing that a strong cup of coffee would not fix. We do not anticipate any technical problems with the call but we did want to mention that they were joining the call remotely.

The financial results for our third quarter 2009 were released through the wire services today shortly after market close. A copy of the press release, Company presentation slides, and webcast link, can be found in the Investor Relations section of our website at www.cymer.com where they will be available for the next 15 days.

On today's call, Bob will discuss our third quarter business highlights and our business and market outlook. I will follow with an analysis of the Company's quarterly financial results, as well as guidance for the fourth quarter. After our prepared remarks we will open up the call for questions. Please be advised that the results we are disclosing during this call are preliminary. The final results will be included in our quarterly report on Form 10-Q which will be filed with the SEC.

Our comments today will include forward-looking statements including, but not limited to, statements concerning the industry, technology trends, our products, and our anticipated future financial performance. Our actual results may differ materially from those projected on this call. There are a number of risks and uncertainties that may affect our business and future results, including those described in our SEC filings. Please do not place undue reliance on these forward looking statements which speak only as of today. We also undertake no obligation to update any forward looking statement to reflect events after today.

With that introduction I will now turn the call over to Bob. Bob?

Robert Akins

Thank you Paul and good morning everyone from Asia. With business improving in the foundry and memory sectors, and the shipment and installation of our first TCZ flat panel display devices, Ed and I are taking advantage of the opportunity to meet with customers and better understand how Cymer can best support their needs now and during the coming year.

In mid-September, we raised our third quarter revenue outlook as we gained confidence that demand for Argon Fluoride immersion light sources was increasing and installed base products revenue was continuing to rise. This trend continued through the reminder of the quarter and we are pleased to announce that our revenue increased 48% over second quarter 2009 levels to $92.3 million.

The higher level of demand was driven by increased investments from foundry and memory customers in support of their transitions to the 5x node and below. Since January of this year, we have seen a steady increase in Gross Pulse Utilization of our installed light sources. Chipmaker utilization at some of the advanced nodes is reportedly at or above 100% and on average it has increased to 80%-90% during the third quarter driven primarily by demand for PCs, Net bugs and Smartphones.

Correspondingly, during the third quarter light source pulse utilization continue to increase and our installed base product revenue rose by approximately 30% as compared to the second quarter of 2009.

We continue to focus on optimizing our operating costs while keeping our structure responses to improve business conditions. In the third quarter, our gross margin increased as it benefitted from changes in product mix, lower OnPulse start-up expenses and improved manufacturing and field absorption.

We increased our investment in EUV development and continue to invest in TCZ commercialization while delivering solid operating income which reached 16.7% of revenue.

I would like to take this opportunity to thank Cymer employees for their continued efforts towards controlling cost while quickly responding to the recent increase in customer demand.

In the current environment, chipmaker light source investment has been and we expect we will continue to be focused on Argon Fluoride immersion. Our immersion light source products are well positioned to support our direct lithography and chipmaker customers with our XLR platform led by the XLR 600ix.

In the third quarter we shipped a total of 12 light sources of which 11 were XLR and we installed 14 light sources at chipmaker locations of which 10 were Argon Fluoride immersion.

As anticipated in the third quarter, gross pulse utilization grew from the previous quarter level although at a lower rate of increase. We estimate that at the end of the third quarter gross pulses will be back to approximately 86% of the June 2008 peak.

Throughout 2009, we have been actively working with chipmakers to demonstrate the value of OnPulse. We have made excellent progress helping customers reduce their contract rations while increasing their light source productivity with our OnPulse product and support infrastructure. In the third quarter, we added additional light sources under OnPulse coverage. We now have OnPulse agreements that at all top ten chipmakers in all three sectors.

During the third quarter, we worked closely with ASML to install our laser produced pass EUV source in their Veldhoven facilities. The installation is complete, first light has been produced and acceptance testing continues. We are currently in the process of assembling several pilot EUV source units in our San Diego headquarters and we anticipate fulfilling our orders for the ASML. We believe that EUV will extend at making technology to single-digit nodes and be viable for approximately 6 node transitions or some other way a decade or more.

Solid progress continues with our first shipment of TCZ’s tool for flat panel display manufacturing. The tools were installed in the third quarter of 2009 at a Korean customer site and we are working with this display manufacturer to demonstrate the tools’ differentiated throughput and superior uniformity of TCZ’s laser crystallization technology. The demonstration period is expected to run for the first half of 2010 and if successful could lead to follow-on equipment orders.

We are excited about the TCZ product offering and believe this business could become a material contributor to Cymer’s growth in the 2011 or 2012 time frame as consumer products such as handheld devices, laptops and TVs adopt, or LED display technology.

We have made good progress in 2009 positioning the Company for growth. Our GBB product portfolio led by the XLR 600ix has earned its market leading position with a 60-90 watts flexible power and improved optical stability aimed at enabling chipmakers most advanced Argon Fluoride emerging needs. Our installed base products led by OnPulse are helping chipmakers increase productivity and lower their cost of operations and we are focused to continue to have more light sources under coverage.

We are proud of Cymer’s quick return to operating profitability and our efforts to increase cash and investments during the second quarter and third quarter of this year. We are committed to the success of EUV and TCZ and we believe that these products are vital to the success and growth of the Company for many years to come.

Thank you and I will now turn the call over to Paul.

Paul B. Bowman

Thanks Bob. The Company’s third quarter financial results reflect the strong operational performance that the Cymer team delivered in support of improved customer demand while continuing to control cost, optimized Company assets and increase our overall cash and investments

In the third quarter, revenue of $92.3 million increase 48% as compared to the second quarter of 2009. Light source shipments led by the XLR tripled and installed base products revenue led by OnPulse continued to increase at double digit percentage growth rate as compared to the previous quarter.

Third quarter gross margin was 48.2%. Our business operations are now leaner and more efficient as they have benefitted from the operational improvements executed since last fall. As compared to a year ago, we delivered a higher gross margin on approximately 17% less revenue which demonstrates the leverage of our business model. We also incurred much lower levels of idle capacity and unabsorbed manufacturing and field costs as business volumes increased.

R&D and SG&A spending totaled $29.1 million. R&D spending rose in the third quarter primarily due to increased investment in our EUV development. Total operating income was $15.4 million or 16.7% of revenue. The third quarter effective tax rate was 35.4% which resulted in an effective tax rate benefit of 21% for the first nine months of 2009. Net income after tax was $10.8 million or 11.7% of revenue and earnings per share was $0.36 with $30.1 million weighted average common shares currently outstanding.

In the third quarter, DUV bookings totaled $99 million which increased $28 million from the second quarter of 2009 resulting in a book-to-bill ratio of 1.07. All of the light source systems bookings were ARF immersion light sources.

We ended the quarter with a DUV backlog of $41.2 million with ARF immersion comprising approximately 95% of the value of systems in backlog at the end of the third quarter.

As of September 30, 2009, cash and investments totaled $158 million increasing $9 million from the second quarter of 2009. Over the last two quarters, cash and investments have increased to approximately $19 million. Total inventory increased $3 million in the third quarter of 2009 in support of higher demand for DUV and EUV source shipments.

Turning to our guidance, in the third quarter we responded to increased demand that resulted in third quarter revenue increasing almost 50% as compared to the prior quarter. In the fourth quarter, we anticipate maintaining this increased level of demand for light sources and installed base products. We intend to maintain our focus on cost control and cash management and we expect to continue to deliver margins that allow us to fund our strategic product and business development investments.

For our guidance, based on the information that is available at this time we are currently providing the following guidance for the fourth quarter of 2009. Revenue to be comparable to the revenue reported for the third quarter of 2009, gross margin to be approximately 47%-48%, R&D expenses to be approximate $17 million, SG&A expenses to approximately $12 million.

In the fourth quarter, effective tax rate would be approximately 39%-41%. This rate, however, may vary significantly depending on the actual extent of the profit before tax.

With that, this concludes our prepared remarks and at this time I will ask the operator, Peggy, to open the lines and we will start the question-and-answer period. Peggy?

Question-and-Answer Session

Operator

Thank you. (Operator's Instructions) Your first question comes from the line of CJ Muse with Barclays Capital. Please proceed.

CJ Muse - Barclays Capital

Good afternoon and good morning. I guess the first question is in terms of your revenue guidance for December, can you comment on what kind of mix you expect? Will it be similar in terms of immersion units and IBP or would there be some sort of shift?

Edward J. Brown, Jr.

Yes, I think it will follow the same basic pattern that you have seen with the past two quarters as far as its ratio, new light sources and IBP, and of course also anticipate the continued very strong dominance of our shipment by immersion sources.

CJ Muse - Barclays Capital

Okay. I guess the natural question is considering you have booked about 99 million in immersion tools in the September quarter that appears to me it will be about 45 plus tools. When shall we start to see the big bump up in immersion units start to hit your shipment level?

Edward J. Brown, Jr.

Well first on that booking includes more than just new unit shipment orders so I do not think it is quite the size that you are talking about there and going forward we anticipate this transition or this increase in business driven principally by technology transitions, 5x and 4x nodes by a relatively small number of chipmaker customers and of course some chipmaker customers decision as to make strategic investment for competitive reasons in their manufacturing capabilities. It is premature at this pretty good point for us to call this broad-based upturn. We are looking forward to their results of the holiday season at the end of this year and I think once we get that behind us we will be able say more about what is going to happen in 2010.

I also think it is important to remember that strong growth in 2010 requires a return of demand for Flash. We have seen some promising uptake and demand in pricing for D-RAM, DDR, but still it is Flash returns, which is not anticipated to happen until sometime in 2010 then we are not going to see a more balanced and sustainable growth for the industry.

CJ Muse – Barclays Capital

That is helpful, one last question if I may, in terms in margins, you came in getting bust for September, when you look at Q4 and beyond, how shall we think about the interplay, I guess between product mix, start-up cost, IVP, annual price downs and contracts there in terms of revenue target with gross margins associated with that and however best you could present it would be very helpful to truly gauge the earnings power here as we see incremental growth to revenues.

Edward J. Brown, Jr.

Well this is Ed, I think that what you have been watching is that our cost down and the performance improvement that we have been able to get out of on-calls particularly in the efficiency of the use of cash and also our resources. So I am comfortable that we are going to continue to see a kind of repeat of the ratio of revenue to margin.

The things that we have seen like in the second quarter where we onboard new systems, sometimes can create some aberration to bring it down, but I think on the average, we are really beginning to see this come together in a predictable fashion, because the number of systems now is approaching 1,100 which represents, you know we are approaching almost 50% of the installed base and the majority of the immersion systems and the argon fluoride systems which will provide most of the engine going forward in this next node.

Operator

Your next question comes from the line of Krish Sankar from Bank of America and Merrill Lynch, please proceed.

Krish Sankar - Merrill Lynch

I have a few, one is, if you look at the ASP in Q3, it seems like it is just below $2 million, how do you think of ASP heading into Q4?

Paul B. Bowman

Yes, I will take that Krish, this is Paul. The ASP in Q3 was right around approximately $1.8 million and the ASP that we are forecasting for Q4 is right around $1.8 million. We actually have a slide in our investor deck that shows the percentage of light-source shipments for the quarter. Now what you will see there is that our XLR made up the bulk of that at 92%.

So, the one KrF unit that we had in there is what drives the average ASP there at that level at 1.8 and as Bob mentioned, previously that we are expecting a similar pattern here for the fourth quarter.

Robert Akins

Let me also just add to what Paul just commented ands say that, looking at that particular slide which is number five in the slide deck, you can see that there has been some krypton fluoride shipments by Cymer in the Q1 2009 and Q3 2009 time period. The Q2 happened to be all argon fluoride and I think our ASPs were higher as a result of that.

Going forward as we have discussed in the past, and we continue to believe that the demand will break up into principally argon fluoride, secondarily krypton fluoride and we do not see much of the demand out there for new dry argon fluoride systems. The install-base of the dry argon fluoride at shipment, like there is insufficient to meet the need and going forward, it was reflected to a combination of krypton fluoride being pushed actually to do in process and somewhat what was otherwise considered dry argon fluoride territory but at lower cost and combined with this large install base of the immersion.

So, expect to see some bumpiness as we are mixing our highest ASP products with our lower ASP products at the same time going forward.

Krish Sankar - Merrill Lynch

Got it and then I have a couple of other questions too. In terms of the krypton fluoride, is the demand for the coming, primarily from the foundry customers? Also, clearly you guys have done a phenomenal job on the margin side, so how do you think of the incremental gross margin or operating margin going forward from here?

Robert Akins

I will take the first part and I think Ed can take the second. It is not just from foundries but certainly foundries are a customer for krypton fluoride but going forward, for many double-patterning layers, with critical dimensions, it can be less expensive to use an argon fluoride tool combined with trimming by krypton fluoride.

So I think any place you expect to see a significant use of the old pattern in both foundry as well as memory and to a less extent, logic, you will find some krypton fluoride demand. Looking at the incremental Ed?

Edward J. Brown, Jr.

Yes, in the incremental margin, so obviously one of the things that is really important is that we fund our R&D with the gross margin we are developing today. So, I think what I would see happening, going forward is as we continue to see the improvement in the margins, the sustainability of the margins on our DUV products as well as our on-call support of the DUV products. That is going to allow us to generate the margins necessary to support the EUV commercialization, which, of course, is what we will be doing very heavily from an expense standpoint over the next couple of years. So my view is it is in pretty good balance at the moment but it is an ongoing effort.

Part of our OnPulse commitment is cost-down year-over-year. So you are always working against a set of variables trying to drive your cost down on a pulse basis, obviously seen an increase in the number of pulses and enrichment more towards argon fluoride pulses and then the efficiency we are getting them for things like our tactical operations are Cymer online, these are all giving us the flexibility now to create algorithms to optimize the spending that we do.

So that optimization shows up in lower cost to our customers but perhaps, more importantly from a financial standpoint, it allows us now to be, be able to tweak our readiness to serve both on the balance sheet by being able to trim our inventories closer to actual need in a more predictable fashion and also, ultimately our OPEX will also be impacted, as we will have less additional labor required as we add systems or as they grow the number of pulse in the field, enabling the customer to get the performance.

So, I think that we have a nice balance with the work that we have done over the last four or five years. I am trying to get the DUV product to be something that was very predictable. The investment and the infrastructure for Cymer online that now will enable us to now add EUV with confidence and of course it will come online with OnPulse as its primary methodology for support.

So, I think we have an engine at the moment that looks like it should be able to produce good predictable, incremental margins overtime, but some of that of course will have to be shared with the customers as part of our commitment to their lower cost of ownership.

Krish Sankar - Merrill Lynch

I got it, got it, and then last question for Bob, what is your view on the time for light sources for 2010, both total as well as immersion?

Robert Akins

I think I will speak to immersion, because total of course is going to be even more dependent upon the timing of upturns over the course of the year. We can see additional capacity buys but I think we are generally thinking somewhere and depending upon how the course of events rolls out and there is 75 units to 95 units for 2010 or so immersion.

Operator

Your next question comes from the line of Peter Wright from GC Research, please proceed.

Peter Wright – GC Research

Fantastic, congratulations on a great quarter. I have a couple of questions, first, was there something in the third quarter that surprised you guys to the upside specific to your service gross margins?

Robert Akins

Well, I think like in the second quarter, we recorded last time that we had some on-boarding cost. I think that we are still dialing them the effect of the, now that we have 1,100 systems in the field roughly that are on OnPulse, is we are looking at the predictability model. These are all based on failure curves and other customer behaviors. So we are kind of dialing-in the algorithm.

So I think that there has been a range of exactly when the timing of cost will hit now that basically those COGS sheet or Cost of Goods Sold in the period that they are actually executed in the field. So there is a little bit of a balance that has been worked, but I believe that we are beginning to get that brought together well.

So in the third quarter, we fell within the range of expectations that I had and on the positive side, I think would probably be the correct answer.

Peter Wright – GC Research

Fantastic, the second question I had is, the ASML set the stage for investors to look for broader economic growth to be able to sustain growth into the second half of next year, with your guys’ exposure to your EUV investment and TCZ, could it be different for you guys and do you feel maybe more confident that you would not need such an improvement in the broader economy to drive sustainable growth in 2010.

Robert Akins

Certainly we have the expectations for some growth in TCZ and EUV, but let me start with TCZ, I think we are pretty consistent with the fact that we are definitely speeding this new marketplace now and I would not anticipate seeing huge growth in 2010. Obviously we are hopeful that we see some growth in 2010, from TCZs revenues, but the near, the growth curve there is again in 2011-2012 timeframe. So that is pushed up, I think it will be beyond, your question Peter, 2010.

On the EUV side, yes we do anticipate in delivering services to ASML and the majority of those would be then revenue that will be happening from this point in time forward, some of which would be on 2010. So that would help to some extent. But when you look at the revenue sources, we still are looking forward to a broader-based adoption driven by real consumer demand growing beyond where it is today over the course of 2010.

Peter Wright – GC Research

When do you expect the revenue in your first EUV tool?

Robert Akins

Go ahead Paul.

Paul B. Bowman

Do you want me to take that Bob? We do not have it forecasted here in 2009, Peter. We do have it forecasted to be sometime in the first half of 2010.

Peter Wright – GC Research

If I could ask one last question, turns ratio on your service business? What portion that you typically recognize in bookings?

Robert Akins

Alright, it is essentially 100%.

Paul B. Bowman

Yes.

Robert Akins

Yes, there really is not that, and especially as we move more towards this OnPulse model, you really do not have bookings and actually our lead times have come down so far over time that we typically have seen the bookings and the revenue occurred in the same quarter reported.

Peter Wright – GC Research

I am trying to follow-up the, I guess the [CTS] questions. So the 99 million in bookings, how much is the typical number you would take out for service and would not be recognized in this kind of systems bookings?

Robert Akins

So in the non-systems, you also have upgrades and other things that are in impact book. So there have been, if you look back in history, for example, when we have the GLX implementation last year, there was a backlog that have been growing in that and I think in a typical quarter, it was $5 million or $6 million, something in that neighborhood.

Peter Wright – GC Research

That does it.

Paul B. Bowman

Yes, just try to add a more color there, Peter, the DUV bookings number that I gave in my remarks at 99 million, that is a combination of both light sources as well as what I have just described, which is the install base products business which is a high-turns business.

Peter Wright – GC Research

Is there a possibility we could just get clarity on what either number systems is, that you guys booked in the quarter or what that number is?

Paul B. Bowman

Yes, we do not go to that level of details, Peter.

Operator

Your next question comes from the line of Ben Pang from Caris & Company, please proceed.

Ben Pang - Caris & Company

Thanks for taking my question, first, on the total available market for immersion. The 75 units to 95 units, does the 95 units assume that MEM flash comes in?

Robert Akins

Yes it does.

Ben Pang - Caris & Company

Okay and in terms of the KrF would all the KrF units for 2010 all be for manufacturing essentially right? That will be the high-volume manufacturing ramp that we will see?

Robert Akins

That is correct, you see almost no demand now and that would be an indication of a broad, consumer-driven demand across a few sectors and chipmakers investing in, in addition to the leading edge investing in balancing their capabilities across the notes.

Ben Pang - Caris & Company

Okay.

Robert Akins

A true reflection of capacity.

Ben Pang - Caris & Company

Then the final question for me on the install base, if you guys get back, you mentioned you are 86% of your previous peak on the pulses, the growth pulses, if you got back to the same number of growth pulses, what would be your revenue?

Robert Akins

Well, it is hard to pinpoint right off the top of my head because you have a couple of things going on in those pulses back in June of 2008, you had a lot of 200 millimeter systems that have come off of offline and have gone to 300 millimeter capacity. So I am struggling a little bit because I would have to calculate a lot different discounts in OnPulse affects et cetera, but I think it is fair to say that it will be similar.

I will think about and get some information to Paul perhaps that would better help you, but at this point in time, I am really focusing on just ensuring that we are providing the best service possible. So we are doing a lot of investment at this point and the infrastructure payoff will come over time and I would expect that our expectation is that we will drive margins that will be incremental over time as we get a more enriched pulse count towards the advanced note.

Ben Pang - Caris & Company

Thank you.

Robert Akins

Then for this some additional color, also, as related to your question. Obviously if you look at our gross pulses over a long period of time, through several cycles, you have seen that the number of gross pulses occurs with a gradually increasing function driven by chipmaker utilization, driven in part by the fact that overtime, with the shipment and use of more and more high rep-rate light sources and lesser views or even decommissioning of some of the oldest low rep-rate light sources and with the number of layers per chip increasing continuously that you would expect the subsequent peaks going forward in the future will reach higher and higher gross pulses numbers.

So we are talking about getting back to 87% of the last peak but there may be opportunities of course to go to higher overall gross pulses, this next upturn and in subsequent upturns as well.

Ben Pang - Caris & Company

That is very helpful, thank you.

Operator

Your next question comes from the line of Patrick Ho from Stifel Nicolaus, please proceed.

Patrick Ho - Stifel Nicolaus

Well thanks a lot and nice job on the quarter. First of all, in terms of the cost-cuts and the resulting margin effect, two tough question one, can you just remind us how much of those cost-cuts were permanent versus some of the temporary costs that will come back and secondly, now that business trends in the overall market are improving, how quickly can your ramp up to meet customer demand and I guess, again how much would that be of the temporary cost coming back?

Edward J. Brown, Jr.

Okay, this is Ed, on the cost side, most of the cost savings that we put in place will remain. The exception being the fact that we fund some of the savings in the fall, in the first quarter by reducing our benefits to cost to our employees and also by reducing salaries and bonuses.

So our intention going forward is that we would put that back into our model. As far as incremental, almost all of the costs that we are adding back in are all variable labors specifically for transaction based events predominantly manufacturing and some service support, but we left the infrastructure in place, you may recall for the service because of the time it takes to recreate that.

So the majority of it will be realized. The other thing that I would point out as Paul had in the script and I did not make a comment earlier on the margin was that we are carrying forward, we have a couple of more quarters, three more quarters of the absorption, the unabsorption that we had during the downturn, will be realized out of the PNL.

So, my view is that we will see that all come back together pretty well, but most of the savings that we have done will be realized going forward continuously and of course, you saw that nice drop through from the revenue to the bottom line, on the incremental revenue above the guidance we had originally given.

As far as our RAM capability, we do not see any hesitation or impact to ramp. We are already ramping back up and has been particularly, first to support the install base as the pulse counts came up, obviously a very large percentage of our business is providing the parts and support.

So we saw that back to, demand come up quickly. Now we have seen the demand come up somewhat on the DUV light sources and of course, we are also ramping up our EUV capability to deliver the remaining units of our commitments to ASML for the pilot systems.

Patrick Ho - Stifel Nicolaus

Great, second related question, in terms of the OnPulse and some of the startup costs that you experienced in the last quarter, now that you have the Top 10 chipmakers on board, should we assume that most of the startup cost are behind us? If any additional incremental ones, it will be a little bit less? Given that we are dealing with smaller chipmakers on a going forward basis?

Robert Akins

Well I think that that there are various levels of subscriptions for OnPulse. So, you have some customers were at 100% of their install base, you have others that are really on a trial period and trying to do comparison, because this is a major shift on the modeling that is done for how service is realized for the organization. So I would say that in general, I would not expect huge shifts like we saw in the second quarter, what I consider to be huge shifts, but we will have onboard and kind of an ongoing basis as customers bring on new fabs et cetera.

But I do not expect that they have the level of magnitude and then in parallel, of course we are going to get the ongoing effect of higher efficiency as we get more and more data than we are managing this OnPulse stream width. So I would expect that we are going to see a dampening and a higher ability to absorb onboarding effects as they come to play. Remember that they do have--.

Patrick Ho - Stifel Nicolaus

[Do you question them…]?

Robert Akins

I am sorry?

Patrick Ho - Stifel Nicolaus

Well, go ahead.

Robert Akins

The other thing I was going to say, remember that we constantly have systems that are coming off of the warranty as well, the customer have added a service for 1-1/2 years or 2 years. So it is kind of an ongoing stream and we are trying to create processes and guidelines that allow us to make those cost and timings very predictable.

So when there is going to be an aberration or an absorption that we need to do, I think we will have a better ability to predict it.

Patrick Ho - Stifel Nicolaus

Great, and the final question on my end, in terms of the competitive environment and I guess the lead that you are probably getting again, once again, with the XLR product, maybe Bob, can you just describe what your customers are telling you in terms of your product the XLR versus what the competitors are working on too, I guess narrow the gap now that you kind of extended your leadership once again at the high-end immersion as we will lead the double-patterning of EUV?

Robert Akins

Yes, of course the, as we discussed the open lane time share, our most competitive, most compelling product is the newest version of the XLR, the XLR 600iX which brings to bear a competitiveness in a few areas, one, the most obvious occurs, being its flexible operating power and I do not mean by that, that it can be configured to run at 60 watts or 70 watts or 80 watts or 90 watts, but that it can be, it is always configured to run flexibly at all those powers, something requiring a control by the standards to do so.

So that is kind of on-the-fly ability to quickly change the operating means that as the chipmaker, you have the flexibility now in going forward to better optimize your forward resists for improved process control and yield by, if necessary inserting some really slow resists for a few layers and knowing that they are going to sacrifice any throughput as a result of that.

Secondly, it has better stabilized optical parameters in the most critical areas especially on center wavelength stability, bandwidth stability. Parameters that can translate into CD variations and cause again yield issues if not that roughly controlled and stabilize and of course, we have also put a lot of new long-light and uptime technologies into the XLR 600iX. Technologies that can substantially reduce the operating costs and improve uptime for our customers and anticipate that we will, as we ordinarily do take advantage of opportunities to backward propagate those new technologies into other XLR and even XLA light sources as required to make sure that those sources as well can achieve, improve the operating performance and or lifetime and uptime.

So those occurs with the XLR 600iX is targeted at the ASML NXT scanner and the 95 SX20, these are the two premier offerings by, respectively for each of those two companies and would be anticipated to be playing the major role over the course of its next upturn, I think beginning to ship in larger quantities in 2010 and we feel a good combination this light source on those scanners as a very productive and efficient solution for the chipmaker customers.

Relatives to the competitive offerings in the past, we have talked about what our competition is not doing, we have a good competitor and we are working hard on this gap between those products, but so far we have not seen any overt signs of that kind of flexible operating power or the new control there which is controlling the XLR which provides the improved optical stability have been brought to the marketplace. So I cannot speak with them as to their plans, but they are not available as we speak.

Patrick Ho - Stifel Nicolaus

Great, thanks a lot.

Operator

(Operator instructions) it appears that we have no further questions. I would like to turn the presentation back over Mr. Paul Bowman.

Paul B. Bowman

Well thank you and I would like to thank everyone for joining us on today’s call. We thank you for your interest in Cymer and this does conclude our third quarter 2009 earnings call. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation, you may now disconnect. Have a great day.

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Source: Cymer, Inc. Q3 2009 Earnings Call Transcript
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