Mattson Technology Inc Q3 2009 Earnings Call Transcript

Mattson Technology Inc. (MTSN)

Q3 2009 Earnings Call

October 21, 2009; 06:00 pm ET

Executives

Dave Dutton - President & Chief Executive Officer

Andy Moring - Chief Financial Officer

Laura Guerrant - Investor Relations Counsel

Analysts

Stephen O’Rourke - Deutsche Bank

Edwin Mok - Needham & Co.

Gary Hsueh - Oppenheimer

Patrick Ho - Stifel Nicolaus

Ben Pang- Caris & Co.

Presentation

Operator

Good day everyone, and welcome to the Mattson Technology, third quarter 2009 financial results conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Laura Guerrant, Mattson Technology’s Investor Relations Counsel; please go ahead ma'am.

Laura Guerrant

Thank you and good afternoon everyone. Thank you for joining us today to discuss Mattson Technology’s financial results for the third quarter of fiscal 2009, which ended September 27. In addition to outlining the company’s financial results for the quarter, we will also provide guidance for the fourth quarter of fiscal 2009.

On today’s call are Dave Dutton, Mattson Technology’s President and Chief Executive Officer; and Andy Moring, the company’s Chief Financial Officer.

Before turning the call over to Andy, I’d like to remind everyone that information provided in today’s conference call, contains forward-looking statements regarding the company’s future prospects, including but not limited to anticipated market position, revenue, margins, earnings per share, tax rate and fully diluted shares outstanding for future periods.

Forward-looking statements address matters that are subject to a number of risks and uncertainties that can cause actual results to differ materially. Such risks and uncertainties include, but are not limited to those described in today’s news release, and in the company’s Forms 10-K, 10-Q and other filings with the SEC. The company assumes no obligation to update the information provided in this conference call.

On another note, the management of Mattson Technology will be marketing with the investment community the week of November 9. They will be marketing in Kansas City, New York, Boston, Cincinnati and Louisville. If you are interested in meeting with management, please contact me at 808-882-1467.

With that, I’d like to turn the call over to Andy. Andy.

Andy Moring

Thank you Laura, and welcome to our third quarter 2009 conference call. After I review the financial performance and give guidance, Dave will comment on the business and then we will open up the call for Q-and-A.

During the third quarter, Mattson continued to see sequential improvement in our business, when compared to the first quarter’s cyclical trough. We are now seeing selective capacity ads from several key customers, leading us to believe a more robust recovery in the memory market is likely.

In addition, we saw strengthening in our spares and service business as fab utilization levels continue to improve. We are encouraged by these optimistic signs, but as we said on the last quarter’s call, the timing of a sustainable industry recovery, characterized by large scale capacity buys across the entire memory market, is largely dependant on the ability of our customers to commit funding for additional growth.

Operationally we have completed the third quarter restructuring efforts, and have lowered our cost structure. Gross margins have improved due to lower inventory adjustments, and our cash position at the end of the quarter was better than we had anticipated. During the downturn we have cut cist significantly, strengthened the balance sheet and put operational initiatives in place that will drive strong performance during the growth phase of the upcoming cycle.

We have accomplished all this and still funded our new product initiatives and enhancements to our core products that Dave will speak to. Here are the key points relative to our financial performance for the third quarter. Operating expenses declined another 5% from last quarter and are down over 35% from the same period last year. Operating expenses are at levels not seen since 2003, and will provide significant leverage during the cyclical recovery.

Our ending cash balance of $67.8 million was better than our guidance. Excluding restructuring charges, the cash burn during the quarter was within our commitment to maintain six to eight quarters of cushion. We have released tax liabilities that have been on our books for several years, as the result of the successful closure of a tax audit. This resulted in a favorable, non-cash P&L adjustment of $0.17 per share.

Now to a more detailed look at our financial results for the quarter: Net sales were $11.2 million, and while still modest were up nearly 40% from the second quarter. While much of the revenues in the second quarter were for technology wins, the revenue mix in the third quarter represents specific capacity ads for new equipment from several customers. Our spare parts and service business has also shown continuous improvement and has recovered to about 60% of the volume before the downturn.

Gross margin for the third quarter was over 22%. Inventory reserve adjustments were back to normal levels during the quarter as the increase in demand enabled us to curtail booking, incremental excess inventory reserves. While margins of these relatively low revenue levels are still unfavorably impacted by factory absorption, we fully expect margins to move to more normal levels as revenues increase and absorption becomes less of an issue.

During the current downturn, as we expanded our outsourcing model for manufacturing, we have cut our fixed factory cost by over 50%. Operating expenses for the third quarter excluding restructuring charges were $17.4 million, compared to $18.3 million in the second quarter, and $27 million for the same period last year.

Operating expenses for the third quarter were down by over 35% from the third quarter of 2008. While some of the cuts we have taken are temporary, most of the expense reduction are of a permanent nature, and we expect that we will be able to keep operating expenses near these low levels, despite a ramp in volume.

During the third quarter, the company bought $1.7 million or a $0.03 loss per share for severance charges related to the restructuring we announced during our last call. We will continue to aggressively manage expenses and will enter the upturn with a substantially improved cost structure.

Also during the quarter we booked a favorable non-cash tax adjustment of $8.5 million or $0.17 per share. The tax adjustment related to the closure of an audit, of the 2002 through 2004 tax years for one of our subsidiaries. This tax adjustment represents reserves that have been on our books since that time frame, waiting for the taxing authorities to engage in and conclude their audit.

Interest and other expenses were slightly negative this quarter due to balance sheet charges or exchange rate currency translations, resulting from the weakening dollar. The third quarter GAAP loss was $8.6 million or $0.17 loss per share, compared to a GAAP loss of $19.9 million or $0.40 loss per share in the second quarter. Included in the net loss for the third quarter were the restructuring charges of $0.03 loss per share, and the favorable tax adjustment of $0.17 per share. Excluding these adjustments, our performance was $0.31 loss per share, which was at the favorable end of our guidance.

Turning now to the balance sheet; cash, cash equivalents, short term investments and restricted cash at the end of the third quarter were $67.8 million which exceeded our guidance. As we stated last time, our cash position includes $2 million of restricted cash, which has been set up to cover vendor letters of credit. Our cash has high liquidity and we continue to have no offsetting debt.

The third quarter cash burn, excluding one time restructuring payments was just over $10 million, an improvement over the previous two quarters. We expect that the cash burn will continue to decrease as revenues recover, and we used up much of our current inventories.

Accounts receivable increased for the first time since the beginning of the year to over $7 million. Inventory decreased by $4.6 million during the third quarter, as we began shipping some of the equipment that we had on hand. As I stated at our last call, we anticipate that working capital needs for cash will be reduced as the upturn strengthens.

As our existing inventory tools are concerned, subsequent orders will be filled by our outsourcing partners, and payments will be made at approximately the same time our customers pay us for the delivery of the tools. This will dramatically improve our cash model for the future.

I will now turn to our guidance for the fourth quarter of 2009. Fourth quarter revenues will be up between 25% and 60%, in the range of $14 million to $18 million. Gross margin will be between 20% and 30%, as we do not anticipate significant inventory reserve adjustments going forward. Earnings will be in the range of loss per share of $0.30 to loss per share of $0.25.

We anticipate that the decrease in cash will ease during the fourth quarter and expect that we will end the quarter with a cash position of approximately $60 million. As the recovery strengthens and the receivables balances grow, the rate of our cash burn will dramatically diminish, and we believe it will be completely abated early in 2010.

So let me summarize. There is overall optimism in the market and limited capacity buys in the memory segment are occurring. The question now is the timing of more broad based customer purchases of significant volume that will enable us to conclude that a widespread upturn is occurring.

In the meantime, Mattson has positioned itself for the recovery. The company has clearly taken significant steps in reducing cost. We have enhanced our CFE model with a higher percentage of outsourced manufacturing, to further reduce the ongoing baseline cost for the company. In addition, our balance sheet remains strong with no debt, and we have put operational initiatives in place that will drive strong financial performance during the growth phase of the upcoming cycle.

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

Dave Dutton

Thanks Andy. Good afternoon everyone. During the quarter we accomplished a number of key strategic milestones. We announced the release of our next generation Helios XP RTP system, and we shipped a Helios XP system to a leading foundry customer for advanced anneal processing. This marks our first Helios system placement in a logic foundry market.

We took revenue on an Alpine Etch system, to a leading logic manufacturer, for their wafer-level packaging applications. This shipment is not only the company’s third customer with the Etch products, but it also opens up a new addressable market in the packaging segment.

We continue to experience improving conditions in the cycle. Third quarter revenues increased 38% sequentially, marking our second consecutive quarter of strong double-digit growth. We integrated revenue from our tool shipment across all three product lines; strip, RPT and ETCH. We added a third customer to our Etch product line.

We extended our RPT segment beyond memory into the foundry market, and we shipped multiple strip RTP systems, demonstrating that all three segments are well positioned for the current up-cycle. These results are a testament for the product acceptance we are achieving in our new technologies, the continuing strength of our core products, and the dedication of our entire team.

On a macro level, the overall market and specifically the market for semi-conductor equipment is decisively turning up. Technology related companies appear to be leading the way out of the recession. We have seen strong results from the lights of Apple, Intel, Sanders, and other drivers of the semiconductor industry.

Memory markets are poised for expansion with the rollout of Windows 7 and 4 bit flash memory, which is expected to drive solid space storage market. Memory pricing has recovered and after a long drive, most industry analysts are expecting a corporate IT refresh cycle as we look forward next year. After a prolonged period of cautious spending on part of the semi-conductor manufacturers due to week demand, it is clear that the trough is behind us, and we are in an upward phase of a new technology cycle.

Although spending has markedly improved over the last several quarters, and the semi conductor industry is in traditional first stage of a recovery marked by technology buys, we do not yet have visibility on the next stage of a more traditional large scale capacity expansion buys which will follow.

Specific to Mattson, during the quarter our customer continue to invest in new technologies as they further migrate to the next technology node, but more importantly we have seen early indications of selective capacity buys. The investment in our diversification and growth strategy is paying off, as we have additional opportunities opened up in new market segments.

Mattson now has a solid diversified portfolio of core and new products, with a vastly larger served available markets. We have the requisite resources and infrastructure in place, that’s solely delivered to our customers’ most aggressive production ramp, and have maintained the critical mass as the industry continues to grow.

Mattson remains well positioned to advance our technology at leading customers. Our strip segment remains well positioned in foundry, logic and memory. We expect our Etch products to be established at four customers, and across all market segments by the end of 2009, and our RTP remains strong at memory and wafer manufacturers, while it is making in-roads into the logic and foundry space.

As Andy stated, our financial situation remains sound. Not only will our new products and new markets allow for higher levels of revenue, our stream line financial model and cost structure will deliver higher profitability.

Lets turn to our product portfolio and our positioning for the future. Let me start by clarifying out Etch market and offerings. Our Alpine Etcher addresses Etch back applications in the metal interconnect and packaging area.

The Alpine combines optimized cost chamber components, coupled with Mattson’s most advanced core platform on which our supreme is based, which is designed for reliable high productivity and low cost of ownership manufacturing while providing highly uniform etch capabilities. The Alpine is used for etch back applications were the combined available market is approximately $500 million.

These areas are more cost sensitive while requiring strong technical capability, which is exactly what our Alpine delivers. It has higher technical performance than the low cost niche etch players while being half the cost of ownership of the typical etch competitor. Our Nexion nature addresses critical front in lined of applications as well as final passive etch.

The Nexion utilizes are proprietary design that creates a tunable plasma, which enables the profile control required for dual pattern processing. Nexion’s available market is approximately $600 million. For the dielectric etch market our Alpine and Nexion span the area from the upper edge of photo resist stripping to the critical hedging process that define the transistor and interconnect.

As previously announced we currently have an Alpine tool at a foundry customer and multiple Nexion etch tools at a leading memory customer. In the third quarter we added our third etch customer and shift in Alpine etch tool to a logic customer for their bump packaging line. This shipment expands our etch to a third customers and opens up a new market for our tool.

The Alpine is able to deliver higher technical performance at low cost of ownership that winds against lower cost niche etch tools typical used in this segment. These developments validate our strategy of moving into the complementary etch market, which opens up a broad new set of customers and opportunities for the capabilities of our tools.

We are excited by our new Helios XP product, for advanced RTP or rapid thermal processing and the placement of this product at a large foundry customer. The XP’s technical characteristics allow a broader temperature range, improve repeatability and exceptional within wafer uniformity that’s required for sub3-X nanometer nodes.

In addition to those process improvements, the XP is demonstrated up to a 25% higher throughput advantage as compare to the competition. Enabling the cost effective development of future technology nodes, including the formation of advance sell at sights. Helios XPs strengthens RTP market leadership for advance chip manufacturing.

The product extends our strong memory market position into logic and foundry segments and will set the stage for a large increase in market share for RTP business. During the quarter we also shipped multiple Helios RTP tools to a long standing customer. In strip, we shipped multiple tools to the foundry segment has our foundry customers are seeing demand across PC and Cell phone channels.

These shipments reaffirm our leading position in strip and we are confident that as the market improves strip will extend upon the market share gains we made over the past year. In summary, despite the recession we choose to invest in a new Mattson Technology that will have a market opportunity near triple the size of what it was before.

Over the last year during the worst of the recession, Mattson expanded etch into multiple new accounts, extended RTP into the logic foundry markets and demonstrated share gains in strip. Even though our strategy ran counter to short term financial results, we made a conscious decision to invest in new programs that position the company for long term growth.

Technology companies like Mattson are like sharks. Sharks perpetually move forward or they die. The advancement of technology can never stop in this industry. The global economy is experience a broad-based recovery, being led by the technology industry over our new products coupled with our advanced CFV model or cyclical perpetual enterprise model should enable Mattson Technology to outpace the recovery and drive return on the investments we have made in our diversification and growth strategy.

Our strategy that as resulted in new opportunities and challenges as we continue to see success with new markets that were not previously available to us. As the industry recovers, you will see a stronger Mattson growing share in our core products and adding unique value in the large and challenging etch market with a lien infrastructure that will translate into strong returns for our investors. We are optimally positioned at the leading customers with a strong balance sheet and the requisite resources to fully leverage these positions as the global economy strengthened.

With that I’d like to thank you very much for listening today. We are now open for your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Stephen O’Rourke - Deutsche Bank.

Stephen O’Rourke - Deutsche Bank

A couple of questions, could you help qualify, where you saw the selected capacity adds? I think you qualified it as early indication of select capacity adds? Can you elaborate on that a bit?

Dave Dutton

We’re seeing it more on some of the foundry side, where we’re starting to see them for example, our stripper which is not typically used at technology buy levels and usually legs quite a bit and is legging in this upturn, but we’re starting to see as I mentioned some demand in those areas, which is more alike selective capacity, where they’re adding and need a little more demand because the fabs are running near full utilization.

Stephen O’Rourke - Deutsche Bank

Can you comment, how you think about potential capacity adds at memory manufacturers and then could you comment a bit about your outlook from Mattson with the Taiwanese memory manufacturers?

Dave Dutton

So, I’ll try and cover that, I think what we see is still most of the memory activity is trying to moving their current capacity to the next technology node and they’re buying incremental equipment to make sure that technology reaches high yield.

I think, I’d still more related to technology buys, where they’re converting existing capacity. I feel that’s going to continue into the first half of next year as we see from the lead players some of the next players start to move down that same path. As far as Taiwanese go, I think what we see is activity start to increase from them along this technology by aspect late this early next year.

Stephen O’Rourke - Deutsche Bank

One last question, is there a way to help quantify what the potential opportunity is over the next year at the foundries which flash aNeil product, the Helios?

Andy Moring

Our Helios is not a flash aNeil, it’s our standard aNeil. So, I guess the way to quantify that is zero today and what see although initial focus is on 22 nanometer, so it’s still out beyond next year probably on a full ramp, but we do expected to get some retro position, because of the strengths we have in low-temperature and I think we’ll start to see that benefit on the second half of the year.

Operator

Your next question comes from Edwin Mok - Needham & Co.

Edwin Mok - Needham & Co.

My first question is regarding, I guess the growth that you’ve seen in the last quarter and the coming quarter. Can you help us all in terms of where you’re seeing that is that on strip, RTP, did you recognize new etch revenue in this 3Q, or we do recognize any in the 4Q?

Andy Moring

As I said in my remarks, we did recognize revenue across all three products. I would say typical of where we are in a cycle where we’re still predominantly RTP and strip. We are seeing RTP see the most growth initially in this cycle and then we’re seeing etch with its emerging position starting to contribute. Strip is still legging in growth which it typically does. Strip usually follows about a quarter and a half later in the up cycles.

Edwin Mok - Needham & Co.

Since you’ve mentioned etch maybe we can touch on that a little bit. It sounds like you guys have the Nexion, which is acquisition in memory maker right now and you have Alpine which is in foundry and logic maker. Can I ask you guys; is it because of the application that’s why you’re proceeding in these two product in different areas? Also in terms of Nexion, it sounds like that had gotten good traction in that memory maker. How is that progress another customer?

Andy Moring

So I think the way to look at it is, the Nexion’s initial strength and remains and continues to be a strength as around dual patterning and especially around the spacer area, which the memory segment, especially DRAM was the first in there and expanding there we see logic moving that way as we get below the 3 note and 3X in below. So our initial focus in the Nexion’s initial strength was in memory and that’s what we’re seeing it expand out.

Unlikely wise then were the Alpine is strong, is on the dual damascene area of the plug HVAC that making you’re interconnect layers and so that is more foundry and logic, and so that’s where the Alpine was targeted first, and so that’s why you hear us talk about in those two respective segments.

Going forward, the Nexion is engaged at foundry logic segment and we are expecting to see an increase in those areas and not only around to say, the space area, but also around bond pad etch, where we have a significant cost of ownership versus anything else has been used today.

Edwin Mok - Needham & Co.

Can you quantify Nexion in terms of maybe in the fourth quarter, on the first half of 2010? Do you expect to have any wins in new customer beyond the one that you’ve already been shipping?

Dave Dutton

We are expecting, as I mentioned to go out of this year with four customers with pace tools and currently we have three and we are expecting that to be Nexion type position.

Edwin Mok - Needham & Co.

Finally, just one more question. It sounds like you’re a little bit more confident from last quarter at least it seems you may have better visibility here? Can you share you’re deal for first half of 2010?

Dave Dutton

I’ll try and give you a broad view on the posted own guide numbers or anything like that, but I do feel more confident and it’s really around, I just got back from Asia and a lot of customer activity, where I think we’re going to see probably three or four more customers than the limited amount today that are starting to do some of spending for their technology wise as they upgrade their fabs. So I think that will still predominate from most of the first half of the year and beyond that is where I think capacity by start to become more likely.

Operator

Your next question comes from Gary Hsueh - Oppenheimer.

Gary Hsueh - Oppenheimer

Andy, could you just give me an update on cash flow breakeven? Just wondering based on working capital, if it still around $22 million per quarter in revenue. Just second question, Dave for you, just in regard to Komanda selling 300 millimeter equipment for TI’s Richardson, art fab project, do you kind of notice any comparable benefit in terms of your visibility on capacity buys particularly in memory segment.

Was that used equipment coming out the market? Can you help me quantify or just understand before and after how much used equipment were is on the market from Komanda and after TI’s purchase of those assets, how much less there is, in terms of used equipment, in terms of Mattson gear here today?

Andy Moring

I’ll start with the cash flow. The number you quoted is still accurate, as far as where we think we need to be in order to get the cash neutral. We have started shipping inventory sets that have been on our dock for a quite a long time. We saw that in the third quarter and we’ll continue to that through the fourth quarter and then to the first half of next year. So we believe that revenue level of $22 million, we should be fairly close to breakeven with the cash position. Don’t forget, our P&L breakeven still stated in the $35 million to $40 million range.

Dave Dutton

So Gary, on the Komanda used equipment, so just probably a high overview. We are engaged with the customers that are working with them and most of the equipment at Komanda on strip side were Alpine trees and so some of our historic Alpine tree customers are especially, if they want to add in low cost capacity on some of their older lines and what we’re seeing that inventory goal and we’re actually very much partnering with our customers to make sure they can bring it up very crisply and have solid performance.

So we’re seeing still on the Suprema side of good demand expected again strip. I want to remind everybody, strip historically ramp because it’s a full capacity type situation and you rarely see much strip in the technology by face, but we are seeing activity around discussions and getting ready to make sure. We have Suprema’s available for delivery as we look forward. So I think for the standpoint of what we’re seeing is, that Komanda inventory has very constructive prices and at the same time it keeps our Suprema market strong.

Operator

Your next question comes from Patrick Ho - Stifel Nicolaus.

Patrick Ho - Stifel Nicolaus

Dave and Andy can you comment on your ability to ramp up, particularly given that you’re coming off these pretty low revenue levels, and historically if it does become a kind of late purchase capacity buy, given all the cost cuts you’ve made in the restructuring; just can you comment on you’re ability to ramp up when you get those orders and shipment deliveries from your customers.

Dave Dutton

Yes Patrick, this is Dave and I think Andy talked about it a little bit in his comments, but if you look at it this way, first of all we do have a fare amount of inventory for the initial buys and we are actually starting to work though that as Andy commented.

Then going forward, we’ve also increased our outsource partners and our reliance on them and (a) they have some inventory because they are getting ready and (b) we are very confident we’ll be able to ramp quickly ahead of the market as we go forward and still keep our internal cost low, and also then keep our cash flow very tight within the quarter, so that our working capital demands should be lower than they have been in the past and allow us to have a stronger financial cash flow as we move forward.

Patrick

In terms of the Nexion and traction in addition to the current customer that put it in volume production, how long do you think these additional customers, at least for the Nexion, you mentioned one more by year end; how long will that turn into a similar situation of capacity buys and production type of purchases for that next customer.

Dave Dutton

I think that next customer would probably be looking at about a six month time frame for them to fully prove out and quality and then start to look forward, and by then we are expecting to actually be moving forward with at least a couple of more customers on an Nexion type Etcher.

Patrick

Okay, and final question from me Dave, you talked briefly about the type one memory customers and historically you’ve had big exposures there; do you feel confident about their financial position, and I guess moving forward, most of them will still be in existence, despite a lot of them are looking for government funding. I don’t think we’ve gotten a clear indication that the government will come through. What’s your take about the situation there and what will transpire, particularity given your exposure to it.

Dave Dutton

Yes, I think we stay a little cautious, just because of the financial overall model, it is difficult, but they are returning to cash flow positive that’s typically a strong aspect of what they’ve historically gotten to before they start to look at expanding again. I think there are still sources of investment for each one of those that they should be able to tap if the market continues to strengthen, to be able to invest and move forward and stay competitive with the leaders in the industry.

Operator

(Operator Instructions) Your next question comes from Ben Pang- Caris & Co.

Ben Pang- Caris & Co.

First question for Andy; the breakeven revenue levels that you guys are projecting, what would your gross margin be?

Andy Moring

We model in the upper 40%, at a more normal capacity level, so it would be in the north of 45%.

Ben Pang- Caris & Co.

Moving onto the Etch, the server developed markets that you gave or the market opportunity that you gave. Since you’ve only qualified one customer or you expect to quality link one customer per application or per segment, how do we acutely look at your available market? Your available market for the Etch pack wouldn’t be $500 million?

Andy Moring

Well it is across a border packaging and as we expand Etch pack into other customers on the locate copper lines, and we are expecting to do that. We are already engaged with other customers, and actually its no just a bump packaging, but we are seeing every strong capability in doing some of the Etch packs in the TSV type packaging as well.

Ben Pang- Caris & Co.

So if you looked out into I guess as least the first half of 2010, I think some of the projects that are expected to go forwarded are kind of well know because of the lead time the lithography guys have. What do you expect to be a bigger opportunity for you over that timeframe; the back end stuff or the Nexion?

Andy Moring

No, we think the Nexion is still the bigger opportunity.

Ben Pang- Caris & Co.

And would that be true for the full year of 2010.

Andy Moring

Yes.

Operator

At this time, that does conclude our question-and-answer session. I would like to turn the call back over to you Mt. Dutton for any additional or concluding remarks.

Dave Dutton

Once again thank you for joining out third quarter conference call, and we look forward to updating you on our progress in the next quarter conference call. So thank you very much. Operator.

Operator

That does conclude today’s conference. We appreciate your participation.

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