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Executives

Suzanne Schmidt – IR

Art Zafiropoulo – Chairman, CEO and President

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

Analysts

Krish Sankar – Bank of America/Merrill Lynch

Josh Baribeau – Canaccord Genuity

Jairam Nathan – Sidoti & Company

Mark Miller – Noble Financial Capital Markets

Tom Diffely – D. A. Davidson

Ultratech, Inc. (UTEK) Q3 2013 Earnings Call October 17, 2013 11:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Ultratech Third Quarter 2013 Earnings Conference Call. During today’s presentation, all parties would be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today October 17, 2013.

I would now like to turn the conference over to Ms. Suzanne Schmidt with The Blueshirt Group. Please go ahead ma’am.

Suzanne Schmidt

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

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

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

Art Zafiropoulo

Thank you, Suzanne. Good morning and welcome to our second quarter 2013 conference call. During the course of this presentation, we’ll make projections of forward-looking statements regarding future events and the financial performance of the company. We wish to caution you that such statements are just predictions and actual events can differ materially.

We refer you to the documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company’s Annual Report filed on Form 10-K for the period ending December 31, 2012, as amended filed as of March 1, 2013 and a quarterly report filed thus on 10-Q for the quarter ending September 28, 2013. These documents contain and identify important factors that could cause the actual results to differ materially. These documents contain and identify important factors that could cause the either results to change those contained in our projections or forward-looking statements.

The third quarter results were top line sales of $29.7 million with earnings per share were a negative $0.28 per share. Book-to-bill was slightly greater than 1.1 to 1. No system cancellations were recorded. However, we did have several system push-outs causing our sales to decrease resulting impacting our financial results. It’ important to note that we provided one of the risk factors of – in the potential financial results to be the positive or negatively impacted by sales of only a few systems. This is due to the average selling price for our AP and LSA products which range from an average of $3 million to $5 million.

The pause in the logic market continued and we now believe it will end during the first half of 2014. I believe it’s important to review the events which have resulted in this pause. It is important also to remind each of you that Ultratech is a logic centric company for both our major products the advanced packaging lithography stepper and our laser spike anneal systems used in the fabrication of transistors and leading logic devices. These devices are mainly manufactured by a handful of foundries such as TSMC, Samsung, Globalfoundries and UMC.

Each generation of transistors and devices have proved an economic reduction of between 40% to 50%. These transistors for these logic chips have historically been manufactured using a planar technology at the last major node which was a 28-nanometer critical pattern the economic gain had continued through this node and the cost model was intact. However, as the industry examine the next logical node 20-nanometers it became clear that the economic model gain would end and expectations had dropped to the 20% reduction in cost range.

Companies such as Apple and QUALCOMM will not then be able to provide the necessary improvements to drive additional features and functions at lower cost for future mobile devices. The industry has pursued in a very limited way to offer a 20-nanometer device. However the size of this market will be much less than the current 28-nanometer node. We estimate the 20-nanometer foundry market to be about 20% to 25% of the 28-nanometer market. The economics for many of the foundries caused them to utilize existing equipment as much as possible reducing their competitive price risk caused by fab equipment depreciation.

Their customers such as QUALCOMM and Apple were requesting solutions which would allow the 40% to 50% cost reflection to resume. It became quite clear the obvious only solution that to move a totally new structure the 3G FinFETs. Most had very little historical experience in the 3G structure and the difficulties to produce the FinFETs with acceptable yields and cost have been a significant challenge. The good news is that we can see the light at the end of the tunnel. There has been significant technical accomplishments and progress during the past quarter.

We believe that at least one major foundry has produced a reasonable number of wafers with yields above 80%. We now are much more optimistic with plans to begin manufacturing volume FinFET devices the second half of 2014. If this occurs, we would expect the equipment to begin shipping for the FinFET ramp no later than the second quarter of 2014. We are in a process of record for several semiconductor foundries for the next generation of FinFETs which will use up to four and possibly five different laser anneal steps as compared to two today. Each foundry uses different designs which require different process steps, however we believe that those will utilize more process steps with laser technology will have an advantage with improved yields, lower loss wafers due to breakage thus reducing chip cost.

Further this quarter the LSA process has been qualified has process of record for 10-nanometer FinFET devices at a major global logic foundry. This again reinforces a superior technology and cost effective solutions are obtained with the LSA systems. The next generation of logic designs, we believe no other competitive advanced annealing solutions offer the extendibility for reduced geometries and larger wafers. Brief in touching days on the LSA memory market, we continue to make progress and the results are encouraging. It is very difficult to predict at this time exactly when will revenue LSA systems for this market opportunity.

Moving to our nano product area. Since our recent acquisition of Cambridge Nanotechnologies, we have introduced the second generation technology in hardware for the Savannah and Fiji products for ALD deposition systems. We are close to breakeven in one of the recent quarters we were actually profitable. We expect that this product will be slightly accretive in 2014. We’re working on several applications which could be very important to our business in the next few years.

The lithography nano stepper LED market has become stronger where factory utilization has been reported to be 95% or greater from several companies. Consolidation in the LED chip industry is continuing and is located primarily in Asia – in China. We are looking at ways to further reduce our cost so we can provide a more attractive financial and technical solution for this industry.

Moving to the advanced packaging bump flip-chip market, not much has occurred during the quarter. System utilization is estimated to be in the 70% range and expected to increase which will require additional capacity in 2014. Even with our competition of significantly reducing prices and offering free systems, we have maintained our 70 plus percent market share. I thought it would be helpful to provide how our installed base is compared to all other competitors. We have shipped more than 250 steppers for our packaging served market while all others combined about 20.

Ultratech has over 92% of the entire installed base for bump lithography steppers. With the large installed base like this, we have the tool of record at virtually every fab in the world. We’re also continuing to provide significant engineering resources to reduce the cost of ownership. Our product roadmap is rich with continued rollout of products to serve our customer requirements.

Now, looking at our inspection product, Superfast 3G which we recently introduced and began shipping this past quarter. The interest level has significantly increased with yields becoming much more critical due to 3D structures for both logic and memory devices, advanced cost effective high throughput tools are more important than ever before. We shipped our first Superfast 3G system to a major memory manufacturer in the past quarter which was accepted in only a few weeks. We plan to ship several more systems this year. However, several of these systems may not be recognized as sales in the fourth quarter due to a longer acceptance period. We have prepared our Singapore facility to meet future customer requirements. We hope to have additional information has to potential ramp at the next quarter’s conference call.

Now, to look at the bookings for the past quarter. As was mentioned earlier in the presentation new systems book-to-bill was slightly greater than 1.1 to 1. New systems bookings were broken out as follows. 48% of the bookings were for the laser anneal products, 24% bookings for the AP lithography systems and 28% bookings for our nanotechnology products which include our nano steppers and atomic layer deposition systems.

Geographically, new bookings were North America 36%, Asia 49% and Europe 11% with Japan trailing at above 4%. We have continued our investment in new product development which will allow us to drive increased market share after the pause. Our technology roadmap is very rich in content and will allow Ultratech to excel in the future logic recovery and have programs in place with our products to diversify our served market to hopefully reduce some of the extent of the sales volatility.

At this time, Bruce will provide details of our financials.

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 decrease in revenue of about 31% compared to the second quarter of 2013, primarily reflecting less revenue from laser processing and advanced packaging, partially offset by more revenue from wafer inspection and atomic layer deposition. Geographically, revenue decreased sequentially from the second quarter of 2013 in North America, Europe and Asia Pacific. Demand for laser processing systems in the third quarter of 2013 accounted for about 21% of revenue and about 48% of new systems orders. Advanced packaging systems in the third quarter of 2013 accounted for about 19% of revenue and about 24% of new systems orders.

Nanotechnology systems which includes high brightness LEDs and ALD systems in the third quarter of 2013 accounted for about 24% of revenue and about 28% of new systems orders. Gross margin in the third quarter of 2013 decreased to about 40% from approximately 47% in the second quarter of 2013, primarily due to lower production volume.

Turning now to a comparison of third quarter of 2013 to the third quarter of 2012. Revenue for the third quarter was $29.7 million, down about 51% from $60.5 million for the same period a year ago. Ultratech had a net loss for the third quarter of $7.8 million or $0.28 per share. This net loss compares with net income of $12.4 million or $0.45 per share diluted for the same quarter a year ago.

For the third quarter of 2013 versus third quarter of 2012 comparison of revenue mix, systems revenue was down about 57% in the third quarter of 2013 and service, repairs and license revenue was down about 20%. For the third quarter of 2013, systems revenue accounted for approximately 71% of the total, broken out as 48% from semiconductor and 24% from nanotechnology and service, spares and license revenue for about 29%.

Geographically, revenue from North America for the third quarter of 2013 was $13.4 million, down about 54% from the third quarter of 2012, and represented 45% of the company’s total third quarter 2013 revenue. Asia Pacific had revenue of $12.9 million, down about 37% from the third quarter of 2012 and represented 43% of the total. And Europe had revenue of $3.4 million, down about 68% and represented 11% of the total.

Our top five customers for the quarter were laser processing, advanced packaging, wafer inspection and nanotechnology customers from North America and Asia Pacific. Overall, the top five customers accounted for 74% of systems revenue. Gross margin decreased to about 40% in the third quarter of 2013 compared with approximately 56.5% in the third quarter of 2012. This decrease was due primarily to a product mix shift and lower production volume.

Looking at operating expenses in the third quarter of 2013, R&D as a percentage of revenue increased to about 28% from approximately 13% a year ago. SG&A expenses increased to approximately 41% of revenue up from about 19% a year ago. Both percentage increases are primarily due to the approximately 51% decrease in revenue for the period.

Total operating expenses for the quarter increased to about 69% of revenue from approximately 32% in the third quarter of 2012. Operating margin for the third quarter of 2013 was about negative 29% of revenue down from approximately 25% in the third quarter of 2012.

Interest and other income net increased to $300,000 in the third quarter of 2013 from $100,000 in the third quarter of 2012. Ultratech booked an income tax benefit of $600,000 in the third quarter of 2013. During the year quarterly income tax provisions are determined using an estimated effective tax rate for the entire year. This rate is based on the jurisdictional mix of earnings and has the potential to fluctuate as business moves from one geographic region to another.

Turning now to the third quarter 2013 versus second quarter 2013 comparison of the balance sheet. Cash, cash equivalents and short term investments increased by about $1 million during the third quarter to total about $300 million at September 30, 2013. Accounts receivable decreased by about 22% during the third quarter to approximately $36 million on a shipment decrease of about 29% compared to the second quarter of 2013. Inventories increased during the third quarter by about 2% to approximately $57 million. Working capital decreased to about $367 million or $13.19 per share at September 30, 2013. Book value per share at September 30, 2013 was $14.44 down from $14.59 at June 30, 2013.

Now let’s take a few minutes to look at the future from a financial perspective. At this point it is 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 certain and dramatic changes, risks and uncertainties. In addition Ultratech undertakes no obligations to update information presented in forward-looking statements.

As you heard from Art’s comments our customers continue to focus our capital spending programs on the memory sector due to the robust demand from NAND flash. Three months ago at our second quarter 2013 earnings release teleconference we told you we thought the spending pattern would result in both the third and fourth quarters of 2013 being essentially flat from a revenue standpoint with the second quarter of 2013. The reality turned out to be worse than we anticipated. Our customers have still not canceled any orders but we are continuing to see delivery push-outs as they wait for the pickup in demand in the logic sector. We now anticipate this pickup will occur in the first half of 2014.

We currently believe that the bottom of this cycle for Ultratech will be the fourth quarter of 2013 with revenue possibly being flat to down 10% compared to the third quarter of 2013. Gross margin maybe down a few percentage points due primarily to product mix. Operating expenses look to be up slightly primarily due to an increase in stock compensation expense. Cash flow could be negative for the quarter with the current shipment schedule resulting in an anticipated increase in accounts receivable partially offset by cash coming in from a decrease in inventories.

For 2014 as Art mentioned we believe the anticipated order pickup in logic during the first half of the year will result in sequential quarterly growth with the full year potentially showing revenue growth of around 20% compared with 2013. Finally we would like to wrap our formal remarks by reminding you of the Reg FDA restrictions. In Ultratech the only three people authorized to talk to you about the Company are Art Zafiropoulo, Chairman and Chief Executive Officer; me, Bruce Wright, Chief Financial Officer, and Suzanne Schmidt of Blueshirt Group. For any calls or questions

after the teleconference call dealing with quantitative matters, we will refer you back to the comments made during the teleconference call. That concludes our formal remarks, and now we would like to open it up for your questions. Operator, would you please begin the polling?

Question-And-Answer Session

Operator

Thank you sir. Ladies and gentlemen we’ll now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of Krish Sankar with Bank of America/Merrill Lynch. Please go ahead.

Krish Sankar – Bank of America/Merrill Lynch

Yeah, hi thanks for taking my question. Art, I had a couple of them. First and foremost at the 20-nanometer at foundries, are you guys (inaudible) at any of the foundries at 20-nanometer planar?

Art Zafiropoulo

Yeah, the answer is yes. At one major foundry we are 100% of the advanced annealing processes are with the laser.

Krish Sankar – Bank of America/Merrill Lynch

Got it. And when do you expect that foundry to ramp up or ready?

Art Zafiropoulo

It’s difficult to say that they will not share that information with us in terms of their ramp if they’re going to ramp, if they’re going to shift FinFETs are what their ranges, all we know is that these foundries are making significant progress in the FinFET. And so it all depends on when they decide to make the change. So at this point we don’t have that information available.

Krish Sankar – Bank of America/Merrill Lynch

Got it, got it. And then I kind of missed it, why did you guys say the 20% growth in 2014, was that first half 2014, was the first half 2013 or was it 2014 versus 2013?

Bruce Wright

Year-over-year.

Krish Sankar – Bank of America/Merrill Lynch

So you expect the calendar 2014 to grow 20% or over for Ultratech versus this year?

Bruce Wright

That is the outlook at this point, yes.

Krish Sankar – Bank of America/Merrill Lynch

Got it, all right. And then one other question for Art I mean Art you are kind of highlighted maybe 20 is a hiccup for you guys but clearly LSA is needed at FinFET and so obviously there is a long-term value in the product. If you are so bullish and then the fact that you have a huge cash balance why would not you put your cash to work either in the form of dividend or buyback if the growth opportunity is loud there for the company?

Art Zafiropoulo

Well let’s go back to 20, we said that we are involved in 20, so that was a premise we made that we are not involved in 20 that we’re just focusing on the FinFETs and I think we just answered that question earlier that we are involved in 20 with at least one major foundry and they had more. At this time at the board meetings we look at all nice possibility. So we do examine things like dividends, buybacks, et cetera at our board meeting. So at this point we have nothing more to report.

Krish Sankar – Bank of America/Merrill Lynch

Got it, all right. Thank you very much. Thanks guys.

Operator

Our next question is from the line of Josh Baribeau with Canaccord Genuity. Please go ahead.

Josh Baribeau – Canaccord Genuity

Hi, thanks. Could you talk a little bit about the percentage of your advanced packaging revenues at least year-to-date or conceptually how you think about it this year going from the foundry IDM section compared to OSATs?

Art Zafiropoulo

I think generally we talked about that the strength this year and last year was OSATs and we believe that will continue next year. There is some foundry certainly some foundry strength but there is no longer as strong as it was. So today if I had to estimate the OSAT market may represent probably 60%, 65% of the total lithography packaging market.

Josh Baribeau – Canaccord Genuity

Great. Any applications in memory for packaging that you see in the pipeline?

Art Zafiropoulo

Yeah we do have equipment and we have been shipping systems for memory for about eight years now. And so we have installed a number of machines for the TSV technology at virtually every major memory site in the world. We are working with foundries and memory currently and probably have more information for you and we have won several orders for this company in Asia. So yes we are in the memory business. At this time we are waiting for the TSV ramp. Gartner has projected the ramp will begin this year and accelerating quite rapidly for the next four or fix, six years. We think their numbers are overly aggressive. We think it will see growth in that area but we believe that, that will be little bit further out and we will discuss that in more detail at our Analyst Meeting in New York next month.

Josh Baribeau – Canaccord Genuity

Great. Just a couple more, Bruce were there any inventory write-downs or anything, any one-times in COGS or was it just really overhead absorption and mix?

Bruce Wright

No, no write-downs, no issues on inventory other than we see the growth and things like atomic layer deposition and wafer inspection. So we’re making sure that we have the materials on hand to meet that growth and that’s reflected in our inventory numbers. We’re looking for inventory to come down pretty significantly this quarter because we do have the materials in hand now for the growth in those two areas. So inventories are anticipated to come down, no write-offs, no one-time charges for anything, it’s all, the whole seven percentage point decrease that I talked about in gross margin sequentially in the third quarter versus the second quarter this year is all tied into absorption and the lower production volume.

Josh Baribeau – Canaccord Genuity

Great. When you talk about geography just unclear, is this where the tools are shipped and invoiced or is this perhaps where the parent company might be headquartered because that can certainly be different?

Bruce Wright

Shipped.

Josh Baribeau – Canaccord Genuity

Got you. And then last from me, pricing pressure in the packaging size you talked about some of your competitors giving away tools are certainly being aggressive on pricing. What’s your – how are you dealing with pricing, are you – does your tool standalone or are you cutting prices in order to pick up a little bit of share in that down market?

Art Zafiropoulo

Currently we have not done that, but currently we’re holding our price fine and we have not looked at that at this point. Having a dominant market share position I think we can maybe be a little bit stronger in maintaining pricing. I certainly – if there is much erosion in the market share we’ll take a look at that again, but at this time we are not making any significant changes for what we did in the past on pricing.

Josh Baribeau – Canaccord Genuity

Okay, great. Thanks, Art and Bruce.

Operator

The next question is from the line of Jairam Nathan with Sidoti & Company. Please go ahead.

Jairam Nathan – Sidoti & Company

Hi, thanks for taking my questions. Just wanted to drill a little more on the push-outs. Is there any particular segments with – between laser annealing and or advanced packaging, does it seem more push-outs stand on the other?

Art Zafiropoulo

No, I think it’s right across likely the both related to logic both the packaging and the lasers. And so I think that maybe slightly more in packaging but they are both being pushed out.

Jairam Nathan – Sidoti & Company

Okay. And if I look at your 20% growth estimate for 2014 based on your guidance you probably end at $160 million this year. So the $30 million again any – I’m sure inspection will be a contributor. Can you give us any idea on like which segments would grow more or like that?

Bruce Wright

No at this point, at this time we’re just talking to it from an aggregated standpoint. I think while the situation continues to exist out there with our customers not really having a lot of visibility and the uncertainty to get into specific segments at this point probably gives an idea of more certainty than really exist out there. So I think just going with the 20% aggregated is about the best we can do at this point.

Jairam Nathan – Sidoti & Company

Okay. And my last question was on operating expense, it was up like close to $1.5 million sequentially and that 100 – even given the 20% growth in 2000 – expected in 2014 you wouldn’t get back to where you were in 2012 or 2011. Is there any plan on the cost side?

Bruce Wright

Well what we are doing right now is really watching cost as we’ve commented on before. We continue to have a hiring freeze in the company. If we see some selective really great talent out there obviously we’re going to be bringing that in but essentially there is a hiring freeze in the company, we’re watching things like T&E. We’re making sure that we’re continuing to spend in our R&D area because we want to meet the customer requirements for what they need as we move on to next generations and just overall watching expenses.

Jairam Nathan – Sidoti & Company

Okay, thanks. That’s all I had.

Operator

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

Mark Miller – Noble Financial Capital Markets

Just like to go back about the – your status with qualification for FinFETs I believe you said you would process a record at least one place for up to four steps. How many FinFET manufacturers are you qualified for the laser product?

Art Zafiropoulo

All, all.

Mark Miller – Noble Financial Capital Markets

At all, okay.

Art Zafiropoulo

All.

Mark Miller – Noble Financial Capital Markets

Could you also address the advantages you would have for FinFETs over the flash anneal and rapid thermal anneal just briefly?

Art Zafiropoulo

Yeah I think we’ve covered that many, many times but certainly we’ll share that with you. It’s a process that, that really produces less stress on the wafer is a direct relationship to stress (anneal), it also because of the being around 10 to 11 millimeters to 11 millimeters wide and we scan it being back and forth, the wafer acts as a (haystack) so reduces the stress and therefore wafer breakage. Breakage is a situation that occurs usually upstream where other processes create stress on the wafer and if it’s high then processes like flash will break the wafers far greater and that will create a downtime of the equipment and utilization dropped significantly, it takes on a flash system, it could take eight hours to 10 hours to clean a machine to remove all the powder particles of silicon.

So it’s really a negative and so the system has inherent advantages, long wavelength, the long wavelength is very important for pattern effects. Now we use the laser and we have number of patterns in this area is what is called Brewster’s angle and that comes in at an angle of about 75 degrees so it’s not vertical, it’s a 75 degree angle from the top so it’s almost vertical but not quite and with that the entire surface of wafer looks like one color. So by doing that the thermal effects within the – in the die are constant and so people use what is known as ring oscillators to measure this and if you change temperature within the die the transistors will act differently.

Regarding the FinFET the work we started about eight years ago on FinFET and we did a lot of work on looking at the angle and the effects of the angle for what is known as the (inaudible) effect and that is really to do with the vertical dimension of the FinFET and if there is any shading that’s going on, none whatsoever occurs and the work we’ve done is in the five nanometer range. So as we get to smaller devices the effects of the shading if you will is eliminated by the thermal diffusion where the silicon smooths moves out any microscopic local non-uniformities that might exist.

So in general this technology as the – geometry get smaller it actually get stronger and if you have light sources like they do with flash lamps the light sources vertical you have pattern effects and that becomes more severe when you have a FIN and the other surfaces around it then you do a planar structure. Now just one final comment on that even a planar structure has vertical dimensions on the gate so that gate vertical height is very similar to a FinFET today. So the effects again are very well proved about uniformity, the thermal effects, the lack of shading and the extendibility to at least the five nanometer structure region.

Bruce Wright

And Mark there was an additional advantage with the long wavelength laser on the (connect) nanomaterials as we move from nickel silicide to titanium silicide.

Mark Miller – Noble Financial Capital Markets

All right. Thank you for that. I appreciate it. Intel said yesterday that was experiencing some production issues on the Broadwell chip. Just wondering if that had any impact on this quarter or could have any impact on you and if you could give any color, what should we think is going on there?

Art Zafiropoulo

Yeah, I think as we’ve talked about before the 14-nanometer FinFET steps they are working on are extremely difficult. And Intel has been working on FinFETs for a number of years. As you know they introduced the first series of FinFETs at the 20-nanometer structures so they have experience in production. And so it’s a move to 14 which they’ve done and others are doing is just truly a challenge. However as I mentioned before there is a lot of companies out there that are making progress in this area and this is going to accelerate the transition of 14 which is driven by Apple, QUALCOMM and others. So at this point certainly everybody will have problems at some point so I mean Intel is a very strong technology company and I can share with you that, the issues they are having are not LSA related.

Mark Miller – Noble Financial Capital Markets

Okay. Just one final thing cash flow from operations please.

Bruce Wright

Yeah, cash flow from operations, cash flow was up about $1 million as I indicated in the comments for the quarter.

Mark Miller – Noble Financial Capital Markets

Okay. Could you just or could you give me the actual figure please?

Bruce Wright

About $1 million, the cash flow.

Mark Miller – Noble Financial Capital Markets

Okay.

Bruce Wright

The cash flow, if you want to poke, have a little, it was cash flow from operations was about $4 million net, was about $4 million and that was offset by capital program of about $4 million we put an LSA system into our demo lab. So it kind of netted out about that way with just a little bit over a positive $1 million positive coming from total cash flow.

Mark Miller – Noble Financial Capital Markets

Okay. Thank you very much.

Operator

(Operator Instructions). Our next question is from the line of Tom Diffely with D. A. Davidson. Please go ahead.

Tom Diffely – D. A. Davidson

Yeah, good morning. First I mean Bruce a question on the revenue growth next year. If you got the 20% revenue growth what would you expect the ramp or the creep in operating expenses to be to support that?

Bruce Wright

I’m not expecting much of a ramp or a creep as I indicated we are all over watching OpEx expenses and what that’s probably going to play out to is a slight ramp in R&D that’s typically what we do through the years and offsetting that to a certain extent in more control over SG&A. We really haven’t even ramped well call it like it’s almost like the equivalent as same-store sales SG&A this year where we’ve been seeing any kind of ramps in SG&A has been due to stock compensation expense and the accounting rules for that. So I’m not looking for a major ramp in OpEx expenses next year over this year.

Tom Diffely – D. A. Davidson

Okay, great. And then when you look at kind of reminder of this pause, what are your projections or estimates for free cash flow?

Bruce Wright

Fourth quarter is going to be tough, you saw in this quarter that we just brought in like I just told Mark about $1 million positive to cash flow. From a free cash flow standpoint we are talking about cash flow from operations, things like interest payments, capital programs, we don’t have a major capital program in the company. We aren’t anticipating very much at all in the fourth quarter. The capital expense that we have this year occurred in the second quarter and the third quarter with two LSA201 systems, one going to engineering and one going to our demo lab, we’ve kind of done that, that’s the extent of our capital program.

As you know with our cash situation we really don’t have any interest payments out there to speak of it at all. And so it’s like free cash flow is almost just the operating cash flow. And that with the outcome or with the guidance that we’re talking about for the fourth quarter as I indicated it looks like it could be negative and that would be based very strictly on the timing of shipments impacting build and receivables we’re going to be getting positive cash flow from the change in inventories.

Tom Diffely – D. A. Davidson

Okay. And then if we look into early next year, a few things ramp like ALD and inspection. Is there any kind of a capital program for that to support that?

Bruce Wright

We’ve pretty much done that. We’ve done everything we need to do over in Singapore, we’ve already put the capital expense into San Jose to extend the clean-room scenario to be able to do 450 millimeter and we’ve already put the money in our Waltham area to meet the demand there. So we’re good from a bricks and mortar standpoint.

Tom Diffely – D. A. Davidson

Okay, good. And then finally if you look at the gross margins, advanced packaging has always been the strongest margin category. It sounds like you’ve been able to maintain prices so far. How are the margins in the other groups like the LSA in some of these emerging systems?

Bruce Wright

Well it’s kind of an interesting situation because when you see gross margins overall with the numbers that we are talking about of course those are being impacted by this low volume of production and the lack of absorption that we can put into the diminished number of systems that we are manufacturing. So it’s a little bit of an aberration right now to talk about overall margins. Let’s just strip it out then as to direct kind of like direct labor stuff like that, direct labor materials that are going into the systems. Those margins are the same essentially as we’ve always had. So we’re seeing advanced packaging being the strongest sector, laser processing being second and then we’re seeing followed off of that by LEDs and with strong margins in the atomic layer deposition systems and wafer inspection it’s – two few systems out there to really tell that’s ramping up at this point.

Art Zafiropoulo

If I could add some color to that, Tom, typically we talked about margins for the Sapphire LED systems to be in the mid-40s or so on average some are a little bit lower, some are a little bit higher. If we look at the AP systems those are in the mid-50s, it could be a little high than that. The laser systems are in the low 50s and then we look at the ALD systems and they are comparable to the AP tools in the mid to a little bit high of 50s. And as Bruce said on the inspection gear real early we just shipped out for a swan, we won’t have any really meaningful information on that so we get few systems out there five, six, seven. But the expectations are that it should be in the same range comparable to the AP and the ALD systems.

Tom Diffely – D. A. Davidson

Okay, yeah. Thanks for the color.

Operator

There are no further questions at this time. I would now like to turn the call back over to Mr. Zafiropoulo for closing remarks.

Art Zafiropoulo

Thank you. We are approaching the end of the logic pause which we believe will occur in the first half of 2014 which you’ve heard during this call. We’ll have our 10th Annual Analyst Meeting in New York on November 5. We will provide in-depth overviews of our major products markets served with industry experts which will share their independent thoughts on the semiconductor industry. We encourage each of you to contact Suzanne Schmidt at the Blueshirt Group or please check at our website for all the details. We have committed limited space available so let us know as soon as you can and I look forward to seeing you on November 5. Thank you.

Operator

Ladies and gentlemen this concludes the Ultratech Third Quarter 2013 Earnings Conference Call. If you would like to listen to a replay of today’s conference please press or please dial 1 (303)-590-3030 or 1 (800)-406-7325 with the access code of 464-2667. We would like to thank you for your participation. You may now disconnect.

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