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Mattson Technology (NASDAQ:MTSN)

Q3 2013 Earnings Call

October 22, 2013 5:00 pm ET

Executives

J. Michael Dodson - Chief Financial Officer, Chief Operating Officer, Executive Vice President and Secretary

Fusen Ernie Chen - Chief Executive Officer, President and Director

Analysts

Y. Edwin Mok - Needham & Company, LLC, Research Division

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

David Duley

Orin Hirschman

Steven Tomingas

Benedict Pang - Northland Capital Markets, Research Division

Operator

Good day, ladies and gentlemen, and welcome to your Mattson Third Quarter Financial Results Conference Call. [Operator Instructions] On today's call are Fusen Chen, Mattson Technology's President and Chief Executive Officer; and Mike Dodson, the company's Chief Operating Officer and Chief Financial Officer. I'd now like to turn the call over to Mr. Dodson. Please begin.

J. Michael Dodson

Good afternoon and thank you for joining us today to discuss Mattson Technology's financial results for the third quarter of 2013. Fusen will give you an overview of the business, then I will provide the detailed financial results and last, Fusen will close with our business outlook and guidance for the fourth quarter of 2013.

Before going into the specifics of the call, 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, compliance with line of credit covenants, cash balances, revenue, margins, operating expenses, earnings per share, tax provisions 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.

And now, let me turn the call over to Fusen Chen. Fusen?

Fusen Ernie Chen

Thank you, Mike, and welcome to Mattson Technology's Third Quarter 2013 Earning Call. I'm very pleased to begin our earning call with the results for the third quarter of 2013. After much hard work, Mattson's financial results exceeded our guidance ranges with net sales of $33.8 million and the most importantly, a net profit of $0.01 per share, excluding restructuring charges.

I would like to thank all of Mattson's employees and the management for their focus and the dedication that has led the company back to profitability. I will also like to thank all of the companies that work with Mattson, our customers and the suppliers. This milestone marks a turning point for Mattson and set the stage for us to continue our growth and provide value to our shareholders.

Over the past 3 quarters, Mattson has settled into an operational model that is controlling expenses while at the same time, supporting our customers and growing revenue. We feel that we are much closer today than at the beginning of the year to achieving an optimal level of operational efficiency. We are setting up all of our operations to be efficient, agile and responsive, and then we'll continue to invest in our growth. This means we are taking care to remain focused on investing in the areas needed to support our growing business. One example is upgrading our premium facility to consolidate RTP manufacturing with the strip and the Etch manufacturing, gaining the cost saving of improved operational efficiency. And at the same time, we remain focused on the needs of our customers and in the first quarter of Fremont based RTP manufacturing, we shipped the highest number of Helios XPs within a quarter in the company's history.

I will now briefly discuss our view of the industry and the technology trend. Cautious spending due to overall economic weakness drove down semiconductor revenue at the end of 2012 and the first half of 2013. We are now seeing a recovery with quarterly semiconductor revenues growing from the mid-$60 billion range for the first half of 2013 to over $75 billion in the second half of this year. As we anticipate last quarters, one major driver for the semi equipment business in the second half of 2013 is the memory companies purchasing capital equipments to begin production of 2x nanometer DRAM and 3D NAND IC unit in 2014. We also see 20-nanometer device production ramping in foundries with sub 20-nanometer coming in 2014. Mattson is planning to support this production requirements of our memory and the foundry customers in the back half of 2013 and into 2014.

I will now give an overview of our product positions in these markets. In less than [ph] 1 year, during the third quarter, we have shipped a record number of Helios XP into foundry customers and are scheduled to continue this pace into 2014. The Helios XP's industry leading pattern loading effect performance continues to provide advantage to our customers' overall complete offering. We are also seeing the Helios XP expanding the number of applications for which it is used by our customers. The increase in the market share from this expansion will be a major growth driver for Mattson in 2014. In millisecond anneal, the Millios, utilizing Mattson's proprietary upland [ph] technology, has achieved superiors on wafers results at multiple customer size. The Millios continue to run extensive production testing and is expected to be released for high-volume and advanced logic production within the next few months. The design of our Millios with the processes the entire wafer surface in milliseconds provides the highest throughput for the most critical applications. With Mattson's advanced wafer stress management, the Millios runs [ph] optimized production processes with minimal wafer breakage. We believe that Mattson's combination of performance and the cost of ownership advantage provides the most effective production solution for our customers.

In Etch, the paradigmE XP with our new proprietary plasma cells has been qualified for new applications by our key customers in the past 2 quarters, which expands our market shares. System orders for advanced 2x nanometer DRAM and 3D NAND memory production has began -- has been pressed and it began shipping this quarter and will continue into 2014. Our work on 3D FinFET technologies with our foundry customers, is showing equilibrium and the higher device yield than our competitor while offering significant productivity advantages. Mattson's focus on the key process applications required for advanced device technologies is leading to further engagements with our foundries and larger customers. In strip, Mattson's products hold strong technical position while our existing installed base continue to run at a high utilization rate for our customers. We are partnering with our foundry customers to expand the supreme technical capabilities for advanced FinFET technologies. More stringent defect reduction requirement and the need to minimize silicon loss for the FinFET structures is driving development of an improved plasma source to address this need. We believe that physical pattern damage induced by wet strip processing will require the continued use of our dry strip for advanced technology nodes. And Mattson's leadership in dry strip will continue to play an important role in the industry.

Now, I will turn the call over to Mike to provide further detail on our financial performance. Mike?

J. Michael Dodson

Thank you, Fusen. I would now like to discuss the detailed financial results for the third quarter of 2013. Net sales for the third quarter were $33.8 million, representing an increase of over 37% as compared to net sales of $24.6 million in the prior quarter. The system sales mix during the third quarter was as expected and included Etch and RTP systems that represented more than 3/4 of the system revenue with the remainder made up of strip systems. The prior quarter system sales mix had strip systems comprising 3/4 of the system shipments with RTP systems representing the remaining system revenues. Shipments into memory applications resumed in the third quarter after a 4 quarter pause. The gross margin in the third quarter was 33.8%, which is down nearly 1 percentage point compared to the gross margin of 34.5% in the prior quarter. As expected, despite a significantly improved mix and benefits from higher sales levels, the slight decrease in gross margin from the prior quarter is primarily due to a higher level of revenue deferrals driven by the typical 10% revenue holdback at the time of shipment. This net revenue deferral resulted in 4 percentage points of gross margin pressure on Q3. Also offsetting the benefits of the improved mix in Q3 were higher production costs, represented primarily by freight and labor charges in response to a shipment schedule that was extremely condensed and back end loaded in the third quarter.

Looking forward to the fourth quarter, we expect our gross margin to be in the same range as the third quarter at 33% plus or minus 2 percentage points. Although we expect to continue the same favorable sales mix in the fourth quarter, with increasing revenues and a carryover from the back end loaded equipment shipment schedule in the prior quarter, we expect to experience even higher level of net deferred revenue driven by the typical 10% revenue holdback at the time of shipment. This net revenue deferral is expected to put up to 6 percentage points of gross margin pressure on the fourth quarter.

In the third quarter, operating expenses, excluding restructuring charges, were $10.7 million, which represented a decrease of $400,000 or 4% from $11.1 million incurred in the prior quarter. We have outlined in prior quarterly calls the details of our 4 phases of the cost reduction program. From the inception of our cost reduction efforts in the fourth quarter of 2011, the quarterly operating expense run rate has decreased by 40%, representing annualized savings of approximately $30 million, excluding restructuring charges. The estimated one-time restructuring cost resulting from the 4 phases of the cost reduction program is $10.5 million, of which all has been incurred to the end of the third quarter of 2013. With the cost reduction efforts now complete, we estimate the actual run rate leaving the third quarter is between $10.5 million and $11 million. To support the expected higher business levels in the fourth quarter and into 2014, we expect operating expenses to increase moderately. Interest and other income and expense netted to an expense of $200,000 in the third quarter of 2013 compared to a net expense of $500,000 in the prior quarter. The current quarter amount primarily represented interest expense related to balances outstanding on our line of credit while the prior quarter amount related to interest expense as well as an unfavorable net foreign exchange loss related to foreign denominated balances at our U.S. operations. Related to income taxes, the benefit for income taxes was $16,000 in the third quarter and there was a provision for income taxes of $12,000 in the second quarter of 2013. The year-to-date tax provision consists primarily of foreign taxes. We expect the fourth quarter tax benefit to approximate the third quarter.

Net loss for the third quarter of 2013 was $400,000 or $0.01 net loss per share. This compares to a net loss for the second quarter of 2013 of $3.6 million or a $0.06 net loss per share, and a $6 million or a $0.10 loss per share reported in the third quarter of 2012. Excluding restructuring charges, the net earnings per share in the third quarter of 2013 was $0.01 as compared to the net loss per share in the second quarter of 2013 of $0.05, and net loss per share in the third quarter of 2012 of $0.10. Our basic and fully diluted weighted average share count for the third quarter of 2013 was 59 million and 60.2 million shares, respectively.

Now, taking a look at our balance sheet. We ended the third quarter with working capital of $29.9 million, which was slightly up by $500,000 from $29.4 million at the end of the prior quarter. This net increase is primarily due to an increase in accounts receivable that was largely offset by an increase in current liabilities and a decrease in current assets other than accounts receivable. Cash balances at the end of the third quarter were $13.7 million, which included the benefit of a $20 million drawdown on the $25 million line of credit. Shortly after the end of the third quarter, we paid down $10 million on this line of credit. The decrease in the net cash position at the end of the third quarter was primarily driven by the increase in accounts receivables by $20.3 million. The DSO for the third quarter was 83 days compared to 39 days in the prior quarter. The significant increase in DSOs during the quarter is primarily due to a heavy back end loaded distribution of shipments during the third quarter.

In summary, from a financial performance perspective, the results for the third quarter continued the sequential quarterly trend of improving operating results with revenues increasing over 37%, operating expenses, excluding restructuring charges, decreasing by 4%, and excluding restructuring charges, Mattson returned to profitability with earnings per share of $0.01. In addition, at the end of the quarter, we were in compliance with our covenants on the line of credit.

Now, I will turn the call back to Fusen, for the business outlook and fourth quarter guidance. Fusen?

Fusen Ernie Chen

Thank you, Mike. Again, I want to thank everyone who helped Mattson reach this important turning profit point -- turning point of profitability. I'm proud of all Mattson employees whose hard work and dedication achieved this milestone. I also want to thank all of Mattson's customers and suppliers who have been supporting us through the difficult times in our past. We expect a brighter future as Mattson's focus on adding values to our customers, partners, employees and shareholders.

We continue to increase by the expansion over the next years of the advanced technology nodes for memory in the 20-nanometer and the deyang [ph] foundry capacity. As a foundry and a memory maker increase the leading-edge capacity to meet the mobile electronic demand, Mattson will be providing them the most efficient and the effective production solution.

Our guidance for the first quarter of 2013 is as follows: We expect fourth quarter revenue to be $39 million plus minus $2 million with the midpoint representing 15% increase over the prior quarters. As Mike has already discussed, we expect gross margin to be 33% plus minus 2%. We expect the earnings per share in the range of $0.03, plus minus $0.02. Thank you for your attention to our business and the financial update. We are now open for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from Edwin Mok of Needham & Company.

Y. Edwin Mok - Needham & Company, LLC, Research Division

First question I have, I just wanted to make sure I got the mix correct. I think you said that strip was only 1/4 of your revenue, or your 2 revenue in the September quarter, right? And the rest of them are all RTP or did you have any Etch shipment for the quarter?

J. Michael Dodson

The 75% -- 25% was strip and the remaining 3/4 was a combination of Etch and RTP.

Y. Edwin Mok - Needham & Company, LLC, Research Division

I see, okay. And for the fourth quarter guidance, what are you baking in, in terms of mix, roughly?

J. Michael Dodson

We expect the same favorable mix in Q4.

Y. Edwin Mok - Needham & Company, LLC, Research Division

I see. So similar mix in the fourth quarter. Okay, that's helpful. Then the second question I guess, just kind of talk about the gross margin. You mentioned that on the fourth quarter, you expect that the net deferred to have a 6 percentage point impact on gross margin, right? When do you expect those deferreds to start to come back into the P&L and start to revert and actually give you a benefit on the gross margin? Is that going to be just 1 or 2 quarter away or is that a full year defer, how do we kind of think about that?

J. Michael Dodson

Yes. It's an issue that occurs as our revenues are increasing, especially at the rate that they've increased the past few quarters. Also impacting us is the timing within the quarter of when we ship. So Q4 is the impact of both increasing revenues. And because so much of our revenues shipped at the very end of Q3, much of that deferral carries over into Q1. So Q4 is actually more or less getting the impact of 2 quarters of the deferrals during the period of raising revenues. We would expect that to start to level off a little bit I would think, into Q1 and Q2 of next year.

Y. Edwin Mok - Needham & Company, LLC, Research Division

I see. So it's -- but the defer actually will give you a margin boost, right? So it is possible that -- if I take the 33% that you talked about, add back the 6%, gets you 39% and as you get to your first quarter or second quarter, you actually might get a boost above that, if your mix in revenue is the same level. Am I thinking about it the right way?

J. Michael Dodson

Yes. As the rate of growth decreases, for example, we grew 37% this quarter and we're -- midpoint of our guidance next quarter is 15%. So as we start to -- as the rate of increase decreases or starts to level off, what happens is we get no -- there's no benefit, there's no detriment. It's only when revenues start to decline do you see an actual benefit from it.

Y. Edwin Mok - Needham & Company, LLC, Research Division

And then I guess, moving on to product, I'll go through a few of them just quickly and I'll let others ask questions. So just on RTP, you mentioned that you have started to have record shipment of RTP in the third quarter, is that sustainable in the fourth quarter and do you see this level off or start to come back, come in as you look beyond this current quarter?

Fusen Ernie Chen

Yes. As I described, Edwin, all RTP momentum will continue into 2014.

Y. Edwin Mok - Needham & Company, LLC, Research Division

Okay, great. And then on -- but RTP is predominantly one major customer, right? Do you expect other customers to come in, in '14 to help drive that momentum or is it just based on that one customer investing?

Fusen Ernie Chen

Well, of course, we are working with not only one customer. And we will not depend on our business just on one customer. So although we actually have quite healthy booking from a major customer, in the meantime, we also engage with a few other customers.

Y. Edwin Mok - Needham & Company, LLC, Research Division

Okay, great. And on MSA, I think previously you guys talked about there was one -- your first customer is getting pretty close to qualification and I think previously you talked about fourth quarter. Is that still the timeline or any change to that timeline?

Fusen Ernie Chen

Yes. One of -- our system is under high-volume manufacturing tests in a major customer as I described last time. And we see the qualification progressing as we expected. So we expect to conclude this effort by end of this quarter. There's a possibility can be just beyond early next quarters.

Y. Edwin Mok - Needham & Company, LLC, Research Division

I see, I see. So it is like it will happen in December, but sometimes sign-off take a few days and that might push it out to the next quarter...

Fusen Ernie Chen

Yes. We do hope as a old friend to conclude this effort by the end of the year. But there's a possibility this can delay until early next quarters.

Y. Edwin Mok - Needham & Company, LLC, Research Division

Is that system baked into your revenue guidance or is it not going to be revenue anyway or how do we kind of think about that?

J. Michael Dodson

Yes. When we put together our revenue guidance, we did not contemplate the addition of that revenue.

Y. Edwin Mok - Needham & Company, LLC, Research Division

Last question, I'll ask -- the other ask question. On the Etch side, you mentioned that 20x -- or sorry 2x nanometer DRAM start to see orders add and it -- and you won some new application that was driving that, right? Is that mostly happened already or is it something that you are expecting in the fourth quarter and beyond? I'm just trying to understand the timing of that opportunity and if there is incremental growth that you expect to come from that in 2014?

Fusen Ernie Chen

So I would answer you, no. The current memory investment, they are few in part and this also NAND for us. We do believe DRAM upgrade will continue and to next years, that's as far as we can see.

Operator

And your next question is from Christian Schwab of Craig-Hallum.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

On the Etch side of the business, would we expect to sell more Etch in Q4 than in Q3?

Fusen Ernie Chen

That's our expectation. A lesser-known industrial investment could, in fact, 3D NAND. So we do expect we will participate in the first quarter with our Etch business.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay. So given some of the trends that we've talked about in the migration, an increased volume capacity on 20-nanometer, as well as 3D NAND spending and orders starting to be released, would we -- is it, I guess, safe to assume that we would expect Q1 revenue to be up again from Q4?

Fusen Ernie Chen

We do not comment beyond Q4. But in general, I think the business environment is healthy. The DRAM price actually is quite healthy and the investment of foundry for sub 20-nanometer will continue into 2014. So the industrial forecast for next year actually is up between 10% to 25% depending on who make the forecast. So we do -- we are positive about the environment, although we don't make a comment beyond Q4.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

When do you think it's logical that you would start recognizing revenue regarding applications for FinFET?

Fusen Ernie Chen

Well, I think FinFET, we actually -- our both the Etch product and the RTP product all participate in the FinFET technology transition. So as we speak, sub 20-nanometer will be a transition of the FinFET technology. So as we speak, I think we are into the FinFET region already.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay. Could that be meaningful volume in the second half of '14 or is that more of a 2015 event?

Fusen Ernie Chen

Well, I think if you look at the foundry investment for sub 20-nanometer, it's going to happen beginning of 2014 and into the whole 2014.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay, great. And then my last question, just so we get the customer triangulation correct, as we exit 2014, how many customers, different customers do you think you'll be shipping to in Etch, in RTP and strip?

Fusen Ernie Chen

Christian, I think it's our goal to widen the portfolio of our customer base. And we do engage with multiple customers at this moment. But in terms of volume per customer, I think it's very difficult for us to make a prediction per product [indiscernible] But it's really our belief and is our intent to engage as many customer as possible at this moment.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Great. And then my last question, on the Millios, I missed that earlier, I'm sorry. Did you ship any of the Millios product?

Fusen Ernie Chen

We have Millios system on the high-volume manufacturing testing. That was the one we mentioned last quarter. And as early in the progress, we plan to conclude this effort by end of the year. But there's a possibility this can slide into probably early next quarters.

Operator

Your next question is from Bev Prio [ph] of B. Riley and Company.

Unknown Analyst

I think most of them have been answered, but maybe if I could just get some details on the rush order. Can you characterize that, anything for us out -- was that a pull in or was that a new order? Can you give us any idea of if it was in memory or what space it was in?

J. Michael Dodson

Yes. In general, our shipments were weighted towards the back of the quarter. So it's just the timing of our shipments.

Unknown Analyst

Okay. So nothing pulling in, I assumed since it was -- you guys topped the high end of revenue guidance, there might be a pull in or something.

J. Michael Dodson

Right.

Operator

Next question is from David Duley of Steelhead Securities.

David Duley

A few questions for me. First, housekeeping. The 10% holdback that you referred to that's impacting your margins, that rolls onto the balance sheet, is that the deferred? Where does that show up...

J. Michael Dodson

Yes. It's deferred revenue and it's at 100% margin, where we recognize 90% of the revenue and 100% of the cost and 10% of the revenue gets deferred.

David Duley

Okay. And it's both the long-term and I think there's 2 balances, a short-term and a long-term. Is it both to -- both the same thing or is that -- it's a longer term than service contracts?

J. Michael Dodson

It's short-term.

David Duley

Okay. And did you guys mention what your book-to-bill was?

J. Michael Dodson

No. And it's one of the things that we really haven't talked about for years. Just given that some of our customers literally give us an order and we ship it a couple of weeks later.

David Duley

Okay. And did you mention in the prepared remarks, regarding the Millios that you're in testing with more than one customer or is it just one customer?

J. Michael Dodson

Yes. We have said that we're at one customer with the high-volume testing evaluation tool.

David Duley

Okay. And I guess just the other customer clarification that I was trying to get from your commentary was I believe you talked about being in high-volume manufacturing with more than one foundry customer on the RTP side, is that accurate?

Fusen Ernie Chen

That's correct. I think our Helios RTP, we do engage with multiple customers.

David Duley

Okay. That's it. One final question for me. The tax rate going forward when you start to produce more profitability, what should we think of longer-term and is there an NOL balance that's not listed on the balance sheet?

J. Michael Dodson

Yes. Really, if you were to model out 2014, really, the only taxes that we would show on our income statement would be our foreign taxes. And for modeling purposes, I'd say $1 million for the year would be a fair number.

David Duley

Okay. And you don't have a big NOL balance?

J. Michael Dodson

Yes. We have -- we obviously have significant NOLs but we also reserve those as well.

David Duley

So I guess I'm getting at is in the future years, how much of a tax liability will we see or do you think the NOLs will cover it mostly like it is in 2014?

J. Michael Dodson

Well, we obviously have hundreds of millions of dollars of NOLs. At some point, after we establish continued profitability over an extended period of time, we'll need to reverse our valuation allowance and then you'll see hundreds of millions come through as a one-time entry. From an actual taxpayer standpoint, those NOLs are going to reduce our actual tax payments for many, many years of profitability.

Operator

Next question is from Edwin Mok of Needham & Company.

Y. Edwin Mok - Needham & Company, LLC, Research Division

Just first question is, you mentioned on there's some timing of shipment that caused a defer. Are you seeing same thing this quarter that your shipments are more back end loaded within the quarter?

J. Michael Dodson

No, we're actually seeing a -- it's more uniform. It's always a little bit lumpy and typically more or towards the back. Q3 was just uncharacteristically back end loaded for us and Q4 is more even.

Y. Edwin Mok - Needham & Company, LLC, Research Division

And then I think, Mike, follow-up question -- the other question is on the offering expense. I think previously, you guys had some target model which imply your OpEx might be at $12 million, at a $40 million revenue run rate. Your guidance seems to imply that your OpEx is actually coming in below that for this coming quarter and $39 million is pretty close to $40 million, right? Should we expect OpEx to kind of trend higher as you get to 2014?

J. Michael Dodson

Well, we mentioned in our prepared remarks that we would expect OpEx to go up moderately as our revenues increase. We have in place what we believe is an efficient model and the variable expenses that would go up would be sales commissions and those types of things. So we certainly would not expect our OpEx to go up on a linear basis as it relates to our revenue and we would see more leverage in our model as our revenues increase.

Operator

Next question is from Christian Schwab of Craig-Hallum Capital.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

On the gross margin front, how good could gross margins get? I mean, you're almost at 40% if your revenues begin to flatline and then, could they get as high as 45% or what would be the objective?

Fusen Ernie Chen

Christian, I think our first goal is to achieve a low 40%. So we will work very hard to achieve that. And then we'll give you an update probably the next 2 quarters.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay. So if I just do the back of the envelope math, right? Even revenue should obviously continue to grow from here but even if they flatline for numerous quarters at $40 million, your gross margins would be in the range of 40% to, say, optimistically, 45% and given your OpEx at $11 million, even if we pump it upwards higher, we're all of a sudden -- we're operating at a 10% to 15% operating margin on as little as $40 million in revenue. Am I thinking about that right?

J. Michael Dodson

Yes. And that is our long-term operating model. What is helping us in these numbers is our mix. As RTP has improved and it's our highest margin, that's definitely helped our margins, gross margins.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Right. RTP is your significantly higher gross margin bids and as long as that would maintain on my calculation, as little as 1/3 of your biz, you could hit that target model, right?

J. Michael Dodson

That's correct.

Operator

The next question is from Orin Hirschman of AIGH Investment Partners.

Orin Hirschman

I just need some clarification again. This question has been asked so many times but on Millios suite, you talked about that maybe it won't be recognized this quarter, more than likely in Q1. There was a follow-up question, at least 1 follow-up question, and probably 2 or 3 on this one, but is there only 1 tool out there or there is more than 1 tool out there that's being tested?

J. Michael Dodson

Yes. We have a number of evaluation tools out for the Millios. We have one that is in high-volume production testing right now. And that is what we have been talking about.

Orin Hirschman

Are any of the other ones that are out there anywhere near getting to that stage where they're being put through real rigmarole?

Fusen Ernie Chen

Well, actually once we conclude our effort of higher volume manufacturing testing, we -- if it's positive, we do believe this will lead to a next step to grow our business. So all our efforts actually is focused on these high-volume manufacturing customers. But once concludes successfully, we do believe they will be our customers, engagement orders should follow.

Orin Hirschman

Any thoughts as to when you might see the next system get closer to commercial acceptance?

Fusen Ernie Chen

Well, we need to really conclude this one first. And the timing will be end of this year, beginning of next year. So probably it will be reasonable to assume a few months after that if we are successful to make this conclusion.

Orin Hirschman

Okay. I apologize because I missed some of your opening comments, the first 5 minutes. So I just -- was there any mention of the greenfield fab opportunity in terms of the timing in China? And I know one of the other smaller equipment guys announced a major order that's more than likely going into there today. Any comments on that you made? And I apologize if you did. And any comments you could share with us?

Fusen Ernie Chen

I'm sorry, could you repeat your question? Comment about greenfield in China?

Orin Hirschman

Yes. The large fab that's hopefully being outfitted [indiscernible] as we speak. That's a tremendous opportunity for you there as it is for a few other companies. Any comments that you made about that in terms of the timing, in terms of potential and how things are flowing in terms of ramp-up?

Fusen Ernie Chen

Yes. We understand it's a -- the schedule actually is a stay form [ph] and as the original plan.

Orin Hirschman

Okay. And in terms of you handling that schedule?

Fusen Ernie Chen

Yes, we do participate in our Q4 business. So that's -- we just make a comment of that.

Orin Hirschman

Okay. Are you able though to close the long lead times on certain key components that go into the systems? Are you able to handle what that customer wants in terms of a ramp?

Fusen Ernie Chen

Yes. Actually this does not happen overnight. So we do believe our industry is what's preparing for that to come.

Orin Hirschman

When does that particular opportunity begin to hit a vigorous stride? Is it Q1, Q2, Q3 of next year? When is the biggest impact that you can sell, which quarter potentially?

Fusen Ernie Chen

Well, I think general guideline is end of the year and beginning of next year.

Orin Hirschman

Okay, so that is a potential big help for Q1 as well?

Fusen Ernie Chen

We do see some opportunity, yes.

Operator

[Operator Instructions] We have a question from Steve Tomingas of RBC.

Steven Tomingas

You have accomplished a lot in a short period of time. My question is -- and I would appreciate an answer from each one of you. As you look into 2014, what do you think the biggest challenge your company is facing and how can you overcome that challenge? And I would appreciate an answer from each one of you.

Fusen Ernie Chen

2014, as I described, business environment will remain healthy. So I think the most important things for us is to improve our product competitiveness. And first step I think Mike and myself and also the whole company, in the past 8 months, with a lot of effort, we turned to profitability. And you can see that the profitability actually was achieved by Etch and Helios, and also a little bit of a strip. And we really need to turn our Millios as essential product and that would be to our second phase of growth for the company. So I think that we will focus really, a lot of effort to excel our engineering capability and that's really is a core competence in the company. So that will be my main focus...

J. Michael Dodson

Yes. And I would say, from my perspective, I would echo what Fusen has shared. And of course, my focus is a little more operational. And I would want to continue to stay focused and improve our operations, improve our supply chain and be more competitive on that side and continue to work on our gross margins.

Operator

Next question is from Ben Pang of Northland Capital.

Benedict Pang - Northland Capital Markets, Research Division

Just to clarify on the gross margin. If you have flat shipments with the same product mix for like 5 quarters, the gross margin will be like 45%, right? Because you're basically in and out on the warranty charge, is that right?

J. Michael Dodson

Our gross margins, for example, when we said in Q3, that our gross margin was 33.8% and we said that was under pressure of 4 points, so that was just underneath 38% on a shipment basis. So if we were flat for a period of time and the deferrals equaled what we collected on the acceptances, the gross margin would be at the shipment margin but they wouldn't be necessarily at 45%. It would depend on the mix and what we had done.

Benedict Pang - Northland Capital Markets, Research Division

Okay. And then in terms of the buying pattern for your products, do you expect that the product mix will stay the same or you guys are the market share leader in strip, do you expect strip will have a higher growth rate relative to your product mix?

Fusen Ernie Chen

Actually, Ben, the strip, as you know, the market size compared to a couple of years has really reduced dramatically. With the throughputs staff around 40 wafers per hour, I would say 7 years ago. And now, some application reach to 400 wafers per hour. So the total size really is not as big as you describe. We do expect the total size of the strip remain around $150 million for the whole industry per year. So, therefore, for Mattson's growth, what come got to come from the RTP and the Etch.

Benedict Pang - Northland Capital Markets, Research Division

Okay. And then the final question for me in terms of the Etch, what do you estimate your market share is for your served markets by the end of this year?

Fusen Ernie Chen

Well, I think a low Etch contribute significant to us, but we are really little guy. So even we are, for example, just pick a number, even we achieve $100 million, $100 million in the $4 billion market is really negligible. So that's why I think in short term, both Etch and RTPs are growth engine. But in the long term, I say 2 years, 3 years down the road, I think probably Etch is our biggest growth opportunity.

Benedict Pang - Northland Capital Markets, Research Division

Okay. And is the correct way to look at your Etch right now that your served developed market is $4 billion?

Fusen Ernie Chen

I would say probably less than that. We would say maybe a little bit more than $1 billion, that would be our target.

Benedict Pang - Northland Capital Markets, Research Division

Okay. So you -- I guess the way to look at it is you guys are targeting 10% market share of your served developed market?

Fusen Ernie Chen

So, Ben, let's put it this way. I think at least poly Etch and oxide Etch you probably can categorize either in either way. And if you take oxide Etch, poly Etch half-and-half. I think poly is probably a little bit bigger now. And under I think, poly Etch, a little bit more than $2 billion. We expect that will be our focus, half of the $2 billion, $1 billion is really our served available market.

Operator

This ends the Q&A portion of today's conference. I'd like to turn the call over to Mr. Chen for any closing remarks.

Fusen Ernie Chen

Thank you for joining us for our third quarter conference call. We look forward to updating you on our progress in the next quarter's conference call. Thank you again.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may now disconnect. Have a wonderful day.

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