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Ultratech, Inc. (NASDAQ:UTEK)

Q4 2009 Earnings Call

February 4, 2010 11:00 am ET

Executives

Laura Rebouché - VP, IR

Art Zafiropoulo - Chairman and CEO

Bruce Wright - SVP of Finance and CFO

Analysts

Brett Hodess - Bank of America/Merrill Lynch

Kelly Anderson - Sidoti & Company

Operator

Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultratech Incorporated fourth quarter 2009 and year end earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Laura Rebouché, Vice President of Investor Relations. You may begin the conference.

Laura Rebouché

Thank you, operator. Good morning, everyone, and thank you for joining us this morning for Ultratech's fourth quarter and yearend 2009 results conference call. A press release detailing our financial results was distributed by Business Wire at approximately 5:15 this morning and is available on our website, at www.ultratech.com. A webcast replay will be available on the website for approximately 60 days after the call.

Joining me today is 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'll turn the call over to Art.

Art Zafiropoulo

Thank you Laura. Good morning and welcome to our fourth quarter conference call.

During the course of this presentation we will be making projections or forward-looking statements regarding future events and the financial performance of the company. We wish to caution you that such statements are just predictions and actual events or results can differ materially. We refer you to the documents that the company files from time to time with the Securities and Exchange Commission specifically the company's Annual Report filed on Form 10-K for the period ending December 31, 2008 filed as of February 27, 2009; and our company's quarterly report on Form 10-Q for the quarter ending October 3, 2009 filed as of November 5, 2009. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

The fourth quarter of 2009 was the final quarter of one of the most challenging periods in our industry's history. Semiconductor capital equipment sales peaked in 2007 at about $43 billion and followed a sharp decrease to about $30 billion in 2008. And the slide continued through 2009 where sales seem to have bottomed out at $16 billion, a 63% decline in just two years. We have recognized the potential severity early in 2008 and took the appropriate actions to keep Ultratech's balance sheet and new products offerings strong and prepared for a future recovery. It appears that we have reached bottom and growth seems to be well underway.

In 2009, we introduced three new products. Each will drive increased sales for the next several years. We introduced and shipped our AP300W, which increases productivity by about 40% for the flip chip bump market the LSA101, which increases productivity for several applications by 300%.

In the fourth quarter we delivered the LSA101 to a major logic foundry in Asia and this new tool can produce up to 60 300 millimeter wafers per hour for ultrashallow junction annealing and for middle line processes such as nickel silicide up to 70 300 millimeter wafers per hour. We also introduced our low cost lithography solution for the manufacturer of high brightness LEDs the Sapphire 100. We have received orders for initial deliveries beginning in the first quarter of 2010.

I would like to spend a few minutes to review the current state of the semiconductor chip industry which is currently exhibiting strong growth. 300 millimeter IC capacity utilization has been reported to be greater than 90% and many foundries have a six month backlog and are putting some customers on allocation.

This morning UMC reported that it will triple its CapEx spending for 2010, adding capacity to 40 45 nanometer and 65 55 nanometer nodes. We are finding that a significant number of orders are in device geometries less than 90 nanometers and increased wafer starts to the 65 nanometer and 40 45 nanometer nodes is underway.

At several foundries this is important to notice that this is an important direction the industry is going. And since our LSA systems are used in every foundry in the world and our customers continued to increase LSA use now at about 600,000 wafer passes per month about 66% increase over the same period last year.

During the sharp collapse in 2008 and continuing to 2009 the silicon worldwide shipments decreased from a high of about 230 million square inches on a three month moving average to 90 million square inches a decrease of about 60%. The most recent data indicates an increase to about 200 million square inches still not at the same level before the industry collapsed. This indicates to me that the industry still has additional unused capacity for nodes probably above 90 nanometers.

Looking at the quarterly IC shipments in the fourth quarter of 2007 shipments were about 41 billion units the third quarter of 2008 44 billion units and the fourth quarter of 2009 again about 44 billion units with a forecast in 2010 about the same as 2009 about 44 million units. This information leads me to believe that the quarterly IC volume shipment trends have been flat with the exception of the downturn and a greater number of 65, 40, 45 nanometer devices are being produced in the same fabs with selected equipment upgrades.

This is terrific for Ultratech since our advanced packaging and laser anneal products are focused for the sub 65 nanometer technology nodes. We also believe that 2010 will show significant growth over 2009 and we have planned for more than 20% growth. We also believe that since very few new fabs are planned for 2010 the growth will continue through the year and accelerate in 2011.

We have extended the applications for LSA technology now up to five (inaudible) annealing steps in the fabrication of ultrashallow junctions and nickel silicide middle of the line processes. Recently Fujitsu published a paper at the recent IEDM Conference showing that short wavelength sources such as Flash have temperature variations of about 100 degrees C many cases more for field-emitting transistors and trench-related structures. But Ultratech's LSA system comparison was about 10 degrees C. The LSA pattern effects is shown to be 10X better than Flash for FETs. If you would like a copy of this paper please contact Laura Rebouché who will send it to you.

We've also made progress in utilizing the LSA for memory applications. Again it has been confirmed that pattern effects for laser diode and flash methods show severe pattern effects resulting in large thermal variations. These effects will alter transistor performance within the single chip.

Ultratech's patents include long wavelength sources at 10.6 microns utilizing Brewster's angle which substantially reduces thermal effects without any additional expensive process steps. For foundries, the laser anneal process is flexible for manufacturing regardless of substrate type polysilicon or SOI. Also the LSA technology can be used for any substrate or device type, providing the lowest cost of ownership.

As we look beyond the 22 nanometer node now plainer structures such as 3D FETs and FinFETs are a likely solution. Again due to our long wavelength we have processed several different FinFET structures without shading. Shorter wavelength methods such as laser diode or flash will have great difficulty in producing needed device performance improvements.

Virtually every quarter we continue to add more applications for our laser anneal process library. With these new applications the served market continues to increase and we expect this to continue. Total today we have shipped three LSA systems with virtually all of them in full production.

The fourth quarter new systems bookings were again outstanding with a second quarter in a row with book-to-bill exceeding two to one. For the fourth quarter book-to-bill was about 2.3 to one. New systems orders for the advanced packaging market represented 55% of bookings the laser anneal systems 35% and the nano products the balance or 10% of sales.

Geographically all regions of the world were included in the new system orders with Asia representing 70% of new orders Europe 16% United States 8% and Japan 6%. With a strong bookings performance in our last two quarters to 2009, we increased our systems backlog by 47% and with STARS the ending backlog was about $80 million.

In the fourth quarter we expanded our customer base in the AP fan out process with an order from a major European semiconductor company. Our best information that we have is that six orders were placed in 2009 and we have received five of them with the only company purchasing a lower technology product. This low tech tool was delivered in 2009 and the same customer now has purchased a tool from us in the fourth quarter. Several other AP orders in the fourth quarter were for TSV solder bump and wafer level CSP applications. In the LSA area we received orders from two of the largest foundries in Asia all to be delivered in 2010. One of these customers was a multiple system order.

Before looking at the next two quarters bookings opportunity may be helpful to explain the large number of bookings which we received from Taiwan in the third and fourth quarter of 2009. The Government of Taiwan put in place a tax benefit for those companies that qualify for equipment orders placed by the end of 2009. This one time tax benefit program was such a significant savings that many foundry companies both in wafer and packaging of semiconductor devices examined the 2010 and 2011 plans and placed orders before the end of 2009.

We saw a significant increase in orders for our advanced packaging tools and to a lesser dollar volume the LSA and nano high brightness LED products. Most of these systems orders were included in our Q3 and Q4 bookings for delivery in calendar 2010. Several other purchase orders were not. These unbooked orders were for AP and high brightness LED systems. However since a scheduled delivery was not in the next 12 months we did not put them into our booked backlog. The amount of unbooked orders was in the $25 million range which will not be converted to bookings until we have a delivery date.

We have mentioned in the past our bookings policy includes a need for a purchase order number acceptance by the company and to be included in our 12 month production plan. If we had accepted these orders in the fourth quarter our new systems book-to-bill would have been 3.8 to one.

Now looking at the first quarter and second quarter order potentials are as follows. We are continuing to see strength in each of our served markets and dependent on the general global economy and how aggressive our customers release their capital expenditures we should see excellent potential. Our forecast potential for the first half of 2010 includes seven LSA orders nine AP systems and six nanosystems. We don't expect that all these bookings will occur since some customers continued to make changes in their CapEx plans almost monthly. However this does indicate continued strength in all parts of our business. These new potential bookings do not include those systems in our unbooked backlog.

We are quite optimistic about the next several quarters. However we are not relaxing and we are keeping strict spending controls in the event the semiconductor CapEx projected spending decreases. We can easily increase our production rate if the demand is there. All in all we had a terrific 2009 and we are cautiously optimistic regarding 2010.

At this time Bruce will provide financial details for the fourth quarter and 2009.

Bruce Wright

Thanks Art. I would now like to go through a brief analysis of our income statement and balance sheet for the quarter and summarize how we did for the entire year. Then we will have a teleconference operator open it up for your questions.

As you've heard from Art's comments the fourth quarter continued Ultratech's sequential quarterly growth and recovery from the recession. Geographically the sequential quarterly increase in revenue stemmed principally from Asia Pacific somewhat offset by a decrease in revenue from North America and Europe.

Advanced Packaging Systems in the fourth quarter of 2009 accounted for about 76% of revenue and about 55% of new systems orders. Laser Processing Systems in the fourth quarter of 2009 accounted for about 34% of new systems orders. Gross margin in the fourth quarter of 2009 was approximately 48.5% down from about 50% in the third quarter of 2009. The company ended the year with a total backlog of approximately $80 million up from about $62 million on December 31, 2008.

Turning now to a comparison of the fourth quarter of 2009 to the fourth quarter of 2008, revenue for the fourth quarter was $26.6 million down about 22% from $34.1 million for the same period a year ago. The company had net income for the fourth quarter of $1.4 million which represented earnings per share diluted of $0.06. This net income compares with net income of $3.9 million or $0.17 per share diluted for the same quarter a year ago.

For the 12 months ended December 31, 2009 revenue totaled $95.8 million; a decrease of about 27% from $131.7 million for the total year in 2008. Net income for 2009 totaled $2.1 million or $0.09 per share diluted. These figures compared to net income of $11.8 million or $0.50 per share diluted for 2008.

Turning to the fourth quarter 2009 versus fourth quarter 2008 comparison of our revenue mix, systems revenue was down about 27% and license and service revenue was down about 2%. For the fourth quarter of 2009, systems revenue accounted for about 76% of the total and license and service revenue for approximately 24%. Also for the fourth quarter of 2009 about 94% of the business came from the semiconductor industry and approximately 6% from the nanotechnology sector.

For the entire year of 2009 systems revenue accounted for about 73% of the total and license and service revenue for approximately 27%. Also for the entire year about 88% of the business came from the semiconductor industry and approximately 12% from the nanotechnology sector.

Geographically revenue from Asia Pacific for the fourth quarter of 2009 was $23 million up about 122% from the fourth quarter of 2008 and represented 86% of the company's total fourth quarter 2009 revenue. North America had revenue of $3 million down about 81% from the fourth quarter of 2008 and represented 11% of the total and Europe had revenue of $700,000 down about 92% and represented 3% of the total.

Our top five customers for the quarter were advanced packaging customers from Asia Pacific. Overall the company's top five customers accounted for 100% of systems revenue. For the entire year revenue from Asia Pacific was $65.5 million up about 15% from 2008 and represented 69% of the company's total 2009 revenue. North American revenue was $27 million, down about 46% from 2008 and represented 28% of the total. And European revenue was $3.3 million, down about 87% and represented 3% of the total.

The company's top five customers for the entire year were primarily advanced packaging customers from Asia Pacific and North America and laser processing customers from Asia Pacific. For the entire year, the top five customers accounted for about 79% of systems revenue.

Gross margin was approximately 48.5% in the fourth quarter of 2009 compared with about 50% in the fourth quarter of 2008. For the entire year, gross margin decreased to about 47% compared with about 49% in 2008. Both decreases were due primarily to lower volume of production.

Looking at operating expenses in the fourth quarter of 2009 compared to the fourth quarter of 2008, R&D as a percentage of revenue held steady at about 17%. SG&A expenses increased to about 27% of revenue, up from about 22.5%. This percentage increase was due primarily to the approximately 22% decrease in revenue for the period. Total operating expenses for the fourth quarter of 2009 increased to about 44% of revenue from approximately 39.5% in the fourth quarter of 2008.

For the entire year, R&D expenses increased as a percentage of revenue to about 19.5% from approximately 17.5% in 2008 and SG&A expenses increased to about 28% from approximately 24%. Total operating expenses for the year as a percentage of revenue increased to about 48% from approximately 42% in 2008.

Operating margin for the fourth quarter of 2009 was about 4.5% of revenue compared with about 11% for the fourth quarter of 2008. Our operating revenue breakeven was at a quarterly run rate of about $25 million. For the entire year, operating margin was about negative 1% of revenue compared to about 7% for 2008.

Interest and other income net decreased to $100,000 in the fourth quarter of 2009 from $300,000 in the fourth quarter of 2008. For the entire year, interest and other income net was about $3.2 million compared to $3 million for 2008.

The company did not book an income tax provision for the fourth quarter of 2009. During the year, quarterly income tax provisions are determined using an estimated effective tax rate for the 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. For the entire year, the company's income tax provision was $100,000 benefit.

Turning now to the fourth quarter 2009 versus the third quarter 2009 comparison of the balance sheet, cash, cash equivalents and short term investments increased during the fourth quarter to total about $160 million at December 31, 2009. That means we added about $2 million to the balance sheet for the full year of 2009 in the face of the recession.

Accounts receivable increased about 22% during the fourth quarter to approximately $31 million on a shipment increase of about 49% compared to the third quarter of 2009. Inventories decreased during the fourth quarter of 2009 by about 12% to about approximately $26 million. We worked especially hard on reducing inventories in 2009 and for the entire year. We dropped them by about $6 million or about 18%.

Working capital increased to about $193 million at December 31, 2009; up from about $187 million at September 30. Book value per share at December 31 was $8.39, up from $8.27 at September 30.

Before moving on to take a look at 2010, let's do a brief overview of 2009. Back in the middle of 2008, we thought that it looked like economic storm clouds were gathering. Based on that belief, we took steps to batten down the hatches to ride out the coming turmoil. Taking those steps at that time proved to be the correct operating strategy.

As the severity of the recession hit in 2009, it basically impacted Ultratech in only the first quarter and second quarter of the year. In each of those two quarters, we were able essentially to achieve breakeven, being just slightly positive in the first quarter and slightly negative in the second quarter. Business picked up nicely in the third and fourth quarters and was reflected in our financials. So, for the worst economic recession since the Great Depression, Ultratech had only one loss quarter and that loss was only $0.02 earnings per share.

For the year as a whole, Ultratech was profitable and positive cash flow of about $2 million grew backlog by slightly under $20 million, saw our receivables grow about $13 million or about 72% and shrink inventories by about $6 million or about 18%, all while maintaining our normal balance sheet position of having no long term debt.

We head into 2010 with a lot of business momentum. Orders for the second half of 2009 were up around 450% compared to the first half of 2009. Our $80 million backlog represents three quarters worth of business at the fourth quarter 2009 run rate. Our normal goal is to have about two quarters worth of backlog. As we surmised, the orders in the third quarter of 2009 were heavily weighted towards Advanced Packaging Systems. As business from the front end of the fab picked up in the fourth quarter of 2009, the order weighting was more balanced, with 55% being from advanced packaging and 35% from laser processing. The year ending systems backlog was split 40% for advanced packaging and 50% for laser processing.

Now, let's take a few minutes to look at the future from a financial perspective. At this point, it's very important to recall and underscore the Safe Harbor comments Art made at the beginning of the call. Ultratech's markets and industry are notoriously cyclical and fully subject to the risks enumerated in the company's 10-Qs and 10-K. As a result, any forward-looking statements are highly vulnerable to very sudden and dramatic changes. In addition, the company undertakes no obligations to update information presented in forward-looking statements.

As I mentioned a few minutes ago, we have approximately nine months of business in our year ending backlog which reflected a 47% increase in systems backlog from yearend 2008. Our book-to-bill ratio in the fourth quarter of 2009 was greater than two to one. Orders in the fourth quarter of 2009 increased about 11% sequentially compared to the third quarter of 2009.

Looking at the advanced packaging area, our customers are experiencing fab utilization rates of about 60% in the gold bump area and 95% plus in solder bump. As a result of the heavy solder bump order activity we saw in the second half of 2009, we are expecting advanced packaging revenue to be relatively steady across all four quarters of 2010 and about the same total level as 2009.

In the laser processing area, we expect greater order and revenue activity throughout the year compared to 2009. However, it will probably be backend loaded into the second half of 2010. Overall, laser processing revenue in 2010 should see major growth compared to 2009.

Nanotechnology revenue growth should also be greater in 2009 than 2009 due to increased sales into the high brightness LED market. For the company as a whole in 2010, revenue conservatively could be about 20 to 30% higher than 2009. Given the projected revenue level and product mix for 2010, gross margin could see a few percentage points increase.

We will remain aggressive in attempting to maintain our operating margin breakeven at a quarterly revenue run rate of around $25 million. We anticipate being profitable and cash flow positive every quarter in 2010. We are shooting for a 2010 EPS number in the $0.20 to $0.30 range.

In looking specifically at the first quarter of 2010, revenue should be up slightly compared to the fourth quarter of 2009, probably around 5% to 10%. Gross margin should be around our operating model target of 50%. The costs involved in exiting one of our two buildings in San Jose as we transition activity to our Singapore office plus the first quarter cost of expanding the Singapore office might result in the first quarter 2010 EPS being a penny or two lower than fourth quarter 2009. This potential EPS outcome should be more than offset as we move through the year and see cost savings from Singapore. Even so, we anticipate being strongly cash flow positive in the first quarter of 2010.

Finally, we'd like to wrap up our formal remarks by reminding you of the Reg FD restrictions. In Ultratech, the only three people authorized to talk to you about the company are Art Zafiropoulo, the Chairman and Chief Executive Officer; me, Bruce Wright, the Chief Financial Officer; and Laura Rebouché, the Vice President of Investor Relations. For any calls or questions after the teleconference call dealing with quantitative matters, we will refer you back to the comments made during the teleconference call.

That concludes our formal remarks and now we would like to open it up for your questions. Operator, would you please begin the polling?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Brett Hodess with Banc of America/Merrill Lynch.

Brett Hodess - Bank of America/Merrill Lynch

On laser side, obviously, the orders have picked up. You mentioned the two foundries coming in. And then, Bruce just mentioned that it's sort of probably backend loaded. Is that because they're going to ship in the latter part of the year or is there still a lag between shipment and revenue recognition as these systems are going in? And if you could comment on the cost of the systems as they install, are the margins getting up to the level that you would want?

Art Zafiropoulo

Brett, it's mainly due to the deliveries of the product that we expect orders in the first half. But currently with the current manufacturing bill cycle, we are pretty well full in the first half of the year and we're ramping up in the second half. So it's going to be basically a ramp up in the second half and POs in the first half and continue with POs in the second half, so a normal controlled output, if you will. And this is based on our current forecast that we're getting from our customers.

They really don't give us good forecasts and they're really changing very quickly, and I'm not about to really relax here and just open up the inventory, the hiring based on their initial comments when they keep making changes so that we're getting much better in the installation time. We are actually installing these machines now in around two months, 2.5 months. That's down from several months. So we are finding it fairly straightforward.

The 101 system that we just shipped in Q4 is coming up very, very fast. So we've made a number of changes to reduce the installed time and we've seen a sharp decrease in the installation costs last year. We haven't seen as much decrease in the warranty cost, not because we have problems, we need some historical data and we didn't ship that much in 2009. So, we expect that to decrease. So I think we've get our hands around this system in terms of the cost. We believe these machines run extremely well. These systems are in full production.

We have no crisis as in the world today, and we continue to have issues with customers on their problems mainly, but these machines are running fantastically well today. Well over 90% uptime, these are just great performance. Just like the AP tool, they are reaching that area. They're not quite there yet as are AP tools, but they are running extremely well. We are really happy with the work the team has put in. In terms of the performance of the tool, the 101 should even be better than the 100A.

Bruce Wright

And Brett, elaborating even a little bit more in that, Art quantified numbers of LSA systems, AP systems and nanosystems that we're kind of looking toward for 2010, and I talked about particularly in the LSA environment that we're expecting revenue to be kind of second half of the year loaded. But I want to say that we are also anticipating that there will be revenue from LSA in the first half of the year.

We're just expecting more revenue from LSA in the second half of the year. And you also talked about margins. We're seeing margins in the mid 40s percent on our LSA systems at this point in time. You know that our operating model is for gross margins at 50% or better and we're continuing to make progress, as Art indicated. As the install times come down, the margins will continue to come up. So they're getting there.

Brett Hodess - Bank of America/Merrill Lynch

Thank you. For my follow on question, I wanted to ask on the AP side. Obviously, the gold bump area has plenty of underutilization, so not a whole lot of upside there. But the solder bump side being so highly utilized, is this a conservative path relatively speaking that this would be sort of a stable market this year given how many advanced logic devices have been moving over AP? It seems given that high utilization rate, you would see some growth driven off of that.

Art Zafiropoulo

Yes. But we see the orders in the second half of the year on the AP, some of which were delivered in '09, but that's going to follow on to 2010. So currently we had a very good year on the AP, a less than a good year for the LSA. And so, we expect the LSA to really be a major increase in our total sales for 2010, and AP, we still maintain 90% or more of the world market share. So the market isn't that large. And so, we see in terms of bookings, a little bit tapering because of all the orders they placed in the second half, especially out of Taiwan. But still a very strong quarter rate, but not to the rate it was in the second half of 2009. So, all in all, we think it's going to be a very good year for the company in AP.

We expect again the revenue to be about the same as last year, which was excellent, and the growth to be in nano, primarily the high brightness LEDs and some activity in the thin film head for disk drives and the LSA should be the star for next year. And it's really working very well where as this increases with our margins increasing and the introduction of our 101, which is going to really knock the socks off the competition in throughput and cost of ownership, we've driven this system to numbers that we didn't expect. The engineering team did a stellar job in designing the optical system upgrade from the 100 system and it's proving that the beam length is longer, the uniformity is better, our overlap is less of the beam.

And so, that the rewards are just significant increases in throughput. And as I mentioned, we have gone from 22 wafers an hour on the 100A to 60 wafers an hour and 70 on the nickel silicide. So we really think that we will now ramp up and take more of this market share with this lowering of cost of ownership and driving margins higher at the same time.

Operator

(Operator Instructions). I'm currently showing that your next question will come from the line of Kelly Anderson with Sidoti & Company.

Kelly Anderson - Sidoti & Company

Just wanted to probe a little bit on the gross margins that you're looking at for 2010. You said that you could be able to achieve a couple percentage points increase. I'm just wondering how that math works with AP expected to be flat and LSA having a major year. I mean, what's the source of the gross margin improvement?

Bruce Wright

The source of the gross margin improvement is twofold. One is we're going to be seeing or at least we anticipate we're going to be seeing an improvement in the LSA margins. The second point is that as we successfully transition activities over into Singapore, we're going to be seeing lower costs, which will come in and be able to drop the cost of sales. And the third point is that we're expecting an increase in volume overall for the company and we should be seeing scaling effects as a result of that for higher absorption and all the other good things that you get from running at a higher volume level.

Art Zafiropoulo

And Kelly, if I could add to that, in looking at Singapore, I'm heading out tonight for Singapore again. But looking at Singapore and the potential of that region by physically being there, we've put teams of people in the materials and purchasing group are going there quite frequently now and qualifying various suppliers within the region. And we are finding significant reductions in material costs and module costs than we have in the United States today.

So, we will be ramping up there. That won't happen overnight, so that we expect to begin to see the rewards of modules being manufactured there for Singapore and for here first, and that's going to result in increased margins. And we are seeing numbers like 20, 30% reduction in standard material cost. And the biggest single part of our systems is material costs, so that we expect margins to really grow significantly over the next two or three years. And it wouldn't surprise me if we do our job correctly that we shouldn't be in the 55% or greater gross margins in a couple years.

Kelly Anderson - Sidoti & Company

Okay. And then just double checking my math on this as well, Bruce, I think you mentioned that you're still going to be operating around a $25 million breakeven level in 2010. With the added expenses of the Singapore facility, how does that work exactly? Why wouldn't your breakeven point change?

Bruce Wright

And first of all, I like your optimism in declaring that as a declarative sentence. Of course, my wording was that that's what we're going to be attempting and shooting for, and that is a goal. But the way that that's possible with increased costs as we're transitioning and starting up the expansion over in Singapore is that we're exiting the second building in San Jose. And so, we will be having cost savings flow through the financials from that.

Kelly Anderson - Sidoti & Company

Okay. And Art…

Art Zafiropoulo

Kelly, just as a note on that that will be completed at the end of Q1 so that the full impact of that will only occur in the next three quarters. So we are seeing a little bit of negative impact in finishing closing the building in Q1 in terms of the EPS. But in terms of the next three quarters, we should be able to pay for Singapore through the savings as Bruce had mentioned in building number two.

Kelly Anderson - Sidoti & Company

Okay, great. And then, Art, if I may, during the Analyst Day you gave some very interesting statistics for the 101 on what you thought you could achieve in terms of cost of ownership and throughput. Have those dramatically changed from your original projections or how do we look at the new tool now?

Art Zafiropoulo

Yes. Let me kind of explain a little bit, if I could spend a couple minutes on that. The beam, we've actually made the beam thinner and longer between the 100A and the 101. Yet the beam density is the same so that we can match the old machines and new machines. So matching up systems is fairly straightforward in this design. And as we made the beam longer, we put in some additional designs and metrology into the optical network and that was able to get us a much more uniform beam, and therefore, we're able to have a much more uniform anneal over the entire wafer.

As a matter of fact, we've changed the reactor design and that allows us to go below three millimeter edge exclusion. And currently, we think it's below two, but the current available instruments are not available to measure the edge exclusion. So we believe the roadmap going to two millimeter that we're already there for that so that the customers can use the edge of the wafer for small die. Now, looking at the 101 again because of the improved uniformity, the overlap of the beam to get optimum uniformity was 50%. We can now overlap almost 100% that is there's no overlap of the beam and still get a factor of two times better than the other processes in the field, whether it be flash or whether it be laser diode.

So if we look at the effect of uniformity, we still have a factor two times better uniformity with less overlap of the beam giving us this throughput. Now we expected to see improvement, but we really didn't expect to see this much improvement. So in our original estimation, it was 35 wafers an hour, and if you overlap the beam by 50%, by allowing the beam overlap to be less, we were able to get 60 wafers per hour and still meet the requirements by a factor of two times the flash or the laser diode technology.

Kelly Anderson - Sidoti & Company

Excellent. That's very helpful. And then, just as you look out to 2010, you gave some very helpful color on how you expect AP and LP to roll out through the year. What are your expectations for the nanotechnology segment?

Art Zafiropoulo

I think that we're seeing some ramping up slowly in the high brightness LED area. They are currently in the small wafer size and they're using contact aligners in most cases are older PerkinElmer projection liners. So as the industry shifts from two inch, three inch to four inch and then later to six inch, they're transitioning in terms of yield improvement to a stepper. We put a major plan in place to reduce the stepper for focusing on the high brightness LED area at $1 million for a new machine. We call that our Sapphire 100. We will begin delivering that system this quarter to a major Taiwanese company.

In addition to that, multiple orders in our unbooked backlog. So we have no dates in which to deliver those tools yet. I'm sure this will be based on the performance of our first tool going into Taiwan. We have a number of these machines out there right now in the field, probably 25 or so in the market. But none of them are this low cost tool. So looking at the future, we expect the high brightness LED area to move up slowly through the year and really increase in 2011 and we're seeing added activity in the disk drive industry.

So we are expecting to see several shipments in the disk drive industry this year and with very good margins. So we're looking at the growth to be there, but slowly in the high brightness area, some fill in for the disk drive industry, potentially significant growth in LSA and really superb continuing good margins and good business in the AP product area.

Bruce Wright

And Kelly, I want to jump in to say that in the comments that I made about quantitative guidance for 2010 in the high brightness LED area, we as normally are being conservative and we factored in very little from a revenue standpoint in the 2010 guidance numbers. If anything, there's upside and maybe who knows it could be sizeable upside in 2010 from that specific sector.

Kelly Anderson - Sidoti & Company

Okay. That's good to know. And then just last quick one for you, Bruce. Do you have any expectations what the tax rate might look like in 2010?

Bruce Wright

It's going to be again, minimal for two reasons. One is because we continue to have a significant NOL position, which we'll be able to work off on any US taxable income, most of the taxes that we've been paying in the past years are result being taxable mostly in Japan. And we're not looking for a whole lot of business out of Japan in 2010. So, that we're not looking for a significant tax rate. If you need something to plug into a model, it's kind of slag, but I'd recommend go with something on the order of 5% for the year at this point.

Operator

And I'm showing that we have no further questions in queue at this time. Does management have any closing remarks?

Art Zafiropoulo

Great, thank you. 2009 has been a most challenging period for Ultratech and that Ultratech has outperformed most cap equipment companies in our sector. During the year, we had increased cash, developed and introduced new products in each of our served markets and we were profitable for the year. We are fully prepared for growth in 2010 and 2011. I want to thank you very much for your participation in our conference call. I look forward to the next call.

Operator

Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may now disconnect.

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Source: Ultratech, Inc. Q4 2009 Earnings Call Transcript
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