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Ultratech, Inc. (NASDAQ:UTEK)

Q1 2014 Earnings Conference Call

April 24, 2014 11:00 am ET

Executives

Suzanne Schmidt - The Blueshirt Group

Art Zafiropoulo - Chairman & CEO

Bruce Wright - SVP, Finance & CFO

Analysts

Krish Sankar - Bank of America-Merrill Lynch

Josh Baribeau - Canaccord

Jairam Nathan - Sidoti & Company

Tom Diffely - DA Davidson

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Ultratech First Quarter 2014 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today April 24, 2014.

I would now like to turn the conference over to Ms. Suzanne Schmidt. Please go ahead.

Suzanne Schmidt

Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss Ultratech’s financial results for the first quarter of 2014. 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 today's 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.

Arthur Zafiropoulo

Thank you, Suzanne. Good morning and welcome to our first quarter 2014 conference call. During the course of this presentation, we'll be making projections of forward-looking statements regarding future events and the performance of the company. We wish to caution you that such statements are just projections and the 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 10-K for the period ending December 31, 2013, filed as of February 28, 2014, and the quarterly report filed on 10-Q for the quarter ending September 28, 2013 filed as of October 28, 2013. These documents contain and identify important factors that could cause the actual results to differ materially.

The first quarter bookings for our lithography products was led by our high-brightness LEDs sapphires and steppers with double digit quantity of systems booked as well as a number of advance packaging lithography products. We are projecting growth in the advance packaging stepper market to the increased utilization driven by logic.

We are also seeing the reuse of our steppers for next generation devices which has been one of our strategies having significant advantages over competitors. We have designed into our unity platform the extendability of these products for future generations of use reducing customers' costs and increasing the market share. It has been published on more than 50% of the chip cost depreciation of capital cost, and unless our customers going to extend the depreciation period due to technological growth and this industry will be at risk.

Our Unity platform strategy for advance packaging and laser anneal products we believe can provide a road map for other equipment manufactures to follow. The book to bill ratio for the first quarter was slightly below 1:1 with a significant increase in quotations for all products lead by LSA. The geographic make up of these bookings were North America 16%, Europe 10%, Asia-Pacific 74%.

Product bookings for the quarter included nanotechnology 72% and the balance 28% for advance packaging. Several LSA bookings were delayed this quarter due to logic bounded (inaudible) either redesigning their FinFET designs to improve performance or preparing initiate their production ramp. Those are planning for the FinFET ramp are determining their wafer start plan for 2014 and 2015. One of our customers later in the first quarter pulled in their ramp schedule.

The level of LSA quotations and delivery (inaudible) sharply increased and has continued into the second quarter. In the second quarter we expect several LSA systems will be booked and others scheduled for shipment in the next several quarters. Our current plans include a sequential increase in LSA shipments for each quarter this year with continued growth in 2015. Our lithography product momentum based on our current booking projection is suspected to sharply increase in the second half of 2014 by more than 50%.

With the continued decrease in high brightness LED bulb prices and growing consumer demand, bookings in the second half are expected to be strong. Virtually all the major high brightness led chip factories are operating at 100% utilization. It is becoming clear to these companies that in order to reduce chip cost they must improve their productivity of their lithography process and reduce rework.

Rework in many steps is still around 50% and is driving operational cost to a critical point. It has taken time for these companies to reach this point and to fully realize that purchasing oldest steppers has severe technical and operational issues will not be a successful growth with profit strategy.

We are becoming increasingly confident that after our initial entry to this market that the 1x lithography new stepper offerings will become the ultimate best technical and cost of ownership solution. We'll need to continue to reduce our material cost so that we can continue to reduce system prices for future steppers to increase our market share and to meet our margins with our business model.

Now looking at our inspection product Superfast 3G plus we continue to gain momentum despite severe competitive competition. We are successfully implementing this enabling technology both logic and memory paths. These advanced paths are currently planning to utilize Superfast inspection tools in production in the second half of 2014.

Superfast 3G plus has a throughput of more than 100 wafers per hour while measuring 3 million points of data directly on the front pattern surface. Others use a secondary backside approach which limits the resolution and provides fuzzy data. This revolutionary inspection technology has been successful implemented for both FinFET logic devices as well as advanced D-RAM and Nand flash memory applications.

During the past year, we have trained our Asian engineers in building these tools at our Singapore facility. We now have fully transferred the future volume manufacturing to that site.

The first quarter has proceeded as expected with a much sharper increase in the quotation level for all of our products. The significant increase in quotation and forecast bookings will support our projections for the remaining quarters in 2014. We also expect this increase to continue into 2015 driven by the mobile market which has been the focus of our R&D spending for product serving this market.

At this time, Bruce will take through our first quarter financial information and provide additional guidance on 2014.

Bruce Wright

Thanks, Art. I'd now like to go through a brief analysis of our income statement and balance sheet for the quarter. Then, we will hand the teleconference operator open it up for your questions.

As you heard from Art's comments, the first quarter saw a sequential increase in revenue about 32% compared to the fourth quarter of 2013 primarily reflecting increased revenue from advance packaging and high brightness LED. Geographically, revenue increased sequentially from the fourth quarter of 2013 in North America and Asia-Pacific.

Demand for advanced packaging systems in the first quarter of 2014 accounted for about 41% of revenue and about 28% of new systems orders. Laser processing systems in the first quarter of 2014 accounted for about 17% of revenue and no new systems orders. Nanotechnology systems which include both high brightness LED and atomic layer deposition systems in the first quarter of 2014 accounted for about 13% of revenue and about 72% of new systems orders.

Gross margin in the first quarter of 2014 increased to approximately 41% from approximately 34% in the fourth quarter of 2013 exclusive of glass inventory reserve primarily due to product mix and high volume of production.

Turning now to a comparison of the first quarter of 2014 to the first quarter of 2013, revenue for the first quarter was $31.6 million down about 48% from $60.6 million for the same period a year ago.

The company had a net loss for the first quarter of $7 million which represent as a loss per share of $0.25. This net loss compares with net income of $13.7 million or $0.48 per share diluted to the same quarter a year ago. For the first quarter of 2014 versus first quarter of 2013 comparison of revenue mix, systems revenue was down about 55% in the first quarter of 2014, and license and service revenue was down about 15%.

For the first quarter of 2014, systems revenue accounted for approximately 72% of the total, and license and service revenue for about 28%.

Geographically, revenue from Asia-Pacific for the first quarter of 2014 was $17.1 million down about 67% from the first quarter of 2013 and represented 54% of Ultratech's total first quarter of 2014 revenue.

North America had revenue of $11.6 million, up about 123% and represented 37% of the total. And Europe had revenue of $2.8 million down about 14% and represented 9% of the total. Our top five customers for the quarter were primarily advance packaging and laser processing customers from Asia-Pacific and North America. Overall, the top five customers accounted for about 80% of systems revenue.

Gross margin decreased to about 41% in the first quarter of 2014 compared with approximately 55% in the first quarter of 2013. This decrease was due primarily to a product mix shift and lower volume of production.

Looking at operating expenses in the first quarter of 2014, R&D has a percentage of revenue increased to 26% from approximately 14% a year ago. SG&A expenses increased to approximately 38% of revenue, up from about 19.5% a year ago. Both percentage increases are primarily due to be approximately 48% decrease in revenue for the period.

Total operating expenses for the quarter increased to approximately 64% of revenue from approximately 33.5% of revenue a year ago. On an absolute dollar basis, total operating expenses were essentially flat with the prior year period.

Operating margin for the first quarter of 2014 was about negative 22.5% of revenue compared with approximately 21.5% for the first quarter of 2013.

Interest and other income net was up slightly at $300,000 in the first quarter of 2014 compared to $100,000 in the first quarter of 2013. Ultratech booked an income tax provision of $100,000 in the first quarter of 2014. Ultratech's tax rate is based on a jurisdictional mix of earnings and have the potential to fluctuate as business moves from one geographic region to another.

Turning now to the first quarter of 2014 versus fourth quarter of 2013 comparison of the balance sheet cash, cash equivalents and short term investments decreased by about $6 million during the first quarter to total about $291 million of March 31, 2014.

Accounts receivable decreased about 9% during the first quarter to approximately $32 million on a shipment increase of about 24% compared to the fourth quarter of 2013.

Inventories stayed essentially flat during the first quarter at approximately $48 million.

Working capital decreased to about $344 million at March 31, 2014, down from about $349 million at December 31, 2013.

Book value per share at March 31, 2014 was $13.59, down from $13.90 at December 31. 2013.

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 you heard from Art's comments, there is a lot going on in Ultratech's world today and the variability level of forecast continues to be extremely high. In general, we continue to see the industry grapple with design issues for the 16 nanometer, 14 nanometer node to achieve acceptable yields. However, we are more confident today than we were three months ago at our last earnings teleconference call that the industry will be ramping to 16 nanometer, 14 nanometer node in the mid second half 2014. In fact, one of our customers at this note just pulled in by a month the delivery date for a laser annealing system.

Overall, the outlook in 2014 for each of our four product lines is more positive than it was three months ago. Specifically, increased demand for mobility products has solidified our confidence in our outlook for advance packaging shipments.

Higher customer utilization rates and lower pricing have increased our projection for high brightness LED shipments. Whole product line build schedules are now full in our Singapore facility through the end of the year. Our Superfast overlay inspection system build schedule now shows increasing shipments sequentially for each quarter in 2014.

For all four of our product lines, the current manufacturing shift plan has 2014 systems essentially equal to or greater and in some cases much greater than 2013 shipments.

As to laser processing, I mentioned a minute ago that we are more confident about the 16 nanometer, 14 nanometer ramp occurring in the mid second half 2014. Working backwards from that time frame lead times from order to delivery for about four to six months for an LSA tool. So order should start flowing in the second quarter of 2014 or the third quarter of 2014.

For that to be the case, order quote activity would need to increase one quarter sooner namely the first quarter of 2014. Did that happen? Yes. We saw a definite pick up in laser annealing order quote activity in the first quarter of 2014. The way events are occurring gives us greater confidence in our perception of how things will roll out regarding the 16 nanometer 14 nanometer ramp.

Also, although we did not book a laser annealing order in the first quarter of 2014, we did ship a laser annealing system to a major customer to be used for FinFET devices. And as a final laser annealing comment, we are anticipating multiple system orders and shipments of laser annealing tools in the second quarter of 2014.

From a guidance perspective, it appears the fourth quarter of 2013 was the bottom of the most recent business cycle for Ultratech. The first quarter of 2014 looks to a start of the recovery and we anticipate it will continue in the second quarter of 2014. Sequential revenue looks to be higher by around 25% compared to the first quarter of 2014. Gross margin could increase to the mid to high 40% range. Operating expenses in the second quarter of 2014 could be about $1 million more than the first quarter of 2014. Tax rate should be around 5%. Cash flow is anticipated to be about neutral.

As you can tell from our comments, there is a lot to be excited about to the full year for Ultratech. However, we want to reemphasize the volatility of what is going on out in the market place and how quickly forecast can change in the current environment.

We also want to make sure that we do not get ahead of ourselves in guidance comments. As a result, we are being conservative and for the time being maintain our full year 2014 revenue growth guidance in the range of 25%, 30% compared to 2013. Gross margin should be increasing with each sequential quarter and we now believe it could be averaging near 50% for the entire year.

Operating expenses look to be up by a few percentage points compared to 2013 primarily due to increased sales and service coverage. We continue to estimate the tax rate for the year to be between 5% to 10%. We anticipate cash flow to be positive.

Finally, we'd like to ramp up our formal comments by reminding you of the Reg FD restrictions. In Ultratech, the only three people authorized to talk to you about the company Arthur Zafiropoulo, the Chairman and Chief Executive Officer; me, Bruce Wright, the Chief Financial Officer; and Suzanne Schmidt of The Blueshirt Group. For any calls or questions after the teleconference call dealing with quantitative matters we will refer you back to the comment 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

Than you, sir. (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

Hi, thanks for taking my question. Two of them. Art, you kind of maintained the guidance for the full year but looks like you gross margin is going to be better 50% now versus mid 40 three months ago. What is driving the implement in gross margin?

Art Zafiropoulo

Well, I will take that one, Krish. What we are really looking at as I commented on is the factory being four. And as a result as we fill up the factory we are getting better absorption and that's going to be impacting margins, and we are also seeing as a result product mix shift. So from a margin standpoint on that regard that also helps. But again, things look pretty good out there, but we don't want to get ahead of ourselves.

Bruce Wright

Yeah, and Krish let me add to that a little bit. In looking at the margins prior to this downturn in our company four quarters ago, we were in the mid-50s. And I can tell you that on average, the margins on the individual products are about the same as they were about the same as they were back then. And we are looking to improve them in terms of reducing material cost to sales. So we have programs under way to drive our cost down and to improve our cycle time in manufacturing. This has something to do --- its just going to be a longer period of time, it's actually one quarter. So overall, once we get this factory full again we expect to get back into the ranges that we were.

Expectations are probably in the 2015 timeframe we will be approaching the same gross margin numbers that we did prior to this downturn. So overall the products are still very strong and that the problem has been really absorption of overhead and keeping these factories full. So at this point, we are now filling the factories and that's what's attributing to the increase in the margin for the year is a factory utilization.

Krish Sankar - Bank of America-Merrill Lynch

Got it. That's very helpful. And then its kind of nice to see like activity on the FinFET side, kind of curious maybe the second half of this year or into early 2015, when you look at the customer potential you have on the 14 and 16 nanometer, can you talk a little bit about the breadth of customers you expect? Do you expect it to come from like one, two or three FinFET customers?

Bruce Wright

No, at this point where we have forecasted really in the full range of FinFET customers. So we have internal projections penetrating virtually every single company that's out there building FinFETs we believe with the customers of ours. If not this quarter, its certainly a few quarters to come. So we are in very strong position. And even those customers that are not using our machine as much as others are sharing with us that they truly believe that we have the best technology solution.

And the way for breakage on the flash systems is persisting regardless of who makes the machine. So it's inherently in the physics of the product and not so much on the company. So this is becoming a major factor. It has been as we have outlined as well as pattern effects but the biggest factor right now is driving cost down. It's become extremely competitive in cost, and so at this stage you can't afford breaking wafers at the rate that the flash systems do today. And unless and I can't see how this is going to be resolved that we expect to be in a very strong position and continue to gain market share. So over the next few years, we expect us to be the dominant market position in terms of lasers.

It is now, if you remember that between the license that we have in laser technology and our own current market share, we are in about 80% market share with our technology and about 20% is with flash. It wasn't there many years ago that flash had 100% market share be fully enter the market. So we believe that we will continue to have that market share or greater in the years to come.

Operator

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

Josh Baribeau - Canaccord

Hi, thanks. I don't think I heard you talk much about I would say in memory of this conference call. Any updates there?

Art Zafiropoulo

No, it's still progressing but it's very difficult not just the challenges technically, the cost issues are another issue that we had spoken before on these conference calls. Memory is really a factor in cost and is extremely competitive, in many cases much more so than logic. So if we can get actually higher gain in performance with memory, it's going to be very difficult to implement it because of the cost. So that's an issue we are looking at right now is the cost issue and the technology issue as it shifts from a planar structure to a 3D structure.

Each one of these memory companies has a different 3D design so that we can't take one process and actually use it across the board, because everyone is so different. So we are working with many companies out there right now, but it's extremely challenging. And so at this point we haven't seen much progress except in terms of still working in the area and hopefully we will find some cost effective solutions as we progress.

Josh Baribeau - Canaccord

Great. And then finally from me any comments on the competitive environment or maybe the pricing environment of the lithography systems for semiconductor packaging?

Art Zafiropoulo

No. Nothing really has changed in the past few quarters. We still have the competition is there and we still have a large market share. We are working had to maintain that. And we are being aggressive in terms of serving the customer not aggressive in just pure pricing that aggressive and serving the customers' needs with our technology. I think we get kind of complacent that when you are the market leader for as many years we've been than over 10 years now at market share well excess of 50%, I think you will get a little bit complacent and expect orders just to roll in. So I think our guys are rolling the sleeves back up again and going back in there and defining why we are the market leader. And I think this is having a significant impact in terms of customers now really fully understanding what we offer versus some of the competition.

So we are comfortable, we will be more aggressive and working with customers to explain why they selected us before and why they should continue to work with us and looking at road maps in the future as to how we grow our business. So all in all, it's a little bit of complacency because of our market leadership position, but that's now behind us.

Operator

(Operator Instructions) Our next question comes from the line of Mark Miller with Noble Financial. Please go ahead.

Unidentified Analyst

Good morning. This is (inaudible). wanted to go back to high brightness LED bookings. Did you say that the bookings you expect to improve 50% first quarter over second quarter?

Bruce Wright

We defined it as -- no, I think I said something about lithography increasing by 50%. I didn't specifically say LED because we have such a very strong quarter. I don't expect every quarter to continue like that, but we had a very strong quarter. And again, we are pleased with that and it just really indicating the significance of our technology with these new systems versus the older reduction steppers, where the rework rates are very high, floor space is big. They don't perform very well. So it's been a cost issue. And we have now defined a better metric and explained to our customers that what we are doing and how much money they are saving. And they're seeing themselves right now in terms of rework and utilization of the equipment, and they can't afford any longer to sacrifice the quality and the productivity of equipment just on the raw system price.

So we are seeing them change and we are encouraged by that and we thing that's going to grow, but I don't think this quarter will see double digit system sales at least this year. It may occur next year when we see a more significant ramp as the consumers begin to increase the consumption of LED bulbs.

Unidentified Analyst

So overall you are saying combined with those systems should increase 50% the second half or the first half.

Bruce Wright

Yes, that's correct.

Unidentified Analyst

Have you had new (inaudible) customers?

Bruce Wright

I can't think of any, we are really spending a lot of time and with the existing major companies, and so I would say I can't think of any off hand right now, but I can't think of some of the major contracts we received in Asia-Pacific from the larger companies, not the smaller ones.

Art Zafiropoulo

Yeah, Mark what you really need to recognize on this is that we are already in to the all of the major LED guys and so if we are going to get new customers it would be along the lines of the second tier players, but the order that we are seeing now are pretty much focused in the really important high intensity players that are gearing up to meet this increased demand because of the prices, the price point falling.

Unidentified Analyst

In the super 3G area I think you mentioned you are receiving some stiff competition there, has that been reflected in the pricing of the competitors tools?

Art Zafiropoulo

We don't know the answer. We think they are probably wrapping the system up their other products. So we don't really know that answer. We think it's going to be difficult on the standalone basis for them to meet our numbers. Our system has the uniqueness of being extremely simple and that's where the patterns are on this technology. Other competitive systems have much more complex optics which caused a great deal of more money and yet they don't really provide a front pattern wafer solution. It's a secondary solution as I referred to this fuzzy data. So it's hard to say because of their, I hate to use the word bundling but it's sort of wrapping it up with a package including many other systems that they offer.

Unidentified Analyst

And then finally, did you provide the cash consumed by operations?

Bruce Wright

We didn't but I'm happy to do that. What I mentioned was that over all cash flow was negative by $6 million and about half of that was from operations.

Operator

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

Jairam Nathan - Sidoti & Company

Hi, thanks for taking my question. Bruce, you had talked about leasing as an opportunity HB LED. Has that been behind the increase that you are seeing in the order outlook? And I had one more question.

Bruce Wright

No, leasing really would take off the table. The only way that leasing would work for this company is that they would lease a multiple numbers tools at one time and otherwise we could justify the cost for maintain these lease products. So we've taken that off the table and we had done an analysis and refurbished the equipment but that doesn't seem to be the solution. So we are going back to the basics again and looking at selling new systems, and that's we are focusing on. So all of these systems that were booked in the first quarter were all new systems.

Jairam Nathan - Sidoti & Company

Okay, great. My other question was on the sales mix. As we enter 2014, between laser advance packaging and HB LED, is that a initial thought on which will be the biggest?

Art Zafiropoulo

Well, certainly early on what we have seen is the thrust coming out of advance packaging and led but as we consistently stated as we really get into the second half and we some of these ramps playing out overall for the year we are looking for the growth drivers to be laser annealing and the Superfast tools.

Operator

Our next question is from the line of Tom Diffely with DA Davidson. Please go ahead.

Tom Diffely - DA Davidson

Yeah, good morning. Bruce, first, did you give a book to bill for the quarter?

Bruce Wright

Art did. And what he said was that it was very slightly below one.

Tom Diffely - DA Davidson

Okay. And then I assume with your commentary the expected book to bill for the year to be well above one?

Art Zafiropoulo

It's pretty dependent clearly on how we see the roll out of the 16 nanometer, 14 nanometer RAM and of course that is tough. I didn't want to emphasize. These forecast are really volatile and moving around all over the place. But with the best information that we have at hand at this point and how we think the laser annealing ramp is going to play out, I think that we could say that, yes we expect a book to bill for the year to be greater than one.

Tom Diffely - DA Davidson

Okay, then the FinFET pilot lines that they are active today, these guys would be using one of your older systems that have had from you already?

Art Zafiropoulo

Now they will be adding capacity by buying newer systems. Many of the customers that have been FinFETs have been using the LSA 100A. And so we don't offer that 2 lane longer. We offer the 101 and the 201 system which is ambient control and these systems have a throughput of almost double the current or the older100A. So the will be using that tool. So now the 100A will not be used. The 101 and 201 will used for FinFETs.

Tom Diffely - DA Davidson

Yes, I was trying to get to those. If these guys out there work on FinFET today and we haven't seen an order from you for a while, they have a tool since they can go through their process with their tool ahead of time before the production begins to start.

Art Zafiropoulo

Yes, that is exactly right, Tom.

Tom Diffely - DA Davidson

Okay.

Art Zafiropoulo

And they can actually do that with the 100A. The only major difference the performance is equally good what the 100A. The only limitation here is cost of ownership, the throughput is much lower. Typically, the throughput is about 20 wafers an hour for the 100A. And with the 101 system, it could be anywhere between 35 to 60 depending on the operational mode.

Bruce Wright

And recognize also that as these guys get into the 16 nanometer, 14 nanometer note that for some of them is very important that they have the ambient control capability. They do not have any of those systems out there now. They can in the pilot lines be working with the 101 and just applying how it is going to qualified in process of record. As we know, we are meeting with many of the foundries out there, but, ambient control is going to be a big deal for quite a few of these customers.

Art Zafiropoulo

Yeah. If I could ask you that there is one major company that there is one major company that will now buy any equipments on LSA unless it did have ambient control. And that is why we begin this project almost three years ago to serve this customer's need. And that could be a significant increase at our business in the years to come.

Tom Diffely - DA Davidson

Okay. And then, Art, I wanted to kind of begin to how much we made about margin getting back to longer term averages sometime next year. I was under the impression that with the handsome packing having little more competition, that the price in the margins than that are relatively higher margin business for you was going to come down a little bit. And then you add to it some success in high-brightness LED which historically has been with a lower margin, it seems like your average margin would be a little lower next year.

Art Zafiropoulo

Tom, what you say is absolutely correct accept the profit mix margin in Ultratech is swamped by the absorption impact. And so, while early on, we might be seeing more of the situation that you talked about. As we are filling up the fabs, you are going to see the margins increase and that supports the comments that I made on margins earlier in our prepared comments. So it is really critical to understand that Ultratech, as we move closer to the breakeven point, the absorption gets better, the margins get better and as we blast through that breakeven point the margins are going to get, we anticipate certainly, back to the numbers that we saw. And everyone heard me make comments about out in the 2015, 2016 timeframe what I expect they could get to. And at that -- as soon as we hit over the breakeven point in addition to the margins, as you are well aware, this company just mints cash.

Tom Diffely - DA Davidson

Okay. And maybe you could talk about on cycle over cycle basis, how you improve margins on such like the high-brightness LED tool as far as designing it for lower cost and also the manufacturing oversees?

Art Zafiropoulo

Sure. We -- the labor content is not very significant, it is in the 3% of selling price range. So that is not the place where we are going to really gain much momentum in cost. It is a mature procurement, and that's where we have -- in a process of restructuring on materials group and adding more capability with this function in Asia. And so, we are expecting to drive the material cost and that is going to have a major factor in this margin increase.

To give you a rule of thumb, in the equipment business typically the material cost and sales is roughly 25% of selling price. So for every dollar you can save and have some 4% impact in selling price, so has great leverage. And so that is the focus right now, as to drive down our cost. And so far, it has been little bit disappointing as to what we try to gain from this. We have not really been a successful as I hope. So that is why we are going through and changing and adding the different kind of people and skill sets to the materials group. And the hope is that we are expecting to see some benefit of that this year, toward the second half of this year and then continue into next year. So overall, and with our new product in the inspection area, we think that the margins that we hit at the last peak of our cycle, we have a good chance to exceed those numbers, not just meet them. So we are targeting the future to actually increase our margins. And I suppose even meeting the numbers that we have reached earlier, which were the mid 50% range.

Tom Diffely - DA Davidson

Yeah.

Bruce Wright

And there is couple of other aspects to that or in that. As you people are on the phone now, we have been migrating most of our products from the San Jose facility over to the Singapore facility. But for example, in starting up new products like Superfast, those initial products were made in the San Jose facility. We are now at a point where we really are complete in migrating all products with the exception of laser annealing tools over in to Singapore and that will just increase the positive impact on margins.

Art Zafiropoulo

The other factor is that this year, as Bruce just mentioned, about our transferring of lithography and Superfast I mentioned earlier in my prepared script to Asia, we estimate this year that may be just under 70% of our systems will be manufactured in Singapore.

Tom Diffely - DA Davidson

Okay. And when you look at the advanced packaging business today, they still just kind of flip chip capacity related or you start to see the beginnings of the two and a half and 3D real advanced packages?

Art Zafiropoulo

It is primarily capacity driven right now. And although, we keep talking about 3D, TSV and that is still on the projections. I think it is getting little more traction but it is slower than any would expect it. But I think that is the next nature move between memory adding more bumping capacity and TSV which we expect to see growing in the next few years. So all the projections that see is that the compound annual growth rate of the back-end or bumping is much, much greater than the front-end CAGR growth rate.

So all the numbers we are seeing indicates a reasonable good growth rate through 2017. And we feel that is going to happen, and that means more TSV use, probably little bit later than sooner in this '16, '17. But we see more momentum and more interest in that area than we had. Cost has then the major issue. Once they can drive down cost in the TSV area, it will be implemented and used more widely.

Tom Diffely - DA Davidson

Okay. Thanks. And then finally, Bruce, the tax rate, I think you said 5% for the quarter. Is that good tax rate for this year? And what is the long term tax rate?

Bruce Wright

Well, the comment that I made for the quarter is exactly as you said and then the comment I made for the year is between 5% to 10% and of course, that's heavily based on the jurisdiction of where the income is taxable. And you have asked about long term, as the 16 nanometer, 14 nanometer ramp occurs that of course is going to be heavily going toward laser annealing, which is U.S. taxable based. Long term, its kind of tough to estimate, but if you are talking long term as we get out there into may be 2015, 2016, I anticipate that the tax rate would go up somewhat because, as I said, we have moved everything now in the Singapore. And so, as laser annealing is a higher proportion of a taxable income, it is going to be taxed in the U.S. But what that means, it is probably a long term tax rate, gets maybe up, as a guess, and it really is a guess at this point I am talking 20%, 25% that kind of a number.

Tom Diffely - DA Davidson

Okay.

Art Zafiropoulo

And also currently on our balance sheet we have about $290 million. More than 90% of money is based in United States, it's not offshore, has been fully taxed.

Operator

That does conclude the question and answer session. I now like to turn the call back over to Mr. Zafiropoulo for closing remarks. Please go ahead.

Art Zafiropoulo

Well, yes. Thank you very much for participating in our conference call today. And we look forward in meeting with you at future investor conferences. And again, thank you for being with us today.

Operator

Ladies and gentlemen, that does conclude the Ultratech first quarter 2014 earnings conference call. If you would like listen to a replay of today's conference, please dial 1-800- 407-7325 or 303-590-3030 with the access code of 4678234. We would like to thank you for your participation. You may now disconnect.

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