Rudolph Technologies' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.28.14 | About: Rudolph Technologies, (RTEC)

Rudolph Technologies, Inc. (NYSE:RTEC)

Q1 2014 Results Earnings Conference Call

April 28, 2014 04:30 PM ET

Executives

Bob Cook - VP and General Counsel

Paul McLaughlin - Chairman and CEO

Steven Roth - Chief Financial Officer

Analysts

David Duley - Steelhead Securities

Patrick Ho - Stifel Nicolaus

Andrew Masuda - D.A. Davidson

Dick Ryan - Dougherty

Brett Piira - B.Riley & Co.

Farhan Rizvi - Credit Suisse

Operator

Good afternoon. My name is Shaira and I will be your conference operator today. At this time, I would like to welcome everyone to the Rudolph Technologies First Quarter Earnings Release Conference 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).

Thank you. Mr. Bob Cook, you may begin your conference.

Bob Cook

Thank you, Shaira and good afternoon everyone. Rudolph issued its 2014 first quarter financial results release this afternoon shortly after the close. If you have not received a copy of the release, please refer to the company’s website at www.rudolphtech.com, where a copy of the release is posted.

Joining us on the call today are Paul McLaughlin, Chairman and Chief Executive Officer and Steven Roth, Chief Financial Officer. As is always the case, I need to remind you of the Safe Harbor regulations. Any matters today that are not historical facts, particularly comments regarding the company’s future plans, objectives, forecasts, and expected performance consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such estimates, whether expressed or implied are being made based on currently available information and the company’s best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that the statements are subject to a range of uncertainties that can cause the actual results to vary materially. Thus, the company cautions that the statements are no guarantees of future performance.

Risk factors that may impact Rudolph’s results are described in the company’s latest Form 10-K, as well as other periodic filings with the SEC. Rudolph Technologies does not update forward-looking statements, and expressly disclaims any obligation to do so.

I will now turn the call over to Paul McLaughlin. Paul, please go ahead.

Paul McLaughlin

Thank you, Bob. Good afternoon, everyone, and thank you for joining Rudolph Technologies’ 2014 first quarter financial results conference call. My prepared remarks this afternoon will address Q1 results, selected highlights, guidance for Q2, and our revenue expectations for the full year 2014. After my remarks, Steve will review our Q1 financials in detail, and then we will open the phone lines for questions.

During the first quarter, our business was evenly balanced with 53% from front-end customers and 47% from back-end customers, versus Q4 2013 where our front-end business accounted for approximately 70% of revenues. Our front-end business in the first quarter was distributed 49% memory, 34% foundry and 17% logic. 81% of our back-end business was used for advanced packaging applications and 19% was used for traditional back-end purposes.

From a business unit standpoint, revenue from inspection accounted for 52%, metrology 24%, lithography 10%, and data analysis and review 14%. In the first quarter we shipped a JetStep system for advanced packaging applications to a customer presently using Rudolph’s Lithography Systems in volume production, packages to mobile device market. This customer foresees expanding capacity needs that require two different types of Rudolph’s Lithography Systems. Let me clarify this.

Our Lithography Systems Group serves both the panel display and advanced packaging markets. While display and packaging are two different markets using different but similar lithography technologies, our product portfolio serves them seamlessly. We introduced the first lithography system last June that was specifically designed to address the embryonic advanced packaging market for panel lithography for semiconductor packages. We’ve noticed confusion regarding the legacy Azores display lithography products and the new JetStep advanced packaging lithography products. So I wanted to take this time to announce the launch of the new JetStep lithography systems family.

Let me explain the family dynamics. The JetStep advanced packaging lithography system will serve OSAT and IBM customers in the advanced packaging applications. While a JetStep display lithography systems will serve the flat panel display manufacturers. Please note that both advanced packaging and display lithography systems use the same basic 2x reduction stepper technology with customizations for particular applications.

The JetStep advanced packaging lithography system consisted two series, the W series and the S series. The W series is designed for wafers around substrates while the S series is designed for square or rectangular substrates.

The JetStep display lithography system will be known as the G series, their models will reflect the universally accepted display panel size terminology known as Generation 3.5 or Generation 4.5. For example, our models will be known as JetStep G35 or JetStep G45 to match that size capability.

Example, JetStep 35 is a product that has substantial installed base of Azores heritage tool for flat panel applications doing lithography for rectangular substrate that has 600 millimeters by 720 millimeters in size, approximately 24x28 inches. Likewise, our new JetStep G45 has an installed base of tools doing lithography for rectangular substrate for correspondingly largest substrate sizes, approximately 900 by 1,100 square rectangular millimeters.

The confusion in the marketplace mentioned earlier revolves around the use of the word panel. The word is deeply engraved in the flat panel display industry to mean square or rectangle. The advanced packaging world uses the word panel inconsistently. For instance, when major OSAT refers to all reconstituted substrates, whether round or square as panels. So, to avoid any confusion going forward we opt to discontinue the use of the name JetStep Panel Lithography System in favor of the new JetStep S series to refer to our Advanced Package Lithography System designed for square or rectangular substrates. I hope that is helpful.

Returning to highlights of Q1, we shift our first NSX 320 TSV Metrology System of through silicon via process development. This new NSX 320 includes specialized sensors to measure critical parameters in 3D integration.

In addition, our software unit at 14% of revenue made very strong contributions to our results, as our industry leading fab-wide yield management system met the software revenue stream for us. These systems analyze data from unrelated sources and multiple sites to maximum fab-wide productivity.

We continue to get traction with our broad portfolio of software solutions. Our software unit, DARBU, data analysis and review business unit has introduced some very well received new fab-wide products as evidenced by Rudolph regaining the number one market share in the recently released document rankings for process control software for calendar year 2013. Our Tewksbury Massachusetts headquarters DARBU, with its development centers in Richardson, Texas and Tianjin, China are to be commended.

Recapping Q1, it is important to note that our back-end business is a current business that often has tool delivery lead times of four to seven weeks. As one consequence, our back-end customers did not rebound as quickly as expected post Chinese New Year in early February, causing us to miss the low-end of our revenue guidance range by $1.4 million.

Special situations in the OSAT community that we discussed in our last call, delayed selected OSAT capital commitment by a couple of months. One of those special situations was an environmental issue at one of our larger OSAT customer. That customer as of this morning has received tentative approval from the Khaosan, Taiwan city government to begin limited production at the effective fab through the end of July.

They won’t receive full release to production until a formal inspection by the city government is passed successfully at the end of July, but this is good news. We expect that delayed business to be fully reinitiated in the coming months likely starting with partial reinstatement in Q2. As Rudolph looks forward, we are exceedingly confident about vision, as we’ve spent the last several years building a comprehensive portfolio of products that surround the dynamic market of advanced packaging.

As our customers move to more advanced geometries and new package type they need more sophisticated system. We believe the suite of back-end solutions we have developed will deliver well over half of Rudolph’s revenues in 2014 and that is just the beginning as 2014 represents the early stages of growth of the advanced packaging market. It’s not about a single product, but rather about the comprehensive total solutions that we have to exclusively deliver value in this high growth area.

We uniquely deliver cost effective, bundled packages of inspection, metrology, software and lithography solutions that give us the leadership position in the space.

With Rudolph’s strong global brand recognition we commend a position of respect with IDMs, OSATs and fables companies. And using a baseball analogy, we believe we get a swing at pad at nearly all of the commercial opportunities in our space. That’s a dynamic we have worked hard to create over many years, and we feel that is essential as we participate in this exciting advanced packaging market. We will be an important and a big player in advanced packaging.

Complementing our unique leverage to advanced packaging is our successful business model for our heritage businesses serving front-end customer with very defined metrology and inspection and software solutions. This front-end business model demands that we have the number one or two market share positions in our chosen niches or a way to get that share quickly or we do not want to stay in the business long-term.

Success in the front-end depends on continually developing technology to address demands at various technology nodes. You can read that as developing solutions that become POR or process of record as front-end customers move their leading edge device production in step with [more].

With the exception of 2013, the top three device manufacturers, Intel; Samsung: and TSMC have historically been in our top three overall customers. I’m pleased to report that dynamic continues to be a core competence of Rudolph. And in fact during the last five months, we have gained two new POR wins, process of record wins that addressed below 14 and 10 nanometer technology node channels -- challenges. By the way that 2013 top three customer that was the first non-front-end customer to break into the top three customer rankings with the leading OSAT who has helped validate our business for advanced packaging that I just discussed.

Now let’s turn to the guidance. Our senior team remains very confident that Rudolph will have a strong second half led by back-end advanced packaging and lithography business resulting in double-digit growth in 2014 including a 20% contribution by our lithography business unit. Having said that, we’re cognizant of headwinds that are impacting front-end business trends in general and we agree with a forecast of one to three quarter pause in front-end capital spend.

The front-end headwinds that we’re seeing come from three factors but could change quickly by at present are looking like reality for 2013. Those are, the technical and commercial challenges in the memory markets, particularly the 3D FinFET adoption; vertical 3D structures are presenting their own unique yield and adoption challenges which will be solved, but not to a point at where we came in acceptably high yields and therefore not to the point meetings of capital commitment in the near-term. Also the number one foundry players indicated that they will have record CapEx spending this year. However, 70% of that will be done in the first half of the year. And additional third headwind origination in logic device market which is going through a structural change as the movement from personal computer market drivers to mobility market drivers presents difficult challenges for some.

I know here that as Rudolph has done in the past, we will not back away from supporting our front-end customers like Intel, Samsung and TSMC during this upcoming pause, but rather we will continue to work diligently there and at other front-end customers to get qualified for process of record for new applications.

The inevitable front-end capital equipment cycle we are entering now does not signal a stop in the movement to 3D FinFET structures, nor abandonment of sub-20 nanometer node device manufacture. As we in fact expect to see increased front-end metrology and inspection capital intensity as EUV extreme ultraviolet front-end lithography adoption gives course out. EUV by the way is [province] with ASML, Nikon and Canon, not Rudolph’s JetStep lithography system; ours is a backend lithography tool.

These new headwinds in the front-end are forecast to affect our 2014 revenues by $20 million to $30 million and we are now forecasting revenues to be $200 million plus or minus $5 million for the year. Q2 is forecast to be flat to up 10% with GAAP -- non-GAAP earnings per share ranging between $0.02 and $0.04.

Bottom-line is we expect a strong second half, which we expect will result in an improvement in 2014 revenue of up to 10% to 16% over 2013 levels, driven by backend advanced packaging and lithography. We had two new solutions that are in beta test that we expect will add new revenue streams to Rudolph beginning in late calendar year 2014, or early calendar year 2015. We’ll be hearing about these initiatives in the next couple of quarters.

As we have an outsourced and leveraged overall business model, we expect gross margins and operating margins to get to the low-end of our target model in Q4. Of course, it goes without saying Rudolph will improve our operational efficiency as we needed to meet our earnings objectives.

Now before I close my prepared remarks, let me do the math for you. If we were to end Q2 at the midpoint of our revenue guidance, then we would need to average between approximately $55 million and $60 million per quarter over the next two quarters to meet our goal of 2014 revenues being up 10% to 16% or in the year at $200 million plus or minus 5% with 20% of that coming from our Lithography System Group.

We will not project at this point the spread between Q3 and Q4, as customer acceptance and revenue recognition issues will be the drivers and those specifics remain to be seen. Steve has talked with you about our revenue recognition policies in prior calls and will be happy to discuss those post this calls of anyone who wanting a reflection.

To put this in perspective, recall that our 2012 revenues were up by approximately 17% while industry was down low-double-digit as our new products generated outsized gains and there was no JetStep Lithography Systems revenue in 2012 as we purchased Azores in mid-December that year. We had a quarter of $62.2 million in 2012, so two quarters ranging between $55 million and $60 million by no means stretches.

Bottom-line, in the coming months you should be hearing means about our Lithography Systems Group and how that affects this forecast.

Now let me turn the call over to Steve, who will review our Q1 financials in more detail. Steve?

Steven Roth

Thanks Paul, and good afternoon everyone. Paul has mentioned some of the financial highlights in the quarter, so let me get into little more of the details. Quarterly revenues for Q1 were $41.6 million, which is the same as our Q1 revenue from the year ago, but down from $44.5 million on a sequential basis from the 2013 fourth quarter.

As we discussed on our last conference call, we are beginning to see strengthening in our back-end business, which represented 47% of sales in the quarter, of these back-end sales 81% went to advanced packaging applications. We also recorded revenue as Paul mentioned for an additional repeat order JetStep from a leading OSAT or outsourced assembling and test customer in the quarter.

On the negative side, our front-end revenues decreased in the quarter from 69% of revenues in the 2013 fourth quarter to 53% in Q1, that decline was mainly with logic and foundry customers. As such the final market split of our front-end business as Paul mentioned was 49% memory, 34% foundry and logic was the remaining 17%.

Our inspection products, which are leveraged to both front-end and back-end markets were the major contributor to revenue in the quarter, representing 52% of revenue. While overall inspection revenue was up quarter-over-quarter gains in our back-end business were offset by weakening in our front-end inspection products.

Our metrology products which are highly leveraged to the front-end markets saw the largest decline this quarter, and represented 24% of sales. As we mentioned we sold another JetStep in Q1, which resulting in our Lithography Systems Group representing 10% of revenue in the quarter and now we’ve got software products, which had strong quarter accounting for 14% of revenues and was a significant contributor to our gross margin in the quarter, which I will talk about in a moment.

Switching to a geographical breakdown of sales Asia was the strongest region, representing 68% of overall revenue, U.S. was 24% and Europe was 8%. From a customer concentration perspective, we had three customers that each represented over 10% of sales in the quarter, with two being large memory customers, and the other a major OSAT.

Looking at our gross margins for the first quarter, our previous guidance was that gross margins to be in the range of 50% to 51%. However, due to the strong performance of our software group, our first quarter gross margins came in at 52%. We continue to post plus 50% margins through bottom of the cycle, as a result of our diverse product mix.

Looking at the second quarter of 2014, we anticipate that trend continuing and forecast that our gross margins will be in the range of 50% to 51%.

Turning to operating expenses. First quarter total operating expenses were $21.5 million, a $500,000 increase from $21 million in the fourth quarter and within our previous guidance. R&D for Q1 was $10 million, an increase from $9.6 million in 2013 fourth quarter.

SG&A expenses increased to $10.8 million from $10.7 million in the previous quarter. The increases in both R&D and SG&A were principally driven by annual salary increases that go into effect from the first quarter of every year, and an increase in accruals compared to Q4 for employee incentive compensation plans.

For the 2014 second quarter, we anticipate our operating expenses will be in the range of $22 million to $23 million, which reflects our continued investments in our lithography operations, offset by cost containment initiatives.

GAAP net loss for the first quarter was $724,000 or $0.02 per share. In the fourth quarter GAAP net income was $2.1 million or $0.06 per share. The Q4 results from last year were positively impacted by a $1.6 million or $0.05 per share tax benefit.

From a non-GAAP perspective our GAAP results were negatively impacted by litigation cost, share-based compensation costs and amortization and expenses related to M&A activities. Excluding these items from our first quarter results, our non-GAAP net income was $1 million or $0.03 per share. Both our GAAP and non-GAAP results were within our previous guidance.

Now turning to the balance sheet. We ended the first quarter with $16.1 million in positive cash flow, resulting in cash and marketable securities totaling $183.5 million and a net cash per share of $4.33. That cash was principally generated by continued improvement in our accounts receivable metrics as receivables decreased $10.9 million ending the quarter at $42.5 million. Also contributing to the increase in cash were the customer deposit for the flat-panel display order that we announced earlier in Q1.

Inventory increased slightly to $62.3 million from $61.4 million in the 2013 fourth quarter, the increase was primarily due to an increase in customer service parts for new products.

Finally to wrap up, capital expenditures for the first quarter were approximately $400,000 and we ended the quarter with a total headcount of 607 employees.

This concludes my prepared remarks and now we’ll open the floor to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of David Duley with Steelhead.

David Duley - Steelhead Securities

Thanks for taking my question. I was wondering if you could just talk a little bit more about your front-end business I guess you’ve cut your revenue targets for the year, I think you mentioned by $20 million because your front-end business, and I think that would mean your front-end business is down for the second year in a row, could you just talk about the dynamics there and have you seen some share loss or something or what is the reason for the decline?

Paul McLaughlin

I don’t think so Dave. Let me describe it this way, I think we’re cautious with two out of our three biggest customers have put things sort of on hold, one in the memory/larger carrier our Korea manufacturing and the other one a domestic, a logic supplier and the signs are not overly optimistic, I have read a lot of comments of the top two of these customers in specific and it’s questionable whether they will be back in late 2014 or early 2015, with chosen that be a more conservative route and I think that’s realistic, because the dynamics are not particularly strong for large CapEx going forward.

So I think that’s what we’re doing here. And you are correct, that that will effect and also as you know, TSMC are the largest foundry manufacturer said has spent his money, ergo in the last two quarters we had a large component from our front-end business 70% in Q4 and 53% this quarter.

So we’ve enjoyed that, that will continue but at a lower rate, I believe if anybody has upside, it’s most likely to be TSMC, but right now they’ve held flat on their CapEx for the year, which is good but 70% of its already been ordered and shipped.

So I think that’s where the caution comes from Dave we’re nervous about the front-end, I’m not saying the front-end is disappearing, but there are some legitimate problems with the 3D FinFET, and so leakage carriage use of the (inaudible) that are popping up. So the yields are unacceptable right now and I don’t think this is a demand from a customer based to rush to that. I think it will happen it will happen soon, I’d say this time next year it will be in the revenue mode most everybody will have done something in 3D FinFET area and vertical NAND and that kind of thing. But right now I think there is a pause. Could be wrong but I think it shared by some of our peer group.

David Duley - Steelhead Securities

So is your final business, I know you have some inspection equipment in the front-end bucket. So I guess what I’m trying to get at here is what your decline you’re seeing in your front-end business is it really driven from your inspection business or from your thin-film metrology or metal metrology tools?

Paul McLaughlin

I think it’s across the board wait and see what’s going to happen. So we wouldn’t single out any given area. So I don’t, I was not be able to tell you exactly what that be Dave, but I don’t it’s any one particularly area, I think it’s universal across the front-end of our business. It will come back; we fully expect it with couple of new process to a record. But at the end of the day, if they are not buying, they are not buying. While we have won the battle, we will get the business, but I question whether it will come this year? And those could easily stretch into late Q4 and in our first part of 2015.

David Duley - Steelhead Securities

Okay. On the lithography side of the business, I think you’ve now shipped a third system into the same customer, I think they’ve been all wafer level systems or did you just say that you shipped a panel level system to a customer? And when might we expect to who you talk about a second customer?

Paul McLaughlin

Okay. I would expect you will be hearing from us over the next couple of months on how we are going to get 20% you can do the math, Dave. It’s 20% of couple of $100 million numbers easy to come to and we will show you where that comes from. It will be a combination of what we call the W Series and the S Series.

W is the one that we have already shipped, which is the three of it, two of it you just mentioned. Those are wafer or round these systems if you will. Could be any size round and that particular case that they are round and they may be bigger than 300 millimeter, in fact one of those is bigger than 300 millimeter. But going forward it will be a combination of the S Series, which is square or rectangle and the W Series, which are wafer-based.

You will be hearing those I expect over the next several months, you will hear about it and see how we are going to get there. As at the moment though, we do not have an additional order on the books at this time.

David Duley - Steelhead Securities

Okay, thanks.

Operator

Your next question comes from the line of Patrick Ho with Stifel Nicolaus.

Patrick Ho - Stifel Nicolaus

Thank you very much. Paul, maybe if you can just give a little comment on in terms of the litho business that you had for the second half of the year. There is still a lot of commentary out there about the high cost of advanced packaging and some of the timing of the adoption of TSV given some of those high costs. What gives you confidence that you’ll still be able to achieve some of the, I guess the high metrics, because it is very back-end loaded even if you get to your $200 million revised target?

Paul McLaughlin

Yes. I think you’re talking a couple of different dynamics there. I do believe that we will get earlier orders from the panel piece of the business, that’s the very exciting piece of our business as we speak. We’re in final negotiations with a couple of people for our wafer systems as well. So, it will be a mixture and they do come in pretty decent chunks as you know, so that when they come in, it’s not an unrealistic number to expect us to do $55 million to $60 million in Q3 and Q4.

Patrick Ho - Stifel Nicolaus

Okay, great. In terms of the, I guess the traditional back-end pick-up, I know you mentioned that some of it has been pushed out due to the delays with that one customer. What else are you seeing in terms of I guess the traditional back-end seasonal pick-up you usually get in the June quarter and even to the early parts of the September quarter for your basically traditional businesses both advanced packaging, as well as some of the legacy stuff?

Paul McLaughlin

Good point Patrick, good point. You’re absolutely right, we’re expecting an uptick. The percentage of 53% front and 47% back will be reversed even more in the second, normally stronger second quarter at our front-end business particularly in logic and in selected foundry applications and the new 3D NAND doesn’t come true, just don’t think it’s going to happen.

I think it may stretch out a little bit and in fact I think you are the one here who has mentioned about some yield issues we’re getting qualifications at the next node, which I do believe is correct. And I think major customers in Korea had that problem and there is no rush today, because I think they’re having trouble with the yield now so they don’t have many customers that they should have at this point. So, I see that being a little bit of longer delay than normal. And of course that has an effect on what we would guide going forward.

So, I think the back-end; to your question directly will be the dominating force in the second half of this year. Yes, we’re still going to do front-end business. Yes, if they kick in, we’re going to get the process of records that we now already have and of course you know we can’t be exact at our biggest customer, but that customer has reengaged in a significant way. They’ve said they’re going to reengage. We’re kind of optimistic, but if you do the math there they’ve got to spend a lot of money in the second six months.

Patrick Ho - Stifel Nicolaus

Great, thank you very much.

Paul McLaughlin

Okay. Thank you, Patrick.

Operator

Your next question comes from the line of Tom Diffely with D.A. Davidson.

Andrew Masuda - D.A. Davidson

Yes. Hi, this is Andrew Masuda calling in for Tom Diffely. Paul, I was wondering if you could talk about the competition in the back-end lithography market and just the dynamics there.

Paul McLaughlin

Okay. Good point. I think the dynamics as we’ve talked about before is we’re going to an advanced packaging versus a bump in. I think what might be reemerging in back-end, I am sure you’re referring to a competitor in the 1x lithography area. I think that the growth there will probably be more in LED, a lower price system which we do not have that is not where we play. So, the dynamics haven’t really changed. I think it will be the tool of choice for the advanced packaging applications as they look to panels and low cost solutions.

Fundamentally because we have a reduction step ahead 2x and that’s what all the dialogue is about, the issue you can expect and let me give you the dynamic that’s in there. This is an unabated change when somebody goes to a panel. And you say why is that, while there is plenty of panels being out there, but not finally of these guys. The people do in panels in the flat panel business, so are you flat display panel business.

Those are the guys doing displays for various modules and that market is a separate market. So, they have the capability. When I go to talk to customers about using our JetStep, our advanced packaging S Series or square substrate series, they are not as familiar with how we expect them, they are not as familiar with how to quote them, develop them. Yes, they say yes, Paul I hear you, but we don’t have that technology and most of them do not, in fact all of them that we’ve talked to do not have that capability to handle large packages, they are all working on it, because the dynamics are so good in terms of what the cost factor is. This is about a huge cost savings, but they are little (inaudible) I thought they’d be more receptive.

We’re in lots of talks about them and I fully expect that will happen, you will hear that I hope very soon. But having said that, the issue is, this is a major technical change with people who now don’t do lithography in the back-end on any panels of significance that just is not done.

So, I think that’s where we will come in. I think we’ve good team we’ve been doing, we’re doing lots and lots of samples and now we’ve got our full units up and working in our labs and moving to Massachusetts and it’s operative customers coming through with samples, but we’ve done a good example at our high time coating, you can picture square panel. We’ll tackle it away from this spin resistance, right coating spin it on and then new developed and then you exit and you can expect it.

When you don’t, you can’t spin a panel, particularly with panel that’s 24 inches by 28 inches of 35 by 43 already in the Gen 3.5 or Gen 4.5 and that’s where all the savings done. So, you have to have a different approach and it’s a spray on, it’s a one spray system and they allow that, but they’re not in the OSAT world, they are primarily customers that you might being familiar with the AUO and a retail, the (inaudible) some of the big houses besides Samsung and GS, those guys they both have capability inside to do both wafers and squares, but they are the only at the moment.

And so, that’s taking a long of people to make the commitment who is not only do a buy a step of (inaudible), but it commensurate demand on the first half, you’re going to have to get all sorts of other equipment. So the capital equipment commitment is larger, the savings are obvious. And I think there isn’t anybody who has not said, this is a real cost effective approach if we have the technology what do I have to do to get it. And then none of them are working on getting that technology.

So in fact, it’s not like you have to invent anything, you just have to go talk flat panel guys. So, one of our jobs has been is to take these customers to other locations where our lithography tools are in place and working on square panels. And so, that’s a dynamic. You will hear about that over the next coming several quarters and that will be a big way to recover and to get to the point where lithography will be 20% of our business this year.

Andrew Masuda - D.A. Davidson

Okay, that’s…

Paul McLaughlin

I’m more optimistic now, to be honestly with you, than I was at the end of last quarter, really seeing the number of people coming through with samples and that they’re struggling with how to call them, we often have to use outside shops to get stuff done. I mean innovation is tough when these people don’t have that ability. We will have some [talented] system in the field very shortly.

Andrew Masuda - D.A. Davidson

Okay, thank you for that. And then just looking in the second quarter, are you able to give just a rough split on your expectation for front-end versus back-end? I know front-end is going to be down but just if you can give a rough split?

Paul McLaughlin

Yes, it could easily reverse that this quarter plus or minus a couple of points. The front-end does still look, still be delivering things to foundries of still collecting their tools from orders that they placed over the last several months and so those tools will come in. So it will be probably reverse of where we are this quarter.

Andrew Masuda - D.A. Davidson

Okay.

Paul McLaughlin

Or close to it, don’t hold me to the 47-53 split being exactly opposite, but it will be relatively narrow. What you Steve?

Steven Roth

Yes, a little more back-end 55-45ish decided for modeling purposes.

Paul McLaughlin

And then going into the summer is where you will see the major shift.

Andrew Masuda - D.A. Davidson

Okay. And then I guess just looking at the front-end, if you were to see one of the end markets pick up first, logic; memory foundry, which one would you say would be the first to pick up?

Paul McLaughlin

Well, I’ve been waiting everyday for my friend number one customer over the last 10 years to announce a solution that involves some kind of foundry work, some kind of partnership with somebody in the mobile display area or mobile product themselves. I still am optimistic as a fab base as you perhaps are aware. They have put a complete fab on hold, they have spent $2 billion out of $8 billion, just to get the structure up and ready, but they’re not equipped yet. And quite frankly I checked again this morning, there is no information. They have not given us any guidance as to when that will be lifted. It could happen and could happen right away, but as you look at the dynamics, and I don’t have any inside information on this, but my gut feel is they’re still struggling with how to do that. And what’s the best way to expand their customer base from a PC focused business to perhaps a foundry business or perhaps a mobile solutions business. So that dynamic is in play as we speak.

Andrew Masuda - D.A. Davidson

Okay. Thank you.

Paul McLaughlin

Okay.

Operator

Your next question comes from the line of Dick Ryan with Dougherty.

Dick Ryan - Dougherty

Thank you. Hey Paul, I’ve got a few in the back-end and litho side as well. And I may have missed this, does any of the 20% guidance that you’ve laid out for litho, is any of that going to come from the FPD market or is it all semi related or the…

Paul McLaughlin

We announced one order out and we expected to do one order this year and that order is in. That is correct. That we’ll ship we said by the end of this year.

Dick Ryan - Dougherty

Okay.

Paul McLaughlin

The back-end loaded and I think we gave a guidance last quarter, there are couple of orders that came in, we’re in the order of $11 million, of which the majority of that, 70% of it or 80% of it was the what we now call a JetStep display products lithography and it will be display of substrates and it will be for mobile displays.

Dick Ryan - Dougherty

Okay. So revenue recognition on any back-end litho, nothing in Q2 or it will be -- the rest will be Q3, Q4?

Paul McLaughlin

Well, I think to be that way we expect to ship something this coming quarter, but probably not revenue recognition.

Dick Ryan - Dougherty

Okay. And looking at the supply chain, I know you’ve mentioned in the past the glass situation but one of your other suppliers is getting acquired in the back-end litho side and I know the acquisition hasn’t completed yet, but are there any concerns with that supplier?

Paul McLaughlin

Zygo, are you referring to them?

Dick Ryan - Dougherty

Yes.

Paul McLaughlin

They are a base supplier of us. We have been telling that they sure want to keep business. AMETEK I guess will be [impact], right?

Dick Ryan - Dougherty

Yes.

Paul McLaughlin

AMETEK is the buyer and obviously they want to keep going what they’ve got. So yes, the answer is they want to keep the business going. And a big chunk of their internal business is optics. They make some wave guides and some clad plate (inaudible) of different kinds, they’re not the only supplier but they’re a very important supplier to our litho business.

Steven Roth

But Dick, it would have no impact on 2014 that supplies ordered in house. That’s here already.

Dick Ryan - Dougherty

Okay. And on capital allocation any thoughts on stock buyback? I know you’ve got the pool of money for M&A, any other thoughts on potential stock buyback at these levels?

Paul McLaughlin

It’s always a question that comes up at every Board meeting. Obviously if you look at some of our M&A activities, you can see, Steve talked about non-GAAP numbers, talked about M&A expenses. We are actively out in the M&A market as we speak. And that’s not included in the $200 million.

Dick Ryan - Dougherty

Okay.

Paul McLaughlin

It’s not at all included in that. We think there is upside if we land. We have enough money. I think Steve has mentioned to you, are up in the $183 million on the balance sheet adequately enough to buy what we’re looking for.

Dick Ryan - Dougherty

Okay. Thanks Paul, thanks Steve.

Paul McLaughlin

Thank you, Dick.

Operator

Your next question comes from the line of Brett Piira with B.Riley & Co.

Brett Piira - B.Riley & Co.

Hey, thanks for taking my question. May be just a clarification here for Steve. Could you repeat what the 2Q OpEx number was?

Steven Roth

Yes, we guided $22 million to $23 million total.

Brett Piira - B.Riley & Co.

And that’s on GAAP basis?

Steven Roth

That’s a GAAP number, yes.

Brett Piira - B.Riley & Co.

Okay, great, great. And then just a take up, you mentioned the litho investment, can you just kind of -- is that just kind of to more support, more expanded customer testing like that or what’s new in there that you haven’t done in litho?

Paul McLaughlin

Yes, we are continually growing that operation, even from an R&D perspective in selective areas. So I mean we’ve talked about new products and the panel products. And so there are investments being made there in selected areas, while you could imagine at these low revenue areas, other business units right now we’re trying to clamp down and do more cost containment initiatives but there, we are in a ramp up mode. So I got some offsetting priorities going out, but so we’re pushing forward with some of the investments in that area and then the other areas we’re just trying to hold the [first things steady].

Brett Piira - B.Riley & Co.

Okay. Great, thanks a lot.

Operator

(Operator Instructions). Your next question comes from the line of John Pitzer with Credit Suisse.

Farhan Rizvi - Credit Suisse

Hi, thanks for taking my question. This is Farhan asking a question on behalf of John. Can you just help us understand like what the revenue mix you expect in 2014 between the front-end, back-end and the litho? I know you mentioned litho is being 20% of the revenues, just wanted to get a better sense of what you are expecting the rest of your business to be?

Paul McLaughlin

Yes, good question. In my prepared remarks I tried to indicate that well over half of the revenues in 2014, that we’re projecting right now, which is $200 million plus or minus five will come from the back-end.

Steven Roth

You’re going to obviously see with the you got Q1 and then we talk about Q2 reserving it so far on and out yet in the 20% number or less out that the second half the year is going to be very heavily weighted back-end versus front-end.

Farhan Rizvi - Credit Suisse

Got it. So if I back out the 20% from your total, is it fair to think like rest of the business is kind of evenly split between the front and the back or do you think like it’s more front apart from the total business?

Paul McLaughlin

I would say it’s pretty closely even.

Steven Roth

Yes, for the second half of the year.

Paul McLaughlin

Yes, the second half of the year. We could be surprised on the upside, I know I read some of the transcripts of some of our peers who said this is a one to two quarter pause, I don’t know I’m really wondering about the push out in FinFET 16, 14 kind of mainly build out, I’m hopeful that it’s Q4. But it would not surprise me from the dynamics that I see that that would be a first quarter of 2015.

And so that’s why we’re taking down what we took down. And I could be wrong I hope I am, I hope I am wrong. But the there are some signs in horizon if I’m not sure there is enough customers at the moment jumping up and down everybody is going to won’t impact right eventually they make a whole lot of sense just the power, all of the issues that’s there. But who is willing to pay for that at this time.

In the memory community, people make money right now and we had 49% of front-end business with memory this last quarter. And how much of that is next generation 3D sales not much it was capacity expansion in the current flame of technology, there is that dynamics in NAND and DRAM that sort of counter into tools here, and I think (inaudible) as written on some of it very often, so I know you are familiar with that dynamic and where it’s coming from.

And you obviously can see what’s happening, we’ve got the mix of people in this stage and we look at the semiconductor capital equipment away from fab equipment business, some people our biggest competitor has guided for a total year of plus 5%, and this last quarter we are all talking 10% to 15% and 15% to 20%, we have reflected that thinking in our guidance we are not so sure, now it’s not the time to do that we want to explain why we think we’ve got a very, very solid franchise in advance packaging. But jury is still out go and prove it, so that’s what’s going to happen over the next couple of quarters, and you are going to see that.

But we want to be more than just a back end company within those front-end a long, long time and with tool of record and copy exactly when Samsung expands we expand with them, when Hynix expand we expand with them, when the foundry is up, we do it as well. So all of those dynamics in the nature we are in, we think we the number one and two in every single market segment we are in, in the front end and we are leaving it to the back-end.

The back end in our strategy has become the go to choice for advanced packaging. I think advanced packaging will definitely be a lot better, if you would ask me last quarter how much did I think our back-end this quarter would have been advanced packaging versus our traditional area, I would have said 95-5 but it did came out at 81% in terms of advanced packaging and 19% in traditional users.

So the dynamic is it takes while for people to change. And obviously that is some of the dynamics going on in advanced packaging. It’s like that trend we’ve all been waiting for in the LED area right. Rudolph has got a pretty good size and installed base in LED and inspection. But the way if I had to make my living off without the last few years, I wouldn’t made it.

But you wouldn’t want to bet against that. Advanced packaging is another one of those dynamics I had, I would not want to bet against advanced packaging. And Rudolph is trying to build a very strong portfolio, we think you will hear a couple of more things in the next couple of months, when we will get now in data that they will bring new revenue streams within that advanced packaging.

Because not everybody has continued same kind of packages, not everybody is going to do it on squares or round, it’s going to be whole carrier fit, we think we’ve got a very elegant portfolio that surrounds advanced packaging. And we are very much leveraged to advanced packaging. We still have solid foundation node driven in world and markets that we make a lot of money and that’s where we get the copy exacts with our metal tools and our transparent tools and you will hear more about that in months to come.

Farhan Rizvi - Credit Suisse

Got it.

Paul McLaughlin

Does that makes sense that I kind of confused you up?

Farhan Rizvi - Credit Suisse

That completely makes sense. And just one area that I wanted to probe a little bit more is in the area of lithography like you are guiding to a pretty strong revenue growth this year. When I looked at Gartner numbers last year, the markets there is for the lithography steppers on the back-end was a little over $100 million. And if we get to about $40 million for you this year, it would be a very big increase in the market share. So, just want to understand like what sort of breadth you are expecting in gaining market share and how much of market growth are you expecting in lithography? And secondly, when you think about the linearity of shipments, how should we think about shipments in Q3 versus Q4 and how much of that is in backlog already versus how much could be at risk?

Paul McLaughlin

I think you’ll see it go up. You can do the math, as I did the math slightly if you take halfway point it would be roughly $85 million at the halfway point. That says, $200 million is $110 million plus or minus $5 million, so you get to $195 million would be a $110 million that’s $55 million on the low side, $60 million on the high for two quarters. It won’t be that way two quarters and it will be tied more to less in the third quarter more we will see some revenue recognition get customer acceptance of tools and that will be more tilted to the fourth quarter.

So, but at the end of the day, you need somewhere between $110 million and $120 million, a very doable for Rudolph particularly when you look at lithography and our lithography number is obviously some one-back flat panels JetStep Gen 4.5 tool is in place and we’ve already announced that that comes in as a good chunk of volume.

I would say going forward in 2015 we will see a series of flat panel lithography tools being delivered on more regular basis what JetStep lithography square kind of units that their glass or laminates or whatever have you, but primarily glass in the flat panel area. So, at the end of the day I think that will be more like one to two a quarter in a year out from now and that’s going to be important.

The other part of our business which is the growth part which leverages whenever we sell the step up that’s round, the JetStep system, we sell at in events packaging with it goes a lot of other stuff, by that I mean software PCs, there are hardware, there is an overlay tool that’s all being done with Rudolph product and they’re going to inspect it and that’s where we’ve got -- they won’t walked away from us, we’ve got that. So, we’ve got a series of revenues streams that right now are very small in each one of the buckets. And if you are a believer in advanced packaging, which of course we are would be a big bet on that, you spend a lot of money on it.

And we think we’ve got very nice packaging products that people can flash on to. Which one will be the best? I think the best way to handle that is to have a series of these so that when one guys picks one direction, we’re able to participate another one picks another direction, we’re able to participate, just like substrate as its going to be glass or its going to be laminate or its going to be silicon wafer, what you’re going to do?

You need to packages be an impact to business, stack, you’re going to make these labor spinners, so you got to be able handle to those, how going to do that, can you handle things on a panel, so there is lots of questions and Rudolph is working with those issues as we speak. Could you got to remember we don’t have to spend time developing the lens in the camera, so shade with our 2x reduction equipment.

We already have that when we bought Azores, so that became the foundation, so you say what’s truly that’s a great thing and I think it is, we’ve got innovation by picking what they had, adapt it, connecting the dots to advanced packaging and say, okay, we’ve got a sweep of things that could help out there, let’s bring out our lithography tool that’s a 2x stepper, not for today’s box star, but tomorrow as the day’s packaging application there are (inaudible) of them that’s where we’re going with it.

And that were -- of them that’s why we’re going with it. And that’s going to be the set of (inaudible) we often in fact do that and that’s the way I hope you can hear over the next very short period of time actually we’re expecting you again some lithography is how we’re going to get through our 20% number quite reasonable.

Farhan Rizvi - Credit Suisse

Got it. Thank you. And just one final question from me; in terms of your expectations on TSV longer term, what green shoots are you seeing? Are you starting to see some of the memory integration on logic on the TSV side like I’ve heard these announcements about integrating memory directly onto the logic and TSMC talked about it on their earning call and Samsung has disappear the wide IO memory integrated into the logic. I just wanted to hear from new electricity have seen any of that starting to take place and lastly like in terms of you mentioned the 10 nanometer wind one of the leading applications. In logic, I just want to know what that as far?

Paul McLaughlin

It’s a Paul. 10 nanometer macro processes and you know we believe or in this spaces as a couple of generations ahead and they have already done with familiar with the process past finding development and then process main of record. They are ahead obviously because they’ve already have 40- nanometer fab and the generation that work within the R&D and what regularly in the development stage is 10 not 14.

The question on 14, how they’re going to ramp more than one fact, I’ll be answer is put it on hold. So when they go to the next generation we will be true record there. I hope is that they want to got a strategy because we’re particularly focus I mean have been for many, many years and I can say that just great technology partners, they are being very loyal to us they’re going through a rough patch that will be solved that would not that against them. They get very, very capable; they got some fundamental issues that I have seen John write about in terms of where is the logic business is going to go with [Intel].

And our guess is as good as mine, but I did not bet against them. They have a powerful technology force. And as I tried to mention in my prepared comments, during this downturn in this cycle it goes down from plus 10%, 15% to 20% of a quarter go to plus zero to 10% or 5% whatever number you want to pick for the balance of the year or what you think the CapEx will be in 2015. The big part of that will go to litho, right.

And litho will get the biggest chunk of that and I think that’s fairly obvious. [DLSI] reported that the top two suppliers get 50% plus percent of the business, big chunk of that business is going to go there and so now that’s what mine normal foundry is very local and that fact they had $1 billion CapEx monthly in January is all litho.

So, we have to sort of wait for those things to happen as a company our size. Having said that, we’re in there with them every day, we are not doubling down to make sure that we get more process of record, because that’s the way we have been successful in the past and I still think that’s the best way to do it whether you’re dealing with Samsung or you’re dealing with Intel or you’re dealing with TSMC. You wanted to be the process of record and that’s where we spend a lot of time. I am happy to say we’ve been successful; I am waiting for the capacity to take off. Does that help you at all?

Farhan Rizvi - Credit Suisse

Thank you. That’s all I have, thank you.

Paul McLaughlin

Okay.

Operator

I will now like to turn the call back over to Paul McLaughlin.

Paul McLaughlin

Thank you. And thank you everyone for joining us today and for your continued interested and in support of Rudolph. We look forward to seeing you at upcoming investor conferences, which we’ll be announcing shortly. Thank you very much. And have a good evening.

Operator

Thank you for joining today’s conference call. You may now disconnect your lines.

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Rudolph Technologies, Inc. (RTEC): Q1 EPS of $0.03 misses by $0.01. Revenue of $41.6M (-0.1% Y/Y) misses by $3.11M.