Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ultratech, Inc. (NASDAQ:UTEK)

Q2 2014 Results Earnings Conference Call

July 17, 2014 11:00 AM ET

Executives

Suzanne Schmidt - The Blueshirt Group, IR

Art Zafiropoulo - Chairman and CEO

Bruce Wright - Senior Vice President, Finance and CFO

Analysts

Krish Sankar - Bank of America Merrill Lynch

Josh Baribeau - Canaccord

Mark Miller - Noble

Jairam Nathan - Sidoti

Tom Diffely - D. A. Davidson

Ted Moreau - Barrington Research

Patrick Ho - Stifel Nicolaus

Operator

Please standby. Good day. And welcome to the Ultratech Second Quarter 2014 Earnings Call. Today's presentation is being recorded.

At this time, I would like to turn the conference over to Suzanne Schmidt with The Blueshirt Group. Please go ahead, ma’am.

Suzanne Schmidt

Thank you, Operator. Good morning, everyone. And thank you for joining us today to discuss Ultratech’s financial results for the second 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 our website. A webcast replay will be available on the website as well for approximately one week after today's call.

Joining me on the 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 turn the call over to Art.

Art Zafiropoulo

Thank you, Suzanne. Good morning. And welcome to our second quarter 2014 conference call. During the course of this presentation, we will make 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 March 29, 2014 filed as of May 2, 2014. These documents contain and identify important factors that could cause the actual results to differ materially.

As we have discussed in our first quarter conference call that our call level had increased which we believe as an important leading indicator in today's uncertain environment and this has continued in the second quarter. This activity has led to a new systems book-to-bill of 1.4 to 1 for the second quarter.

Our advanced lithography steppers accounted for slightly above 60% of system bookings with laser spike anneal and high brightness LEDs steppers sharing most of the remaining bookings. We had no new orders for Superfast inspection tools, which is in the cost evaluation phase. The ALD products added about 2% to new bookings.

Looking at each of our major product areas, we have seen a significant increase in our advanced packaging stepper bookings at both IDMs and OSAT companies. The OSAT bookings as expected were in the Asia region. With the IDMs primarily in North America, we expect that our advanced packaging stepper business to trend up over the next few quarters.

Also utilization of our steppers is about 90% and several of our customers are planning expansion in the near future. Other IDMs who use our steppers are in the reuse strategy are currently installing major upgrades, which we expect to continue through next year.

Our HBLED stepper business is continuing to increase due to our low cost of ownership within lithography 1X steppers, providing increase yield and much lower rework. In the past this industry has selected very old reduction steppers, which due to the substrates surface warpage had low throughput. Generally it takes three of these reduction steppers to equal the throughput of a single 1X stepper system.

Another major cost issue is rework, where in many cases up to 50% of wafers for each step are reworked, a very costly issue which significantly reduces with our steppers. With the sharp decrease in high brightness LED bulbs, the lower selling price is driving the LED manufacturer to increase yield and decrease rework.

We've seen the increase of applications from the PSS layer to all shipped pattern steps. On average there are five additional litho steps and we have been qualified as POR for many and some cases all of them with a large number of high brightness LED manufacturers.

We expect this business to continue to show strength through this year and into next year. Both our advanced packaging and high brightness LEDs steppers are manufactured in our Singapore plant and only a couple of slots are open to the rest of 2014.

Moving to our latest exciting new product the Superfast inspection system, we continue to make progress and have installed several evaluation tools at leading logic and memory companies throughout the world.

We have learned that a great deal of yield loss both in 3D logic devices, FinFETs and 3D NAND flash chips are due to parametric yield loss, due to local and global stress issues. Our Superfast inspection technology has the ability to measure local and global stresses which directly relates to parametric yield loss. This killer yield phenomenon only gets worst as device density increase.

We have published several papers subscribing this yield loss relationship. We are the only company in the world that can measure millions of points of data per wafer with throughputs over 100 wafers per hour.

Based on current information we are expecting to slowly receive purchase orders and we expect this to increase in future quarters. The result as expected have indicated that our Superfast inspection system is very timely and producing a necessary quantity of data at the lowest cost so that our customers can make -- improve their yield both memory and logic devices.

Finally, reviewing the laser spike anneal products where the industry is still experiencing yield issues in the manufacture of 14 and 16-nanometer FinFETs. Before providing further color on this issue, it maybe best to tell you how we are doing.

We have booked LSA business for the production ramp of 14-nanometer FinFET. We've had a sizable backlog in LSA systems, which was scheduled to be shipped within our backlog policy of one year and now several had been released for delivery this year.

This is from more than one company. These systems have been POR for 14-nanometer FinFET for several quarters and are currently in production, use for 4-millisecond anneal steps.

We have been communicating with both our customers and investors that the LSA product produced less local global stress, which is now a major issue in parametric yield loss, other technologies such as flash anneal due to the physics of elevated temperature of the entire wafer thus increased local and global stress, and also negatively impacting other important factors such as pattern effects.

We believe these companies currently increasing wafer starts will continue to ramp their 14-nanometer FinFETs with LSA and we are told this ramp will continue into 2015. This is very good news, despite the recent information by other companies who are having difficulties in improving yield.

Just, yesterday, Morris Chang of TSMC on his conference call indicated that their 16-nanometer FinFET programs will be delayed until the end of next year. Also it has been reported that an internal e-mail from Intel has been obtained by Chinese source, which indicates that Intel decide to postpone the launch Window of a 14-nanometer core-M Broadwell microprocessors. This was confirmed yesterday at the Intel conference call that the delay would be from September to December, January 2015. Speculation was, this was due to lower than expected deals.

Again, neither of these events will impact our projected LSA ramp, which as mentioned has begun with those producing 14-nanometer FinFET devices, who are now ordering and releasing for backlog several of our LSA laser anneal systems with delivery in the next two quarters.

In the past we had mentioned at several conferences that advanced FinFET devices would be -- would use more LSA steps than we use at 28 and 20-nanometer nodes. These releases and orders currently utilizing our laser systems are currently used for four steps. This is an increase 1 to 2 steps over the previous nodes and could further increase.

Last year, the laser anneal systems shipped by Ultratech process more than 3 million wafer passes. In the past three months, we have seen a significant ramp and the use of our laser anneal systems and at the rate greater than we have seen in the previous ramps.

We have delivered over 70 systems to date and we expect to have available hardware which can be still install within a couple of days which is intended to improve the productivity and wafers per hour and micro uniformity with our current LSA machines.

We continue to invest in technology which can improve our customers cost of ownership critical in their success. I had communicated in the fourth quarter of last year would be the bottom and the last two quarters was sequentially better in topline sales, gross margin and closing the GAAP and profitability.

Our company has significant leverage an EPS as a function of topline sales and once we hit breakeven, the leverage of the bottom line is huge as witness in the past. I am as optimistic as ever in my expectations of our company future success.

This is probably a good time to share some additional information regarding our second quarter bookings. We shared earlier in this presentation the makeup of the new product bookings and a percentage of the bookings and our major geographic regions were as follows, North America 14%, Europe 17%, Asia-Pacific 69%.

Bruce will now provide detailed financial information with future guidance.

Bruce Wright

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

The second quarter saw a sequential increase in revenue about 17% compared to the first quarter of 2014, primarily reflecting increased revenue from laser processing and high brightness LED, partially offset by decrease revenue from advanced packaging and Atomic Layer Deposition.

Geographically, revenue increased sequentially from the first quarter of 2014 in Europe and Asia-Pacific. Demand for laser processing systems in the second quarter of 2014 accounted for about 31% of revenue and about 16% of new systems orders.

Advanced packaging systems in the second quarter of 2014 accounted for about 31% of revenue and about 63% of systems orders. High brightness LED systems in the second quarter of 2014 accounted for about 11% of revenue and about 19% of new systems orders.

Gross margin in the second quarter of 2014 increased to approximately 45% from about 41% in the first quarter of 2014, primarily due to product mix and higher volume of production

Turning now to a comparison of the second quarter of 2014 to the second quarter of 2013, revenue for the second quarter was $36.8 million, down about 14% from $42.9 million for the same period a year ago.

The company had a net loss for the second quarter of 2014 of $3.9 million, which represented a loss per share of $0.14. This net loss compares with a net income of $900,000 or $0.03 per share diluted for the same quarter a year ago.

For the second quarter of 2014 versus second quarter of 2013 comparison of revenue mix, systems revenue was down about 11% in the second quarter of 2014 and service, spares and license revenue was up about 21%.

For the second quarter of 2014, systems revenue accounted for approximately 75% of the total, broken out by 62% from semiconductor and 13% from nanotechnology, and service, spares and license revenue were about 25%.

Geographically, revenue from Asia-Pacific for the second quarter of 2014 was $18.2 million, essentially flat with the second quarter of 2013 and represented about 49% of Ultratech's total second quarter 2014 revenue.

North America had revenue of $11.8 million, down about 43% and represented about 32% of the total. And Europe had revenue of $6.8 million, up about 74% and represented about 19% of the total.

Our top five customers for the quarter were principally laser processing and advanced packaging customers from North America and Asia-Pacific. Overall, the top five customers accounted for about 96% of systems revenue.

Gross margin decreased to about 45% in the second quarter of 2014, compared with about 47% in the second quarter of 2013. This decrease was due primarily to product mix and lower volume.

Looking at operating expenses in the second quarter of 2014, R&D expenses increased to approximately 22% of revenue from approximately 18% a year ago. SG&A increased to about 34% of revenue, up from about 26% from the same period a year ago.

Both percentage increase was due primarily to the approximately 14% decrease in sales for the period. Total operating expenses for the quarter increased to about 56% of revenue from approximately 45% in the second quarter of 2013.

Operating margin for the second quarter of 2014 was about negative 11% of revenue, compared with about positive 3% for 2013. Interest and other income net increased to $100,000 in the second quarter of 2014 from negative $200,000 in the second quarter of 2013.

The company booked an income tax benefit of $100,000 in the second quarter of 2014. During the year, quarterly income tax provisions are determined using an estimated effective tax rate for the entire year. This rate is based on the jurisdictional mix of earnings and has the potential to fluctuate as business moves from one geographic region to another.

Turning now to the second quarter 2014 versus first quarter 2014 comparison of the balance sheet, cash, cash equivalents and short-term investments increased by about $10 million during the second quarter to total about $300 million at June 30, 2013.

Accounts receivable decreased about 7% during the second quarter to approximately $29 million and a shipment increase of about 25% compared to the first quarter of 2014.

Inventories increased during the second quarter by about 2% to approximately $49 million. Working capital increased to about $348 million at June 30, 2014, up from about $344 million at March 31, 2014. Book value per share at June 30, 2014 was $13.60, up from $13.59 at March 31, 2014.

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 the 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 of forecast continues to be extremely high. In fact, the visibility into the 16, 14-nanometer node is worst today than it was three months ago as the industry continues to grapple with significant FinFET issues.

The essence of the problem appears to be a lack of understanding of whether the poor yield performance at 16, 14 nanometers is due to process issues or design problems. Against this background, there is tremendous pressure to ramp FinFET production for inclusion in next year’s mobility products.

So, producers are faces with the question of ramping FinFET production now with poor yield resulting in higher chip cost or delaying the FinFET production ramp to obtain better yield or potentially being later to market than the competition. To the best of our knowledge, one producer is delaying the ramp for the first quarter of 2015 and another to late 2015. However, two are ramping in the fourth quarter of 2014.

And to this shifting landscape, we have been and expect to continue in the second half of 2014 ramping laser processing and shipping systems to customers for 16, 14-nanometer production.

Overall, Art mentioned that Ultratech’s book-to-bill was about 1.4 to 1 in the second quarter of 2014. The strong bookings performance was led by orders from advanced packaging, laser processing and high brightness LED.

We are currently seeing strong demand for both advanced packaging and high brightness LED systems with pulling delivery requests for advance packaging tools. Our Singapore facility is essentially fully booked out for the remainder of 2014 for both advanced packaging and high brightness LED. The Superfast overlay inspection system is on track for expected orders and shipments in the second half of 2014.

From a guidance perspective, the fourth quarter of 2013 continues to look like the low point of the last business cycle for Ultratech. Both the first quarter of 2014 and the second quarter of 2014 showed sequential revenue growth and we anticipate the same for the third quarter of 2014 and the fourth quarter of 2014.

The sequential revenue growth in the third quarter 2014 looks to be higher by around 25% to 30% compared to the second quarter of 2014. Gross margin could increase by another couple percentage points. The tax rate should be around 10% to 15%. EPS looks to be in a range of a slight loss to breakeven and cash flow is anticipated to be positive.

For the full year of 2014, we continue to see growth across all four product lines with the overall outlook being highly determinate on laser processing. We discussed the poor visibility and yield issues regarding FinFET production a few minutes ago. Revenue growth for 2014 at this current moment looks to be about 15% to 25% compared to 2013.

Gross margin should be increasing with each sequential quarter and could average near 50% for the entire year. Operating expenses look to be up by few million dollars compared to 2013, primarily due to increased sales and service coverage for high brightness LED and Superfast sales. We estimate the tax rate for the year to be about 5%. Cash flow is anticipated to be positive.

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

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll take our first question from Krish Sankar of Bank of America Merrill Lynch. Please go ahead.

Krish Sankar - Bank of America Merrill Lynch

Hi. Thanks for taking my question. Couple of remarks. First, nice to see traction on the FinFET side. I was wondering based on what you believe there are steps to be implemented this year and next year for FinFET. Is there anyway you can quantify what it means for Ultratech, let’s say you have 30,000 wafer starts FinFET factory?

Art Zafiropoulo

If I guess, you can kind of run the numbers through. And there is a lot of variation in the numbers because of how they are using. If we assume, it’s 30,000 wafer starts and is four steps. And if we look at multi-pass there is some steps that the customer may choose to do more than one pass on the wafer. And so that's why we discussed the passes and maybe about, I’m guessing, 20% of the customers would use multi-pass.

But let's assume that doesn’t exist and we move the throughput up unto the range of let's say, 40 wafers per hour from our current 30 wafers per hour, say 40, 45 and the numbers will be in the range, the full fab, it was all put in together one-time, would be probably about around 60 systems.

Krish Sankar - Bank of America Merrill Lynch

And do you expect that to happen this year, next year, do you think that’s going to happen over the course of a FinFET investment cycle?

Art Zafiropoulo

Yeah. It’s going to happen over the investment cycle. It's hard to take -- to determine right now exactly what’s going to happen in any one quarter. As you have seen from what's going on in the industry now and push-outs and pull-ins and all kinds of things happening. So it’s going to be hard, but I think what I believe is we’re going to see added momentum next year in FinFET.

I think once we see the mobile devices beginning to use FinFETs and I'm projecting that, that’s going to occur before the middle of next year. I think everyone is going to be forced into accelerating their ramp, regardless of the yield. Otherwise they are going to lose a whole node and order.

So I think there will be a lot of pressure next year on companies to accelerate their FinFET production and even if the yields are below where they would like them to be otherwise, to lose the entire node, may be really a disaster for them for a couple of years.

Krish Sankar - Bank of America Merrill Lynch

Got it. Got it. And then, I want to follow-up, one of your North American competitor, their tool seems to have had some recent issues, event or the headline program, however, you want to categorize that. Rather curious what that means to you, what it means to Ultratech LSA tool and can you just throw some light on it on how the momentum of the customer is going in light of the competition’s recent challenges?

Art Zafiropoulo

Yeah. We still focus on DNS as being our major competitor. They are very strong, a good company in Japan. They were the first ones in the market. They had a 100% market share and that’s dropped to 20% to 25% over the past six or seven years. And so they are really in production with issues, with breakage issues, with many other issues and pattern effects and stress issues both locally and global issues on their stress.

So these problems exist to the physics of the processing when you do entire wafer. And at this time, we are truly at production system. We have very good uptime in our systems. It’s being run 7 x 24 for several years and it is the mainstay right now for mobile products.

So people will try and come in. They will come in, they will go out and the basic factors that you always need to have competition and our customers would hate to have just one company in the industry selling their product where they may have some disadvantages in negotiation.

So many times they will look at stalking horses to control pricing as much as possible. Sometimes it works and sometimes it doesn't. So I guess -- I guess in summary, we do have competition with Dainippon Screen. And they continue to be primarily in two companies and we are primarily the rest of world. So I guess, that’s about it. And the problem is the other company that the North American company is having, I think it’s understated. I think the problems are far more than what’s known. And I'll leave it at that.

Krish Sankar - Bank of America Merrill Lynch

Got it, got it. And then, maybe another question just on the competition side. If I look at the semi-cap industry, for large -- for most of the product lines, it’s kind of duopoly at the most. As I look at your -- I guess, like the MSA kind of an opportunity, you have -- you guys, you have DNS and quite honestly, you can even argue that there is Mattson and Applied Materials. So I’m just wondering are four players too, too many in this business?

Art Zafiropoulo

I guess they are but there’s really only three players in this business. DNS and Applied. Applied has a license in our technology. So I consider them to be indirectly almost like Ultratech, where we combine our technology both laser and what we license because we think it's really not good to have one competitor. That's why our licensed the technology in 2002 Applied Materials. They did their due diligence and all the methods that were available and even at that time, DNS had been doing this some development work with Toshiba and flash.

And so they license the technology and they have a market position. So between the two of us in the later area, that we invented we control the space right now. So less competition existing and really three players and two of which are laser.

Krish Sankar - Bank of America Merrill Lynch

Got it. So just a final question for Bruce. Is there increase in tax rate in Q3 just a function of improving revenues in the geographies or is there something else going on?

Bruce Wright

No it’s just -- it goes strictly to the jurisdictional comment that I made. We saw an increase in revenue in a high tax jurisdiction area. And so as I indicated the projection for the year is significantly lower than just what we saw in the third quarter. But it tends to fluctuate based on geographic jurisdiction throughout the year.

Krish Sankar - Bank of America Merrill Lynch

Thanks a lot guys. And good luck on the upcoming FinFET uptick. Thank you.

Art Zafiropoulo

Thank you.

Operator

And next we’ll hear from Josh Baribeau of Canaccord. Please go ahead.

Josh Baribeau - Canaccord

Hi. Thanks. Just maybe to go back to the answer from the previous caller. Did you say 60 systems as in 6-0. And I might have missed. Is that for, let’s call it, four major logic and foundry customers. I just want to make sure I get those assumptions correct?

Art Zafiropoulo

I’ve given you a rough estimate and without doing the calculation. So that you can do the calculations yourself and I’ll give you some criteria. If you have 30,000 wafer starts a month and there are four process steps. Some of those steps may have double pass. I'm assuming there is no double pass in the calculations.

You can assume the factory utilization at 75% or 80% and then you can run the numbers through and see how many systems will be required at a throughput of about 30 wafers an hour and will be increasing that during the course of next year to 40 wafers per hour with our upgrade. So I’ve just given -- you’ve seen in the past rough numbers, that maybe now you can run the math and get a better number.

Josh Baribeau - Canaccord

Okay. But I -- I’m not holding you to it. I guess, I just want to make sure I heard the number correctly, it’s 6-0, 60 right?

Art Zafiropoulo

Yeah. That’s the number, yeah.

Josh Baribeau - Canaccord

Okay.

Art Zafiropoulo

And we’ve been told rumors -- that's okay, Josh. And rumors are that some of the customers are talking that probably we would place next year tens of system orders with us.

Josh Baribeau - Canaccord

And that's for 30,000 wafer starts or is that for the whole industry, for the whole node?

Art Zafiropoulo

No, no, that’s from a customer. Generally, at 30,000 wafer start factory is fairly common. And it usually takes two years to fully facilitate those factories generally. They can change. It could go from one to two years but depending on the company and their product but generally, a 30,000 wafer starts factory is common in the industry for new factory. And so we many factories out there projected at 14, 16 and also 10 to be with -- each one to be at 30,000 wafer start range.

Josh Baribeau - Canaccord

Great. Thanks for clarifying that.

Art Zafiropoulo

I might add -- I might add that if I could give a little bit more color since I brought up 10 millimeters, all the projections we’re seeing now that I look at now in new fab sort of plan that they are far more fabs being planned at 10 millimeter than they will be at 14 and 16.

Josh Baribeau - Canaccord

Okay. Great. Could you talk a little bit about if you’re seeing any pricing pressure in the LSA and or things that you can do to reduce the costs in that system, if you need be?

Art Zafiropoulo

I think that we see pricing pressure in everyone of our products. I think every customer in the world is putting pressure and is under pressure in pricing. So the objective is that how could we do better job? And so, yeah, the Singapore operation is helping on lithography and will help on Superfast. And then we look at the laser technology and we do have extensive R&D programs in place. And many of them are to lower the cost of ownership of the equipment.

Josh Baribeau - Canaccord

Got you. And then maybe probably more of a technical question if we can just keep it high level. The phenomenon of multipass, is that something that, let's call it an upgrade for laser tool could do some of the things you talked about a year or so ago with the dual beam 201 type of systems?

Art Zafiropoulo

Multipass is being used really when there is a benefit of two passes in terms of either leakage or the actual performance of the device. It’s mainly leakage. So they may pay a premium for two pass, if the performance enhancement is significant. And so in some cases, on some devices the customer will select to do two passes. And some cases way back two and three years because they did up to four passes. So it depends on the customers. So this is not a new phenomenon. It's been occurring for several years now.

But as we begin to increase the productivity and we reduce the micro uniformity effects, we think the double pass or triple passes will decrease and possibly just -- and totally go away. So we are not seeing that to be an ongoing requirement to get high performance. We just think that this is evolution and we think it’s getting toward the end, so that the double pass will probably diminish over the next couple years.

Josh Baribeau - Canaccord

Okay. Great. That's it for me. I will pass it on.

Operator

And Mark Miller of Noble has our next question.

Mark Miller - Noble

For the 32, 28-nanometer node you had previously quoted a very significant cost of ownership advantage. I think it was $3.90 versus over $11 versus competing process. And I'm just assuming you continue to have that cost -- significant cost of ownership advantage for 14, 16-nanometer FinFETs?

Art Zafiropoulo0

Well, I don't know those numbers. But if you factor in the utilization of typically flash systems being in the 60% range with a high wafer breakage, it's hard to determine that, but it really certainly we feel is significant. In addition, the consumable costs are significant in flash and that our system, the gases we use per year is about $16,000. So that’s a total consumable cost a year. And the flash systems could range anywhere per system between $300,000 and $3 million for lamp replacement.

Mark Miller - Noble

You had suffered last year and it looks like you are starting to ship out of that LSA backlog. And I'm assuming there is still multiple tools in that backlog that you expect will ship by the end of this year?

Art Zafiropoulo

We won’t get yet all our backlog shipped this year that we have. Some of the backlog we hope will be shipped next year.

Mark Miller - Noble

And finally, Qualcomm is talking about reducing the line width for backend processes. I think they put out two microns, something like that. As that, those line was decreased, does that kind of tilt the playing field more towards reduction steppers?

Art Zafiropoulo

Not really. We have our systems are built to meet the roadmap requirements for the next 15 years. So we feel very comfortable and the upgrades right now that we're providing, which are in our standard tools that we’re shipping will take the industry in the future a very long way before it reaches a point that our optical system is not capable of doing that job. And we again have programs underway to meet any requirement that’s necessary going forward.

Mark Miller - Noble

I'm sorry. I was just wondering if you could just give me again the sales breakout in terms of high-brightness LED, advanced packaging, and LSA, I missed that?

Bruce Wright

Sure. I will go through the whole litany on this. Laser processing had 31% of revenue for the quarter. Advanced packaging was 31% of revenue. High-brightness LED was 11%.

Mark Miller - Noble

Thank you.

Art Zafiropoulo

And Mark let me just add a little bit more information on the lithography steppers for packaging. We have in the entire market produced 92% of all the steppers in the field are made by Ultratech, 92% of them.

Mark Miller - Noble

Thank you.

Operator

And next, we will hear from Jairam Nathan of Sidoti. Please go ahead.

Jairam Nathan - Sidoti

Hi. Thanks for taking my question. Just wanted to kind of focus on the advanced packaging side. So the demand that you are seeing, is that coming from the flip chip kind of portion, are you seeing some demand, even some early demand from TSV kind of applications?

Art Zafiropoulo

Most of it is in bump flip chip technology and where we are seeing more interest and we have installed a number of machines globally over the last nine years. So we have a very large installed base in TSV and those customers had been producing TSV for some time now and the ramp will be dictated by the cost of bump versus wire bonding. And so that is the major issue, it’s not the fact that we’d like to it, it's a cost issue.

And so when I look at the challenges going forward for the entire industry, it's really a 3-D phenomenon, it’s 3-D FinFETs, 3-D memory, and 3-D packaging. And 3-D in those cases is expensive due to yield or material costs. So I think that's a universal challenge we have going forward. And I suspect as we go forward that the TSV will grow sharply. But at this point, it’s not as growing as sharply as the industry had projected.

Jairam Nathan - Sidoti

Okay, thanks. And then the next question was on -- you mentioned in the last call about taking some actions to reduce material cost. I was just wondering if you could give us an update. And it looks like based on the gross margin average, we should expect over 50% gross margin for the balance of the year. Is that driving some of that, apart from mix and stuff?

Art Zafiropoulo

Yeah. I think the major portion is absorption. So I don’t think we've seen the material cost kick in yet, because that's now take a longer time because of our inventory situation. So that’s going to occur, but that's over a longer period of time. More short term, it’s absorption.

Jairam Nathan - Sidoti

Okay. Thank you.

Operator

And next, we will hear from Tom Diffely of D. A. Davidson.

Tom Diffely - D. A. Davidson

Yes. Good morning. Art, a quick question on the LSA side. Are you seeing a significant amount of reuse, people moving from 28 to 14 nanometers with your systems, perhaps with the upgrades? And the reason I ask is, it looks like you have only booked one system over the last three quarters and I am kind of curious how you’re going to meet the ramp later this year without the reuse.

Art Zafiropoulo

We spoke earlier about the backlog. I think that ramp will be from the backlog and there will be additional orders that we will get going forward. So that we will see turns business. I shouldn’t say turns, it may not be the same quarter. We will see increased bookings for LSA, new LSA and we will use part of our backlog going forward. And so the industry has now -- some companies have indicated that they are going to ramp and they have met whatever challenges they needed to meet to expand their production. They hadn’t reached those in the previous quarters. And I'm just -- this is not just with my company, it’s with everybody. The past growth in industry has been driven by the NAND flash. We are not a memory company. We’re a logic-centric company. So we expect that growth to be as I mentioned from orders coming in the remaining part of the year and from our decent backlog in LSA.

Tom Diffely - D. A. Davidson

Okay. If you have an LSA system in backlog, how fast can you turn that? Have you already started the manufacturing process so it turns quicker than a new system order?

Art Zafiropoulo

We typically have a production plan and our turns is about eight weeks.

Tom Diffely - D. A. Davidson

Okay. And is that the same for whether it's in backlog or if it's a new system order?

Art Zafiropoulo

That just -- we based on our production plan.

Tom Diffely - D. A. Davidson

Okay. And Bruce, you've always had some very nice operating leverage in the model. Can you give us a feel for what the incremental gross and operating margins are from here on any incremental revenue? I know it's mix related, but maybe just a general number.

Bruce Wright

Well, like I indicated in the guidance comment, we are looking for third quarter gross margin improvement of around a couple of percentage points compared to the second quarter. And I also gave you the number for the average for the year. So having kind of the actual for the first quarter and the second quarter and the guidance for the third quarter, you can pencil out an estimate for the fourth quarter, but it goes straight to Art’s point of absorption as we get into hitting over our breakeven point and our normalized breakeven point is right around $40 million of revenue per quarter. As we get to that and we become profitable, the absorption becomes much better and the incremental impact margin on the gross margin is very significantly positive. So it moves in a hurry once we get back into profitability.

Tom Diffely - D. A. Davidson

Okay, sounds good. And finally, Art, you talked about the stepper upgrades. I'm curious what the kind of the relative price of an upgrade versus the new system, and then I assume they are pretty good margins as well for upgrades?

Art Zafiropoulo

It depends as there is going to be an upgrade that the system has returned to the factory or if it’s a minimum upgrade. The upgrade range, the range could be anywhere from 750,000 up to 2 million.

Tom Diffely - D. A. Davidson

Okay. And relative margins, I assume that they are pretty good margins on this business?

Art Zafiropoulo

Yes.

Tom Diffely - D. A. Davidson

Okay. Thank you.

Operator

And now we will hear from Ted Moreau of Barrington Research. Please go ahead.

Ted Moreau - Barrington Research

Yes. Thank you very much. I was wondering, you guys mentioned you are near capacity on the advanced packaging and HB-LED stuff. So do you need to add capacity as demand continues to expand there and what will be the timeframe of that and what will that consist of?

Art Zafiropoulo

We have already taken steps in Singapore to ramp up the square footage on clean room capability. So I think we’ve done what we need to do there. As far as any kind of incremental additional, that would be more towards just hiring more people, training more people, getting them into productive situation over there. So we’ve spent the money on bricks and motor already.

Ted Moreau - Barrington Research

Okay, great. And then, Bruce, I mean, as demand continues to ramp up here later in the year and into 2015, how do you project out inventory fluctuations? I mean, is that going to -- are we going to start to see some spikes in inventory to meet the demand, or does it not really flow through onto the balance sheet?

Bruce Wright

I’m not anticipating spikes in demand, because if you look at our comparison on quarterly basis of revenue versus inventory, yes, the inventory has come down and it’s what turning a battleship, like you know, but it really hasn’t come down as much as I would have expected.

Given the kind of the extent of the down part of the cycle that we went through in the second half of 2013 and the first half of 2014, a large part of that goes to the lack of visibility that we have in bunch of our product areas and that is reflected in changing bill schedules, things moving around all the time. It is very, very fluid.

That impacts inventory in that we’ve had a higher inventory number than I would have expected given the business cycle. The reason I’m going into detail on that is because as a result, I don’t expect a major spike in inventory going up as the businesses increases because we do have a fair amount of materials inventory on hand, which will be working through and working off as the business ramps up.

Art Zafiropoulo

If I could add a little bit to that also is that one other targets we’ve had during this down turn is to reduce our bill cycle of all our products. And our target is to do it in approximately six weeks. Therefore, we can get two systems in a bay per quarter as a build plan. By doing that, if we’re effective in this longer term, we should be able to reduce inventory as we ramp up production.

So one of the factors is the bays are bought for the quarter with one tool. So we’re driving now not just a cost of material which is certainly part of our plan, but reducing build cycle is a very important part of our future plans to keep inventory under control.

Ted Moreau - Barrington Research

Okay, great. And then, since you already have a sizable amount of inventory already on hand and the cycle has pushed a little bit, is there any risk that you would have to write off any inventory, or do you feel like you are comfortable with the type of inventory that's on hand?

Bruce Wright

Very comfortable with the type of inventory on hand. You may recollect that in the last couple of quarters -- well, but the first comment is we look at inventory on a quarterly basis to see exactly whether the demand going out year, and year and half is going to be able to absorb what we have on hand.

If there is any kind of issue there, we take steps and that’s what I was going with my comment about a quarter or two ago. You know that we took a write-down of a certain amount for glass inventory on gen-1 glass for advanced packaging product just exactly for the reason that you’re talking about. So I’m very comfortable with what we have in inventory right now and the fact that we will be using it over time going forward.

Ted Moreau - Barrington Research

Okay, thanks. And then final question. Art, you had mentioned you anticipate an increase in the number of fabs as the industry moves to 10 nanometers. Can you give us some historical perspective on how like the -- maybe the order of magnitude change from 28 nanometers to 16/14? And then as we go from 16/14 down to 10, just kind of what the difference is on the number of fabs that we could be thinking about?

Art Zafiropoulo

Yeah. I don’t have that information at my fingertips so I can give you my feelings is that the 28 nanometer node was a very, very big node and it’s going to have a very long tail. So there will be residual business going on as the second tier companies begin to expand their 28-nanometer capacity because of pricing. They will low their pricing to get the business and then the top tier companies will move into the more advanced devices. So we see also going forward that the 28-nanometer tail is going to be longer than any node that we’ve seen so far.

We think that the 14/16 is going to be a node, that’s going to be bigger than the 28. However, what we're seeing now in the projections at the 10, that’s even going to be even larger. Now this is just number of fabs. I don't have it right in front of me, but I have looked at it in the last week and I can't remember exactly, didn’t count them up. But it's amazing when I counted the wafer starts, they were significantly higher projected in 10 than they were at 14 or 16.

Ted Moreau - Barrington Research

Okay, great. Thank you so much.

Art Zafiropoulo

This information really maybe available, you maybe get access to it. So I’m using SEMI’s information database for this. I don't know what they make available to nonmembers, but this is where I get my information on the projected fabs, the press releases and they tract us and I get my information from the membership that we have at SEMI.

Ted Moreau - Barrington Research

Okay. And actually, one follow-up to that, you mentioned the 28-nanometer tail being longer. Do you still -- are you still recognizing revenue and shipping products on the 28 nanometers? Or is the opportunity really more on the 16 and going into, I mean as we look out to the -- I mean, can you talk about how your mix might shift as how 28 might fall off as 16 ramps?

Art Zafiropoulo

Yeah. The 16 and 14 ramp in terms of our products, most of our -- most of our sales in LSA this year are sub 20 and so it’s dramatic. And I don't have the numbers in front of me. I think we made it public and I’ll double check that if we did, that we will get it out to you. But we talked about last year and what percent of the nodes are LSA 13 and we talked about projected 14 numbers and is a very strong transition. However, 28 doesn't go away, it drops, but a very sharp increase. I'm guessing this year will be about 60% and that range of our systems will be sub 20.

Operator

And we’ll take our final question from Patrick Ho of Stifel Nicolaus. Please go ahead sir.

Patrick Ho - Stifel Nicolaus

Thank you very much for taking my questions. Art, maybe just looking at it from a different angle in terms of the transition to FinFET at both 16 and 14 and then eventually to 10 nanometers. I think in the past you mentioned that the LSA process from an application standpoint minimizes the thermal budget as well as dopant reactivation. Perhaps at this early stage, and I know it's early because 10 nanometers is in development, how many more steps do you think it will require LSA as you go from the first generation of FinFET to 10 nanometers?

Art Zafiropoulo

It’s hard to say right now in 10 and 7 and 5 nanometers, but we see a shift and more from the junction formation to the middle of the line in material modification. So we think that there may be in the future could be 10 steps greater in other than what we know today. And so this is a lot like implant was in 1970. And so we believe that when we stop talking about thin films that we will have to modify these films with may be various reactant gases with the laser and at minimum stresses and with that as you mentioned the reactivation -- those are all important issue.

So we have identified looking forward both developed here and by our customers, it could be as many as 10 or more steps that could be added to the production that however shifting from maybe the transistor to middle of the line.

Patrick Ho - Stifel Nicolaus

Great. That’s helpful.

Bruce Wright

Patrick, there is another aspect to this question too because as you know on the chip there are three levels. And Art and I have really been talking with to everybody about the first two levels, the device level and the nickel silicide connect level. We haven’t even really got into that stage in the development of the industry where millisecond annealing is going to be required on the operating layers level. And those are multiple layers and that’s where we can really potentially see an explosion of the number of laser systems that are going to be required overall to service the industry. I don’t know what node that gets, where we have to get to a node but we will get there at some point.

Patrick Ho - Stifel Nicolaus

Great, that's really helpful. And my final question, again, kind of from a different angle, primarily looking at the DRAM. LSA obviously is a different model, logic versus memory, the cost of ownership, particularly in memory. But however, as DRAM continues to migrate from the 2X and eventually to 1X and they are experiencing issues with lower leakage and eventually they may go to a 3D device format. What are some of the levers on the cost of ownership that you can do for the DRAM industry that may, I guess, help the adoption of LSA down the road?

Art Zafiropoulo

Yes. I think if we could take out something in the range of 30%, at least 30% of the material cost, we could drive the product cost down considerably and that is underway right now as we speak. We’re looking at alternative strategies to get laser technology down into that range so could be used in a widespread manner in the memory field.

And in the memory field we see, as you see lots of the application both in the NAND and DRAM. And we’re currently working with customers exploring those areas and in parallel we’re looking at technologies and cost of materials that I could drive the cost down even further to make it again better cost effect in this of the tool for their applications and they struggle because of their low ASP.

So yeah, we are looking at that very hard. And we have lots of good ideas, but we don’t see this coming to the marketplace for a while.

Patrick Ho - Stifel Nicolaus

Okay.

Art Zafiropoulo

Yes. It’s not something in our plans for next year.

Patrick Ho - Stifel Nicolaus

Okay, no. And I just want to make sure I'm clear on that 30%. If you take out that 30% of materials cost, that becomes more attractive to the memory customers?

Art Zafiropoulo

Absolutely.

Patrick Ho - Stifel Nicolaus

Okay.

Art Zafiropoulo

Very much so.

Patrick Ho - Stifel Nicolaus

Great. Guys, thank you very much.

Art Zafiropoulo

Thank you, Patrick.

Operator

And that does conclude today’s question-and-answer session. Mr. Zafiropoulo, I’d like to turn the call back over to you for additional or closing remarks.

Art Zafiropoulo

Thank you. We are increasing our sales driven by advanced packaging high-brightness LED products. And we expect in the future months and quarter significant contributions from our laser anneal products, then followed by the Superfast inspection systems will accelerate our recovery. Although I’m recently pleased with our recovery, but I’m always looking at how we can increase our momentum. I can assure you that we are all working very hard to meet the expectations set. Thank you very much for participating on our call and I hope all of you have a great summer.

Operator

And now it does conclude today's conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ultratech's (UTEK) CEO Art Zafiropoulo on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts