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Mattson Technology, Inc.

Q4 2010 Earnings Call

February 2, 2011 05:00 pm ET

Executives

Dave Dutton - President & Chief Executive Officer

Andy Moring – Chief Financial Officer

Laura Guerrant – Investor Relations

Analysts

Edwin Mok - Needham & Co

Operator

Good day ladies and gentlemen and welcome to the Mattson fourth quarter financial results. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder this conference call is being recorded.

I would now like to turn the call over to Ms. Laura Guerrant, Mattson Technology Investor Relations Counsel. Please begin.

Laura Guerrant

Thank you and good afternoon everyone. Thank you for joining us today to discuss Mattson Technology's financial results for the fourth quarter of fiscal 2010 which ended December 31. In addition to outlining the company's financial results for the quarter we will also provide guidance for the first quarter of fiscal 2011.

On today's call are Dave Dutton, Mattson Technology's President and Chief Executive Officer; and Andy Moring, the company's Chief Financial Officer. Before turning the call over to Dave I'd like to remind everyone that the information provided in today's conference call contains forward-looking statements regarding the company's future prospects including but not limited to anticipated market position, revenue, margins, earnings per share, tax rate and fully diluted shares outstanding for future periods.

Forward-looking statements address matters that are subject to a number of risks and uncertainties that can cause actual results to differ materially. Such risks and uncertainties include, but are not limited to those described in today's news releases, and the company's Forms 10-K, 10-Q and other filings with the SEC. The company assumes no obligation to update the information provided in this conference call.

On another note, the management of Mattson Technology will be participating in the Stifel Nicolaus technology conference in San Francisco on February 11, and the Oppenheimer Semi-Conductor Summit in New York on February 17. We look forward to seeing many of you there, with that I would like to turn the call over Dave. Dave?

Dave Dutton

Good afternoon everyone. Thank you for joining our Q4 and fiscal year 2010 financial results conference call. I would like to provide you an outline for today’s call. First, I will give you an overview of the business. Then Andy will provide the financial results and last I will close with our good new outlook and guidance. During Q4, we experienced customer driven rescheduling in some DRAM related orders, which as we announced in the pre-earnings release on January 4, flattened our trend of double digit quarterly growth rates.

Although this was disappointing, it is worth noting that without our new product positions in NAND and our strip systems strong foundry presence, we would have experienced a revenue decline rather than an increase. Despite this near term setback, we remain positive about Mattson Technology’s growth in 2011, and are confident that our new product positions will result in substantially improved financial performance for the company.

As of today, 80% of the systems delayed into Q4 2010 have been rescheduled with firm shipment dates in Q1 2011. 2010 was a strategically successful year for Mattson Technology. Our revenue grew 225% over 2009, while the industry grew at approximately 100%. As we had targeted, our Etch products contributed to 30% of our total systems revenue. While we were able to maintain tight control of our operating expenditures, the strong growth we experienced caused a strain on our cash levels, as we had to make significant investments to deliver the new products, to meet our customers demands.

We set very aggressive goals in 2010, and met a majority of them, particularly in the new product penetration area. In 2010, we secured 10 new application positions at six different companies in the foundry NAND and packaging markets. Our first priority in 2010 was new product expansion, with an accompanying focus of financial execution.

Looking back, we hit a homerun for the new product division, but left runners on base for the financial execution. For 2011, financial performance is our top priority as we seek to leverage the hard fought and won new product positions. We have further streamlined our operating expenditures and will continue to drive gains in our product margins. We expect to see results accelerate as the year unfolds.

The positions we have gained will drive the company to outperform the market as the next wave of Greenfield projects proceed. Our estimates show that for a new Greenfield project starting in 2011, we have an (inaudible) market several times greater than we had for projects we started a few short years ago.

Now let me explain this impact in a review of our business lines. First, Etch will deliver purely incremental gains as we move forward. Last year we expanded Etch into the NAND and (inaudible) segments from our initial position in the DRAM market.

In 2010, we entered the year with the paradigmE solidly established in the DRAM market and successfully expanded its presence into NAND and (logifab refabs) for multiple advanced Etch applications. We shipped the paradigmE to major DRAM and NAND fabs where this leading edge system is currently in volume production. The alpine etcher was established for volume production for advanced packaging applications.

In Q4 we shipped Etchers for production into a new Etch application set that further increases our Etch served available market by approximately 500 million and more importantly, doubles our Etch application portfolio. This move is part of our long term vision to aggressively expand into the Etch market. In 2010, Etch revenue increased six times over 2009 as we expanded into the NAND, foundry, and packaging markets.

The expansion in these markets contributed to our Etch products ability to generate over 30% of our systems revenue in 2010. In 2011, we expect Etch to continue to broaden our application base, thereby continuing our Etch growth trajectory. Although we welcome the growth, we underestimated the cost of organically ramping and expanding our Etch business, causing our expenses to be higher than we had originally anticipated.

It is important to understand that Etch is not just a single product or application, in fact, we address over a dozen Etch applications, each of which has required significant expenditure to enter, but adds to our served available market. This resulted in pressure on our gross margins and slowed our progress to profitability. As I mentioned earlier, we felt it was our highest priority to enter these new markets, even at the expense of short term financial results, as this sets the stage for longer term financial performance and investor value.

In Strip, we significantly increased revenue year over year. We are engaged in eight of the top ten CapEx spenders and continue to expand our core base, achieving the following accomplishments: we added two new customers for Suprema, expanding into a foundry and a major memory manufacturer; strip is established at multiple customers for 2X-nanometer, clearly demonstrating that we expect to maintain our leading position; our Strip systems maintained their technical leadership, with leading results in (inaudible), high (inaudible) metal gate cleaning, and ball stripping at our top customers.

With an estimated market share of approximately 20% in 2010, up significantly from 2009, we are well positioned to grow our strip business. Although demand for Suprema and legacy Aspen III strip products remains very strong as evidenced by our high percentage of strip business in Q4, the overall market size is shrinking. Yet there remain five active competitors in the market. Obviously this makes for a highly competitive and challenging pricing environment, but regardless it is critical that we continue to support our customers and meet their demands for these legacy products.

In RTP, we made significant progress in our mission to expand beyond DRAM. In 2010 for the Helios XP, we generated revenue from two of the top three NAND customers, and shipped Helios XP into logic and foundry lines of three leading Asian semi-conductor manufacturers. Most of the RTP work in 2010 was positioning for the next generation, with expected revenues to start as the industry begins ramping the new technology node toward the middle of 2011.

The effort with our Helios XP will double our available market for RTP, starting this year. Beyond the Helios based expansion, Mattson Technology millisecond and yield technology, the Millios, also made progress during 2010. The Millios has achieved process tool record status for advanced logic and DRAM applications at one of the world’s largest semi-conductor manufacturers. Additionally, the Millios is established as the primary development tool at two key foundry customers for 2X-nanometer and below applications.

The new position in Etch and RTP added to our broad strip base, expand our available market, especially in the new Greenfield fabs by several times overall. We believe this is a true game changer for the company. These successes in Etch and advanced logic RTP underscore Mattson’s transition away from productivity driven markets into more technology driven markets. We are steadfast in our new direction, and committed to delivering improved financial results in 2011, based upon the battles won and milestones achieved over the last two years.

And now I’ll turn the call over to Andy to provide the financial updates. Andy?

Andy Moring

Thank you Dave. Q4 marked Mattson Technology’s seventh consecutive quarter of sequential growth in revenue. However, the customer driven rescheduling of our shipments did have an impact on our financial results for the quarter. While we were not able to continue our trend of double digit growth, and profit targets were not achieved, there are some positive points to consider.

With revenues growing and exceeding the $40 million level, we clearly continue the road to recovery from the steep downturn experienced in 2009. With our Q4 results, revenue for the fiscal year of 2010 was up 225% from the previous year, and has exceeded our 2008 revenues when the industry began to downturn. In addition, during the quarter, we continued to ship Etch production tools to multiple customers.

The company has reinvented itself by entering significant new markets, spearheaded by these Etch products. From a two product portfolio in the previous cycle, we are now solidly positioned in three markets, with a greatly enhanced potential for the company to grow and profit.

Now for a more detailed look at our financial results for the quarter and the year. Net sales in Q4 were $41.3 million, up 4% from Q3 2010. The business continues to be broad based and capacity driven as we shift equipment to 17 different customers. We came in below our revenue expectations for the quarter, as a handful of tools were delayed, primarily our RTP equipment for DRAM customers.

At Dave noted, 80% of the delayed systems have either shipped or have confirmed delivery dates in Q1. During Q4 we continued to sell our Etch products into customer production facilities. We have recognized revenue for more than a dozen paradigmE and alpine Etch tools, and have achieved our goal for the new Etch market to comprise over 30% of system sales during 2010.

In addition, we have a number of Etch evaluations ongoing at several customers. Gross margin for Q4 was 30%, about 6.5 margin points lower than Q3 results. With softening of the DRAM market, our product mix has shifted dramatically to our strip products, and beginning the Q4 a significant portion of our revenue comes from this market. While our strip equipment is sold to multiple customers in both memory and foundry applications, and is our most diversified product line, the competitive landscape is tough, resulting in margin pressure.

For example, in previous quarters we had talked about our shipment of the lower margin Aspen III tools that are being sold to customers that use these legacy products in their older generation production facilities. In Q4, and in the upcoming Q1, we continue to ship significant numbers of Aspen III’s and we will obviously continue to do so to satisfy the customer requirements, and to provide incremental profit, despite the impact they have on our margins.

The mix shift to strip products in Q4 resulted in an erosion of margins relative to the previous quarter of about four percentage points. The remaining discrepancy to Q3 results was due to higher manufacturing costs in our Fremont facility, driven by the ramp of the Etch products, and one time charges for overruns and warranty expenses for new products and inventory reserve charges.

We anticipate that the lower gross margin performance due to the product mix will continue in the short term, until we see a more normal distribution of all of our products brought about by the opening of customer memory facilities later in the year.

Operating expenses for Q4 were $19.9 million, up slightly from Q3. Due to the timing of our accounting calendar, Q4 had 14 full weeks, while all other quarters in the fiscal year had 13 weeks, causing us to absorb one extra week of incremental expenses.

To offset the slowdown in DRAM purchases, we have taken several initiatives to drive down our OPEX. This involves selective head count and management realignment, limited furloughs for our employees in Germany, where government subsidies help supplement the employees, and an overall tightening of discretionary spending.

There were approximately $400,000 of one time charges in Q4, relative to these initiatives. We expect that these cost reduction activities will drive down our OPEX in Q1 by as much as 10% from Q4 levels. The Q4 GAAP loss was $7.9 million or $0.16 loss per share, compared to a GAAP loss of $6.4 million or $0.13 loss per share in the previous quarter.

Looking now at our results for the entire fiscal year 2010, revenues for 2010 were $138 million. Gross margin ended at 32% for the year, and OPEX were $78 million. Our revenues have bounced back dramatically from last year’s trough, and we are now at roughly the same revenue level we shipped in 2008, the first year of the downturn. Our margin performance of 32% is comparable to the 2008 timeframe as well.

However, our OPEX are about 30% less than the experience that year. Now with the addition of the third product line to our portfolio, we expect our top line to continue to recover, and coupled with a significant reduction to our operating cost structure, we will derive greatly improved profitability in the future.

Cash, cash equivalents, short term investments and restricted cash at the end of Q4 were $23 million down from Q3 as our working capital accounts grew. As previously stated, our net loss for Q4 was about $8 million, excluding approximately $2 million of non-cash expenses such as depreciation and stock option expense. The true cash drain from operating losses was approximately $6 million.

The remainder of the cash reduction quarter over quarter was a result of changes to working capital. Accounts receivable grew $10 million during the quarter, due to backend loading of our shipments. Inventories and other use of cash grew $7 million during the quarter, a result of the delayed systems and the planned increases in our evaluation portfolio. We are closely managing our receivables and inventories as well as maintaining tight controls over spending.

So to summarize, in Q4 we experienced our seventh consecutive quarter of sequential growth in our business. We ended 2010 with similar revenues and margins to what we had experienced two years ago, during the onset of the downturn, but we now have a substantially improved operating cost base that will provide better profitability in the future. We have shown proven results in our Etch business, and this momentum is the key to our continued year over year growth potential.

Our confidence in Mattson Technology strategy and new product positions remains high, and we are enthused by our new potential in this new fiscal year, 2011.

Now I will turn the call over to Dave, who will elaborate further on Mattson Technology’s business results, prospects, and Q1 guidance. Dave?

Dave Dutton

Thanks Andy. Overall in the last few months our view of the industry has decidedly improved. We had thought that 2011 would be flat or modestly up, we now see a more confident upward outlook, fueled by foundry and NAND strength. While we expected a slowdown in DRAM spending, we did not anticipate the rapid rate of change in the order momentum.

According to Garner Dataquest, 2010 CapEx spending was up a little over 100% over 2009, while Mattson Technology revenue was up 225% during the same period. Looking into 2011 capital spending growth will moderate to around 10%, due to continued foundry spending along the NAND capacity increases.

Like the industry we do expect our growth to moderate, but we believe that we will significantly outpace the industry as we did in 2010, due to our new product positions, which will become incremental revenue generators as we progress into the second half of 2011.

Our guidance for Q1 2011 is as follows. We expect Q1 revenues to be in the range of $36 million to $44 million. We expect margins to be in the range of 28 to 32%, gross margins at these levels will continue to be impacted by mix. Earnings will be in the range of loss per share of $0.16 to a loss per share of $0.08. We are guiding cash balances in excess of $24 million. We will continue to closely manage our cash, and are projecting improved cash flows by the end of the quarter, despite the projected operating loss.

I cannot stress enough that achieving earnings and cash breakeven levels are the highest priorities of the company. In conclusion, global electronics growth is forecasted to be around 9% in 2011, with PCs, smartphones, and tablets all expected to grow significantly year over year.

We believe that the mobility electronics era will drive the next set of Greenfield fabs starting around mid-2011, making the first true Greenfield project since 2007. Mattson technology has won positions in some of these new projects that give us incremental upside versus our 2007 positions. Due to our incremental new positions in Etch and RTP, we expect to significantly outpace the industry growth trend.

The semi-conductor industry continues to be a tough, dynamic industry filled with both opportunity and challenges. Although it is impossible to predict the outlook for 2011, from a high level macro-economic view, through consumer spending, electronics, semi-conductors, and finally down to semi-conductor equipment, all appear positive and seem to be continuing on an upward trend.

Through a lot of hard work and some pain, we have positioned Mattson Technology to leverage this recovery fully and outgrow the industry in 2011 as we did in 2010. We are well positioned to reap the financial rewards from our investments.

With that, I’d like to thank you very much for listening to our business and financial updates. We are now open for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions.) Our first question is from Edwin Mok of Needham and Company.

Edwin Mok - Needham & Co

Thanks so much. My first question, I wanted to touch on the cost savings that you guys talked about. Andy talked OPEX being down around 10% in Q1. Is that a sustainable level, would that bring down your break-even level and tied to that, you talked about closed-margin impact by the mix of this product. Do you have a more normalized or less….for improving gross margin?

Dave Dutton

Yes, Edwin. In answer to your first question, the OPEX being down 10%, we consider that to be sustainable as long as we need to. We’re continuing to drive through to achieve our first objective, which is the cash and PNL break even. Margins are more difficult to determine, as we talked about previously, we have almost 37% margins in Q3, based on—what I say—the more normal mix. As we said, this time because of the strip influence we tended to have the lower margin. So again, it’s difficult to determine where the cash break even is on a more normalized basis. We’re really not standing down from what we’d earlier projected which is cash break even mid-40’s, PNL break even in the $45-50 million dollar range.

Edwin Mok- Needham & Co.

I see. Okay, maybe just talk a little bit about your end custom mix? In 2010 you guys have a lot of shipment to carry over to imply a lot of DRAM customer, a lot of your big percentage of revenue came from DRAM customers. I was wondering, can you elaborate more on the customer mix from 2010 in terms of foundry versus NAND versus DRAM and maybe other packaging, and how do you kind of think that will change in 2011?

Dave Dutton

I think, Edwin, in 2010, how we saw it was a lot of 2010 we were still more dominant. memory spending with foundry running probably in the 35-40% range and in the memory side was mainly DRAM and as we got into Q4 and when the DRAM had what we saw as a very abrupt slow down, then we saw foundry spending really increase in the Q4 as a percentage. Looking forward, as we look into 2011, we see that foundry spending will continue to be a key part of our business and probably as a percentage get closer to between 40 and 50% levels and then we expect on the memory side that NAND spending will increase versus DRAM spending so we expect our memory shift to be more towards NAND as we move through the year in 2011.

Edwin Mok- Needham & Co.

Okay, that was helpful. You mentioned that you guys have ten new applications that you guys have won in 2010 that probably drives some revenue. Is it possible for you to break that down between the strip and the RTP and also in terms of customers is it possible to break down between foundry and memory?

Dave Dutton

Yeah, well, I’ll try. I can’t be too specific. You know we said ten new applications across six customers and that is across all product areas. I think to give you a flavor, in the thermal side a lot of that is in foundry area and logic area. As far as new application wins we’ll start to see those move into revenue in the 2011 time, I’d say mid-2011. On the etch side we saw NAND applications and foundry applications in our expansion and starting to see that moving forward. Also, in millisecond and neil we had some key boundary logic area applications and also a DRAM application as well. So those, I hope, give you a little bit of a picture without really getting to the next level of customer detail.

Edwin Mok- Needham & Co.

Is there any way you can size your revenue potential for those ten applications?

Dave Dutton

It’s kind of a mix. I think that the way to think about it is, in the RTP side we look at going into 2010 we were still mainly about half of the RTP market. Coming out of 2010 we’re really more fully into what you’d call the RTA market, so that is probably a couple hundred million of increase in TAM and RTP, thereabouts doubling, and then the rest is closer probably to what I said, which is we’ve expanded into a new set of applications into our etch side which increases the surveyable market by about half a billion dollars, or $500 million so I think that is the best way to frame it.

Edwin Mok- Needham & Co.

Great, one last question. In terms of cash plan appears to be stronger than March quarter so assuming that plays out for you guys and you guys get close to cash break even what do you think the cash will end up being by that time frame?

Dave Dutton

I think it’s hard to project that far out but here’s how we look at the flow, and we do look at our cash flow really and how do we make sure we fund the continued growth….in looking into Q2 where we do expect some of these new projects to start to emerge and starting to deliver product into those so we do see and we continue to drive self-funded of our cash balances, we have AR balances that will move back toward cash and I think we will be able to use our cash to continue to fund those investments and move forward. We do expect to grow our cash balance as we move through the year, even with a fairly aggressive ramp as we experienced in 2010 as well.

Edwin Mok- Needham & Co.

Maybe tied to that question do you expect inventory to go up in the March quarter or are you collecting on the shipments that you have, and just what was your depreciation and cap-ex for the quarter?

Dave Dutton

In inventory, we are expecting inventory to reduce as we go through this quarter, essentially due to the flattening we’re seeing in Q4 and Q1. Andy, you want to talk about depreciation?

Andy Moring

Yeah, our CapEx is minimal. I think we’ve been averaging, for the last several quarters, somewhere in the neighborhood of $2-300,000 so that’s a minimal amount of drain, I think.

Edwin Mok- Needham & Co.

Great. That’s all I have, thank you.

Operator

Thank you. (Operator Instructions). I’m showing no further questions or comments at this time. I’d like to turn the call over to management for any closing remarks.

Dave Dutton

Alright, thank you. Once again, thank you all for joining our Q4 and 2010 Year End Conference call. We look forward to updating you on our progress in the next quarters conference call. Thank you.

Operator

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

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