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Mattson Technology (NASDAQ:MTSN)

Q2 2011 Earnings Call

July 27, 2011 6:30 pm ET

Executives

Laura Guerrant-Oiye -

Andrew Moring - Chief Financial Officer, Chief Accounting Officer, Executive Vice President of Finance and Secretary

David Dutton - Chief Executive Officer, President and Director

Analysts

Christian Schwab - Craig-Hallum Capital Group LLC

Edwin Mok - Needham & Company, LLC

Benedict Pang - Caris & Company

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Mattson Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the program over to Laura Guerrant, Mattson Technology's Investor Relations Consultant. Please go ahead.

Laura Guerrant-Oiye

Thank you, Henry, and good afternoon, everyone. Thank you for joining us today to discuss Mattson Technology's financial results for the second quarter of fiscal 2011, which ended July 3. In addition to outlining the company's financial results for the quarter, we will also provide guidance for the third 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 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 release and in 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 both the Oppenheimer and Morgan Stanley conferences scheduled in August and the Rodman & Renshaw conference in September. We look forward to seeing many of you at the event.

And with that, I'll turn the call over to Dave. Dave?

David Dutton

Thank you, Laura, and good afternoon, everyone. Thank you for joining us for our second quarter 2011 financial results conference call. I would like to provide you with an outline for today's call. First, I'll give you an overview of the business. Then Andy will provide the financial results. And last, I will close with our business outlook and guidance.

The second quarter marked our 9th consecutive quarter of growth, one in which we grew at a robust rate of 9% over the first quarter, driven by continued strength of our new etch business, plus gains in the strip business.

In the first half of 2011, our revenue was slightly under $100 million, over 20% higher than the second half of 2010, an accomplishment that few in our industry can match. As you'll see when I discuss guidance, in the first 3 quarters of 2011, we expect to do as much business as we did in the entirety of 2010. We expect to significantly outgrow 2010 in a year where the industry is flat to slightly up. We grew our cash by over $5 million operationally during the quarter and ensured our ability to continue to fund this growth rate by raising $13 million through our stock offering in May. Our cash position is now over $42 million with no debt.

As part of our growth plan, we put in the extra investment to ensure that we could support our new positions, a critical factor for our customers. This early investment has kept our breakeven higher, but we have been able to grow 20% in the first half of 2011 while keeping OpEx flat. This is an indication that the effort we made to deliver the right product with the right resources in place is successful. Due to the investments we made in our new product support, with the increasing volume, our bottom line will continue to improve, and I expect this to continue as we grow in the future.

Our gross margin improvement efforts are beginning to show real results. And with less Aspen III in our product mix next quarter, we expect to see solid improvements in our margins and expect further progress as we move through the second half 2011.

We also significantly expanded our product positions. During the second quarter, we continue to book and ship etch tools, further extending into new applications. The paradigmE etch system is now in volume production for DRAM and has established itself at advanced NAND production.

The Alpine is running volume production etchbacks at a leading foundry and is established in the growing packaging market.

Beyond etch, our market share growth in strip continues as a result of our low-cost, high-productivity strategy. In the second quarter, we shipped strip tools to 4 of the top 5 CapEx spenders, as identified by Gartner, showing our continued strength as a strip leader.

In RTP, we have been selling our Helios product to a NAND flash expansion, which is a new position gained over the last cycle. We recently shipped our Millios millisecond anneal system to a major customer for 20-nanometer and below processes. This shipment is a new customer for the Millios product and demonstrates a growing recognition of our technical strength for 20-nanometer and beyond millisecond annealing.

As we described at our Analyst and Investor Day on May 18, we are a much different company than we were during the last cycle, which ended in 2007. At that time, we had 2 products competing in capacity-driven markets, with a served available market of about $800 million. We invested heavily during the downturn and strength in the product portfolio in these 2 core markets. But more importantly, we successfully launched our paradigmE and Alpine etch products to compete in the much larger etch market. With these new etch products, we bring differentiated technology for our customers as they attack the many challenges of Moore's Law in ever smaller geometries. And we deliver this with superior cost of ownership advantages to help our customers fully deliver on Moore's Law.

In 2011, Mattson Technology is well positioned with 3 products in both capacity- and technology-driven markets, with a new combined market size of over $2.8 billion. On the strength of our new product portfolio, we have delivered 9 consecutive quarters of growth. And investment in organic growth, such as our investment in etch, takes time to development.

With our momentum and growth firmly established, we expect that organic growth will deliver high returns over an extended time. That is the position we have brought Mattson Technology to. We have invested in and built a portfolio we feel can generate greater than $500 million annual top line in the coming years. Our focus is now to execute strongly to reap a full return for all of our stakeholders.

And now I will turn the call over to Andy to provide the financial update. Andy?

Andrew Moring

Thank you, Dave. During the second quarter, we have made solid strides in our ongoing effort to deliver improved financial performance. As Dave has said, we had our 9th consecutive quarter of sequential growth in revenue. Our margins improved by 0.5%. Our GAAP loss declined by $1.1 million quarter-over-quarter. And we have secured our cash position, as we grew cash operationally, as well as through our stock offering. During the quarter, we continue to hold operating expenses relatively flat despite the ramp in revenue. And operationally, we have lowered inventories by 7%.

Now to a more detailed look at our financial results for the second quarter.

Revenue was $51.3 million, up 9% from the first quarter 2011. Etch accounted for about 1/3 of the system shipments made during the quarter. The lower margin Aspen III product accounted for about 15% of the systems volume and continues to pressure our margin position. We sold tools to a number of foundries during the quarter, but 60% of our systems business continues to be to memory customers, especially shipments made to the new Greenfield Land factories.

For the first half of the year, our revenue was $98 million as compared with the second half of 2010 when our revenue was $81 million, a 21% improvement. Clearly, the growth trajectory we are on is impressive when compared to many others in this industry.

During the second quarter, we announced a large follow-on order in shipments of our paradigmE etch and Suprema strip products into our customer's production facility. We have now shipped over 30 paradigmE and Alpine etch tools.

Gross margin for the second quarter was 30.1%, up approximately 1/2 a point from the first quarter. During the quarter, we continue to ship significant quantities of our legacy and lower margin Aspen III strip tools to one of our customers. As we said last quarter, although we would prefer to sell our standard Suprema tool to this customer, we will continue to support their production needs by providing this previously qualified equipment.

The mix of Aspen III strip products in the second quarter resulted in lower margins of about 3 percentage points. We anticipate that the lower gross margin performance due to the product mix will ease in the near future, as we see a more normal distribution of our products during the second half of the year.

Operating expenses for the second quarter were $19.4 million, up about 2% from the first quarter. The continued strengthening of the Euro had an impact of approximately $200,000 on expenses for our German operations, which was the primary reason for the OpEx increase. We continue to focus on effectively managing our operating expenses and do not expect to see any significant increases in this category in the foreseeable future. The Euro strengthened relative to the dollar by about 5% during the second quarter.

The required accounting revaluation of certain balance sheet items, including intercompany accounts, are charged to the P&L in the Interest in Other Income and Expense category. This category had approximately $900,000 of unfavorable, noncash-related adjustments, primarily the result of the Euro revaluation. We also recognized a tax expense of about $300,000. We typically have some foreign tax expenses despite our operating loss because we have a cost-plus arrangement with most of our regional entities.

The second quarter GAAP loss was $5.2 million or $0.10 loss per share compared to a GAAP loss of $6.3 million or $0.12 loss per share in the previous quarter. Our weighted average share count, including the mid-quarter stock offering, was 54.6 million shares. Going forward, you can model our stock count at 58 million shares. Losses from operations, which exclude the Interest in Other Income and Expense, the tax expense adjustments were $4 million.

Cash, cash equivalents, short-term investments and restricted cash at the end of the second quarter were $42.9 million, an improvement of $18.4 million from the first quarter. Since the net proceeds from the 7.8 million shares that we offered in May was $12.6 million, we were able to improve our cash flow by an additional $5.8 million, despite the small loss in operations.

Net inventory for the quarter was $31.7 million, a decrease of $2.5 million from the first quarter. Receivables balances were also down quarter-over-quarter, as we had an excellent receivables collection efficiency, with almost 65% of the revenue earned during the second quarter actually being collected before the end of the quarter. We continue to closely manage all of our working capital accounts, as well as maintaining our usual tight controls over spending and remain confident we have enough liquidity to properly manage through the business cycle.

To summarize, in the second quarter, we experienced our 9th consecutive quarter of sequential growth. We improved gross margins and continue to hold our expenses relatively flat despite the impact of the strengthening Euro. We grew cash despite the demands of the 9% revenue ramp and our continued attention to detail on working capital management is maintaining a strong liquidity position. We showed continued momentum in our etch business, which is vital to our growth strategy. Our P&L performance will continue to be a top priority throughout the year, as we improve the operating performance of the company.

Now I will turn the call back over to Dave, who will provide third quarter guidance and elaborate further on Mattson Technology's business results and prospects. Dave?

David Dutton

Thank you, Andy. The first half of 2011 is now complete, and we finished up 20% over the second half of 2010. Looking forward, we see a market with good opportunities. Global macro economic uncertainty is translating into more conservative plans on the part of our customers. These more conservative plans have caused the CapEx forecast for 2011 to be reduced by approximately 10%, creating a flat to slightly up 2011 semiconductor equipment forecast.

Despite this uncertainty, mobility products such as tablets and smartphones are driving the first greenfield NAND investments since 2007 and spending on advancing to the next technology node for logic will help keep a firm level of demand for semiconductor equipment. The opportunities for us lie in our new positions, which we expect will help us continue to outperform the industry.

Our guidance for the third quarter of 2011 is as follows: We expect third quarter revenues to be in the range of $40 million to $50 million. We expect margins to improve and be in the range of 31% to 35%. Our margins will improve as our mix of Aspen III business declines and our cost reductions are realized on products shipping through the second half of 2011.

Earnings will be in the range of a loss per share of $0.11 to a loss per share of $0.05 on 58 million shares. We are guiding cash balances greater than $37 million. The decrease in cash is due to working capital timing, which we expect will be recovered in the fourth quarter.

Our investments are paying off with true growth momentum for Mattson Technology. At the mid-point of 2011, we have shipped as much etch and strip as we did in all of 2010. And we are on a path to significantly grow over 2010.

We expect that our growth strategy focused on long-term shareholder value will continue to play out across multiple cycles, creating solid growth that we expect will outpace the industry.

And with that, I'd like to thank you very much for listening to our businesses and financial update. We are now open for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first questioner in queue is Edwin Mok with Needham.

Edwin Mok - Needham & Company, LLC

First question I have is, you mentioned Dave -- I think you mentioned that on the first half, 60% of your sales was to memory customer. I was wondering, do you expect that mix to increase in the second half because of weakness in foundry or do expect that to stay around the same level?

David Dutton

I think it was in the second quarter we mentioned about 60% of our business was to memory customers. And I think looking forward, at least into the early part in the third quarter, we still see somewhere around 50% of the business is NAND based of the memory side, and it really comprises most of the memory. And we're looking at then about 35% to 40% of the business is in the foundry logic area. We see foundry logic increasing a little bit for us.

Edwin Mok - Needham & Company, LLC

I see, but the high leverage from NAND obviously helped you guys having a better trend than other guys. One of your etch competitors just sort of along today talked about they have been pushed out and even fall pushed out just a couple of days resulting in pretty steep shipment guidance, down 27% in the coming quarter. I was wondering have you guys seen something similar? And I think the largest memory maker has talked about potentially even increasing CapEx, because of increased NAND spending. Are you guys factoring that into your guidance?

David Dutton

Yes, I think we haven't seen big push out moves like we've heard some of the others talk about. And on the NAND side, yes, what we're seeing is still customers being more aggressive on the NAND side as I think as we've seen reported where, especially like Apple, have seen strong demand for their mobility products.

Edwin Mok - Needham & Company, LLC

I see, great. And one question I have is on the foundry side. My understanding is that you guys have some good position there on the RTP side and it should start to turn into revenue for you guys. Do you expect that shipments for those wins to start in the third quarter or is it more like the fourth quarter and beyond?

David Dutton

I think it's more like the fourth quarter and beyond, as we see foundry spending for the next technology key nodes [ph] will start later this and early next year by current view. And then again, that's not set in stone but I would look at it this way, when the technology spending starts for the next round on foundries, we expect to see more RTP revenue, which we've had really nothing historically.

Edwin Mok - Needham & Company, LLC

I see, great, very helpful there. Two more questions and I'll let you guys go, just related to the model. First one is, if I take the midpoint of your guidance, Dave or Andy, you implied that you guys will have a little higher OpEx in the coming quarter? Did I get that wrong? If that's the case, can you explain why?

Andrew Moring

Well, I mean, we give a fairly wide range in all those categories. I don't think you can infer that. What we said was, we were up slightly this quarter, 2%, having to do with exchange rates primarily. Next quarter, I think you can see exchange rates going down, so I could see some opportunity for us to have some slight decreases in OpEx. Again, when you're talking at these levels, several hundred thousand either way is within the realm of possibility. It does not mean it's a trend. It just means that's just how the spending happens to play out during the quarter.

Edwin Mok - Needham & Company, LLC

And just one last question, how do we think about tax?

Andrew Moring

I'm sorry?

Edwin Mok - Needham & Company, LLC

I'm sorry, the last question is how do we think about tax? Tax for the year, let's say.

Andrew Moring

Well, the tax situation is always modeled for everyone is when we're in a losing situation, we have $200,000 to $300,000 a quarter in taxes and that has to do with the way we have our regions on a cost-plus arrangement. When we are making money, the rule of thumb is about a 10% tax rate against income and that's because we do have significant operating losses to carry forward.

Operator

Our next questioner in queue is Christian Schwab with Craig-Hallum.

Christian Schwab - Craig-Hallum Capital Group LLC

Regarding the gross margin guidance for next quarter being up, maybe the 3 points that was negatively impacted by mix, should we imply from that, that the mix is improving next quarter? Or is there something else that's help driving that on a flat to down revenue?

David Dutton

Well, I mean certainly as we said, the one big driving point is that we're getting back to a more normal product mix as we continue to ship into the NAND factories and other factories, the greenfield sites. We are constantly working on the product specific for cost reduction. To give you an example, early last year, when we started shipping our etch products, our margins were in the low 30% on that product. We've done a lot of work with that product. And recently, the margins are now in the upper 30s and in some cases, in the lower 40%, and we're not even feeling like we're through with opportunities that we have to continue working with our vendors and continuing to work some of the cost down on the product. So we're driving from a number of different perspectives getting the margins up to where they need to be, which is, of course, our model closer to the mid-40s.

Christian Schwab - Craig-Hallum Capital Group LLC

And what type of revenue range with a normalized mix would it take to get to gross margins, not necessarily to 45, but just to 40?

David Dutton

Well, certainly to get to 40, I think if you're probably talking the mid- to upper $50 million range, we could be there. But again, I think over the long term that we're continuing to drive that point down because as we continue to get margin improvements in our products, obviously, we can drive that down to an even lower level. But at this point in time, I'd say we'd have to be in the mid- to upper 50s.

Christian Schwab - Craig-Hallum Capital Group LLC

Okay, it makes sense. And then on the new greenfield NAND fab that you talked about, what is the -- can you quantify what the revenue opportunity is there?

David Dutton

Well, I think Christian, on both Greenfield fab opportunities and maybe on a bigger context, one of the strategies that we had in place was -- and essentially, it was greenfield plus 1. So we tried to be in every new greenfield. We had one more product set in there than we would have had in 2007. And in this case, in both cases, we've had new product sets. In some it's etch and then in others, it's RTP, and strip has been consistent in both. And depending on what you're looking at, but the RTP side is typically for like a $25,000 phase is about a $10 million incremental improvement in revenue potential for us. And on the etch side, it's closer to about--it's about the same, it's about $7 million to $10 million also for a $20,000 phase.

Operator

[Operator Instructions] Our next questioner in queue is Ben Pang with Caris & Company.

Benedict Pang - Caris & Company

You guys are shipping a lot of new products or new wins to different customers. Is there a different sign-off period that we should expect for those tools? And particularly if you get revenue in Japan, are you going to have a longer delay in recognizing those revenues and how does that impact the gross margin?

David Dutton

Yes, I think for -- Ben, I think there's a couple of things to look at. One, most of the work we did over the recession, which we had to even [ph] out tools in these places. So the products were embedded out, the initial tools are accepted, so the follow on volume production, which is minimal we're talking about here, is really operating at our Reg Act [ph] rules, which is -- our normal Reg Act rules. And I think a second thing to look at and as Andy mentioned in his comments, we're actually seeing very strong DSOs, very good cash collections, which I think shows also because a lot of this is new product-based, that the performance of these products and the support we put in place is actually achieving strong customer satisfaction. And not that we can't continue to improve but in all of these product cases, no, we're actually at normal Reg Act rules for these cases.

Benedict Pang - Caris & Company

Okay. In terms of -- Andy was talking about the breakeven level. What is your breakeven level right now?

Andrew Moring

Well, again, it's very much a function of mix, and I think Dave's been putting it well. If you start at $50 million and do plus or minus 10%, we can be at breakeven, depending on the product mix at that point in time. If we're selling more of the Aspen III products, obviously, our breakeven point goes higher than the $50 million. If we're more selling more of our normal mix of RTP, etch and Suprema rather than the Aspen III on the strip side, then our breakeven point goes into the mid- to upper 40% range.

Benedict Pang - Caris & Company

Okay. Just for verification [ph] , the Aspen III percent of revenue was 15% or is that the number of tools?

Andrew Moring

Aspen III in the second quarter, and really in the first quarter as well, were about 15% of revenue -- systems revenue.

Operator

[Operator Instructions] Presenters, I'm showing no additional questioners in the queue. I'd like to turn the program back over to Mr. Dave Dutton for any closing remarks.

David Dutton

Thank you. And once again, I would like to thank everybody for joining our second quarter conference call. We look forward to seeing you at the various Investor Events over the next quarter and to updating you on our progress in the next quarters's conference call. Once again, thank you for attending this call. Operator?

Operator

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.

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