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Mattson Technology (NASDAQ:MTSN)

Q3 2011 Earnings Call

October 25, 2011 4:30 pm ET

Executives

Laura Guerrant-Oiye -

Michael Dodson -

David L. Dutton - Chief Executive Officer, President and Director

Analysts

Benedict Pang - Caris & Company, Inc., Research Division

Edwin Mok - Needham & Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Mattson Technology's Third Quarter 2001 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Laura Guerrant, Mattson Technology's Investor Relations Consultant.

Laura Guerrant-Oiye

Thank you, and good afternoon, everyone. Thank you, for joining us today to discuss Mattson Technology's financial results for the third quarter of fiscal 2011, which ended October 2. In addition to outlining the company's financial results for the quarter, we will also provide guidance for the fourth quarter of fiscal 2011. On today's call are Dave Dutton, Mattson Technology's President and Chief Executive Officer; and Mike Dodson, 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 2 investor conferences over the next few weeks. On Thursday of this week, October 27, Dave and Mike will be participating in the Houlihan Lokey Conference in New York, and then Mike will be participating in Day 1 of the TechAmerica AeA conference in November 7 in San Diego. In addition, we will be participating in the Needham & Company Growth Conference scheduled to take January 10 through 12 in New York. We look forward to seeing you at the conferences. And with that, I'll turn the call over to Dave. Dave?

David L. Dutton

Thank you, Laura, and good afternoon, everyone. Thank you, for joining our Third Quarter 2011 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 Mike will provide the financial results, and last, I will close with our business outlook and guidance. Before I begin, I'd like to officially welcome Mike Dodson, who you'll hear from shortly. Mike brings with him a great track record and strong industry experience. Mike is a welcome addition to our team, and as you can well imagine, has been extremely busy since joining us just a mere 2 weeks ago.

As we have progressed through the current quarter, we have seen the level of economic uncertainty increased around the sovereign debt crisis in Europe, U.S. economy with stagnant unemployment, and tepid consumer demand. These uncertainties are having an effect on the overall demand of electronics and are keeping our customers cautious. Near-term, we are seeing increased volatility in our forecast, as our customers adjust their plans on a monthly basis to react to the changing financial conditions. The shift to mobility products such as tablets, smartphones, plus emerging-market growth is helping to drive IC demand in the NAND and some advanced foundry areas, while the soft economy is muting a PC and corporate refresh, and keeping DRAM demand in line with existing capacity. Overall, this results in demand that is technology-based in anticipation of our capacity increases.

Now let's turn to our results. The third quarter was an extremely productive quarter for Mattson Technology. While we ended our 9 consecutive quarters of industry growth, the softer revenue was offset by a strong increase in gross margin which was above our guidance range and resulted in lower loss per share. These results are all indicative of the strength of our business brought about by our new product portfolio and highlighted by continued new wins in the quarter. Through the first 3 quarters of 2011, our revenue was $143 million, more than 48% higher than the same period of 2010. And when the year is finished, we expect to be about 25% higher than in 2010. Our cash position continues to be healthy at over $38 million.

Despite the industry weakness, we continued to achieve important milestones in our product positioning as announced during the quarter. We continue to book and ship significant number of Etch tools, further extending into new applications as we announced our move into the silicon Etch with the introduction of our new paradigmE silicon. Our Suprema strip product has had wins at the 30-nanometer and below in both foundry and memory market, meaning we will participate in advanced volume production facilities in the future. And recently, we announced a significant RTP win in the foundry arena, securing our first-ever position in the current generation foundry with our Helios XP.

Now, let me give some specific updates on our product portfolios, starting with our Etch products, which continue to deliver at the very leading edge. We started the third quarter by announcing our move into silicon Etch with the introduction of the paradigmE silicon. The new system's capability to perform the expanded polysilicon Etch application increased our available serve market by over $500 million. Etch now addresses over half the applications in the total Etch market. Moving forward, we expect Etch to contribute an even greater portion of total revenue as more customers select our Etch tools based on their excellent process performance and superior cost of ownership. We will update you on Etch's continued momentum and new position wins as the year comes to a close.

Now let's turn to strip, which continued its strong market presence. During the quarter, we shipped our strip tools to 4 customers across foundry, logic, and manned. Our customers are using Suprema for both front-end-of-line and back-in-the-line applications as this system provides the highest level of technology, reliability, and productivity for bulk, high-dose implant, and new materials at advanced nodes. Suprema continues to win customers as a result of its high productivity, low cost of ownership, and technology expandability.

In RTP, we announced in August the previous placement of our Helios millisecond anneal system at a major North American logic manufacturer. We are shipping volume levels of our Helios system to a major NAND producer, a new position we gained during the last cycle. We have highlighted that the Helios XP will ship to 3 different foundry customers, and we just announced the first of these is in volume production. We were pleased to see the industry commitment to 450 millimeter with the consortium investment in upstate New York. Mattson Technology is developing 450 millimeter products across its current market, and it's fully supportive of the current industry efforts to move to 450 millimeter wafer size. Our newest board member, Scott Kramer, led the industry in the initial 450 millimeter effort at the industry consortium SEMATECH.

And now, I'll turn the call over to Mike to provide the financial update. Mike?

Michael Dodson

Thank you, Dave. During the third quarter, we saw improvements in our operating performance. As Dave mentioned, despite the industry-driven decline in our net sales, the gross profit grew in dollars and the gross margin improved by 7 points over the prior quarter. Although we made minimal headway in reducing our operating expenses, the loss from operations for the third quarter approached cash flow breakeven. In addition, our balance sheet remains strong at the end of the third quarter, with working capital of $57.6 million, cash of $38.1 million, and no debt.

Now I would like to take a more detailed look at our financial results. During the third quarter, net sales were $44.9 million and were down $6.3 million or 12% from the prior quarter and were in line with the midpoint of our guidance. Net sales for the first 3 quarters of 2011 were $143.3 million, an increase of $46.2 million or 48% from $97.1 million for the same period of the prior year. Year-to-date, the sales into the Etch market represented approximately 37% of our new system shipments compared to 27% in the same period last year. Gross margin for the third quarter was 37.1% and represents an increase of 7 margin points from the prior quarter and was 2 margin points above the high end of our range. The third quarter benefited by 3 margin points from an improved sales mix, representing fewer sales of the low-margin Aspen III system. For example, the Aspen III represented about 50% of system sales in the prior quarter and 4% this quarter. Also contributing to the improved gross margin is our continuing cost-reduction efforts.

Operating expenses for the third quarter were $19.3 million and flat with the second quarter. Given the weak industry forecast and expected continuing softening of the net sales in the fourth quarter, as we experienced in the third quarter, we are aggressively going after operating expenses and expect a sequential decrease in the fourth quarter. In connection with these efforts, we may experience one-time restructuring charges but have no range of estimates for those one-time costs at this time. The loss from operations in the third quarter was $2.6 million, which is $1.4 million better than the prior quarter. This improvement was driven by the increase in gross margins. The third quarter loss from operations approached cash flow breakeven when taking into consideration the loss included $2.1 million of noncash charges for depreciation and amortizations.

The third quarter interest and other income was $0.6 million compared to an expense of $0.9 million in the prior quarter. The income from the current quarter was primarily due to a foreign exchange gain pertaining to the European operations as a result of the weakening euro. This favorable foreign exchange impact during the third quarter follows 2 quarters of unfavorable foreign exchange impacts. Year-to-date, interest and other income was an expense of $1.9 million.

We recognized a tax expense of $0.2 million during the third quarter, which was basically flat with the $0.3 million recorded in the prior quarter. As we close out the year and complete our annual tax provision, we expect a one-time benefit of approximately $2.6 million or $0.04 per share in our fourth quarter tax provision related to uncertain tax benefits due to a lapse of the statute of limitations. This one-time noncash benefit is not included in the range of fourth quarter EPS guidance that Dave will be discussing later in the call.

The third quarter net loss of $2.3 million or a loss per share of $0.04 was $0.01 better from the low end of our guidance and compared to a net loss of $5.2 million or a loss per share of $0.10 in the prior quarter. This improvement in the bottom line from the prior quarter, despite the drop in revenue, was primarily due to improved gross margins and the foreign exchange benefit from our European operations. Our weighted average share count for the quarter was 58.2 million shares.

Now looking -- I'd like to take a look at our balance sheet. We ended the third quarter with $57.6 million in working capital, which was slightly down from $58.9 million at the end of the prior quarter. Cash balances at the end of the third quarter were $38.1 million and were a bit better than guidance. Compared to the prior quarter, cash decreased $4.8 million. We expect that this use of cash, as we anticipate higher levels of investments and inventory, to support manufacturing for certain system deliveries that we had previously outsourced. We are bringing in-house all system manufacturing to help us leverage our fixed factory expenses and drive gross margin improvement. As such, we noted our inventory balance has increased at the end of the quarter by 4 million compared to the end of the prior quarter. Given the uncertainty of the customer demands in the next quarter, combined with the completion of the program to bring all system manufacturing in-house, we expect inventory balances to increase up to 3 million.

Accounts receivables at the end of the quarter were $14.5 million or down $2.6 million from the prior quarter end. DSOs for the third quarter, including advance billings, came in at 34 days compared with 36 days for the prior quarter. In summary, despite a softening of the net sales during the quarter, our better sales mix and cost controls led to improve gross margins. Our working capital position remains strong and will support our continued efforts to position the company for growth when industry conditions improve. There will be a continued focus in the fourth quarter to aggressively challenge operating expenses and other costs with the objective to accelerate the path to cash flow generation and profitable operations.

Now I will turn the call over to Dave, who will provide fourth quarter guidance and elaborate further on our business results and prospects. Dave?

David L. Dutton

Thanks, Mike. In summary, the long-term investment of our customers remains unchanged for the capacity build-out of NAND, advanced foundry, and even of FDM. Near-term economic uncertainty causes our customers modulate spending in an attempt to match production to demand. This requires us to be ready with near-term acceleration or deceleration of delivery requirements, which means we need to have the inventory in place to meet acceleration but it requires cautious guidance in case of deceleration. Although we expect a similar softening of revenues in Q4 that we saw in Q3, we feel confident that our new product wins, coupled with our improved gross margins, will continue to lessen the impact of a current weak industry. It is likely that we will continue to bounce along at reduced levels until there is an improvement in macroeconomic conditions that will return the semiconductor industry to growth.

For the fourth quarter -- our guidance for 2011 of the fourth quarter is as follows: We expect fourth quarter revenues to be in the range of $30 million to $40 million; we expect margins to be in the range of 32% to 36%; earnings will be in the range of loss per share of $0.15 to $0.09, the one-time noncash tax benefit of $0.04 per share that Mike mentioned earlier is not included in this range; cash will be between $30 million, plus or minus $2 million.

During the last cycle, we were in full investment mode, introducing new products in Etch and foundry RTP. We have already shown that we are positioned to outperform our peers in the long term, as we have gained acceptance and revenue, winning new products while significantly improving the company’s structure both now and for the future. Although the current industry conditions and uncertain global economic environment are masking the true successes we have achieved with our strategic efforts, we are confident that they will become more evident as the industry returns to growth and these successes translate into strong financial rewards.

Looking forward, we see a number of inflection points driving IT demand. The next-generation smartphones and ultra-mobile PCs will drive incremental demand for mobile DRAM and NAND beyond 2012. According to Gartner, smartphones, tablets, and solid-state drives are the 3 applications that will drive growth and contribute high demand over the next several years, accounting for 75% of demand through 2015. In addition, cloud computing and digital streaming are increasingly becoming mainstream and will push foundry demand as more network infrastructure is required. As macroeconomic conditions ultimately recover, we are confident that Mattson Technology's position in these new leading markets will drive us to record performance. Rather than resting on these successes, we are attacking on all fronts to achieve the next level of performance. In this dynamic industry, in which conditions change rapidly, we will continue to respond quickly and align our company structure to me the changing need of the market and our customers. We appreciate the confidence and support of all of our stakeholders who play a critical part in Mattson Technology's continued success. And 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] And your first question comes from Edwin Mok with Needham & Company.

Edwin Mok - Needham & Company, LLC, Research Division

So first question I have actually relates to your outlook. So if you listen to some of your peers and what they are talking about and some of the challenge in the industry, it sounds like a few of your major customers may decide to stop placing order late in this quarter. I was wondering how much of that have you factored into your guidance? And, Dave, it sounds like you are less convinced that you will see a balance in the first quarter. Do you have any comment around that?

David L. Dutton

I think that, really what I talked about was what we want to do is make sure we remain cautious on our revenue outlook and at the same time be prepared to ship for these upsides that our customers are doing. I think the reality of this business is our customers, and I use the word modulate, really are modulating their fab demand and equipment demand on a monthly basis, which means we have to be prepared to ship in for upside. But we also want to be careful in the current economic environment where I think our customers continually see global economic news that causes them to pause. But we don't over set expectations for the investment community. So I would say, looking at the fourth quarter and the first quarter, I think we're properly positioned for any business upside, but we remain cautious given the current global economic turmoil.

Edwin Mok - Needham & Company, LLC, Research Division

So is it fair to say that because some of these orders may depend slightly on the macro environment or the order might or might not materialize and that's the reason why you have such a big, $10 million, range on your top line?

David L. Dutton

Yes.

Edwin Mok - Needham & Company, LLC, Research Division

And then, just quickly touch on the gross margin. Mike, by the way welcome to your team. So just quickly, on the gross margin side. I was wondering -- you mentioned that 3 points come from better product mix. I was wondering, is it like the other 4 points all come from just better, call it product cost or is that other type of cost reduction that was baked into that? And then the other follow-up question to that also is -- assuming, let's say, some of your main customer that buy the Aspen kind of come back and stop buying these product in the first quarter, can we expect possibly, that the margin will come back in because of the poor mix?

Michael Dodson

Okay. I will answer the first part Edwin and then I'll defer to Dave in the second part of your question. Well in the first part, our margin improvement, the 7 points, the largest portion was related to the mix because of the higher number of Aspen III tools shipped. The remaining 4%, in total, was primarily related to the cost-reduction efforts that we've done. So we've reduced the overhead pool, the other spending, that rolled through there. But also it would be fair to say that during the quarter, we also saw a little bit of improvement in our spares and service business as well, so that also helped margins a little too.

David L. Dutton

Okay. And on then the Aspen III, obviously, there's a very big customer that still appreciates that product. Again, we're continuing to see them go into some of our other strip products and regain strength in the customer region there. But at the same time, as Mike mentioned, we've done a number of things to improve margins, including on the Aspen III. Part of it is we've brought a majority of it back in-house, which actually allows us to be more cost-competitive and more flexible than when we had it outsourced, as well as continuing to drive supply chain cost reductions. And so I think although it still will never get to the level of margin performance that we want for all of our high-end products, we expect it to -- even though we expect to see some volumes, probably later in 2012, we expect its effect to be much less severe and to be muted by the stronger position of the other products. What I'm saying is, we welcome Aspen III business and we are doing everything we can to continue to do that. We don't expect it to be a major drag on margins looking forward.

Edwin Mok - Needham & Company, LLC, Research Division

One quick follow-up in terms of your cost construction, the financial model. So with this high-level gross margin and then looks like you guys are putting some effort into containing your operating expense. At least you're flat sequentially, you can work it down in the coming quarter. How do you kind of think about your breakeven revenue?

Michael Dodson

Well, let me take that, Edwin. And just to share with you, I'm new to the company and my primary focus for the first 45 days was to work with management to formulate a plan, really to minimize the cash burn from operations. I can look at things starting from a blank sheet of paper. I'd like to see Mattson operate within the parameters of a successful company in this space. What that means is our gross margin should be at least in the mid-40s. Operating expenses should be no higher than 30%. That leaves operating profits in the mid- to high-teens. You want to be sized so that when you're in tough times, you're basically cash flow breakeven. So that you're around with the times get good. So what does that mean? I'll be looking at how we can reduce our cost of manufacturing, how do we simplify our structure. One program, as David mentioned, is we're bringing manufacturing in-house. I think that's a good approach for a company our size. I think it will drive a little higher inventory balances in the end, but it gives us better overall margins and it gives us more flexibility to meet our ever-changing customer needs. On the operating expense line, that's something that you got to size given how big you are and you got to keep your eye on it. Again, I'm new; I'll be turning over every rock that I can. What we want to do is take the actions to ensure that we're not burning cash from operations. From my perspective, cash is king. It's near and dear to my heart. As long as we can get the operating spending sized appropriately, I think we'll have the working capital we need to take advantage when the business turns up.

Edwin Mok - Needham & Company, LLC, Research Division

Just on the new product front, Dave, you mentioned both actions strip. I want to feel -- sorry, actually, on RTP. I want to focus a little bit more on the RTP side. So those 2 announcements in the quarter, that one in Millios and one in Helios, I was wondering, are these products tied to foundry customer ramp in 28-nanometer. In other words, this year 2011, 28 has been vertically small against your capacity when you add it. So assuming the foundry customers are starting to add capacity in the coming year, would that help you drive growth in that area? And is there a way we can think about it, let's say, every 10,000 wafers start, how many RTP, too, we need? Any way you can help us with that?

David L. Dutton

Yes. Let me try and give you some general flow on that. And I think first of all, Edwin, as we’ve stated before, our RTP business was almost 100% DRAM-based, and we have put a very strong effort into moving it into foundry. And as you're starting to see, the fruits of that labor are starting to bear – or the efforts of that labor are starting to bear fruit. And as we mentioned the Millios activity, which is associated with foundries is really focused at the 20-nanometer. And so I think that is still more a long-term work with our customers and at the leading edge and continue to show our technology leadership there. So we really won't be a larger revenue driver, probably late next year and into 2013. For the Helios XP, actually our penetration point was at the leading edge. And because of some of our strength in productivity and overall ability to improve what customers call a pattern loading effect, which is, as devices get closer together keeping the thermal uniformity between devices very, very small. Our Helios actually is very strong at a very good cost of ownership. So we're seeing some of these wins and expect follow-on revenue orders at the upper technology. By that, I mean 28 through 40. And so, yes, as foundries start to come back, we expect to see incremental gains in the Helios XP revenue and really help the company outgrow the market with this new position.

Operator

Our next question comes from the line of Ben Pang with Caris and Company.

Benedict Pang - Caris & Company, Inc., Research Division

First on the your revenue outlook for the fourth quarter. Between the high-end and the low-end, is that more product-based or customer-based?

Michael Dodson

I think it's just variable. It's really, I think, just looking at -- if our customers deliver on what they want, if the market holds, we see more towards the high-end and if our customers feel cautious because of the economy, then I think that's for the low-end and so it's not necessarily a customer base. I think it is NAND is the volume part of shipment right now, so if you wanted to look at it that way, it's probably most NAND-related as far as how much NAND capacity gets added this quarter. And I might add, if you look at it, our customers have added 2 pretty strong quarters of NAND investment and it's also not unusual for them to have small digestion period, typically after a couple of quarters of investment like that. So I think when you take that experience into account plus the overall macroeconomic conditions, we just feel it’s prudent to stay cautious.

Benedict Pang - Caris & Company, Inc., Research Division

Okay. And when a look at your gross margin -- the changes in your gross margin, is Aspen going to go to 0% and that's in the fourth quarter in terms of the percent of shipments?

Michael Dodson

No, it actually still moves along at kind of that single-digit level that Mike highlighted in his comments.

Benedict Pang - Caris & Company, Inc., Research Division

Okay. And so the difference between the high and the low, for the gross margin, has also primarily been volume, right?

David L. Dutton

Yes.

Benedict Pang - Caris & Company, Inc., Research Division

Okay. And then in terms of the lead time right now for your products. Are they pretty much all the same or does Helios have a longer lead time?

David L. Dutton

Well, I mean, probably the longest lead time product is the Millios followed by our Etch then Helios XP and then strip. But all of our lead times are really within about a quarter of -- when a customer needs demand, we can deliver it pretty quickly.

Benedict Pang - Caris & Company, Inc., Research Division

Okay. And final question for me is you talk a lot about of the Etch wins in terms of the applications you guys are serving. You're greater than 50% now of the available market for Etch. Where do you expect will be the fastest growth application for you, for Etch, kind of in the first half of 2012 or something? Do you have any kind of outlook there just In terms of which application you see the best momentum for?

David L. Dutton

Yes, just in a general sense. I'm going to be a little general, mainly because the competitive situation is tough. But I think the silicon Etch area that we've introduced has some of the most growth, especially around NAND and some of the memory areas first. And it really is related to, as we've mentioned before, trim Etch and space Etch, as in build pattern etching are all areas where we're really helping contribute significant performance, plus significant cost of ownership for our customers. And so that's where we're not only expecting to continue to see growth, but we're gaining new and more customer interest because of the successes we've had.

Operator

[Operator Instructions] And I'm showing no further question in the queue, sir.

David L. Dutton

Right. Great, thank you, operator. And that does conclude our question-and-answer session. And I want to thank you, once again, for joining our third quarter 2011 conference call. We look forward to seeing you at our various investor events over the next quarter and to updating you on our progress in the next quarter conference call. Thank you very much. Operator?

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program; you may all disconnect. Everyone have a great day.

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