Full Transcript of Novellus Systems' 3Q05 Conference Call — Q&A (NVLS)

Here’s the entire text of the Q&A from Novellus Systems’ (ticker: NVLS) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Q&A

Steven Chin - UBS

Q: Hi Richard.

A - Richard Hill: Thank you.

Q: Could you tell us what geography is driving the flat up booking for Novellus.

A - Richard Hill: Well, certainly as I mentioned flash is the key area for demand going forward. And I think that will continue, and again the gain more is also which is a foundry driven business. So it’s largely an Asia centric growth from when I am going forward.

Q: Okay and then I can just ask the quick second one for William. Did each of the issues though that you said the cost the lower gross margin have a similar impact or I just want them such as higher warranty cost have the greater impact in the quarter. Thank you.

A – William Kurtz: Sure hi Steve the warranty was the largest impact followed by the smaller impact due to the lower absorption, and then finally the timing impact, you know was about the same the same as the absorption impact, so by far the warranty impact have these impacts on of course.

Q: Okay thank you.

Operator: Ben Tang - Prudential

Q: Hi quick question on the installation on warranty cost. Can you comment on which product line that is and if the trend, if the transition period for this product is over in 2005, because the customer will have already signed off or you changed the product. Can you just comment on going forward which expect and a lot of changes, thanks a lot.

A – William Kurtz: This is William its more its not one particular product line as it is more the deployment of the new tools in the 300 millimeter cost, it had this trend for us I look back on the historical has been seeing before, when the tools are deployed. And so we see that the early part of the implementation occurs, which we projected we continue for another quarter and then start to improve after that.

Q: So if this and is truth both I guess your higher volume higher market share products like the PVD, CVD and HTP as well as for the PVD plus a product.

A - Richard Hill: We don’t disclose individual products, so can’t answer that question.

Q: Thank you.

Tim Shetlander (ph) of Morgan Stanley.

Q: Hi just seen guys, two quick questions if I can just housekeeping to make sure to understood this. William Kurtz quick question you mentioned restructuring could I get this right the sequentially its 9 followed by 6 million followed by 13 million for a total of 28 and estimated saving of 1.2 million a quarter, is that am I correct.

A – William Kurtz: That’s correct and the 1.2 million is after the complete restructuring is completed by the second quarter.

Q: Okay and on the guidance front you said $0.16 to $0.17 before restructuring but I am assuming it does already include the 6 million just nothing on top of that. Always excluding, its just an underlying basis then excludes the 6 million.

A - William Kurtz: It would include whatever benefits expected in the fourth quarter although I would say its pretty small.

Q: Right if you said that is 6 million of restructuring charges to come in the fourth quarter.

A - William Kurtz: That’s right that is not included.

Q: That’s not included in the $0.15 to $0.17.

A - William Kurtz: That’s not included in the $0.15 to $0.17.

Q: Right very clear. Thank you.

A - Richard Hill: Sure.

Operator: Jim Covello of Goldman Sachs.

Q: Good afternoon and this is Amanda Henry in for Covello. I have a few quick questions. Can you help me better understand what you mean by timing affects when you referring to one of the issues due to impacted gross margin. I understand it was one of the smaller impacts for I just want to get some better sense in what you are referring to, I am not sure if it is SAB101 related.

A - Richard Hill: No, you hit it right on the notes it is the SAB101 and it is the bifurcation affect that will vary from quarter-to-quarter depending on the timing associated with that and so I captured that affect under timing

Q: Okay thanks and then I know you are not giving exclusive gross margin guidance today but I am wondering if you can help us understand we are magnitude what we should be thinking about for gross margins in Q4?

A - Richard Hill: We are not providing specific guidance on gross margin for Q4. We do expect that the trend that we’ve seen in Q3 will continue into Q4.

Q: So they should continue to be under pressure?

A - Richard Hill: The additional warranty expenses will continue, as far as the business itself the ASP’s are holding fine. And so when you say under pressure I wouldn’t want you to interpret you know anything other than the fact that the incremental warranty expenses are the point its impacting gross margin at this time.

Q: Okay I understand thank you.

A - Richard Hill: You are welcome.

Operator: Steve Delayo - Fulcrum Global Partners.

Q: Yeah, just one quick question I guess, given the SAB101 you get a little longer lookout in your gross margins based on your deferred revenue. Could you talk a little bit about like your shipment based gross margins currently and where that’s running and what might actually suggest your gross margin might be a quarter or two from here.

A - Richard Hill: Steve unfortunately we don’t disclose shipment gross margin so I really can’t say.

Q: Can you color in anyway a little bit, we need a lot of help on this, this is probably _____ this quarter.

A - Richard Hill: I think the standpoint of the gross margin at this juncture you should assume that flat with occasional variability due to warranty expenses we cannot get it under control in short order. Certainly there is the major focus on gross margin right now and a major factor in our gross margin erosion has been installation and warranty expense which we are hoping we can get under control in one quarter, in which case we are continuing to drive for the model which is 52 % to 54 % gross margin.

Q: Thank You.

Mark Fitzgerald - Bank of America.

Q: Hey. Richard what do you mean by installation and warranty expense when it pertains to new tools here. Are these tools just not coming up or is it too much of a give away here up front in terms of trying to get these seated. What is going on here?

A - Richard Hill: Well I think that one of the things that you are seeing in the market place today is as technological demands continue to accelerate, the ability to be able to meet the customers demands dynamically and the ability to be able to maintain price for the long term has over the past 6 to 9 months, I think cost us to be a little less disciplined that we should be relative to no charge items on purchase orders and shipments and so I think that is something that we are getting under control at this point in time and hopefully that will have a positive effect long term.

Q: Basically you are saying that they are shutting that down now, the aggressive give away?

A - Richard Hill: This is just not the way to say that however certainly we are taking a hard look at what we have been doing and making sure that our value is received for the goods that are delivered.

Q: Okay. Thank you.

Operator: Brad Hartess - Merrill Lynch.

Q: Richard, when you say you are reviewing all your R&D going forward to the side of the ‘06 plan, does that mean you might be looking at making some hard decisions of cutting some lines and we are wondering also if you could update us on what the CMP is costing you these days?

A - Richard Hill: Well we don’t divulge any single line, however clearly this time of year is when we always review our strategic plan and as part of the strategic planning process, we look at our priority and given the revenue growth that we have had we clearly have to have a priority to list relative to R&D program. We can’t fund all of our customers R&D desires. Now does that mean that there are wholesale product lines that are up for chopping off? At this time I would have to tell you absolutely not. I think the credit for us to be successful. But do we have program that we are funding that infact have well I would classify less than high probabilities of success? The answer to that is yes. And we will have to make hard calls on those programs in order to bring our R&D inline with I think what the industry can support at this juncture.

Q: Thank You.

Operator: Timothy Arcuri - SmithKline.

Q: Hi Richard, I actually had two things. Number one, cancellations were particularly high this quarter and if I look in my model this is even more cancellations than post 2000, so I am wondering why they were so high, number one and then I have a follow up, thanks.

A - Richard Hill: Yeah. First of all I have no idea why they were so high this particular quarter, but I think it is driven largely by the fact that there are some customers who are all customers at this juncture that are driving their businesses based on cash flow and when they haven’t seen the cash flow materialized in order to avoid cancellation chargers, they are canceling things prior to having to be able to take 100% of those products into their factory and therefore jeopardize their cash flow. And I think that’s a major area. So companies with less cash flow wore the character of the companies that made the cancellation.

Q: Yeah I guess this is a somewhat odd because other equivalent companies don’t have cancellation that big but I guess, the second question was, is your guidance part of 10% on orders, is that often the gross bookings numbers or of the net bookings number?

A - Richard Hill: Those are for the net, we always quote net, we didn’t try quote gross bookings. I just gave you the number of what cancellations were net-to-net.

Q: Okay perfect. Thanks Richard.

Operator: Steve _____ - Duestche Bank

Q: Thank you good afternoon. Back to the warranty issues, you spoke I think about warranty costs continuing and then kind a coming down after that, how long will it take it back to normalized levels and when do you think we can start converting some of these evaluation systems?

A - Richard Hill: I think some of the evaluation systems will convert within the fourth quarter and then there is a series of schedules going out through the first half of next year that will convert and of course there are incremental evaluation systems that will go in. But definitely at a rate slower than what’s going out. Relative to warranty costs, I think over the last month we’ve spent a long time taking a look at what’s been committed and what we need to do in order to fill the customer requirements and we are a long way into that that’s why we said it would take through this quarter to get a handle on it. And I believe that beginning in the first quarter and the second quarter we’ll start to get back to levels that were more normal. The $5 million incremental expense was higher than we had anticipated.

Q: Okay one follow up Richard, can you give us an idea of how the numbers just your quantity of evaluation systems has changed over the course of the year. Is that up by a factor of two by 50%?

A - Richard Hill: I am sorry….

Q: The number of the evaluation units you had out there, how is that changed over the course of ’05 is it up by a factor of two?

A - Richard Hill: It’s up by a factor of four

Q: Okay

A - Richard Hill: From, over the last 18 months

Q: Thank you.

Operator: Michael O’Brien - Bear Stearns

Q: Hi good afternoon I wanted to touch base on the bookings again. You made comments that the environment is flat up slightly and may be including this cancellations, but if we kind of look at the business excluding those cancellations it sounds like you’re bookings would still be down. So what am I missing there from that perspective on why you guys are _____?

A - Richard Hill: Well that’s why I have a hard time quoting gross bookings versus net booking all of the time and I always go net to net, okay? And so the reality is what we are putting on our books relative to the backlog is a function of the 289 number that we shipped it would go from 309 to 320 on a gross bookings basis from Q2 to Q3. If you just looked at the number on a gross basis we don’t do that, so we are basically saying that we have gone down from Q2 to Q3. And we’ll go back up again in Q4 by what we said. You know it’s a math problem.

Q: And the bookings what was, were they across the board or where were they concentrated?

A - Richard Hill: They were very concentrated and as I articulated before it seems to be centered around companies with somewhat limited cash flow and its designed basically to I think take care of potential cancellation charges.

Q: Thank you

Operator: Jay Deahna - J.P. Morgan.

Q: Thanks very much good afternoon, I have got two issues I would like that ask you about. The first one is in terms to the company’s strategic direction, it’s a follow up on Bred’s question. The fact that you are willing to evaluate or reevaluate some of the R&D programs. Is this a precursor to reevaluating the whole multiple product line strategy or the conglomerate strategy that the company is on? That’s the first question then I have got a follow up.

A – Richard Hill: Well first of all I wouldn’t say that we are on a conglomerate strategy, clearly having multiple product lines addressing the semi-conductor industry is definitely not I think a conglomeration. Now if you are commenting regarding Peter Walters piece of the business which is directed and again in an industrial segment of polishing and folds on our core expertise and knowledge deposition and removal of material. I think they are very strategist and there is a lot of leverage that can be had even though we managed those two businesses separately. I think what I articulated earlier to Bred’s question was the fact that I think what we’ve done is gone out and chased a lot of business with ideas thinking that we can do everything that the customer request us to do and still be able to run a profitable business. And I think we are clearly re assessing that strategy and going back to a more focused prioritization and picking the areas to where we want to focus. I think that part of what is happened within our R&D is each individual business unit in attempting to go after every small piece of business in their particular segment, hasn’t been as disciplined in picking R&D projects and engineering projects and it has cost our R&D numbers to balloon somewhat. And as a result we see that there is opportunity there to improve dramatically. And we will do it in a very organized process where we ask ourselves where is the industry going and what are the key engineering programs that are likely to be successful and then focus in those particular areas. I think we have been using lately a more shotgun approach, when the customer has an idea, we become the implementation tool for that idea and I don’t think we are of the size like an employ that strategy. And so I think that’s the fundamental change Jay.

Q: So that is within a product line reducing the number of flavors or variations as it was suppose to potentially cutting out of product line.

A – Richard Hill: That’s correct at this juncture, yes.

Q: Okay then the second issue that I had is that you had two announcements recently on management changes, one who was making Chi-Foo Chen the CPO, and the other one was making Susan Chen the CPO of Asia, correct me if I am wrong but wasn’t she the person that was doing PE CVD presentation at Semicon West?

A – Richard Hill: Well she was in PE, CVD for a very, very short time. And one of the elements when you put a lot of products out into the CO is when you are integrating him within a facility there is a lot of high technology interaction that needs to go on and since we have made tremendous inroads within Asia, we have not really taken our technical expertise up to the level it needs to be within the local geography. So we’ve made a calculated move of taking one of our brightest people to put into Asia to help us to develop our technical expertise there. Now why are we doing that? Well we are doing that because we waste R&D dollars when our R&D engineers are out doing work within the field that we have field process engineers and field service engineers that we need to bring up to a level to be able to handle on a routine basis. And so this is the first ways of really trying to get our technical expertise closer to the customer and thereby been able to have the business units focused more on closing the problems on products back within the factory without all of them being in the field. And that is the reason we made that move.

Q: And then lastly is Dr. Chen reporting to you directly?

A – Richard Hill: You are talking Ming Chi?

Q: I am sorry no, Foo Chen?

A – Richard Hill: Foo Chen? Yes he does, he reports directly to me.

Q: Okay so what is _____ role then in the CPO process now?

A – Richard Hill: _____ drives the business unit has he has done since the day that he has gotten here. And he continues to do that with no change.

Q: Okay thank you.

Operator: John Pitzer - First Boston

Q: Yeah I have quick question. When you look at the cancellations in the quarter can you help me understand the timeframe that you might see those rebooked? And was this mainly PVD or was it spread across PVD and CVD and I am just wondering if you can tell me if it was concentrated what type of device type logic memory or foundry? Thanks.

A – Richard Hill: They were on booking spaces?

Q: Yes.

A – Richard Hill: From a standpoint of all the bookings numbers?

Q: No when you look at the cancellations in the quarter Rick, I am kind of curious you should say that this was done for a company to not have to pay a penalty charge and I am wondering at what point do you expect these bookings to be rebooked and then help me understand with this PVD, CVD or both and then DRAM company, logic company or foundry company? Thank you.

A – Richard Hill: Yeah I think there was a substantial amount of the D-bookings, which evolved around some 8-inch business. That will be replaced by 300 millimeter.

Q: As early as this quarter or do you expect that to be a little bit longer timeframe?

A – Richard Hill: Yes, I would anticipate that it will probably not happen until after the first of the year.

Q: Okay and I am assuming that it was 8-inch it was mostly in the CVD division?

A – Richard Hill: I don’t have that breakup and I would not disclose it if I did. So thanks for trying though John.

Q: And then just lastly can you help me understand what vertical this customer was in?

A – Richard Hill: What vertical?

Q: Foundry, logic, memory?

A – Richard Hill: I really don’t want to go that deep. I just keep narrowing the playing field and I wouldn’t be fair to them either.

Q: Maybe one last question, could you help me a little about the pricing environment in PVD and what’s your outlook as you move to the fourth quarter and first quarter of next year on pricing?

A – Richard Hill: Well I think that from a standpoint of PVD it is quite clear our competition would like us not to be able to continue to succeed in eroding market share so, I have to tell you this as intense as I have seen within this industry.

Q: Great thanks.

Suresh Balaraman - ThinkEquity Partners.

Q: Thanks. Rick any thoughts on how the quarter beyond December would shape up and some of your peers are talking about growth continuing beyond the December quarter and it doesn’t seem like a one-quarter bounce, as you bounce along the bottom and can you share your thoughts on that? Thanks.

A – Richard Hill: Yeah Suresh, I think its the overall industry itself is being driven on some good fundamentals from a standpoint of cash flow from our customers, which I think is a good sign that the levels we are at are going to continue to sustain themselves. Now to the extent our customers suddenly gain tremendous profitability through hot new products or something that they want to expand capacity to sell then I think you will see an up ticking growth. Otherwise I anticipate the business staying within this band of growth from the 0% to 10% range in declines in the 0% to 10% range indefinitely at this juncture. Again caution that the real changes of the macro economic because its consumer driven more so that industrial driven.

Q: If I can take on a follow up. Is there a fundamental change in the CMP environment that the consolidation makes sense now that it did not when you acquired Speed Sam?

A – Richard Hill: Reword that question for me. I didn’t quite understand it.

Q: When you bought speed Spped Sam you probably had thought through some kind of a consolidation, why does it make sense now, when it did not two years back?

A – Richard Hill: Well I think as I have articulated before relative to the purchase of Speed Sam I-Tech, it was both an offensive and a defensive strategy. I think if you go back into the 90s there were competing products in every single area. And gradually through the 90s a lot of those companies failed. And other people got out of the business for example LAM getting out of CMP. LAM was providing an effective competition, although they weren’t winning any business against a major CMP manufacturer and as a consequence it didn’t allow them to deploy, excessive gross margins against other core products. Well as LAM made the decision to pull out of CMP there became no viable competition for one player, now that’s a very dangerous situation in our business, because given the history of their anti-competitive practices of bundling, there is the possibility of them, basically taking profits and putting them against our strong product lines. So the industry is changed enough today where the critical element is that there is competition at every level. And either we have to provide it ourselves or that there have to viable competitors in the market place. And I think our customers are beginning to wake up to that factor, and as a result I think it’s an opportunity to grow in these businesses where there has been a single dominant market share player. And I think that, that’s the rational and that rational still holds true.

Q: Thanks Richard.

Robert Meyer – _____ and Co.

Q: Yes. The question is getting back to the warranty and other installation costs issues. Is it a fundamental change in company philosophy that might have been in place with the managements that have left the company?

A – Richard Hill: Relative to warranty?

Q: Well relative to the method of getting equipment into customers, some large competitors use a fairly large balance sheet and an ability to put a lot of tools at the customer at lower or minimal cost to sort of gain a share. Is this change in philosophy to perhaps not take that sort of direction in trying to place equipment with customers?

A – Richard Hill: Well I think we will always be placing equipment with customers but I think clearly use that to be able to do it in a way where you are likely to succeed and the reward for the investment is contemplated, calculated and then executed upon. I don’t think you can do this business any other way. Now if you are asking can a company the size of Novellus do the exact same thing as a competitor who is four or five times as large, the answer is clearly they cannot. We have to be more selective, I think we have to be quicker in what we do, we’ve got to be more astute where we want to focus and I think to a certain extent, we lost that. I think it was one of the assets we had as a company and I think it’s one we still have, we just have to have the discipline and place to do it. And I think we are putting that discipline in or back in.

Q: Okay. Great thank you. That answers it.

Operator: Elle Glazer - _____

Q: Yeah. Richard, on the macro environment, last week was the conference call from your occasional marketing partner and that’s LAM Research. They seem to have a more positive spin on the overall order outlook, could it simply be that they are picking up market share in certain markets, or you are more conservative?

A – Richard Hill: Well, I think that they are clearly winning market share, it’s going down to a two player market, an edge between LAM and TEL so that we see is a very, very positive sign for us as there is just one more area where more money has to funneled by our large competitor and they have done a great job. You can’t take anything away from what they’ve been able to accomplish. So they forecasted what they forecasted and we see what we see. Part of it is the difference in approach to the market, we are in an area where we’ve added so much productivity into the market as we grow markets we shrink markets. And from a standpoint of what they were before, but that’s a path we’ve chosen to take. The S market hasn’t found itself conducive to that strategic attack but the deposition market clearly has been and I think you will find the same is true with the CMP market. But that’s just a different strategy and the important thing is to try to get a return and we need to drive our returns up from where they are. Although there is a whole bunch of people in a lot of industries even in this one that would die for our returns, but of course we are not satisfied with them either.

Operator: Shekhar Pramanick - Moors & Cabot Capital Markets.

Q: Hi Richard, I know you have a gross margin target of 52% but maybe give us some road post like, say $320 million revenue level where once you have fixed these issued, some 320 - 350 how the gross margins would look? And then I have one more.

A – Richard Hill: Okay. First of all at the 320 I would have expected them to look a lot better and at 338 I would even expect them to look substantially better than a 320, however, given some of the things that we have done in order to position ourselves going forward as we have already articulated, we’ve sold something’s at levels we would not have ordinarily have sold them at. So from that standpoint, we were disappointed given the amount of revenue that was generated, what the gross margins were. On the other hand however, once we get these shipments out, and we secure a new bookings and billings it is our anticipation that coupled with reduced cost, that we are continuing to drive within the company we’ll see an acceleration in the improvement of gross margins, but again we’ve got to prove that, we can’t just talk about that.

Q: On the CMP side, how do you incrementally feel that, do you see any light out of the tunnel, I mean what do you think needs to happen, you showed up last year around summer time frame, a lot of significant improvement and what not, but it has not really played out on a market place, could you give us what went wrong and where are the next set of improvements that are going to come which will make the in roads in the CMP.

A – Richard Hill: I think there is a light at the end of the tunnel and that light at the end of tunnel is our customers have to continue to be competitive. The reality is if you look at the industry, five years ago you would have one deposition tool, you have a PVD, you would have three PVD tools followed by one Electrofill tool followed by four CMP tools. Today you have one PVD tool followed by one Electrofill tool followed by three CMP tools. Now that three CMP tools has gotten there just because Novellus is a player in the market or it would still be at four CMP tools for every one Electrofill tool sold. I think we can take to one PVD tool to one Electrofill tool to one CMP tool, which is a tremendous productivity enhancement to the industry. At the same token given our low levels of revenue it’s a 100% growth opportunity for us. And so I think that’s the dynamics that will make us successful in the market, the continued ability to be able to lower our customers costs and also be able to do it from a standpoint of our technical performance basis. Now one of the things that has slowed the process in doing this is the fact that there are limited number of customers who have positive cash flow and the investment capability to continue to evaluate new equipment and some people due to their level of investment and what they are trying to do are out of the game now, for equipment evaluation so the process is a little slower and they are doing it based on cash flow but the trend is undeniably such that we have got to lower our customers costs and that’s where we are focused. And we think that’s where we will be successful doing with CMP and we are still committed to it and believe that it will happen. Okay.

Q: Thanks.

Operator: Mark Bachman of Pacific Crest Securities.

Q: Hi Richard quick question for you, you talked a little bit about the cancellations and saying that there were cash flow issue there. Are you hinting at all the present risk out there with your DSOs right now?

A – Richard Hill: Not that I know of.

Q: Okay and then, you have seen a couple of partings this year of two key executives this year with the most recent being Tom Dennis who was heading your sales organization I have two questions surrounding this, one is do you expect any more departures from your executive staff over the next six months? And two, what changes can we expect in leadership in your sales organization over that same time frame?

A – Richard Hill: Well I think first of all from the standpoint our leadership in the sales organization you can expect that to be filled in by the first of November. From the standpoint of further departures if we don’t get results there have to be departures. Because whatever we talked about the business the most important thing is to getting a return and getting the company back on the trend of the profitability levels we have historically experienced and nothing will keep us from that path. Now are there any planned to purchase that I know of that you would like to me to announce? Absolutely not.

Q: Okay Richard. Thank you for your time.

Operator: Stuart Muter - RBC Capital Markets

Q: Yes thank you good afternoon question for Richard. Could you provide some color on a level of bookings in Q3 that Peter Walters contributed and what you expect in Q4? Thank you.

A – Richard Hill: You wanted some color on the level of booking in Q3 and what was the little nuance there?

Q: Yeah the level of bookings in Q3 that Peter Walters contributed and what you might expect or what you are expecting in Q4 from Peter Walters.

A – Richard Hill: Yeah we don’t disclose on an individual basis the bookings but Peter Walters at this juncture is not the major factor at all if any factor in the growth of the bookings going forward.

Q: Okay thank you.

Operator: David Duley - Merriman Curhan Ford &Co.

Q: Yeah just one housekeeping, did you actually mention what the warranty reserve dollar was this quarter and can you give us a base number from last quarter and then just Richard from a summery perspective what do you think wafer fab equipment spending will end up doing in 2005 and do you think you’ve picked up, or maintained or lost market share?

A – Bill: This is Bill, let me address the question on warranty. We are not providing the total reserves on warranty but we are giving you insight into the variation in gross margin that we experienced in the past quarter as a result of an increase in the warranty expenses that we are reflected. So, hopefully we have given you enough insight to understand that.

Q: What was the increase then?

A - Bill: The increase accounted for about of 1.5, two points to the gross margin decline.

Q: Okay and that’s something we can find in your queue at the end of the quarter?

A - Bill: As for as the queue we don’t specifically disclose the level of warranty but we would comment in MD&A about the impact of warranty as we normally would be required to do so.

Q: Okay and the market share stuff?

A - Bill: Would you repeat the question on what that based on, it was based on the industry growth.

Q: Yeah I guess first of all from your perspective where do you think wafer fab equipment goes in total in 2005? Up, down, flat, whatever number you want to throw out at us and in regards to the spaces that you service. Do you think you maintained, gained, or lost share?

A - Bill: I don’t have the numbers handy but I’ll have them with us at the next meeting and including the quarterly update try to answer that for you.

Q: Right.

Operator: Edward White - Lehman Brothers.

Q: Yes, Richard you talked about what you are going to do improve the gross margins going forward, and you talked a little bit about the need to take a harder look at R&D but if you look at expenses they are about flat in the quarter what’s your outlook for that? Do you think you can hold expenses roughly flattish in this environment?

A – Richard Hill: I think that will be flattish-to-down

Q: Okay so and if we look at it. Where is the biggest opportunity you talked about the R&D but can SG&A come down as well? What are your thoughts on that?

A – Richard Hill: Well I think in order for SG&A there to come down we have got to fix some of the areas relative to training of people in the field to make them more efficient which then allows our factory to be more efficient and so there is a series of things that will happen and that will take us a little while to accomplish.

Q: Okay. And then finally you talked about guidance bookings to be flat-to-up but shipments and revenues guidance’s is down. How long would it take given SAB101 timing for the bookings to translate into better shipments and revenues - from what you can see right now?

A – Bill: First of all the bookings as you know right, turn into shipments and then shipments turn into accepted revenue.

Q: Right yeah.

A – Bill: It is about on average a two-quarter process. There are timing differences that are depended on the way the acceptance is are either zero or 100 or they are bifurcated so there is variation when the mix changes, but as a general rule of thumb, there is about a two-quarter process. I also wanted to make a comment on our point about our operating model and our financial model. Because I think it’s important for all of you to understand what we are communicating here. As we’ve look at the company’s financial performance and compare it to current performance to our desired target model there are two areas that jump off the page. One is gross margin we have talked quite a bit about that. We know what we need to do to improve that and second is R&D productivity, and that is the other reason we mentioned our strategic plan process. We are also looking at everything else on the income statement as well as the balance sheet to improve but those are the two that have the clearest indications to us that we want to see improvement as we move our business forward.

Q: Great thank you.

A – Bill: Alright.

Operator: Tim Shoals - _____

Q: Hi. Actually I just had a follow up for Bill and a follow up for Richard. Firstly Bill, you come to Nevada obviously you have a lot of financial experience. Can you just share with us what are the variables that you would be looking to determine what is the right amount of cash for this business to hold and when would you expect to start recommending to the board that the company pay a dividend?

A - Bill: Yes. Tim thanks for that question. Variables to look out obviously include the cycles of the business to understand what your working capitals would need in a down cycle so that you can weather the storm. As well as the investments that you need to grow the business. So I don’t come here today with a formula that I can provide to you for recommendation. Our goal though is to make sure that our cash is being used where it can be to grow shareholder value.

Q: Okay thanks may be a followup then for Richard just on the PVD side. Can you just share with us, maybe a little bit more in terms of how you have been marketing the PVD product. Broadly has it been a similar price tool with more free putt and therefore a lower cost wafer then your competitors, or are you really pitching it more as a differentiated technical performance? If you have got some data or something to illustrate that will be very helpful.

A – Richard Hill: Well I think what you can see is that the eNova has been built and has demonstrated the ability to extend PVD technology down to 45 nanometers. If you go back to when the system was implemented everybody was telling how ALD was going to be in at 90 nanometers and then 65 and then 45 and now its’ down to 32 nanometers. So, I think it has been a compelling story that the hollow cathodes magnetrons has demonstrated the ability to be able to utilize the technology that the main developer of what I would call sort of older generation PVD had themselves seen a limit at 90 nanometers. Now the advent of ACM has forced them to go into massive redesign and to their credit they have done an extremely good job in copying elements of the eNova in order to extend their technology and they have used their power of position to the best of their ability to maintain that position. But clearly it has been an enabling technology. Most of the game chips that are being produced today are being produced on the eNova system from a copper PVD standpoint and as a result it was an enabling technology because this is a state of the art technology driving the industry today. And so clearly, it has been a technologically driven business with productivity. Even today our competition can’t meet our productivity and when you look at the elements of simplicity and design, the design is much simpler and therefore we believe our ultimate reliability produceability, utilization and uptime will be substantially better than our competition. But I think it’s a combination of this business and the inhibitor has been more function of the industry in the number of people to invest rather than the technology or the capabilities of the product. Okay?

Operator: Timothy Arcuri - _____

Q: I have a question on the accounting for the evaluation systems. Is it true that when you send out an Eval you keep it in inventory before it is accepted because, inventory is coming down pretty significantly yet there are a lot of evaluation systems in the field that are resulting in installation and warranty expenses being, so much higher, so I am wondering how those two jive?

A –Bill: The accounting for Eval systems is that they are placed into service, they are put in dollar assets and then depreciated.

Q: So they are not in inventory?

A – Bill: They are not carried into inventory.

Q: Okay. Thanks.

Operator: Michael O’Brien - Bear Stearns

Q: May be just, there has been so much focus on the expense, just give a little more color on just the areas where you are seeing this up a little bit trend across the board and a little bit more color on memory not just NAND related which we know is strong but what your thoughts on DRAM over the next several quarters, and what are your thoughts on foundry sounds like foundry has picked up a little bit, is that broad based or is it one or two specific customers? Thanks.

A – Richard Hill: Thanks Michael. I think first of all as I mentioned before NAND/growth is one of our largest drivers going forward. And it’s not only NAND for a single application but it’s what we have talked about before. It’s the multitude of the application that’s allowing it to be much more stable predictable growth and so I think that’s a good thing. Relative to DRAM part of the expansion of capacity for NAND flash has been the fundability of DRAM capacity in the NAND flash and as a consequence there has been a increase profitability in the DRAM and given their still expansion in Bit growth, we have seen some continued investment in DRAM and we will continue to see that going forward. So I think that holds well for the NAND DRAM market. In the foundry areas I think that business is being driven by supply chains to in particular to the gain mores business. And I think this Christmas time and the success of those programs will be a major factor in the continued expansion of foundry capacity. But make no mistake the concept of the foundry is only going to continue to grow as the expense to transition to new technology increases. So I see that the future for the foundry continues to be extremely good and for the guys who are capable of staying on the technology curve, they will have the greatest opportunity going forward and I think there are three or four players who will fill this void and then there will be people trying to be foundries beyond that.

Q: So is the improvement in your outlook for orders any help from a foundry perspective just one customer or more.

A – Bill: I think it’s from multiple customers, it comes in certainly the foundries are a factor, NAND flash is a factor, but so is the Microprocessor market place and continued growth there.

Operator: Bill Lu -_____

Q: Yeah. Hi Richards, a quick question, we have pointed numbers recently and it’s seems to us like your overall market share, is a little better with the memory customers in this with Logic would you agree with that?

A – Richard Hill: Well certainly, our market share is extremely well in the memory arena. I think whether or not it’s better than it is within the foundry, I think it depends upon the product and it depends upon the ordering cycle. But today we are pretty balanced across Logic and memory and certainly you only need to look at Electrofill, which dominates the market and certainly the foundries are bringing on only copper capacity going forward. So there tends to be a bias for us there. And certainly where our PVD product is having the most success again it’s in the foundry environment and so that again is a bias for our success. So it’s hard to just say, I am not sure to be accurate to say we are preponderance in memory although we are strong there.

Q: Okay thanks a lot.

Operator: And gentlemen I will turn the conference back to you for any closing or concluding comments.

A – Richard Hill: Well thank you very much for joining us, we look forward to talking to you at our mid-quarter update. And we look forward to continued growth in the semiconductor industry and continued improvement in our operations. Thanks very much.

Related:

• The prepared remarks from this call are here.
• A list of full conference call transcripts available on the Seeking Alpha Network.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL 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 CONFERENCE CALLS. 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 CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.