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Executives

Terrence Slavin - Director of Corporate Communications and Investor Relations

Robert Akins - Chairman and Chief Executive Officer

Ed Brown - President and Chief Operating Officer

Nancy J. Baker - Senior Vice President and Chief Financial Officer

Analyst:

Satya Kumar

Jay Deahna - JP Morgan

C. J Muse - Lehman brothers

Mick Tarsenko

Patrick Ho

Harlan Sur

Mark Miller

Weston Twigg

Benedict Pang

Cymer, Inc. (CYMI) Q4 2007 Earnings Call January 29, 2008 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Cymer Fourth Quarter 2007 Earnings Conference Call. (Operator Instructions).

I would now like to introduce your host for today’s conference Mr. Terrence Slavin. Mr. Slavin, you may begin.

Terrence Slavin, Director of Corporate Communications and Investor Relations

Thank you, Joe. Good afternoon and thank you for joining us today. With me on today’s call are Bob Akins, our Chairman and CEO; Ed Brown, our President and COO; and Nancy Baker, our Senior Vice President and CFO. As usual, you may access the webcast link, today’s slides, and press release in the Investor Relations section of our website at www.cymer.com, where they will be available for the next 15 days.

Please be advised that the numbers we are disclosing during this call are preliminary numbers. The final numbers will be included in our annual report on Form 10-K, which will be filed with the SEC. Our comments today will include forward-looking statements including statements concerning industry and technology trends and developments, new products and technologies, semiconductor demand, demand for and utilization of lithography tools and our products, product orders and shipments, and our anticipated future market share and financial performance. Our actual results may differ materially from those projected on this call.

There are a number of risks and uncertainties that may affect our business and future results, including those associated with the performance and market acceptance of our new products or technologies, the demand for semiconductors, the cyclicality in the market for semiconductor manufacturing equipment, the delivery rates of our light sources and our direct customers’ lithography tools, timing and size of orders from our customers, and other factors, including those set forth in our SEC filings. Please do not place undue reliance on these forward-looking statements, which speak only as of today. We undertake no obligation to update any forward-looking statement to reflect events after today.

I’ll now turn this call over to Bob.

Robert Akins - Chairman and Chief Executive Officer

Thank you, Terry, and welcome to all of you joining us on today’s call. Fourth quarter 2007 revenue grew to $139.9 million, a 6% increase over Q3 revenue of $132.1 million, driven first by continuing strong demand for our argon fluoride immersion light sources, and second by larger than forecasted fourth quarter non-systems revenue, which reached a new quarterly record. Total revenue for 2007 was $521.7 million.

In Q4, we shipped 49 lasers, 32 of which were our XLA series argon fluoride light sources. In Q4, we shipped multiple XLR 500i lasers that will begin to be installed before mid year and advanced high volume immersion production applications at about the 45-nanometer node. Since we introduced the XLR series, with its improvement and stability and significant reduction in cost of operation, interest in it has grown steadily. Based on discussions with our customers and their indicated needs, we anticipate a strong ramp up of the XLR series products throughout 2008.

Demand for our argon fluoride lasers in Q4 enabled our currency-adjusted ASP to continue in excess of $1.3 million for the quarter. In 2007, argon fluoride light sources accounted for 67% of system shipments and we shipped a record 128 XL platform lasers, which included a record number of light sources for use in high-volume immersion applications.

With our advanced argon fluoride immersion light sources accounting for such a significant percentage of shipments, our annual ASP for 2007 increased to an annual record of $1.254 million comparable to an ASP of $1.006 million in 2006, an approximate 25% increase year-over-year.

Our quarterly average laser pulse utilization rate grew again in Q4’07, increasing approximately 8% over the prior quarter and driving Q4 non-systems revenue to a record $74.9 million, equal to 53.6% of total revenue. Quarterly growth in pulse utilization was attributable primarily to our memory sector customers and secondarily to our foundry sector customers.

By the end of 2007, total pulse utilization had grown approximately 20% over the 2006 level and annualized average light source utilization reached 10 billion pulses per laser. This in turn drove our 2007 non-systems revenue to a record $275.2 million, which accounted for 52.8% of 2007 total revenue.

In the fourth quarter, product gross margin came in at 48%, 2 percentage points below the previous quarter’s level, primarily due to the large end of the year increase in non-systems revenue which carries a lower gross margin than light sources. Annual gross margin for 2007 came in at 50%. For the first time in our history we’ve achieved annual gross margin at this level. This significant accomplishment reflects the improvements in operating efficiencies we’ve achieved over the past few years and the strong demand for our argon fluoride sources.

Operating income rose to $29.2 million for Q4, yielding a 20.9% operating margin. For 2007, operating income totaled $114.5 million, yielding an operating margin of 21.9%. Q4 net income totaled $21.4 million equal to $0.67 per share fully diluted. Net income for 2007 totaled $88.4 million, which resulted in fully diluted earnings per share of $2.50, the highest annual EPS in company’s history.

DPV bookings for the fourth quarter of 2007 totaled $128.7 million resulting in a book-to-bill ratio of 0.92. Under current slowing industry conditions, this includes orders from multiple direct customers for sources that are currently scheduled for delivery beyond the current quarter. That has been the case for the last several years, argon fluoride continued to dominate systems orders in Q4, with 75% of the systems booked in the quarter and about 90% of the value of systems booked in the quarter being argon fluoride.

We ended the quarter with a backlog of $99.6 million with argon fluoride comprising 78% of the units and approximately 90% of the value of systems in backlog. 55% of the value of systems in backlog at quarter-end is attributable to argon fluoride immersion.

With the installation of 46 light sources at chipmakers and other end-users in Q4, our total installed base now exceeds 3250 systems, which equates to approximately 85% of cumulative installations of all XLA lasers in production. As of yearend, we had installed more than 610 argon fluoride light sources. More than two-thirds of those argon fluoride installations are XLA series products and our industry wide immersion share remains well above 80%, with 80% to a 100% market share at each of the top 10 chipmakers.

As of December 31st, 2007, we estimate that the trading average fourth quarter value share of our light sources installed at chipmakers and other end users was 70%. As we proceed through 2008 with our XLR products seeing growing demand, we anticipate growth in market share beginning in the first half of this year. We believe the XLR 500i will become the industry standard for high volume argon fluoride immersion production at the 45-nanometer node.

You remember that in 2007, two of our direct customers completed technical evaluation of the XLR 500i. Enhancing the already strong adoption trend of this light source, one of our direct customers has now begun technical evaluation for the 500i for its next generation argon fluoride immersion scanner, which we anticipate will be completed before mid year.

Our number one focus is on understanding our customers' immediate and longer term needs and enabling productivity and cost-reduction enhancements for them for the development of more advanced light sources and technologies. For example, we’ve recently introduced our Gas Lifetime extension product or GLX to customers which increases system availability and productivity and is currently demonstrating its value at installations and high volume production fabs of two of the world’s largest chipmakers.

To meet our customers’ needs for argon fluoride immersion double patterning at the 32-nanometer node, we have introduced a second generation in the XLR series; the 600i, which offers 90 watts of output power. Double patterning is driving increased throughput and tighter CD in OPE light budgets and the XLR 600i is designed to meet the most stringent light source specifications with its higher output power partially offsetting the need to expose each diode twice.

With some NAND Flash manufacturers beginning production at the 4x-nanometer node, there is now some industry anticipation that double patterning could begin by the end of 2008. There is currently a good deal of R&D underway for double patterning with different chipmakers taking different approaches looking for the specific path that would allow optimization of circuit designing and yield, while minimizing costs.

We held Cymer’s 15th Annual Lithography Symposium during Semicon Japan this past December. With approximately 160 attendees, it was perhaps the best attended and most successful symposium in years. The theme was the transition from argon fluoride immersion to DUV lithography when will it happen and what will it take? Speakers in panel discussion members included representatives from ASML, Canon, Nikon, Hynix, NEC Electronics, Toshiba, Satellite, and Symantec, as well as Cymer.

The most significant conclusions reached at the symposium were; first, with immersion lithography beginning production for high-volume manufacturing at the 4x-nanometer node, defects and overlay at this CD are considered resolved or resolvable issues.

Second, for the 32-nanometer half pitch, argon fluoride immersion double patterning is the most viable solution. When EUV is ready for high volume manufacturing, however, some double patterning critical processes could potentially be replaced by less process intensive UV.

Third, the productivity impact implementing double patterning maybe compensated for in part by effective process integration and utilization improvements.

And fourth, the key to EUV's success is source development, not only because it will be key in determining tool throughput, enhance economic viability, but also because it will enable resist unmask challenges to be faced and resolved.

We made further progress in EUV development during Q4 demonstrated by our announced achievement of a key milestone of 100 watts of burst power at the intermediate focus in October 2007. This is up from 12 watts burst power in October of the prior year. With EUV source power requirements expected to continue increasing over time, the proven scalability of our laser produced plasma or LPP approach will be essential for delivering the cost effective clean power our customers will need for high volume EUV manufacturing.

Interest in our EUV source is very high and since the announcement of our selection as the EUV source supplier for ASML last summer, we have hosted visits by all the leading chipmakers. The several who have issued purchase orders for EUV scanners, mostly NAND Flash manufacturers, who are already driving towards the 32-nanometer production node, seek regular progress and performance updates and want to visit our lab to view our progress with the EUV source technology.

Looking forward through 2008, concerns are obviously high that a slowdown in the US economy could have global consequences, especially on consumer purchases of electronics. This in turn is reflected in the uncertainty of capital planning and buying activities at chipmakers. However, the overall thesis of the industry embracing advanced lithography technologies, argon fluoride immersion, double patterning, and EUV remains fully intact, driven by the needs to increase productivity and reduce manufacturing costs. It is progressively more a question of when, not if, these lithography production technics will be used.

In the memory sector, we believe the larger NAND Flash manufacturers will continue with their strategic buying plans to drive to smaller critical dimensions. DRAM pricing is still weak, driving the largest manufacturers to convert their 200 mm fabs to 300 mm production. Logic should remain steady. Foundries, which have been under-spending, may need to augment their leading-edge capabilities with some immersion tools, but in all sectors, the smaller, less financially healthy participants will most likely delay or cut portions of their CapEx spending.

Turning to our Q1 2008, over the past few weeks we have been chasing a downward moving demand target. We currently see the light source business with all three of our direct customers to be down in Q1 over Q4 levels. This is due primarily to industry conditions resulting in push-outs from chipmakers, particularly for capacity tools into late 2008 or even 2009 with similar effect on the build plans of our direct customers.

Remember, for Cymer, being one step further up the supply chain, but in addition to our business slowing as our direct customers' business slows, additionally our customers become more conservative with their laser inventory levels, which further impacts laser demand. This has led to significantly reduced that is double-digit decrease, demand for our light sources in Q1.

Demand for our leading-edge tools will bias our product mix toward XLA and XLR Series light sources, so that ASP of light source sales should remain at or above the Q4 level. With Deep UV lithography now the predominant technology for wafer processing, we anticipate continuing growth in our non-systems revenue as we support our customers' drive to increase their utilization rates and productivity.

I will now turn the call over to Nancy.

Nancy J. Baker, Senior Vice President and Chief Financial Officer

Thank you, Bob. In Q4, we completed our stock buyback program under the $300 million authorization our Board of Directors approved in April 2007. Under the program from Q2 through Q4, we purchased a total of approximately 7.5 million shares for $300 million. When added to our stock buyback programs in 2005 and 2006, over the three-year period we purchased a total of approximately 12 million shares for a total of approximately $451 million.

During Q4 we generated approximately $57.2 million in net cash from operating activities, a quarterly record. With spending for the acquisition of property, equipment, and patent license during the quarter of approximately $13.1 million, this means we generated approximately $44 million in free cash flow for the quarter.

For 2007, we generated a record $142.1 million in net cash from operations, spent approximately $26.8 million on the acquisition of property, equipment, and patent licenses for the year, and generated approximately $115.3 million in free cash flow, another record. We finished 2007 with approximately $357.5 million in cash, cash equivalents and investments.

Turning now to our guidance, we anticipate revenue to be approximately 15 percent lower than reported for Q4 2007; due primarily for slow in industry condition. Our foreign currency adjusted ASP to be approximately $1.35 million on the strength of our XLA and XLR demand. Gross margin to be approximately 47% to 48% as lower margin non-systems revenue continues to become a larger percentage of total revenue.

R&D expenses to be between $23 and $24 million as we continue to commercialize our EUV source and TCZ technologies. SG&A expenses to be between $18 and $18.5 million, and our estimated annual effective tax rate is expected to be approximately 38%. This higher tax rate is result of the US congress not yet renewing the R&D tax credit.

This concludes the prepared portion of our call. Bob, Ed, and I will now be pleased to answer any questions you may have. Joe, will you please assist us with the question and answer portion of the call. Joe, are you there?

Terrence Slavin

Hello, Joe?.

Question-and -Answer session

Operator.

(Operator Instructions). Our first question comes from Satya Kumar.

Satya Kumar

Yeah, hi. Thanks for taking my question. In Q4, I just had a clarification question; on the one hand it seems that the industry is postponing capacity buying which we would think would lead to a higher mix of ArF over KrF. From Q3 to Q4 your ArF units actually down sequentially, what’s the reason for the rich in mix of KrF? How much should we worry about potentially loosing some more share in ArF, in Q4?

Robert Akins

I think its more an issue of the strength of Cymer in krypton fluoride than the weakness in argon fluoride and you may have remembered that on our last call we talked about our gross margin and how we would go after strategically important krypton fluoride business to us and, I think that’s helped in bolstering the amount of KrF business.

Satya Kumar

Okay and in terms of disclosure you normally breakout for revenue by product type in your presentation. I think its very useful, but I didn’t see the data this time, do you plan to provide that data going forward?

Nancy Baker

Actually we don’t typically provide revenue by products.

Satya Kumar

Units by product, sorry.

Nancy Baker

Oh, units?

Robert Akins

Yes, we ordinarily do that. We decided this time not to provide it, but if really for yourself and others that's useful information then we can go ahead and include that again.

Satya Kumar

Yeah, I find it very useful. And my last question when you look around Q1, can you give us a sense of granularity in terms of the declines system and non systems, is one or the other moving a bit more?

Robert Akins

I'm sorry, could you repeat that question.

Satya Kumar

As we look into Q1…

Robert Atkins

Yes.

Satya Kumar

Can you give us a sense of a granularity in the declines between systems and non-systems as one of the other moving a bit more than the other?

Nancy Baker

We actually don’t typically disclose that information but we did talk about double digit declines in systems unit.

Robert Akins

And meanwhile we don’t have any direct information at this point in time to make us suspect that the light source utilization field is going to do anything but stay where it is or perhaps go up more because we believe that factories are going find ways all new ways of increasing utilization of their light sources so you can draw conclusions from that.

Satya Kumar

Thank you very much.

Operator

Our next question comes from Jay Deahna.

Jay Deahna

Thanks, Jay Deahna of JP Morgan, good afternoon.

Robert Akins

Hi Jay.

Jay Deahna

Hi Bob. Couple of questions first of all on R&D that level that you got into in Q1 I presume that’s perking up a little bit because you got to commercialize EUV. Is that a level that’s sustainable throughout the year or would you expect that to ramp up throughout the year and I got a few follow on questions?

Nancy Baker

Actually Jay we expect it ramp up a little bit more throughout the year.

Jay Deahna

Okay.

Nancy Baker

And that it is primarily EUV and some activities around TCZ.

Jay Deahna

Okay. So, I don’t know, you are talking like can you quantify that like $1 million a quarter, $0.5 million a quarter or more?

Nancy Baker

It’s in that range, Jay.

Jay Deahna

Okay. All right, fine. And then, on your market share comment that market share should come up in the first half of ’08 is that on a trailing fourth quarter revenue basis or is that on a single quarter basis?

Robert Atkins

That’s on a trailing fourth quarter basis Dave

Jay Deahna

So, the way you’ve been doing it all along?

Robert Atkins

Correct.

Jay Deahna

Okay. And then, two other quick ones here, first of all, it looks like your inventory popped up about $5 or $7 million or so in the fourth quarter, for whatever reason were there any shipments that were expected to go out late in the quarter that didn’t push out their execution issues that we are having?

Edward Brown

No, this is Ed, no, there was no execution issues or late ships or push outs on systems. We have been building inventory for service support as the ramps, particularly in Asia has been going significantly up quarter-over-quarter.

Jay Deahna

Okay. And then, the last one might be difficult to answer, but Bob at this point in the ballgame, which to your sense as to the trough quarter, does Q1 look like a trough to you or is it difficult to say?

Robert Akins

Well, it's tough for me to be that specific. That’s why I said first half of the year only because of the uncertainty and what’s going to be happening both in Q1 and Q2 I think that's about. We have more optimism or faith about the strength of the second half of the year once these uncertainties kind of have a chance to work their way through the system. So depending upon the mix in the volumes and so and so forth it could be any time in the first quarter, the first half of the year. So I really can't break it down to particular quarter.

Jay Deahna

And then just one last follow on. Would you say that your XLR 500 unit shipments would be multiple higher in the second half than the first half?

Robert Atkins

Yes they will be higher in the second half versus the first half.

Jay Deahna

And we are taking more than 2x higher not.

Robert Atkins

Yeah that’s the range.

Jay Deahna

Okay, thank you

Operator

Our next question comes from C. J Muse from Lehman brothers.

C J Muse

Yeah good after and thank you for taking my question. I guess first half, I was hoping to clarify an earlier question regarding the consumable business in Q1 I thought earlier in the press release that you anticipate continued growth suggesting that all the weakness is coming from units is that true.

Robert Atkins

That’s pretty much true yes.

C J Muse

Okay, and I guess assuming that to be the case, I would suggest units are down in kind of the low 30s and so I guess question there is how should we think about the overall assuming that to be a case that would suggest the answer down and kind of a low 30s and so I guess my question there is how should we think about the overall market litho market in ’08 and balance on a unit basis where you expect trough in share loss.

Robert Atkins

Well again given the uncertainties and our visibility with our short lead time I think our direct customers have better visibility in what chipmakers buying a scanners are going to how they are going to behave over the course of the year. I think we all listened to the ASML conference call a week ago or so and I think they were also expressing their optimism about the second half of the year but at the same time, be reticent to be able to actually quantify anyway what that pattern will be and if they can’t do that certainly with our short lead times we are not in the position to be any clearer than they are.

C J Muse

Okay. And I guess second question is on the ASPs when I look at both of the mix I guess primarily the mix per March implied in terms of the XLA 300 and above, I get a closer 141.45 bonded ASP and so I guess my question here is mix wise am I wrong there or is pricing resetting as we enter 2008 for your higher end product offerings.

Robert Atkins

This is why I said in my script that we expect that ASPs for the current quarter will be at or above the Q4 level.

C J Muse

But I would have thought you know a $100,000 at least more given that units are probably down in the low 30’s and you are doing 20 plus in ArF?

Nancy Baker

So C J, as you can also do the math, if the units are down it doesn’t take but one or two systems to change your ASP significantly by about a $100,000 so the numbers we have given you is our best estimate at this time.

C J Muse

Got you its great, all right. Thank you.

Operator

Our next question comes from Mick Tarsenko

Unidentified Analyst

Good afternoon. Thank you for taking my call. I have two questions the first one is about XLR. You mentioned that three systems were shipped, how many were paid for and when do you expect for the payment for these two systems? And the second question is related to units by product, I understand you might not remember all the distribution but if you could provide the distribution of let’s say KrF 2 KHz, 4 KHz and ArF 4 KHz and 6 KHz with the possible differentiation between a dry and wet ArF.

Nancy Baker

Mick, I can actually take the payment side our XLR zone have any different payment terms than in the other type of system which we don’t disclose.

Robert Atkins

That's right and all that were shipped were for revenue.

Nancy Baker

Yeah.

Robert Atkins

And when it comes to the breakdown of the units (inaudible), this obviously you are going to make your question just to reenforce that you and others spying that particular graph that the numbers are of value and that Terry is in the process to trying to pull that up so, well we try to give you a verbal quantification or qualification of that later on in the call.

Unidentified Analyst

Thank you.

Robert Atkins

Thanks Mick.

Operator

Our next question comes from Patrick Ho.

Patrick Ho

Thanks a lot, a couple of questions, first in terms of the March quarter 08 the units decline that you are talking about, its obviously likely relate to the capacity buys. Is any of this decline related to any share pressures or areas where you chose to walk away from.

Robert Atkins

Its certainly not due to any areas that we chose to walk away from and you know, obviously we have a viable competitor out there but I really can't quantify the impact of market share on our projections. Right now the primary issue is industry slowdown which is as I said impacts us directly through our customers and then secondarily the desire by some our direct customers to work down their inventory levels because of their increased uncertainty of deliver as well.

Patrick Ho

Okay fair enough. In terms of the competition staying on that for a second on the ArF front are you seeing any more pressures against your XLA 300 or 400 or are they still generally at the lower ends of the ArF front?

Robert Atkins

No we are definitely and I think we talked about this in past conference calls, the XLA including now the 300 and 400 which are getting somewhat long in the (inaudible) themselves are facing competition and so we look forward to the strong adoption of the XLR’s invention which has already started and we expect to build continuously throughout the year.

Patrick Ho

Okay great and final question in terms of the non-systems revenues business it looks like that that’s going to be a big percentage over the next few quarters given some of the industry weakness out there right now. Are there anything you can take on that front that can you help your margins get back closer to the 50% level?

Robert Atkins

Well we are working on several items all the time as we have talked about in CIP we continue to work operational improvements. We have some new processes to be brought into manufacturing and we also believe that some of the contracting work we are doing on-pulse nodes and those things will also help that in the long run. I will also point out that although service has a lower margin than the light sources remember that it actually contributes more strongly to the operating income line. So its already a very reasonable business.

By the way going back to the previous question about the percentage of light source shipments by products, or basically just, I am looking at another screen right now and I will basically read off the breakdown. We had no ELS-6000 Series for the quarter. We had 26% of shipments worth a ELS-7000. Moving to argon fluoride 4% of shipments were the NanoLith 7000, 42% of shipments were the XLA 100 Series products that’s 100, 105, and including the 200; 4% were our XLA 300, 20% were the XLA 400, and 4% comprised the new shipment of XLR 500i. So, relative to Q3, we actually saw a little bit of strengthening in the krypton fluoride market especially the ELS-7000 growing from 17% of unit shipments in Q3 to 26% of shipments in Q4. So, I hope that helps and we will find a way to convey this information to you and we will of course go ahead include this in our next package going forward.

Operator

Our next question comes from Harlan Sur.

Harlan Sur

Hi good afternoon. Just wanted to know what is the level of inventory of light sources that your customers, exiting the fourth quarter and how much do you expect that to bleed down here in the March quarter?

Robert Akins

We think that we had about a 105 light sources in our direct customers' inventory as of the end of the quarter. And as I said before, that’s the number we typically see increase during up trends and decrease during slowdowns and ballpark estimate is that it could reduce by something like 10% to 15% somewhere to about low to mid 90s over the next, the current quarter and Q2 of this year.

Harlan Sur

Okay. So basically as your customers continue to work down inventories that will put a little bit of pressure and obviously its pressuring revenues here in March quarter. But it looks like its also going to be pressuring your revenue and your shipments in the June quarter as well?

Robert Akins

That’s right. And I want to also point out that this kind of normal behavior of inventories, swinging up and down, up trends and down trends overlays what we have been talking about for quite some time about reducing our cyclic times continuously to be more responsive to chipmakers so they can hold fewer light sources in their inventory and our direct customers efforts to reduce their cycle time. All in an attempt to make the entire supply chain more rapidly responsive to chipmaker ships which is something we believe is going to be characterizing the business going forward especially in the memory sector as allocation decisions between NAND Flash and DVM can be made on a relatively short-term basis and we in the industry have to be able to respond to that.

Harlan Sur

Understand that makes a lot of sense. And then second question for Nancy, it looks like in addition to the R&D, the SG&A spending is going up as well in the March quarter why the increase? And how do you expect that to trend as the year unfolds?

Nancy Baker

Most of that increase is from infrastructure build that we have going on around our new service products. Its also from a little bit of increased spending around TCV and then just due to standard activities that take place in the first quarter of any a year what we have merit increases and payable tax and things like that. But from our trending perspective, I expect it stay relatively flat.

Harlan Sur

Okay. Great and then one last question what is the company's capital spending plan for 2008?

Nancy Baker

Currently because of the EUV developments activities we are looking at a little bit higher than what we were in the 2007 timeframe. So my estimate today would probably be closer to the maybe $35 to $40 million level.

Harlan Sur

Okay. Thank you.

Operator

Our next question comes from Mark Miller.

Mark Miller

These are difficult questions because I guess everybody's crystal ball is cloudy. But I am just wondering, we’ve heard in the last couple of weeks that despite the concerns about the recession, that even with that that some people feel that some of the projections taking out some sort of economic weakness and some of the flash memory projections going forward have been trending coming down. And I assume that’s came in to about 10% to 20% below what people thought were revenues the other day. I was just wondering, do you feel some of the, and I know it's hard to subtract the macroeconomic interpretation but have you heard anything indicating that maybe flash memory is not going to be it’s still going to grow, but maybe not as strong as people thought even in a flat economy.

Robert Atkins

Actually I haven’t heard that. Of course, the SanDisk business and profitability was down somewhat but they're facing stiff competition themselves. And my personal belief is that the pricing swings in flash in the downward directions have opened up new opportunities for flash adoption as we have seen in the past of course with DRAM. So, I continue to be very bullish on the flash marketplace.

Mark Miller

The second question is again this is a hard question, but projections for growth of emergent systems year-over-year in the industry shipments, would 40% be a ballpark figure? Do you have any, I think I have some old yearly figures they gave it seemed to be quite a bit higher than what I thought.

Robert Atkins

Yes, I think they talked about the potential for doubling, but that’s their shipments as opposed to industry shipments, and I am sure that includes their protections for gain, continue to gain market share and so and so forth. That’s a pretty good view I mean spoken by the leader in the immersion marketplace today, and again, given our reduced visibility to that it’s tough for me to look at our laser orders which have one-quarter lead time, and give you a bit of different or better flavors than that. But certainly an aggressive increase in the number of immersion shipments in 2008 versus 2007.

Mark Miller

Thank you.

Operator

Our next question comes from Weston Twigg.

Weston Twigg

Hi, there. Just a couple of questions here. One I was wondering if you can explain, when you describe your immersion market share of over 80%, is that based on total cumulative installations, or can you just maybe explain me exactly how you get to that number?

Robert Atkins

Well, it’s a measure of a number of things. To begin with as I said, it’s well over 80%, that’s on a cumulative basis, that’s on a instantaneous basis, that’s on in the basis of units basis or value basis, it all comes in well over 80% and I also want to, having said that, at ten chipmakers we have by chipmakers anywhere from 80% of the emergence installations in their facilities up to 100% of their installations.

Weston Twigg

Okay, I guess my next question then is, just looking at your advanced lasers which I would count as Six 200 series with the 300s, 400s and then the XLR 500. It looks like you shipped about, given those number you gave earlier 14 units in Q4. So by my calculation that shows that would have by unit shipment in Q4 about 56% share. Does that sound about right?

Robert Atkins

I don't have your numbers and again, on an instantaneous ship basis our, our calculation is well over 80%.

Weston Twigg

Okay, thank you.

Operator

Our next question comes from Ben Pang.

Benedict Pang

Thanks for taken my question, two quick questions and first on the inventory levels can you compare the 105 lasers relative to what the inventory level was like at the beginning of 2007?

Robert Atkins

We've got to go through some numbers here, and see if we can find that for you.

Benedict Pang

May be, I'll ask my second question while you are looking for that?

Robert Atkins

Okay, please.

Benedict Pang

I just want to get a clarification on your comments on the immersion growth, are you guys having an official view on the number of units in 2008?

Robert Atkins

The total number of DPD or total number of immersion?

Benedict Pang

Total number of immersion.

Robert Atkins

We have not, and don't plan to put out a number for that.

Benedict Pang

Okay, thank you very much, even if you could, if I guess, answer my question, you guys have to be....

Robert Atkins

We'll continue to search those and during the call if we can find it, we'll go ahead and answer it for you.

Thank you very much.

Operator

Our next question comes from C J Muse

C J Muse

Yeah hi, thanks and a quick follow up, I guess I'm trying to better understand the emerging market out there. It looks like the total market size was about 65 units if I assume you are kind of 85% market share you talked about from a laser supplier perspective. But then if you talk to the big three, it looks like they are going to have shipped about 49. So, roughly 30% plus excess lasers of there in the channel and I guess my question here is can you help me understand what do you think that right inventory level and does that inventory look good to you today? Does it seem a little bit excessive and does that impact the first half demand for promotion immersion lasers?

Robert Atkins

It depends upon on our direct customers. I think some are running a little lean and some a little rich. Overall it’s about right, and remember that we expect immersion to grow not only in 2008 but also 2009, so I would anticipate that at the, we have to ship enough units so that at the end of 2008 the inventory of those light sources for the first half shipments in 2009 immersion tools will be probably looked after as well. Of course the immersion tools currently are the longest lead items with light sources typically arising a couple of quarters before delivery. We do expect over time for the folder models of the immersion tools but that will come down substantially over the course of 2008 as well.

C J Muse

Got you and I guess my next question is you talked about pulses being up 20% in ’07 with consumables up 5%, exactly which relationship that you think revenue growth in consumables relative pulse? And then, I guess my next question is as you look out to 2008 if I were on, flat at the current run rate of consumables you are talking about kind of 10% growth. I mean is that really achievable or will there be some pricing pressure that will keep the growth at that kind of up 5% type of level?

Robert Atkins

Well I think its probably going to be more in the 5% than the 10% because basically at the same time the pulse counts are going up. The pressure is on us to continue to make the tools more productive. So we end up having longer, and longer life module, longer lived modules for a value shared pricing with the customer.

C J Muse

Got you and then the last question from me I believe in terms of ring technology, can you provide an update on where you stand on the KrF side?

Robert Atkins

On the KrF side, our recent work is focussing on a 50 watt version of a single-chamber Krypton fluoride light source. In our opinion there is no need to go to dual chamber for Krypton probably for higher power, it would only increase the price of the unit and potentially the operating costs. It would not be in keeping with the value adds. So we have found ways to take our existing care of basic technology apply some of the new things we’ve learned from the argon fluoride technology and boosted its efficiency so that it can produce about 50 watts and you know that some of our customers will be introducing high throughput Krypton fluoride tools starting in 2008 those who probably come out initially with the standard Krypton fluoride light sources and then we anticipate shipping the 50 watt versions in the Q3 timeframe to make available to chipmakers at even higher throughput version of some of those new care of scanners.

C J Muse

Okay. Thank you.

Operator

Our next question comes from Satya Kumar.

Satya Kumar

Yeah, could you give us a number for the EUV’s shipments that you plan to make in calendar '07 and number of systems that you'll recognize revenues on?

Robert Atkins

Well, you mean 2008?

Satya Kumar

In terms of’08.

Robert Atkins

And we have just, we have said in the past that the agreement that we have with ASML calls for the first shipment by the end of 2008.

Satya Kumar

So, it’s not likely that ’08 you would see any be any revenues from EUV, is it?

Robert Atkins

Well, what I said is certainly consistent with gaining revenues in 2008, but…

Satya Kumar

Okay.

Robert Atkins

But you are in the area now where I am not going to speak for our customer. That's fair business. I think you need to ask them that question directly.

Satya Kumar

How would TCZ, what’s the update on that, is there any revenue potential in the second half of TCZ?

Robert Atkins

The first evaluation systems are expected to go out this year. Potential for revenues here probably is low, but is possible.

Satya Kumar

Okay. And one final sort of high level sort of question; if you look at your Deep UV shipments going from calendar ’06 to calendar ’07, they are down to 25%, 30% or so, ’07 CapEx was sort of going from calendar ’06 to calendar ’07 they are down roughly 25%, 30% or so, ’07 CapEx was sort of flattish maybe Deep UV systems for the market very flat, some of this decline is probably inventories and maybe some was share, as we look into ’08 with CapEx down 10% would you sort of characterize what sort of Deep UV market you would expect?

Robert Atkins

We haven't run the case based upon different assumptions for CapEx reduction at this point in time because of it was more or less theory back in late December and early January now starting to turn to reality, so we are still running those cases and analysis and perhaps we can discuss those in our next call.

Satya Kumar

Is the inventory of light sources at your customer at a stable low level, I mean this was sort of the lowest level that I have seen in many quarters right?

Robert Atkins

Well let me, when you ask about inventory light sources let me just refer also to the earlier question which was whether it was the inventory of light sources at our direct customer at the beginning of 2007? That number was 128 and we just said that we currently have about 105. We have seen this continuous decline based principally on cycle time and as I mentioned earlier I think that with our aggressive work and our direct customer aggressive work that that’s still has room for coming down.

Satya Kumar

Okay thanks.

Operator

(Operator Instructions). Our next question comes from Patrick Ho.

Patrick Ho

Nancy just a quick question on the stock option expensing do you a breakdown of that or if you don’t do you know what the earnings per share impact was?

Nancy Baker

You mean just what the actual was for Q4?

Patrick Ho

Yes.

Nancy Baker

That’s typically around 1 million, 1.5.

Patrick Ho

Great thank you.

Operator

Mr. Slavin, I am seeing no further questions at this time.

Terrence Slavin

Okay that’s fine Joe. Since there are no further questions I think we will just say good bye and thanks again to all of you for joining us today.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.

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Source: Cymer, Inc. Q4 2007 Earnings Call Transcript
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