Cymer Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript

Apr.22.08 | About: Cymer, Inc. (CYMI)

Cymer Inc. (NASDAQ:CYMI)

Q1 2008 Earnings Call

April 22, 2008 5:00 am pm ET

Executives

Terrence Slavin – Director Investor Relations

Robert Akins – Chairman & CEO

Edward Brown – President & COO

Nancy Baker – Senior VP & CFO

Analysts

Satya Kumar - Credit Suisse

Jay Deahna - JP Morgan

Patrick Ho - Stifel Nicolaus & Company

C.J. Muse - Lehman Brothers

Ben Pang - Caris & Company

Mark Miller - Brean Murray

Brett Hodess - Merrill Lynch

Operator

Good day ladies and gentlemen and welcome to the Cymer first quarter 2008 earnings conference call. (Operator Instructions) I would now like to introduce your host for today’s conference, Mr. Terrence Slavin, Director of Corporate Communications and Investor Relations. Sir you may begin.

Terrence Slavin

Good afternoon and thank you all for joining us today. With me on today’s call are Robert Akins, our Chairman and CEO; Edward 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.

In the near future we will send out a save-the-date notice announcing that our 2008 Analyst Day will be held on Friday morning, September 12th. We hope that many of you in the analyst community will be able to join us for the event and will provide additional details within the next couple of weeks.

Please be advised that the numbers we are disclosing during this call are preliminary numbers. The final numbers will be included in our quarterly report on Form 10-Q, 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 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 demand for semiconductors, the cyclicality in the market for semiconductor manufacturing equipment, the performance and market acceptance of our new products or technologies, 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 Robert.

Robert Akins

Thank you Terry and welcome to all of you joining us on today’s call. Total revenue in Q1 came in at approximately $124 million driven by adoption of our latest argon fluoride immersion light source the XLR 500i and higher than anticipated non-systems revenue. As we had anticipated chipmaker push-outs of lithography tools into late 2008 and 2009 affected the build plans of our three direct customers and brought about reduction in their demand for light sources in Q1 compared to the prior quarter. In this environment our direct customers have also become more conservative about the level of their laser inventories working down the number of our light sources in their work in process by an estimated 24 units in Q1; over approximately 20%.

So while our new systems shipments totaled 31 light sources in Q1 this number was effectively augmented by the additional 24 units supporting an increase in our installations at chipmakers to 55 systems, up from 46 in Q4. In Q1 we shipped 24 XL Series argon fluoride sources with 13 of them or 54% being immersion light sources. We were pleased to see the number of XLR 500i sources shipped in Q1 triple compared to last quarter and all of them are destined to be installed at chipmakers very soon in advance immersion applications.

With the product mix continuing to shift to our XL platform products our average selling price on a currency adjusted basis rose again to $1.44 million. We’re obviously pleased with the customers’ enthusiastic reaction to the XLR series. As customers come to understand the superior performance and lower cost benefits of these light sources the number of selections is growing. One advance logic customer who has recently evaluated both Cymer and our competition and selected the XLR 500i calls it a compelling product and indicated XLR significantly raises the bar.

Based on indications from our lithography tool manufacturer and chipmaker customers alike, we anticipate that the demand ramp for the XLR 500i that began in Q4 2007 will continue throughout this year as more and more chipmakers enter production at or below the 45nm node. Adoption is beginning first with the NAND flash segment and the most advanced logic manufacturers and will continue later this year and early next as [inaudible] manufacturers enter 4Xnm production.

The adoption cycle for the XLR 600i our next generation 90W immersion source which targets double patterning at the 32 nm production node or slightly larger could also begin as early as the second half of this year. We anticipate that the XLR series adoption cycle will continue over a number of years even as EUV may begin to be implemented for critical layers and high volume manufacturing.

The first chipmaker installation of an XLR 500i is currently underway and is anticipated to be completed within this week. Due to the growing level of customer demand for immersion we expect this product to continue to flow from Cymer to our direct customers and then to chipmakers at relatively high velocity. In fact we anticipate the XLRs we have shipped through the end of Q1 will be installed at chipmakers before the end of Q2. Accordingly the net reduction in our laser work in process at our direct customers in Q1 involved no immersion sources.

The XLR 500i was designed from the onset to be upgradable to XLR 600i configuration increasing average output power from 60W to 90W. We first shared the results of 90W performance on the XLR in February, 2007 and I am pleased to report that we have recently increased output power of an XLR 500i in the field to 90W at a direct customer’s facility for production qualification in support of double patterning. This is the first argon fluoride lithography light source in the field operating at 90W of output power and reflects Cymer’s leadership in providing high performance light sources for advanced argon fluoride immersion applications as well as our ability to rapidly develop and deliver new products.

We believe it is a significant benefit for our customers and the competitive strength of the XLR series that every XLR 500i shipped can be upgraded to this increased power level. It has been our experience that the ability to field upgrade a laser’s power can be critical in supporting productivity enhancement upgrades to scanners and/or offsetting optical trade efficiency losses with time to maintain productivity.

Our non-systems revenue for Q1 grew to $79 million accounting for 64% of total revenue and was driven by both increasing pulse utilization and by an increase in the sale of upgrades to enhance light source productivity and reduce cost. Pulse usage trends continue to show solid growth in the quarter driven by continuing high utilization in all three chipmaker sectors and significant usages increases in both the memory and logic sectors. As you know in recent years chipmakers have been controlling the number of new tools they need to purchase by improving their manufacturing efficiency, utilization and repurposing of existing tools. For those reasons we anticipate ongoing increases in utilization rates of our growing installed base.

In addition to increasing pulse contributing to non-systems revenue in Q1 were the first sales of our gas lifetime extension or GLX control system upgrade. GLX reduces laser gas refill frequency by a factor of 10 to 20 to increase laser availability and chipmaker productivity. GLX is a standard feature on our XLR product series and has been our practice over the years, we are now backward migrating it into earlier products both argon fluoride and krypton fluoride to improve the realized productivity of the light sources installed at our chipmakers customers fabs and help them maximize return on their capital investment.

Chipmaker reaction to GLX has been more than enthusiastic and since completing the first trial installations in late Q4 with outstanding results, we have installed the upgrade on more than 50 XLA lasers in the field. What’s more we have an aggressive installation ramp planned for Q2 particularly among our memory customers and expect ongoing GLX installations throughout 2008.

GLX is just the most recent in a series of chipmaker value adding features and upgrades we’ve introduced to help enhance light source performance and reduce costs. We provided our chipmaker customers with power upgrades to enhance throughput, a series of [inaudible] modules to improve performance and reduce costs and a suite of spectral engineering and measurement techniques to enhance wafer process performance and maximize yield and we’re working on more.

Another example of our continuing effort to deliver increasing value to our chipmaker customers is our OnPulse service product. Our comprehensive approach to enhancing laser productivity and reducing cost made possible by leveraging our comprehensive worldwide technical support and field service infrastructure. OnPulse provides flexible and customizable payment and service options, a pay-per-use model that is based on light source output rather than parts and service, and a stable and predictable cost of ownership reduction over time. As of the end of the first quarter we are pleased to report 12 of our chipmaker customers under OnPulse agreements and we are in the final stages of negotiations with several additional customers. By the end of the current quarter we anticipate that we will have approximately 800 light sources in our installed base operating under an OnPulse program and we believe it will become the standard for providing customers with the service and support levels they require.

In Q1 we increased our field spare parts inventory to address the need for faster parts availability for increased XLA utilization primarily in the memory sector. Also in concert with our customers initial adoption of the XLR and in support of the growth of OnPulse agreements.

Moving to Q1 financial performance product gross margin remained at about 48%. Operating income for the first quarter totaled $19.7 million and yielded an operating margin of 15.9%. As is our normal practice when the industry slows in Q1 we continued taking prudent and measured steps with respect to controlling non-essential spending. Net income for Q1 2008 was $12.9 million and yielded $0.41 per share fully diluted.

Our DUV bookings in Q1 totaled $101.1 million resulting in a book-to-bill ratio of 0.82. Approximately 53% of the DUV units and 83% of the value of bookings in the quarter were argon fluoride. At the end of Q1 our DUV backlog totaled approximately $76.7 million with approximately 65% of the units and 85% of the value of units in backlog being argon fluoride. Additionally approximately 65% of the value of backlog is attributable to argon fluoride immersion up from 55% in Q4 2007.

As I reported earlier in Q1 we installed 55 light sources at chipmakers and other end users. The [inaudible] quarter value share of our light sources increased from 70% for Q4 to 72% for Q1 primarily on the strength of argon fluoride and argon fluoride immersion installations. As of March 31, 2008 our total base of more than 3,300 installed at chipmakers includes approximately 650 argon fluoride light sources and more than 100 of which are immersion.

Turning to our EUV source development in Q1 we continued to make significant progress. Since successfully demonstrating 100W of burst power in October of last year, we are currently achieving increases in average power and over growing durations of running time. The construction of our first deliverable EUV source is underway in one of our new EUV manufacturing [bays] and building CSD 6 for year-end 2008 shipment in support of our announced supply agreement with ASML. Additionally interest by leading chipmakers is at an unprecedented high and we are hosting a growing number of in-house demonstrations.

Good progress also continues with TCZ our joint venture with Carl Zeiss developing a tool for the flat panel display manufacturing industry. TCZ conducted critical customer demonstrations on the first full scale tool during the quarter processing panels in quantity for multiple customers. We remain optimistic about TCZ’s opportunity to install the first TCZ 900x system this year.

Turning to our outlook there is of course growing speculation that the US economy has already entered a recession. US consumers under increasing pressure from lower real estate values, tighter credit and higher energy and food prices find themselves with less discretionary income. These macro economic factors are affecting the industry worldwide. A number of our chipmaker customers have indicated they are slowing their capital expenditures and pushing some scheduled deliveries into future periods. The NAND flash sector should see growth in unit shipments but price declines are occurring more rapidly than manufacturing cost reductions and some planned fabs have been delayed.

DUV manufacturers are carefully managing their 200 mm fab obsolescence to balanced 300 mm fab capacity builds which has led to some delays in new orders. The logic sector continues to spend at a steady albeit incremental pace and the foundry sector continues to keep spending low through careful improvement of manufacturing efficiency.

Though the current cyclical environment is challenging Cymer is well positioned as growing numbers of chipmakers adopt and ramp our argon fluoride immersion and continue rapidly moving toward adoption of argon fluoride double patterning and the evaluation of EUV. Near term the adoption cycle for the XLR series of products is clearly gaining momentum. Medium term we anticipate the 90W XLR 600i will become the light source of choice for double patterning at the 32 nm node. Longer term the success of our LTP source development has solidly positioned us as the EUV technological leader.

Finally as the potential for significant ongoing growth of our non-systems revenue it is driven not only by increasing pulse counts and a growing installed base but increasingly by our continued efforts to bring to our customers higher performance features and upgrades aimed at providing substantial improvements in uptime, availability and cost.

And now I’ll turn the call over to Nancy.

Nancy Baker

Thank you Bob, one additional Q1 financial item of note, our net income for the first quarter of 2008 includes and impairment charge of $3.8 million on our sole investment in auction rate securities. This impairment was recorded in order to properly reflect the fair value of this auction rate security given the current credit market crisis.

Yesterday we announced that our Board of Directors had authorized $100 million for a new stock buyback program as we continue our practice to use excess cash to buyback our stock. This is the fourth such program in the last four years. We are confident in the growth opportunities we see in the future and in our ability to continue to generate cash from operations.

Turning now to our guidance for Q2 2008, we anticipate revenues to be comparable to the revenue reported for Q1 2008. Our foreign currency adjusted ASP to remain at approximately $1.4 million based on continuing strong demand for XLA and XLR light sources for immersion applications. Gross margin to remain at approximately 48%. R&D expenses to be between $25.5 million and $26.5 million as we continue to commercialize our EUV source and TCZ technologies. SG&A expenses to be between $17.5 million and $18 million. Our estimated annual effective tax rate to be approximately 37%.

This concludes the prepared portion of our call. Bob, Ed and I will now be pleased to answer any questions you may have.

Question-and-Answer Session

Operator

Your first question comes from Satya Kumar - Credit Suisse

Satya Kumar - Credit Suisse

A question on immersion backlog, I just wanted to make sure I’m doing the math right, I get the dollar value of immersion in your backlog going from $55 million in Q4 to $43 in Q1, appears to be down 23%, am I doing the math right?

Robert Akins

The value of our argon fluoride immersion in our backlog went from 55% in Q4 to 65% in Q1. It went up.

Satya Kumar - Credit Suisse

Right that’s the percentage; I’m just trying to see the actual dollar amount. If the backlog has also gone down, if you actually look at the dollars of immersion in your backlog that has declined 23%, is that right?

Nancy Baker

The reason the math doesn’t quite work Satya is because our spares backlog is actually higher as well. So if you’re looking at total backlog –

Satya Kumar - Credit Suisse

No I’m just looking at the systems backlog at the end of Q4 and the systems backlog at the end of Q1.

Nancy Baker

We’ll get back to you on that one.

Satya Kumar - Credit Suisse

Okay, also a question on inventory, the dollar value of inventory is up 18% I think that’s a five year high, can you walk us through what was sort of the reasons – is there any impact on gross margin from that?

Robert Akins

Sure there’s three main reasons why the inventory is up and it really has to do with the fact that we have a much higher utilization which we’ve been reporting as you’ve seen not only in the pulse counts going up but also in that we have most of the customers particularly the foundry and the memory customers who have been pushing utilization to very close to theoretical 100% utilization and in doing that there’s been a requirement to have parts closer so that downtimes for maintenance were much shorter so we’ve changed and significantly increased the amount of inventory that is close to customers particularly in Asia. Secondarily we have the initial XLR installations and they’re in several places and of course as you’d expect they’re in multiple places around the world which means we have to have that initial buildup of inventory that’s required to support a new product and the third is for OnPulse contracts, where we have more of the inventory which basically is controlled and owned by us then in the past where the customers buy them, that’s all part of the process. So in doing that we had a significant increase in inventory in the field and they’ll be small incremental amounts throughout the year, much smaller than what we’ve seen so far.

Satya Kumar - Credit Suisse

And on gross margin is there any impact on gross margin due to inventory build?

Robert Akins

No, actually there’s a very small impact in gross margin as you see that we’ve been able to maintain about 48% and as Nancy indicated we expect that to continue so there is certainly absorption of overhead that is – but we’ve been controlling our costs and we have a pretty good control process and [our variable] cost to basically be able to adapt that to the changes in the absorption.

Satya Kumar - Credit Suisse

Okay thank you.

Operator

Your next question comes from Jay Deahna - JP Morgan

Jay Deahna - JP Morgan

A couple of quick questions; it looks like in 1Q ASML’s order value went down 60% and Cymer’s bookings went down 21%. Does that imply they ordered a bunch of lasers from you that kind of primes the pump if you will and that things will sort of balance out in 2Q, I’m just a little bit – that’s a pretty big disconnect, so I’m curious about that. And then the second one is your non-systems revenue. You talked a lot about that in your prepared comments and I’m just wondering is it fair to assume that that will be up year-over-year?

Robert Akins

Let’s talk about the non-systems revenue first, at this point in time we don’t have any reason to believe barring a catastrophe in the industry, economic conditions that the utilization will be less than it was last year so having it be up over 2007 is a good assumption. As we were pointing out in the call I think we’re entering more recently this newer mode where our non-system’s revenue is a combination of the straight forward operating cost times utilization plus these growing number of features and options and upgrades that we’ll bring the customer that are able to increase gas light, reduce operating cost, improve performance, improve the measuring techniques used to calibrate the laser in a way that improves yield, and so on and so forth. So the non-systems revenue business I think takes on an expanded scope of business opportunities for us which also adds to the grow opportunity going forward. The fact that ASML’s business was – bookings were down more than Cymer’s, I don’t have a straight forward explanation for you. You had suggested priming the pump certainly a possibility but given that we have a relatively complex situation with any of our customers of their instantaneous business, that work in process, their new orders and then what’s flowing most rapidly through the work in process and what’s flowing most slowly impacts it all. It’s hard for me right now without thinking about it a little bit longer Jay to give you an insightful answer to that question.

Jay Deahna - JP Morgan

Okay so just to follow up on those on the non-systems revenue given that you’ve been selling the longer life chambers here for quite some time is it the upgrades that would drive growth in the non-systems revenue this year as opposed to just straight service? Do you anticipate orders being down or up in 2Q and then lastly this R&D level, this new level of roughly $26 million is that sustainable through the rest of the year or is that going to come up or down?

Nancy Baker

Yes Jay I think that’s probably a pretty good level to keep going through the remainder of the year.

Robert Akins

Back to the order situation, I guess I would say that in ASML’s conference call they described the fact that their bookings might begin to increase in Q2 which would result in shipments increasing in Q4 so if that thesis was true, if their bookings were increasing Q2 and shipments in Q4 then we would expect Cymer’s bookings would begin to increase in Q2 and Q3 and shipments from Cymer would begin to increase in Q3 to support that business. And then lastly on the upgrade side of course as we’ve developed the long live modules we share that value with the chipmaker customer and it lasts longer but it also generates more up front revenue for Cymer so the effect of that on Cymer’s non-systems revenue is one which is still to be understood but its not clear at this point in time if its going to have a negative effect. It may just have somewhat of a leveling effect and as those get rolled out in larger quantities [inaudible] more customers, certainly on top of that upgrades of various types will become an important driver for that [inaudible] today and continuing going forward.

Jay Deahna - JP Morgan

And what percentage of your installed base has the long life chambers?

Edward Brown

Of the total installed base – if we look at the memory sector is basically 100% now on or close to 100% and some of the – I would say that probably of the installed base probably something on the unit base is something less than 25% of all the installed units. Of the more advanced systems it’s probably at 35% or 40%.

Jay Deahna - JP Morgan

I’m sorry, memory is at 100% but the total is at 25% or 35%?

Edward Brown

Thirty-five and 40% of the dry and wet argon. The first reference was wet only.

Jay Deahna - JP Morgan

Okay thank you.

Nancy Baker

Also to get back to a question that Satya had asked us at the beginning of the Q&A regarding the backlog and immersion, what we actually see is a slight dip in the actual number of units but that is reflecting the fact that the immersion particularly the 300 and 400s has been being built for a few quarters now that the lead times are actually coming down quite a bit. So you would expect this type of activity.

Operator

Your next question comes from Patrick Ho - Stifel Nicolaus & Company

First a quick question, Nancy in terms of the stock options what was the impact this past quarter?

Nancy Baker

It’s about $1.5 million and actually Patrick if you look at our cash flow statement it shows it there.

Patrick Ho - Stifel Nicolaus & Company

Great, on to the other questions, maybe for Ed or Bob, in terms of the OnPulse program that you have initiated, can you provide a little color on how these contracts are structured? Are they annual contracts with renewal options? How do they work?

Robert Akins

Some of them are annual for the most part they’re multi year. If you remember the value that we’ve talked about adding is for the commitment of multi year. It gives us an opportunity to put our operational improvements and decision making in the process and we can basically, we’re able to provide a better yield for reduced costs for us and pass that on to the customers. But I would say on a dollar basis the majority of them are multi year and with an average of probably 2.5 years.

Patrick Ho - Stifel Nicolaus & Company

Okay great and a follow-up on that, I think you mentioned at the last Analyst Day that you were still building out the infrastructure for this program; can you give us an update on how that ramp is going?

Robert Akins

We have infrastructure in several different areas. We have manning basically to cover on a worldwide basis, in field service engineers in systems and we are probably in the mid 90% of what we had anticipated where we’d be at this point in time and so that’s going well. The rest of the infrastructure which really has to do is connectivity to the systems and monitoring here in San Diego through our Tack Op center is on line. We are running programs now that are giving us some preliminary ability to anticipate needs for maintenance far in advance of actual needing it and so those efficiencies we expect over the course of the next several quarters are going to get much stronger. But the basic infrastructure is in place.

Patrick Ho - Stifel Nicolaus & Company

In terms of the revenue outlook, obviously it highlights that you are performing quite well, what’s the nix that you’re looking for in the revenues, do you see non-systems remaining at the 60% plus levels for Q2 or do you see it bounce back in the systems revenue in the June quarter?

Robert Akins

Well I think that as we are watching the number of systems purchased dropping in the year and perhaps flattening out I would expect that the current levels of percentage of revenue will probably be maintained or maybe even increase a little bit.

Patrick Ho - Stifel Nicolaus & Company

Thanks.

Operator

Your next question comes from C.J. Muse - Lehman Brothers

C.J. Muse - Lehman Brothers

I guess first question on a consumable business with your installed base slowing here and units expected to slow for the next couple of quarters at a minimum, what impact will that have as tools come up warranty and the long-term growth outlook for the consumable business, if we were to exclude the option and upgrade segment of that business.

Robert Akins

If you look at the pulse count increases we have been reporting on a quarter-by-quarter basis they are actually growing as a percentage faster than what we were having in new systems that were coming off warranty. So I would say that its pretty balanced out for this year but also remember that the amount of revenue that comes off of argon fluoride systems is higher, a little bit higher than krypton fluoride so as we are getting more of those systems basically implemented and running at full utilization then we’re getting a higher yield if you will on an average basis for the systems in the field.

Edward Brown

Remember also that light sources don’t come off of warranty for about two years. So in the short-term a slowdown in unit shipments really does nothing to impact the number of sources that are coming off of warranty. Those were shipped a couple of years ago. And then let me just reiterate lastly that as we said in the prepared comments that as things slow chipmakers seem to find all new innovative ways of improving the efficiency and utilization of their existing sources which again just drives up pulse utilization even more.

C.J. Muse - Lehman Brothers

Just to follow-up on your comment there about coming off warranty so I guess is it fair to say that the growth we’re seeing and we saw in ’07 and we’re continuing to see here in ‘8 is really a reflection of the strong unit volumes back in ’06 early part of ’07 and I guess that begs the question with unit volumes going where they are versus where they were in ’07 does the consumable business flat line out say in 2009?

Edward Brown

To your first point yes, that is exactly correct. It’s the units shipped back in the 2006 timeframe that are now coming off of warranty and contributing to that.

Robert Akins

One point of clarification is that the main system has a warranty which is about two years or so on average but the components, the consumable components of the system are warranted with time and also pulse counts and what we typically see is those portions of the system which make up most of the spares revenue pulse out or go out of warranty far earlier than two years.

Edward Brown

That being said we don’t anticipate a saturation or a flattening of that for a number of reasons. One of course is as we’ve said now we’re getting heavily into the value-adding upgrades for our chipmaker customers which will be augmenting that and remember that many of the systems that were shipped in the last two years that are coming off of warranty are argon fluoride, those are higher pulse repetition rate for [inaudible] machines and of course they’re the newest technology with the highest revenue per pulse in our installed base.

C.J. Muse - Lehman Brothers

On the consumable side what percentage of the mix was options and upgrades and what impact does that have on margins? Is that higher or lower than the corporate average?

Nancy Baker

I’m sorry C.J. we actually don’t disclose the details of our non-systems product revenues.

C.J. Muse - Lehman Brothers

Okay, I guess in terms of the overall market what’s your latest view on the DUV market for 2008 in terms of industry units?

Robert Akins

Well we’ve looked at the numbers, Data Quest just had their forecast on April 18 calling out downgrading from previous forecast down to about 260 DUV units for 2008 and ASML’s materials on Wednesday of last week, they had about 56 fewer – I’m sorry 482 total was Data Quest’s revised forecast 260 DUV, ASML had about 56 fewer units at 426 total units. I think that we’re probably somewhere in the middle between those two and if everything were to stand right now we think there’s an opportunity for that to potentially go a little further south before it goes north again.

C.J. Muse - Lehman Brothers

On the immersion front Satya asked the question in terms of your backlog on revenue for immersion going down are you concerned at all about immersion inventory in the channel. It looks like there’s 40 to 50 lasers out there and I guess I’m wondering what impact that has on your view for that business in the next couple of quarters and then secondly I was surprised to see you sold five EOS 6000 tools, is that a one-time blip there or is that something that’s sustainable?

Nancy Baker

I should first clarify C.J. it wasn’t that the immersion revenue was expected to go down. That’s because the backlog is down we’re not forecasting that immersion necessarily from a revenue perspective goes down. That was my point of immersion has been out there now for a while but the lead times are actually coming down. So it’s not our projection that immersion comes down from a revenue perspective.

Robert Akins

I don’t believe that as far as our visibility goes we agree that the number of immersion tools could roughly double in 2008 relative to 2007. I don’t see any immersion tools sitting around and WIP so those are going quickly and I think what’s needed is being ordered only. As far as the is the EOS 6000 a blip or not, we occasionally see these kinds of things occurring I certainly don’t expect that to be a trend going forward.

C.J. Muse - Lehman Brothers

Thank you.

Operator

Your next question comes from Ben Pang - Caris & Company

Ben Pang - Caris & Company

In regards to the service business in 1Q was it better than you expected?

Edward Brown

No I’d say it came in very close to what we had projected and as Bob and Nancy both indicated earlier some of the enthusiastic acceptance if you will of the GLX product which we were able to install over 50 systems in the first quarter and we’re anticipating that that will increase significantly going forward.

Robert Akins

That being said I think certainly the ratios came in as anticipated but the absolute strength of the non-systems revenue was a little bit larger than we would have guessed in the January time frame.

Ben Pang - Caris & Company

And is that due to the GLX?

Robert Akins

That’s a really significant contributor yes. I think what has pleasantly surprised us is the relatively aggressive way the GLX has caught on.

Ben Pang - Caris & Company

And in terms of the product, you’re new ring, XLR product you mentioned that there should be some cost of ownership advantages correct?

Edward Brown

That’s correct, it’ll have about a 20% reduction in cost [inaudible] relative to our previous products which is the first time we’ve ever introduced a new model that has substantially higher performance and yet is substantial cheaper to actually operate.

Ben Pang - Caris & Company

Okay how long does that actually take to prove out at the customer side, at the end user side?

Edward Brown

At a memory chip manufacturer it doesn’t take too long. Certainly we’re looking at a year or less.

Ben Pang - Caris & Company

So at what point will I guess you get a better feel for whether that 20% is proven in the field? Is it the middle of this year?

Edward Brown

Probably late in the year is the time frame for that but of course in the meantime we’ve been doing in-house operating type tests on this configuration for some time so our – there’s always a difference between what you do internally and what you do in the field and that’s what we’ll be learning over the next several quarters.

Robert Akins

In addition so that the customer can realize it even faster in the case of buying the new tool, ring laser and putting it on an OnPulse contract they get the guaranteed cost benefit on a pulse basis right from the initial installation.

Edward Brown

Right so that’s one of the benefits of OnPulse is that Cymer takes the complete risk if you will of module lifetime with respect to cost operation for chipmaker.

Ben Pang - Caris & Company

And any customer can get that particular deal of the guaranteed cost reduction on the cost of ownership?

Edward Brown

That’s correct.

Ben Pang - Caris & Company

Thank you very much.

Operator

Your next question is a follow-up from Satya Kumar - Credit Suisse

Satya Kumar - Credit Suisse

Is there any TCZ included in Q2 guidance? How should we think about the opportunity in the second half?

Nancy Baker

No there is not.

Satya Kumar - Credit Suisse

And you mentioned there could be some TCZ installed in the later part of this year, is that going to revenue in the later part of this year?

Nancy Baker

From an estimate perspective Satya I would assume it doesn’t show up until 2009 because these will be evaluation units primarily.

Satya Kumar - Credit Suisse

Okay and Bob I don’t recall you mentioning this rolling four quarter market share this time around, I was wondering if you have an update on that.

Robert Akins

Yes the rolling four quarter market share ticked up from 70% last quarter to 72% in Q1.

Satya Kumar - Credit Suisse

And what about market share in immersion at this point?

Robert Akins

We do not have an update on that specifically.

Satya Kumar - Credit Suisse

Do you think that the immersion market share we are holding that given the decline in immersion backlog and doubling of shipments, if you could give some color on how to think about immersion market share?

Edward Brown

I think in the immersion area there are a number of factors to consider. First off of course as you are well aware chipmakers are demanding a second sourcing across the wavelength spectrum which certainly affects us as well and of course our XLA product as we’ve discussed on past several conference calls is getting long in the tooth and therefore we don’t believe it offers substantial differentiation from competitors product. The XLR has just shipping in Q4 and with that we anticipate growth and market share beginning in the first half of this year and them moving on forward led by that XLR 500 adoption.

Satya Kumar - Credit Suisse

Okay and XLR is something that you’re shipping to both the immersion [windows] at this point?

Edward Brown

Correct.

Satya Kumar - Credit Suisse

Okay, thanks.

Operator

Your next question comes from Mark Miller - Brean Murray

Mark Miller - Brean Murray

Just had a question about you said your rolling four quarter average share went up by 2%; do you feel confident also that market share immersion share still stayed above 80%?

Robert Akins

I don’t have those numbers in front of me right now but a lot of it depends on going forward on what happens in this mall to marketplace. We certainly believe that we have arrested the market share erosion. Of course it slowed as it got down to the 70% level and now has ticked up a little bit. But the slowdown is of course adversely affecting all chipmakers but especially the logic and foundry sectors where Cymer has traditionally had a very high market share. So recovery of those sectors is going to bring further strength to Cymer market share in immersion when that does occur. We’re seeing some signs that logic CapEx spending immersion might pick up in the second half of 2008 but overall XLR gives us confidence that across those sectors and memory that Cymer will see stronger adoption going forward.

Mark Miller - Brean Murray

Okay thank you.

Operator

Your next question comes from Brett Hodess - Merrill Lynch

Brett Hodess - Merrill Lynch

On the service side of the business because you started recognizing revenues on the GLX in the quarter did some of those very large sequential increase due to that new program on top of the ongoing upgrades and service business?

Robert Akins

That is correct, yes.

Brett Hodess - Merrill Lynch

And do you think as you look forward on the GLX business its going to continue to – that was the first quarter revenue will that continue to have sort of more like little bit step function impact on that business or do you expect to see more linear from here?

Robert Akins

As I said we’re certainly pleased with the speed with which this is being adopted but it’s been adopted where you’d expect first and that is on XLAs. It comes standard on XLRs going forward but we have a whole slew of light sources out there, dry argon fluoride and krypton fluoride and this can be applied and is designed to apply to all of them. So we would anticipate that we’re going to see some pretty significant adoption of TLX here in the first few quarters and then it will continue for a long period of time as it makes its way through the other high duty cycle portions of our entire install base.

Brett Hodess - Merrill Lynch

If you look at the XLR as you mentioned the differentiation on that relative to your competitor opens up again, and but of course you’ve been talking about the products over the past year or so, so do you have any idea how long it might take for them to come out with a product that’s more similar to the XLR and increase the competition again? Do you a year lead or can you give us any kind of sense on that?

Robert Akins

Well it’s difficult for us to speak and we don’t make a point of speaking about our competitors’ products because it’s difficult to understand the internal workings of their R&D efforts on the surface but I will point out that the gigaphoton GT 61a is a 60W only argon fluoride laser. The GT 62a is both a 60W and upgradeable to 90W but to the best of our understanding it has only been delivered and operating at the 60W performance level as we speak. The XLR 500i of course as we just discussed is upgradeable today. We’ve already done it. It will be upgradeable – any XLR already delivered will be upgraded when the customer desires to the 90W level in the field which is a real nice advantage and so it has a lot of extra capability and reserve designed into it which I think gives it additional legs.

Brett Hodess - Merrill Lynch

On the increased R&D for the rest of the year, a pretty big jump, can you give us some idea of how much of that TCZ versus EUV versus the next generation deep UV?

Nancy Baker

The majority of it is EUV Brett. There is a very small portion that is TCZ and the investment on the DUV side has been balanced for the last several years. So the increases are really on EUV and a small portion on TCZ.

Brett Hodess - Merrill Lynch

Okay thank you.

Operator

Your next question is a follow-up from Jay Deahna - JP Morgan

Jay Deahna - JP Morgan

Bob what is the -- remind me, the inventory of laser units at the OEMs?

Robert Akins

It was at 105 units at the end of Q4 and we estimate now it’s about 81 units as of the end of Q1.

Jay Deahna - JP Morgan

Those are Cymer units only?

Robert Akins

Those are Cymer units only, yes that’s correct.

Jay Deahna - JP Morgan

Okay and how does that compare to historical levels and to what extent are customers comfortable with that level and also to what extent has your lead time reductions allowed them to be potentially more comfortable at lower than historical level?

Robert Akins

I think you hit upon the issue. I think any comparison to historical levels show that these numbers are getting lower consistently over time and our customers have done an amazing job at reducing their integration cycle time. We have also done a good job at reducing our cycle times as well so going forward we would expect these numbers will continue to go downward. Now when business picks up again then of course WIP always increases but to the extent that additional efficiencies in the supply chain and integration time have been learned in that period of time, they’ll go up again but not to the same levels that they were prior to the decrease.

Jay Deahna - JP Morgan

Okay and then of those 81 do you have any idea what the mix is between ArF and KrF, is it kind of like two-thirds one-third split or something like that?

Robert Akins

Yes, about two-thirds of them are argon fluoride, one-third krypton fluoride and of the two-thirds argon fluoride a little over half are immersion.

Jay Deahna - JP Morgan

Okay. You talk a lot about the ring technology and the power on the XLR models, what is the situation with dry argon fluoride competitively and with the advent of ArF immersion does that permanently reduce the market size of ArF dry or as you shrink down the 32nm do you do some [mint] criticals with the dry ArF?

Robert Akins

Dry ArF by all the forecasts and discussions with our customers and chipmakers that we’ve talked to doesn’t seem to have a lot of growth opportunity in units [going forward]. That’s especially impacted by the fact that flash memory seems to use this large amounts of immersion, large amounts of lower resolution but in the dry argon fluoride doesn’t’ use much at all. DRAM is a little bit more balanced but that combination means that argon fluoride dry just isn’t going to be most likely a big unit seller going forward over the next many years.

Jay Deahna - JP Morgan

And how do you feel about your competitive position in dry ArF, is that more akin to KrF and ARFI or where does that stand?

Robert Akins

No it’s a dry argon fluoride our competitive position there is substantially better than krypton fluoride.

Jay Deahna - JP Morgan

Based on what?

Robert Akins

Units installed, fourth quarter however you want to define it, our market share or argon fluoride dry is doing well.

Jay Deahna - JP Morgan

Okay thank you.

Operator

Your next question is a follow-up from Patrick Ho - Stifel Nicolaus & Company

Patrick Ho - Stifel Nicolaus & Company

In terms of your upgrades business I think over the last few years we’ve seen how big the non-systems revenue have grown and we’ve started seeing a lot of these new upgrade offerings for the XLA, would it be fair to characterize and you don’t have to get into specifics that the turnaround time for new upgrades for the XLR products are going to be less lengthy that we’ll see those quicker than we’ve seen for the XLA?

Edward Brown

Yes we are definitely trying to improve our capability of doing quick turns that impact customer productivity in real time. Remember that the XLR basically is currently shipping with all of the current upgrades that we’re offering for the rest of the install base. So that’s really where they were developed and they were backwards migrating them and making them available to the install base.

Patrick Ho - Stifel Nicolaus & Company

Thank you.

Operator

Your final question is a follow up from C.J. Muse - Lehman Brothers

C.J. Muse - Lehman Brothers

Nancy, you guided to a 37% effective tax rate for the year, what should we be modeling for Q2?

Nancy Baker

I would model 37%.

C.J. Muse - Lehman Brothers

Okay so it would have to be a little higher than that given you did 31% in Q1?

Nancy Baker

No we actually did 37% in Q1. The only real caveat that I have C.J. and anybody else that’s listening is to please push on the R&D tax credits that in Congress today because if they would get that through that would be the only area that could potentially reduce our tax rate to about the 33% 34% level.

C.J. Muse - Lehman Brothers

Okay, thank you.

Robert Akins

Since there seems to be no more questions I’d like to thank everyone for joining us on the call.

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