Varian Semiconductor Equipment Associates, Inc. Q2 2008 Earnings Call Transcript

Varian Semiconductor Equipment Associates, Inc. (VSEA)

Q2 2008 Earnings Call

April 24, 2008 5:30 pm ET

Executives

Robert Halliday - Executive Vice President and Chief Financial Officer

Gary Dickerson - Chief Executive Officer

Analysts

C.J. Muse - Lehman Brothers

Patrick Ho - Stifel Nicolaus

Peter Kim - Deutsche Bank

Satya Kumar - Credit Suisse

[Jadece Ire] - UBS

[Paul Swett - Capital Flows]

Jay Deahna - J. P. Morgan

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Varian Semiconductor Equipment Associates, Inc. conference call. My name is Karen and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I will now like to turn the presentation over to your host for today’s call, Mr. Robert Halliday, Executive Vice President and Chief Financial Officer. Please proceed, sir.

Robert Halliday - Executive Vice President and Chief Financial Officer

Good afternoon. I’m Bob Halliday, Varian Semiconductor’s Chief Financial Officer. I want to thank you for joining us for our fiscal 2008 second quarter conference call and webcast. With me on the call this afternoon is Gary Dickerson, our Chief Executive Officer.

Before getting into our financial results, we want to remind you that during the course of this call we may make various comments about the company’s future expectations, plans and prospects. These forward-looking statements are subject to various risks including those detailed in the company’s public filings including our most recent 10-K filing. The company cannot guarantee that these forward-looking statements will actually occur and we assume no obligation to update these forward-looking statements.

We will refer to measures not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation to the most directly comparable GAAP measures is available on our website under the presentations tab of our Investor Relations page.

Recent highlights for Varian include our overall market share increased to 64.5% in calendar 2007 and our gross margins are holding up well in a difficult market. Now, I will review the results for our second quarter ended March 28, 2008.

Second quarter 2008 revenue totaled $255 million, the third highest quarterly revenue in Varian's history and 6% higher than the 242 million we recorded for the second quarter of fiscal 2007. During the quarter, sales to two memory manufacturers, a major logic company and a large foundry in Asia, each accounted for 10% or more of our total revenues.

We shipped 36 single wafer high current tools in the second quarter of 2008, the same number we shipped in the fourth quarter of fiscal 2007. 34 out of 36 of those tools were 300 millimeter tools. Our installed base of single wafer high current tools now exceeds 500 tools.

Our book-to-bill ratio in the second quarter approximated the industry average. Second quarter 2008 net income was $34 million or $0.45 per share. Second quarter revenues and operating margin were approximately what we expected for the quarter.

However, the outlook for the remainder of the year softened during the quarter particularly in Asia. This reduced forward outlook result in a higher share of US taxable income for Varian, which is taxed at a higher tax rate. The projected tax rate for the remainder of the year has increased to 39.5% with a second quarter catch up tax rate of 45%.

The higher tax rate in the second quarter reduced earnings by $0.10 per share. With our original estimated tax rate, we would have been at $0.55 per share, the high end of our guidance. Second quarter 2008 pretax income at $62 million was close to the first quarter's pretax income.

The geographic breakdown of our revenue this quarter based on fab locations was: Asia 70%, North America 25%, Europe 5%. Second quarter 2008 tool shipments in units were approximately 56% memory, 16% logic and 28% foundry compared with 82% memory, 9%logic and 9% foundry in the first quarter of 2008. Shipment pulling from a major Taiwanese foundry in the second quarter offset push-outs by two memory companies.

300 millimeter tool shipments increased to a record 97% of total tool shipments in the second quarter. During the second quarter, we recognized revenue for six PLAD tools at three different customers including two different fabs at a major memory manufacturer.

Our installed base of PLAD tools has now reached 26. We are forecasting seven PLAD tool sales in the third quarter of fiscal 2008. Second quarter 2008 gross margin was 47.5%, at the high end of our guidance. Second quarter margins were lower than the first quarter of 2008 mainly due to an unfavorable customer and tool mix, partially offset by continued cost reduction in a strong spare parts business. In fact, we set another record for parts and service revenue in the second quarter.

R&D expenses of $28.5 million came in slightly under our guidance due to the timing of engineering materials purchases. Marketing, general and administrative expenses increased slightly from the first quarter of 2008 to approximately $33 million, inline with our guidance.

At the end of the second quarter, our full time equivalent headcount was 1,906, down from 1,999 at the end of the first quarter of fiscal 2008. This decrease was due primarily to lower manufacturing headcount.

During the second quarter, we bought back nearly $40 million or 1.2 million shares of our stock. Through today, we have bought back a cumulative total of about 20.1 million shares of our outstanding shares at September 30, 2005 at a cost of approximately $653 million. Since the start of our buyback in the first quarter of 2006, we have reduced our net outstanding shares even after the impact of additional option exercises by approximately 14% including 11% in the last 15 months. Earlier today, we announced that our Board authorized an additional $100 million to repurchase more shares. As a result, we plan to continue to buyback our shares.

Second quarter 2008 capital spending was $2.5 million. Depreciation expense for the quarter was $4.2 million. In the third quarter of fiscal 2008, we anticipate revenues of between 175 and $185 million. In the third quarter, we anticipate the tool shipments in units will be approximately 54% memory, 29% logic and 17% foundry. Despite lower revenues, we expect that gross margins will increase to between 48 and 48.5% in the third quarter of fiscal 2008. This is due to a higher percentage of spare parts sales in the third quarter combined with continued cost reductions, partially offset by an unfavorable customer mix.

Our gross margins have held up for several reasons. One, our gross margins are favorably impacted by our growing upgrades and spare parts business. We put a lot of focus on developing and delivering high value upgrades and spare parts to our growing installed base.

Secondly, we anticipate that sales of our PLAD tool, which carries higher margins than are beamline tools, will almost double in fiscal year 2008 from $46 million in fiscal 2007.

Third, VIISta common product platform allows us to buy the same parts and assemblies for all of our tools. We continue to reduce product cost as we increase our worldwide sourcing activity. We also are shortening our manufacturing cycle times. Somewhat slowing our gross margin improvement this year is a challenging pricing environment especially in terms of mix. Also, we have some but not large unfavorable manufacturing absorption issues.

Our gross margins translate well into operating margin leverage because R&D expense is very efficient with the VIISta common platform. We expect that R&D expense will decline by approximately $1 million to about $27.5 million in the third quarter. We are tightly managing program expenditures in light of the current business environment.

Marketing, general and administrative expenses should decline to approximately $32 million in the third quarter due to tight spending constraints. Included in our third quarter outlook for marketing expense is an increase in our funding for new evaluation tools, which should lead to future market share opportunities. As a result, we anticipate operating profits of approximately $28.5 million. These profits will be taxed at a higher estimated tax rate of 39.5% and translate into earnings per share between $0.21 and $0.26 in the third quarter of 2008. With a more normalized business mix in the future, we expect Varian’s tax rate to trend down over the next few years. We expect capital expenditures in the third quarter to be approximately $3 million, mainly for R&D projects and facilities improvements.

Now, I’ll turn the call over to Gary for his remarks.

Gary Dickerson - Chief Executive Officer

Thanks Bob. In 2007, Varian increased its overall market share from 43.2% to 64.5% of the implant market. We increased our high current share from 46% to 78%, our medium current share from 53% to 57%, and we maintained 100% share of the ultra high dose or PLAD market, which grew from almost nothing in 2006 to 64 million in 2007.

In 2006, Varian’s dollar market share was 1.8% higher than its unit share. In 2007, Varian’s dollar share was 5.6% higher than its unit share. What this comparison of dollars and units points out is that Varian is widening the gap in the value proposition we provide to our customers and our competitors are largely selling older technology at higher discounts. This is also seen in the 10% decline in our competitors' average selling price in 2007 versus 2006.

In 2007, there were 193 tools not sold by Varian. Included in this total were 76 million current tools mostly in Japan, 44 high current batch tools, 31 batch high energy tools and 29 high current and medium current tools where Varian has been selected as production tool of record. Varian is well positioned in all four of these categories.

The 29 tools where Varian has already been selected as production tool of record will be Varian’s to the extent these customers buy. The 44 batch high current tools where Varian already has been selected for the next technology node or is actively engaged this is mostly in Japan. The 76 medium current tools where Varian gained 4% share in 2007 and has the best most valuable medium current implanter in the world and the 31 batch high energy tools where Varian has a single wafer solution to help customers produce more die per wafer and increase yields.

The segmentation of the market has changed over the last three years in ways that are beneficial for Varian. In 2005, there was no ultra high dose market. In 2007, the ultra high dose or PLAD segment was $64 million market, which could grow to approximately 90 million in calendar 2008.

The high current market remains the largest segment at 50% in 2007. In 2005, approximately 55% of the high current market was single wafer tools. In 2007, approximately 82% of the high current market was single wafer. In 2007, there was a significant shift between the high energy and medium current markets. From 2006 to 2007, the medium current TAM increased 10% and the high energy TAM decreased 37%.

The major driver for the change from high energy to medium current is the transition of some well implants from high energy to medium current tools. Varian captured a number of these sales in the Taiwanese memory market with its VIISta 900XP, a medium current tool capable of doing some traditional high energy well implants. For instance, in the Taiwanese market, high energy was 11% of the market in 2005 and 6% in 2007. Another large change in TAM was in Japan. The Japanese market was down from 28% of the worldwide TAM in 2005 to 19% in 2007. Within the Japanese market, high energy was 19% of the total in 2005 and only 11% in 2007. In 2007, it appears that Japanese customers also transitioned some steps from high energy to medium current and reallocated some of their previously purchased high energy tools for their new production requirements.

We better understand our customers' new production requirements because of our large market share and the people that we have added to the company with strong process and device backgrounds. The R&D customers are now working much more closely with Varian's process directors to find implant solutions to their challenging device performance requirements. This cooperative working relationship combined with Varian's technology leadership and the development leverage of the VIISta platform are powerful enablers of future improved operating performance by Varian.

Customer spending could be off by more than 20% in 2008. However, we see 2008 as a year of opportunity and positioning for additional share gains. The PLAD segment should continue to grow in 2008 and we plan to introduce several new implant tools this year, which will provide opportunities for future growth.

In the high energy segment, we will offer customers the option of purchasing either our VIISta 900XP or VIISta 3000XP, both of which provide precise zero degree well implants on production proven tools. Zero degree implants can only be done on single wafer tools. We believe the customers, particularly cost conscious memory customers, can get more chips per wafer and higher yields with precise zero degree single wafer tools.

Our beamline and plasma doping tools are recognized as the most accurate and cleanest in the fab. This opens the door for the broader use of implant beyond traditional electrical applications into precision material modification.

Since we last discussed our customers' interest in new implant applications at Investor Day, we have made considerable progress. We are currently engaged with major customers in the memory, foundry and logic markets to develop and implement several potential new applications. Opportunities exist for materials modification and photolithography, etch and films processes. Our applications team is encouraging great customer pull for new potential uses for implant technology for both beamline and PLAD.

We have seen customers add new implant process test to solve problem including resist stabilization steps to solve yield problems and steps to resolve issues with etch microloading. We have many customers evaluating additional applications including ways to increase strain, improve electromigration and other film modification implant steps.

In the last couple of years, we have brought in key process technologists to help us exploit these new opportunities. We have built our regional technical expertise to help drive our share growth and TAM expansion. We have brought in people with knowledge of lithography, etch, and films processes to drive these new applications.

With our strong share growth, our installed base is expanding, creating future business in service and support. We are engaging with our customers to solve some of their most challenging problems through new innovative implant technology for both electrical and precision material modification.

2008 should be a strong launching point for Varian given our share position, product pipeline and development and financial leverage of the VIISta platform and the emerging applications we see for our beamline and PLAD tools for both electrical and precision material modification. Although, we are just customer spending in 2008 is affecting total sales for the industry, Varian should enter 2009 with a very strong product, operating and financial model.

Now, we will be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of C.J. Muse with Lehman Brothers. Please proceed.

C.J. Muse

Yeah, good afternoon. Thank you for taking my question. I guess the first question is, I guess, given the backdrop for where we are in the cycle, where do you think CapEx lands this year and how do you think implant does relative to overall, I guess, WFE spend?

Robert Halliday

Yeah, I think, CapEx in total is down 20 to 25%. I think implant keeps a steady percentage. We were off a little bit last year. And if you look at why we were off last year, we actually drilled into a lot of this information recently. If you look by segment, high energy went down from about 17% to 11%, which looks like it's the well implants and some moves to medium current.

Most of that's over, but there could be a little bit more of that maybe in Taiwan. Japan has dropped about 24 to 19% and that was the high energy impact and also some stuff moving like LP to the Rex chip.

If you look at this year, it looks like the logic guys that spend will use more implant than the logic guys that aren't spending. In other words, the number one versus the two guy and number one using a little bit more implant than number two. And if you look at the other mix issues, I think we'll be pretty steady as a percentage of the TAM this year.

C.J. Muse

Okay. And then from a service perspective, I think in the past you thought that could grow around 10%. Is that still something that's achievable in this environment?

Robert Halliday

Yeah, I think so.

C.J. Muse

So, when you add all that up, that would suggest if you bounced around the current revenue run rate, say June to September, I am not trying to make you god there, but that would suggest a sharp uplift back to the 250 range in December, assuming CapEx around down 25%. Do you have visibility to that type of recovery? Are you ready to call the bottom here? What are your thoughts?

Robert Halliday

I am not going to call any.

Gary Dickerson

I think it is difficult to say from a CapEx standpoint. Again, as Bob said if you look at what the dynamics were in 2007, about a 10% impact to TAM was the high energy decline and actually there was a pretty significant impact from lower competitor pricing. The competitor pricing declined about 10%. So, that was also an impact in the overall total available market. I think longer-term, C. J., in terms of the implant TAM, the longer-term outlook is encouraging. Last month I met with one customer where they have about 20% more implant steps for the next technology node. Obviously that's very positive for us.

They've added on their next technology node additional precision material modification implant steps. This is a big issue for a lot of customers implant steps to improve device performance going from arsenic to phosphorus plus carbon in preamorphization implants. So, going from one implant to three implant on source drain extension. Memory customers are focused on higher speed and the periphery is becoming more logic-like, and as we've also talked about PLAD increasing from a TAM perspective. So I think all of those things longer-term are positive for us. There were a couple of dynamics last year that were not as positive. Fortunately again, the competitor pricing is not an issue for us, in fact strengthens us longer-term. But it did impact the TAM last year.

C.J. Muse

Thank you. It was very helpful.

Robert Halliday

Sure.

Operator

Your next question comes from the line of Patrick Ho with Stifel Nicolaus. Please proceed.

Patrick Ho

Thanks a lot. A few quick housekeeping questions, Bob. What was your stock options expense this quarter? What was cash flow from operations?

Robert Halliday

Our cash flow from operations was 24,444 positive and the stock option expense for the quarter net of tax was 3.236 million. At for pretax line, you add back another 2.704 million so that at the pretax line it was about 5.9 million.

Patrick Ho

Great. I think it's known that the memory is the main driver for the weakening CapEx environment in the near-term. From your perspective, where do you see the incremental worsening? Is it from DRAM or is it from the NAND Flash guys?

Robert Halliday

Well, I think you have to say…

Gary Dickerson

DRAM.

Robert Halliday

Yeah, I think it's DRAM. I think there are two things; one, what the world is internalized versus what we think. I think it's still DRAM now.

Patrick Ho

Okay, great. Second, in terms of the disruption your competitor is seeing right now in the marketplace particularly with the host of bid out there. Has that influenced or has that created any potential opportunity for you guys in the near-term as some of their customers look for more viable option?

Robert Halliday

Well, I think incrementally it's positive. I think the major battleground right now is who's got the best product. We gained about 20 odd points of share based on this product. We gained against everyone. So we have a lot of momentum regardless of what they are doing and I think regardless of what the outcome is. We have a lot of momentum on the product side.

Gary Dickerson

Yeah. Patrick, I was just on a trip to Asia and I probably had 25 meetings with customers. It was very interesting that that topic or the question didn’t come up in any of the discussions.

Patrick Ho

Okay, great. Final question. In terms of the high energy opportunity you have mentioned before in the past, you are talking about offering either the medium current tool or your high energy tool. Given some of the differences I guess between both the ASPs and the margin profiles for those two tools. Is there anyway you can, I guess, almost like force your or potential customer to take say the medium current tool versus the lower margin high energy tool?

Gary Dickerson

Well, I guess a couple of things. On medium current tool, again, it always takes part of the well implants from high energy, so there is still a high energy market that's there. It's a positive thing for us because our medium current tool runs those higher energy implants better than any other medium current tool. So it's further differentiation for us. In terms of high energy, again what we see for those remaining well implants, the customers are still focused on transitioning from batch to single wafer. When I was out traveling over the last couple of months, a lot of pull-through for customers making this transition because there is a good value proposition in die per wafer and higher yields.

The high energy market is the strongest market for our competitors with by far the highest margins. So, for us to take share there it's kind of a double win for Varian. It's a great incremental opportunity for Varian because we leverage the common VIISta platform where the same in-station software control system, those symmetry systems, angle control, all of those things are common across all of our products. So it's a great incremental opportunity. Whereas we believe we are in a very strong position to take share in this market. We penetrated two new accounts with eval systems this quarter including a large memory company, so we are making progress there. And, 2008 we see as a transition year where we are penetrating new accounts, transitioning them to single wafer and then positioning Varian for future production buys.

The other thing I would say on high energy is this will not be lower margin in the future from a high energy perspective. That has been true in the past will not be true in the future.

Patrick Ho

Great. Thanks a lot guys.

Robert Halliday

Welcome.

Operator

The next question comes from the line of Peter Kim from Deutsche Bank. Please proceed.

Peter Kim

Hi. Thanks for taking my question. You went through a lot of statistics about the market share and I was wondering, I was looking at that data and I noticed that overall wafers type equipment was up about 10%, but high current market size actually contracted and considering the pace of technology and the shrinks that are happening in memory as well as in logic, I would have thought that they would have gone the other way. And I understand that your competitor is selling smaller number of units at a discount but that quite does not make up the gap. So I was wondering if you could reconcile that for me?

Robert Halliday

Sure. Within high current, the high current TAM in dollars was down about 5.7%. And if you look at our competitors ASPs where they are selling older batch tools or even AMAT sold their tools as they have given out of the business at pretty darn low prices. Those units, if they were sold at our ASPs, it would have given a 9.7% less than a TAM actually. And if they were just even sold at their prices our competitor sold every four, it would have given a 5.7. So a fair amount of this was pricing by our competitor. So, to be honest with you, we have also displaced some of the TAM data because what really fell apart was three places we don’t have as much insight, Japan high energy and average pricing from our competitors and so this ASP stuff, we have just crunched up last couple days. So, if you look at the high current ASPs for the competition and high current was down 22% year-to-year.

Peter Kim

So, do you think that represents an opportunity for you guys to raise ASPs going forward or is that and considering the downturn environment is that that is not a near-term priority?

Robert Halliday

Well, I think there is two things. I think a lot of those tools they sold last two years were going out of business sales were old node tools. And if those swing over to newer technology and that capacities added at newer technology nodes that’s where we are already tool of record in most cases and we'll get our existing pricing. So I expect wee will benefit from this.

Gary Dickerson

Yeah, the other thing again is we have talked about in the script, we are introducing new tools across all of the different products. That’s a great opportunity for us to raise prices with further differentiation for the products.

Peter Kim

Okay. And lastly, I want to ask about the competitive position in Japan. Obviously considering what's going on in the overall marketplace, I was wondering how you are faring again your competitors' tools in Japan in the high current single wafer market?

Robert Halliday

Well, I am glad to announce that we are finally making progress and penetrating additional large accounts in Japan with high current and that will be positive for our Japan market share. We're also in addition to further large account penetrations, which has been the long time coming, continuing to build our organization, adding people with much stronger technical and device experience to leverage our technology, to work with customers to solve major device performance and yield challenges. So we are making progress there both in building the organization and penetrating new large customers and that will be positive for our market share in 2008.

Peter Kim

Okay, great. Thank you.

Operator

The next question comes from the line of Satya Kumar with Credit Suisse. Please proceed.

Wills Valuri

Hi, thanks for taking my question. This is Wills Valuri instead of Satya. One question on your June guidance. Does your June guidance fully reflect the weakness from some of the DRAM and NAND push-outs that are going on and how should we just think about second half and there will be a second half perhaps recovery from any of your large logic customers?

Robert Halliday

Well, I think the June quarter obviously reflects weakening from DRAM. In terms of post-June, we haven't given explicit guidance. We're taking a conservative outlook on the September quarter frankly. Logic specifically is going pretty well still, so I am not sure it has to recover, it's pretty steady right now. Foundry is kind of a lumpy quarter-to-quarter, but DRAM is where the real concerns are.

Wills Valuri

Okay. So foundry, you think it's lumpy. So it maybe more or like second half loaded or…?

Robert Halliday

No, no. If you look at our percentage split, which we gave you on the call today, we had a bigger percentage split in the foundries in March quarter than the June quarter guidance. So those guys are kind of lumpy. Our position is particularly strong with them. Whether they are buying more or less in September and December, we don’t honestly know.

Wills Valuri

Okay. And one question on sort of your -- for your OpEx for the rest of the year. Are you comfortable maintaining the June gross margins at the trough level for the year?

Robert Halliday

Well, June gross margins, we are pleased to say were up almost -- we are hoping to be up close to a point and Gary will guide it up 48 and 48.5, which is pretty growth up from 47.5 this quarter. Can we maintain those margins? I think we will strive to rebounce around them.

Wills Valuri

Okay, thank you.

Operator

The next question comes from the line of [Jadece Ire] from UBS. Please proceed.

Jadece Ire

Hi Bob. Hi Gary. I had a couple of two quick questions. The first question is how do you see the market, overall market as you stand here for medium current, high current on high energy turning out to be for 2008. Can you give us some kind of visibility into that?

Robert Halliday

Well, we will speculate. I think PLAD is in pretty good shape. No one didn’t ask about.

Jadece Ire

Somebody spent it out, so that's fine.

Robert Halliday

Yeah, I guess that was a good news, right. Yeah, we said the total CapEx is down 20% for the whole industry. I think that’s sort of a floor. There is a little bit of, let me say 20% or more. Within the segments, high energy surprised us with how weak it was in '07. I will be a little -- most concerned about high energy in '08 if there is any more transition to medium current or things like that. And I think it’s a good opportunity for our single wafer high energy tool particular because we think we can create a great value proposition for customers. But they used less high energy tools in ’07. I think medium current high current, they’ll be pretty stable as a percentage of the TAM and pretty solid businesses, it’s just a question of overall CapEx by customers there. So I’d say as businesses high current, medium current will be pretty solid, PLAD should gain and high energy has got some risk.

Jadece Ire

Going to the prior question on the gross margins Bob, in terms of the second half of ’08. Do you expect any kind of mix shift to really impact that given that you’re continuing to have good margins on your spare parts? Do you think that should not be a big deal in terms of sustaining that margins?

Robert Halliday

Well, I think we got a couple of things going around. We got into 48 to 48.5% this quarter, which is pretty darn good, again pretty good pick up from spare parts and upgrades business. That business tends to be a little lumpy, once in a lot it’s a little bit risky if customers turn out equipment sales sometimes they turned out upgrades a little bit. The second thing is if you think about our opportunities, they tend to be in Japan, which Gary mentioned in the high energy, which are both new markets for us. And typically when we go to new markets particularly those where we don’t have significant share, getting into the market, there is some cost. So I think our gross margins look pretty good the rest of the year, but I don’t think there’s a lot of upside from where we are.

Jadece Ire

Okay, that’s helpful. Thanks Bob. Thanks Gary.

Robert Halliday

Welcome.

Operator

Your next question comes from the line of [Paul Swett] with [Capital Flows]. Please proceed.

Paul Swett

Thank you. One for Gary and one for Bob. Bob, could you just make a few comments, I don’t quite understand why there is such a big swing in the tax rate. And Gary, under the -- I’m sure you will cover this in the Analyst Meeting, but you hint at materials modification being a big market for the tools going forward and it’s a broad category. Maybe you could just talk a little bit about specifically the kind of things you’re aiming at?

Robert Halliday

Sure, Gary’s bitterly disappointed that you’re asking me to do the tax rate question. He wanted to do all those questions, but I’ll try my best. Paul, we have fundamentally two sources of income, US income and foreign income. Our US income is taxed at only US tax rates basically close to, so that’s probably 38, 39% something like that.

Gary Dickerson

Maybe 39.

Robert Halliday

And then the foreign stuff is taxed at very low tax rates, right, particularly because we move the intellectual property to Switzerland. So tool sales are at very favorable rate to receipts. But what you have right now is moving that intellectual property overseas that was a US taxable gain spread over several years. It started last year and it goes through ’08, '09, '10, '11 and it goes down every year, but it gives us lumpy US taxable income. We thought and the benefits of that is we have low rates on the foreign income. While what’s happened is the US taxable income is maintaining at the same level we expected that is sales to people like a major US logic manufacturer keeps buying and the gain on their transfer to the IP is pretty much fixed. But what we are losing is the foreign sales at very low tax rates particularly in Asia. That means the mix of our business is relatively high US tax rate and lower in foreign rates. As business gets more normalized, so we expect those rates to go down in the future. But this year we are suffering from a decline in foreign business.

Two things will drive those rates down pretty consistently in the future. One is that gain on the sale of the IP diminishes in amount every year over the next several years and that’s at US rates. And secondly, we expect the foreign business to come back which will give us income at low rates. So what you are looking at we think is an unpleasant but it's relatively short term scenario.

Paul Swett

Thank you.

Gary Dickerson

Okay. On the precision material modification…

Paul

You employed an insulator stuff, I guess?

Gary Dickerson

Well, no, the implant and PLAD. Basically what you have are tools that are extremely precise in terms of the depth of the material that you put into a substrate, the angle, the purity of the materials, and again beamline tool, it is the cleanest tool on the fab. So customers have already implemented some leading customers applications in lithography for instance, where they stabilize the photoresist and they have solved yield problem on 45 nanometer technology and beyond. Etch, where they are creating structures like embedded silicon germanium. Customers are also looking at applications where you create strain by implanting certain materials into a substrate, modifying electromigration, which is a big problem for customers and there’s really not a good solution today. So again, there are many areas in lithography, etch and in films especially films is one that is emerging with a lot of pull from different customers with the beamline and PLAD technology. And then other ones I can’t talk about, again that we are working on.

Paul Swett

Thank you.

Operator

(Operator Instructions). And your next question comes from the line of Jay Deahna with J. P. Morgan. Please proceed.

Jay Deahna

Thanks very much. Good afternoon Gary and Bob. I joined the call a little bit late so I missed the fun part of it, but a couple of questions. When do you see the transition to single wafer high energy really gaining momentum and when do you yourself taking advantage of that and showing some significant and material share gain associated with that? That’s number one. Number two, where do you see the cyclical turn? What quarter do you think is the bottom for orders and when do we start to migrate into some sort of a new cycle? And number three, can you talk about the increase in process steps whether it would be for logic or memory at the transistor level at 45 nanometers and below and what that means for your business versus the average wafer fab equipment supplier? Thanks.

Gary Dickerson

So high energy, again as I said before, a lot of pull from customers right now to make the transition from batch to single wafer. If you look at the breakdown, the biggest part of the high energy business is memory. Those customers are very cost conscious, yield conscious and evaluations we’ve done with customers they have proven higher yield with single wafer high energy.

So, as I mentioned earlier, we’ve penetrated two new accounts recently with evaluation tools. I think this year Jay, will be one where we have the penetration, the device qualification and then that sets up for large share gains in 2009.

Robert Halliday

In terms of the cycle Jay, god only knows. I’ll tell you my -- as I think September is a soft quarter for the industry. December has an opportunity to be better, but we really can’t call for sure.

Gary Dickerson

Okay, in terms of additional implant steps for 45 nanometer and beyond, again a lot of pull from customers for the precision material modification types of implants. We went out with customers with some concepts like improving line edge roughness and they took the concept and applied it to other yield problems that they have and in some cases have already on the run card added implant steps in this type of an application.

A lot of it was also around device performance issues for customers as they go to smaller device nodes, much more difficult to hit the device requirements steps I talked earlier about, the change from arsenic to phosphorus carbon and a preamorphization implant. So again, going from one to three, just to hit the device requirements. And there are many different situations like that. System on chip is another one where you have multiple transistors and you have multiple VT and halo implants that’s also an increase for us.

In memory, we’ve talked about the dual polygate as an additional step that wasn’t there in the previous technology node. And right now still really you have the one customer that’s ramped, another customer has started a ramp. But there is still a lot of adoption and just in the dual polygate application for memory customers. So that’s incremental from a TAM perspective. And then another issue in memory is the higher speed and the periphery going to more logic like type of structures, again that add more implant steps. So that’s kind of a brief overview. We will cover it a whole lot more at the Investor Day meeting in August.

Jay Deahna

Thanks very much.

Operator

Your next question is a follow-up from the line of Peter Kim with Deutsche Bank. Please proceed.

Peter Kim

Yes. With regards to your -- I was just looking at your backlog, stated in your 10-K, I know it was about 179 and considering that bookings have been -- book-to-bill ratio has been less than 1 over the last two quarters, I assume that the backlog has contracted from that number and so it brings to question what is the churns business looking like today and how do you anticipate the churns business to look like going forward?

Robert Halliday

Sure. A couple of things on backlog. Our customers have changed their behavior in placing POs. What they typically do, particularly in Asia, is they will tell you three to four month ahead of time, we expect to take a tool on August 24, this is the type of tool, where is the fab we want to add, but they don’t give you a PO. They may not give you a PO really big customers until a week before. And but they basically committed. So what goes into backlog is getting to be a smaller and smaller number, but to be honest with you, it sounds like a crazy situation, it isn’t that crazy because they are pretty committed to taking the equipment and they give us a high recovery PO they could push over if they wanted. It's just the nature of which the process paperwork has changed, so backlog has downward bias in the recorded number.

Peter Kim

So unique -- really hasn't changed much. I mean it's not like your lead times has all of a sudden contracted allowing that kind of a churns business?

Robert Halliday

No, I mean it still takes a little over three months to get the parts until they are implanted.

Peter Kim

Okay.

Robert Halliday

And that hasn’t change that much last year, so it's just the way they book the paperwork so what literally is churns business is a pretty high percentage of equipment business, it's been there for a while and if I get a bigger backlog number sometimes I just have a little bit more US and Europe business because the US and Europe customers or the logic customers tend to be more predictable. So it's just a base that -- so I won't read too much in that. I would say most of the business the next couple of quarters is churns business.

Peter Kim

Okay. Great. Thank you.

Robert Halliday

Welcome

Operator

And your final question is a follow-up from the line of C. J. Muse with Lehman Brothers. Please proced.

C. J. Muse

Yeah, thanks. Just a couple of quick follow-ups. I guess with the PLAD tool, are you seeing any applications besides dual polygate in volume with your customers?

Gary Dickerson

We are seeing some additional applications. I don’t think we want to talk about them right now. Some of -- again, the area that we work in with the customers in a lot of cases is very confidential. So if they find something from a device performance standpoint that gives them an advantage, it's not something that we can publicize, but there are some other applications.

C. J. Muse

Okay. And then two last quick questions. Bob I think like a month or so ago, you were talking about potentially deferred revenues from Japan negatively impacting revenue guide for June. Is that the case and I guess maybe could you help us understand the delta between revenues and shipments for June? And then lastly, can you remind me what your SG&A guide was? I missed that.

Robert Halliday

Our orders for Japan are forecasted to be stronger in Q3. Our shipments are forecasted to be stronger in Q3 than Q2 and our revenues are forecasted to be stronger. Couple of asides. One, it happened a little later again than we expected, but we are getting some real high current orders it looks like right now. So I thinks it's happening but again it's slower than we expected, so it didn’t have as big an impact as I thought three months ago in terms of deferred shipment data.

C. J. Muse

And the SG&A?

Gary Dickerson

32 million

C. J. Muse

Great. Thank you.

Gary Dickerson

Welcome.

Operator

I would like to turn the presentation over to Mr. Rob Halliday for closing remarks.

Robert Halliday

Sure. We want to thank everybody for joining us today. We were pleased about the '07 results in terms of 64.5% market share. We're pleased the next quarter, even in a sort of tough environment, we're going to have gross margins 48 to 48.5%. And frankly we're pleased that we've shipped our high energy tools to a couple of potential new customers who are very intrigued by our single wafer high energy opportunities. And we're getting pull from Japan not just for high current but they have started pulling us for PLAD and also for our medium current tools, they are asking about it. And the latter is without a heck of a lot of push from us.

So, I think in terms of opportunities, we are waiting to pick up share on the old batch tools, the AMAT business, high energy, and PLAD. We're pretty optimistic. I think a lot of that will be positioned in '08 or '09 but we're looking forward to the rest of the year in terms of setting ourselves up for a great future. Thanks for joining us today. We really appreciate your time. Bye, bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, 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 AUDIO PRESENTATIONS. 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 AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you.