Mattson Technology Inc. Q1 2008 Earnings Call Transcript

Mattson Technology Inc. (MTSN)

Q1 2008 Earnings Call

April 23, 2008 5:30 pm ET

Executives

Bill Turner - CFO

Dave Dutton - CEO

Analysts

Gary Hsueh - Oppenheimer & Company

Brett Pyre - Caris & Company

Patrick Ho - Stifel Nicolaus

Peter Kim - Deutsche Bank

Radika - Citigroup

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Mattson Technology Earnings Call. My name is Shawn and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instructions)

Before we begin, the company has asked me to read the following statement. Information provided in today's conference call contains forward-looking statements regarding the company's future prospects, including but not limited to anticipated market position, bookings, revenue, margins, earnings per share, tax rate and fully diluted shares outstanding for future periods. Forward-looking statements address matters and subjects to a number of risks and uncertainties that can cause actual results to differ materially. Such risks and uncertainties include but are not limited to those described in today's news release and in the company's Forms 10-K, 10-Q and other filings with the Securities and Exchange Commission. The Company assumes no obligation to update information provided in this conference call.

I would now like to turn the presentation over to your host for today's call, Mr. Bill Turner, Chief Financial Officer. Please proceed.

Bill Turner

Thank you, and welcome to our 2008 first quarter conference call. With me today is our CEO, Dave Dutton. After I review the financial performance and give guidance, Dave will comment on the business, and then we'll open up the call for Q&A.

No one will argue that cap equipment companies are operating in a highly challenging environment, but I think it's important to note that we have continued to advance our new products, and they are making excellent progress, laying a foundation for future growth and industry outperformance. While Dave will discuss this in greater detail, there are a few key points I would like to emphasize relative to our financial performance for the first quarter.

Revenue for the quarter of $48.7 million and gross margins of 42.8% slightly exceeded guidance. We ended the quarter with cash and short-term investments of $146 million, which translates to nearly $3 per share, and we also continued to repurchase shares. We have bought back 3.8 million shares, or 7% of total outstanding shares over the last 12 months under our previously announced share repurchase program. This reflects Mattson's strong cash flows and reaffirms our confidence and optimism in the long-term future of the company.

We're pleased with these achievements, particularly in light of current market dynamics. They are a direct result of strategic investments in our leading-edge technology and financial discipline reflected in our successful CFE outsourcing model, which enables us to minimize losses while maintaining critical investments in our products and delivering the new products into production.

Now to a more detailed look at our Q1 our financial results. Revenue for the quarter of $48.7 million slightly exceeded our guidance of $42 million to $48 million. By region, the Q1 revenue percentage breakdown was Taiwan 39%, Japan 18%, Korea 14%, North America 11%, rest of Asia 11% and Europe 7%. Memory was the largest segment at 60%, followed by foundry at 26 and logic and other applications at 14%.

Excluding the royalties from DNS, gross margin for the current quarter of 42.8% was down 1.2 percentage points from the previous quarter and down 1.8 percentage points from the first quarter of 2007. The decline in gross margins is largely attributable to unfavorable manufacturing absorption.

First quarter R&D expenses of $7.8 million compared to fourth quarter R&D expenses of $8.0 million and $9.1 million reported for the first quarter of 2007. First quarter SG&A expenses of $16.8 million compared to fourth quarter SG&A expenses of $15.4 million and $16.0 million reported for the first quarter of 2007.

We're continually in the process of optimizing the organization and aligning our headcount to current requirements while maintaining our critical investment in new products. During the quarter, we continued to examine all spending and undertook a number of cost-cutting measures, including a modest headcount reduction. However, these measures may not be readily apparent on the P&L as we shifted some of the R&D expenses into SG&A to roll out our new products.

We're moving rapidly from development to production and are accelerating new product launches. We're being operationally prudent and have been lowering costs throughout the organization to offset these very critical investments and holding overall expenses as flat as we can while balancing the impact of the organization. As Dave will discuss further, our investments are beginning to pay off and we're pleased with the progress that we're seeing with our new products.

Operating expenses were higher by $1.2 million in the first quarter of 2008, primarily due to the $600,000 spent on systems being evaluated at customers' sites, new product concept and feasibility activity and the weakening dollar.

Interest income of $1.2 million for the quarter was down $500,000 from $1.7 million in the previous quarter, due to declining interest yields arising from the Federal Reserve rate cuts in the first quarter.

Other expenses were a net expense of $1.4 million for the quarter compared to a net gain of $200,000 for the previous quarter, primarily due to FX losses on the monthly intercompany settlements. The first quarter tax expense was $100,000.

Loss for the current quarter was $4.2 million, or a loss of $0.09 per share compared with net income of $4.8 million or $0.09 EPS for the previous quarter and $7.7 million or $0.14 earnings for the first quarter of 2007.

Turning now to the balance sheet, our balance sheet remains strong and reflects sound financial and operational controls. We are well-positioned with cash of $146 million. As a side note, we have no exposure to auction rate securities, SIVs or investment impairments. In addition, we have no debt.

DSOs of 67 days were essentially flat as compared to last quarter in a challenging environment. This compares favorably to our peers, particularly considering that we do not factor our receivables.

Inventories rose by $1.1 million in the quarter, mostly due to an increase in spares and new product inventory. We have maintained an active stock buyback program and continue to execute on our strategy of returning capital to shareholders. During the quarter we repurchased $2.6 million worth of shares of our common stock at an average price of approximately $7.95., under the previously announced $50 million share repurchase program. We are maintaining a healthy cash position that we can utilize for growth or for additional share repurchases as warranted.

I will now turn to our guidance for Q2 fiscal year 2008. Based on the protracted weakness in the DRAM market, our guidance is for the following, Q2 revenues to be in the range of $40 million to $45 million. We expect gross margins to be in the range of 39% to 41%, we expect a fully diluted share count of approximately 49.5 million, and we expect Q2 earnings to be in a range of a loss per share of $0.17 to a loss per share of $0.10.

So let me summarize. While these are clearly challenging times in our industry, we're working diligently to manage our operating expenses without sacrificing our new product introductions. We maintain very healthy levels of cash, which gives us a critical flexibility to continue our investment in new products and sets the stage for growth.

Now, I will turn the call over to Dave, who will elaborate further on Mattson's business results and prospects. Dave?

Dave Dutton

Thanks, Bill. Good afternoon, everyone. Our industry is certainly facing challenging times. However, while financial results for the first quarter reflect the industry's continued weakness and further declines in the memory CapEx spending, we're on track with the company's strategic new product investments and end-market diversification. We maintain financial stability and continue to advance our technical programs in core product areas and with our new initiatives.

Now, let's talk about the industry. We have very limited visibility on the outlook for the industry, but we believe the current turbulent conditions remain at least through the second quarter of 2008 before we may see any signs of improvement.

We are expecting to see some memory spending in the second half of 2008, driven by replacement of 200-millimeter fabs with 300-millimeter capacity, incremental equipment buying around technology transitions and some NAND expansion at existing fabs, but very limited new NAND fab projects in 2008. These improvements will be tempered by a slow global economy that has delayed foundry expansion and kept logic focused on profitability improvements rather than capacity expansion, such that it is not clear how far into the future the expected inflection point will be.

As you all know, memory spending is highly cyclical; and, while we're currently going through a normal slowing of the memory spending, after several years of somewhat excessive spending as the industry normally does, it is exacerbated by an overall weak global economy which is compounding the effects. Despite the difficult industry conditions, our focus remains on advancing our new products and market expansions, both areas in which we're making considerable progress.

Let's turn to the product front. Our success with products stems from our leading technology, which helps our customers deliver complex chips at a significantly lower cost of ownership. In today's environment of price-sensitive consumer electronics, Mattson delivers to this value proposition.

Let's start with our core markets in strip and RTP. First, in RTP, we've made significant progress during the quarter in all three key product areas, and we continue to drive share gains in this critical market. In fact, this is our fifth straight year of market share gains.

In anneal, the Helios continued its strength in the wafer manufacturing market with additional shipments to a Japanese customer. In addition, we saw strengthening of our product position in the memory market by shipments into a new Korean NAND Flash line and continuous strengthening of performance versus the competition in the DRAM sector, most notably with our throughput.

Our oxidation program expands our RTP TAM by roughly 30%. During the quarter, Atmos moved into full production at two key customers in Taiwan, joining our already existing oxidation production levels in Korea, China, U.S. and Europe.

We're seeing increased interest and acceptance of our millisecond anneal system, the Millios. On Monday, we announced receipt of an agreement from a leading memory manufacturer for a tool in its development facility which will be for manufacturing process qualification as well as next node development qualification. Millios is the only tool that delivers full manufacturing controls with the ability to combine standard and millisecond anneal. We will continue to update you on this compelling technology as it advances in the marketplace.

Now let's turn to strip. As you know, in 2007 we made a calculated strategic decision to advance our product position and shifted our focus from the previous Aspen III platform in favor of the market-leading Suprema. Business slowed, as it normally would during a product transition period, and we lost momentum as customers invested time to qualify the new system.

We have regained momentum with business reaccelerating during the fourth quarter. It continues to accelerate as we penetrate both new and existing customers through the first quarter of 2008. It is a testament to the entire organization that during the transition we did not lose a single customer. In fact, from where we started this transition over a year ago to where we are today, we've gained more customers, which demonstrates the momentum we have with Suprema.

Suprema continues to displace its competitors and is winning in both established and new accounts. This success is due to its advanced technical performance and compelling cost of ownership gains for our customers. The Suprema has been installed and is operational at eight of the top 10 global semiconductor companies and is being used for high-volume production as well as sub-45 nanometer process development. Our expectations are that we'll achieve market share gains in this area going forward.

There has been considerable activity this quarter. We continue to see the Suprema being delivered into top-tier NAND Flash providers, and we shipped our 100th Suprema. This milestone shipment to a customer in China for one of the newest 300-millimeter semiconductor foundries in the world expands our installed base of Suprema systems and demonstrates our market leadership position with photoresist strip products. We also received multiple orders for production from a leading Singapore 300-millimeter manufacturer, adding another new customer win to Suprema's strong record.

And lastly, this afternoon we announced our first front-end-of-line order from a Korean memory manufacturer. We have enjoyed a long relationship with this customer in their back-end-of-line processes and are pleased that they chose to extend the Suprema's position in their manufacturing facility to their front-end-of-line processes. They chose our technology based on productivity enhancements, most notably in throughput, reliability, low cost of ownership and the overall process capability. We have maintained our existing customers and are gaining new ones, which confirms our strategy of extending our strip leadership.

As a result of these wins at new accounts and new fabs, Suprema is gaining market share. With the foundation firmly established over the past year, Suprema is ready to take on the market, and we fully expect that going forward, it will be a strong contributor to the company's strategy to outgrow the industry.

And at long last, literally, let's move to etch and our Nexion product, which is advancing to the next stage. We know you've been waiting for a long time. So have we. During the quarter we received an initial order from a major 300-millimeter memory manufacturer in Asia for multiple Nexion tools. The expansion into the etch market doubles our served-available-market and broadens our future growth opportunity. I think it's telling that etch is advancing in spite of a tough memory environment, and we are seeing progress. We now have shipped three Nexions into three different fabs to be utilized for production.

The Nexion technology is of increasing interest to our customers and is drawing their attention to other applications due to its unique capability, which provides opportunities for us to expand the application that this tool serves. We're engaged with multiple customers in different regions and expect increased etch tool shipments as we move into the second half of the year.

In summary, we're using the downturn to our advantage by strengthening the company and positioning it for expanded growth. We're optimizing the organization to support the development and launch new products. Over the last several years, we have made significant progress in our outsourcing capability through efforts such as our CFE model, have successfully reshaped and strengthened the company.

As a result, we are a leaner, more flexible organization with the strongest product portfolio in the company's history. We have a strong balance sheet, which gives us the financial confidence to move forward with our long-term investments in products, despite lean times. And further, our CFE model has essentially allowed us the flexibility to fund our critical new product investments while mitigating the extent of the financial impact to the company. In fact, I think it's important to point out that, had we not chosen to invest in the future at this point in time, our current financial performance would have been much different.

And frankly, we would not be operating at a loss right now. Our losses for the quarter are largely attributable to our spending on the new product rollouts. We made a conscious decision to invest in future products and markets. We're already seeing these efforts pay off as many of our new products have already shipped or been accepted although not yet revenued. We invested in our future, knowing that we would likely be incurring near-term losses. I cannot stress this enough, the future of Mattson is of utmost importance, and we will not sacrifice our long-term investments in product positioning for near-term positive results in our earnings performance.

We are investing in our future with a long-term strategy to drive share gains in existing markets, expand into new markets and outgrow the industry. We have set an aggressive schedule for ourselves and we have no intention of letting up on the intensity of our technological investments with new product launches.

The next growth cycle will come; it always does. In preparation, we are seeding the market and continue to position ourselves for success. In anticipation of the up cycle, we have advanced strip with our Suprema technology, our RTP five-year penetration record continues and etch has already made inroads into a market which has a larger TAM than RTP and strip combined.

We will take advantage of further growth opportunities by leveraging our strength, technology leadership through product innovation, a broad customer base and solid, flexible operations. We are positioned to rapidly deliver competitive solutions to our customers as they address increasingly complex technical challenges and continue to invest in their technology updates.

And with that, thank you very much for listening to our first quarter conference call. We're now open for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line Gary Hsueh with Oppenheimer & Company. Please proceed.

Gary Hsueh - Oppenheimer & Company

Hi, Dave. Thanks for taking my question. I joined a little bit late, but just looking at the traction you're getting in shipping out multiple etch eval units out to key customers, how much do you think, of those units, if they were fully converted to revenue this year, how much would that approximately total in terms of revenue recognition, if that were to happen?

Dave Dutton

Yeah, Garry, thanks for the question and thanks for joining the call. I'd just refer back to what we stated in the last conference call, which was we expect roughly around 10% of our revenue this year to come from our etch program.

Gary Hsueh - Oppenheimer & Company

Okay. Just wondering, Dave, because you haven't shipped all those units, and I'm just wondering if this market does still experience a crunch in the back half whether, even if you just recognize revenue on the ones you have out, how much of upside there would be to your top line?

Dave Dutton

I'll just hold it to what we've talked about, and we are seeing our plans still stay aligned to those.

Gary Hsueh - Oppenheimer & Company

Okay. And my next question is just about breakeven and profitability. You're guiding to another quarter of net income loss. I'm not sure if you have visibility here on when the recovery would be. But have you changed your mind here in terms of breakeven, and any kind of action outside of the R&D spending line that you could do to kind of reduce breakeven?

Bill Turner

Yeah, Hi Gary, this is Bill. We think that breakeven is still in the low 50's and we don't have any specific actions taken to change that. We think it would be sort of dangerous for the shareholders if we were to radically chop expenses now to try to get to a breakeven, that that would hurt new product introductions and would not be a good idea

Gary Hsueh - Oppenheimer & Company

Okay, fine. And I'll circle back. Thank you.

Dave Dutton

Thanks, Gary.

Operator

Your next question comes from the line of [Brett Pyre] with Caris & Company. Please proceed.

Brett Pyre - Caris & Company

Hey, guys, thanks for taking my question. I'm filling in here for Ben Pang. Just real quickly, I saw that you guys shipped them, but there was no revenue recognition for the etch tools, correct?

Dave Dutton

Yeah, that's correct. On new product, they go to our new rec rules, and we expect that to be out in the future.

Brett Pyre - Caris & Company

Okay. Thanks a lot.

Operator

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

Patrick Ho - Stifel Nicolaus

Thanks a lot. Actually kind of a follow-up question to the last one, how are you going to recognize revenues on the Nexion product? I think you just kind of inferred that they're going to have a different recognition policy from your current product line. Can you just give a little more detail on that?

Dave Dutton

Well, yes. Patrick, the rules are that we cannot take revenue on a shipment, on a new product, until they get signed off in the field at the customer facility. And after that, it proceeds by the normal rules.

Patrick Ho - Stifel Nicolaus

So these evals are just until they are signed off, so it's just the standard way as well?

Dave Dutton

It's the standard way, but on the first round, we have to get field acceptance before we take anything.

Patrick Ho - Stifel Nicolaus

Okay, great, that clears it up a little bit. Can you also just go over again, because I also joined a little bit late, on the other income line, what was the negative effect that caused, I guess, the big loss on that front?

Dave Dutton

Yeah, Patrick, that's basically the effect of the constantly rising euro during the quarter. We do settle our intercompany accounts with Germany, which is a big one, every month, but when we went to settle, every time, because the rate was basically heading skyward, we had to take a loss to do so. That I should not repeat, going forward, unless the rate continues to rise every month, but that's what hit us in Q1.

Patrick Ho - Stifel Nicolaus

Okay. So it wasn't any type of hedging or that kind of front?

Dave Dutton

No; it was absolutely nothing to do with hedging. We don't hedge, actually, on intercompany. We are not hedged anywhere on anything right now. It has nothing to do with auction rates or SIVs or anything like that. It's simply settling the intercompany debts between our Fremont factory and our German factory, which we do every month.

Patrick Ho - Stifel Nicolaus

Okay, great. And Dave just a question on the Millios, you mentioned that a memory manufacturer had taken a tool. Can you explain just a little bit of the differences between what a logic manufacturer would look for in the Millios, which is what I thought would be more targeted towards, and what a memory manufacturer would use the Millios for?

Dave Dutton

Well, I think principally it's about the same thing. Both of them are looking for maintaining the control of the junction as they shrink devices. What we're seeing is the focus is probably first around DRAM area and around the 4X node and below. And so, it's that timing where we are moving into that section with them, where they're developing that. For about a year from now, we'll start to see that roll out into production.

So, it's the same thing. What we're happy to see is that the memory customers are testing the Millios and seeing the same impact that some of our logic interactions have seen before. We're very excited about that tool's capability to really start to penetrate the market.

Patrick Ho - Stifel Nicolaus

Great. A final question, Bill what was the stock option expense in dollars this quarter?

Bill Turner

It was $1.4 million.

Patrick Ho - Stifel Nicolaus

Great, thanks a lot guys.

Dave Dutton

Thanks, Patrick.

Operator

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

Peter Kim - Deutsche Bank

Hi, thanks for taking my question. I wanted to ask about the OpEx on an ongoing basis. You talked about how you are going to continue to support your new products. I assume those would include the Nexion and the Millios. Do you expect OpEx to pretty much hold the current run rate on an absolute dollar basis?

Bill Turner

Yeah, Peter, our best guess is that will be roughly constant to where it is right now, possibly slightly up, but we're trying to balance reductions in areas where we can reduce and also get the new products out.

Peter Kim - Deutsche Bank

Okay. With regards to the orders for the Nexion, is that order from the customer who had previously qualified for the front-end application?

Dave Dutton

Peter, its Dave. I think, as we mentioned in the release, it's to a memory manufacturer and it now has the Nexion engaged at three different fabs at this current customer.

Peter Kim - Deutsche Bank

The same customer at three different fabs?

Dave Dutton

Yes. In this particular case we are talking about, it's the same customer.

Peter Kim - Deutsche Bank

Okay. If and when you do recognize the Nexion, what kind of an implication would that have on the company gross margins?

Dave Dutton

As we talked about all along, it would, as the Nexion starts to ramp, it will have positive implications for the gross margin long-term. Probably near-term, on some of these first tools, it will be more neutral.

Peter Kim - Deutsche Bank

Okay, great. All right. Thanks very much.

Operator

(Operator Instructions) Your next question comes from the line of Timothy Arcuri with Citigroup. Please proceed.

Radika - Citigroup

Hi, this is actually [Radika] for Tim. In your Q3 '07 call, you said that you will have one more DNS royalty payment in the June quarter. Could you give us some guidance for the quarter? And will that include the royalty payment or not?

Bill Turner

Hi, you are right; we will have one more DNS royalty payment in Q2. We don't really have any idea what it's going to be, and therefore we don't forecast it. It will be a little less than normal, though, because we are going to get a stub period; I think its 9.5 months versus, obviously, the usual 12 month payment, but we don't forecast it.

Radika - Citigroup

Okay, thanks.

Operator

You have no other questions at this time. I would like to end the Q&A and pass the call back over to Mr. Dutton for closing remarks.

Dave Dutton

Thank you, Shawn. And once again, thank you for joining our 2008 first quarter conference call. We're looking forward to updating you on our progress across the company as we go through 2008.

One last thing as an added note, we wanted to make sure that our investors and analyst community have the following data on your calendars. I want to remind you, we will be hosting our annual analyst event on Thursday, May 8, in the afternoon, from noon to 6:00 PM here at Mattson headquarters. So please add this to your calendars. We're looking forward to, not only Bill and I, but our management team greeting you and talking about our excitement and where the company is going. So with that, thank you and I'd like to turn it back over to the operator.

Operator

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

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