Executives
Robin Yim – IR
Rick Hill – CEO
Jeff Benzing - CAO
Analysts
Gary Hsueh - Oppenheimer & Co.
Mahesh Sanganeria - RBC Capital Markets
Suresh Balaraman - Think Equity Partners
Timothy Arcuri - Citigroup
James Covello - Goldman Sachs
Edwin Mok - Needham & Company
Brett Hodess - Merrill Lynch
C.J. Muse - Lehman Brothers
Ben Pang – Caris & Company
Chris Shankar – Banc of America
Jay Deahna - J.P. Morgan
Patrick Ho - Stifel Nicolaus
Peter Kim – Deutsche Bank
Stephen Chin - UBS Warburg
Keith Lee - Morgan Stanley
Novellus Systems, Inc. (NVLS) Q2 2008 Earnings Call July 14, 2008 4:30 PM ET
Operator
Welcome to Novellus second quarter 2008 earnings conference call. As a reminder this call is being recorded today, July 14, 2008. I would now like to turn the conference over to Ms. Robin Yim of Novellus Systems; please go ahead.
Robin Yim
Good afternoon everyone and thank you for joining the Novellus Systems second quarter 2008 earnings conference call. Joining me on the call today are Rick Hill, Chairman and Chief Executive Officer and Jeff Benzing, Chief Administrative Officer.
Financial results for our second quarter 2008 were released on PR Newswire shortly after 1:00 P.M. Pacific Daylight Time. You can obtain a copy of the news release in the Investor Relations section of our website at www.novellus.com.
Today’s earnings call contains forward-looking statements about Novellus' business outlook, the future performance of Novellus, and our products and forecast of key metrics for the second quarter of 2008. Specific forward-looking statements include but are not limited the forecasted bookings, shipment volume; revenue; gross margin; operating expense; tax rate and benefits; DSOs; earnings per share, both on a U.S. GAAP and pro forma basis; our ability to forecast future results and product mix; our expectation to hold expenses at the $110 million level and further implement cost reductions; our continued efforts to hone our operations and focus on our core business; our intentions to tightly manage inventory until business improves and other anticipated future events.
We caution you that forward-looking statements are projections and expectations regarding future events, which may involve risks and uncertainties that could cause actual results to differ materially from the results contemplated, including an inaccurate basis for our financial forecast.
Information concerning risks that could cause actual results to differ materially is contained in today’s press release, our filings with the Securities and Exchange Commission, including our Form 10-K for fiscal 2007, and Form 10-Q for our first fiscal quarter of 2008 and our most recent Form 8-K. Forward-looking statements are based on information as of today and we assume no obligation to update any of these statements.
Jeff Benzing will begin today’s call with a review of the financial results for the second quarter. Then Rick Hill will discuss the state of the business and our industry outlook followed by guidance for the third quarter of 2008 and then open the call for the question-and-answer session.
I will now turn the call over to Jeff.
Jeff Benzing
Thank you Robin. I’ll start by reviewing the second quarter 2008 results. Bookings for the second quarter were down 21% at $235 million which was within the guidance range of down 10% to down 25%. Weakening semiconductor business conditions were pervasive in the quarter as memory capacity additions which came online outpaced the rate of demand.
This over capacity coupled with weak [NAND] pricing, tight liquidity in the credit markets and negative economic news caused memory customers in particular to pause on orders. Shipments for the second quarter were $240 million, down 23% from the first quarter and within the guidance range of $235 million to $260 million.
Revenues for the second quarter were $258 million, down 18% from the first quarter and at the high end of the guidance range of $245 million to $260 million. Second quarter revenues by geographic region are as follows: in the United States 27%; Greater China 36%; Korea 17%; Japan 8%; and Europe at 12%.
Gross margin excluding $6.5 million in charges related to our decision to curtail certain business activities came in at 45.6% which was in line with guidance of approximately 46% and relatively flat with the first quarter despite an 18% quarter-over-quarter decline in revenues. Favorable product mix and strong cost control in our manufacturing organization were offset by under absorption of fixed overhead costs as our shipment volume weakened in the second quarter.
On a GAAP basis including the $6.5 million of charges, gross margin was 43.1%. The $6.5 million in charges in the quarter were primarily due to a write-down of evaluation units in inventory related to certain advanced technology programs along with some modest severance related costs.
Operating expenses for the second quarter totaled $115 million excluding $7.1 million in charges related to our decision to curtail certain business activities. On a GAAP, second quarter operating expense was $122.3 million. As we exit the second quarter we have achieved our stated goal of $110 million go-forward run rate and operating expenses as first discussed in our fourth quarter 2007 earnings call.
We have accomplished this by continuing to focus on operational execution and a paring down on certain research and development activities related to advanced technology [nodes]. These activities resulted in write-downs of related laboratory assets and reductions in headcount. OpEx related impact in the second quarter of these charges totaled $7.1 million of which $4.3 million was in R&D and $2.8 million in SG&A. Going forward we expect to hold operating expenses at the $110 million level as we continue to hone our operations and focus on our core businesses.
Other income for the quarter came in at $5 million due to higher average cash levels and a positive foreign exchange impact. Our effective tax rate for the year before discrete items has increased to approximately 37% which is slightly higher then our previous guidance of 36%. As business conditions weaken we expect to realize a lower benefit from our international tax structure.
In the second quarter we saw a tax benefit from the charges to write down assets and headcount reductions as well as adjustments to deferred tax accounts related to foreign operations which resulted in a net tax benefit of 63%.
Net income for the second quarter excluding the $13.6 million in charges previously discussed was $6.2 million or $0.06 in earnings per fully diluted share. The EPS exceeded the guidance range of $0.01 to $0.05. On a GAAP basis including the charges we generated a net loss of $2.4 million or a loss of $0.02 per fully diluted share which fell within the high end of the guidance range of breakeven to a loss of $0.06.
Turning to the balance sheet we ended the second quarter with $709 million in cash, short-term investments, restricted cash, and long-term investments, an increase of $133 million from the $576 million in the prior quarter. Cash flow from operations in the second quarter was robust at $158 million and was comprised primarily of a marked decrease of $156 million in accounts receivable due to collections in the quarter.
This resulted in an improvement in our accounts receivable DSOs to 76 days in the second quarter down from 107 days at the end of the first quarter due to a continued emphasis on collections. Inventories decreased by approximately $15 million in the quarter as a result of tight asset management in a weakening business environment. We intend to continue to tightly manage inventories until business improves.
In the second quarter $10 million of cash was used to purchase stock in our buyback program. Approximately $0.50 million shares were purchased at an average price of just under $22.00. The repurchase offset $5.4 million of dilution from our ESPP and stock option exercises in the quarter. Outstanding shares at the end of the quarter remained at approximately 99.5 million.
That concludes my remarks for the second quarter, now I’d like to turn the call over to Rick who will comment on the state of our business and will provide guidance of our key metrics for the third quarter.
Rick Hill
Thank you Jeff, good afternoon ladies and gentlemen and as Jeff just reported our GAAP earnings were a minus $0.02 per share. This included $13.6 million of one-time charges making our non-GAAP earnings per share $0.16 per share.
Bookings were $235 million which is the low end of guidance; shipments were $240 million again were at the low end of guidance as we tried to manage to a one-to-one book-to-bill ratio. Revenues were at the $258 million which was at the high end of guidance because of catch-up on our industrial systems business, acceptances that were pushed out at the end of the first quarter and caused our miss during the first quarter. So we actually caught all of those up.
On a pro forma basis our gross margins were 45.6%, actually held in quite well given an 18% decline in revenue. Our pro forma operating expenses were down $3 million quarter-over-quarter and the run rate at the quarter-end is at our $110 million target we set at the beginning of quarter one. From balance sheet perspective the performance has been outstanding as cash from operations was $158 million.
Stock buyback of $10 million total, 500,000 shares at an average price of $21.97 was also completed during the quarter. Now the real big question on everyone’s mind is what is the outlook? Now on a global perspective we see a shrinking of excess capacity and under normal macroeconomic circumstances, we would project to see an upturn in orders in the third quarter. Hence our third quarter upside projection of up 5% in bookings, there’s a fair amount of uncertainty however in the market, particularly in the memory market.
So the downside of the bookings outlook is minus 15%. On a regional basis, all regions remain weak. Virtually all the business we’re seeing is at 300 mm, there is some refurbished business at 200 mm. There are fundamentally four customers with a stable level of CapEx spending and all other customers are cautious and at very low levels; only filling out capacity.
On a product perspective the reliability, the technology performance and the productivity of all the product lines has allowed us to see head-to-head wins for new business in almost every customer. You also may have noticed Novellus was number two in the VLSI quality survey that has just been released.
Our PECVD business has had wins with Vector Express, Vector Extreme and our new ashable hard mask Vector Extreme during the first half of the year. HDP with our HDP Max has demonstrated significant technological superiority and productivity over competitive offerings. We have sold and shipped over 50 units since the beginning of the year.
In our electrofill business, Sabre Extreme has demonstrated fill down to 22 nm and seeing major wins in the emerging memory market for copper. Our tungsten business with the new AltusMax has seen continued market share leadership and our SIG business with the recent G400 photoresist strip introduction has set a new benchmark in productivity and has seen major wins at both logic and memory locations.
PVD has demonstrated successful barrier/seed deposition at less then 45 nm and become the development tool of record for 32 nm barrier/seed for a major logic manufacturer. In CMP we remain optimistic in the value to be offered to the customers but no new business this quarter.
Therefore our guidance for the third quarter is as follows: our bookings plus 5% to minus 15%; shipments from $225 million to $250 million, again we will try to manage book to ship at a one-to-one book-to-bill ratio; our revenues from $240 million to $252 million; our gross margins are projected to be flat from quarter two 2008 to 45% to 46% with an EPS of $0.01 to $0.05.
So with that I’d like to open it up to any questions you may have.
Jeff Benzing
Before we start, I’d just like to clarify Rick’s earnings per share was $0.06 not $0.16.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Gary Hsueh - Oppenheimer & Co.
Gary Hsueh - Oppenheimer & Co.
It looks like the rate of descent in terms of orders is sort of getting better or flattening out, you got it down 10 to down 25 last quarter and now you’re guiding up 5 to down 15, at the margin, what’s getting better quarter-over-quarter here?
Rick Hill
Well I think from our perspective we have seen a greater interest in the productivity that we offer particularly in the memory business and we’re seeing wins in new applications that we had previously not seen and so therefore from our perspective we’re seeing a little strength there even though I recognized that overall the market itself for memory tends to be weak.
Gary Hsueh - Oppenheimer & Co.
You also touched on the adoption or mass implementation of copper in DRAM devices, I think that’s certainly happening with the Tier 2 Taiwanese DRAM guys moving to copper inner connects, is this something that’s also factored into your guidance or is this a mechanism that you think could help sort of sustain and improve order environment and for specifically Novellus in Q4?
Rick Hill
Well I think that clearly with our product offering in copper and it doesn’t just include our metallization but it includes the accompanying dialectric films that go around the copper I think to the extent that people use the downturn to transition to this technology including the Taiwanese manufacturers, this could help us more within in the first quarter as you suggest.
Gary Hsueh - Oppenheimer & Co.
If you look at the market size for just electroplating, it’s around $200 million per year, with the adoption by copper, how much should that move up from to serve the available market of around $200 million per year?
Rick Hill
Are you talking multiple films or just the copper fill itself?
Gary Hsueh - Oppenheimer & Co.
Just the copper fill itself.
Rick Hill
I think that it isn’t quite a doubling because obviously there are less layers in memory in there are in logic but the number of wafers is substantially higher. It’s probably in the range of up to 350, 375.
Operator
Your next question comes from the line of Mahesh Sanganeria - RBC Capital Markets
Mahesh Sanganeria - RBC Capital Markets
I have a question on your orders, you’re giving a pretty wide range, can you help us a little bit understand what you’re factoring and what could be further risk—are you dependent on any big orders especially memory, for making these numbers because if we have another push-out there could be another down side--?
Rick Hill
I don’t think the range is that out of the ordinary of what we’ve done in the past but I think that your intuition that there are some large orders that we have some concern with, sometimes we feed off of each other’s data, I do read what you guys says and take it into account along with what customers say to me and we try to integrate that and give you a number. But I think we’re trying to be cautious given the uncertainty of the markets and the fact that with all the uncertainty in the credit market and when you look at what’s necessary for a large segment of the memory manufacturers to be able to invest capital, you know they have to go to either the equity or the debt market, that brings us some concern.
Operator
Your next question comes from the line of Suresh Balaraman - Think Equity Partners
Suresh Balaraman - Think Equity Partners
When you look at the utilization rates in the industry they seem pretty high by historical standards, not like a downturn scenario at all, and I’m wondering if the utilization levels of your tools are consistent with the overall industry utilization levels.
Rick Hill
As I said in my first statement on a historical basis, based on the utilization rates we see, and supply and demand mix, you never see really a shortage of production capability but as that producing capability gets close, meaning high utilization rates, you begin to see reordering. And in fact, we would have suspected to see that in the third quarter and then continued on into the fourth quarter. There is some I think uncertainty in our customers’ minds on how long their business is going to sustain itself. Right now I think most of them see it as they’re very strong and they of course don’t want to put on capacity if there’s going to be a downturn. So I think this whole uncertainty in the overall macroeconomic is playing into the investment scenarios of all our customers throughout the food chain and we have to watch it very carefully.
Now from a capacity standpoint we have plenty of capacity so turning it on in a short period of time is relatively simple. But in the short-term given a potential downturn, we want to minimize inventory and we want to really play our assets so that’s sort of the game we’re playing right now; trying to be responsive to our customers, if they see that demand coming in which by all indications to now, we’ve received mostly positive input but waiting until we see the orders to the last possible moment before we react to build is one of the key things that we’re trying to do. And so I think that’s just the general tenor of the market, I agree with you utilization rates are high. We see that. We see that in the [spares] business so again, our expectations based on that would be that we’d start to see reordering but as I’ve said, we’re cautious.
Operator
Your next question comes from the line of Timothy Arcuri - Citigroup
Timothy Arcuri – Citigroup
This is the first quarter in awhile, I’m looking back at your share count, and your share count has come down pretty consistently in the last couple of quarters. And in this quarter you didn’t buyback much stock, yet the stock is sitting on its lows here, lows in quite some time, so I’m wondering why not a bigger buyback?
Rick Hill
Well I would prefer to have as much flexibility as a company in very uncertain equity and debt markets; so that we’re positioned to do anything we’d like to do with that cash. I can conceive of opportunities in the market for companies that could come under extreme duress if a downturn were to continue and I want to make sure that we’re positioned to take advantage of that should the case arise. But we do continue with the buyback as you’ve seen, we didn’t not buyback but we clearly had it at a reduced level.
Timothy Arcuri – Citigroup
Going forward you can see how there could be some significant leverage here in the model, once revenue gets better, but I guess that’s dependent upon you being able to hold OpEx at that kind of $110 million level so I guess my questions are number one how can you do that and still stay committed to all these different products lines and number two how should we think about say incremental margins or some sort of point margin guidance kind of off the bottom? Is there some way to think about how margins will [rev] off the bottom?
Jeff Benzing
Well I think first touching on your first question which was the operating expense line; we’ve had quite a focus on the OpEx line now here for the past few periods. We have pared back our advanced R&D programs. We are focusing more and more on our core business. That gives us some efficiencies as we have less spread if you will within those technologies. On a go-forward basis I think we’re quite well positioned from both a headcount and an operating expense standpoint.
The only thing which I think comes will cause us some ability or some concern is when the profitability comes back in this business we can roll in profit sharing and keep those numbers. So I’m quite confident that we can on an operating level keep the business efficient both on and off Ex line as well as on an above the line period cost line which will enable us to get the margins in a more favorable level when we see shipment volumes recover. And to the extent shipment volumes stay down, and then we’ve got programs looking at honing those operational costs and showing margin improvement even in a flat shipment situation.
Rick Hill
One of the things I’d like to point out, we’ve said this before, is that our plan is to hold that operating expense line at that level through $400 million in revenue. We haven’t forgotten that at all and except for one speculative investment within CMP, all our other businesses in fact, generate business, have reasonable gross margin. Some have very good gross margins, others we’re working on the gross margin and in a lot of cases; they’re of a critical mass which is substantially greater then a lot of other companies that have multiple product lines. In fact some of our smallest product lines are bigger then some other companies in the market who I think will come under extreme pressure during the next several quarters. So I don’t think we have a huge challenge.
What we’ve done is really focused on what we are doing from an R&D standpoint. We’ve focused on what we’re doing from a customer standpoint. We had gone off of our core values in putting out eval systems to everyone rather then selling the product. We had gotten ourselves strung out with support in places that weren’t likely to yield the kind of returns we want in the business. I think we’ve refocused the company. We have everybody’s minds and hearts in the same direction and we’re not going to deviate from it again.
Operator
Your next question comes from the line of James Covello - Goldman Sachs
James Covello - Goldman Sachs
If I think about the memory space and I kind of break it down between DRAM and NAND, is it fair to think that maybe the DRAM companies have kind of sufficiently cut back on the capacity and were kind of fixing the excess capacity problem but the NAND companies while recognizing that there’s terrific demand, we just haven’t seen enough cutbacks in NAND capacity ads to feel comfortable that that couldn’t get any worse even though DRAM looks like we’re probably at a bottom, is that a fair breakdown?
Rick Hill
Well I look at it a different way, and again, I’m trying—I’m an optimist by nature most of the time, although I’m pragmatic. I think the NAND market given the nature of NAND memory and I’ve said this multiple times is it’s an application generator. And its in such a wide variety of places, the question is at what price point does it get to where it becomes the predominant source of mass storage. I think on a small level from a standpoint of solid state drives, we are very close to that level. Now there’s another factor that has to happen in NAND flash in order for there to be a switch from disk drives to solid state drives and that is that when laptop computer manufacturers make that switch at the right price point, they can’t suddenly have a flurry of orders and have the price spiked up and effect their profitability with the laptop manufacturers.
And so as a consequence there has to be enough capacity in line in order to make sure that the volume can go up at a given price point. I think we’re at the price point and I think we’re almost at the capacity standpoint. So I don’t think that we necessarily have to take capacity off line, but we have seen a little bit of a slowing in NAND but I think the applications are expanding faster then you think.
Operator
Your next question comes from the line of Edwin Mok - Needham & Company
Edwin Mok - Needham & Company
Just to follow on the NAND side, do you think that given that NAND has been the process [inaudible] driver in the last few years, do you think there’s any risk for NAND to slow down this year when they transition for the node reader?
Rick Hill
Well every time you make a transition to a new node there are technological challenges. One of those technological challenge is bringing the entire market onto a copper inner connect which is clearly happening in the NAND space first followed then by DRAM which is occurring simultaneously. And it does provide challenges. So there could be some temporary slowdowns but I think that the applicability of NAND flash is so pervasive in everything that we use electronically, there’s no place but up and to the right for NAND period, still today.
Operator
Your next question comes from the line of Brett Hodess - Merrill Lynch
Brett Hodess - Merrill Lynch
I’m wondering if you can talk on the new product area that you enumerated in your prepared remarks, are the wins that you’re getting at this point primarily [sole] sourced wins or are they places particularly like when you look at markets like PVD and PECVD where you’re splitting the business and how do you see that going forward?
Rick Hill
I think they’re a combination of both and as I highlighted there are particularly in the PECVD business, applications that we were not in fact even getting a shot at before. So we’re both increasing the breadth of applications that the tools address as well as the productivity and technological performance of the systems making them a much more attractive opportunity given the market conditions today and I think the market has clearly come around to focusing on cost of ownership which has many factors in it which include technological performance.
Operator
Your next question comes from the line of C.J. Muse - Lehman Brothers
C.J. Muse - Lehman Brothers
On the $50 million delta to the high end and for orders, can you talk a little bit about whether that’s specifically DRAM or both DRAM and NAND and also whether there’s any foundry in there and then in terms of your industrial business going into the second half, can you comment, and I know you don’t like to break that out, but can you comment on whether that will be a headwind or a tailwind for you?
Rick Hill
On the $50 million delta to the high end I would have to say that that’s probably memory driven. Memory is not coming in quite as robust as we thought they might and you see that same reflection I think going forward in some of our cautiousness. In the industrial business, our industrial business has been strong. We don’t see it…that there’s a headwind but we don’t see a tailwind anymore with that business either at this juncture. So it’s not helping nor hurting in the next quarter.
Operator
Your next question comes from the line of Ben Pang – Caris & Company
Ben Pang – Caris & Company
You mentioned that your four customers or I guess there are four companies in the industry that have a stable spending level and the rest of the customers are down, in the scenario that you put forward on the order guidance what determines the up or down? Is it the four customers or the rest of the people?
Rick Hill
Well it’s a combination of the level of the four and what we think, you know, we analyze every single customer and we try to look at what the probability is of them being able to execute to bring on capacity in the subsequent quarter. So it’s a little combination of both on the upside.
Ben Pang – Caris & Company
You answered an earlier question regarding the over capacity on memory commenting in terms of capacity doesn’t need to come off line for NAND, but if you go to your kind of historical way that you’ve looked at the memory business in terms of your customers’ profitability, can you comment on what’s your outlook there? I mean do you expect that it’s going to change by the fourth quarter?
Rick Hill
On customer profitability as we all know, that has been suffering for most memory manufacturers except [sans] maybe two. Those customers obviously continue to spend as they take an advantage to try to win market share through capacity expansion. We don’t expect that to change very much. The biggest thing I think holding back capacity expansion will be a little bit of strengthening more in the price of DRAM which we’re beginning to see, and then the availability of capital for suppliers of DRAM in particular. I think those will be the two factors we have to look for before we see a broad based rebound.
Operator
Your next question comes from the line of Chris Shankar – Banc of America
Chris Shankar – Banc of America
If I look at it you have curtailed your R&D spending quite a lot and you’re also [backing] market share with [applied] so is your thinking that the existing platform on CVD and PVD is good enough and every incremental change that needs to be done is just productive with your [COC] improvement, nothing big on the technical side?
Rick Hill
No I don’t think so but our R&D expenditure is still stays at a relatively high rate. We just have that more focused on what it is that we want to do. We’ve also addressed SG&A, we’ll continue to address SG&A, and we’ve taken a lot of field costs out as well so I don’t think it’s a fair characterization to say we’ve whittled away our R&D. In fact our R&D has become much more productive then it was and operating at a 20% level here is pretty darn high as far as I’m concerned. We have some tense conversations on making sure that R&D is delivering and actually they’ve been doing an extremely good job. I’m very proud of them.
Operator
Your next question comes from the line of Jay Deahna - J.P. Morgan
Jay Deahna - J.P. Morgan
You made a comment earlier that you’re reluctant to buyback stock because you might want to take advantage of some bargain basement opportunities on the acquisition front, so I think that’s kind of interesting. I haven’t really heard that from you in awhile so on one side of the coin you’re saying we’re reducing the number of projects in R&D to focus on highly commercially, or likely commercially available projects and on the other hand you’re actually saying we’d be interested in bringing in more products lines. So can you vet that out a little bit?
Rick Hill
Well I think that the key always becomes what it costs you to do a development and what kind of return that you can get from that investment. There are opportunities that we’re seeing starting to come into play. I don’t see at the current price levels any public entities but certainly on the private side, both from an industrial business that I talked about in the past there are clear opportunities that we want to be ready to take advantage of. But it all gets down to an investment level and when you buy an entity as you well know, you buy not only the technology that you’re buying but you buy the customer base and you also buy and establish position and that’s important too especially if you’re going into a different product line.
Operator
Your next question comes from the line of Patrick Ho - Stifel Nicolaus
Patrick Ho - Stifel Nicolaus
You noted in your commentary that some of the near-term market share gains you’re seeing is CVD is helping your overall orders outlook, can you give a little bit of color, are these capacity buys and what technology node are they for?
Rick Hill
I think that they are largely capacity buys right now with some technology buys and the node is typically 55 nm in the memory market.
Operator
Your next question comes from the line of Peter Kim – Deutsche Bank
Peter Kim – Deutsche Bank
I was wondering, earlier you talked about how ECD could increase the [third] market because memory is going to make the transition to copper, I was wondering how you see your gap fill products fairing out under that transition considering that if the metals there do move to copper that maybe there’ll be less there for gap fill?
Rick Hill
That’s something today in our presentation you’ll see, we recognize that this gap fill market is a flattening market rather then a growing market but we see the opportunities to gain market share there especially with our SpeedMax introduction. We in fact have done that substantially and we think as that—as production expands at the 45 nm node, we should definitely see growth in that particular area. But you’re absolutely correct, as we switch to copper it also as I made the point before, doesn’t just effect our copper fill business, it also effects our dialectric business because there is multiple dialectric layers that are added in that process and we definitely have tools that provide the quality of the film as well as the productivity of the films that can give us a competitive advantage.
Operator
Your next question comes from the line of Stephen Chin - UBS Warburg
Stephen Chin - UBS Warburg
I just wanted to ask if you could elaborate more on the comments about there being four customers at stable CapEx, do you believe that you have the dominant share of these four customers and did your comments imply that these four customers you expect their CapEx to remain stable in the second half of the year versus the first half of the year?
Rick Hill
Okay the answer is yes and three out of the four we have a commanding position at and one out of the four we have a growing position at.
Operator
Your next question comes from the line of Keith Lee - Morgan Stanley
Keith Lee - Morgan Stanley
If I look at the [street] or third party outlook on 2009 CapEx it actually its kind of a weird year where the range is somewhere from down 10% to up 20%, I just wanted to see what your guess on 2009 CapEx is and when do you think the 2008 CapEx is in the rear mirror, basically when do you think you’re going to be getting the orders for shipments for 2009 CapEx?
Rick Hill
I don’t spend all day forecasting the future like these other guys do, and I think the wide range shows the uncertainty in the market. You’re looking at multiple sources, you’ve got to sort of take everybody’s view point and try to figure out what really is going to happen. I’m not a good prognosticator out a year and lately it’s been tough to prognosticate one quarter in advance. Again I always try to share the data points that I’m using to make decisions so you can have that same data point not saying they’re right or wrong, just saying that’s the data points we’re using.
I appreciate you asking but I really don’t—I don’t know what next year is going to bring. It will clearly be dictated I think by macroeconomic affects. I think if we can not enter a recession or worse, then if we see growth then I don’t see any way how given current utilization rates and absorption of capacity that 2009 would be down over 2008. It just doesn’t pass the common sense test. But given that big macroeconomic driver and not knowing what that’s going to do, that builds in a lot of uncertainty into next year. And clearly all the bad news coming out with banks even though the US government seems to be going to run to the rescue of everybody, it just doesn’t seem to me that that can be all that good news but I am hoping that it is.
Operator
Your next question is a follow-up from the line of Jay Deahna - JP Morgan
Jay Deahna - JP Morgan
Just following up on my last question, in terms of an acquisition strategy, would you be looking to find new technologies in your served segments or would you be looking to broaden out into adjacent segments or non wafer fab equipment?
Rick Hill
Yes, I think our first priority is our served markets, meaning the semiconductor space and the industrial application space. Third would be a third leg of the stool if we saw an opportunity where there was a business that could leverage either some of our technology or the strength in our distribution channel or potentially it’s a new emerging market that we think is not well known and likely to be fairly sizable. Those would be the only three possibilities but first priority is the existing product lines meaning IAG, which we’ve stated. We have a goal of driving that to about $0.50 billion business through acquisition of basically privately held companies. Certainly expanding the strength of our core product lines through some potential industry consolidation. There’s probably enough competition worldwide that some of that can be eliminated and finally the third one would be expansion outside of those cores.
Operator
Your next question is a follow-up from the line of Peter Kim – Deutsche Bank
Peter Kim – Deutsche Bank
Just a follow-up on the tax rate, you talked about the tax rate for 2008 being roughly 37%, how do you see the tax rate going into 2009?
Jeff Benzing
The tax rate moving forward into 2009 is going to be dependent on number of issues which have to do with overall profitability so it would be difficult for us to comment on that at this period in time.
Operator
Your next question is a follow-up from the line of Timothy Arcuri - Citigroup
Timothy Arcuri – Citigroup
I just wanted to actually clarify something, are you saying that you can hold your OpEx flat at $110 million without getting rid of any product lines all the way up to $400 million revenue?
Rick Hill
Provided we can manage the profit sharing as Jeff articulated because we’ll be very profitable, the answer is yes, I feel I can do that. It’s not easy.
Operator
Your next question is a follow-up from the line of Keith Lee – Morgan Stanley
Keith Lee – Morgan Stanley
In your prepared remarks, you mentioned there is some strength in 200 mm and refurbished business, is this 200 mm [inaudible] being requested to upgrade to 300 mm or is it just your normal 200 mm refurbished business?
Rick Hill
Normal 200 mm after market business.
Keith Lee – Morgan Stanley
And typically 200 mm business is the first one to pick up if the capacity utilization is getting tight, is it too early to read anything in--?
Rick Hill
Yes, I wouldn’t read anything into it. It’s more of an expansion in China then it is anything else.
Operator
Your final question is a follow-up from the line of Edwin Mok – Needham & Company
Edwin Mok – Needham & Company
Just a follow-up on copper and to memory, you mentioned that for the ECD market it go up to $350 to $375, can you give us a timeframe of that and also do you eventually guess on the barrier/seed side of the business as well?
Rick Hill
That would be, the ECD market we’re talking over the next few years to that $375 level. And what was your second question again?
Edwin Mok – Needham & Company
What about on the barrier/seed side you ventured a guess how much option you can get out of that?
Rick Hill
Well our goal is to achieve of the copper barrier/seed market, in the neighborhood of 40% to 50% market share and that market size five years out, I think by my recollection is roughly $600 million.
Operator
And it appears at this time that we have no further questions in the queue so I would like to turn the call back over to management for any closing or additional remarks.
Rick Hill
Thank you very much for joining us for our second quarter conference call. Later this afternoon we will be hosting a webcasting in our press events at Semicon West. For those of you who are in the area, we welcome that you attend in person. We always do like to see you. For those that cannot feel free to join into the webcast at the Novellus Theatre at the Yerba Buena Center for the Arts. We thank you very much today for all your questions and we look forward to talking to you again this afternoon and as always at or mid-quarter update. Thanks very much and have a great day.
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