Executives
Paul Bowman – VP of IR
Bob Akins – Chairman and CEO
Nancy Baker – SVP and CFO
Ed Brown – President and COO
Analysts
Brett Hodess – Merrill Lynch
Satya Kumar – Credit Suisse
Patrick Ho – Stifel Nicolaus
Elisa [ph] – Lehman Brothers
Ben Pang – Caris & Co.
Joe Sang [ph] – JP Morgan
Cymer, Inc. (CYMI) Q2 2008 Earnings Call Transcript July 24, 2008 5:00 PM ET
Operator
Good day, ladies and gentlemen, and welcome to Cymer's second quarter 2008 earnings release conference call. (Operator instructions) As a reminder, this conference call is being recorded. I'd now like to hand the conference over to Mr. Paul Bowman, Investor Relations. Sir, you may begin.
Paul Bowman
Thank you. Good afternoon everyone, and thank you for joining us today. With me on today's call are Bob Akins, our Chairman and Chief Executive Officer; Ed Brown, our President and COO; Nancy Baker, our Senior Vice President and CFO; and Terry Slavin, our Director of Investor Relations.
Financial results for our second quarter 2008 were released to the wires services today shortly after market closed. You may access the press release, Company presentation slides and webcast link in the Investor Relation section of our Web site at www.cymer.com, where they will be available for the next 15 days. Before we begin with management remarks, I would like to invite the analyst community to our 2008 Analyst Day, which will be held at Cymer headquarters on Friday morning September 12 beginning at 8 o'clock am. We have a four agenda plan, and hope that you will be able to join us for the event and we would encourage you to RSVP as soon as soon as possible.
On today's call, Bob will provide a comment on the company's progress and accomplishments as well as our strategic focus in market outlook. Nancy will follow with an analysis of the company's quarterly financial results and guidance for the third quarter. After our prepared remarks, we will open up the call for questions to Bob, Ed and Nancy.
Please be advised that the results we are disclosing during this call are preliminary. The final results will be included in our quarterly report on Form 10-Q, which will be filed with the SEC. Our comments today will include forward-looking statements including statements concerning industry and technology trends and developments, new products and technologies, semiconductor demand, demand for and utilization of lithography tools and our products, product orders and shipments, and our anticipated future financial performance. Our actual results may differ materially from those projected on this call. There are a number of risks and uncertainties that may affect our business and future results, including those associated with the demand for semiconductors, the cyclicality in the market for semiconductor manufacturing equipment, the performance and market acceptance of our new products or technologies, the delivery rates of our light sources and our direct customers’ lithography tools, timing and size of orders from our customers and other factors, including those set forth in our SEC filings. Please do not place undue reliance on these forward-looking statements which speak only as of today. We undertake no obligation to update any forward-looking statement to reflect events after today.
With that, I'll now turn the call over to Bob. Bob?
Bob Akins
Thank you, Paul, and thank you for joining us on today's call. Before I begin our formal remarks, I would like to publicly welcome Paul Bowan to Cymer as our Vice President of Investor Relations. We are delighted to have Paul with us, and I invite you to contact him when you have questions or need additional information about Cymer.
In the second quarter, we made substantial progress. We are particularly pleased with the strong adoption of our XLR 500i. Shipments of the XLR more than doubled again this quarter as compared to last quarter, accounting for 45% of light source shipments. We also reached a new milestone this quarter installing five XLR 500i light sources at chipmaker locations. Additionally, we received our first order for two XLR 600i systems, the industry's first 90 watt argon fluoride light source designed for use in double patterning applications. As I've mentioned in the past, we believe the XLR rigidity of Ring Technology is superior to any light source available today, and it provides customers with significantly improved performance and the lowest cost of operation.
We also continue to make rapid progress in our EUV development. In May, we announced that we had achieved a milestone of 25 watts of continuous average power over 1 1/2 hour period. We remain on track to achieve the 100 watts of continuous average power that will be required for the first production EUV source, which is scheduled to ship near the end of the year. Additionally, during the quarter, customers were impressed by seeing multiple EUV sources running simultaneously at Cymer. With the rapid progress we've made, the talented team we had assembled and the results we've been achieving with source development, we continue to solidify our strong leadership position in EUV technology.
Total revenue for the quarter at $125 million was in line within our guidance issued at our last earnings call, and comparable to last quarter, in an otherwise soft market environment. Advance technology light sources purchases by customers and continued growth in our installed base of products in service business offset a lower number of light sources at shipments. As a reminder, our revenues comprised of two major components, light sources to help our direct customers achieve their product road maps, a business which scales generally with the semi-equipment cycles, and our installed base products and services to help chipmakers increase productivity and reduce their overall cost, which scales with the utilization of our life of our installed base.
In the second quarter, we shipped a total of 29 life sources. 19 of these were argon fluoride sources built on the XL platform. The higher percentage of XLR 500i shipments and the overall strength of the XL platform which our customers have been using in production for more than 5 years now kept our currency adjusted average selling price above $1.4 million. Demand for our XLR series is gaining significant momentum. Customers can benefit from the XLR's performance improvement and reductions in operating cost resulting from significantly extended chamber and optics module lifetimes. The XLR 500i is steered [ph] upgradeable to 90 watts of upward power and offers Gas Lifetime eXtension or GLX. It also included advanced bandwidth stabilization or ABS as a standard feature and tunable ABS as an option, which allows for OPC mask optimization and tool-to-tool matching. We believe the success with this product (inaudible) will translate into market share gains later this year and into 2009.
As evidence of the growing demand for the XLR series, we recently announced that we had secured a multi-unit agreement with Toshiba under which they would use both our krypton fluoride and argon fluoride sources in their 300mm memory fab in Japan. The XLR life sources were an important factor in this selection decision. We also announced that we received the industry’s first 90 watt order for two XLR 600i life sources. The XLR 600i is designed to enable argon fluoride immersion Double Patterning applications at the 32nm node and below. It provides superior performance and reduced cost operation that characterize the XLR series and we expect initial shipment of the XLR 600i this year in support of customers’ early Double Pattering applications.
We anticipate that the adoption cycle of our XLR series of products will be broad based across all sectors as demand for these life sources are spreading from the early adopting nanoplast manufacturers to (inaudible) manufacturers and with logic and foundries beginning to install the technology in support of their most advanced production needs. The focus of our installed base products and services business enables chipmaker customers to achieve increased productivity and lower cost of operations as we support them with our certified field service engineers and continually improve consumable modules. This business has grown 28% as compared to this time a year ago. The growth is being driven by one, continually increasing pulse counts driven by higher pulse rates and a growing installed base. Average annual pulse utilization per laser reached 11.1 billion pulses, and has been growing 2% to 3% per month. Additionally, gross pulses, the aggregate pulses used by all time lasers in production is now well above 2.1 trillion pulses monthly, and up almost 50% in the last two years.
Two, further growth has been realized through customer adoption of OnPulse, which helps chipmakers meet diversed operational, financial and technical needs. The programs are real time monitoring and on-demand service reduces downtime, guarantees year-to-year per pulse cost reductions for each laser and enables optimal light source performance. This quarter we signed an additional three customers bringing the total number of chipmakers to 15, and I'm pleased to report that we currently have more than 900 light sources operating under OnPulse. To help support this aggressive growth, we had continued to invest in field inventory to ensure parts availability and high levels of tool uptime.
And three, our installed based products and services growth opportunity has also been expanded by light source enhancements such as GLX. We've installed more than 100 GLX upgrades so far this year, and we recently announced GLX2. Our original GLX product extended gas lifetimes to 1 billion pulses, 10 times the previous lifetime, requiring one-tenth of previous downtime for gas refills. GLX2 can now extend gas lifetime to 2 billion pulses, a 20 times improvement. With GLX2, life source running at 30 billion pulses a year needs a gas refill only 15 times a year, yielding additional production time of about 100 hours per year which translates to approximately 4500 to 7200 additional wafer passes per year.
During the quarter, we installed 33 life sources at chipmaker locations. We estimate that our rolling four quarter value share of our light sources installed is 71%. On a rolling four quarter basis, we estimate our unit share at 65% comprised of krypton fluoride at 58%, and argon fluoride at 69%. We are focused on providing our customers with the best technology, highest reliability, and lowest cost of operation available. We believe that we will exit 2008 in a stronger market position based upon the realized strength of the XL platform, growth in demand for the XLR series and proliferation of our installed base of product and service offerings. Recent customer wins in krypton fluoride, argon fluoride, the XLR 500i and the XLR 600i attested to that growing strength. Additionally, as logic manufacturers made capacity investments in the 32nm advanced technology node, and as foundries began to increase capital spending, we believe that we will benefit to an even greater degree in these sectors.
Turning to our outlook, the semiconductor and semiequipment industries are operating in a difficult economic environment with softer consumer spending, tighter credit markets, volatile oil prices and rising unemployment and inflation, all taking a toll. Lower chip prices have resulted in overall slowdown in semiconductor capital spending, affecting every segment of the equipment industry including lithography. Accordingly, we expect Q3 light source demand to be lower and keeping with chipmakers revised capital investment decisions. However, we do expect demand for immersion tools to remain strong. As I stated earlier, although, demand for some light sources will vary generally with semiequipment cycles, our installed base products and services demand will be driven by pulse utilization, installed base growth, OnPulse adoption and other cost down and productivity enhancements, a business which has demonstrated significant resiliency to macro semiequipment cycles.
So, what are the demand drivers that will turn the market? We envision several catalysts including the ramp up of 55nm DRAM [ph], the transition to Double Patterning and increased foundry demand, all of which would be supported by an improving macroeconomic climate, and in turn stronger consumer confidence. Given the ongoing under investment and capacity tools, and with overall fab utilization high, the stage is set for growth when these demand drivers are realized. We have taken responsible actions in the second quarter to keep our expenses inline with market conditions. However, we are maintaining our investment in R&D to ensure our leadership position going forward. Cymer is well-positioned in this market to support immersion at the 65nm, two 45nm nodes with the XLR 500i to support Double Patterning at the 32nm node with the XLR 600i, and we remain in a very strong leadership position with next generation EUV. Our installed base of products and services business will be driven by anticipated increases in pulse utilization and installed base growth, and we intend to support customers with ongoing performance, productivity, ups and improvements and reduce cost of operation advantages with OnPulse, GLX, and other ongoing enhancements.
And I'll now turn the call over Nancy.
Nancy Baker
Thank you, Bob. In the second quarter, as we anticipated, revenue totaled $124 million comparable to last quarter's revenue. Cymer's revenue has held up well in a difficult environment supported by technology wise of our most advanced argon fluoride immersion light sources and strong growth in installed base products and services revenue. These service revenues reached $82.3 million for the quarter, equal to 66% of total revenue driven by high pulse utilization and strong adoption of OnPulse and GLX.
Gross margin for the quarter was 48.9%. Given the difficult economic environment within our industry and the associated slowing in semiconductor capital spending, we began taking steps to reduce our overall expense levels in the second quarter to better align with current business condition. These actions include significantly reducing variable compensation, prioritizing projects, doing certain initiatives and tightening overall cost control. Second quarter expenses and earnings were positively affected by our decision to reduce second quarter variable compensation including approximately $3 million a quarter in the first quarter. However, R&D spending did increase from Q1 levels as we continue to invest in XLR, EUV, and TCD development in commercialization, which are top priorities of the company.
Operating income totaled $22.2 million, yielding an operating margin of approximately 18%. Net income totaled $14.3 million of $0.46 on a fully diluted earnings per share basis. EUV booking for the second quarter of 2008 totaled $97.4 million resulting in a book-to-bill ratio of 0.79. Approximately 86% of the units and 95% of the value of units booking in the second quarter were argon fluoride. We ended the quarter with a DPV back log of approximately $50.2 million with argon fluoride immersion comprising approximately 78% of the value of systems in backlog.
Turning to the balance sheet, inventory increased $21 million during the quarter as we accelerated our investment in fuel stocking levels from the third and fourth quarters into the second quarter. This was done to preposition echo our replacement part inventory in support of the first installations and to enable them more rapid than anticipated adoption of OnPulse. Additionally, EUV work in process inventory grew in support of planned production demand. We expect our DPV inventory to remain relatively flat at these levels through the remainder of the year but expect some increase in EUV and TCD inventory requirements.
Cash and investments declined by $46 million versus the prior quarter, as we strategically increased field inventory, continued our investment in EUV commercialization and purchased approximately $14.6 million of our common stock of 496,000 shares at an average price of $29.49.
Turning to our guidance for Q3 2008, we anticipate revenue to be down 8% to 10%, compared to the revenue reported for Q2 2008. Our foreign currency adjusted ASP to exceed $1.5 million based on the light source product mix being weighted towards XLA and XLR light sources for immersion application. Gross margin to be approximately 45% due to higher mix of installed base products and services. R&D expenses to be between $26 million and $27 million as we continue to invest in our DUV and EUV leadership and TCD technology.
SG&A expenses could be between $16.5 million and $17 million. And our estimated third quarter effective tax rate could be approximately 41% due to discrete high-tax items specific to the third quarter. We do, however, anticipate our annual effective tax rate will remain at approximately 37%. In the (inaudible) industry condition, we intend to focus on ongoing cost control. However, third quarter spending is expected to be above last quarter levels as the second quarter contains some significant one-time cost reduction opportunities. Adjusting second quarter expenses for the variable compensation accrual reversal, expenses in the third quarter are forecasted to be up approximately $1.5 million or 3.5% over the adjusted second quarter level, principally in the R&D area as we plan to continue to invest in XLR, EUV and TCD technologies.
For reasons of competitiveness when industry fundamentals strengthens likely late this year and early next year, we believe it is critical for us to not disrupt our positive momentum on product development and field responsiveness. In summary, the Cymer team has made excellent progress this quarter advancing our light source technology leadership and further expanding our installed base products and services growth opportunity. We do believe as a company, that our business fundamentals are solid and that we are well-positioned with the right products and superior service to increase our competitive position and deliver increased shareholder returns.
Paul Bowman
Thank you, Nancy. At this time I'll ask the operator to open the lines and we will begin with the question-and-answer period. Sayeed?
Question-and-Answer Session
Operator
Thank you, sir. (Operator instructions) First question comes from Brett Hodess from Merrill Lynch.
Brett Hodess – Merrill Lynch
Good afternoon. Bob, I'm wondering if you can talk a little bit about the – you talked about a lot of the wins here with the new products. But as SemiCon last week Giga Fulltone [ph] was talking about share gains as well. So, I'm wondering if you could talk a little bit about the mix going forward, is it mostly going to be immersion side, I guess what I'm trying to ask is was the most going to immersion in the leading edge going forward, does Giga Fulltone in fact is far away at this point as a competitive threat on the leading edge items, and it is sort of backward looking relative to their comments on market share?
Bob Akins
Yes. What we believe as they stated and we discussed before Brett that the XLR offers many – very compelling advantages to our direct customers and to the chipmakers. And actually I think about this, you might recall that when we introduced our mop up [ph] products for the first time in January 2003, it was strongly embraced by one of our direct customers, a second direct customer got into a neutral position, and the third direct customer didn't adopt it for another year and a half or so. So, when we first introduced that product, it took about a year and a half or two before we saw it have a significant impact on our market share. And we believe that XLR is going to happen more quickly than that, but we started to ship that in Q4 of 2007 and it takes time for these machines to be evaluated qualified, orders placed and for that to pull over into the plant where we were including it in our installed base market share. And let me just briefly outline that the XLR brings with it in no particular order a number of energy stability improvements, lower cost operation, longer pulse durations for reduced optics damage or increased optics lifetime both in the laser and in the scanner. It has to be all these to support individually or together. GLX for the longer lifetime, EVS and tunable ABS to help chipmakers really tune their processes to make the most of masks or to utilize existing masks that they already own and mix the masks between tools. Also of course light source which is upgradeable from 60 watts to 90 watts in the field, which allows customers to take advantage of productivity enhancement packages from scanners – from scanner manufacturers without having to change the light source. There are other advantages that we start to publish in conjunction with our direct customers such as speculum prevents that can reduce line with roughness starting at about the 45nm node as well. So, believe that really changes the game. I think I used the term raises the bar, which is used by one of our large customers who had qualified the product recently. And I think that the adoptions that we announced at SemiCon by Toshiba and prior to that some selections by Samsung and other companies attest to that compellingness.
Brett Hodess – Merrill Lynch
Great. And a quick follow-on for Nancy, just to be clear, so is the $3 million reversal of the variable compensation from 1Q, so that was the $3 million reduction to the expenses in 2Q?
Nancy Baker
Yes. It was.
Brett Hodess – Merrill Lynch
Okay. And then that you want to keep the lower variable compensation rate going forward?
Nancy Baker
Yes, that's correct.
Brett Hodess – Merrill Lynch
Got it. Thank you.
Operator
Our next question comes from Satya Kumar from Credit Suisse.
Satya Kumar – Credit Suisse
Hi, thanks for taking my question. Directionally Bob or Nancy, can you give us some color on how you expect non-system revenues to trend up or down in the third quarter?
Bob Akins
Ed, I think it probably should be best addressed by you?
Ed Brown
So, our expectation is that we'll continue to see it trend up as we have been seeing throughout the year. It's not going to be dramatic or getting more and more of the product or where the customers' aren't to OnPulse, and that has a leveling effect. And we are watching the 2% to 3% increase in pulse counts and a little bit of a slow in obviously the number of units that are being installed from what we saw in the first half of the year. But we do see a positive but not significantly positive from a rate for the rest of the year.
Satya Kumar – Credit Suisse
Got it. Do you have any sense at this point what product or install base is on the longer life modules at this point?
Ed Brown
The first customers to come on long life module were the nanoplast memory manufacturers in Asia. So, they've been up now for almost year and a half in many cases. And so, probably over the course of next round of module changes I would expect that probably 60% or 80% something like that of the total modules will be on long life. But that probably will take until sometime in middle of 2009.
Satya Kumar – Credit Suisse
Okay. And a little bit of clarity Nancy on the inventories since it is the highest level you carried on the balance sheet both in absolute and days times [ph]. Do the inventory items carry any capitalized factory absorption costs or not? How should I expect inventories to track in Q3? And is there any component to your Q3 gross margin guidance that is also coming from potentially it worked on its inventories versus just the product mix?
Nancy Baker
So, yes, there is a small piece of capitalized factory absorption that's in the inventory balance. It's fairly immaterial, and it typically bleeds out over a three-quarter time period. And what was the second part of the question?
Satya Kumar – Credit Suisse
Q3 gross margins are down a little bit more than that of prod just given the revenue guidance. Is that all product mix or is that a component of that just from inventory you wrote down, and do you expect inventories to be up or down in Q3?
Nancy Baker
The majority really is the overall product mix with the installed base products and service revenue is being a large portion of our revenue. And then there’s also your basic, if you are not as producing as much you have some factory absorption issues. But the majority of it is product mix.
Satya Kumar – Credit Suisse
Okay. Couple of model question if I may, what should be the model for other income in Q3 and going forward and tax rates I guess you guide in Q4 to 41% for the full year, you are still saying 37%. Does it mean Q4 is down and what's the outlook for '09 for tax rates?
Nancy Baker
So, I'm not giving tax rates for '09 as I actually don't know what the financials look like for '09 yet. Tax rate for the Q4 time rate – for time frame you would assume it's going to be lower obviously than the Q3 level, so that it comes out to be 37% tax rate. The other income piece of it, most of that is we don't currently forecast a foreign exchange gain or loss. We also don't forecast debt write offs either or investment write offs. And so in the – for the most part it's interest income and interest expense, and we actually have the modeling basically that breaking even.
Satya Kumar – Credit Suisse
Got it. Thank you.
Operator
Our next question comes from Patrick Ho from Stifel Nicolaus.
Patrick Ho – Stifel Nicolaus
Thanks a lot. May be this is a question for Ed because it relates to OnPulse. As that becomes a bigger percentage of your overall business, what are some of the – I guess ramifications to the Cymer business model in total? Do we see I guess a more stable growth in operating model – operating margin profile going forward as it becomes a bigger percentage?
Ed Brown
Yes. It will have a dampening effect on the predictability of the cost and the margin as we get more and more of the installed base on that. I think you probably recognize that we had last time talked about it by 800 systems that would be on OnPulse. We are now well over 900. So, not only did that satisfy us that customers really see the value and then also we have added three major customers there. But also it allows us to begin to optimize how we get the procedures in place to basically make that happen and also of course bought forward more inventory than we had planned originally which Nancy just reported. But my expectation is it will have a more predictable factor going forward and we are hoping that that number will grow significantly going through 2009.
Patrick Ho – Stifel Nicolaus
Great. And a follow-up on that in terms of the OnPulse program itself. Do you have the infrastructure generally in place right now or you still incurring the start up cost related to the program?
Ed Brown
We are certainly incurring additional inventory costs. We are adding some labor directly at customers as most of the customers that we are putting online are moving to a 7x24 coverage. And we have some infrastructure we are putting in place relative to utilizing our Cymer ONLINE data to provide better maintenance and monitoring for the customers. But I don't view it as being significant. The majority is already built into the '08 plan, there may be some added into '09, but for the most part the numbers that we are showing include the additional manning that we are expecting that need in the short term.
Patrick Ho – Stifel Nicolaus
Great. And a final question may be for Bob. In terms of some of upgrades offerings that you have now with the GLX, do any of those upgrade offerings potentially cannibalize new system sales for some of your I guess more mature say XLR products because they are extending the life while you are upgrading a customer from one system to the upgrade offering. Can you give a little color on that?
Bob Akins
Historically we have always found, and we continue to believe that the increased productivity or the – sorry the increased utilization of our light sources in the field scales faster than our ability to increase module lifetime. So, by making the amount of modules last longer, and reducing cost operation, if anything that encourages chipmakers to make higher use of their DPT products. So, I don't expect that will cannibalize. And when it comes to features and options, the only thing what I can think that would come close to that would be for example the ability to upgrade from 60 watts to 90 watts in the field. But understand that that is not going to be a path taken by a chipmaker. Instead of buying a new scanner that has a 90 watt machine, that's going to be a path taken because either the optical components in the optics (inaudible) had aged. Their transparency reduced and they want to maintain their original throughput or they've purchased a productivity improvement package from the lithographical [ph] supplier and it needs to be accompanied by a laser power improvement at the same time. So, no, these are not cannibalizing, these are enhancing features from a revenue perspective.
Patrick Ho – Stifel Nicolaus
Great. Thank you.
Operator
Our next question comes from C.J. Muse from Lehman Brothers.
Elisa – Lehman Brothers
Hi, this is Elisa [ph] calling in for C.J. Thanks for taking my question. I guess the first thing I wanted to ask was if I take from the point of your revenue guide and assuming relatively flattish service and upgrades rather than new and your ASP guides I would suggest though, the unit shipments of about 20. So, how should taking that in line with the past few quarters, how should I think about the overall market for laser units, even if the (inaudible) you expect a pretty strong fourth quarter? Do you expect the overall view of these shipments for the whole industry to actually be closer to 200 or is there a lot of excess inventory of lasers in the channel, I guess how should I reconcile all of that and some of the comments that we've heard from the laser makers?
Bob Akins
Yes, there are a few excess lasers in the channel. I think our work-in-process decreased by about 4 systems from Q1 to Q2. So, there's a few and we really expect a few more might come out of that over the course of the year depending upon the conditions. But we would see that, yes, we anticipate that Q3 would be our lowest light source shipment quarter, and then some significant improvement in Q4 in units that we ship. That being said, I believe that the forecast that are out there right now still don't take into account the full magnitude of the shifting to the rate that has been occurring in chipmaker lithograph [ph] to investments over the past few months. And so, this will be a smaller year than it was more recently forecast.
Elisa – Lehman Brothers
Can you provide your outlook for the overall industry, what's the units?
Bob Akins
I'm sorry, I haven't with the numbers, so I don't have a quantifiable number for you but I think it's just going to be less than what the forecasts are today.
Elisa – Lehman Brothers
Got you. And then I guess a follow-up on the questions about the impact of mixes to there is upgrades in your margin structure. Based on your guidance it seems like you had previously suggested that even (inaudible) were lower gross margin that would be comparable operating margins, but your guidance suggests that operating margin is actually going to take a pretty big hit in the next quarter. I guess can you talk about what your (inaudible) are for gross margins to operating margins at various levels of mix or this is implied but you still have a little or a long way to go in terms of cutting down variable costs to get to that target?
Nancy Baker
I'll actually take that if you guys have anything else to add, but our status hasn't changed as far as the bottom line contribution of systems versus the installed base products and services revenues. The difference that you are seeing when you see that the operating margin is coming down in our Q3 guidance really has to do with the fact that we are continuing to invest heavily particularly in EUV and TCD and keeping our level of investment around our ongoing XLR and also our installed base enhancement. The biggest driver is really the increase around EUV, R&D and in the TCD area, which there are no sales associated with it. So, there is no contribution margin from the top line there.
Elisa – Lehman Brothers
And how long will those incremental R&D dollars is spent on? I mean is the EUV or TCD or alternatively when do you expect I guess for that to be up flat by revenues?
Bob Akins
I'll talk about EUV and Ed can talk about TCD. One EUV side of things is of course as I said we anticipate shipping our first unit at the end of this year, and then the first pilot production EUV scanners are scheduled to be shipped to chipmakers in early 2010, support pilot production work at around the 22nm node. So, I would think that that will start to show the beginnings of the ramp up of EUV which will be slow at first as just the top five or six chipmakers in the world that are pushing that (inaudible) and then it will proliferate more rapidly. So, I would expect that you'll see us spending R&D dollars for further R&D and things on – lot more commercialization dollars over that timeframe. On the TCD side of things, Ed?
Ed Brown
So, as we have said before, we have the first two units of TCD that are currently demonstrating our performance to flat panel display makers that and this is in our partners facility in Oberkochen, Germany. We are expecting at least one if not two of those will actually go into production line of valuation in 2008. From there we will have continued R&D, it'll probably will step down somewhat as the tools are being evaluated. But there will be a continuous stream throughout 2009.
Elisa – Lehman Brothers
That's it. Okay. That's all I have. Thanks so much.
Operator
And our next question comes from Ben Pang from Caris & Co..
Ben Pang – Caris & Co.
Thanks for taking my question. If I look at your service revenues, how should I think what the growth for the second half of the year? You mentioned you have the pulse usage increasing, so that's growth driver. Than you have signed up more laser on your OnPulse program, and then you also have I guess some better upgrades that provide better pricing on the service side. What's actually the key driver on the second half of the year for the service business?
Ed Brown
So, the pulse count is a continuous driver of increased revenue. We also have the GLX module which we have to date installed about 100 systems on a potential install base tam of about 450. I would expect that it is possible that that number for forensic [ph], argon fluoride could potentially double in the year. And then in the fourth quarter, we will introduce a product which works for krypton fluoride product, which will generate revenues well into 2009.
Ben Pang – Caris & Co.
I may have misunderstood one of the answers to the earlier question then.
Ed Brown
Okay.
Ben Pang – Caris & Co.
Are you saying that on the third quarter for the service revenues is the growth rate increasing?
Ed Brown
We believe it will slightly increase, yes.
Ben Pang – Caris & Co.
Okay. So, for a quarter-to-quarter basis much is going up at the growth rate, the actual rate actually is going to increase in the third quarter, correct?
Ed Brown
Yes. The pulse rate change causes most of the change in the revenue.
Ben Pang – Caris & Co.
And that should go up typically for the industry through the second half of the year?
Ed Brown
Typically in the industry what happened to the second half of the year for service is you have a propensity for chip suppliers to buy a part, particularly in the fourth quarter as they are running out of budget. So, typically that's what happens. The OnPulse model is a more linear model. So, you won't – we are not expecting that to be to a long-term plan, although, at the moment only about 20% probably of the total revenue is coming up along. So, that will increase over time. But I don't expect a hockey stick fourth quarter driven by industry models for using their budgets.
Ben Pang – Caris & Co.
Okay. And one follow-up on the immersion. You talked about the inventory level, and I guess your comment for all for the lasers. But are you starting to see that your customers are going to build inventory for emerging [ph]?
Ed Brown
I don't expect them to build inventory. If you look what's happened is that lead times have actually been reduced as these products are now getting into quantities of multiple tens of history for manufacturing build. So, I would expect that most we'll see requirements turn within the same quarter that they ordered often, although, they will continue to be a surge capability in the width. But I don't anticipate to see a growing number of immersion tools that are added to whip in preparation for any sort of change in the production output.
Ben Pang – Caris & Co.
Thank you very much.
Operator
(Operator instructions) Next question comes from Jenney Yeung from JP Morgan.
Joe Sang – JP Morgan
Hi, this is actually Joe Sang [ph] for Jenny. Wanted to see if I could get some commentary on the 200 mm going offline. There seems to be an acceleration particularly – the acceleration particularly in memory (inaudible) and Hynix recently had some commentary that they are going to take additional 200 mm offline for DRAM. So, how does that impact repairs and services business, as well as what percentage do you think is this 200 mm offline as a percentage of your install base?
Bob Akins
Sorry. I don't have that percentage number for you. But the 200 mm question is an interesting one because while as you said some companies are taking their tools offline. 200 mm is being explored by many other chipmakers some second tier memory manufacturers as well as foundries and others. As a fully depreciated extremely low cost on a production vehicle and they actually plan to make investments in that capability that tune up to maximum and using it as very cost effective and competitive way of building certain types of chips. So, I think that's likely that we might see machines that are turned off and made available on the secondary market to move to other chipmakers that'll put them to very good use. So, from a point of view of planning our support in service products business I think we'll see those tools potentially move around but still stay strong in generating business for us in the aftermarket.
Joe Sang – JP Morgan
So, on the data that you furnished on the 2%, 3% growth rate per month on the pulses. Doest that incorporate the 200 mm offline?
Bob Akins
To the extent that those tool – those tools have been coming offline now for quite some period of time. So, yes, that includes that and it's been the fact which has been occurring over some period of time now.
Joe Sang – JP Morgan
Okay. Very good. Thank you.
Operator
I'm showing no further questions at this time. I would like to hand the conference back over to Mr. Paul Bowman for any closing remarks.
Paul Bowman
Thank you, Sayeed. Since there are no further questions, I would like to thank everyone for joining us today on our second quarter earnings call, and with that this concludes our call. Thank you very much.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may now disconnect and have a wonderful 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: transcripts@seekingalpha.com. Thank you!