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Executives

Raymon F. Thompson – Chief Executive Officer

Larry Murphy – President and Chief Operating Officer

Larry Viano – Vice President and Chief Financial Officer

Geoff High – Pfeiffer High Investor Relations

Analysts

Edwin Mok – Needham and Company

Matt Petkun – D. A. Davidson

Gavin Duffy – Broadpoint Capital

Graham Tanaka – Tanaka Capital

Semitool, Inc. (SMTL) F3Q08 Earnings Call August 4, 2008 5:00 PM ET

Operator

I would like to welcome everyone to the Semitool third quarter 2008 conference call. (Operator Instructions) I would now like to turn the call over to Geoff High of Pfeiffer High Investor Relations.

Geoff High

Welcome to Semitool’s third fiscal quarter conference call. Presenting on behalf of the company will be Chairman and Chief Executive Officer Ray Thompson, President and Chief Operating Officer Larry Murphy, and Vice President and Chief Financial Officer Larry Viano.

I would like to remind everyone that the matters discussed during this call may include forwardlooking statements that are based on management's estimates, projections, and assumptions as of today's date and are subject to risks and uncertainties that are disclosed in Semitool's filings with the Securities and Exchange Commission. The company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forwardlooking statements. Semitool assumes no obligation to update forwardlooking statements that become untrue because of subsequent events. A webcast replay of today's call will be available at semitool.com for 90 days after the call. In addition, a telephone replay will be made available for 48 hours beginning approximately two hours after the conclusion of this call. Details for listening to today's call or webcast are available in today's news release. With that, I will now turn the call over to Ray Thompson.

Ray Thompson

With today's results, we have reported five straight quarters of improved bookings. This puts yeartodate orders up 66 percent versus the first nine months of last year, in a down market environment.

You might be wondering just how this is all happening. The short answer is three forces working in combination. The first is our threeyear-plus investment in the Japanese and Asian markets, where we have built solid Semitool teams for sales and service. Second is the expanding market in waferlevel packaging. Third is the bulletproof reliability of the Raider platform, which is going into a market that is extremely sensitive to payback. It delivers consistently and predictably, an additional very significant accelerating force.

Last quarter, we delivered a Raider plating tool to the Maydan Technology Center of Applied Materials. Today, we are running wafers through it with a substantial backlog of customer samples. The influence of this relationship has just begun. We are optimistic that it will lead to a significant expansion of our customer base. Our third quarter achievements extend well beyond our strong financial performance, as Larry Murphy will discuss in a minute. First, Larry Viano will provide you with some financial highlights.

Larry Viano

I'll start with the breakdown of our fuel composition for the last 12 months. Approximately 81% came from Raider sales and 19% from batch tools. Geographically, 33% of sales came from North America during the last 12 months, while 28% came from Europe and 39% came from Asia. Third quarter gross margin came in at 48%, up from 47% in last year's third quarter.

Looking at expenses, SG&A was $19.2 million, or 29% of revenue, versus $16.1 million or 34% of revenue in the third quarter last year. This decrease on a percentage basis shows our ability to leverage these costs.

Third quarter R&D expense was $7.9 million, or 12% of sales versus $6.5 million, or 14% of sales in the same quarter a year ago.

Turning to the balance sheet, we closed the quarter with $13.9 million in cash. Working capital is $134 million. Receivables came down $8.7 million from the prior quarter to $74.6 million. Inventories increased slightly to $89 million versus $87 million at the end of Q2. Our tax rate for the first nine months of the year was 36%.

With respect to guidance, we currently expect fourth quarter revenues to be in the range of $62 million to $64 million which would put us within our forecasted full year revenue range of between $230 million and $250 million. We are expecting fourth quarter earnings per share of between $0.05 and $0.07, which would put the full year EPS in the range of $0.20 to $0.22. Fourth quarter shipments are expected to range from $61 million to $62 million. Now I will turn the call over to Larry Murphy who will provide you with some operational highlights.

Larry Murphy

With another strong quarter for Semitool, our most notable achievements again came in Asia, which was responsible for approximately 60% of our third quarter tool bookings. As we noted in today's news release, the Chinese and Korean markets were especially active and collectively generated more orders in Raiders in Q3 than have been sold in these markets during the past four years in total.

Waferlevel packaging and copper damascene for memory remain strong. During the quarter, our Raider platform achieved acceptance from another major memory manufacturer as its process tool of record, continuing to capture POR opportunities, in spite of the down market. I believe we are well positioned for the next upturn in capital spending.

Other active markets include [inaudible] and thin film heads, both of which were responsible for strong order volumes during the third quarter and can generate meaningful booking activity in the foreseeable future.

From a development standpoint, the opportunities associated with our through-silicone via program are showing increased promise, as many of our customers are accelerating their TSV activities. In addition, we are continuing our development of high throughput platform using our porous silicon technology for the solar market.

We also recently initiated a development program with a major logic manufacturer that is working to develop a range of front endofline single wafer cleaning processes.

With our strong booking momentum, the expansion of our presence in Asia, and the many promises R&D projects we are involved in, we are excited about our prospect for fiscal 2009 and beyond. Operator, we are now ready to take any questions.

QuestionandAnswer Session

Operator

(Operator Instructions) Your first question comes from Edwin Mok with Needham and Company.

Edwin Mok  Needham and Company

Start off by asking you little about shipments for the last quarter, was a little bit below guidance, was it due to just the memory project of [inaudible] in Singapore? Or is it just any shipment got delayed September quarter?

Larry Murphy

You know, I think there was one shipment that got delayed by just a few days that pushed it into the next quarter. That's probably what caused most of the little bit lighter shipments than we thought at the start of the quarter.

Edwin Mok  Needham and Company

In terms of your guidance, your bookings look pretty strong actually for the quarter, right? And I would think that you would have a slightly higher shipment guidance. Is it just you have been a little more cautious given the environment or any incremental pushout that makes worry about the September quarter or two? That's why you provided your guidance?

Larry Murphy

Couple of things. Some of the bookings are scheduled to ship in Q2 of next fiscal year; there's a significant number of those. We got a big order in, and that's when those tools are scheduled to ship. That puts them out. Also, in this quarter, we have a few demo tools going out so the shop floor is actually busier than it appears to be from the dollar volume of shipments. These demos are with key customers, and we have high hopes for their results.

Edwin Mok  Needham and Company

Do those demos have any impact on the gross margin for the past quarters?

Larry Murphy

The demos? No.

Edwin Mok  Needham and Company

One question on waferlevel packaging. That looks that market is still quite strong, and that explains why you are outperforming the rest of the industry, which is great. Question is regarding the longevity of that market, if you will, right. Given that has been strong for a few quarters, how do you look at the major projects out there? Do you think there is more spending going on? Specifically, on the two big projects for the [inaudible] right now, both the TI and Samsung, I was wondering if you have any comments on those projects.

Larry Murphy

Everything we see from that market itself is that it's going to continue strong for some time. There's a fairly small percentage of all wafers are packaged with waferlevel packaging today. They continue to be more and more as we go forward. That investment in everything from the foundries and the IDMs. The two you mentioned recently are the ones in the Philippines, both TI and Samsung, where the IDMs are actually doing the packaging themselves. That encourages us. I think we're certainly the POR for those opportunities, and we've actually received some of our bookings to date for some of those applications.

The other application that's really accelerating on the packaging side is through-silicon via. We see that potentially as being the size of the copper damascene market in a three to fouryear time frame. We are very well positioned in that space. And we have customers accelerating their projects with us right now.

Edwin Mok  Needham and Company

Can I ask the booking that is not slated to ship until fiscal second quarter 2009, is that a waferlevel packaging or is that a copper plating application?

Larry Murphy

It's to a new fab in China. It's really gallium arsenide.

Edwin Mok  Needham and Company

One last question, and I will let the others get on. Just some housekeeping, tax rate for the coming quarter? Tax rate was a little lower for this quarter, what do you expect tax rate would be for the coming quarter and for the coming year?

Larry Murphy

For the coming quarter, 36% unless the R&D tax credit gets reinstated. We should be at that 36% rate. As far as next year, it really depends on what happens with the R&D tax credit. I assume we would probably stay at that 36% unless that goes through and, at this rate, even if it does pass this year, we won't get much benefit that we can record this year. So, if it does go through, our tax rate will go down significantly next year.

Operator

Your next question comes from Matt Petkun of D. A. Davidson.

Matt Petkun  D. A. Davidson

Larry Viano, just on the gross margin expectations for next quarter, roughly when you look at the tools you're expecting to see revenue recognition on, should we see margins expand a little bit? This has been a constant source of question for us as we see you gain a lot of market share in Asia, and I know that Ray has really driven towards trying to maintain these 50% gross margins. Is that a realistic goal as we look for the next couple of years for Semitool?

Larry Viano

We still think it's a realistic goal. We think next quarter margins will be up versus where we were this quarter. At least that's away we're modeling. We're not quite modeling 50% yet, though.

Matt Petkun  D. A. Davidson

And then on the R&D side, R&D was up as you mentioned Q3 to levels we haven't seen before. Is that a number that is kind of fixed and should stay there because you're working on some new applications or was it more temporary kind of materials driven in the quarter? Can you explain that?

Larry Murphy

I don't think it's really fixed. It really varies a lot with what projects we have going on at any point in time. But we did have a fair number of projects going that caused it to go up a bit. I don't see it being fixed at that rate, no.

Matt Petkun  D. A. Davidson

I guess the other thing I am trying to do is really ultimately, we've been impressed and we continue to be impressed by the market share growth that Semitool has. But the overall operating margin hasn't really expanded over the last couple of years. It looks like you will do sales roughly like what you did in 2006. Granted with a completely different customer makeups and impressive growth, I think, from a customer standpoint. But the operating margins look like they're going to be well below where they were in 2006. Can you talk about maybe some interim targets for operating margin expansion?

Larry Murphy

We feel that will take care of itself as we grow the top line. A lot of those costs are fixed, and they will not decrease anywhere near the rate that the top line should increase.

Matt Petkun  D. A. Davidson

Just finally, it's small, but it can make a difference, the nonoperating income, the interest and other income was in expenses last quarter. How should we be thinking about that line item? Obviously there's not a ton of cash to generate interest on, but should that be kind of an average neutraltype influence on individual quarters?

Larry Viano

It could effect, it averages out, neutral over time. One of the big components in there is FX, the effect of foreign currency on the balance sheet. So that can go up and down with what the dollar does. It will level out over time. In any quarter, it can be significant.

Operator

Your next question comes from Gavin Duffy with Broadpoint Capital.

Gavin Duffy  Broadpoint Capital

Couple questions here. Update on Japan? Do you face, have you revenued any tools in Japan? And can you talk a little bit about the demo activity over there?

Larry Murphy

Yes, we have revenued some tools in Japan for the big customers, anything packaging related. We expect to revenue ones for copper damascene in the near future. Our success rate in Japan continues to accelerate. We have a tool in a major memory manufacturer there that they accelerated their POR with us right now. And we're making great progress there. As we demonstrate our cost of ownership improvements over the current POR, we expect to gain market share at that particular account.

The other major memory manufacturers in that country has not moved to copper yet as far as production goes. They're doing development. And we expect to have an opportunity there as well.

Gavin Duffy  Broadpoint Capital

On the relationship with Applied Materials, are your sales forces making any joint calls yet to customers?

Larry Murphy

We have joint development programs with a few customers around the world already. I am not sure I would call it joint sales calls per se, but it is a coordinated effort what we're doing in the technology program at those accounts and it's going extremely well.

Gavin Duffy  Broadpoint Securities

My last question here, are you maybe seeing some opportunities for copperplating tools in Taiwan foundries since a former supplier there got out of the business.

Larry Murphy

Would you repeat your question?

Gavin Duffy  Broadpoint Capital

I was just wondering if you were seeing increased opportunities in Taiwanese foundries. Now that Applied Materials exited that business and that was like their last customers.

Larry Murphy

I understand your question. We certainly see an opportunity there and we're working it.

Operator

Your next question comes from Graham Tanaka with Tanaka Capital.

Graham Tanaka – Tanaka Capital

I was wondering about the demo tools, which make it hard for us particularly on revenue versus units, how many demo tools went out this last quarter versus the prior two quarters, and what do you think might go out in the fourth quarter?

Larry Murphy

Three went out this last quarter. I can't tell you how many went out before that, I think it was no more than one.

Graham Tanaka – Tanaka Capital

No more than one in the prior two quarters?

Larry Murphy

Well, last quarter was three demo tools. And before that, I don't have off the top of my head what went out in the prior two quarters, but I think there wasn't more than one in any of those quarters.

Graham Tanaka – Tanaka Capital

In the fourth quarter, what do you think you might get? In terms of demo tools out?

Larry Murphy

Probably one or two. I see in Q1 of next year, there's probably an opportunity for another three again. After that, I think it will slow down a little bit. We'll have to see how that plays out.

Larry Viano

Then the typical lag, I don't know if anything is typical nowadays, of lag in terms of PTOR, [inaudible] tool of record. Can reduce the record from demo.

Larry Murphy

You're right, there is no typical, but our expectation is something under six months to accomplish that.

Ray Thompson

Depends on how desperate their need.

Graham Tanaka – Tanaka Capital

You need a better economy, right, Ray? And then the other thing is through-silicon via which we've been talking about for a while. It's good to hear that's coming through. How fast is that coming through? Is that as much as 10% of revenues yet or not?

Larry Murphy

No, but it could be very soon.

Graham Tanaka – Tanaka Capital

Margins okay on that? In terms of what's going out the door?

Larry Murphy

Absolutely.

Graham Tanaka – Tanaka Capital

And the R&D tax credit. How much of a swing could that make in terms of what you think they're talking about down there, if it does go through? What kind of percentage reduction of tax rate are you talking about?

Larry Murphy

It would cause at least two or three percentage points off our tax rate. So 36% down into the 33% or 32% range. If it all gets piled into next year, our tax rate could go down as low as 28%.

Graham Tanaka – Tanaka Capital

You mean if they have cumulative from this year and into next year?

Larry Murphy

The way it works is you can't accrue for that in any way and since our fiscal year is before the end of the calendar year, Congress could pass it before December, effective for 2008. We couldn't get any benefit in 2008, but we would get a double benefit in 2009.

Graham Tanaka – Tanaka Capital

That's just for companies like Semitool with a different fiscal yearend?

Larry Murphy

Yes, it really affects us more than calendar yearend.

Graham Tanaka – Tanaka Capital

I was wondering if you might hazard a guess or range on market shares or maybe points picked up this year now that you're getting close to the end of the year and you know what your orders are? How much market share is gained? Roughly what you might be gaining in key markets.

Larry Murphy

That's really hard to tell with the disruption of who's buying and who's not. I guess one way I could say it is in wafer-level packaging, we captured two new large customers in the year that we didn't have before, so that's significant to us. And the copper damascene space, we expect to be in just about every memory manufacturer in the world by this time next year. That's all market share gain opportunity for us.

Graham Tanaka

Maybe a way to do it, I know you've talked about the available market. By this time next year, how much do you think your available market will be enhanced by market share gains? 40%, 30% increased improvement from this last year?

Larry Murphy

As far as addressable market? Absolutely. Right now, it's not really available because a lot of these guys haven't moved to copper yet. As soon as they do, that number goes up tremendously.

Graham Tanaka – Tanaka Capital

What kind of order magnitude?

Larry Murphy

I think we'll share that with you next quarter. It will be more valid at that point.

Operator

Your next question is a followup from Edwin Mok with Needham and Company.

Edwin Mok  Needham and Company

I have two questions. First question is regarding the [inaudible] makers in Taiwan. I understand you guys are cornering them right now. Any idea if you expect to see any kind of revenue or shipment to those guys? Any kind of color there would be helpful.

Larry Murphy

Based off the information we had today, we expect to have some revenue next quarter with some of those guys. It's premature to get it this quarter. We will see how that plays out, though.

Edwin Mok  Needham and Company

Next, you mean December quarter, right?

Larry Murphy

December quarter, right.

Edwin Mok  Needham and Company

Then the second question is regarding demo. You mention there's quite a few demos that is planned ongoing out in the coming quarters as well. And you said around can be up to six months, but on the two that have been shipped out and that you are planning on shipping out this quarter, how many of them, if any, do you expect to recognize revenue on in the coming quarters?

Larry Murphy

In the coming quarters, we expect to, fully expect to, recognize revenue on both of them. One just went out, just last week, it could possibly be some revenue in the December quarter, but most likely in the March quarter.

Edwin Mok  Needham and Company

Is it fair to assume that the three that went out in the June quarter potentially can come in in December or, if not, in the March? Somewhere around that time frame?

Larry Murphy

Yes.

Operator

There are no other questions at this time.

Larry Murphy

I want to thank you for joining us.

Operator

Excuse me. We have a question.

Graham Tanaka – Tanaka Capital

In terms of cost, how are you doing in terms of pricing versus cost per unit and inflation?

Larry Murphy

Our margins keep tending to go up, so we're doing well there. There's no problem.

Ray Thompson

We are working on cost issues, though. We are appreciative of that whole issue of inflation.

Graham Tanaka – Tanaka Capital

You're having an upward bias on margins from the mix, right?

Larry Murphy

Yes.

Ray Thompson

An upward bias on margins? That's our expectation, yes.

Larry Murphy

We think that mix gets better over time.

Ray Thompson

Again, I want to thank you for joining us on today's call. As you can see, from our perspective, we still have momentum building. As you just heard our story. We believe there's still better yet to come for Semitool and stay tuned.

Operator

This concludes today's conference call.

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Source: Semitool, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript
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