Ultratech's (UTEK) CEO Art Zafiropoulo on Q1 2016 Results - Earnings Call Transcript

| About: Ultratech, Inc. (UTEK)

Ultratech, Inc. (NASDAQ:UTEK)

Q1 2016 Earnings Conference Call

April 21, 2016 11:00 AM ET

Executives

Suzanne Schmidt - Blueshirt Group

Art Zafiropoulo - CEO

Bruce Wright - CFO

Analysts

Krish Sankar - Bank of America Merrill Lynch

Mark Miller - The Benchmark Company

Patrick Ho - Stifel

Craig Ellis - B. Riley

Tom Diffely - D.A. Davidson

Operator

Good day and welcome to the Ultratech First Quarter, 2016 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Suzanne Schmidt. Please go ahead, ma'am.

Suzanne Schmidt

Thank you, operator. Good morning, everyone, and thank you for joining us today to discuss Ultratech's financial results for the first quarter of 2016. A press release detailing our financial results was distributed this morning by Business Wire at approximately 6:00 AM Pacific Time and is available on Ultratech's website. A webcast replay will be available on the website for one week after the call.

Joining me on today's call are Art Zafiropoulo, Chairman and Chief Executive Officer; and Bruce Wright, Senior Vice President of Finance and Chief Financial Officer. After management's opening remarks, we will open the call for your questions.

And with that, I will turn the call over to Art.

Art Zafiropoulo

Thank you Suzanne. Good morning and welcome to our first quarter 2016 conference call. During the course of this presentation we'll be making projections of forward looking statements regarding future events and the financial performance of the company. We wish to caution you that such statements are just projections and the actual events can differ materially. We refer you to the documents the company files from time to time with the Securities and Exchange Commission specifically the company's annual report filed on 10-K for the period ending December 31, 2015 filed as of February 26, 2016. And the quarterly report filed on 10-Q for the quarter ending October 3, 2015 filed as of October 30, 2015. These documents contain and identify important factors that could cause the actual results to differ materially.

The first quarter of 2016 showed a sharp improvement over the past several quarters, improvements were in virtually every major product line. As we have said in many previous conference call we are a logic application centric capital equipment supplier to the semiconductor chip industry and working at greater diversification through investments in the 3D inspection business and the nano product market. As reported in this mornings press release we've made significant improvements in our sales and earnings which was aided by our shipments of laser spike anneal tools and the continuous strong sales of our industry leading advanced packaging stepper products. We had a very strong quarter in system bookings with a book to bill upgraded in 1.3 to 1.

In our new systems bookings we received several additional LSA orders as well as multiple Superfast 3D inspection systems and a large number of advanced packaging steppers. New system bookings by product area are as follows. LSA represented 36% of total bookings, inspection products were 11%, advanced packaging steppers accounted for 49% and nano products which included ALD tools were 4%. Geographically system bookings were North America, 3%, Europe 11%, and Asia-Pacific 86%. Total bookings in the first quarter of this year exceeded every quarter since the fourth quarter in 2012. The strong bookings in the first quarter has continued in the first few weeks of the second quarter. With another LSA order and several orders for the advance packaging AP300 steppers.

Orders are expected in the high-brightness LED, immense stepper applications and we are also expecting Superfast inspection business during this quarter. We received a multiple system order in the first quarter for the Superfast 4G+ 3D inspection tool for production use in 3D vertical NAND devices. We are working with top tier memory companies and one of these companies have determined possible use of our 3D technology for the 30 different steps. Effort is underway to determine the sampling needed for each step and the number of tools that maybe needed. This activity would be ongoing for partially several quarters as they determined a yield improvement obtained and analyzed the ROI gain as they ramped their 3D NAND way for starts.

We are very encouraged that the potential of this DT 3D inspection technology will help in our market to diversification strategy. This effort will be ongoing and we believe can lead to incremental increase both in top line sales and EPS over the next several quarters.

We are also working with a major logic foundries and their 10 nanometer and 7 nanometer FinFET device yield improvement program. Since we don’t have detail device yield data it is very difficult for us to provide much guidance and the timing of sales for these systems. We have spoken in the past that FinFET logic devices have been experience sub yield resulting an increase device cost. Progress has being made, however the cost per transistor has not decreased as expected. The industry is moving very quickly through the 10 nanometer node and they are now focusing on the 7 nanometer FinFET design.

Many will move some of their top level of 10 nanometer production, but at this time their focus is to move as quickly as possible to the 7 nanometer node. Their projections are, it can reduce device cost within improved device performance at that node. We have our LSA systems currently qualified and used to produce leading edge FinFET devices with three of the top four logic chip companies. The LSA system is also being used as the process of record at the 10 nanometer node and activity is continued with all four major advance FinFET foundries.

Their current over capacity at the 14 nanometer node and the fabs are currently running and some fabs are currently running at underutilization. We have guided that deploying the logic node specifically the 28 nanometer geometry devices and even some 40 nanometer chips would require additional capacity. The fourth quarter of 2015 began the positive inflection point and the LSA orders increasing that first quarter of 2016 and continuing into the second quarter. We have received multiple orders in the first quarter mostly for use for 28 nanometer capacity. We expect 2016 to be a stronger year in comparison to last year.

Looking ahead we expect based on our customer success in resolving yield issues and future mobile device demand that capacity increase requirements will result in new LSA some node orders for advance FinFET for the 10 nanometer and 7 nanometer nodes.

The increasing activity in our LXA melt systems is expected to gain momentum during the balance of 2016, leading to increased business in 2017. The advance packaging lithography stepper market is increasing and based on extra information we expect this to continue for the next several years.

2015 was a growth year for the stepper package business despite the large -- a large idea moving to our EU strategy to decrease the capital spending. The first quarter has continued with strong bookings from the OSAT and foundry customers and this momentum has continued in the early part of the second quarter.

Our current projections are that the increase in the market shift from wire bonding will continue. The next several quarters the main application drivers will be copper pillar projected to have a five year CAGR of 23% through 2019. Fanout with the five years CAGR forecasted at 63% CAGR. Also we expect image sensors to be implementing TSV bump packages reducing the thickness of future consumer products. We have technology and market leadership in all these applications and continue to invest in R&D of technology future needs and reduction in cost of ownership. We are currently booked in our production plans to the third quarter and our facility in Singapore is running at closely 100% utilization. We have the ability and necessary long live material on hand to ramp up the capacity to support customers demand as it occurs. So as the industry demands increase we will be position to meet the industry requirements.

Our ALD business has also improved since we acquired the assets of Cambridge nanotech a few years ago. We completed the second generation program for our family ALD tools and added several improvements and important features and options to these stores.

Growth in sales is expected in 2016. As we increase our top line sales gross margins will increase due to a reduction and absorption. We are focus in obtaining every order and increasing our market share to our product areas. We are also focused on cost reductions and expense control wherever possible without impacting future potential growth. At this time, Bruce will share financial details and future guidance.

Bruce Wright

Thanks Art. I would now like to go through a brief analysis of our income statement and balance sheet for the quarter. Then we will have the teleconference operator open it up for your questions. As you’ve heard from Art’s comments, the first quarter saw a sequential increase in revenue of 60% compared to the fourth quarter of 2015, primarily reflecting increased revenue from advanced packaging and laser processing.

Geographically revenue increased sequentially from the fourth quarter of 2015 in Asia-Pacific and decreased in North America and Europe. Demand for advanced packaging systems in the first quarter of 2016 accounted for about 57% of revenue and about 49% of new systems orders. Laser processing systems in the first quarter of 2016 accounted for about 26% of revenue and about 36% of new systems orders.

Nanotechnology Systems, which include both high brightness LED and Atomic Layer Deposition Systems in the first quarter of 2016 accounted for about 2% of revenue and about 4% of new systems orders. Superfast Systems in the first quarter of 2016 accounted for about 11% of new systems orders. Gross margin in the first quarter of 2016 increased to approximately 40% from approximately 38% in the fourth quarter of 2015, primarily due to higher volume of production.

Turning now to a comparison of the first quarter of 2016 to the first quarter of 2015. Revenue for the first quarter was $45.2 million, up about 8% from $41.9 million for the same period a year ago. We had a net loss for the first quarter of $1.2 million, which represented a loss per share of negative $0.04. This net loss compares with a net loss of $1.7 million or a negative $0.06 per share for the same quarter a year ago. On a non-GAAP basis, we have net income for the first quarter of $2.7 million or $0.10 per share diluted. This non-GAAP net income compares with non-GAAP net income of $2.9 million or $0.10 per share diluted for the same quarter a year ago.

Turning to the first quarter of 2016 versus first quarter 2015 comparison of revenue mix. Systems revenue was up about 20% in the first quarter of 2016 and license and service revenue was down about 31%. For the first quarter of 2016 systems revenue accounted for approximately 85% of the total and license and service revenue for about 15%. Also, for the first quarter of 2016, about 96% of the business came from the semiconductor industry and approximately 4% from the nanotechnology sector.

Geographically, revenue from Asia-Pacific for the first quarter of 2016 was $41.6 million, up about 77% from the first quarter of 2015 and represented 92% of Ultratech’s total first quarter 2016 revenue. North America had revenue of $2.9 million, down about 77% and represented 6% of the total, and Europe had revenue of $700,000, down about 87% and represented 2% of the total. Our top five customers for the quarter were primarily advanced packaging and laser processing customers from Asia-Pacific. Overall, the top five customers accounted for about 97% of system revenues.

Gross margin decreased to about 40% in the first quarter of 2016 compared with approximately 45% in the first quarter of 2015. This decrease was due primarily to a product mix shift.

Looking at operating expenses in the first quarter of 2016. R&D as a percentage of revenue decreased to about 18% from 20% a year ago. SG&A expenses decreased to 25% of revenue down from about 29% a year ago. Both percentage decreases are primarily due to the approximately 8% increase in revenue for the period along with an approximately $1 million absolute dollar decrease. Total operating expenses for the quarter decreased to approximately 43% of revenue from approximately 49% of revenue a year ago.

Operating margin for the first quarter of 2016 was about negative 3% of revenue compared with approximately negative 3.5% for first quarter 2015. Interest and other income net was up slightly of $200,000 in the first quarter of 2016 compared to $100,000 in the first quarter of 2015. Ultratech recorded an income tax credit of $100,000 in the first quarter of 2016. Ultratech’s tax rate is based on its jurisdictional mix of earnings and has the potential to fluctuate as business moves from one geographic region to another.

Turning now to the first quarter 2016 versus fourth quarter 2015 comparison of the balance sheet. Cash, cash equivalents and short term investments decreased by about $10 million during the quarter to total $242 million at March 31, 2016. This decrease in cash was primarily due to system shipments occurring late in the quarter, resulting in an approximately $23 million dollar increase in accounts receivable. We expect to collect early in the second quarter 2016 most of the cash involved in the accounts receivable increase. No common shares were re-purchased in our stock buyback plan during the first quarter 2016. Accounts receivable increased about 80% during the first quarter to approximately $51 million on a shipment increase of about 66% compared to the fourth quarter 2015. Inventories decreased during the first quarter 2016 by about 7% to $61 million.

Working capital increase to about $318 million of March 31, 2016 up from the about $315 million at December 31, 2015. Book value per share at March 31st 2016 was $12.89 flat with $12.89 at December 31st 2015.

Now let's take a few minutes to look at the future from a financial perspective. At this point it is very important to recall and underscore the Safe Harbor comments Art made the beginning of the call. Ultratech's markets and industry are notoriously cyclical and hard to predict and fully subject to the risks enumerated in the Company's 10Q and 10K.

As a results any forward-looking statements are highly vulnerable to very sudden and significant changes, risks and uncertainties. In addition the company undertakes no obligations to update information presented in forward-looking projections, forecast or estimates. As you heard from Arts comments there is a lot going on in Ultratech's world today. In our last earnings release teleconference call three months ago we signaled our belief that we are seeing an inflection point for Ultratech. That scenario looks to now benefit playing out.

After our fourth quarter 2015 book to bill greater than 2:1 we saw a greater than 1.3:1 book to bill for the first quarter 2016. This strong order sequence is now converting to revenue with first quarter 2016 revenue being up 60% over the fourth quarter 2015. The order strength as across all three product lines of advance packaging, laser processing and metrology inspection.

Our Singapore manufacturing facility is fully booked through the third quarter of 2016 and rapidly filling build slots in the fourth quarter 2016. We anticipate no turns business needed to meet our projections for the second quarter of 2016. Well the overall industry continues to struggle with cost and yield issues with FinFET logic devices and sectorial business cycle weakness particularly in DRAM Ultratech's differential positioning looks to be exerting itself. Advanced packaging remains strong driven by an increase in capacity to meet wafer fanout needs and continued focused on packaging cost.

As FinFET logic device production has stalled demand for planar logic devices has increased at the 28 nanometer node again driven by cost and yield considerations. With more numerous vertical layers for 3D NAND wafers, demand is increasing for superfast ability to perform advanced metrology inspection applications as result of all these factors we anticipate Ultratech's second quarter 2016 revenue will be sequentially up above 5% to 10% over the first quarter 2016.

Gross margin could increase mid-40s percent level. Operating expenses look to be about the same as in the first quarter 2016 within increase in R&D and a decrease in SG&A. the tax rates has estimated to benefit in the mid-single digit range, we anticipate being profitable in the second quarter 2016 on both of GAAP and non GAAP basis. Cash flow for the second quarter 2016 should benefit positive.

Finally we would like ramp up our formal remarks by reminding you the Reg FD restrictions. In Ultratech the only three people authorized to talk to you about the company are Arts Zafiropoulo the Chairman & Chief Executive Officer, me, Bruce Wright, Chief Financial Officer and Suzanne Schmidt of Blueshirt Group. For any calls or questions after the teleconference call dealing with quantitative matters we will refer you back to the comments made during the teleconference call. That concludes our formal remarks and now we would like to open it for your questions.

Operator, would you please begin the polling?

Question-and-Answer Session

Operator

And we'll take our first question from Krish Sankar with Bank of America Merrill Lynch.

Krish Sankar

I had a few of them. Art or Bruce, did you guys give your revenue breakdown for superfast 3G in Q1? Did you revenue any superfast 3G products.

Art Zafiropoulo

We did not.

Krish Sankar

And then the next one is in terms of the LSA demand thanks for the color on that I'm kind of curious if you tried to break it for this year, would you say there will be more LSA being sold for 28 nanometer or do you think it's going to be more for 40 and 10?

Bruce Wright

Now that should be more for 20 and 40 than for 10.

Krish Sankar

And when do you expect the 10 nanometer shipments to start for LSA?

Bruce Wright

They already have started, we have a number of machines already being used to produce 10 nanometers. And so at 3 of the 4 sites that provide leading edge FinFETs, they are currently using our tools and qualified at 10.

Krish Sankar

So these are basically your existing customers?

Bruce Wright

That is correct. There are no new advanced FinFET customers that we know in the world.

Krish Sankar

So again I’m just curious. At 10 nanometer, are you seeing any new penetration where some of the larger guys didn’t use you at either 14 or 22 or so?

Art Zafiropoulo

No. The guys that are at 14 are using us at 10.

Krish Sankar

Got it. Alright. And then another question on the advanced packaging side, you just spoke a little bit about the traction you are seeing on the inflow side for your tools. I’m kind of curious have those sales already done for this year or do you expect more inflow-related sales to continue in the back half of the year.

Art Zafiropoulo

Yes, we expect sales to increase in the second half and they are increasing in the first half. So that business will continue to ramp in info and also copper pillar. They still go hand-in-hand. The industry is shifting from dimension going from larger dimension to small dimensions. They reduced the number of layers again reduce in the packaging costs. So that there’s a need for additional capacity for more advanced steppers.

Krish Sankar

All right, got it. And the final question, Bruce, how much do you have left in your buyback at this point?

Bruce Wright

We’ve executed on about 40% of the $100 million program and that’s been if memory serves correctly about 2.25 million shares through. So we’re 40% of the way through.

Krish Sankar

Got it. Thank you very much. Thanks a lot, guys.

Operator

Thank you. And we’ll take our next question from Mark Miller with The Benchmark Company. Please go ahead. Your line is open.

Mark Miller

Congratulations on your momentum, which seems to be improving nicely. You had mentioned you had received some orders this quarter, I believe it was for LSA. Were there other orders you received this quarter already?

Art Zafiropoulo

Yes. We have, we receive thus we mentioned a number of orders for advanced packaging.

Mark Miller

Okay, for both advanced packaging and LSA. Cash from operations, you were down because of the late shipments. What was the cash flow from operations for the quarter?

Bruce Wright

Cash flow from operations was negative 9 million.

Mark Miller

I see and you expecting that to reverse next quarter, that’s correct?

Bruce Wright

Yes.

Mark Miller

That’s all. Thank you very much.

Operator

Thank you. And next we’ll move to Patrick Ho with Stifel. Please go ahead. Your line is open.

Patrick Ho

Thank you very much. Art, maybe from a big picture industry perspective, given the long life and productivity of the 28-nanometer node and perhaps the lower than expected demand and attraction for 16 and 14. How do you see the next generation 10 and 7 nanometer nodes relative to these two notes? Do you see 10 and 7 having a potentially longer lifecycle, maybe more demand? And then how do you believe it will translate for LSA demand on a going-forward basis?

Art Zafiropoulo

All right. From what we are learning from our customers, they are moving as rapidly as possible through the 10. They feel that the 10 may not provide the kind of cost savings and performance that’s needed. And some are calling it 7, some second generation 10. But the initial designs for 10 don’t seem to be what the industry will require in large volume. So the 10 may look more like maybe a 40 nanometer node in volume, but not like the 28 that I see right now. So based on what I’m sensing out there, that they are all focusing on the 7, is what they are hoping will become the 28 nanometer for FinFET.

So they originally thought 10 and I believe now they are focusing on the 7. And the question here is, can they really perform the way they should perform in reducing costs? To give you some basic numbers that are kind of interesting, as you all know that about 55% of the chip cost is depreciation of the equipment. And that’s why the industry is trying to get to a reuse strategy to reduce that percentage.

In addition to that, of that 55%, 45% is lithography. And the question really is, at 7 nanometers, do you increase to double or triple patterning with immersion steppers, or do you move to EUV? It’s my feelings that the industry will move to multiple patterning with immersion steppers and slide EUV, my feelings are, to the 5-nanometer node. And so there will be additional costs incurred with the additional number of patterns that are required.

So I’m hoping that it will be able to improve their situation in terms of cost per chip depreciation while they expand somewhat in the number of steps that they need for lithography. So we see LSA as being an important part of that, and there is indication due to resistance in the junction formation that they are looking very hard at the laser melt systems, and that may occur somewhere along the 7 nanometer or 5 nanometer node.

There will be papers presented of coming in June which I’m not at liberty to discuss openly. But a very impressive data has been achieved with our LXA melt systems for junction resistance. So with that, I think that in general the industry is targeting 7 for a big node, 10 there will still be some production there for sure. Reuse strategy will continue throughout the entire fab to reduce the percentage of depreciation costs, but that's going to be quite limited on those common tools. We at this time think that there's a big opportunity for both the sub-melt LSA and the melt LXA in the next generation of FinFETs and the expansion of the 28 nanometer plainer devices.

Patrick Ho

Great, that's helpful Art, and secondly in terms of the inspection Superfast product, given the build out that we're seeing in the industry today with 3D NAND, is the traction you're seeing with multiple customers or primarily coming from say one large order from one customer.

Art Zafiropoulo

Well there's one customer in the lead for sure, but there's multiple customers, and we're focused on only a few, we certainly want to focus and just use our resources wisely here, but these systems that we’ve been shipping are going in full production with 3D NAND flash. These are not for R&D purposes or pre-production, are going into full production. They have a compelling return on investment on yield, a program for the customers.

Patrick Ho

Great, thank you.

Operator

Great, thank you, and next we'll move to Craig Ellis with B. Riley, your line is open.

Craig Ellis

Art, I just wanted to follow up on the comments regarding industry's interest in moving quickly from 10 nanometer to 7 nanometer, given some of the costs and performance dynamics at 7. As you look out there into the customer base, from a timing standpoint when would you expect that transition to occur? How far out are we looking for the beneficial impact of what would be 7 nanometer orders for Ultratech and industry?

Art Zafiropoulo

I think the production orders will occur primarily next year, in ’17. And there may be some residual R&D programs. But again, the bulk of this year's business will be in 28 nanometer. And we are expecting a number of orders in the coming into the Pacific region in the second and third-tier companies. So we understand from their expansion programs, and we have very strong position in this space, not only in Taiwan and Korea but also in China. And so we expect China to grow rather substantially in the 28 and 14 nanometer node in '16 and '17.

Craig Ellis

Thank you. And the follow-up is with regards to just the different product groups, I think at times in the past you have provided an expectation for those which you thought would grow year on year in the calendar year. Could you recap for us what your expectations are in that regard for things like advanced packaging, inspection, etc.?

Art Zafiropoulo

I think that in all the areas that we are looking at growth, last year as we talked about in the advanced packaging, we transitioned quite nicely, grew our business into the OSAT and foundry market, where the IDM market became much weaker due to the industry shifting from PCs to mobile. It wasn't unexpected, and we did a very good job in maintaining our market share. And as a matter of fact, we grew our market share last year and are in a pretty strong position there. We see from last year to this year, again, an increase in advanced packaging over last year, which was a very good year. The LSA area -- we're going to grow substantially greater than we did last year. Last year was a pretty bad year, but this year should come back to something that we're going to be somewhat proud of. But we are not going to reach an all-time high there, for sure. But we are making great progress in that area. And the products are working very well in the field.

Our reliability, uptime, performance is just superb. I think we are the best of breed in terms of performance and uptime in the industry. And that includes wafer breakage. We are the lowest there. So as a cost basis, it's just a terrific tool. In the inspection area, percent-wise, we expect to grow much faster than we did the previous year, as we see these production units. It takes a lot of work developing the algorithms to provide the information to the customers, and each one is different. Each step is different. So there's a lot of software that goes into it, and so that's an area that we have been focusing on. But that's certainly one of the areas that slows us down a bit in working with the customer as much as they will give us in developing algorithms.

As I mentioned earlier, the ALD technology is moving very nicely. We expect this year to be number one in the market we serve there. We are very close to it right now. They were a strong company prior to their difficulties, financial difficulties a few years ago. We redeveloped the whole process, the programs, the machines and so we are coming back stronger than ever. And I'm very comfortable, and I think there's a couple of breakout applications that may be on the horizon there that we are excited about.

The high-brightness LED business is a little bit softer. There's excess capacity out there. But we expect this to somewhat recover to some degree in the second half of this year and somewhat next year. And we combine those two in our nanotechnology space, so that in general will be greater growth at ALD than it would be at high-brightness LED. And our Stars business typically is flat to down, spare parts and services. And what the customers are doing is they are cannibalizing those systems that are in stand-by, and they are using those systems for parts to reduce their costs.

But we see now that beginning to change and they are now putting parts back in the machines and bringing it back online. So again, the Stars business has been impacted by them cannibalizing these tools for spare parts.

Bruce Wright

And Craig I want to jump in on a comments are made because he mentioned that, but it might have been lost in the rest of the explanation and that have to do with utilization rates and uptime rates for our systems out there in the field. We have a very-very stringent QA approach to making sure by the time we ship a tool that it is going to meet specs when it gets installed at the customer site. And that’s reflected in our warranty cost which runs 2% of revenue, that’s really-really low and is emblematic to the fact that our systems when they leave the factory and they get installed, they run and run and run.

Craig Ellis

That's very helpful color, guys. Thank you.

Operator

Thank you [Operator Instructions]. We’ll move to a question from Tom Diffely with D.A. Davidson. Please go ahead, your line is open.

Tom Diffely

So the first one, I guess, Bruce, why did you decide not to buy back shares this quarter? What was the thought process there?

Bruce Wright

Every quarter we go through a process of looking at a bunch of variables, among them well where is the current stock price? What’s the result than and tranches of the stock buyback in previous quarters? What does it look like the cash flow is going to be for the quarter? What kind of M&A activity is going on in the quarter that might impact Ultratech? As you’re aware, there has been a lot of consolidation that’s been happening around recently. And so we really stir all of these variables together in the pot and we make a determination at that point, okay does it make sense for this given quarter to be active in the buyback market or not and we’re going to continue to do that on quarter by quarter basis.

Tom Diffely

Was there one thing in particular that made it so you chose not to?

Bruce Wright

Well, one of the things certainly that I commented on was how we saw receivables popping up and that meant that there was going to be less cash coming into the company during the first quarter. And that was a little bit of an abnormal situation for us. And with everything going on that probably had a little bit more weight than in past quarters, but like I said we kind of look at all small four of those variables together.

Tom Diffely

And then looking at the margins, they are down a bit year over year. You said it was mix-related. I wonder if you could give us a little bit more color on that. And if it is purely just mix, is that particular mix expected to continue here?

Bruce Wright

It was mix related, it has to do with the balance largely of laser and AP and Superfast as you’re aware the Superfast tools have very good margins and you already heard my answer to the question earlier that there wasn’t any Superfast revenue in the quarter. So that had an impact. And the answer to the second part of your question is that some of those tools which were perhaps over weighted on a lower than normal gross margin basis in the first quarter, kind of have played out and we won’t be seeing that going forward to the extent that we saw in the first quarter. And that was largely behind my comment as to an expectation of gross margin increasing in the second quarter to the mid-40s percent level.

Tom Diffely

And I think it was about a year ago you talked about some pricing pressure in advanced packaging from Canon. Are you still seeing some pretty competitive environments for this advanced packaging part of your business?

Art Zafiropoulo

Yes, I think that Canon is a viable competitor, and they certainly are still there. And they are a good company. So yes, I think that each one of our product areas where we have competition. And I think that's healthy. It keeps us on our toes and we keep developing better technology at a lower cost. And so, they are a good competitor and we respect them and we beat them.

Tom Diffely

And then the parts and services business is that a little bit softer last couple of quarters. Do you expect that to bounce back at some point here?

Art Zafiropoulo

Hard to say as to when, we’ve factored in this year to be typically flat for each quarter, and just a tiny increase, so that visibility is not great yet. But as the utilization begins to improve, that should improve also. And we’re also beginning to get a listing of upgrades that we can provide to our customers to improve their efficiencies and that should help. But in general on our planning for the year, we’re being very conservative and it's essentially flat each quarter.

Bruce Wright

And Tom you may haven’t noticed but again this quarter we saw a negative margin in service and that goes to the fact that we don’t run the service component of the business in our company on a profit center basis. The important aspect of service to us is to be able to make sure that we are meeting the customer needs for our systems that are out in the field.

So we have a certain amount of expense that's just embodied in being able to fulfilled that mission from a service standpoint, then the revenue aspect of what's going on in service is tied into sales of spares and time and materials contracts and service contracts that are out there and that just tends to fluctuate just based on market condition. So the two aren’t necessarily as closely linked as you would see and more of a systems product context.

Tom Diffely

Okay, great. Finally, it sounds like there's continued momentum in a lot of different groups that you compete in. At this point are you expecting growth half over half in the second half of the year?

Bruce Wright

We really haven’t commented a whole lot on that and what we've said is that things continue to look more and more positive. We haven’t given a lot of quantitative guidance just because the things out there particularly and the nodes that Art was talking about regarding FinFET design and yields are just -- our customers don’t know they are not having the technological breakthrough and so that makes it a lot harder to be able to give any time the quantitative guidance about first half and second half, and so we really aren’t getting quantitative guidance but I think Art went into a the lot of details from the qualitative standpoint as to the outlook.

Tom Diffely

Great. All right, thanks for your time.

Operator

Thank you. And next will move to Mark Miller with The Benchmark Company. Please go ahead. Your line is open.

Mark Miller

In terms of the heightened or the improving demand for your 4G+ systems, is that basically being driven by the increased number of layers and the focus on stress control in the films? Or is there something else also driving the need for the tools?

Art Zafiropoulo

No. That's true for the vertical NAND structures. That is really a major problem. And their tighter CD controls they are moving now down to lower than 4 nanometers. So that's becoming a big problem. Also, we are finding in advanced FinFETs that the CD control, again with multiple patterning is becoming a big problem. So we are being used in conjunction with etch and lithography to minimize the deviation by CD control across the surface being printed to be able to then to get better and tighter controls. We've seen significant improvements by percentage improvements in even advanced FinFET devices in the Superfast. So, we are seeing now some activity, and it's getting more and more aggressive with a major company in Asia. But we had focused initially on the memory market and now are spending some time with one major company and Advanced Logic.

Mark Miller

In terms of the CD control you are starting to displace or are you using as complimentary and with respect to optical metrology techniques?

Art Zafiropoulo

Yes it's really a complimentary strategy and it's a production tool it's capable of producing a 150 wafers an hour, 12 inch wafers an hour at up to 3 million points of data per wafer. So it allow the information to go back and feed forward this information, let say to the stepper, emersion stepper and so they can adjust the focus beforehand to maximize their yield and their CD control and they increase productivity at the same time. So it's a benefit not only in yield but it's a benefit in productivity of the stepper so as I guess the double a double positive impact, so it's getting a lot of attention. We've been working on this now for over one year with the feet forward and so now it's beginning to move into more of a production node for the memory and we are anticipating it's going to do the same thing in the logic FinFET business side in the future.

Operator

Thank you. And at this time I'd like to turn the conference back over to Art Zafiropoulo for closing remarks.

Art Zafiropoulo

Thank you. We've started 2016 with our first quarter exceeding our internal business plan and momentum we haven’t seen in more than two years. Short-term visibility has improved and we are cautiously optimistic regarding 2016. We are prepared for customer shipment demand as they occur and we continue to focus on cost control wherever possible.

Thank you for joining our conference call and we look forward to seeing you at one of our future conferences. Thank you.

Operator

Thank you. This does conclude today's teleconference. You may disconnect at any time. And have a great day.

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