Question-and-Answer Session
Operator
Than you, sir. (Operator Instructions).
Our first question is from the line of Krish Sankar with Bank of America-Merrill Lynch. Please go ahead.
Krish Sankar – Bank of America-Merrill Lynch
Hi, thanks for taking my question. Two of them. Art, you kind of maintained the guidance for the full year but looks like you gross margin is going to be better 50% now versus mid 40 three months ago. What is driving the implement in gross margin?
Art Zafiropoulo
Well, I will take that one, Krish. What we are really looking at as I commented on is the factory being four. And as a result as we fill up the factory we are getting better absorption and that’s going to be impacting margins, and we are also seeing as a result product mix shift. So from a margin standpoint on that regard that also helps. But again, things look pretty good out there, but we don’t want to get ahead of ourselves.
Bruce Wright
Yeah, and Krish let me add to that a little bit. In looking at the margins prior to this downturn in our company four quarters ago, we were in the mid-50s. And I can tell you that on average, the margins on the individual products are about the same as they were about the same as they were back then. And we are looking to improve them in terms of reducing material cost to sales. So we have programs under way to drive our cost down and to improve our cycle time in manufacturing. This has something to do — its just going to be a longer period of time, it’s actually one quarter. So overall, once we get this factory full again we expect to get back into the ranges that we were.
Expectations are probably in the 2015 timeframe we will be approaching the same gross margin numbers that we did prior to this downturn. So overall the products are still very strong and that the problem has been really absorption of overhead and keeping these factories full. So at this point, we are now filling the factories and that’s what’s attributing to the increase in the margin for the year is a factory utilization.
Krish Sankar – Bank of America-Merrill Lynch
Got it. That’s very helpful. And then its kind of nice to see like activity on the FinFET side, kind of curious maybe the second half of this year or into early 2015, when you look at the customer potential you have on the 14 and 16 nanometer, can you talk a little bit about the breadth of customers you expect? Do you expect it to come from like one, two or three FinFET customers?
Bruce Wright
No, at this point where we have forecasted really in the full range of FinFET customers. So we have internal projections penetrating virtually every single company that’s out there building FinFETs we believe with the customers of ours. If not this quarter, its certainly a few quarters to come. So we are in very strong position. And even those customers that are not using our machine as much as others are sharing with us that they truly believe that we have the best technology solution.
And the way for breakage on the flash systems is persisting regardless of who makes the machine. So it’s inherently in the physics of the product and not so much on the company. So this is becoming a major factor. It has been as we have outlined as well as pattern effects but the biggest factor right now is driving cost down. It’s become extremely competitive in cost, and so at this stage you can’t afford breaking wafers at the rate that the flash systems do today. And unless and I can’t see how this is going to be resolved that we expect to be in a very strong position and continue to gain market share. So over the next few years, we expect us to be the dominant market position in terms of lasers.
It is now, if you remember that between the license that we have in laser technology and our own current market share, we are in about 80% market share with our technology and about 20% is with flash. It wasn’t there many years ago that flash had 100% market share be fully enter the market. So we believe that we will continue to have that market share or greater in the years to come.
Operator
Our next question is from the line of Josh Baribeau with Canaccord. Please go ahead.
Josh Baribeau – Canaccord
Hi, thanks. I don’t think I heard you talk much about I would say in memory of this conference call. Any updates there?
Art Zafiropoulo
No, it’s still progressing but it’s very difficult not just the challenges technically, the cost issues are another issue that we had spoken before on these conference calls. Memory is really a factor in cost and is extremely competitive, in many cases much more so than logic. So if we can get actually higher gain in performance with memory, it’s going to be very difficult to implement it because of the cost. So that’s an issue we are looking at right now is the cost issue and the technology issue as it shifts from a planar structure to a 3D structure.
Each one of these memory companies has a different 3D design so that we can’t take one process and actually use it across the board, because everyone is so different. So we are working with many companies out there right now, but it’s extremely challenging. And so at this point we haven’t seen much progress except in terms of still working in the area and hopefully we will find some cost effective solutions as we progress.
Josh Baribeau – Canaccord
Great. And then finally from me any comments on the competitive environment or maybe the pricing environment of the lithography systems for semiconductor packaging?
Art Zafiropoulo
No. Nothing really has changed in the past few quarters. We still have the competition is there and we still have a large market share. We are working had to maintain that. And we are being aggressive in terms of serving the customer not aggressive in just pure pricing that aggressive and serving the customers’ needs with our technology. I think we get kind of complacent that when you are the market leader for as many years we’ve been than over 10 years now at market share well excess of 50%, I think you will get a little bit complacent and expect orders just to roll in. So I think our guys are rolling the sleeves back up again and going back in there and defining why we are the market leader. And I think this is having a significant impact in terms of customers now really fully understanding what we offer versus some of the competition.
So we are comfortable, we will be more aggressive and working with customers to explain why they selected us before and why they should continue to work with us and looking at road maps in the future as to how we grow our business. So all in all, it’s a little bit of complacency because of our market leadership position, but that’s now behind us.
Operator
(Operator Instructions) Our next question comes from the line of Mark Miller with Noble Financial. Please go ahead.
Unidentified Analyst
Good morning. This is (inaudible). wanted to go back to high brightness LED bookings. Did you say that the bookings you expect to improve 50% first quarter over second quarter?
Bruce Wright
We defined it as — no, I think I said something about lithography increasing by 50%. I didn’t specifically say LED because we have such a very strong quarter. I don’t expect every quarter to continue like that, but we had a very strong quarter. And again, we are pleased with that and it just really indicating the significance of our technology with these new systems versus the older reduction steppers, where the rework rates are very high, floor space is big. They don’t perform very well. So it’s been a cost issue. And we have now defined a better metric and explained to our customers that what we are doing and how much money they are saving. And they’re seeing themselves right now in terms of rework and utilization of the equipment, and they can’t afford any longer to sacrifice the quality and the productivity of equipment just on the raw system price.
So we are seeing them change and we are encouraged by that and we thing that’s going to grow, but I don’t think this quarter will see double digit system sales at least this year. It may occur next year when we see a more significant ramp as the consumers begin to increase the consumption of LED bulbs.
Unidentified Analyst
So overall you are saying combined with those systems should increase 50% the second half or the first half.
Bruce Wright
Yes, that’s correct.
Unidentified Analyst
Have you had new (inaudible) customers?
Bruce Wright
I can’t think of any, we are really spending a lot of time and with the existing major companies, and so I would say I can’t think of any off hand right now, but I can’t think of some of the major contracts we received in Asia-Pacific from the larger companies, not the smaller ones.
Art Zafiropoulo
Yeah, Mark what you really need to recognize on this is that we are already in to the all of the major LED guys and so if we are going to get new customers it would be along the lines of the second tier players, but the order that we are seeing now are pretty much focused in the really important high intensity players that are gearing up to meet this increased demand because of the prices, the price point falling.
Unidentified Analyst
In the super 3G area I think you mentioned you are receiving some stiff competition there, has that been reflected in the pricing of the competitors tools?
Art Zafiropoulo
We don’t know the answer. We think they are probably wrapping the system up their other products. So we don’t really know that answer. We think it’s going to be difficult on the standalone basis for them to meet our numbers. Our system has the uniqueness of being extremely simple and that’s where the patterns are on this technology. Other competitive systems have much more complex optics which caused a great deal of more money and yet they don’t really provide a front pattern wafer solution. It’s a secondary solution as I referred to this fuzzy data. So it’s hard to say because of their, I hate to use the word bundling but it’s sort of wrapping it up with a package including many other systems that they offer.
Unidentified Analyst
And then finally, did you provide the cash consumed by operations?
Bruce Wright
We didn’t but I’m happy to do that. What I mentioned was that over all cash flow was negative by $6 million and about half of that was from operations.
Operator
Our next question is from the line of Jairam Nathan with Sidoti Company. Please go ahead.
Jairam Nathan – Sidoti Company
Hi, thanks for taking my question. Bruce, you had talked about leasing as an opportunity HB LED. Has that been behind the increase that you are seeing in the order outlook? And I had one more question.
Bruce Wright
No, leasing really would take off the table. The only way that leasing would work for this company is that they would lease a multiple numbers tools at one time and otherwise we could justify the cost for maintain these lease products. So we’ve taken that off the table and we had done an analysis and refurbished the equipment but that doesn’t seem to be the solution. So we are going back to the basics again and looking at selling new systems, and that’s we are focusing on. So all of these systems that were booked in the first quarter were all new systems.
Jairam Nathan – Sidoti Company
Okay, great. My other question was on the sales mix. As we enter 2014, between laser advance packaging and HB LED, is that a initial thought on which will be the biggest?
Art Zafiropoulo
Well, certainly early on what we have seen is the thrust coming out of advance packaging and led but as we consistently stated as we really get into the second half and we some of these ramps playing out overall for the year we are looking for the growth drivers to be laser annealing and the Superfast tools.
Operator
Our next question is from the line of Tom Diffely with DA Davidson. Please go ahead.
Tom Diffely – DA Davidson
Yeah, good morning. Bruce, first, did you give a book to bill for the quarter?
Bruce Wright
Art did. And what he said was that it was very slightly below one.
Tom Diffely – DA Davidson
Okay. And then I assume with your commentary the expected book to bill for the year to be well above one?
Art Zafiropoulo
It’s pretty dependent clearly on how we see the roll out of the 16 nanometer, 14 nanometer RAM and of course that is tough. I didn’t want to emphasize. These forecast are really volatile and moving around all over the place. But with the best information that we have at hand at this point and how we think the laser annealing ramp is going to play out, I think that we could say that, yes we expect a book to bill for the year to be greater than one.
Tom Diffely – DA Davidson
Okay, then the FinFET pilot lines that they are active today, these guys would be using one of your older systems that have had from you already?
Art Zafiropoulo
Now they will be adding capacity by buying newer systems. Many of the customers that have been FinFETs have been using the LSA 100A. And so we don’t offer that 2 lane longer. We offer the 101 and the 201 system which is ambient control and these systems have a throughput of almost double the current or the older100A. So the will be using that tool. So now the 100A will not be used. The 101 and 201 will used for FinFETs.
Tom Diffely – DA Davidson
Yes, I was trying to get to those. If these guys out there work on FinFET today and we haven’t seen an order from you for a while, they have a tool since they can go through their process with their tool ahead of time before the production begins to start.
Art Zafiropoulo
Yes, that is exactly right, Tom.
Tom Diffely – DA Davidson
Okay.
Art Zafiropoulo
And they can actually do that with the 100A. The only major difference the performance is equally good what the 100A. The only limitation here is cost of ownership, the throughput is much lower. Typically, the throughput is about 20 wafers an hour for the 100A. And with the 101 system, it could be anywhere between 35 to 60 depending on the operational mode.
Bruce Wright
And recognize also that as these guys get into the 16 nanometer, 14 nanometer note that for some of them is very important that they have the ambient control capability. They do not have any of those systems out there now. They can in the pilot lines be working with the 101 and just applying how it is going to qualified in process of record. As we know, we are meeting with many of the foundries out there, but, ambient control is going to be a big deal for quite a few of these customers.
Art Zafiropoulo
Yeah. If I could ask you that there is one major company that there is one major company that will now buy any equipments on LSA unless it did have ambient control. And that is why we begin this project almost three years ago to serve this customer’s need. And that could be a significant increase at our business in the years to come.
Tom Diffely – DA Davidson
Okay. And then, Art, I wanted to kind of begin to how much we made about margin getting back to longer term averages sometime next year. I was under the impression that with the handsome packing having little more competition, that the price in the margins than that are relatively higher margin business for you was going to come down a little bit. And then you add to it some success in high-brightness LED which historically has been with a lower margin, it seems like your average margin would be a little lower next year.
Art Zafiropoulo
Tom, what you say is absolutely correct accept the profit mix margin in Ultratech is swamped by the absorption impact. And so, while early on, we might be seeing more of the situation that you talked about. As we are filling up the fabs, you are going to see the margins increase and that supports the comments that I made on margins earlier in our prepared comments. So it is really critical to understand that Ultratech, as we move closer to the breakeven point, the absorption gets better, the margins get better and as we blast through that breakeven point the margins are going to get, we anticipate certainly, back to the numbers that we saw. And everyone heard me make comments about out in the 2015, 2016 timeframe what I expect they could get to. And at that — as soon as we hit over the breakeven point in addition to the margins, as you are well aware, this company just mints cash.
Tom Diffely – DA Davidson
Okay. And maybe you could talk about on cycle over cycle basis, how you improve margins on such like the high-brightness LED tool as far as designing it for lower cost and also the manufacturing oversees?
Art Zafiropoulo
Sure. We — the labor content is not very significant, it is in the 3% of selling price range. So that is not the place where we are going to really gain much momentum in cost. It is a mature procurement, and that’s where we have — in a process of restructuring on materials group and adding more capability with this function in Asia. And so, we are expecting to drive the material cost and that is going to have a major factor in this margin increase.
To give you a rule of thumb, in the equipment business typically the material cost and sales is roughly 25% of selling price. So for every dollar you can save and have some 4% impact in selling price, so has great leverage. And so that is the focus right now, as to drive down our cost. And so far, it has been little bit disappointing as to what we try to gain from this. We have not really been a successful as I hope. So that is why we are going through and changing and adding the different kind of people and skill sets to the materials group. And the hope is that we are expecting to see some benefit of that this year, toward the second half of this year and then continue into next year. So overall, and with our new product in the inspection area, we think that the margins that we hit at the last peak of our cycle, we have a good chance to exceed those numbers, not just meet them. So we are targeting the future to actually increase our margins. And I suppose even meeting the numbers that we have reached earlier, which were the mid 50% range.
Tom Diffely – DA Davidson
Yeah.
Bruce Wright
And there is couple of other aspects to that or in that. As you people are on the phone now, we have been migrating most of our products from the San Jose facility over to the Singapore facility. But for example, in starting up new products like Superfast, those initial products were made in the San Jose facility. We are now at a point where we really are complete in migrating all products with the exception of laser annealing tools over in to Singapore and that will just increase the positive impact on margins.
Art Zafiropoulo
The other factor is that this year, as Bruce just mentioned, about our transferring of lithography and Superfast I mentioned earlier in my prepared script to Asia, we estimate this year that may be just under 70% of our systems will be manufactured in Singapore.
Tom Diffely – DA Davidson
Okay. And when you look at the advanced packaging business today, they still just kind of flip chip capacity related or you start to see the beginnings of the two and a half and 3D real advanced packages?
Art Zafiropoulo
It is primarily capacity driven right now. And although, we keep talking about 3D, TSV and that is still on the projections. I think it is getting little more traction but it is slower than any would expect it. But I think that is the next nature move between memory adding more bumping capacity and TSV which we expect to see growing in the next few years. So all the projections that see is that the compound annual growth rate of the back-end or bumping is much, much greater than the front-end CAGR growth rate.
So all the numbers we are seeing indicates a reasonable good growth rate through 2017. And we feel that is going to happen, and that means more TSV use, probably little bit later than sooner in this ’16, ’17. But we see more momentum and more interest in that area than we had. Cost has then the major issue. Once they can drive down cost in the TSV area, it will be implemented and used more widely.
Tom Diffely – DA Davidson
Okay. Thanks. And then finally, Bruce, the tax rate, I think you said 5% for the quarter. Is that good tax rate for this year? And what is the long term tax rate?
Bruce Wright
Well, the comment that I made for the quarter is exactly as you said and then the comment I made for the year is between 5% to 10% and of course, that’s heavily based on the jurisdiction of where the income is taxable. And you have asked about long term, as the 16 nanometer, 14 nanometer ramp occurs that of course is going to be heavily going toward laser annealing, which is U.S. taxable based. Long term, its kind of tough to estimate, but if you are talking long term as we get out there into may be 2015, 2016, I anticipate that the tax rate would go up somewhat because, as I said, we have moved everything now in the Singapore. And so, as laser annealing is a higher proportion of a taxable income, it is going to be taxed in the U.S. But what that means, it is probably a long term tax rate, gets maybe up, as a guess, and it really is a guess at this point I am talking 20%, 25% that kind of a number.
Tom Diffely – DA Davidson
Okay.
Art Zafiropoulo
And also currently on our balance sheet we have about $290 million. More than 90% of money is based in United States, it’s not offshore, has been fully taxed.
Operator
That does conclude the question and answer session. I now like to turn the call back over to Mr. Zafiropoulo for closing remarks. Please go ahead.
Art Zafiropoulo
Well, yes. Thank you very much for participating in our conference call today. And we look forward in meeting with you at future investor conferences. And again, thank you for being with us today.
Operator
Ladies and gentlemen, that does conclude the Ultratech first quarter 2014 earnings conference call. If you would like listen to a replay of today’s conference, please dial 1-800- 407-7325 or 303-590-3030 with the access code of 4678234. We would like to thank you for your participation. You may now disconnect.
Ultratech"s CEO Discusses Q1 2014 Results - Earnings Call Transcript
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