Azenta Inc (AZTA) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Helix Technology second-quarter conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to our host, President and CEO, Robert Lepofsky.

Thank you, operator. We appreciate each of you joining us this morning for our second-quarter conference call. Joining me today are Jay Zager, SVP and CFO; Jim Gentilcore, our COO; and Beverly Armell, our Director of IR. Before we begin I would ask Beverly to take a moment to review our Safe Harbor disclosure.

Thank you, Bob, and good morning everyone. We assume that each of you has received a copy of our press release that we issued this morning. If that is not the case, please call 508-337-5172 and we will fax one to you immediately. Now I'd like to take a minute to read our Safe Harbor statement. The following call contains certain forward-looking statements including statements regarding the company's future performance. Such statements are based on current expectations and are subject to risks, uncertainties and changes in condition, including among others market acceptance of and demand for the company's products, the success of the company's strategic initiatives including its global support operations, the health of the global semiconductor capital equipment market and the timing and scope of any change in the current depressed industry conditions, the company's success in sustaining order bookings and other risks indicating in the company's filings with the Securities and Exchange Commission. Accordingly actual results could differ materially from those indicated. The company assumes no obligation to update the information in this call.

Thank you, Beverly. Earlier this morning we announced our second-quarter results. While much improved from last year, our results did lag a bit on a sequential quarterly basis. On slightly improved sequential revenues we reported a flat bottom line. While we would have expected about a one cent sequential improvement given the incremental revenue improvement, our particular customer product mix in the quarter really limited our performance. We'll have more to say about this dynamic in just a moment.

As you know from our comments in prior conference calls, we are unwavering in our commitment to converge on profitability and positive operating cash flow with only small improvements on the revenue line. While we still have some work to do on the profitability side, we are pleased to report that we did achieve our goal of positive operating cash flow in the quarter, a position we expect to see strengthen as we move throughout the balance of this year. As we reported in our last conference call, we expected sales to the ion implant sector which were quite strong in the first-quarter, to weaken a bit in the second-quarter and this in fact did occur.

What we did not expect entering the quarter was the strength in sales of our legacy 300 millimeter products by our CTI Cryogenics group. Compared to the first-quarter, unit shipments of CTI's older, lower margin systems were up substantially. As we have reported, we are in the process of transitioning our older 300 millimeter pumping system solution to our new On-Board IS platform. This new product platform has superior performance characteristics that our customers need and importantly for us superior cost price parameters that will improve our margins in the quarters ahead.

While sales in the quarter were weighted towards the older lower margin system, production startup costs for the new systems continued, causing an additional drag on our second-quarter performance. Fortunately we do not believe that this drag will continue. Overall you should have confidence that we continue to look to convert more than 50 cents of every incremental sales dollar into incremental operating margin. The On-Board IS product is the pump of choice for our major OEMs newer tools and they are working closely with us to convert their customers to this new product. Some OEMs have already incorporated On-Board IS into their newest tools while others are receiving tailored versions this quarter for new tools yet to be announced.

And to that point, those of you of you attending Semicon West last week may have noted an interesting contrast to last year when there was quite a bit of talk about private labeling and fear of loss of market position for many key suppliers. Our position at the time was there was far too much made of this by the financial community and that our OEM customers recognized the value that critical suppliers bring to new tool development and customer support.

This year our largest OEM featured our new On-Board platform on one of his new tool introductions and facilitated discussions with customers about the transition to this new offering. Our Granville-Phillips group in the quarter recorded good progress for both traditional and newer product offerings. While continuing to hold its own and even gain ground in the semiconductor sector, this group is doing an impressive job expanding its position with both standard and tailored solutions for new OEM accounts in the analytical instrument market. And during our last conference call we commented on our high expectations for the performance of our growing global services business.

As the second-quarter progressed we saw real momentum in customer commitments to our TrueBlue Service Agreements. Our work in this area is changing the way semiconductor fabs think about and deal with their vacuum system support needs. We're moving our larger customers away from traditional transaction based commerce and into multi-year relationship based contracts with us. In the quarter we both saw new contracts and expanded the scope of earlier contracts with customers in the United States, Europe and Japan. This positive momentum is continuing as we enter the third quarter.

Just last week at Semicon West we met with representatives of one of the largest IDMs who now has finalized plans to move TrueBlue service across all of their fabs, a multimillion dollar commitment to Helix. This customer is not an anomaly. An early adopter of our GOLDLink capability, he has seen the benefits both in improved tool productivity and lower cost of operations each time he has expanded the number and types of tools we support and the fabs within his system that we support.

This most recent commitment will be the basis for our continued expansion of our work with this very important customer whose fab depends on Helix day in and day out. Now before I comment on our view of the balance of the year, let me turn the call over to Jay who will provide you with more details on our results for the second-quarter and offer some guidance for the third quarter. Jay?

Thank you, Bob, and good morning everyone. Sales for the second-quarter were $24.6 million, up about 4 percent from our Q1 levels and about 15 percent lower than a year ago. Our net loss for the quarter was $1.4 million or five cents per share. These data were essentially unchanged from our Q1 results. Orders for the first quarter were $24.9 million, up about 5.5 percent from Q1, and are book to bill ratio was slightly over 1.0. Let's look behind the revenue levels. Sales to semiconductor customers were approximately 65 percent of consolidated sales for the quarter, up slightly from 63 percent in Q1. Sales attributable to our CTI-Cryogenics vacuum pump products were about 80 percent of our total, with sales of our Granville-Phillips vacuum measurement and controls instrumentation products about 20 percent of the total.

Our global support business contributed about 33 percent of our total revenues compared with about 33 percent of our revenues in Q1. Of particular note was the strong market acceptance of our new TrueBlue service offerings as we signed several key customer contracts in the quarter. We record revenues from these contracts on a pro rated basis throughout the life of the contracts. Accordingly, this business not only contributes to our current quarter results but gives us a strong and growing revenue stream in each subsequent quarter.

OEM sales as a percent of revenue were about 50 percent of total sales, unchanged from the prior quarter, and sales to our largest customer including outsourcing partners were about 26 percent of our business compared with about 17 percent in Q1 and we ended the quarter with a backlog of $6.5 million, up from $6.2 million in Q1. Headcount at the end of the quarter was 513 people including temporaries, essentially unchanged from the end of Q1. Our permanent workforce actually showed a modest decline in the quarter and remains at under 500 people.

Our gross margin in Q2 was $7.5 million or 30.7 percent of sales compared with 33.1 percent of sales in Q1. The reduction in our gross margin from the prior quarter was due to two key factors, a shift in the mix of our products towards products with lower margins and some unusually high temporary production and customer support costs relating to the introduction of our new generation of vacuum products. We expect that these temporary We expect that these temporary production and support costs will continue in this quarter, albeit at a lower level and we expect these costs will be essentially gone by the start of the fourth quarter. R&D expenditures for the quarter were $2.5 million compared with $2.7 million in Q1. Selling, general and administrative expenses for the quarter were $7.6 million, a slight reduction from the Q1 levels. As a result of these factors, our total operating loss for the quarter was $2.6 million, unchanged from the prior quarter. The contribution to our profits from our joint venture in Japan was $309,000, up slightly from Q1.

Net interest income was $214,000 compared with $253,000 in Q1 reflecting the continued decline in interest rates throughout the quarter. The net loss before taxes was $2.1 million and our tax rate for the quarter was 32.5 percent. Let me now turn to our balance sheet. At the end of the quarter our cash and investments was $67.9 million, a decrease of $1.5 million from Q1. This decrease was due entirely to cash payments associated with our previously announced restructuring actions and to our quarterly dividend. Cash from operations was slightly positive in the quarter for the first time since the first quarter of 2001.

This was a result of our significant focus on cash management throughout the corporation. Customer receivables were $16.9 million, a reduction of about $350,000 in Q1 at higher revenue levels. As a result, our DSO improved to 62 days compared with 66 days in Q1. While our revenue SKU improved somewhat the quarter, we still did not return to our traditional monthly SKUs, and as a revenue SKUs return to more normal levels we should see continued improvements in our DSO performance and we do not have any significant collection issues.

Inventory levels declined by about $1 million in the quarter to $22.6 million, reflecting our continued focus on inventory management. Inventory turns improved to slightly over three turns compared with 2.7 turns in Q1. Capital expenditures were about $900,000 compared with about $400,000 in Q1 and we expect full year capital spending to be in the $3 to $4 million range. Depreciation was $1.6 million in the quarter and we expect that to remain at that level for the balance of the year.

And last week our Board approved a quarterly dividend of four cents per share unchanged from the prior quarter. Additional information can be found in our 10-Q which, as has been our practice, was filed earlier this morning. Now I would like to provide some insight into the current quarter. Our business has remained stable for the past several quarters despite plant shutdowns at key OEM's continuing. This trend has continued this quarter with OEM shutdowns occurring earlier this month.

We've seen, however, a gradual improvement in our business and we expect this trend to continue for the balance of Q3. As a result, we anticipate modest growth in Q3 revenues in the range of five to ten percent above Q2 levels. We will continue to hold our operating expenses at current levels and therefore anticipate that incremental sales will lead to a direct improvement on bottom-line results. We also expect to deliver positive cash flow from operations in the quarter, and while visibility beyond the current quarter remains uncertain, we're optimistic that our revenue levels will continue to improve. And now I would like to turn the meeting back to Bob.

Thank you, Jay. As all of you know, there is a fair amount of optimism in our marketplace right now. Across the industry there is also a healthy dose of skepticism that is a byproduct of several dashed hopes for an industry recovery over the course of the last year. The operating people here at Helix have just completed a detailed fab by fab, customer by customer analysis of orders anticipated over the next six months. And while there is considerable debate about the precise timing of order placements, all in all, as of today things look reasonably good.

As you know, most of our major OEM accounts have not yet held their conference calls and while we do not want to get too far ahead of them, based on comments made at Semicon by several of our key OEM accounts, things appear to be looking much brighter for the second half of this year. These comments, combined with announcements by our end-users regarding fab utilization and commitments to new fab construction, lend credence to the belief that we may have in fact finally turned the quarter.

It has been our position for some time that market demand for chips would not utilize available supply until late '03 or early '04. If this scenario plays out, then device makers will have to begin their investment phase in late Q3 or early Q4. All of the signals from our customers are positive right now, so we are preceding ahead with tempered optimism, prepared to respond to increasing customer demand while keeping a tight control on operating expenses.

On the other hand, if the expected increase in orders does not materialize, Jim, Jay and their teams are prepared to take such steps necessary to continue to improve our bottom-line while protecting our leading market position. At Helix we know that we have the right product portfolio, the right customer relationships, and the right resources in place to take full advantage of the expected business upturn, and it is against that backdrop that we're looking to deliver strong operating results in the quarters ahead. Operator, we would now like to pause and open the line for questions.

[CALLER INSTRUCTIONS]. Ali Irani with CIBC World Markets.

It's nice to hear you have a positive tone after a year of low visibility. Historically people have thought of Helix as a capacity buy and it seems to me that the company is now more than ever, leveraged on technology retooling. I'm thinking there the 300 millimeter aluminum buys in DRAM that are gaining momentum in the second half and the copper activity that is increasing. And obviously you're one of the first companies to report here, the outlook. So could I be seeing correctly in the shift of the company's positioning?

I would not necessarily call it a shift, Ali, from our vantage point. I think your characterization is correct relative to perceptions of an orientation to capacity. And yet, if you look over time, we have very much participated with each technology node transition. That said, I think as we go forward your observation becomes more important, particularly as we're engaged in new product development in previously unserved market areas and we've talked about some of those in previous calls. So I think that yes, technology buys are important to us, capacity buys obviously are still very important to base underlying volume.

Just a follow-up on the services. I know Jay you provided data to 37 percent of revenues from support. What kind of mix to you see the support versus the product in the long-term with some of these contracts you have been signing? Can we see the support represent as much as -- continue as much as 30 to 40 percent of revenues even with the product side growing?

Ali, let me reiterate that we've had a long-term goal to move the services, if you will, global services compared to the hardware side to -- of our business over the long-term to a balance of 50-50. I think what you will see in the short term is step by step with the momentum we have in the services business that even as the hardware business expands we will continue to move the number up and near term it would not be unrealistic to see that number cross over the 40 percent mark and again, a long-term objective to have a 50-50 balance.

That sounds like good visibility. Thank you, Bob.

Stuart Muter from Adams Harkness & Hill.

Adams Harkness & Hill. Good morning Bob, Jay and Jim. A couple of questions. The startup costs, could you elaborate a little bit more? Is it related to the On-Board IS or is Micro-Ion Plus? Could you just provide a little more detail on the nature of these unusual startup costs?

I'll pick up on it and than let Jay expand. First I wouldn't call them unusual, Stuart. I think that the box that we were in the quarter was that we had the startup costs transitioning of the new product without the level of revenues that we would have expected from the new product and coupled with unusually high revenues in our legacy products, all within the On-Board IS transition within the CTI-Cryogenics operations.

The Micro-Ion Plus continues to make headway in the marketplace, and that was not a contributor to the disappointing result, and again, we want to emphasize disappointing was we have a long track record of converting incremental sales into incremental operating profit. And on the small change in incremental sales in the quarter, we did not see our customary drop down to the operating margin line.

And the reason for that, as we've said, was we were carrying the startup costs for On-Board IS without necessarily the associated volume. And again, to keep that in perspective, we are only talking about a couple hundred thousand dollars in the quarter. So not a major issue, but it was disappointing for us and I'm sure in the models that the analyst community carries, that Helix didn't convert incremental revenues to incremental margins.

Bob, a follow-up question. You mentioned on Granville-Phillips you are making progress with the -- gaining ground in the semi area? Could you provide a little more detail on that?

Let me let Jim take a crack at that.

The Micro-Ion Plus or combination gauge is what that group of products is typically called. We're seeing early evaluations that are moving to tools that we expect to be introduced by OEM customers over the next couple of quarters. And there's a lot of different combinations of gauge choices out there, and we are very happy with what we're seeing as the acceptance of the technology behind the Micro-Ion Plus as moving to the front of the choices in combination gauges. Besides the semiconductor market we are also seeing acceptance of the GP products in others -- in the analytical instrumentation market as well but that's not the Micro-Ion Plus specifically.

Thank you.

Steven Pelayo from Morgan Stanley.

It's Bill Lu for Steven Pelayo. So you've done a good job in cutting operating expenses quarter. Could you just help me with your breakeven levels currently or your [substitute] for that?

We're still at a breakeven level of around $27 million or so. Obviously, when you get to that specific level of a calculation, one of the key variables for us is the mix of our products. The On-Board IS product is a product which offers us favorable margins compared to the older P300 product that it's replacing. And so, one of the key variables for us is the extent to which that transition occurs. But assuming that the transition occurs at a reasonable rate, our breakeven remains at about $27 million.

Can you talk about the difference in gross margin between the On-Board IS and the Legacy product?

I'm sorry, could you repeat that question?

I was just wondering if you could talk a little more specifically about the difference in margin between the On-Board IS and the Legacy products?

I wouldn't what comment on the specific margins but basically the On-Board IS a product that offers greater features in functionality and from a manufacturing standpoint, our cost to produce it are substantially less.

Let me and a little bit there, Bill. What you will see our On-Board IS product are margins more typical of Helix. The situation we've had with the Legacy 300 millimeter product is typical of what people across this industry had, and that is that the early 300-millimeter tools and the components in those tools did not have very attractive cost price relationships. In fact, those early products have been a drag on OEMs and on sub tier suppliers.

Over the course of the last year, year and a half, virtually everybody in this business has been focused on next generation tool sets and the components and subsystems that go into those tool sets to achieve a much more attractive and more typical cost price relationship in the current environment that we all operate in. So I think what you will see is -- for us at least, a return to our more normalized gross margins across the board, and this one anomaly within our product mix will tend to fade into history.

That's very helpful. Thank you.

Robert Stern with Needham & Co.

At the Semicon West show MKS introduced a new gauge, that's a MEMS gauge that competes in your space. I have three questions. Number one, could you comment on the competitive effect of the MKS gauge? Number two, what is your effort in MEMS? And number three, what's the overall effect of MEMS going to have on the space in gauges?

I'll pass on a direct question answer to first question if I could. In terms of any new product, I think we all react to each other's products. Ultimately the important piece is how customers react, and that's an issue that will take place over time. But let me comment on your second and third questions, and that's regarding MEMS technology. I think that all players of consequence in this space, including Helix, are focused on, have had product development programs and potential product offerings utilizing MEMS technology. So you can draw from that. We too have projects underway.

There are some applications and some product offerings that that technology does add quite a bit. And I think you'll see from Helix and from others a flow of MEMS-based technology going forward for some time. It is a technology that has been around for a long time in other applications has been slow to find utilization within our applications meaning vacuum instrumentation, and some of that is related to unit volume issues. So the technology is highly appealing, the applications are appropriate to the needs of our marketplace, and I think you will see more from us and others in that area going forward.

Mark Miller from Hoefer & Arnett.

I was just wondering if you could comment. We've talked about this before, have you seen things still remain stable relatively on a product mix of CVD versus PVD products? This relates to the difference in the pumping technology. Is this still the same product mix we have been seeing over the last couple of years or are we starting to see more of a shift towards CDD.

I would say broadly, Mark, the mix is comparable to what it has been. For us, the product mix gets enhanced by our strategic partnerships with other pump manufacturers as we build integrated solutions for our customers. And further that we do more in the again support as a result of those strategic partnerships. But fundamentally, there has been nothing in the technology to force a mix so it's more about product configuration and integrated solutions.

Some people -- I'm hearing some reports at Semicon that pricings from your customers, there is still a lot of pricing pressure and some firms have reported, are walking away from certain deals with their customers. How is pricing pressure? Is there any let up on that or do you see any light at the end of the tunnel?

Again, I think that little changes, however, I come back to the comment that I made in our prepared remarks and that is the food chain values, what the important players in that chain bring to the party. In our case I think our customers value what we bring to the party. But there is a constant effort on the part of OEMs to reduce their bill of materials and that translates into pressures on sub tier suppliers like Helix to be innovative in their product offerings.

If we were continuing to deliver our Legacy 300 millimeter product for example, the results are fairly unattractive. So the impetus to us was to redesign, provide a new product and in the course of that deal not only with the cost price issues but also the technical performance requirements which continue to get more difficult and evolve over time. I think that Helix's view is that OEMs are under pressure from their customers, it goes right through the food chain and so that price pressure will never go away and the only way that we and our peers can deal with that price pressure is provide our customers with innovative solutions to their needs.

Just one final question. The bright spots over the next six months, at least some people in the industry believe it will be more in the Samsung area and the DRAM area, and also a couple Japanese firms are supposed to be picking up their spending, Sony and Toshiba. Are you plug in fairly well to both these opportunities?

We would say we are quite comfortable and excited about being a participant.

Thank you.

Theodore O'Neill from AG Edwards.

Bob, as the new products are rolled out, your customers' new products are rolled out, can they buy the old Legacy On-Board and put in on or are you only selling the On-Board IS at this point?

No, we continue to have the full portfolio, and it's important that the On-Board product is still an important and viable part of the product line. The Legacy product that we were principally focused on in our earlier comments relate to a Legacy 300 millimeter product. Now one of the dilemmas, as you well know in this industry, are firms that follow copy-exactly formats, and what will ultimately happen in those situations is that there will have to be price adjustments reflecting Legacy products compared to latest generation as the customer base goes through the transition.

I'm missing the point on the pricing adjustment.

Well, typically when you have older Legacy products they tend to be more expensive than newer solutions.

Okay. And Jay, did you give us any guidance on gross profit margin for the September quarter?

Not specifically, Theodore, but we anticipate that the margins will improve in the third quarter as we phase out of some of the temporary issues that occurred in Q2 and as we see a stronger mix of our products, particularly with respect to the On-Board IS product.

Thank you.

Ali Irani.

Looking at your joint venture income, obviously seven percent growth, a good indicator for flat-panel markets. I'm wondering if your core Helix business, also the flat-panel shipments grew in the quarter, Bob?

We don't really track it at that level at this point, Ali.

Any sense generally?

I would say that for our -- the OEMs that typically provide flat-panel solutions, solutions of flat-panel for us, are up a little bit this quarter. We have several -- it's more dispersed obviously than the semiconductor capital. But, we're seeing improvements in those areas, a reflection that there are things going on in flat panel even with some of the smaller OEMs.

Great, thanks a lot, Jim.

Due to time constraints we will not be taking any further questions. I would now like to turn the conference over to your host, Robert Lepofsky.

In closing let me repeat words we have shared with you in the past. As a management team we are motivated but deliberate to change that which we can control. We are realistic about the dynamics within our marketplace and understand that which we cannot control. We will continue to manage our resources, leverage our competencies, and enhance our operating performance for the long-term benefit of our shareholders. We appreciate your continued support and your continued interest in Helix Technology Corporation. Operator, that concludes our call for today.

Thank you, sir. Ladies and gentlemen, that does your conference for today. Thank you for your anticipation and for using AT&T's executive teleconference. You may now disconnect.