Azenta Inc (AZTA) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Helix Technology third-quarter teleconference. 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. (OPERATOR INSTRUCTIONS) As a reminder this teleconference is being recorded. I would now like to turn your conference over to the President and Chief Executive Officer, Mr. Robert Lepofsky. Please go ahead sir.

Thank you, operator. We appreciate each of you joining us this morning for our third-quarter conference call. Joining me today are Jay Zager our Senior Vice President and Chief Financial Officer, Jim Gentilcore our Chief Operating Officer and Beverly Armell our Director of Investor Relations. Before we would 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 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 moment 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 conditions. 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 indicated 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, Bev. Earlier this morning we announced our third-quarter results. We continue to make progress which you can see in both our top and bottom lines which both met expectations for the quarter. On slightly improved sequential revenues, we reported significant progress on our path to profitable operations. Equally important, operating cash flow was also positive again this quarter. As Jay will speak about shortly, we are now forecasting profitable operations and continued good operating cash flow results beginning in the fourth quarter of this year. Having worked our way through three incredibly difficult years, we are pleased to be in a position to now be able to forecast our return to profitability. It is ironic, however, that accounting convention requires us to take a full valuation allowance against our deferred tax asset at this time. The creation of this valuation reserve is reflected in our $8.4 million tax provision this quarter.

As noted in our press release, without this charge we would have reported a small 2 cent lost share, 2 cent per-share loss in this quarter. Again, Jay will have more to say about this later in the call. I am pleased to report that as we had forecasted during our last conference call, the unusual and unfavorable product mix issues that limited our performance in the second quarter were in fact a short-term phenomenon. The transition to our newer OnBoard IS product line continues to go well as evidenced by the favorable mix of new 300 mm product shipments which is outpacing legacy 300 mm system shipments to our largest OEM account.

The transition of other OEM accounts to OnBoard IS also continued on plan in this quarter. This newer product platform is showing its superior performance benefits in an expanding set of applications and process tools. Also worthy of note is the higher-than-expected production startup costs that we noted in the second quarter have abated as planned in the third quarter. Thus allowing us to generate our more normal cost margin ratios.

And finally, our Granville-Phillips vacuum instrumentation business remains on track. We continue to work with customers with new products, specifically targeted to increasing our market share in the semiconductors sector and deepening our participation in non semi markets such as the analytical instrument sector. Our global customer support business unit was our strongest sequential performance in the quarter. That business whose offerings include spares, repairs, retrofits, upgrades, e-diagnostics and relationship base support agreements, reported excellent progress. This strong performance is reflective of both improved factory utilization rates at our customers plants throughout the world and the attractiveness of our TrueBlue support agreements.

Our TrueBlue customer support agreements are less about fixing things that break, than they are about increasing the productivity of our customers' factories and reducing the overall cost of operations of semiconductor production facilities throughout the world. Both of these benefits are top priorities of customers, regardless of the type of product they are producing or the age of their tools. Clearly TrueBlue support agreements are also beneficial to Helix as well. When we set out to change the traditional business model for customer support operations in this industry, we saw this new way of working with our system users, the device makers themselves, as being more efficient and more profitable for us. We also wanted to create a stream of revenue that had less cyclicality than our product business while more closely aligning the ongoing cost of global support with a continuous and growing stream of revenue. TrueBlue support agreements are gaining considerable traction because they work for our customers and they work for us.

As you know from our comments in prior conference calls, we have been unwavering in our commitment to converge on profitability and positive operating cash flow with only small improvements on the revenue line. Our people have worked hard to achieve the position we are at today. While we have effectively managed our costs during this time, it is clear that we have also brought to market the product and service offerings that will be the basis for important profitable growth trends as external business conditions in our principle serve market improve.

I would now like to turn the call over to Jay who will provide you with more details on the quarter. Before I do, I should note that as is Helix's normal practice, we filed our 10-Q coincident with the issuing of our press release this morning. The availability of our 10-Q should ensure that you have all the information you need to understand and assess our performance.

Thank you Bob, and good morning everyone. I would like to provide some insight into the financial results we just announced. Sales for the third quarter were $26 million, up about 6 percent from our Q2 levels and about 5 percent lower than a year ago. Our net loss for the quarter was $9.1 million or 35 cents per share. These results include a onetime charge primarily to the establishment of a full valuation allowance against our deferred tax assets. This adjustment, which was taken in accordance with FAS 109, and after discussions with our external auditors, was 8.6 million dollars or 33 cents per share. Excluding this charge our net loss was $458,000 or slightly under 2 cents per share. Compared with a $1.4 million or 5 cent per-share loss in Q2.

Orders for the quarter were 26.7 million, up about 7 percent from Q2. Our book-to-bill ratio was about 1.03, (indiscernible) the revenue numbers. Sales to semiconductor customers were slightly over 60 percent of consolidated sales for the quarter compared with about 65 percent in Q2. Sales attributable to our CTI cryogenic vacuum pump products were about 83 percent of our total. With sales of our Granville-Phillips vacuum measurement and controls implementation (ph) products were about 17 percent of the total.

Our global support business contributed about 41 percent of our total revenues, compared with about 37 percent in Q2 and 33 percent in Q1. We continue to be pleased by the market acceptance of our TrueBlue service offerings as we signed several additional key customer contracts in the quarter. As we indicated in our last conference call, this business not only contributes to our current quarter results, but gives us a strong and growing revenue stream in subsequent quarters. OEM sales as percent of revenue were about 46 percent of total sales down slightly from the prior quarter. Sales to our largest customer, including outsourcing partners, were about 19 percent of our business compared with about 26 percent in Q2. And we ended the quarter with a backlog of $7.2 million up from $6.5 million in Q2.

Headcount at the end of the quarter was 521 people including temporaries compared with 513 people at the end of Q2. During the quarter, we actually had a slight decline in our permanent workforce which was offset by increases in our temporary manufacturing populations. Our gross margin in Q3 was $8.8 million or 34.0 percent of sales, an improvement of 330 basis points over the Q2 levels. This improvement was due to several factors. A shift in the mix of our products toward our newer, higher margin products. A significant reduction in the startup costs for our new major platform launch as this product is moving into full release mode and continued improvements in our manufacturing operations. R&D expenditures for the quarter were $2.3 million compared with $2.5 million in Q2. Selling, general and administrative expenses for the quarter were $7.6 million essentially unchanged from Q2.

As a result of these factors, our total operating loss for the quarter was $1.1 million, an improvement of 1.5 million or 58 percent from the prior quarter. The contribution to our profits from our joint venture in Japan was $161,000 compared with $309,000 in Q2. This lower contribution was due primarily to a year end adjustment in the joint venture tax rates. The interest income was $229,000, a slight increase from the prior quarter. And the net loss before taxes and charges was $680,000.

Let me now turn to our balance sheet. At the end of the quarter, our cash and investments totaled $66.3 million, a decrease of $1.6 million from Q2. During the quarter, we made a $1.4 million payment to our pension fund, we had $400,000 in payments associated with our previously announced restructuring actions, and we funded our dividend. Excluding these items, cash flow from operations was in excess of $1 million. This was the second consecutive quarter of positive cash flow from operations; anticipate that this trend will continue for the foreseeable future.

Customer receivables were $18.4 million, an increase of about $1.5 million from Q2 reflecting primarily the higher level of sales. Our DSO was 64 days, a slight increase from 62 days in Q2. The increase in our DSO was due to the monthly revenue skew in the quarter, we do not have any significant collection issues. Inventory levels were $21.8 million, a decline of about $800,000 from the prior quarter. We continue to focus on inventory management and have now seen our inventory turns improve to 3.1 turns, slightly improved over Q2.

Capital expenditures for the quarter were about $700,000 compared with $900,000 in Q2. Capital spending for the full year should be slightly above $3 million. Depreciation was $1.5 million in the quarter and should remain at that level in Q4. And on Friday, our Board approved a quarterly dividend of 4 cents per-share unchanged from the prior quarter.

Now I would like to provide some insight into the current quarter. We have seen for the past few months a gradual improvement in our business and we expect this trend to continue in Q4. We currently anticipate modest revenue growth in Q4 in the range of 5 to 10 percent above Q3 levels. As you know, we have been carefully managing our operating expenses and will continue to do so in the fourth quarter. Because our fiscal year ended December 31st, we will have three extra business days in the quarter. This will result in a modest increase in operating expenses when compared with Q3. Despite this modest increase in expenses, we are currently expecting to return to profitability in Q4. And will continue to generate positive cash flow from operations in the quarter.

With regards to our views on 2004, we will have more to say on that subject at our next conference call. And now I would like to turn the meeting back to Bob.

Thank you, Jay. As we reported to you last quarter, there is still both a fair amount of optimism in our marketplace as well as a lingering dose of skepticism. The skepticism is a byproduct of the multiple dashed hopes for an industry recovery that has occurred over the course of the last year. The optimistic view is supported by excellent production levels, particularly of leading-edge devices, high semiconductor plant utilization rates, and the proliferation of new products, within increasing requirements for high-performance chips.

The successful implementation of fine line with 300 mm production lines fuels both the optimistic and pessimistic views of the near term prospects for the semiconductor capital equipment business. As people sort through the longer-term implications that highly productive 300 mm tool sets might foretell for this industry. But for now, the move to 300 mm is clearly underway, the pace of business is improving and we remain generally bullish about our own prospects. At Helix, while we have not yet seen a sharp upturn in our business, we have recorded incremental improvements in revenue throughout this year. The progress has been slow but steady. We were concerned in the closing weeks of the third quarter that order bookings from our major OEM accounts were slowing. That trend reversed itself at quarter end and order bookings have been robust so far this quarter. As Jay noted, after this unexpected slowing of orders, revenues for September turned out to be quite good. The operating people here at Helix have just completed their detailed customer by customer analysis of the orders we expect over the next three to six months. And while there is always 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, consequently we will not be coning today on our OEM customer billed plans but prefer to defer that to the OEMs on this account. It has been our position for some time that the market demand for chips would fully utilize available supply in late 2003 to early 2004. As this scenario plays out, we believe that device makers will begin to accelerate their investment phase late in Q4.

At Helix, we know we have the right product portfolio, the right customer relationships and the right resources in place to take full advantage of an upturn. In addition, based on the success we have enjoyed throughout this year, we are particularly encouraged by the impact and rate of customer acceptance of our product support initiatives. Within an improving top line, and continued tight control on operating expenses, product costs and cash, we are looking forward to delivering strong operating results in the quarters ahead. Improving market conditions will only accelerate our progress.

Operator, with those comments we would like to now open the line for questions.

(OPERATOR INSTRUCTIONS) Theodore O'Neill at AG Edwards.

Thank you very much. Bob, a couple of questions for you. You said here at the end that you think the device makers are going to accelerate their build (ph) at the end of the fourth quarter. Are you also -- you are seeing that presumably from your own people at the semiconductor makers. Do you also sense that the OEM manufacturers see this as well?

Absolutely.

Can you talk about the mix of product shipments between 200 and 300 mm and what the breakdown is changed over the last quarter?

Theodore, we tend not to put a precise number on 200, 300 in our calls given the complexity of the various business units. I would generally say, however, in the volume part of the business that in the volume part of the product business, that transition and mix continues to weigh towards 300 mm solutions compared to 200 mm solutions.

Would you care to comment on how the business mix is between PVD and implant?

If you remember in the first quarter of this year, implant was quite strong and we and obviously our implant customers, suggested that that would not continue in the second quarter. They were optimistic about stronger performance late in this calendar year and that is exactly the way things are playing out.

Thanks very much. The next line we will open is the line of Steven Pelayo at Morgan Stanley.

Good morning, Bob, good morning, Jay. The question about your guidance going forward here, that is great 5 to 10 percent revenue growth. I remember we had been talking the last couple of quarters or so the kind of $2 million per week run rate. I was just thinking that the next quarter tends to have with some of your major customers -- one week shuts down to Thanksgiving, maybe a week or two at Christmas timeframe. I realize you are slightly ahead of this $2 million per week run run rate, but should we not be taking out a couple of those weeks for shutdowns and in fact you are doing even better than that?

Obviously as we prepare the guidance and look at our internal forecast we are aware of potential shutdowns. From what we can see right now other than shutdowns around the holiday, Christmas holidays, we don't see any major shutdowns. And for us the difference between 2 million a quarter, and 2.1, or 2.2 million a quarter adds another million or so to the bottom line. We feel fairly confident right now that the guidance we have given reflects what we expect our customers to be doing and reflects their shutdown patterns.

That is great with potential one to three weeks of shutdown at major customers you will still be guiding up on revenues?

We are hearing nothing like three weeks. The information we are getting assumes normal shutdowns around the holidays.

The other piece for us and again, understand that in the fourth quarter we are always appropriately nervous about what will the end of the year look like. We haven't heard anywhere from our customers enough shutdown plans that would equal three weeks in the quarter. So we put that one aside. The second piece for us, and again it can go either way, is that mix between shipments to OEMs and our activity in the fabs. If one believes, as we currently believe, that utilization rates will remain high, and people will continue to be planning for higher output post January 1, that suggests that our services business can remain strong through the holiday weeks. But it is clearly a risk factor within the quarter, and one that we do watch closely. But from where we sit today we don't see this one being as bad as a year ago, for example, which was a tough quarter for us where we lost effectively two plus weeks.

Question about how this transition from transaction based to more longer-term customer service commitment. How is that improving your visibility? I assume is this all booked to one large contractor, is it still kind of turn (ph) space, is there a (indiscernible) backlog of service in there? How does that improve your visibility and is there some way you can quantify and how it affects that?

Basically these are contracts that range generally between one and three years, and we book the revenues on a straight line basis through the life of the contract. So the nice thing is at the end of the quarter going into a subsequent quarter, all these contracts that we've signed in the prior quarter on day one is going to contribute to the current quarter results.

Okay. My last question I guess this is relative, too. We are hearing from some of the other subsystem suppliers that there has been some shift in tone from your major OEM customers from beat you up on price, do whatever you can to -- are we sure these guys are going to be ready for the ram? Are you getting much of those type of inquiries or ramp readiness preparation, that type of thing?

I will let Jim Gentilcore comment about ramp readiness and then I will give you my standard answer about pricing.

I think that Helix has always been at the forefront of being ready for the ramps regardless of the size. In this particular go around we've had some discussions but at this point all of our major OEMs have satisfied themselves that we are ready and quite frankly as we have all said, it doesn't look like they are going to be as steep as they were before, so it is easier for us to be ready. So we are ready for the ramps, our OEM customers know that.

I think that our customers, Steve, acknowledge that the Helix product manufacturing model is different than most people in this industry. We start with that short cycle manufacturing process, number one. We've done an excellent job with our supply chain and our sub tier suppliers being aligned with us, and then I must say that we continue to do an excellent job managing the availability of the workforce. And again, it's different than a lot of people who talk about temporary people, but the problem that they experience is the ability to attract and train the temporary workforce. Our temporary workforce is available and trained because we work with those people even when they are not here and tend to bring back the same individuals that we had previously. So we have a very short cycle time on ramping the factory on the labor side; materials are in good shape, and that gives our OEM customers a high degree of comfort. Unfortunately sometimes they take advantage of that high degree of comfort and wait even longer to place their orders with us. Again, we are used to that. An as we have said in previous calls, that leaves us in the situation where our revenues more closely are aligned with our customers revenues than our customers orders. The pricing environment, again, has remained fairly stable for us. Our customers, the OEM accounts, remain under intense pressure for the price of their products, but I would say that they continue to work with us rather than in the beat the price mode, the issue of transitioning our newer platforms that deliver more performance at lower cost to them as our pathway to solving their problems.

And a better margin for you, too.

Better margins for us as well, absolutely. Thank you Stephen.

Mark Miller at Hoefer & Arnett.

Congratulations on coming back to profitability and your margin improvements and positive cash flow. I like to talk about, follow-up on the last question. Are you seeing -- would you characterize the pressure from your OEM accounts that the semiconductor people are more aggressive than your other customers in the OEM?

Yes, well we have a smile on our face, Mark, it's a tough world we live in. We don't whimper about it. We accept it as a reality, but yes, it is a tough market. And probably tougher than other markets that we are peripherally involved in.

Question about the gross margin improvement. You gave us some possibilities on product mix. Product mix are you including this global support the increased global level support you are seeing revenues, is that also contributing to better margins, is that part of the product mix?

Yes. There are two things going on within our basic CTI core products, as we've indicated on several calls. Our new products have better margins than the legacy 300 mm products they replaced. As we indicated in the second quarter, there was more of a shift to the legacy products than we would have expected and in Q3 that returned to more of a normal pace. With respect to the service business, we are blessed with the fact that our service business in general tends to have gross margins that are equal to and in some cases slightly above the product business. We also get the benefit to some extent from the increased contribution of the service business.

You had mentioned you were making some progress, that Granville-Phillips had introduced some new products, but your revenues dipped down a little from Granville-Phillips. I was wondering about the attraction of some of these new products you introduced at Granville-Phillips?

What we said last time is that the Granville-Phillips new products are very specific to certain new tools that are just in introduction now so one particular tool is a little slower start than we had hoped for. And that showed up on the Granville-Phillips product side. But generally speaking, the new product that we talked about last time is in evaluation on all of our targeted OEM customers. Just a little bit more sensitive to the volumes of those new tools and we would expect to see continued and modest improvement in that.

Thank you.

Ali Irani of CIBC World Market.

A couple of questions actually. Looking back at your breakeven, Bob, it seems that you are still very close to that target of about 27 million. I am just wondering looking through the fourth quarter and again next year whether with some of these mix changes with On-Board IS in particular, you will be able to keep your breakeven at these current levels as you ramp revenues. And then on another front, I was hoping you could give us a low qualification of the upgrades to tools now that the fabs are full. Typically at this time in the cycle your customers look to extend the productivity or the performance capability, and I am wondering where the opportunity there is in your services business from here?

With respect to the breakeven as you indicated we have been fairly consistent that our breakeven as a company is about $27 million. It actually drifts up a little bit in Q4, as I mentioned, because we have three additional working days. With respect to next year and going forward, we would expect the breakeven to remain relatively consistent. Now having said that, as you know, as an example we've not taken salary actions increases in the last year or so. And as the business returns, we would expect that we would be taking a hard look at that. So we might be making very conscious decisions to move the breakeven up slightly to reflect aspects like that. But in general, in terms of pricing pressure in the marketplace, we will continue to strive for manufacturing efficiencies and continually strive to keep our gross margins moving upward by offsetting any pricing pressure through improvements in the manufacturing operations line. I will let Bob or Jim comment on the upgrades.

Just as an additional observation to Jay's comment about the breakeven and compensation, unlike many of our peers, we did not take any weeks out of the quarter, weeks without pay, these kinds of short term fixes that we are going to now have to layer in. So the only issue in terms of increase in breakeven will come from resumption of normal payroll increases as we get back to profitability, number one. And those obviously will be spread throughout the year. And then appropriate expansion where necessary to support growing aspects of our business. So that is the breakeven piece.

With regard to your second question on tool upgrades, yes, you are absolutely right, this is a time when upgrades are in the minds of customers. And part of the performance of the global support unit was strong performance in the upgrades, as well as relationship bases. As a matter-of-fact, every element of our services unit did increase in the quarter. And that is directly attributable to the activity level within the fabs.

Just one extra follow-up question on the services side. Do you have visibility at this point on a timeframe within which, say 12, 18, 24 months a TrueBlue of your services business would actually represent 10 percent of your revenues? It seems like it's just getting closer and closer.

That is certainly well within our vision. And again, what Jay suggested earlier, is the nice part about the services business is each quarter with the new contracts, they layer on a flow of revenue on top of the flow that you had in the previous quarter. So it is a layering activity and when we look at the expansion of the business both in terms of customer tools covered and equipment covered, that is absolutely the direction that we are going. So you can look at our TrueBlue service agreements as being basically a foundation platform that will allow us to grow the business and have an increasing impact of this revised business model.

I would just add Ali that the service contracts really will grow from literally two dimensions, number one as we've indicated. We are continuing each quarter to sign up more and more fabs to participate. But the second thing is within the existing contract base, we are always looking for additional revenue streams, additional offerings, additional support capabilities so part of the ongoing discussion with our existing service contract people is really to look at how we can provide more services under the TrueBlue umbrella.

If I can just add to that, once the original contract is in place, the kind of starting friction if you will is overcome, and then the way we grow on that as Jay said by adding products to it, it's a lot easier. A lot less resistant.

Great, thank you very much.

Our final question comes from the line of Stuart Muter at Adams, Harkness & Hill.

Thank you. Good morning. Question first for Jay. Would you expect the joint venture profits to improve in Q4?

Yes, I mean basically I think we've been modeling that at about $300,000 a quarter or so. And the reduction in Q3 was due to the tax rate. But moving forward in Q4 that should return to more historic levels.

Right. For Bob, back to the discussion on the micro ion gauge plus, would you expect evaluations at your major OEMs to be complete by the end of the year?

I think that we have a number of customers, it certainly is possible that evaluations at more than one could be complete this year. But it is an ongoing process. So this is not an all or nothing where we are betting on one particular evaluation on one particular tool. It's much broader than that, Stuart.

Thanks Bob. And one quick question in general. What are you see from your data storage customers. Are things improving?

Yes. We are seeing an improvement. Our customer base is not obviously significant part of our total compared to semiconductor or flat panels. But clearly as they are trying to de-bottleneck their production facilities we do see orders coming for a lot of our products both Granville-Phillips and CTI products to do that. And some of our service agreements are also with the data storage customers that are just trying to wring more productivity out of their factories.

Excellent. Thank you.

Mr. Lepofsky, please continue with your presentation.

Thank you. In closing I would just like to repeat words we have shared with you in the past. The management team at Helix is motivated to change those things which we can control. We are realistic about the dynamics in our marketplace; we continue to manage the resources, leverage our competencies and enhance our operating performance for the long-term benefit of our shareholders. We appreciate your continued support and we appreciate your continued interest in Helix Technology Corporation. Operator, that concludes our call for today.

Ladies and gentlemen, that does conclude your teleconference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.