科磊 (KLAC) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ICOS Vision Systems third quarter 2002 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference please press star then zero on your touch tone telephone call. As a reminder this conference call is being recorded. I would now like to introduce your host for this call, Ms. Judith Berknine (ph).

Judith Berknine (ph): Good morning, everyone in the United States and good afternoon everyone in Belgium. Welcome to ICOS Vision Systems third quarter 2002 earnings conference call. With me on the call today is Anton DeProft, President and Chief Executive Officer. You should have all received a copy of the press release which was issued earlier today. But if you have not received a copy, it has been posted to the investor relations section of the company's web site at www.ICOS.be. Before starting the call, I'd like to mention that certain statements made by management during the course of this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of ICOS to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those detailed in the company's reports filed with the Securities and Exchange Commission. With that, I would now like to turn the call over to Anton. Anton?

Hello everyone. Welcome to our third quarter conference call. I will start by discussing our performance during the third quarter followed by a review of the financial results for the quarter and the nine months ending September 30. Then I will comment on the outlook of our business, and after that, I would be glad to take your questions following -- followed by some closing remarks. Revenues for the three months ended September 30, 2002, 8.5 million, representing an increase of approximately 7 percent over second quarter revenue of 7.9 million and a whopping fourfold increase compared to the 1.9 million reported for the third quarter of 2001.Income from operations for the third quarter of 2002 was $100,000 versus an operating loss of $5.7 million for the third quarter of 2001.We were able to realize a net profit over the third quarter of $190,000, or 2 cents per share, compared to a net loss of 4.6 million or 44 cents per share for the third quarter of 2001. For the nine months period ending September 30, 2002, we are reporting revenues of 20.5 million compared to revenues of 20.6 million for the first nine months of 2001. The net loss for the first nine months of 2002 was 1.3 million, a considerable improvement over the 6.6 million net loss ICOS reported over the nine months ending September 30, 2001.We are happy that we can present a quarter with operational and net profits.

This is the result of many months of hard work, which started with the restructuring and cost-saving measures that were taken last year. In addition, thanks to an increasing market share for our main product line, we've increased our revenues during four quarters, bringing the third-quarter revenue to over four times that of the same quarter last year. First-time buyers accounted for 21 percent of revenue for the third quarter of 2002. These customers who are located primarily in Europe, Asia, and the United States, and were customers for both OEM products and inspection machines. New products, then, throughout the downturn, we have kept our ability to develop new leading-edge products in tech as we've always -- intact, as we've always seen, that I say key factor for our future success. In fact, our R&D department was busier than ever during the quarter resulting in an increase of our R&D expense from 1.46 to 1.85 million. The increase was also partly due to the weakening of the dollar during the quarter on an average base, and also to an increase to an increase of R&D expenses.

A substantial amount of R&D effort during the quarter was spent on finalizing the CIG10 which was introduced according to schedule during the Semicon Taiwan show in September. The CIG-10 system is a gravity based inspection system for the inspection of CUPE based components either two sighted leader components or the newer type of leadless (ph) components. This product opens a new market segment to ICOS and increases its sales potential. The introduction of the CIG-10 marked the second major product introduction in as many quarters following the introduction of CI-9250, 9450, during the previous quarter.

Other substantial R&D efforts were spent on the ongoing developments of this CI-9250, 9450 system, especially related to the inspection of additional packages such as pin grid array components and newer leadless (ph) packages. Finally major effort was also spent on the continuous improvements of various products and on the development of technologies for future generation inspection equipment. The intensive R&D work during this and the previous quarters has resulted in new product sales, accounting for 11 percent of revenue and new customers accounting for 21 percent-of-revenues. The competitive situation, then, as we mentioned during our last conference call, we are a leader in our market for trade based component inspection systems. After the introduction of our latest generation of equipment, our main competitor has announced that it's selling its division which is competing with ICOS. We believe that ICOS has become the leader in this market, despite entering later than its competitors, thanks to a substantially better inspection technology, both in terms of flexibility and cost effectiveness. Following the announcement of our competitor, more customers have started to qualify our inspection systems for various applications and various components.

Even though we don't see another strong competitors emerging today, we see several other companies trying to enter this market, and we have to assume that some of them will become successful. The organization, then, we are continuing our efforts to further strengthen the organization and to prepare it for its future growth. We have finished the integration of the mechanical design center in Hong Kong into the organization. The total number of employees stood at 152 full-time equivalents at the end of the third quarter, up from a level of 148 full-time equivalents at the end of the second quarter. The revenue breakdown per product line for the third quarter, the revenue breakdown was 13 percent board level, 21 percent system level, and 66 percent inspection machines. This compares to 11, nine and 80 percent for the second quarter of the year.

The revenues were better spread over the different product lines, indicating that the market revival has spread to other segments with strong growth in both board level and system level OEM products. Unfortunately, the strong growth that we have seen for the inspection machines during the first half of the year has peaked and we saw a decrease of sales for this product line. Then the revenue breakdown for geographic area during the third quarter of this year the major sales volume was again realized in Asia where we did 32 percent of our turnover in Japan and 33 percent in other parts of Asia.

Further, 26 percent our turn oar was in Europe and 90 percent in the U.S. Just as we saw our sales spreading over the different products lines we also saw our growth spread over different regions. With strong sales in Japan, Asia, and Europe, we also saw increase in the first part of year. We also saw a decrease from mainly Taiwan which was a stronghold during the first half of the year. Such strong and sudden changes are typical for this year's market, and we expect to continue to see substantial shifts in the near future.

As an example, for the fourth quarter we expect revenues from mainland China to grow substantially. Then the financial information for the third quarter on revenues of 8.5 million, we achieved a gross margin of 57 percent in the third quarter, compared to a gross margin of 68.3 percent in the second quarter of 2002, which was positively impacted by the reevaluation of previously depreciated inventory. Excluding this impact or gross margin for the second quarter would have been 55 percent. As we mentioned last time, we also believe that in the near future, we will be able to keep the gross margins roughly at the 55 percent level. R&D expenses were 1.85 million for the quarter, compared to 1.46 in the previous quarter.

The above-mentioned ongoing R&D project and the weakening dollar have led to additional expenses in the quarter. SG&A expenses decreased from 3.23 million to 2.89 million. This decrease was primarily caused by the write-off of our investment in Koven at the end of the second quarter. This loss was affecting our SG&A expenses in the second quarter for about half a million dollars. Our SG&A expenses of this third quarter reflect the current cost level for the next quarter.

Of course, it being understood that the SGNA expenses will go up as well as the area mix of those sales. The operating gain for the third quarter was $100,000, a significant improvement over the 5.7 million operating loss we reported for the third quarter of 2001.As mentioned before, this quarter marks a further return to operational profitability after a year with operational losses. We recorded income tax expense of 27,000 in the third quarter, or approximately 12 percent of the income tax before -- of the income before taxes. The low tax rate is the effect of the tax area mix. We recorded income tax expenses of -- I'm sorry. Consequently the net income for the third quarter was $190,000 compared to a net loss in the second quarter of 560,000 and a net loss of 4.6 million during the same period of last year. Cash flow from operations in the third quarter was positive at 270,000, which was an improvement over the second quarter, including the changes in working capital such as increases in accounts receivable, operating activities, used cash of approximately 720,000 during the quarter.

Let's now turn to the balance sheet. Cash balances stood at 25.6 million at the end of the quarter, 1.7 million lower than at the end of the second quarter. This change in cash position is mainly caused by the above-mentioned cash used by operating activities, and the Capex of 600,000. We further finalized the construction and surrounding of our headquarters during the quarter including some additional improvements of our facilities. We believe that our current cash level is more than adequate for future operations, even during a prolonged and severe downturn.

Accounts receivable increased to 8.1 million from 5.9 million at the end of the second quarter of 2002. Those outstanding were 86 days in the second quarter, increasing from 67 days in the second quarter. Inventories decreased slightly to 13.2 million compared to 13.8 million at the end of the second quarter. The inventory split was 6.3 million raw materials, 5.0 million work in progress, and 1.9 million finished goods. Then the business outlook, we have to say that the market during the third quarter contained a number of mixed signals. The market got a broader support with a much better spread of revenues over the different geographical regions and over the different product lines. But at the same time, we saw a decrease in the order intake during the quarter, especially in those areas that carried their weight during the first half of the year. Therefore, we see a more sideways move in the market in the near future. While excess inventory is burned off and capacity utilization is in general quite high, we are now dependent on a recovery in the end-user markets. Even to the next quarter, the visibility remains poor with conflicting and frequently changing inputs from our customers.

For the fourth quarter we expect our revenues to be flat to down slightly. Since we are still close to a break-even situation, this may result in a small operational loss over the next quarter. In addition, a tax reform in Belgium is expected to be approved during the fourth quarter. As part of this tax reform the corporate tax will be lowered. However, this will lead to a decrease of the tax efforts of the company and according to the U.S. GAAP rules the company could not take any provisions for this but has to account for this as a one-time negative effect on the net result during the quarter of enactment of the tax reform. At this point we believe that will be the fourth quarter. But obviously the decreased corporate tax rate will have a positive effect on the company's ability to generate profits in the near -- in the future and so, in fact, it is good news. Nevertheless, despite very difficult market conditions during 2002, with the semiconductor equipment market evolution of minus 25 to minus 30 percent, ICOS will post a positive growth for the year between 10 and 20 percent.

To conclude, ICOS is concentrating on the several opportunities to expand its market position and is grabbing these opportunities with both hands. The major focus now is to strengthen the market position and to widen the base from which the company can grow and the market recovery. That concludes my comments. I would now like to open the call to questions. Operator?

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again if you have a question please press the one key. One moment for our first question. Our first question comes from Mike Mary (ph) of Mary Asset Management .

Hi, guys. Couple questions. The tax rate, what's the tax rate going to go to, and also how much will the write-off be on the balance sheet? Hello?

Yes. The write-off will be 600,000, and the tax rate will depend on -- oh, you mean the Belgian tax rate?

Yes.

Will actually change from 40 percent today to about 34 percent starting January 1 .

Great .

That's the expectation that we have, but we do expect that this law will be approved this quarter.

Okay. And capex, now that you sent us your facility, what should capex -- finished your facility, what should capex be going forward?

Well, it will be lower, although it's a little bit difficult because, you know, in the end there's always some loose ends and we're just in that process of these loose ends. So - .

Right .

-- it's a little bit difficult to put an exact number, but they will definitely -- definitely go down.

Okay. And another little question before I get to the bigger-picture questions, but working capital, if revenues flatten out here for the next couple of quarters, do you have any opportunities to bring down the amount of capital you have in working capital?

Yes, the accounts receivable could go down also, the inventory could be further worked off, because in fact during this quarter we also purchased some new materials and new equipment which we wouldn't need to do with current levels of the market, so that would definitely further -- go further down then.

Okay. And, you know, on the bigger-picture things, your largest competitor is selling their division. Have you seen business coming from them yet or has it been mostly approvals, and how much business would you expect to get from this over the next year or so?

Well, we have seen some business over the last few quarters. This is a process, as you know, that doesn't go all at once in one day. This is a slow process. I think we've said consistently over the last few quarters that we have gained market share. This is correct. And so we have definitely gotten new business. Also, if you look at it on the whole year, if we see that we will advance by 10 or 20 percent, this is much better than the market average of a shrinking of maybe 25 to 30 percent. So this definitely is real business that for a substantial part came from there.

On the other hand, we have to say that the market is indeed relatively weak, so that we believe that the potential in there is much bigger because in fact we also see a number of customers that are qualifying and that are -- well, like I said, qualifying us for the next purchases. But in the meantime they haven't purchased for 12 months now. So indeed there is -- that is why we're in effect in a little bit of an ironic situation in the sense that the sales, the market is weak. On the other hand, the R&D manager just told me a few days ago that this is the busiest R & D year we've seen in five years. So it's a little bit a strange combination of effects.

Okay. And so next year, if the market were to be flat, would you expect to still gain business from the competitor that left, or would new business require you to continue to introduce new products? I know you'll be introducing new products anyway, but I'm just trying to get a sense if you think there's still business to be had from the competitor blowing up.

That's -- I think the better part -- How should I formulate this? I think most of the growth -- Yes, you have new product, that's one thing, but most of the growth will come from people and from applications that we are already qualified and selected for today but that we didn't see a single dollar of income yet. So I don't know how you would qualify as this. Is this new business to come over, or is this business that we are already assured but we haven't seen a single dollar yet? Because that's typically how it goes. People, customers qualify you, and then they say, "Okay, next time we standardize on this equipment." But then you have to wait for capacity increases before they buy new equipment.

Okay .

And we have quite a bit of that in the pipeline.

Okay. I guess what I'm trying to get to is, I know there's no visibility on next year in terms of orders, but -- .

Yes .

-- if you have any visibility in terms of how ICOS will do relative to the market, just based on the amount of qualifying you did this year and some of the other -- .

Then I would say I believe that we should be able to do better than market, because all the cases that I just described before haven't generated a single dollar this year, some of them, so that would still be accounted for next year, so I would say in general, we -- we expect to do better than the market, but then also you have to be careful with the statesmen because there is competition and you don't know what other competitors may come up. But in general I would say I would expect us to be able to do better than the average of the market, yes.

Okay, thanks.

Thank you, sir. Our next question comes from Gibbon Vanderbrugen (ph) of Peter Kaamp (ph). Thank you, sir .

Gibbon Vanderbergen (ph): Yes, hello. First question on this CIG-10. Do you have already shipped that to clients and when do you expect to have the dollars from it? And then I have follow-up questions.

In fact we don't release specific information on that. It's a very specific question. I can tell you that you have to look on this product a little bit longer term. This is a product which is made for what we call the two-sided devices, mainly. These are commodity products and these are products that at this moment there's very little or no capacity increase typically for these -- for this product. So the answer is definitely it's low, plus we are also still, well, finalizing some of the features of the system.

Gibbon Vanderbergen (ph): Okay. And then on R&D side, so you said it was a more active A&D year since five years or so. Do you want to maintain R & D levels at those of the current quarter, or what can we expect for the next quarter and then for next year?

Yes, roughly we will stay at these levels because, like I just explained also for the last question, we have this situation where on the one hand, yes, the market is very weak getting all these opportunities, and we have to grab them with both hands, and in fact we are busier than ever, so we think it would not be a good idea to try and save costs on these R&D efforts which are in fact all real seeds and real business opportunities towards next year.

Gibbon Vanderbergen (ph): Okay. So you think in absolute terms for R&D compared to -- .

Yes, yes. We expect to keep these levels and not have them down

Gibbon Vanderbergen (ph): Then you say you expect a growth of between 10 and 20 percent while there is one quarter left. So that means that basically you are expecting revenues for the fourth quarter to be between six and eight million. This can make a huge difference. Do you have more visibility with the October quarter up to now? If you achieve the bottom of that range, it would be much more difficult for next year to have good growth with the market going forward.

Well, the market visibility indeed is relatively -- it's bad, eh? I don't mean we're not used to not having too good visibility in our market but we have to say that this time it's worse than ever. Where customers are really giving us very conflicting information, and it changes often. I mean whatever you get as information in the morning may not stand at the end of the day. So it's very erratic and very difficult. But there is a lot of things going on, eh? So we believe that the market will move sideways, but we know it's a quite wide range of things that we -- that we give, but that's unfortunately what the market tells us. But there is definitely a lot of things going on and -- but, you know, we try to be conservative and not let too much of dreams so to speak. But, yes, it's a wide range but in reality that's just a translation of a limited visibility.

Gibbon Vanderbergen (ph): Okay. Then one additional question on your accounts receivable, which went up quite substantially.

Yes .

Gibbon Vanderbergen (ph): This was because of the late invoicing of your -- in the current quarter?

Yeah, that basically has to do with shipments during the quarter, yes.

Gibbon Vanderbergen (ph): Which were invoiced very late?

Yes, because depending on the product mix and depending on the customer mix, there are also different payment terms, of course. That is the reason for it, yes, there is no bad debts in there or aging towards bad debts .

Okay. Because I mean if you see during the year, and thanks to the pickup -- slight pickup of the market you have seen during the year, but your days outstanding have increased quite substantially. Is it something that can be proved, or is it just a question of timing of when they have been invoiced?

It really has to do with timing of invoice and, like I said also with product and customer mix, eh? So -- but I think -- .

Gibbon Vanderbergen (ph): Sometimes you give more than four months to customers to -- .Anton DeProft: No, no, no, no, no, no. It's business that was invoiced during the quarter .Gibbon Vanderbergen (ph): Okay. And then on our inventories, I mean when you look backgrounds at your inventory levels, the highest quarter was the first quarter 2001, and you actually have brought down this, but are there some efforts that can be done there in order to improve working capital or do you have to maintain those levels -- Because I mean if you see that the market is weak, is it necessary to keep inventories so high?

No. Like I said, I think that the inventory from here can go down. But, well, the situation and the evolution of the orders if you look at them over the last four quarters, we've seen a lot of sales growth. And so we also prepared for that if we now move into a more sideways pattern, then we can have that inventory, we can build it off a little bit further, yes. But we indeed increased the inventory or purchased, at least, new parts during the quarter . Gibbon Vanderbergen (ph): Okay. Thank you.

You're welcome .

Thank you, sir. Our next question comes from Phillippe Rocher (ph).

Phillipee Rocher (ph): The first question, the 82, the product you announced a year ago it was the Bund waver (ph) inspection system. Have you made any progress with this system so far?

We said a couple quarters ago that this product is not expected to become a major product for us in the year future. We also believe that this is also in all a quite relative -- or a -- yeah, relatively small market at this point, and so we don't expect that product to really contribute substantially over the short-term. And that's still the situation today. Now, I cannot comment too much about the specific details without going into competitive issues. But that is the situation today. Still, we believe that this is a good product for us longer term.

Phillippe Rocher (ph): Okay. And you also mentioned that other companies were trying to enter the market. Are these companies which are already in the semiconductor inspection segment, or newcomers, completely newcomers?

Most of them are relatively small companies that are active in the semiconductor company, sometimes on a very local basis. It's not really people coming out of the -- out of the semiconductor market. But like we said at this point, none of them is really very substantial or the product threat is not substantial at this point, but we just thought it was fair to mention this, because you no longer see a world without competition, we don't believe it exists. We just have to assume that we will get other competitors. Whatever happens to our current competitor, which let's not forget, it is still there today. That's why we thought we felt it was fair to make that comment.

Phillippe Rocher (ph): Okay, thank you.

Sure.

Thank you, sir. Once again, ladies and gentlemen, if you have a question, please press the one key. We have a follow-up question from Mr. Vanderbergen. Please go ahead, sir .

Gibbon Vanderbrugen (ph): Yes. Quickly doing the math on your P&F for next year, if you want to maintain that level of R&D, I mean if you assume sales around 13 million for next year, which would already be growth, I mean you could expect some flat to slight growth next year, wouldn't it put your break-even level into question for next year? Wouldn't you have to scale down R&D back to -- I mean are these R&D projects easily cancelable?

Well, what we're essentially saying is that we expect the market to move short-term sideways. Short-term doesn't mean that this is what we expect for the whole of 2003. In fact -- well, it's very difficult to make serious statements about the, for instance, the second half of -- of next year.

We do believe that there will be a gradual improvement, though, of the market over the years, or over the quarters during next year, but that is based on general information which you have just as good access to as we have and also based on what our customers tell us. In essence what we're saying is that short-term, we see a sideways move, and let's not forget that this quarter we made a small profit. We believe that we're going to see roughly the same type of performance short-term.

Since we're quite close to the break-even point, that doesn't mean we cannot exclude that we make some small losses, but definitely small compared to our balance sheet. We're absolutely convinced that the market recovery will come, that in the meantime, we may see further consolidation and further opportunities for us in terms of new customers and new products and so on. We believe that strong companies like ourselves now should concentrate on this R&D and plant seeds for the future.

So we believe it would be not a good idea to try and cut back at this point on R&D where like I said we're even making a profit this quarter. Let's not forget that this is the first quarter we make a net profit in, what is it, five quarters.

Gibbon Vanderbrugen (ph): Okay. Thank you. I have a follow-up question, actually. Wouldn't you fear that the competitor you mentioned who is selling its semiconductor equipment group could sell its division to a large semiconductor equipment company that would have means to make of this former division of your competitor, something that would be stronger for you to compete with?

Well, I don't like to give too much -- or too many comments on the competition. I think we should concentrate on our own business. But what I can say is that we feel that we have a very, very good technology for this inspection. I mentioned it in the call, both in terms of flexibility, in terms of cost efficiency. So -- in terms of margins and with flexibility, I mean the type of components that it can inspect the type of defects that it can inspect and the flexibility, the adaptability of the machines to new environments, new components, new type of things that need to be inspected. For instance, the leadless (ph) devices don't have leads, or at least not leads sticking out. They have a totally different requirement of inspection.

Our technology was adapted to that quite easily because it's a much more flexible technology. So it's a more flexible technology. It's a substantially more cost effective technology. On top of that, we believe that we have a very good technical support organization worldwide. We invested in that over the years. That means that we believe we are very competitive, and well, we should concentrate on our own thing and make sure that we keep our customers happy and the only thing we can see today is that our potential is only increase and go our number of customers is only increasing and of course we have to deal with competition when it comes.

Gibbon Vanderbrugen (ph): Okay.

I think we shouldn't be afraid of anybody, either, not at all.

Gibbon Vanderbrugen (ph): Thank you.

You're welcome.

Thank you, sir. Once again ladies and gentlemen if you have a question, please press the one key. Sir, there appear to be no further questions. At this time I'd like to turn the program back over to you.

Okay, well, thank you very much. I just would like to summarize by saying that the short-term outlook for the whole industry is somewhat uncertain, but we are in fact very optimistic about ICOS's future. We have a very strong balance sheet with a cash position of $2.4 per share and a book position of eight per share. We have substantially grown our customer base, increased our portfolio, and strengthened our organization and we believe that we will emerge a lot stronger from the current downturn. Thank you very much for joining us today, and we look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.

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