科磊 (KLAC) 2003 Q1 法說會逐字稿

Good morning. My name is Amy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ICOS Vision System conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Ms.Burfening, you may begin your conference.

Thank you, Amy. Good morning, everyone. This is Judy Burfening of Lippert Heilshorn and Associates. Welcome to ICOS Vision Systems first quarter, 2003, earnings conference call. With us today is Anton DeProft, President and Chief Executive Officer. By now, everyone should have received a copy of the press release which was issued earlier today. If anyone has not yet received a copy, we invite you to visit the company's 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 from time to time with the Securities and Exchange Commission.

With that, I would now like to turn the call over to Anton. Anton?

Yes. Thank you, Jody, and hello, everyone, and welcome to our first quarter, 2003, conference call. I will start by discussing our performance during this first quarter. Then I will give some financial information and comment on the outlook of our business. After this, I would be glad to take your questions, followed by some closing remarks.

To start, let me remind you that following the change in reporting currency as from the previous quarter and year 2002 announcement, all financial statements are expressed in euro. Revenues for the three months ended March 31st, 2003, were EUR9.3m, representing an increase of approximately 8% over fourth quarter, 2002, revenues of EUR8.7m and almost doubling compared to the EUR4.7m reported for the first quarter of 2002. Income from operations for the first quarter of 2003 was EUR483,000 compared to an operating loss of EUR1.6m over the first quarter of 2002.

We realized a net profit of EUR244,000 or two euro cents per share versus a net loss of EUR1.1m or 10 euro cents per share during the first quarter of 2002. We are pleased with our performance during the quarter. In line with our guidance, and despite a further decline of the dollar and the yen, we present an operating profit and a net profit.

We have now achieved operational profitability during four consecutive quarters, illustrating that our cost structure is in line with current market conditions. In addition, thanks to an increasing market share for our main product line and new products to expand our addressable market, we have now increased our revenues during six consecutive quarters.

First-time buyers accounted for 25% of revenue in the first quarter of 2003. These customers were located primarily in Japan, U.S. and Singapore and were customers for OEM products as well as for inspection machines. It is this continuous flow of new customers that has allowed us to grow our sales in a very weak market and that made us the market leader in our most important market, that of the [[true-based]] inspection systems.

New products. Throughout the downturn, we have kept our ability to develop new leading-edge products intact as we see this as the basis for our future success. During the first quarter, our R&D department was very busy again, working on the advancement of existing products as well as on technology developments for future generation products. One major part of the work kept going into [true-based] products. To satisfy our growing customer bases, these systems were further improved and features were added.

A second major portion of the R&D work was devoted on the newer product lines, mainly the CIG-10 for [true-based] inspections and the FDI for TAB type tape inspections. Both products continue to gain market acceptance.

Finally, major R&D work was spent on the continuous improvement of various products and on the development of technologies for future generation inspection equipment. The intensive R&D work during the last few month has resulted in new product sales, accounting for 37% of revenues in the first quarter of 2003.

The competitive situation. We believe that we have continued to strengthen our market leadership position in the market for [true-based] component inspection systems and also strengthened our position in other product lines, such as the [inaudible] based CIG-10 system and the FDI for the inspection of TAB tapes. Due to the continued financial difficulties of our major competitors, we believe that we will continue to strengthen our position in the market.

The organization. The total number of employees stood at 160 full-time equivalents at the end of March 31st, up from a level of 150 full-time equivalents at the end of fiscal year 2002. This increase is mainly the result of the end of the time credit system which was a part of the savings programs through which employees voluntarily chose to work part time in the difficult year 2002. Despite the continuous increase of our revenues over the past six quarters, ICOS continued to monitor closely all of its expenditures including hiring of new employees.

During the first quarter of 2003, we also further strengthened our commercial network. We signed a new distribution agreement with Kestronics BT Limited which has a very strong local network throughout Southeast Asia. Already during the quarter, this resulted in new sales in this entire area.

The revenue breakdown per product line. The first quarter of 2003 breakdown was 19% board level, 19% system level and 62% inspection machines. This compares to 19%, 13%, and 68% for the fourth quarter of 2002. The inspection machines continue to be our largest product family, followed by increasing board level and system level sales. We believe that the returning strength to all product lines is an indication of a continuous market recovery.

The revenue breakdown per geographic area. During the first quarter of the year, the major sales volume was again realized in Asia where we did 21% of our turnover in Japan and 39% in the other countries of Asia. Further, 26% of our turnover was realized in Europe and 14% in the U.S. The strong sales in Asia were mainly fueled by our increasing sales level through our new distributor in Southeast Asia together with our continuously strong position in Japan. Although it's normal to see relatively large variations between geographies on a quarterly basis, we see some strength returning to all areas, which again indicates a recovery in the broader market.

The financial information, then, for the first quarter of 2003. On revenues of EUR9.3m we achieved a gross margin of 55.1% compared to a gross margin of 57.4% in the fourth quarter of 2002. Our gross margin was affected by a strong decline in the dollar and the yen versus the euro. Taking into account that new orders are currently mainly in euro, we believe that our gross margin will remain around 55%.

R&D expenses were EUR1.66m for the quarter, virtually unchanged from the EUR1.64m in the previous quarter. We believe that the R&D expenses reported during the first quarter are a good guidance for the current quarter.

SG&A expenses increased slightly to EUR3m compared to EUR2.9m the previous quarter, mainly as a consequence of the increase of the number of full-time equivalents. Again, we believe that the report of cost level is a good indication for the expected costs in the current quarter, with the understanding that the SG&A costs contain sales commissions which depend on the overall sales level and the product and area mix.

The income from operations for the first quarter of 2003 was EUR483,000, a modest improvement over the EUR427,000 operating profit we reported for the first quarter of 2002. The fact that we have now achieved four consecutive quarters with operating profit illustrates that our cost structure is well in line with the current market conditions.

During the first quarter of 2003, we incurred a foreign currency exchange loss of EUR290,000. Despite the strong decrease of the dollar and the yen, the measures that we have taken to lower the effect of the foreign currency exchange are starting to take affect. We expect that the affect of those measures will further lower the impact of foreign currency exchanges as we move along.

We incurred a tax of EUR34,000 or approximately 12% of income before taxes. Consequently, we realized a net gain for the first quarter of 2003 of EUR244,000 comparing to a net loss of EUR926,000 for the fourth quarter of 2002.

Cash flow from operations in the quarter was positive at EUR275,000. We further optimized our working capital and gained EUR2.2m net cash from operating activities, including changes in working capital. During the first quarter of 2003, we used EUR180,000 in investing activities which was mainly the finalization of the construction work for our new headquarters in Belgium, whereas financing activities used EUR160,000 for repayment of borrowings.

Let's now turn to the balance sheet. Cash balances stood at EUR27.6m at the end of the first quarter, an improvement over the EUR25.9m at the end of the fiscal 2002. This change in our cash position is mainly caused by the above mentioned cash provided by operating activities. We believe that our current cash level is more than adequate for future operations.

Accounts receivable increased to EUR9.4m from EUR7.6m at the end of the year 2002 as a result of the increased sales volume. Days outstanding were 90 days in the first quarter of 2003, increasing from 79 days in the last quarter of the previous year.

Inventories continued to decrease to EUR11.1m at the end of the quarter, compared to an inventory level of EUR11.6m at the end of 2002. The inventory split was EUR4.8m in raw materials, EUR4.1m work in progress, and EUR2.2m finished goods.

The business outlook, then. Throughout the downturn ICOS has constantly concentrated on two priorities new product developments and superior customer support. This strategy is paying off with six consecutive quarters of sales growth, and we believe that also in the near future we can continue to outpace the market.

Predicting the short-term market evolution remains difficult, however. On the one hand, we see a continued recovery of the semiconductor market, driven by an improving IT investment cycle and other semiconductor market segments. The expected catch up in the semiconductor [inaudible] investment could [inaudible] and a new Gartner Dataquest report, for instance, predicts a growth of 21.4% for [inaudible] semiconductor equipment this year.

On the other hand, a number of elements continue to plague the state of the economy in general and that of the semiconductor industry in particular, the latest element now being SARS virus that is affecting one of the fastest-growing markets in the world.

Nevertheless, based on our current order flow, we expect revenues to continue to grow slightly during the current quarter and we expect another profitable quarter. That concludes my comments. I would now like to open the call for questions. Operator?

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Gaëtan van der Bruggen with Petercam.

Yes, hello. I had a question on your backlog at the end of January. It stood at EUR50.5m, like you mentioned in your annual report. How has it evolved during the quarter? How was it at the end of the quarter? And eventually, if we can have some flavor on the orders in the first month of the current quarter. Hello?

Yes, yes. I hear you but I want to let you know we are not providing any information on backlog and revolution of backlog because of a number of issues. First of all, the OEM products typically come in very large batches of long-term orders, which means you have every now and then a big spike, so to speak, in your order intake, and then you use that over a long period of time. And then for the other type of equipment, the stand-alone systems, a lot of the systems are shipped in the same quarter as ordered. And because of the combination of these two things, the backlog numbers are too difficult to interpret and that's why we're also not communicating them.

OK, but you communicated at the end of January.

Yes, we do that once per year because that is the requirement.

OK. And perhaps going forward on your activity, do you have more visibility now on what's happening in the current quarter and eventually further in the year on what could happen for acquisition in terms of the top line?

Well, the direct guidance we really give you the next quarter because we believe that the general economical situation is too how would I say? Unpredictable at this time. Also I mentioned, for instance, now the SARS virus. What kind of affect will that have on the economy in Asia and will that have an affect on, for instance, the semiconductor investments. That is very difficult to predict. On the other hand, I mentioned this report on the [Beckon] semiconductor equipment saying that it will grow 21.4%.

Also, if we look at the semi published book to bill for the North American-based suppliers of test and assembly, so the back end equipment, we saw that at the end of Q3 it was 0.71. At the end of Q4, it was 0.84 and now at the end of Q1, it's 1.12. So that's a major improvement. For instance, comparing to the front end, both at the end of Q4 and the end of Q1, it stood both at 0.96. So we clearly see an improvement in the back end. It's supported by a number of factors. So that's good and positive information going forward.

On the other hand, especially now, like I said, for instance, the SARS virus and some other more general economical situations make us quite or make us more careful. That's why we've given the forecast that we and that's mainly based on what we hear and see from our customers and the orders that we come in. We say, "Well, what we do see for this quarter is a slight increase of the sales." But going beyond that, and going further well, I've given you all the elements and everybody can balance and can weigh them according to their own views.

OK, thank you. A final question, You were able to keep your inventories rather low while it was perhaps more a problem last year where it was difficult for you to because of the low volumes to have good inventory turn over. Do you see going forward can you keep it at such low levels or at a certain point in time it would be necessary for you to increase inventories?

Well, we can definitely keep it at lower levels unless the sales would go up quite substantially, yeah? But with the current sales levels, we could definitely keep it at this level.

OK, thank you.

You're welcome.

Your next question comes from Mike Neary with Neary Asset Management.

Hi, guys. A couple questions. What was depreciation in the quarter and what is your forecast for CAPEX this year?

The depreciation was EUR187,000. And the going forward, the investment is not very high for the year, definitely less than EUR1m.

OK. And what's the, where are we currently on the stock buy back program? You proposed that a while ago. What's the progress on that?

OK. What it is ,that is a decision of the board of directors to ask that to the General Assembly. And the General Assembly meeting will take place on May 13. So on May 13, we will have a decision on that. And then after that, if it's granted, then we expect to execute it or that's up to the board of directors, of course.

OK. And you mentioned what percent of your sales in the first quarter were from new products. What percent of your sales in the first quarter are from completely new markets that you weren't in, you know, two years ago, as opposed to just being upgrades of old products in the same markets?

Well, in all honesty, we don't and that's for competitive reasons, we don't really divide the sales more specifically per product line. And if I would answer this question, I would well...

Yeah. No problem.

Yeah. You understand that.

Can you talk a little bit, then, about the new markets that you are in, what you think their size potentials are, [inaudible] something like that?

Well, I mean there are for us, we have indeed a number of new markets. I have mentioned two where we're making quite good progress. We're still in the beginning of the market now or in the market acceptance as far as we're concerned. And the CIG-10 and they're two different markets. The [true-based] market is in fact a fairly traditional market where we believe that with our technology, with our reputation we have a good sense over term to become also dominant in that market. And we're encouraged by the progress that we're making at this point.

Now, that is also like I said, the traditional market it's also a market that is capacity driven. It's not technology driven. So in general, this market at this point is still relatively small, but as soon as the cycle comes back, that market would also become more important. Then the other market that we talked about, the FDI for the TAB inspection that's a totally new market in the sense that it's replacing visual inspection by operators. That's a much more challenging, much more technology driven market where we are, we believe, well, I would say in [inaudible] position. But there, it's really the market that has to develop itself, so to speak.

OK. And what are your ASPs [inaudible]?

The ASPs? Well, I, assume that you're asking whether they're competitive and there I can say, yes, they're definitely competitive.

OK.

Does that answer your question?

Yeah. I mean I'd love to get ASPs and, you know, some type of estimate for what units could be so I could get an estimate for how big those markets could be. You know, the last up cycle your core business [inaudible] and I'm trying to figure out how big these new market could be for you. We can do that off line.

Yes, OK.

Thank you.

Your next question comes from Erik De Clippel with KBC Securities.

Hi, Anton. Some a few additional questions. You were mentioning the share buy back program. So I understand it is difficult to [inaudible] details, but what I wondered if you look at your current cash position, what amount of money could be spent for this? So the question is mainly, how much cash do you need or do you feel safe with for continuing operations and also as a cushion to pay some opportunities. So could you give an idea of the minimal cash position you want to maintain going forward?

Well, I can comment on the first part of your question, on the share buy back program. We've the question that will be asked to the General Assembly is to buy back up to 10% of the shares. As far as the cash position is concerned, I think that's a difficult question to answer in the sense that if you would ask any CEO, I would say, that same question in 2000 and 2002, I'm sure you would have gotten a completely different question [sic].

I would rather answer by saying that [inaudible] well, a conservative company from that point of view. We believe that if you are active in a very volatile technologically driven cyclical market, as we are, then you have to be conservative on the financial side. And that's what we like to do. Obviously, now we have a cash surplus, and that means we can develop some initiatives, like, for instance, the share buy back program. But it also allows us to take other initiatives, and given the state of the industry, this puts in a quite good position going forward. And it gives us opportunities. But we will definitely not I've said this many times we will not buy, for instance, a company that is a big cash burner or something, or we will not in any way risk our strong balance sheet. That would be foolish and we will definitely not do so.

Thanks. Another question on the currency effect. You were mentioning some measures you were taking could you give a comment on how far this completion is already? Let's say suppose that we had received the same currency valuation in the coming quarter, to what extent will this affect the [inaudible]? Are we half way through the program or is it almost completely finished? Could you give some information on that?

Well, that's difficult to put a real number on there. But it's well, if you compare to the last time, we already have a much better situation. We have an improvement of about EUR500,000 on that line but of course it's that's not comparing apples and apples because no two quarters are similar. So but no, We expect that that can further improve, but it's difficult to put an exact number on there as to it will be half or it will be whatever. This is a very complex line, in all honesty, that's constituted of a lot of effects of different currencies of [inaudible] and so on. So there's a lot of effects that play into that, but well, what we believe we can improve some more from here and already now it's not at a very high level anymore.

And another question. You were mentioning some strength in Japan. Is this mainly from new customers or is it also the existing customers that are really buying, or let's say activity has increased?

It's a combination of both. Our existing customers are strengthening but also we have some major new interest in customers in Japan. So it's really a combination of both.

OK, Thanks a lot.

You're welcome.

At this time, there are no further questions. Are there any closing remarks?

Yes. To conclude, I would say that we have a very strong balance sheet, our operations are profitable and we're generating cash. We have substantially grown our customer base and we have increased our addressable market. Therefore, we believe that we will emerge a lot stronger from the current weak market conditions and our revenues will follow any further market recovery closely. So thank you very much, everyone, for joining us today and we look forward to speaking to you again next quarter.

This concludes today's conference call. You may now disconnect.