科磊 (KLAC) 2003 Q2 法說會逐字稿

At this time, I would like to welcome everyone to today's 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. (CALLER INSTRUCTIONS).

I would now like to turn the call over to Ms. Jody Burfening.

Thank you, operator. Good morning. This is Jody Burfening of Lippert/Heilshorn and Associates. Welcome to ICOS Vision Systems' second-quarter 2003 earnings conference call. With me today is Antoon DeProft, President and Chief Executive Officer.

You should have all received a copy of the press release which was issued earlier today. If you have not yet received a copy, one has been posted to the Investor Relations section of the company's Website at www.ICOS.be.

Before starting the call, I would like to remind everyone 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 and 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 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 Antoon.

Yes. Thank you, Jody, and hello, everyone, and welcome to our second-quarter 2003 conference call. Let me first remind you that we started listing on the first market of Euronext Brussels during last quarter, and as a consequence, our current and our future press releases will contain a consolidated statement of cash flow. Also, let me remind you that our listing on NASDAQ Europe will end on August 15th. We will, of course, continue to list on NASDAQ and Euronext.

During the call, I will first discuss our performance during the second quarter, then I will give some financial information and comment on the outlook of our business. After that, I will be glad to take your questions, followed by some closing remarks.

Revenues for the three months ended June 30, 2003 were 9.8 million, representing an increase of approximately 5 percent over first-quarter revenues of 9.3 million, and an increase of approximately 14 percent when compared to the 8.6 million reported for the second quarter last year. Income from operations for the second quarter was 901,000 compared to an operating income of 483,000 reported over the first quarter of 2003, and an operating income of 771,000 for the second quarter one year ago. This last number was positively influenced by a one-time re-evaluation of inventory at that time.

We realized a net profit of 502,000 5 euro cents per share, compared to a net profit of 244 or 2 euro cents per share reported over the first quarter of this year, and a net loss of 607,000 or 6 euro cents per share during the second quarter of last year. We are very pleased with our performance during the quarter. With revenues up 5 percent quarter over quarter, we more than doubled our net profit from 2 to 5 cents per share. We did so despite a further decline of both dollar and yen. This shows the strength and the leverage in the ICOS model. Against the backdrop of a declining market, we now reported our seventh consecutive quarter of revenue growth, with an average quarter-over-quarter growth of 24 percent, by consistently gaining market share and by increasing our product portfolio. But the biggest reward for the hard work of all our people during the downturn has come in the form of the recognition of our customers, now including essentially all blue chip companies in our industry.

First-time buyers accounted for 14 percent of revenue in the second quarter of 2003. These customers were located primarily in Japan and the rest of Asia, 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 revenues in a weak market, and that made us the market leader in our most important market of the tray-based inspection systems.

The new products and the R&D activity, then -- throughout the downturn, we continuously kept our focus on developing new leading-edge products, as well as new technology for the next generation of products. This has led to many new customers and many new opportunities, which also has kept our R&D department extremely busy. The second quarter was no different, and the first major part of the work kept going into the tray-based products. The addressable market for these products was further expanded, as we developed inspection applications for a wider range of components, including LGA (ph) components and a variety of sockets and substrates. A second large portion of R&D effort was devoted to the newer product lines, mainly the CI-G10 for tube-based inspection and the FTI for tape-automated bonding tape inspection. Both products continue to gain market acceptance. Finally, major R&D work was spent on the continuous improvement of various products and the development us technologies for future-generation inspection equipment. The intensive R&D work during the last quarters has resulted in new product sales accounting for 40 percent of revenues in the second quarter of 2003. This number is somewhat inflated, as the transition to our latest-generation tray-based system has come to full swing, and we expect it to drop considerably next quarter, as it will move out of this statistic.

The competitive situation -- we believe we have further consolidated our market leadership position in the market for the tray-based component systems, where we are now regarded as the undisputed market leader in technology, quality and support to our customers. We have also continue to make progress in terms of market acceptance of our other product lines, such as the tube-based CI-G10 and the FTI system for the inspection of TAB tape. A VLSI market research report has reported us for the first time as the overall market leader in the semiconductor back-end inspection market over the year 2002.

Due to the continued financial difficulties of some of our major competitors, we believe that we will continue to strengthen our position in the market. On the other hand, the weakness of these traditional competitors is attracting new entries into the market, which we have to take seriously. However, we believe to be in a very good position, and can continue to build on our strengths.

The organization -- the total number of employees stood at 158 full-time equivalents (ph) at the end of June 30, slightly down from a level of 164 full-time equivalents one quarter before. We now have increased our revenues over the past seven quarters, and we believe that the leverage in our operational model will allow us to grow this revenue further substantially, with only modest additions to our organization.

The breakdown of the revenue, in terms of product lines -- it was 20 percent board-level, 16 percent system-level and 64 percent inspection machines, comparing to 19 percent, 19 percent and 62 percent one quarter ago. The inspection machines continue to be our largest product line, followed by board-level sales. We believe that the returning strength to all product lines is an indication of a continued market recovery, although we may continue to see substantial swings in product mix from quarter to quarter.

The split in geographic area during the second quarter -- the major sales volume was again realized in Asia, where we did 17 percent of our turnover in Japan and 47 percent in other countries of Asia. Further, 29 percent of our turnover was realized in Europe and 7 percent in the U.S. The strong sales in Asia were mainly fueled by our increasing sales of inspection machines, especially in Singapore, Malaysia and in Taiwan. While its normal to see relatively large variations between geographies on a quarterly basis, we continue to see strength in all areas, which points to a recovery in the broader (ph) market.

I will now turn to the financial information over the second quarter. On revenues of 9.8 million, we achieved gross margin of 56.8 percent in the second quarter, compared to a gross margin of 55.1 percent in the first quarter. Our gross margin increased during the quarter, based on the product mix, and as a consequence of our policy to invoice in euro. We believe that we will contain gross margins in the 55 to 57 percent range. R&D expenses decreased to 1.51 million, compared to 1.66 million in the previous quarter. Those expenses were influenced by the recording of 280,000 out of the total government grant of 1.1 million, which we reported in the press release earlier. We believe that the R&D expenses will continue to be in the range of 1.5 to 1.7 million for the next quarters. SG&A expenses increased slightly to 3.16 million, compared to 3 million flat in the previous quarter, mainly as a consequence of the higher expenses in relation to our first listing on Euronext and also due to the increased revenue level. We believe that the reported cost level is a good indication for expected costs in the current quarter, with the understanding that 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 second quarter was 901,000, almost double of the 483,000 that we reported for the first quarter of 2003. This doubling of the operational profit on a sales increase of less than 5 percent illustrates the leverage in our operational model. We believe that we will continue to see a strong leverage when our revenues increase further.

During the second quarter, we incurred a foreign currency exchange loss of 303,000, and we expect that the measures that we have taken to limit the effect of the foreign currency exchange fluctuations will further lessen the sensitivity to the currency valuation in the next quarter. We incurred a tax of 175,000 or approximately 26 percent of income before taxes. Consequently, we realized a net gain for the second quarter of 2003 of 502,000, more than double of the net gain of 244,000 for the first quarter of 2003. Again, we see the leverage of our operational model at work. Cash flow from operations in the quarter was positive 679,000. We further optimized our working capital and gained 1.6 million net cash from operating activities, including changes in working capital. This is the result of a further improvement of both inventory levels and accounts receivable. During the second quarter, we further used 72,000 in investing activities and 125,000 for repayment of borrowings. We did not repurchase any of our shares during the quarter.

Let's now turn to the balance sheet. We continued to have a very strong balance sheet, as our operations generated extra cash and we kept managing our working capital carefully. Cash balances stood at 29 million at the end of the second quarter, up from 27.6 million one quarter earlier. We believe that our current cash level is more than adequate for future operations. Accounts receivable decreased to 8.6 million from 9.4 million at the end of the previous quarter. Days outstanding were 79 days in the second quarter, decreasing from 90 days a quarter ago. Inventories continued to decrease to 10.7 million at the end of the second quarter, compared to an inventory level of 11.1 million at the end of the first quarter. The inventory split was 4.5 million raw materials, 4.1 million work in progress, and 2.1 million finished goods.

On the business outlook, then, throughout the downturn, ICOS has constantly concentrated on two priorities -- new product development and superior customer support. The strategy has been paying off, with seven consecutive quarters of sales growth, and we believe that also in the near future, we will continue to outpace the market. The market forecasters seem to be in agreement that the semiconductor market is poised for strong growth during the remainder of the year and into the next year. While there is quite a range of forecasts, most forecasters predict the IC markets to grow around 10 percent this year, and 20 to 25 percent next year. In the capital equipment market, this upturn will be led by the back-end segment, the market in which we are active. According to Semi (ph), the capacity utilization of the back-end semiconductor equipment was 78 percent last quarter, and is expected to increase to 85 percent this quarter. The semi book-to-bill ratio for North American based equipment suppliers supports the same picture. The bookings have now increased in every month so far this year, and the book-to-bill ratio came in at 1.19 in June. The semiconductor back-end equipment market seems to be finally catching up to compensate for the serious under-investments during the last two years. This has led Gartner Dataquest to predict a growth of 21.4 percent for back-end semiconductor equipment this year, based on accelerated growth during the second half of this year. Also, Semi has presented similar numbers and now estimates that the back-end equipment sales in 2004 will be 75 percent higher as compared to 2002. That's over a two-year period, of course.

Based on our customers' input, we indeed see a further strengthening of the market, but our short-term visibility remains somewhat limited, and our market has proven to be unpredictable in the past. From a management point of view, our priority is to be prepared to deliver quality products and support to our customers when they need it. Should the semiconductor market experience strong growth during the remainder of this year and into 2004, as industry analysts expect, we are prepared to ramp up quickly and to fully benefit from our operational leverage. Based on the current order flow, we expect to see a further revenue growth and higher profitability during the third quarter.

That concludes my comments, and I would now like to open the call for questions.

(CALLER INSTRUCTIONS). Mike Nary (ph), Nary Asset Management.

Can you talk a little bit about your share buyback program -- what you are authorized to do, if you have done any since the second quarter and what your thoughts are there?

Yes, of course. Well, thanks, Mike, for the comments. We have reported, and we will continue to report, on the activity as far as the share buyback program is concerned on the past quarter. But we don't give any comments on what our intentions are for this or next quarters. Of course, this is a mandate for the Board of Directors, and also, there has been a mandate from the Board of Directors to the management at this point. But we don't really give any specific comments as to our intentions with that program. I can, of course, repeat the general outlines that we are allowed to buy back shares up to EUR10, of course.

You mentioned that you are seeing strength in your business, as well. Is your strength similar to the numbers that you talked about in terms of what the forecasters have seen so far this year, or in terms of relative to the book-to-bill for the back end?

Yes. Well, that's a very good question. I think it's all a matter of timing. I do believe, based on the number of assessments, that indeed there is quite a bit of catch-up to do. Definitely, that has started. And also, with the capacity utilization around 80 percent, we will see more and more capacity buys. And we are, indeed, seeing them. But the vigor with which this is all going to happen -- that's more of a question mark. And it's difficult to predict exactly, because it's just going to be a hockey stick. And when is it going to happen? That's a big question mark. What we're seeing right now is more of an increase quarter by quarter, and I expect that increase, indeed, to continue over the next quarters. That's the best that we can see today. As to exact percentages, I would be more careful with that.

Can you talk a little further about what you're doing to make your company stronger now? Throughout the downturn, you focused on R&D and customer service. Are you going the same things now? Can you provide a little more detail?

Yes. Essentially, that is still the same. And there is a lot of activity going into these areas, as I indicated also during the call. And for the time being, we will not have major increases, for instance, on the R&D spending patterns, for instance, as we are first waiting for our sales to further increase. Our longer-term R&D efforts are in the 11 to 13 percent range, and we're still a little bit above that number at this point. So these are still the two major areas that we are managing on. At the same time, we also are actively looking to expand our markets, and we have taken several initiatives. I have mentioned some of them, and we believe we will continue to do so. What we are doing, or what we intend to do, is build some of our market leadership and extend this into all back-end components, whereas now we are more specialized in certain type in the tray-based components. So I would say, from a marketing point of view, historically, we have grown quite vertically here from the board-level to the system-level to the inspection machines. Over the next quarters and years, I expect us to grow more on a horizontal basis, offering more solutions and more products to our customers through the same markets.

Manoj Nadkarni, chipinvestor.com.

Can you give us more color on market share gains? In what segments are you doing well?

Well, this is quite a sensitive question, because we of course know that also the competition is listening in. And we don't give specific splits as far as the product lines, and definitely not as far as the market shares in product lines. I can't say that, when we're saying we are market leader in certain segments, then I can say that our market share, we believe, it's well above 50 percent. But making that much more specific is difficult to do.

And are you seeing demand across different types of end-users like logic chip manufacturers, DRAMs, other types of memories?

Yes. In general, the answer there is yes. And quite a lot of that actually comes through subcontractors, also, which we don't always have a very clear picture as to exactly what is the underlying pattern of customers there.

You mentioned that the semi North American book-to-bill for the back-end equipment was about one. If I may ask, if you can tell us, what was the ICOS book-to-bill for the second quarter?

Well, we don't give specific booking numbers. And I will explain -- I have done this before, but I will explain again why that is. We have the OEM product lines, and there we typically get the large, long-term orders every now and then. So you get a spike every now and then in the order, and it's quite confusing to interpret. On the other hand, the inspection machines have very short delivery times -- at this moment, around four weeks -- which means that the majority of the sales for those product lines -- actually, the bookings and shipments are in the same quarter. For those reasons, we don't provide specific data on bookings. But I can say in general, of course, that our indications for future sales are based on what we see in terms of order fills, of course.

And were there any sales in the non semiconductor market, such as TAB tape inspection, during the quarter?

Yes, but quite minimal, and -- well, we could argue, I guess, whether TAB tape would be considered a semiconductor market, yes or no.

Bob Poole (ph), Bracular Capital (ph).

My question is, what would you think, assuming a similar mix to what you have had in the recent past, if you add a dollar of revenues, how much of that would you expect to drop to the operating line on an incremental basis?

Well, you can count on the same gross margin, more or less the same operational absolute expenses, operational expenses, except with some increase for the commissions. And then you would have a tax rate which is roughly on the order of magnitude of also now in let's say the 25 to 30 percent range. So that there you have all the numbers to do the math. If you want, we can do it here quickly.

Do you think of it in terms of something on the order of, what, 35 percent drops to the bottom line?

No, that's a little bit too high. It would be more like, I believe, in the 15 to 20 percent range.

Well, let me make sure. If I'm looking at a gross margin of almost 57 percent in the quarter, if operating expenses do remain the same, how much is that selling expense as a percentage of sales?

Well, it depends on products and area --

On average, with sort of your existing mix, it would be --

In fact, we are doing the math at this point, the complete math. And indeed, you are correct -- you are coming to about 25 percent on the bottom.

At this time, there are no further questions.

All right. Then, to conclude, I would say we're confident about the future, as we believe that when the market turns up, we will fully benefit strongly from our market leadership and from the leverage of our operation model. Thank you, everyone, for joining us today, and we look forward to speaking with you again next quarter.

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

(CONFERENCE CALL CONCLUDED)