科磊 (KLAC) 2003 Q3 法說會逐字稿

Welcome to the ICOS Vision Systems third-quarter 2003 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, October 24, 2003. I would now like to turn the conference over to Jody Burfening. Please go ahead, ma'am.

Thank you, operator. Good morning, this is Jody Burfening, Lippert/Heilshorn & Associates. Thank you all for joining us today for ICOS Vision Systems third-quarter 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 anyone has not yet received a copy, a copy has been posted to the investor relations section of the Company's website at www.ICOS.be. Before starting the call I 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 a future results performance or achievements expressed or implied by such forward-looking statements. Such factors include among others as 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.

Thank you and hello everyone and welcome to our third-quarter 2003 conference call. I will first discuss our performance during this quarter and I will also give you some background acquisition of Jointech in China. Then I will give some financial information and comment on the outlook of our business, and after that I will be glad to take your questions followed by some closing remarks.

Revenues for the three months ended September 30, 2003 were 10.6 million, representing an increase of approximately 8 percent over the second-quarter revenues of 9.8 million an increase of approximately 23 percent when compared to the 8.6 million reported for the third quarter last year. Income from operations for the third quarter of 2003 was 1.4 (ph) million compared to an operating income of 901,000 reported over the second quarter of 2003. And an operating income of 106,000 for the third quarter one ago. We realized a net profit of 1.3 (ph) million or 12 euro cents per share, compared to a net profit of 502,000 or 5 euro cents per share over the second quarter and a net profit of EUR195 or 2 euro cents per share during the third quarter of 2002.

We are very happy with these results. Revenues have now grown for eight consecutive quarters as a result of ICOS continued market share gains and strengthened product offering. In addition revenue gains continued to translate into operating margin improvements on the basis of our low fixed cost manufacturing model. Operating margins have increased from 5.2 percent in the first quarter to 9.2 percent in the second and 13.3 percent in the third quarter. Likewise, earnings per share have steadily grown from 2 euro cents in the first quarter to 5 euro cents in the second and 12 in the third quarter.

New customers, the first time buyers accounted for 15 percent of revenue in the third quarter, these customers were located primarily in Japan, rest of Asia and Europe and were customers for OEM product as well as for inspection machines. We continue to gather new customers in several areas and for several products indicating our strength and market leadership.

New products, our R&D activities remained intensive in support of our growing product offering and customer bases. A major part of our developments went into the continued development of the FTI product for which we have announced our first large order of EUR2.6 million last week. And for which we expect additional orders in the coming weeks. Second important portion of the development efforts went in the expansion of the features of our trade base products to expand the addressable market into applications such as the new processors and their sockets, as well as other connector and substrate inspections.

Finally, major R&D work was spent on the continued improvement of various products. And on the development of technologies for further generation inspection equipment. Sales of new products in the third quarter account for 6 percent of revenues. The competitive situation, we believe that we continue to strengthen our market leadership positioning in the market in terms of level of technology, product quality and customer support. I would like to specifically mention the FTI product, with the first large order for this product and with more orders expected, we believe to be leading this emerging market segment where human inspection if gradually replaced by automated inspection. Mainly driven by flat-panel displays in lap tops, desk tops and television sets, we believe that the market for TAB and COS tape will double by 2006 to a total of 5.5 billion units.

The organization, the total number of employees stood at 162 full-time equivalents at the end of September, slightly up from the number of 158 full-time equivalents at the end of the second quarter. We have now increased our revenues over the past eight quarters and we believe that the leverage in our operation model will allow us to grow this revenue further with only modest additions to our organization.

Revenue breakdown for product line, the third quarter of 2003 revenue breakdown was 8 percent board level, 15 percent system level and 77 percent inspection machines. This compares to 20 percent, 16 percent and 64 percent for the second quarter of 2003. The strongest growth during the quarter was realized in our inspection machines driven by a strengthening market recovery. However, we expect to continue to see swings in the product mix from quarter to quarter.

Revenue breakdown for geographic area, during the third quarter of this year the major sales volume was again realized in Asia, where we did 27 percent of our turnover in Japan, and 48 percent in the other countries of Asia. Further 19 percent of our turnover was realized in Europe and 6 percent in the U.S. In general, the recovery of the market was nicely spread geographically but Japan posted a particularly strong growth.

Before we move on to the financial information, I would like to give you now some additional background on our pending acquisition of Jointech in China. After this acquisition will be concluded, ICOS China as we will rename it will perform a final assembly and quality control and will control a large network of subassembly and part manufacture in China. With this acquisition we will increase our ability to expand our production capacity as demand increases during the up cycle of the semiconductor market. The basic premise behind the acquisition is of a strategic nature. To execute our new growth strategy and I would like to give you some background on that.

Between roughly 1993 and 2000 our growth strategy was mainly based on vertical integration. ICOS started out as a supplier of the heart of the inspection system being the board level OEM products. Then we added cameras and elimination systems and added the chassis and PC and introduced the system level OEM products. Finally, we added mechanics to handle and sort the components and offered our first inspection machine. By offering more complete systems, we added more value for our customers and the contribution per system rose. This growing contribution has been a major driver behind our growth in the period 1993 to 2000. These inspection machines have also given us access to the end users and allowed us to build up an excellent reputation amongst the chip manufacturers. During this whole period, but especially since 2001, we have rapidly gained market share and this market share growth has been the second contributor to our recent growth. This has allowed us to continue to grow in a declining market and has made us the market leader.

Now, since last year we have entered again a new phase in our growth strategy by leveraging a reputation and offering more products to our end users for the inspection and finishing of other semiconductor devices. In fact, our customers often play an active role in this themselves by sharing their roadmaps with us and asking us to offer additional inspection machines with the same technical advancements and support which they have come to appreciate from us. To implement the strategy ICOS has set up a mechanical design center in Hong Kong last year and today the acquisition of Jointech is a new and important step in the implementation of this new growth strategy. Both the mechanical design center in Hong Kong and the manufacturing in China will work very closely together and will help us to expand our product offering and to serve our customers better.

Then the financial information, on revenues of 10.6 million we achieved a gross margin of 56.8 percent in the third quarter which is identical to the gross margin of the previous quarter. The gross margin may vary from quarter to quarter based on the product mix that we believe that our gross margins will slightly increase to a range of 56 to 58 percent in the fourth quarter and 57 to 59 percent in 2004.

R&D expenses increased slightly to 1.55 million compared to 1.61 million in the previous quarter. These expenses were influenced by the recording of 111,000 of government grant. We believe the R&D expenses will continue to be in a range of 1.5 to 1.6 million. SG&A expenses decreased to 3.05 million compared to 3.16 million in the previous quarter. Mainly because the previous quarter contained onetime expenses related to our initial listing on Euronext. Apart from the effect of the sales commissions which depend on the overall sales level and the solid area mix we believe that the current SG&A costs is a good guidance for the next quarter. The income from operations for the third quarter was 1.4 (ph) million, almost 56 percent higher than the 901,000 reported in the previous quarter. We believe it will continue to see a strong leverage in our operational profit when our revenues increase further.

During this third-quarter of 2003, we recorded a foreign currency exchange gain of 90,000. This is the first quarter in which all of the measures that we have taken to limit the effect of the foreign currency exchange fluctuations were in full effect and therefore the sensitivity to the currency valuations in this quarter is limited. We incurred a tax of 262,000 or approximately 17 percent of income before tax, as a consequence of the tax area mix. We realized the net gain for the third quarter of 2003 of 1.3 million, more than double of the net gain of 502,000 for the second quarter.

Cash flow from operations in the quarter was positive at 1.5 million; this resulted in 600,000 net cash from operating activities including changes in working capital. During the third quarter of 2003, we used 31,000 investing activities and 126,000 for repayment of borrowings. We did not repurchase any of our shares during the quarter. As a consequence of the stock option plan that was initiated in 2002, we have started to report diluted earnings and diluted weighted average of numbers of shares. I would like to point out that the number of options under the plan is fixed but that the reported diluted number of shares according to U.S. GAAP may vary from quarter to quarter as the stock price varies.

Now turn to the balance sheet, we continue to have a very strong balance sheet as our operations generated extra cash, and we remained tight control of our working capital. Cash balances stood at 29.4 million at the end of the third quarter up from 29 million one quarter earlier. We believe our current cash level is more than adequate for future operations.

Accounts Receivable increased to 9.6 million from 8.6 million at the end of the previous quarter. Days outstanding were 81 days in the third quarter, up slightly from the 79 days in the second quarter. Inventories continued to decrease to 10.3 million at the end of the third quarter compared to an inventory level of 10.7 million at the end of the second quarter. The inventory split was 4.1 million raw materials, 4.3 million work in progress and 1.9 million finished goods.

In the business outlook, when we look ahead we see growing evidence that the semiconductor industry is entering an up cycle. Particularly in the back end. Our visibility has definitely improved over the last two months, order intake is increasing and includes sizable orders for capacity expansion. And our customers are giving us positive indications of renewed spending into 2004. For all these reasons we expect to further substantial growth of our top and bottom line in the fourth quarter both sequentially and year-over-year. We also expect that the favorable top and bottom-line comparisons will continue in 2004.

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

(OPERATOR INSTRUCTIONS) Gaetan Van Der Bruggen with Petercam.

I would like to know if you can give me the total number of customers you now have for the new products the CI-G10, the FTI, and (indiscernible) if it's possible?

Thanks for the compliments but I'm afraid I am going to have to disappoint you on this question because we don't give specific information broken down per product line as this information would be too sensitive for competitive reasons.

The number of customers?

No, sorry.

Okay, then if I may on the working capital side, how do you believe that working capital will evolve into next year, when you will probably have to invest more in working capital?

Yes, the Accounts Receivable will of course grow as the revenue grows, but the target is to keep that under 90 days. The inventory will, we don't expect a large impact on the inventory over the next quarter, and then Accounts Payable will also move according to the sales level.

Okay.

Philip Roches (ph) with (indiscernible).

I have the few questions. Could you comment on the strength of your ordering (indiscernible) by geographical region and by type of product? Then could you give an indication of the tax level you expect for the next quarter and for 2004? And finally, given the facts that the share price is now above the limit for the share buyback plan; do you have other plans for your cash?

I'm sorry; we were just taking notes trying to remember all your questions. Your first question was on the geographical split of the order intake. There we have to say that the geographic split is quite, you know that we don't give specific numbers on order intake but I can tell you that the order intake is quite strong in general. And also fairly well spread over the different areas and the different types of products. This is totally different from the situation that we have that we had last year. For instance in the second quarter we had a quite strong moment in the market but that was quite limited in terms of products and in terms of geographical spread. At this moment we see that it's really quite broad based effect where all areas and all products are really gaining momentum. As far as the -- I think your second question was regarding the tax level. Indeed that can depend from quarter to quarter based on the tax area mix. I think going forward the better guidance would be around 25 percent for the tax. And then your last question was regarding the share buyback program.

And the use of your cash --

The share price has gone above 10 euro and the limits for repurchase of the stock was up to 10 euros. But in fact we believe that we have to remain quite good amount of cash in an industry which after all remains cyclical, but also we have some other plans, we believe we have good ideas what to do with the cash but we will make announcements when appropriate.

Thank you.

Mike Mary with Nary Asset Management.

Excellent results again. A couple of questions, the tax rates going forward, the 25 percent, is that good for next year as well?

Yes, that is the general guidance that we will go into next year as well, yes.

You gave a lot of information about the FTI market which is fantastic, and I appreciate that as an investor. When you talk about the market being 5.5 billion units and you shipped about EUR2.5's worth of equipment, how many of those units would the equipment you shipped inspect? I mean is EUR2.5 million enough to inspect 10 percent of the market, or 50 percent of the market, or roughly how big is a 5.5 billion unit market?

I do agree with you that we gave quite a bit of information because we believe it's important to inform our investors well. But also that means that going much more specific than that would be would become very sensitive, as we also have to realize that the competition is listening so to speak. So I cannot -- because this kind of questions would refer to what is the UPH of these systems and so unfortunately we cannot comment on. But while this is the first order and we expect more orders. and that gives you a feel that we are indeed talking about a substantial market, but also the total size and the timing of the market eventually will depend on the wait with which the transition from human inspection to automated inspection will take place.

Up until now it's been almost 100 percent human inspected, is that correct?

That is correct. We believe that for the first time now we or anybody else for that matter has brought the state-of-the-art to such a level where indeed it becomes economical and in fact it even improves the quality of the product by implementing this automated inspection.

And last question, a large reason why you have been able to generate such good margins and returns on capital over the years is because of your low fixed cost business model which you talk about. Is that going to change with the Chinese manufacturing and the design center in Hong Kong and your other plans for cash?

No, not really. The design center is part of R&D and R&D is an important part of our organization. If you look at the fixed cost they are mainly based out of R&D and support which is SG&A, that's really two very important parts. And that's already in the numbers as you see them here. The acquisition of the manufacturing facility in China will also not materially affect it, because our philosophy of manufacturing will remain exactly identical in the sense that we control the output of the products and we control the quality but also we want to have a good control over the whole network. In China we've opted that it's best to do that with having what always owning what we would call the top of the iceberg, because that gives us better control that allows us to ramp up and down more quickly, that allows us to control the quality better as well. But still the same idea of low fixed costs and the costs that we are talking about here are not of such a nature that they would change this set up.

Thank you.

Manoj Nadkarni with Chipinvestor.com.

Congratulations on outstanding results. From a different end market for semiconductors like microprocessors, flash memory, (indiscernible) DSB's, etc., where are you seeing the most growth for ICOS (indiscernible) systems, can you give us some color?

We are doing the final outgoing inspection of the parts which means that the electrical content of the part doesn't matter for us. We are inspecting the high-end processors, as well as the memory, as well as the fairly benign smaller chips so to speak. So that question and since we have a very good market coverage and we are selling basically to all the IDM's and the subcontractors, our sales is very good combination of everything that's going on in the market. Which means that answering this question is really answering where the, what the general market of the ICs is doing. And I think well maybe you are even in a better position to answer that but we definitely see a lot of growth in the wireless. I also have to say that for instance subcontracters, one major part of our customers; we don't always have a very good view on exactly what the end application is there. That all being said, wireless is definitely important, but also the consumer market, and then more recently we see more and more signs of the PC market getting healthier and recovering. I guess that gives you a little bit of color on the drivers.

As your business improves, are there any capacity concerns or any supply chain limitations?

Definitely not as of yet. We have in fact prepared for this, and so at this moment, in fact we've been preaching that the market would rebound and would maybe rebound strongly at one point in time. We had a little bit of a general reversal at one point last year, but as you know the market went away quickly then. So we've definitely had ample time and also ample cash resources to prepare for that. So we believe we are well prepared and for the foreseeable future we don't see capacity concerns as of yet. Of course, while it all depends on what the market will do, but this is one of the major focuses of management now to consistently watch capacity. And to make sure that we have plan A, B, and C for all the different scenarios because one thing we've learned that this market is very difficult to predict, of course.

You have existing capacity, is it fair to say that it could support another 30 to 50 percent growth?

Oh, yes. Yes.

We saw that your account receivables increased. Was that due to increase in sales to Japanese companies?

Well, it is due to increased sales in general. If you look at the days outstanding they are virtually flat, they went up from 79 to 81 days and that's well within our target of 90 days.

Would you like to comment on how you are doing in the bumped (ph) wafer inspection area?

Well, as I said before we really don't give specific information for product as the competition is really listening in. So we don't give that kind of information unfortunately.

Okay, well again, congratulations.

Thank you very much.

(OPERATOR INSTRUCTIONS) Jerome (indiscernible) with KBC Securities.

I got two questions, could you quantify a little bit second (indiscernible) sales growth to expect from Q4 (indiscernible) and also for next year? And do you have an idea of your current market share for inspection tools?

I have to admit I missed some important words in your first questions and I really didn't understand it, so could you repeat please?

Could you quantify a little bit the sales growth you expect for 4Q and for next year?

So we have given you the general trends; we see that it is improving nicely. I would say the general indication I could tell you that the sequential growth that we saw this quarter is a quite good indication for next quarter. We believe that it will be in the same order, maybe even slightly higher. But that is a good guidance. Which also would bring you on the year to year basis in the general order of about 35 percent growth. But, of course, you know giving exact numbers quarter per quarter is always difficult, but that definitely gives you a general idea.

On the current market share, you know also calculating market share is more an art than a science I would say because it really depends on how what you include and what you do not include. But it's at this point for the high end products for instance, the trade based products, the market share is quite high. We definitely are above 50 percent there.

Is it safe to assume that you are still gaining market share right now?

Yes, but in the some of the products we are, the market share or the market share level, that growth is becoming less important, I would say there is a limit to that. So the market share growth comes more in other products, newer products that are gaining market acceptance and market share.

Thank you very much and once again congratulations on your quarter.

Gaetan Van Der Bruggen with Petercam.

You mentioned that first-time buyers which is (technical difficulty) percent of your revenues in Q3, could you indicate how many customers were that and over the full year 2003 how many new customers have you signed in?

It is several customers but also especially if you ask that number for the whole year we really wouldn't have that number on the top of our head. For the third quarter its several customers, let's say half a dozen or so are the most important chunks. But if you like to have more detail for the year we really have to look that up and I suggest you would maybe give us a call afterwards.

Gross margin, you used to be somewhat more conservative concerning gross margin being (indiscernible) around 55 percent. (indiscernible) you are now guiding into next year towards higher gross margin. While component inspectors, the stand-alone machines are becoming bigger in your product mix and you used to think they were bearing lower gross margin. Does it mean the gross margins you have on the newest products they are higher gross margin? Would that be a fair assumption to make?

I'm not too sure about that. Going towards the fourth quarter, we have indeed, we expect the product mix and both the gain in product mix and manufacturing efficiencies. If you look at the product mix of this quarter you also see that it was quite low on the board level. So it's a little bit more complex than just saying its new products that will do so. Going into next year, it's also more on the manufacturing side. But in general, of course, it's a fact and it's true that newer products and more advanced products typically have higher margins than some lower added value products. That's correct. But in general, I think we can say that all of our products are high added value and have good margins.

On your competition because it has always say it is very difficult to assess market share data. Would it be fair to say that your competition -- actually where do you see competition? More in Asia or is it also in the U.S. that you see this competition?

I have to say that if there is no competition there is no market. So we continue to see competition. And then you see competition everywhere, especially when a market is growing or when some players become weak in a market that attracts also newcomers. So that is only a very natural process. So I think -- also I mean we would never guide for a situation or a market where there is no competition, because I think that would be fooling ourselves and fooling all our investors at the same time. I think we have to be realistic and realize there will always be competition. I think the good part is that we from a technology point of view, from a product portfolio point of view and an organization point of view; we are in a very strong position. We have the ball and it's ours to drop so to speak is our feeling now. So we can work from our strength, make sure we continue to provide high-quality products and good support to our customers. And then we don't have to fear anybody so to speak.

You feel that competition is more local, more local players than perhaps less product offering than you have?

Yes, that's part of the competition but it's not the only one, but yes that is indeed part of competition or sometimes local players that are really making specific machines for a few local customers. That is part of the competition landscape, yes.

Thank you.

There are no further questions at this time. Please proceed with your presentation or any closing remarks.

To conclude I would just like to say that we are confident about the future as we believe the up cycle in the market has started, and that we will fully benefit from the leverage in our operational model. Then I would like to thank everyone for joining us today, and we are looking forward to speaking with you again next quarter.

That concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.