科磊 (KLAC) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the ICOS Vision Systems Third Quarter 2004 Earning Conference Call. At this time our participant are in a listen-only mode. Following management's prepared remarks will hold a Q&A session. To ask a question please press "*", followed by "1" on your touchtone phone. If anyone has difficulty hearing the conference please press "*","0" for operator assistance. As a remainder this conference is been recorded today, October 28, 2004. I would now like to turn the conference over to Ms. Jody Burfening. Please go ahead ma'am.

Thank you, operator and welcome everyone to ICOS Vision Systems third quarter 2004 earnings conference call. With me today is Anton De Proft, President and Chief Executive Officer. You should have all received a copy of the press release that was issued earlier today. If you have not yet received a copy, one has been posted to the Investor Relation section of the Company's website at www.icos.be.

Before starting the call I would 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 report filed with the Securities and Exchange Commission. With that I would now like to turn the call over to Anton. Good morning Anton.

Yes, good morning Jody and thank you for the introduction, so I would like to welcome all the rest of you on the phone and welcome you to the third quarter 2004 conference call. I will start by discussing our performance during the third quarter then I will comment on the outlook of our business and after that I would be glad to take your questions followed by some closing remarks.

Revenue for the three months ended September 30, were 24.7 million euro, a sequential decrease of 9.5% over the second quarter of 2004. Revenues of 27.3 million and an increase of 233% over the prior year third quarter revenues of 10.6 million.

Income from operations for the third quarter of 2004 were 8.3 million euro, sequentially down 13% from the operating income of 9.6 million for the second quarter and approximately six times up from the 1.4 million for the third quarter of 2003. The net income for the third quarter of 2004 was 5.8 million euro or 55 euro cents per share compared to a net income of 6.7 million euro or 64 euro cents per share for the second quarter and compared to a net income of 1.3 million euro or 12 euro cents per share during the third quarter of 2003.

For the nine month period ending September 30, revenues were 73 million, almost 2.5 times up from the 29.7 million for the same period in 2003. Income from operations was 24.2 million, over eight times at 2.8 million for the same period last year and the net income was 17.1 million or 1.62 euro per share also over eight times up compared to a net income of 2 million or 19 euro cents per share for the first nine months of 2003.

Despite an expected sequential revenue decrease we are happy with our performance over the third quarter. Our revenue mix further diversified and we have been able to limit our revenue decrease with respect the overall market decrease. Further, our flexible operational model enabled our margins to come in at a higher end of our guidance, our operating margin a key performance measure remained strong at 34%.

Finally, careful working capital management helped to generate 9.4 million in cash during quarter, which impacted all time high. Over the first nine months, we believe that our performance can be best illustrated with our stockholders equity, which increased 32% to 71 million or by the trailing fourth quarter return on equity of 33%.

In previous quarters our flexible operational model has allowed us to grow up to 40% sequentially without extending delivery time. In the past quarter we saw an equally important aspect of our operational model as it is now allowing us to control our working capital closing. In fact we managed to lower our inventory in the same quarter in which our revenues dropped for the first time after a period of rapid expansion.

New customers accounted for 7% of revenues during the quarter, those customers were mainly located in South-east Asia and to a lesser degree in the U.S. and Europe and were mainly buying our component inspector and to a lesser degree, solar cell inspection systems.

New product sales accounted for approximately 9% in the third quarter of 2004. Our R&D activities remained intensive and were expanded slightly especially in support of our new wafer inspection business. This product line remains perfectly on track with our earlier indication. We have several orders for this product line from both inside and outside the Siemens family of companies. The first new systems are been installed as we speak and we are on track to generate the first revenue during the current quarter. But more importantly this product also remains on track towards a more substantial ramp up next year. The R&D activities on this product are intensive and concentrate on combining the Siemens and ICOS technology in to a superior product for several applicants.

Further, we are finishing off our clean room and will start the first production batch in our new production facilities during the current quarter. Further, major portion of our R&D activities concentrated on supporting our growing customer base and product liner. A product by the component inspector, FTI, G10 and solar cell all were further enhanced and expanded. Finally, but not less important, our engineers have spend a considerable amount of their time and energy on developing inspection metrology system of the next generation.

The competitive situation as our product portfolio expanse [inaudible] our group of our competitors. For certain products like our component inspector or FTI, we are market leader but for others like G10 or wafer inspector we are of course encountering players that have been much longer active than us. However, we do feel that our excellent technology and products especially in terms of advanced inspection capability in combination with our strong sales and support network and our flexible operational model put us in a strong competitive position. In other words, we can concentrate on our customers need and on delivering products and services to meet those needs.

The organization, the total number of employees stood at 267 full-time equivalent at the end of the third quarter, up from a level of 251 at the end of the second quarter of 2004. During the quarter we have added staff to strengthen our organization, about half of the staff addition happened in China as the activities in China further expand. The rest of the additions were quite well spread over different areas and departments. As indicated about another important part of our attention is going into the further strengthening of our R&D team to carry the wafer inspection business.

Then the revenue breakdown for product line was 13% board level, 11% system level and 76% inspection machines; this compares to 9%, 15% and 76% in the second quarter of 2004.

While we don't breakdown our sales into the individual products, it is worth mentioning that we saw a shift in the product mix for inspection machines. In fact we were able to defend ourselves quite well against a rather steep market declining during the quarter, by selling a broader mix of products. If we hadn’t been able to do so our sales would have [tracked] the market decline more closely and would have dropped more significantly.

Revenue breakdown for geography during the third quarter, the major sales volume was again realized in Asia; where we did 76% of our turnover of which 38% in Japan. Further, 21% of our turnover was realized in Europe and 3% in the U.S. Especially Japan performed very strong during the quarter with 38% of overall sales. We are the market leader in Japan and we believe that this is significant as Japan is a key driver in consumer electronic, a leading area in driving up quality; both trends being key drivers for our Company.

Then the financial information on revenues of 24.7 million, we achieved gross margin of 61.3% in the third quarter compared to a gross margin of 61.6% in the previous quarter. For the running quarter we expect our gross margins to remain approximately steady in the 60-62% range.

R&D expenses increased to 2.4 million compared to 2.2 million in the previous quarter, mainly as we are executing the transition of the 2D wafer inspection technology from Siemens towards ICOS. We expect R&D cost to remain in the range of 2.3-2.5 million in the next quarter.

SG&A expenses decreased to 4.5 million compared to 5 million flat in the previous quarter, mainly as a consequence of the lower sales level, leading to a lower -- level of commissions and other costs. Included in the SG&A cost for the first time is the amortization of the intellectual property that we acquired from Siemens amounting to approximately 300,000 euros. We believe that the current SG&A cost is a good guidance for the next quarter, taking in to account, of course, that the commissions will continue to vary with varying sales levels.

The income from operations for the third quarter was 8.3 million, down 13% from the 9.6 million reported in the previous quarter. Our operating margin remained strong at the level of 34%, slightly down from 35% in the second quarter. In fact without the affect of the amortization of the Siemens IP assets our operational margin would have remained stable at 35%.

During the third quarter of 2004, we incurred a foreign currency exchange loss of 161,000 and we expect currency exchange affects to remain relatively limited in the near future. We incurred a tax of 2.5 million or approximately 30% of income before taxes. Our tax rate decreased slightly as a consequence of the tax base mix. We expect our tax rate to remain in the same rang during the next quarter.

Consequently we realized the net gain for the third quarter 5.8 million or basic earnings per share of 55 euro cents. Cash flow from operations in the quarter was positive at 7.9 million; the net cash flow from operations including changes in working capital amounted to 9.4 million. During the third quarter of 2004 we used 500,000 in investing activities including the investments in our headquarter buildings and we spent 134,000 for financing activities.

As for the remainder of the year, we expected investment of approximately 600,000 for the final investment in our headquarter buildings including the setting up of a clean room area for the production of our wafer inspection product.

So we turn now to the balance sheet and where we continue to have a very strong balance sheet as our operation generated extra cash and we continue to manage our working capital carefully. Cash balances stood at 40.1 million at the end of the third quarter, up from 31.5 million one quarter earlier. Due to closed working capital management, we managed to generate 9.4 million of cash from our operations which, is the highest amount ever. Consequently we believe that our current cash level is more than adequate for our future operations and to finance further possible acquisition opportunities.

Accounts receivable decreased to 21.9 million from 23.2 million at the end of the previous quarter. Days outstanding were at 80 days in the third quarter, up from 76 days in the second quarter of 2004. Inventories decreased to 7.5 -- 17.5 million at the end of third quarter, compared to an inventory level of 18 million at the end of the second quarter. As indicated the above we believe that this inventory decrease is a good indication of the flexibility of our operational model, which allows to us ramp up quickly in periods of rapid growth but also allows us to control our working capital closely when the market retreat. The inventory split was 6 million in raw materials; 8 million work-in-progress and 3.5 million finished goods.

So then the business outlook consistent with industry trends, we have seen evidence of substantial market softening. The North American book-to-bill ratio as an example for just an assembly equipment has dropped quickly over the last few months and has been the low priority during the whole third quarter. From a value of 1.10 in June, the book-to-bill number dropped to preliminary 0.64 in September. Also numerous semiconductor and semiconductor equipment companies have reviewed their guidance down during the quarter and several market researchers have lowered their semiconductor market forecast.

Looking ahead to predict demand is therefore, a more delicate method with visibility very limited and clear signs of a short-term market retreat. During the third quarter we have been able to counter the market retreat with an increasingly diversified product sales mix. However, assuming that market conditions remained equally soft during the remainder of the year, we would expect that our sales in the fourth quarter would sequentially decrease by perhaps as much as 20-30% which would still, in fact represent a 15-30% increase over one year ago.

In fact at this point I would like to take you back to our first quarter conference call at the end of April, back then we had just reported on two quarters with very strong sequential growth and guided towards an additional quarter of strong sequential growth. However at that moment back in April, I warned for extrapolation and gave a very early indication of a less second half year.

Well at this moment I would also like again to warn for extrapolation. Without any doubt, the market for assembly and test equipment has retreated rather strongly in the third quarter and we expected to continue to retreat into fourth quarter. However, looking into the beginning of next year while our delivery times are just a few weeks and our visibility is therefore very limited. We do see some evidence that our markets will not decline further, that will move into a more sideways pattern.

So let's now return to the guidance for the fourth quarter and based on the gross margin and cost evolutions that we discussed before; we currently expect our operating margins to remain in the mid 20s, but could in fact vary anywhere from 20% to 30% if you take the extreme numbers.

I would like then to finish off by repeating what I said numerous times. From a management point of view our interest is in fact not so much to predict the short-term market evolutions but to constantly optimize our flexibility and to grow our business by introducing strong new products. I believe that the evolutions of our gross margin and working capital especially inventory are ample evidence of the flexibility in our operation model. Then looking a little bit more deeply in the revenue line for the second half of the year; I also noted that about one quarter of the revenues come from product that did not meaningfully contributed to our sales one year ago. And finally, we are on track for our -- with our wafer inspector product and expect this product for the ramp up next year. So for all these reasons we are confident about the future and we believe that regardless of near-term market weakness; we are well-positioned to deliver long-term growth that out paces the market and to create long-term value for our investors.

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

Ladies and gentlemen if you wish to register a question for today's Q&A session you will need to press "*" then the number "1" on your telephone. You will hear a prompt to acknowledge your request. If your question has been answered and you wish to withdraw your poling request, you may do so by pressing "*" then the number "2". If you are using a speakerphone please pick up your handset before entering your request. Again we ask to if you had press "*", "1" to ask a question before this time, please press it once more to ensure your entrance for queue; one moment please for the first question. Our first question comes from Jerry Fleming with WR Hambrecht.

Thank and nice results and -- I wonder if you could give us a little bit of a qualitative feel for which product within the inspection area were picking up the slack in the quarter and the new products that are contributing?

Okay well thank you Jerry for the comments. In fact you know that we don't break down into really individual product lines, but when I am talking about the group of products that did not contribute meaningfully last year then I am talking about the FTI flexible tape inspection the G10, the solar cell and the wafer inspection products, of course, the wafer inspection [tests] -- contributed all in Q3, So but it’s the combination of the other product of which in fact FTI is the largest one of the three contributing.

Okay and in terms of the wafer inspection product you mentioned that we could have revenues in the current quarter, are those initial ones coming from Siemens or are you going to have third-party revenues as well?

Well this could be third party revenues.

Okay thank you.

Thank you.

Our next question comes from Gaëtan van der Bruggen with Petercam.

Gaëtan van der Bruggen: Yes, hello my first question -- when you shipped your first wafering sector with two -- Siemens technology integrate into and -- kind then you correctly to the combined victory the technology?

So we -- in fact the first system has shipped is being installed as we speak that is a system doing 2D inspection; the 3D, as we also indicated earlier, is we will integrate that in the course of next year, so that's something that you should expect sometime during the course of next year as a product introduction and this moment we are talking about a 2-dimensional inspection system and so the first shipment to customers has had happened.

Gaëtan van der Bruggen: And I mean -- do you plan to integrate the entry fee as one of the competitors has announced recently, one tool in the industry, do you expect to combine those technologies and how do you prove your projects compared to the competition in the market?

Well that the second question; I am going to start out by saying that of course I am biased but we do believe that our technology is very strong. And we believe that both in 2D and in 3D but also in handling, in alignment, in the whole envelope of things that you need to make a competitive product; we believe that our technology and this product is very strong. So we will be combining that into one product it will indeed be organized in such a way that you can have both combined in one system, yes.

Gaëtan van der Bruggen: Okay then two additional questions. [Refuse] from the U.S. are lower and are suffering actually from the beginning of the year, probably more than in any other area. Is it due to the fact, that -- I mean you locate your revenues where you shipped?

That is correct; where orders are placed and shipments are made that's, of course, where the sales are accounted for, that’s correct.

Gaëtan van der Bruggen: Okay and final question you generated a lot of cash in Q3 where do you see cash generation in fourth quarter taking into account the guidance you are giving and where do you see for example inventories going into fourth quarter?

While these are quite detailed questions -- on Q4 already. The general trend is, of course, that as the market retreats, what we expect it will do, that, well we will of course, control our working capital so that means we will control our inventory. Of course, after a series of rapid growth you have also while -- you have tried to build up your capacity and your inventory; so it's quite a job to keep that inventory under control. So I would say well probably rather flattish -- we will see -- I mean we really haven't done that exercise into a lot of detail yet. We are quite confident that they will not like it for instance did in 2000 -- in the year 2000 and it will continue to over shoot; we are quite clear and you saw an early indication of that already in this quarter, that our inventory will not do so. Normally also the cash generation should be healthy as you recover working capital -- especially accounts receivable are being collected. But we don't have -- I don't have here quantitative numbers on that with me.

Gaëtan van der Bruggen: Okay thank you very much.

Thank you.

Again ladies and gentlemen "*" then the number "1" for any question or comments at this time. Our next question comes from [inaudible] with One Investment.

Good afternoon everyone and just two questions, probably follow-up of the previous question. In the need of 25 and I am trying to forecast 2005 on your new product the 2D and the 3D, the one that -- that the 2D, which is starting to shipping now and the 3D that you will ship in the quarter 2005, what kind of sales level do you think it's correct to start to penciling our prices. That will be my first question. The second question is I understand that or I presume that some of the cash generated is fantastic. Cash generation that you had in the quarter was due to the this low down of the business, which wasn't obviously helping collecting receivable more than making new receivable, if one has to try to understand what is the correct, what kind of sustainable cash conversion or free cash flow one can workout in the quarter; for every quarter, would it be correct to say to take half of that cash flow as [endemic] and the other half as dependent through the acceleration or deceleration of the business?

That’s -- it's difficult to answer, I think well it's best then to look historically I would say at the operating profit and the net profit evolution and then, of course, well also in our cash flow statements you can see what the collections in terms of accounts receivable inventory [inaudible]. So I think I would answer to question that the more sustainable generation would, of course, come from your net profit so -- then the other question that you asked -- filling out your spreadsheet for the sales levels in 2005, well, you know, lastly this is a new product so this year it's almost not contributing to sales at all, so you have to be a little bit realistic as to how much you put in your spreadsheet, I am not going to give you the number by the way but just -- to be little bit realistic from where you can get from zero in one year. We believe we are quite well equipped in terms of the production over at least setting everything up and we feel we will be ready also in terms of customers we have to say that we will start with certain segments in the market and then add -- like I gave the 3D example, as an example, that we will introduce latter during the year, but also other applications -- so this will be something that you can expect from us in fact several introduction of this product or versions of the product during the course of next year. So we believe it's going to be substantial addition to our revenue next year, but you have to be realistic where you can get from zero; and that’s the point I want to make here. Yeah, I hope that answers your question.

I was hoping for a quantitative answer. I will go home with my [substantial], but thank you.

Yeah I got, I can imagine you were hoping for that but -- no I mean that would really -- in fact we don't even normally report on the breakdown or we don't report on the breakdown of our product, so doing that then in a forecast measure for a period that’s a six months and more away that would be really a quite a bit, little bit too much of a quantitative number for us.

Okay, thank you, can you also comment on operational leverage. We have seen in these quarter that despite the -- the sequential slow down in sale; the profitability remained at the higher level, is that because of flexibility in production and high recourse to standard production or there is something that’s extraordinary that we are missing?

No, there is something extraordinary that you are missing; indeed the gross margins in general are very stable because of the operational model and the out sourcing model that we are using so that is the main reason why the gross margin remains very stable and therefore, also well also the operational leverage remains relatively stable.

Good, thank you very much.

Thank you.

Our next question comes from Marry Brexy (phonetic) with CIBC World Market (phonetic).

Good morning gentlemen, thank you for the detail that you provided during your introductory remarks. I guess my questions kind of are tied into the prior questions. You said that wafer inspection, of course, is going to start contributing a substantial more amount of revenues as we go into '05, does that also mean that the gross margin -- we can expect the margin to also feel a positive impact in '05, I am under the assumption and you know, please tell me if I am wrong that, these are wafer inspection systems carry a higher margin.

I guess, I have to disappoint you on that Marry, because in fact our margins are quite higher, if you -- I am sure you noticed. If you compare our margins now they are I think the highest in the industry even if you compare them to wafer inspection product, as for instance, you compare our margin to [inaudible], so these kind of companies, we are higher. But in fact the margins are very similar to our current products so we don't believe that there will be a substantial impact either way on our margins.

Alright, great. I understand, -- oh yes and I want to compliment you on your high gross margins as well. The second question I had was, I hoping if you kind of give a little bit more detail on the geographic breakout as we going to the fourth quarter and may be even looking at into first quarter of '05. Do you see Japan continuing to make up, you know, the high percentage 38% of total sales or do you see Japan starting to [fly] back as we move into 4Q and 1Q, do you have on that level visibility at this point?

Just one second for that. Well we were looking for more exact numbers in -- Japan is strong at this moment and it will remain strong although it may taper up a little bit -- because, of course, 38 is quite extreme number.

Okay great.

So but it is going to remain substantial over the next quarters, that is correct and may be I should add a comment to that, one of the biggest trend in our industry is in fact the transition from a computer PC eccentric markets towards a consumer market where now less than one and two chips in fact end up in computers and that has a lot of consequences, it drives up the quality and quality need especially in applications like automobile and also it drives up quantity, of course, in numerous consumer applications. Now Japan in both of these is very important driving factor of course its still one of the main areas in terms of development for consumer products, and consumer product -- electronic, consumer electronics and also it's a very quality conscious country, where for instance the automobiles but also other industries are taking a lead and are driving up quality to the level of quality that they need for their applications, which in fact is higher than a PC, which leads a very easy life, it doesn't go out on the streets and it doesn't get bumped around and things like that.

Great. Alright, great, thank you so much.

Thank you.

Again ladies and gentlemen's, "*", "1" for any questions or comments. Our next question comes from Philip Mitchell (phonetic) with KBC.

Yeah Good afternoon, Eloper Charles (phonetic) from KBC Securities. I have two questions as I joined late the conference may be this has been already answered and I apologize for that. The first one is on wafer inspection systems. Could you please state how many customers are interested in those systems; we are talking of one or two customers or a boarder possible line of customers? And the second question is, as we enter into a quarter with a significant slow down, is there a risk of inventory write-down as what occurred in the previous downturn?

Okay, well I don't know which comments you heard or missed on the wafer inspector, I did make the comment that we are having orders, and in fact, well, from both the Siemens group of companies and other companies not belonging to this group. I have also commented that the first installations are actually going on at this moment. There was also a question on whether the revenue that would be a generated this year would be inside or outside Siemens, and I, in fact, said that also outside Siemens; we would or we expect to generate revenues this year. I guess that answers your first question, and summarize that. The second question was -- help me a little bit Philip.

As we --

Added the write-down, I am sorry.

Yeah possible write-downs on your inventories.

Yes. Well at this moment there is no indication of that. I think well it's clear that we are monitoring our inventory very closely. I think you will also notice that our inventory went down this quarter, which means that our operational model is flexible and we don't have very long-term or lot of very long-term commitment and so on; we did something we really carefully watch. If you look at 2000-2001 period is there the situation was different. We had much longer term commitment. We indeed, when the market dropped down we saw an over shoot, we saw the inventory increasing during a couple of quarters and we don't have that situation today, so the inventory is managed much more closely, the system is much more flexible and so at this moment there is absolutely no indications that the write-down would be necessary.

Okay thank you.

Thank you.

There are no further questions at this time. I'll now like to turn the conference back over to management for any further comments or any closing remarks.

Okay, well, we just like to finish by thanking everyone for joining us and saying that I am looking forward to talking to you again next quarter. Thank you.

Thank you ladies and gentlemen for participating in today's conference. You may now disconnect.