科磊 (KLAC) 2004 Q4 法說會逐字稿

Welcome to the ICOS Vision Systems fourth-quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded February 17, 2005. I would now like to turn conference over to Miss Carolyn Capaccio. Go ahead.

Good morning, Carolyn Capaccio from Lippert/Heilshorn & Associates. Welcome to ICOS Vision Systems fourth quarter 2004 conference call. With me today on the call is Anton DeProft, President and Chief Executive Officer. You should all have received a copy of the press release that was issued earlier today.

If you have not received a release, a copy 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 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 and Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of ICOS to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those detailed in the Company's reports filed with the Securities and Exchange Commission.

Now I would like to turn the call over to Anton DeProft. Good morning, Anton.

Good morning, Carolyn and thank you for the introduction. To everybody else, welcome to our fourth-quarter and fiscal year 2004 conference call. I will start by discussing the performance during the fourth quarter and the entire year 2004. Then I will comment on the outlook of our business. And after that, I will be glad to take your questions followed by some closing remarks.

As we already pre-announced, revenues for the three months ended December 31, 2004 was 16.3 million Euro, a sequential decrease of 34 percent over third quarter revenues of $24.7 million, and an increase of 8 percent over the $15 million Euro reported in the fourth-quarter 2003. Income from operations for the fourth quarter was 3.3 million Euros sequentially down 60 percent from the operation income of 8.3 million during the third quarter, and up 6 percent over the prior year fourth quarter of 3.1 million Euro. The net income for the fourth quarter of 2004 was 3.4 million Euro or 32 Euro cents per share, compared to a net income of 5.8 million, or 55 Euro cents per share for the third quarter, and compared to net income of 3.3 million Euro, or 31 Euro cents per share for the last quarter of 2003.

Revenues for the fiscal year 2004 were 89.3 million Euro, almost double of the 44.8 million in 2003. The operating profits amounted to 27.5 million, compared to an operating profit of 5.9 million in 2003. The net income in 2004 was 20.5 million or 1.95 Euro per share compared to a net income of 5.3 million Euro or 51 Euro cents per share in 2003. Despite the sequential revenue decline in the second half of the year, we are very happy with our performance in 2004.

In dollar terms, revenues for the year grew to 110.5 million, our highest level ever recorded and exceeding the 2000 peak by 13 percent. Our annual dollar revenue growth was 117 percent, well over double of the 47 percent growth rate for the market for packaging and assembly equipment according to Gartner Dataquest.

Our revenue mix further diversified in our flexible operational model enabled us to -- to grow our operation margin, a key performance measure, to more than 30.5 percent coming from 13.1 percent in 2003. Further, careful working capital management helped us generate 21.2 million in cash from operating activities during the year, ending with 42.2 million Euro in cash and cash equivalents.

Finally we believe after everything is said and done, our performance can probably best be illustrated by our stockholders equity, which increased 35 percent to 72.9 million Euro. First-time buyers accounted for 19 percent of revenues during the fourth quarter. These customers were mainly located in the U.S. and Southeast Asia, and were buying several types of our inspection systems, mainly our component inspectors and to a lesser degree, our wafer inspectors. For the fiscal year 2004 new customers accounted for 9 percent of revenues.

We have further solidified our market leader position, as we build up strong relationships with all large integrated device manufacturers, and their main subcontractors. We also added new customers for our more recently introduced product line, thereby expanding our product -- our market potential. Sales for new products account for approximately 10 percent in the fourth quarter of 2004, and 9 percent for the entire year.

Our R&D activities remain intensive and continue to expand slightly, especially in further support of our new wafer inspection business. This product line remains on track with our earlier indications, and we have already shipped several systems both inside and outside of the Siemens family of companies. We expect this product line to continue to ramp up in the current quarter, generating between 5 percent and 10 percent of total sales. The R&D activities on this new product will be further intensified and concentrated on combining the Siemens and ICOS technology into a superior product for different applications. We also finished our clean room facility here in Belgium, and started the first production batch in this new facility.

Further, a major portion of our R&D activities concentrated on supporting our growing customer base and product line-up, often to support consumer-driven applications requiring new packaging styles and new inspection capabilities. As an example, chips going into automotive applications require a higher degree of inspection, as they will have to operate in more extreme circumstances and need a longer lifetime.

And then finally but not less important, our engineers have spent a considerable amount of their time and energy on developing inspection and metrology systems of the next generation. As our product portfolio expands, so does our group of competitors. For certain products like our component inspector and FDI, we are the clear market leader, but for others like G 10 or wafer inspector, we are of course encountering players that have been longer active than us. However we do feel that our excellent technology a products and advanced inspection capabilities and strong sales and support network and flexible operation model put us in strong competitive position.

In other words, we can concentrate on our customers' needs and on developing and delivering products and services to meet those needs. One of these competitors, Scanner Technologies had filed suit against us in 2000 for alleged patent infringement. Even though we strongly contested the allegations as previously disclosed, we settled the case last year for the majority of the systems. For the remainder of the systems, the court ruled that ICOS was not infringing the patents. Scanner appealed this ruling and the U.S. courts of appeals for the federal circuit remanded the case to the district court for trial.

This trial is first scheduled to commence on March 14. We were advised by our attorneys that the trial duration is likely to be a couple of weeks. While litigation is unpredictable, we continue to believe that we have not violated any valid patent claims, and we intend to vigorously defend our interest. In any event, Scanner's damage claims only involve the sale of a limited number of systems in the United States and to our knowledge actual damage claimed by Scanner are in the range of $120,000 to $950,000. Scanner is also seeking treble damages and attorney fees. Such additional damages and attorney fees are only awarded in the U.S. in circumstances where there is a finding of willful infringement.

Then the organization -- the total number of employees 262 full-time equivalents at the end of the fourth quarter 2004, down from a level of 267 at the end of the third quarter. However, this reduction is mainly caused by a layoff of a number of workers in China. On the other hand, we have added staff during the quarter, mainly to strengthen the R&D department to carry the wafer inspection business and the more broadened product range offering. The revenue product line for -- or the revenue breakdown per product line will be changed a little bit as beginning with the fourth-quarter results. We are changing our reporting. Previously, we reported revenues for the three product categories, board level products, system levels products, and inspection machines.

Going forward we will combine board level and system level products into one product group named inspection modules, and report a second category, inspection systems. Using this breakdown, inspection systems accounted for 72 percent and modules were 28 percent in the fourth quarter, comparing to 77 percent inspection systems and 23 percent modules in the third quarter. For the whole year 2004, inspection systems accounted for 77 percent, and inspection modules for 23 percent of revenues.

During the fourth quarter, the market for semiconductor back-end equipment continued to decline in general, reflected mainly in the strong decline in sales of component inspectors only partly compensated by the sales of the newer products. Revenue breakdown per geographic area during the fourth quarter of 2004, the major sales volume was again realized in Asia where we did 65 percent of our turnover, of which 36 percent in Japan. Further, 22 percent of our turnover was realized in Europe, and 13 percent in the U.S. [Rest of year] we realized 28 percent of revenues in Japan. 47 percent in other countries of Asia. 19 percent in Europe, and 6 percent in the U.S.

In the fourth quarter, especially the markets of Southeast Asia declined strongly as this is the most important market volume, for volume production and strongest affected by market swings. Japan continued to contribute strongly and driven by new products and customers, the U.S. also performed strongly more than doubling the revenues versus the prior quarter.

Then turning to the financial information for the fourth quarter on revenues of 16.3 million, we achieved the gross margin of 61 percent in the fourth quarter, compared to a gross margin of 61.3 percent in the previous quarter. For the first quarter of 2005, we expect our gross margin to remain steady in the 60 to 62 percent range. R&D expenses increased to 2.5 million, up from 2.4 million in the previous quarter, mainly as we are increasing our sales efforts, and effort in general for our wafer inspector product line. We expect R&D costs to further increase to the range of 2.5 to 2.7 million during the first quarter of 2005. SG&A expenses decreased to 4.2 million, down from 4.5 million in the previous quarter, mainly as a consequence of the lower sales levels, leading to a lower level of commissions and other costs. For the current quarter, we expect SG&A to rise, mainly at a consequence of the Scanner trial, which is scheduled during the current quarter.

The income from operations for the fourth quarter was 3.3 million, down from the 8.3 million reported in the previous quarter. Despite the revenue decline, we were able to maintain our operation margin of 20 percent, down from 34 percent in the third quarter. Also during the fourth quarter, we incurred foreign currency exchange gain of 640,000 Euros as Euro funds were accumulated in countries with dollar related currencies. We expect currency exchange effects to become relatively limited again during the current quarter. We incurred a tax of $600,000, or approximately 15 percent of income before taxes. Our tax rate in the fourth quarter was positively influenced by the release of evaluation allowance for deferred tax assets in the U.S. subsidiary.

We expect our tax rate to return to 25 percent to 30 percent range during the current quarter. Consequently we realized a net gain for the fourth-quarter 2004 of 3.4 million, or basic earnings per share of 32 Euro cents. Cash flow from operations in the quarter was positive 3.9 million. The net cash flow from operations including changes in working capital amounted to 3.5 million. During the fourth quarter, we used 900,000 in investing activities, including the final investments in our headquarter buildings, and in our clean room facility. And we spent 200,000 for financing activities. We now turn to the balance sheet.

We further strengthened our balance sheet as our operation generated extra cash and we continued to manage our working capital carefully. Cash balances stood at 42.2 million at the end of the fourth-quarter 2004, up from 40.1 million one quarter earlier. Consequently, we also believe that our current cash level is more than adequate for future operations, and to finance further possible acquisition opportunities. Accounts receivable decreased to 16.2 million, from 21.9 million at the end of the previous quarter. Days outstanding were at 89 days in the fourth quarter, up from 80 days in the third quarter of 2004. Inventories increased slightly to 18.1 million at the end of the fourth quarter, compared to an inventory level of 17.5 million at the end of the third quarter, to support the growing product range. The inventory split was 6.8 million raw materials, 7.6 million work in progress, and 3.7 million finished goods.

And then to conclude the business outlook, looking ahead, visibility remains limited and predictions risky. We are encouraged as we expect our component inspector systems sales, probably the best indicator for the overall market to rebound in the first quarter, after declining sharply during the previous two quarters. Further, we expect our solar cells and wafer inspector products to continue to rise. On the other hand, we expect flex tape inspections and OEM demand for inspection modules to decline in the first quarter.

Further, after a strong start to the current quarter, we have seen some softening in demand for our products, but continue to anticipate a steady stream of new investment projects. Therefore, we expect revenues in the first-quarter 2004 --- '05, I am sorry, to be equal to, or slightly below the fourth quarter of 2004. Further as we increase our R&D efforts to invest in our products of the future and taking into account the one-time extra cost that we expect from the Scanner case, we expect our operating margins in the first quarter to be between 10 and 15 percent.

Even though we believe that we are currently going through the market trough, we are less concerned with predicting next quarter exactly, but instead focus on developing the profits and technologies that will support our future growth. The real bump in line for us is that we see abundant opportunities for our inspection products, as the semiconductor market is transitioning from computer-driven to consumer-driven market, and as we believe that products like cars, phones, and consumer electronics, will drive the IC unit levels higher, as well as impose higher quality standards and increase packaging complexity and variety.

All these trends create additional inspection opportunities, and we are investing in R&D as we are committed to grabbing those opportunities with both hands. In fact, as the market leader the field of IC package inspection, we see it as our mission to enable our industry to provide consumers with the products that meet their quality standards and price points, and in doing so, we believe we can help enable our industry to continue its growth path.

That concludes my comments. I will now like to open the call to questions. Operator. Operator?

[OPERATOR INSTRUCTIONS] One moment please for the first question. Your first question is from the line of Jim Ricchiuti of Needham & Company.

Good afternoon. Anton, wonder if you can comment a little bit about the patterns of business you are seeing in the quarter. It sounds like you are assuming that the equipment business is going -- is going to rebound in Q1, yet, it also sounds like you saw a stronger start to the quarter and now a bit of a pause. Is some of that due to perhaps the Chinese New Year? I wonder if you can elaborate on what you are seeing in the market.

Well, first of all, hello Jim, and thanks for the question. In fact, I think you answered the question halfway yourself. Indeed it is, of course, Chinese New Year now, so that may be very well why the -- the market is a little bit softer now, after a very strong start the first couple of weeks of the year.

So I think this is something where we really cannot draw any conclusions from, at this point, I would say if you look a little bit -- from a little bit more distance what we see is that the market is fairly flat at this point, and like I said, the best indication is zooming in on the component inspector, which is -- since we have this large market share probably the best indicator for the overall market, and there we see that it really very strongly declined in Q3 and Q4, and we see a fairly healthy rebound without being spectacular, but we see some rebound in -- in Q1.

So on the one hand, that makes us feel fairly comfortable. On the other hand, we have this -- this very short-term pattern here which may be a part of Chinese New Year. But I think we wanted to share that information because it is as good as we can describe the current situation.

Do you have any sense, Anton, what kind of utilization rates some of your customers are seeing?

Yes, --

Have we gotten to the point where business has picked up late in the December quarter and they now -- you know that contributed to the -- the pickup in order activity that you saw in the beginning part of -- of this year -- of the first quarter?

Well, I would avoid saying -- and maybe we created the confusion ourselves, but I would avoid saying that we have seen a strong pickup and then, again, the market softening. I think we really are talking about weeks here -- a couple of weeks. A couple of weeks softer, and I think -- I wouldn't really call that a trend. What is more important, I think, is that we do see a continuous stream of new projects, of customers coming to us with the capacity need and buying some systems. I mean, it is not huge quantities, but it is -- we get a continuous stream of those, and typically, well, they get on the radar screen and execute it relatively quickly. So that means that the risks -- there still is the need for -- for some additional capacity out there, and that's probably the -- the best indication that utilization rates are -- are quite high.

Okay. Fair enough. One final question, if I may. I missed the early part of your presentation. I wonder if you can comment on what you are seeing in terms of new customers for the wafer inspector decision. Can you elaborate what you are seeing in terms of demand, initial demand for that product?

Well, I gave an indication that in the first quarter, we expect that between 5 and 10 percent of our overall sales will come from the wafer inspection product. So that means that we will see a good -- or I can say a very good interest in that product. We believe that the customers seem to agree with us, that this is a good product with good technology. Also -- and that is, in fact, the reason why we are beefing up our R&D is that -- actually you get more customers -- all these customers want something special or additional or have a little bit -- their own needs and we, of course, want to -- to -- so that is also the reason why we are increasing our R&D efforts to continue to grow with that. So I think the answer there is -- is -- is quite positive. And when we said six months ago when we acquired this product line that we believe that we will ramp it up in 2005, that's exactly what we are doing right now.

Can you say how many customers you have either installed at or have received orders from?

I cannot comment on the exact numbers. I have said that we have several customers both inside and outside of Siemens group. I think that is the best indication I can give you without being too specific.

Okay. Thank you very much.

Sure, thank you.

Your next question is from the line of Jerry Fleming of WR Hambrecht.

Yes, good afternoon, Anton. A couple of questions. First of all, on the SG&A guidance, roughly how much do you expect in terms of litigation expense from the Scanner Technology suit? A couple hundred thousand dollars?

It could be a little bit more than that. I think -- the overall SG&A number could go as high as maybe 5 million. We have given that guidance by saying that the overall operational margin may go to 10 percent to 15 percent, but that's roughly the number that -- so that means that it's -- it's higher than just a couple hundred thousand. It could go more in the 500, 600 range.

Okay. And also in the development of the wafer inspection system, what you are shipping today, does it have full 3D capabilities, or still a 2 D system?

Still only a 2 D system. And the 3 D, we are working on that. And we will introduce a 3 D system sometime this year, but we haven't specified any more specific timing on that.

Okay. And is that just being used for bumping?

The 3 D?

The 2 D?

No, no, the 2D is used for general inspection. Most of that is -- is -- is back end, so it is after dicing the 2-dimensional inspection, but it is not for -- it can be used on bumping, but most of the time it is used without bumps.

Okay. And then the last question is, in your component mix, roughly how does that break down between sales to subcontractors and sales to IDMs?

That varies all the time of course because subcontractors have the tendency to swing more than IDMs. So at this point, the subcontractor number would be somewhat lower. I would probably say 30/70 at this point but this is coming from the guts -- but it's -- it is probably fairly -- yeah, it's --

Okay. Thank you very much.

Sure, thank you.

Once again, ladies and gentlemen, as a reminder, to register for a question, please press star and then the number 1 on your telephone. Your next question is from the line of Luca Orsini of One Investments.

Yeah, good afternoon, everyone. Just a question. Could you restate your guidance for second quarter -- the first and the second quarter of this year? And if you can tell us what is the -- what would be the guidance without the extraordinary charge for litigation?

We did not give any guidance -- we don't have any plans to give any guidance on Q -- on the second quarter, so the only guidance we gave is for the first quarter, were on the sales side, we -- we said it is going to be flat to slightly down. R&D we said 2.5 to 2.7. SG&A well, I gave the rough number of maybe 500,000 to 600,000, but obviously this can vary but as a general number, that would be the number to be taken out of the -- of the overall number, if you want to have it without the one-times.

And so we also -- well, I -- this is not really a guidance, but in the answer I gave that it could go including the one-time charges could go up to -- to about 5 million, so without that, it is more like -- well, minus the 500 to 600. And then we also said the -- which is -- for official guidance, so to speak, 10 to 15 percent operational margin. I think that is the summary of all the guidance we gave, and all on Q1.

Yeah, any anything On Q2 at this point?

No. We typically don't give any guidance beyond the current quarter, except when we see -- well, a very important reason to do it otherwise. But at this time, we don't see that.

Okay. Thanks.

You are welcome.

Your next question is from the line of Stuart Muter of RBC Capital Markets.

Thank you. Good afternoon. A question for Anton on the wafer inspector product. How do you see the pricing environment for back-end defect inspection?

How do I see the pricing environment? Well, maybe I can answer with saying that we don't expect that our margin will be really affected by the product mix.

In other words, that these margins are more or less in line with the rest of the products. Maybe a little bit lower in the beginning of the ramp-up, but, then, of course, the contribution to sales is also quite limited. So that means that the pricing environment is apparently fairly normal, I would say. No -- of course, there is constant competition and price pressure. I mean, also the customers do their jobs, of course, but nothing special.

Okay. So you are not seeing anything extraordinary in terms of your competitors responding to your product in terms of pricing?

No.

Okay. Thank you.

You are welcome.

Your next question is from the line of Lee Simpson of Arete

Quick question on clarity for your modules business in Q1. I think you said it was going to decline perhaps in sales, but the orders were going to rebound, is that correct?

No, we did not comment on the orders. Because orders for modules, most of that is OEM business, which means that you typically get maybe once a year ,or every two years you get a very large order for a very long time and it has taken a little bit quicker or slower depend on the market. The order intake for modules doesn't really make any sense. That is also -- I wouldn't say "doesn't make any sense", but difficult to interpret. That is also the reason we don't give the order intake numbers. But it is -- I did make the comment that -- that it declined in Q4.

Ah, Q4. A follow-up question, noting with interest [KLE] is tabling an offer for August, I wonder what your comments would be on such an acquisition, especially with their intent to move into the back-end market?

Well, I find it very difficult to make comments on -- on intentions of other -- of other companies. Other than very general comments saying that if there is no competition, there is no market. So it seems like this -- this market -- well, there is a real market, and there is real competition, which means that we have to make sure that we do a very good job and hopefully a better job than our competition in -- in bringing out the best products and giving customers the best support.

But you don't see your strategic decision to move into some of the new products you have seen recently such as flex tape, and even the back end wafer inspection, as being resistant to some of the advances that you are making.

No, I -- I think if anything it is an indication that this market is, indeed, a good and growing market, which also we -- we see and -- I mean any market has competition and I should say deserves competition. So it really doesn't alter our attitude toward that market.

Okay, thanks a lot.

Sure.

Your next question a follow-up from the line of Jerry Fleming of WR Hambrecht.

Can you give us a little bit of color on your inventory increase?

Yes. The increase really comes from the fact that we have to support quite a few additional product lines. You have the wafer inspector, of course ramping up. You have solar cells, which is ramping up. These are really the two products -- that -- well, require some additional inventory. If you look at the last six months of the year, our inventory is almost perfectly flat, and that is -- and that comes after a period of which we ramped up very, very quickly.

So I'm glad to say that we didn't really have any overshoot in the production or in the manufacturing for our standard products like -- or our older products like -- like the component inspectors. So, in fact, the -- we've been able to almost immediately ramp down the inventory for those products, but on the other hand, we have some additional inventory because of -- because of these new products, and, therefore, in the second half of 2004, we kept our inventories almost perfectly flat around 18 million.

Okay, and then one last question relates to acquisitions. You mentioned something in your presentation that -- that's still something you are considering. Is your focus on acquisitions to get more measurement and inspection technology to take into your existing platforms and markets? Or to acquire new platforms that -- that take you into -- into different segments?

Well, for us, it all kind of is the same thing, in sense that our mission and vision is really to -- provide inspection equipment for the packaging arena in general. So that means packaging materials, processes, and, of course, packages in all forms and shapes. So when you see our existing platforms, then, of course, my immediate reaction is that platform base is constantly growing, and that's a combination of -- of acquisition. We did some IP purchases that formed the basis of G-10 of one of our products. We did the acquisition with Siemens which formed the basis of the WI. What is important for us is that whether we do an acquisition and own development IP, whatever, it always fits in there, and then secondly, we look for -- for synergy.

So, for instance, with the -- with the Siemens acquisition, it is very clear that we have by now this is really a mixture of Siemens and ICOS technology already and we are pouring very quickly our own technology and knowledge in that system to combine -- to combine it. So -- but we are very pragmatic. I wouldn't say that we are -- that we have an acquisition strategy that we want to grow by acquisition.

What we want to do is we want to grow by filling in all these niches, so to speak, and then when we constantly evaluate what is the best way to do things. R&D, internally, that is, R&D also externally, we work with partners, IP purchases, and outright acquisitions. All of these things are possible and whatever gets us to our goal quickest and most efficiently, that's what we -- that's what we do.

Thank you.

I hope that answer the question, Jerry.

I couldn't ask you, who are you going to buy, but -- [LAUGHTER]

I wouldn't answer anyway.

Once again, ladies and gentlemen, as a reminder, to register for a question, press star and then the number 1 on your telephone. You do have a question from the line of Jim Ricchiuti of Needham & Company.

Anton, can you comment in your presentation about demand you are seeing for the flex tape inspection system?

Yes, the flex tape, that's also a good question because, indeed, the flex tape, in our guidance towards Q1 also, it's the -- the flex tape system, together with the modules are the two products we expect to go down somewhat. Maybe I have to explain a little bit how we see that. This is a product at this point that is being carried by a small of amount of customers that have gone through certain -- or that are going through certain investment cycles. Now they decide to -- to change a certain product line into automatic inspection, and then you see a burst of investments. And then you have -- well, additional product lines and additional customers still coming into this. So -- what I am trying to say is that you see some quantums of investment. And at this point -- and that is the reason why in Q1 and in the next few months we see a little bit lower revenue from that product line, because we are a little bit in between some of these major projects. But we do still expect this product to continue to grow in -- in the longer run, as we do have today quiet a bit of additional projects in the pipeline and we do expect them to come into volume, but we are right in between some of these waves a little bit now. So it is not more a market trend, but just quantum effects, I would say.

Because the -- the applications for this -- for the [inaudible] -- for the system, the market is still pretty healthy.

Yes, it is, so -- like I said, we have a number of projects going on, and you see lots of things in the pipeline there. So we are definitely not pessimistic about the product line, but like I said, we are a little bit in between some of these larger investments at this point.

Okay. Thank you.

You are welcome.

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

All right. Well, I am going to keep it very brief and thank you, everybody, for joining us today, and we are looking forward to speaking with you all again next quarter. Thank you.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.