科磊 (KLAC) 2005 Q1 法說會逐字稿

Welcome to the ICOS Vision Systems first-quarter 2005 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 April 28, 2005.

I will turn the conference over to Carolyn Capaccio. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone. This is Carolyn Capaccio from Lippert/Heilshorn & Associates. Welcome to ICOS Vision Systems' first-quarter 2005 conference call. With me on the call today is Antoon De Proft, President and Chief Executive Officer.

You should all have received a copy of the press release which was issued earlier today. If you have not received the 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 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 (ph) to be materially different from any future results, performs or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those detailed in the Company's report filings with the Securities and Exchange Commission.

Now, I would like to turn the call over to Antoon.

Thank you and good morning, Carolyn. For all the rest also, good morning or good afternoon and welcome to our first-quarter 2005 conference call. I will start by discussing our performance during the first quarter of 2005. 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.

Revenues for the first quarter of 2005 were EUR16.2 million, approximately 1% lower than the 16.3 million reported for the fourth quarter of 2004, and 23% lower than the 21 million reported for the prior year's first quarter.

Operating income was EUR2.3 million, compared to 3.3 million for the fourth quarter of 2004 and 6.3 million for the first quarter of 2004, representing decreases of 29% and 63%, respectively. Net income was 1.7 million or EUR0.16 per share, compared to 3.4 million or EUR0.32 per share for the first quarter of 2004 and 4.6 million or EUR0.44 per share for the first quarter of 2004.

The first quarter's sequentially flat revenues were at the high end of our guidance, and indicate to us that we have reached the end of the downcycle with demand for our products stabilized. In other words, we believe that we are in the flat part of the trough. Following the strong correction period, which started around the middle of last year, chip inventories and back-end equipment utilization rates appear to be back at healthy levels, meaning that increases in unit demand in the end-user markets will now directly translate in increasing demand for our inspection equipment.

Our newer products, notably wafer inspection and solar cell inspection, continue to gain market acceptance. That is consistent with our policy of investing in future product introductions during downcycles. We further increased R&D efforts during the quarter.

Despite weak market conditions, despite the increased R&D spending and despite one-time legal fees, we still generated an operating margin of close to 15% and a net margin of just over 10%. Further, careful working capital management helped us generate 4.5 million in cash from operating activities, and we ended the first quarter with EUR46.1 million in cash and cash equivalents.

New customers -- first-time buyers accounted for 14% of revenues during the first quarter. Those customers were mainly located in Europe, the US and China, and were buying mainly our component inspector and wafer inspector equipment. We are also proud to say that the two of our major customers, notably Intel and Aevita (ph), provided us with an award. Intel Corporation provided us with the Preferred Quality Supplier award, and Aevita with the supplier excellence award. We believe that both awards illustrate that our customers share our views and appreciate our mission to be a long-term reliable partner to them.

New product sales accounted for approximately 10% in the first quarter of 2005. Despite weak market conditions, we intensified our R&D expenses, as our newer product lines further gained acceptance in the market. After correction for R&D grants, (technical difficulty) is now 31% higher than one year ago, clearly illustrating our strategy to expand our product portfolio and expand our market.

In the quarter, a considerable part of our R&D effort was spent on our wafer inspector product to further enhance its performance and features, and to expand its market potential. The development of this product remains on track, and we believe that it will continue to ramp up during the next several quarters.

More in general, we use downcycles to develop next-generation products, and R&D has been very active in all product lines, including component inspector, flex tape inspection and solar cell. Efforts are spent on supporting our expanding customer bases, on expanding the applications for the different products and on developing the next-generation products.

The competitive situation -- as the market conditions are weak, there is less business available in the market environment, and the market environment tends to be very competitive, with competitors offering aggressive pricing and features. Despite those tough market conditions, we do believe that we are competitive, and provide excellent technology on products with unique inspection capabilities to our customers. In combination with our strong sales and support network and our flexible operational model, we believe we have a strong competitive position, and we remain focused on our customers' needs and on developing and delivering products and services that meet those needs.

One of these competitors, Scanner Technologies, has filed suit against ICOS 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 patent. Scanner appealed this ruling, and the United States Court of Appeals for the Federal Circuit remanded the case to the District Court for trial.

This trial started on March 14th, as we indicated during our last conference call, and has been finished in the meantime. However, contrary to earlier indications, the trial was held as a bench trial before the judge instead of before a jury, as Scanner unexpectedly waived its right to a jury trial on the date trial commenced. As a practical consequence, there is no set time for the court's ruling, and we cannot predict any time of such ruling. While litigation is always unpredictable, we continue to believe that we have not violated any valid patent claims, and that the damages involved in this case are not material.

The organization -- the total number of full-time equivalent was 272 at the end of the first quarter of 2005, up from a level of 262 at the end of the fourth quarter of 2004. We have added staff during the quarter to strengthen both the R&D and operations department, mainly to support the wafer inspector business.

The revenue product breakdown for product line -- inspection systems accounts for 80% and inspection module for 20% of first-quarter revenues, comparing to 72% inspection systems and 28% inspection modules in the first quarter of 2004.

Zooming in on the product level, we saw some rebound in our component inspector sales, as we predicted during our last call, and illustrating a strengthening market environment. We also saw strong growth in our wafer inspector and solar cells. On the other hand, we saw lower sales for FTI and for the OEM-driven modules, all as we indicated during the previous call.

Revenue breakdown for geographic area -- during the first quarter, we realized 66% of our turnover in Asia, of which 22% in Japan and 44% in other areas of Asia. Further, 23% of our turnover was realized in Europe and 11% in the US. The markets in Asia, driven by Taiwan, Korea and China, recovered best from the strong decline of the second half of 2004. Southeast Asia is the most important market for volume production and strongest affected by market swings. Therefore, a recovery of the market in Southeast Asia is typically an early sign for a broader market recovery. During the first quarter, China performed particularly well and even became, for the first time, the area that contributed most of our revenues, just ahead of Europe and Japan.

Then the financial information over the first quarter -- on revenues of 16.2 million, we achieved a gross margin of 60.5% compared to a gross margin of 61% in the previous quarter. For the second quarter of 2005, we expect a gross margin around 60% with guidance between 59% and 61%.

R&D expenses increased to 2.6 million from 2.5 million in the previous quarter, mainly as we are increasing our efforts for our wafer and inspector product line. Our R&D expenses benefited from a grant of 143,000. We expect that R&D costs will continue to rise slowly in the second quarter, and including a grant of approximately 200,000, will be in the range of 2.6 to 2.8 million during the second quarter of 2005.

During the quarter, a new R&D grant of EUR500,000 was approved from IWT, a regional public institute for stimulating innovation by science and technology in Belgium. This grant is expected to be spread over approximately one year and, depending on timing of payments, will reduce our gross R&D expenses accordingly in the coming quarters.

SG&A expenses increased to 4.8 million compared to 4.2 million in the previous quarter, mainly as a consequence of the one-time legal expenses of approximately 650,000 incurred during the quarter for the Scanner trial. For the current quarter, we expect legal costs for the Scanner case to be in the 100,000 to 200,000 range, assuming commissioned (ph) expenses similar to those in the first quarter. We expect SG&A expenses during the current quarter to decrease to between 4.2 and 4.4 million.

The income from operations for the first quarter was 2.3 million, down from 3.3 million reported in the previous quarter. Despite the weak market conditions, extra R&D efforts and one-time legal expenses, we generated an operating margin of 14.4%, at the high end of our earlier indications and down from 20% in the fourth quarter of 2004.

During the first quarter of 2005, we incurred limited foreign currency exchange loss of 131,000, and we expect the impact of currency exchange effects to remain limited during the next quarters. Interest and other income increased to 154,000.

We incurred a tax of 680,000 or approximately 29% of income before tax, compared to a tax of 600,000 or approximately 15% of income before taxes in the fourth quarter of 2004, which was positively influenced by the release of a valuation allowance for deferred tax assets in our US subsidiary. That was in for the fourth quarter.

For the current quarter, we expect our tax rate to remain in the 25% to 30% range. Consequently, we realized a net gain for the first quarter of 2005 of 1.7 million or basic earnings per share of EUR0.16.

Cash flow from operations in the quarter was positive at 2.1 million. The net cash flow from operations including changes in working capital amounted to 4.5 million. During the first quarter of 2005, we used 258,000 in investing activities, including the purchase of measuring equipment, and we spent 175,000 for financing activities.

So we now turn to the balance sheet, where we further strengthened our balance sheet as our operations generated extra cash and we continued to manage our working capital carefully. Cash balances stood at 46.1 million at the end of the first quarter, up from 42.2 million at the end of last year. Accounts receivable decreased to 14.2 million from 16.2 million at the end of the previous quarter.

Days outstanding were 79 days, down from 89 days in the previous quarter. Inventories decreased to 16.7 million at the end of the first quarter, compared to an inventory level of 18.1 million at the end of last year. The inventory split was 6.5 million raw materials, 6.3 million work in progress and 3.9 million finished goods.

Stockholders' equity stood at 75.2 million at the end of the year, an increase of 3.2% versus one quarter earlier and 27% versus one year earlier.

The business outlook, then -- as we indicated earlier, we see several indications that we are in the very early stages of a market recovery, but for the time being, without much strength. Apart from our wafer inspector products, which will continue to grow strongly, there is no clear indication of the sales evolution of our other product lines, which may be determined by the outcome and timing of some individual orders. As a consequence, we expect second-quarter revenues to remain relatively flat (indiscernible) to the first quarter, even though we see some evidence that demand will pick up towards the end of the current quarter. What is more is that, as a consequence of lower legal expenses, our operating margins will improve, and we currently expect an operational margin in the second quarter in the 15% to 20% range.

However, the real bottom line for us is that we seeing abundant opportunities for our inspection products, and that we are investing in R&D during this market downturn to develop the technologies and products to address these opportunities. We are happy with our progress, and we therefore believe that we are well on our way to, again, emerge stronger from this downturn.

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

(OPERATOR INSTRUCTIONS). Gerry Fleming, Hambrecht.

A couple of questions about the wafer inspection product. Could you give us a rundown on what that part of the market looks like? Is this mostly bumping, or is this the product that was out there before bumping? And also, what happened to the RVSI technology after they went into bankruptcy?

On the wafer inspector, as of now it's a pure 2-D situation. And it's not bumping as of yet, and even after 2-D or 3-D bumping, we have indicated before that we are working on a system there and that we expect to be introduce that actually -- well, late in the year, probably. So for now, it's purely surface inspection and 2-D. And, without going into too far detail, it's at this moment mainly concentrating on smaller device types. But what we are doing there is constantly expense but in an organized way, I would say, our entry in the market there.

And then for RVSI, well, you probably know just as much as we do. We only see the press releases about it. This technology was sold and then, in all honesty, we have not really seen anything about it since then. They are not really a force in the market at this point. Does that answer your questions?

Yes, thank you.

Jim Ricchiuti, Needham & Co.

A follow-up on the wafer inspection product. Can you say (inaudible) what the revenues represented in terms of quarter or range (ph)? I think in the past, you said you thought that it would be about 5% to 10% of revenues in the March quarter. Did it come in above that?

No, it did not come above that. Actually, it came a little bit at the low end of that guidance. But you do know that we don't really intend to give product breakouts anymore, as this information is a little bit too sensitive, competitive-wise. But since I gave that guidance, yes, it came in, but at the low end. And we do see it grow, as I said during the call also, quarter over quarter for the remainder of the year. But obviously, this also depends a little bit on when individual orders and deliveries are timed. But then -- well, we do see it ramp up quarter after quarter.

It sounds like you saw a modest pickup on the component inspector product offering in the quarter. Was that toward the end of the quarter? How has it continued so far in the early weeks of Q3?

Well, it was actually spread a little bit on the quarter. Also I have to say that -- well, we have to be careful; if we really zoom in too much, then what you see is certain quantums. You have a single customer that orders a few systems in one quarter and the next quarter and so on. That's also why I said that there is only one product that is a very clear trend in this WI that is really increasing very rapidly. All the rest of the products don't really have a very clear direction. So in fact, in Q1, the CI came back. Q2 -- as far as we can see now, you know that we have a delivery time of four weeks, though; the quarter is definitely not over. It may be equal or even down a little bit, but definitely above the Q4 level. But then also, the rest of the products, what went up in Q1 goes down in Q2 and then vice versa. So that's why I said there is no clear sense of direction there. But in any event, for the component sector, we are clearly -- both Q1 and Q2 are clearly above Q4 levels.

And just what you are seeing in the flex inspection and solar, if you could elaborate a little bit more (multiple speakers)?

Well, I was saying it went up in Q1. We expect to go down in Q2 a little bit and vice versa. So we expect FTI that went down a little bit in Q1 will go up a bit in Q2, and solar cells actually, which went up handsomely in Q1, will actually go down a little bit in Q2.

Is there any way you can tell us, without compromising any competitive (technical difficulty) roughly how many customers you have right now for each of those products, without naming names? (Multiple speakers) give a sense as to how.

That would really go very, very far in -- if that helps a little bit, we're talking multiple customers for all these product lines.

Any new customers added for either during the quarter?

Yes. Well, we have about 14% for new customers.

I was just wondering for those two product lines. But it may be drilling down a little further than you are willing to go.

Yes.

Could you also -- I apologize; I missed your guidance. I think you gave a range for gross margin in the June quarter. I wasn't sure what that was.

Yes, we said 59% to 61%

And I think, all things considered, pretty good quarter, considering the environment.

(OPERATOR INSTRUCTIONS). Frits de Vries, Rabo Securities.

Perhaps, can you say something additional about wafer inspection tool? You say sales picking up very rapidly. To what kind of levels will it go in Q4? Will it account for, I don't know, 10% of those sales alone, or 15? What kind of percentages are you looking for?

That's a little bit difficult of a question, in the sense that we don't give guidance beyond the current quarter, let alone that we would start to split the guidance for product lines. What I can say is that indeed, we do expect quarter after quarter that the wafer inspector will go up. We see strong demand in the marketplace. We believe, as we have also (technical difficulty) earlier calls, we do believe that between the technology that we (technical difficulty) and our own technology, which -- well, by the day, we are adding more and more of both together, that we do feel we have a very competitive solution. Early indications from all the customers that we have talked to so far are supporting that, so we are very bullish, I would say, about that product. But one of the things that we need to do is, of course, to grow in an organized and orderly fashion. And that is actually what we are doing now.

But we don't have specific guidance here for how much will it be, but it's a handsome -- we are aggressive about the product, without being too aggressive so that it becomes disorganized. And we do expect quarter after quarter to see nice progress there.

And can you tell us something about the 3-D version? You mentioned it will be introduced at the end of this year. How important do you think will this be for the wafer inspection business next year?

Well, also there we believe we have very good technology. Of course, it's up to the customers to vote on that, as we always say. We do believe it is an important aspect of the market, especially in combination with 2-D. So we do believe, again, that we have all the pieces of the puzzle, but we are working very hard, still, to put everything together. So the answer there is important, without going into numbers and percentages and things like that.

Perhaps two smaller ones -- perhaps I missed it, but can you give some guidance about gross margins for Q2? And perhaps, can you give us the number for legal costs for Q1?

The margin guidance for Q2 is 59% to 61%. And then, you said the legal costs in Q1? Well, we have the Scanner legal costs in the press release, and that is 650, and the rest is more regular SG&A that is going on. I don't have that number here.

(Multiple speakers). But I'll look for the scanner.

Gerry Fleming, WR Hambrecht.

This is actually (indiscernible). Could you give us a breakdown of the revenue mix for Q1 between subcons and IDMs?

And my second question was, could you also give us qualitatively assessment of business trends in Q2, what you've seen so far and what you expect going forward by regions, and perhaps between subcons and IDMs?

Well, as you say, subcons and IDMs -- I don't really have statistics immediately handy like that. The IDMs is a larger portion, I believe, probably 60/40 or something. But that's a little bit from the stomach that I am mentioning those numbers.

When you talk, then, about the evolution per area -- I think that was the second part of your question?

Yes, but actually your assessment of business strength in different regions in the current quarter.

Well, one of the important things I said during the call is that some areas where there is mainly subcons, like Taiwan, is a little bit of a thermometer, as you know, for the rest of the market. And we have seen that in Q1, actually, Taiwan grew quite strongly. And we expect that to continue into Q2. So that's one of these signs where we say, okay, that's typically an early indications of a market recovery, that countries like Taiwan are actually growing, because they are the first ones to go down and the first ones to come up. So I think that is one of the areas.

Also what we saw is that you know that we are not reporting booking numbers because it's a little bit too complex, the combination of OEM and then other products that are stirring around in the quarters. But I can say that if you look at our inspection systems bookings, that they are also progressing, but nothing spectacular, but they are sequentially up. Also, if you would calculate a book-to-bill there, it's about 1, not a whole lot.

So we see the same pattern coming back and back. We see the same thing in the industry bookings, which have been both -- well, for American-based and worldwide-based back-end companies, bookings have come slightly up over the last few months. And we see also the book-to-bill actually is back to 1 there. I talked about the sales increases in Taiwan, I talked about the component inspector picking up somewhat. I talked about our bookings sequentially, book-to-bill.

So all of these things are pointing in the same direction. They are all -- I would say all these indications are agreeing (ph) but very weak. None of these is very strong, saying okay, we are clearly in the strong recovery phase here. So that's why, for the time being, we would rather call it the bottom of the trough here rather than saying, okay, we have started a recovery, because that -- all these signs, while they are positive, they are definitely not strong enough. I hope that gives you a more qualitative feel for the market.

Wim Lewi, Fortis.

I had a follow-on question. You already mentioned book-to-bill of slightly above 1, but could you give a bit more quantitative guidance into the sales growth for the second quarter?

Well, the sales growth is around 0, is our guidance; it's relatively flat. We have said that, indeed, we see some pickup of demand towards the end of the quarter. So we see a better June month. What also that means -- it's always a little bit difficult with prediction because that means that, as I also said, the timing of certain orders there may be very important in determining what the exact outcome of the quarter will be. So it's always difficult to predict in a reliable way when there is this back-end loading in the quarter. For all these reasons, the guidance that we gave is essentially flat -- relatively flat, is what we said.

When you say back-end loaded, do you mean that orders could come in by the end of the quarter but they could slip for delivery into the next quarter, and that you're not certain whether you can ship them in the second quarter? Is that the uncertainty?

Well, as you know, a lot of our systems, we have delivery times of four weeks, which means that we still have four or five weeks for orders to come in. And then -- so at this moment -- that's why I'm saying, indeed, if this order comes in a little bit sooner or later, or the delivery is a little bit sooner or later, as you have relatively important volume towards the end of the quarter, it's a little bit more difficult to predict. That's what we wanted to say with the fact that we see some strengthening demand towards the end of the quarter.

We talked a lot about the wafer inspection business. Before, you used to give also some indication about the strong grower in 2004, which was the flex tape business. Can you give an indication on the potential for that? Does that sector have a weak patch? Do you think that will recover towards the second half, or how is that evolving?

Well, actually, in Q2 it's moving up. So it was, I would say, particularly weak in Q1. In Q2, it's going to be, again, much more average. But as you know, we would like to -- I've given a little bit of hints to give indications as to which product lines are -- well, about the pickup of certain product lines. But you know that we don't want to go as far as break these really down into percentages. But as far as the FTI is concerned, again, it was kind of an unusual weak Q1. But that's going to be resolved again in Q2, it looks like.

Eric de Graaf, Petercam.

Maybe a completely different type of question. You have been quite successful in adding to your cash amounts in the first quarter. And looking at your predictions and my predictions, as well, you should continue doing that. Now, with a current net cash position of around 40 million, are there any thoughts if and at what level you would be thinking about paying a dividend or buy back shares or anything like that?

Well, the Company policy is at this point not to pay any dividend. And that's the Company policy that of course we are holding. We are noticing that some of our peer companies are changing their policy and paying dividends, but we are not changing our policy on that issue.

Lee Simpson, Arete.

Just a quick question, again, on flex tape inspection. I apologize if this has been asked. I really just wanted to know -- are we saying that there is more than one customer you are playing into now?

Yes.

Yes? And so does that mean you have gone multi-geography? You're now moving into Taiwan and Korea?

I am not looking to answer that question, because there is too -- well, statistically speaking, this is a dangerous question to answer, because there is too much information there.

Could you give us a feel, then, for how big your addressable market may be, perhaps even number of players you could address and what the sort of likely number of machines you reckon an average player would take?

Well, that depends on the penetration of automatic inspection, and that's the most difficult parameter, always, to predict. It's a sizable market, but it's not a market that can go to the size of component inspector, for instance, or wafer inspector also has the potential to become quite big. The FTI is smaller, I think about probably order of magnitude about half or so of, for instance, component inspectors.

And I just note that the last couple of quarters have been a little bit disappointing for FTI. You say it's coming around to average. Is that back on track with earlier guidance that you gave, or is this on track with something that is now, if you like, two quarters skewed? To what extent are we talking an uplift here? Are we saying a doubling on Q1, or just a percentage rise?

No, no. It's a little bit more substantial. And I think we are -- yes, we are back to historical, more historical -- well, guidance. We never really gave guidance, but we are back to historical or 2004, the more healthier numbers.

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

Okay. I would just like to thank everybody for joining us today, and say that we're looking forward to speaking with all of you again next quarter.

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