科磊 (KLAC) 2005 Q2 法說會逐字稿

Welcome come to the ICOS Vision Systems Second 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. 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 reminder this conference is being recorded today, July 28th, 2005. I would now like to turn the conference over to Jody Burfening, please go ahead ma'am.

Thank you operator and welcome everyone to ICOS Vision Systems Second Quarter 2005 Earnings Conference Call. With me on the call today is Antoon De Proft, President and Chief Executive Officer. You should have all received a copy of the press release which was issued earlier this morning, those who have not yet 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 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 risk, 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 as detailed in the Company’s report filed from time to time with the Securities and Exchange Commission. With that I would now like to turn the call over to Antoon, good morning Antoon.

Good morning Jody and thank you and to the rest of you also welcome to our second quarter 2005 conference call. I will start by discussing our performance during the second 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.

Revenues for the second quarter of 2005 were 16.1 million Euro, representing a decrease of 1% over the first quarter revenues of 6.2 million and a decrease of 41% compared to the 27.3 million reported for the second quarter of 2004. Operating income was 2.7 million Euro, 18% higher than the first quarter operating income of 2.3 million and 71% lower than the 9.6 million reported for the second quarter of 2004. Net income was 2.1 million Euro or 20 Eurocents per share compared to net income of 1.7 million or 16 Eurocents per share for the first quarter of 2005 and to net income of 6.7 million or 64 Eurocents per share for the second quarter of last year.

Our revenues for the six months ending June 30 were 32.3 million Euro representing a decrease of 33% over the 48.3 million for the same period last year. Income from operations for the first half of the year was 5.1 million compared to 15.9 million for the same period last year. Net income for the first six months was 3.8 million Euro or 36 Eurocents compared to 11.3 million or 1.07 Euro per share for the six months of 2004. Our performance in the second quarter was inline with our guidance, with revenues holding steady at around 16 million Euro for the third -- second quarter while operating profits and net income improved sequentially. On the last call I mentioned that we were in the flat part of the turf and this continued to be the case during the second quarter, consistent with our policy to invest in the future during down turn, we kept our [shore] and defocused to develop the technology and the product of the future.

We are excited about the potential of our newer products to successfully penetrate some existing and emerging markets and to deliver future profitable growth. Beside the strong market leadership for our component inspectors we believe that the flexible tape inspector, the wafer inspector and the solar cell inspector all offer strong possibilities in the market. New customers accounted for 8% of revenues during the second quarter. Those customer were mainly located in the U.S. and Europe and were mainly buying our wafer inspectors and solar cells inspection modules.

Sales of new products accounted for approximately 19% in the second quarter. As mentioned, we generally use down cycle to developed next generation products and it's not different this time and we currently have several newer products lines that are gaining market acceptance. Therefore we continue to intensify our R&D efforts and after correction for R&D, our gross R&D spending is now 32% higher than one year ago, clearly illustrating our strategy to expand our products portfolio and expand our markets. Our R&D efforts in the quarter have been quite intensive across all product lines, a considerable part of our R&D efforts were spend on our component inspector, which continues to be out high running product line. During the second quarter, we have sold and shipped our first component inspector system for the three dimensional inspection of Pin Grid Arrays to a leading global semiconductor manufactures. Pin Grid Arrays which have hundreds of delicate pins that need to be inserted into the socket of a printed circuit board are used for high-end processors in computing applications.

Including these new products we now offer a comprehensive line of three dimensional inspection products for substrate sockets and micro processors in either Pin Grid Array or Land Grid Array format. This offering or the offering of three dimension inspections for Pin Grid Arrays is unique in the industry and further strengthen our market leadership position in the market for inspection equipment for semiconductor packaging.

Secondly a major part of our R&D efforts were spent on our wafer inspective products to further expand it's applications, in terms of inspection items and wafer types and on future product variance such as three dimensional inspection.

Further we spent major R&D efforts on the further expansion and improvement of our flex tape inspector and solar cell inspector, these developments will allow us to broaden the inspection applications and extend the customer basis for these products. Finally we spend R&D on developing technology for our next generation products.

The competitive situation during weak market conditions to reflect, this is available and the market environment tends to be more competitive with competitors offering aggressive pricing and features. In addition, as our Company portfolio or our product portfolio is expanding so is our set of competitors. In certain areas that we are entering or have entered recently, some competitors are active longer and are more established in these market segments than we are. However we do believe that we provide excellent technology and products with unique inspection capabilities to our customers. In combination with our strong sales and support network and our flexible operation model we believe we have a strong competitive position as long as we remain focused on our customers need and on developing and delivering products and services that meet those needs.

One of these competitors Scanner Technologies had filed suit against ICOS in 2004, alleged patent infringements. A trial was held in direction in March 2005 and a decision is still pending. ICOS defended on the ground of non-infringements, patenting validity and inequitable conduct by Scanner in their procurement of the patent. Since the time of the trail Scanner has been issued additional patents in the same filed. Recently ICOS has become aware of Scanner as a certain intent and treats to commence new litigation against ICOS, in at lest one company that purchases BGA devices in connection with those newly issued patent. ICOS believes that the threats of patent infringement with respect to the newly issued patents to be un-sound and further that Scanner's threats against the purchaser of BGA devices is improper and constitutes unfair competition. Therefore on July 25, ICOS initiated a declaratory judgment action in United States, district court of the certain districts of New York against Scanner Technologies Corporation. This is a second litigation involving the bodies in what ICOS believes to be unwanted assertion of patent infringement by Scanner.

ICOS filed the declaratory judgment action to resolve the disputes. The relief ICOS seek in the new action includes the declaration that ICOS does not infringe any of the newly issued patents as well as a declaration that Scanner's assertion of those patents against purchaser of BGA devices is improper and amounts to unfair competition.

The organization, the total number of employees stood at 267 full-time equivalents at the end of the second quarters, slightly down from the level of 272 at the end of the first quarter. This numbers does not include people that work on a contractual basis for ICOS. For the current quarter, we expect our total staff to increase again as we hire or hiring to intensify our R&D efforts and to strengthen our overall organization to support our multiple product portfolio. The revenue breakdown for product line was 72% inspection systems and 28 inspections modules for the second quarter as it goes to 80% inspection systems and 20% inspection modules for the first quarter. These changes do not constitute any trend and for the current quarter, we expect the percentages for inspection systems to rise again.

Zooming in on the product level, the sales shipped between product lines it also not reflect a clear direction, but we’re rather caused by the outcome and timing of some individual orders. Apart from our Wafer Inspector product, which increased in both Q1 in Q2 it still happens to be that product line that increased in Q1 decreased in Q2 and vice versa. The revenue breakdown for geographic area then, we realized 64% of our turnover in Asia in the second quarter of which 18% spend and 46% in other areas of Asia, further 23% of our turnover was realized in Europe and 13% in U.S. Revenues in Taiwan have grown strongly in both Q1 and Q2 this is significant as Taiwan is an important volume production area and contains many subcontractors. Therefore, Taiwan is strongly affected by market swings and the market recovery and [impacted recovery]. Also during the third quarter, we expect Taiwan to continue to grow strongly.

Lets then turn to financial information on revenues of 16.1 million, we achieved gross margin of 60.2% in the second quarter compared to a gross margin of 60.5 in the previous quarter. For the third quarter of this year, we expect the gross margin to increase and we also increase the guidance to a range of 60% to 62%. R&D expenses increased to 2.7 million from 2.6 million in the previous quarter, mainly as we are increasing our effort for wafer inspection development. Our R&D expenses benefited from a grant of 272,000 in the second quarter and 143,000 in the first quarter. We expect that our net R&D costs will continue rise slowly in the third quarter and including a grant of approximately 200,000 will again be in the range of 2.6-2.8 million during the third quarter of 2005.

SG&A expenses decreased to 4.3 % which was midpoint of our guidance, down from the 4.8 million in the previous quarter. This decrease was the consequence of lower legal expenses, during the quarter. For the current quarter, we expect SG&A expenses to increase mostly driven by an increase in business activity and change in geographical mix to a range of 4.5 to 4.8 million. The income from operations for the second quarter was 2.7 million up from 2.3 million in the previous quarter. We generated an operating margin of 17% up from 14% in the previous quarter. We expect our operating margin to continue to improve slightly in the current quarter. During second quarter of 2005, we incurred a foreign currency exchange loss of 267,000, despite a strong foreign currency fluctuations of the past few months, we believed we were able to limit the foreign exchange losses, we expect the impact of currency exchange effect to remain limited during the next quarters. Interest income increased to 200,000. We incurred a tax of 555,000 or approximately 21% of income before tax compared to a tax of 608,000 or approximately 29% of income before tax the previous quarter. This change in tax-rate is mainly a consequence of geographical mix, of sales and manufacturing. For the current quarter, we expect a tax-rate in the mid 20. As a consequence, we realized the net gains for the second quarter of 2.1 million or basic earnings per share of 20 Eurocents. Cash flow from operations in the quarter was positive 2.9 million; the net cash flow from the operations including changes in working capital amounted to 1.1 million. During the second quarter, we used 180,000 in investing activities and we spend 79,000 for financing activities.

So let's now turn to the balance sheet, cash balances good at 47.2 million at the end of the second quarter, up from 46.1 million one quarter earlier. Accounts receivable increased to 17.3 from 14.2 at the end of the previous quarter, days outstanding were 97 days in the first, up from 79 days in the first quarter. This was mainly as a consequence of increased shipments towards the end of the quarter. Inventories increased to 18.2 million compared to an inventory level of 16.7 million at the end of the previous quarter. That inventory split was 6.4 million raw material, 7.4 million working progress and 4.4 million finished goods. So called as equity stood a an all time high of 78.7 million at the quarter an increase of 4.6% versus one quarter earlier and an increase of 20% versus one year earlier.

Then the business outlook, during our last call we mention that we saw several indications that were in the very early stages of the market recovery. We’re happy to report that we continue to see the sign and I’m going to give you some of the science to try and give you general picture first of all our own bookings have picked up recently in the last few weeks and also our customers are telling us that they expect to invest more in all types equipment during the second part of this year. For the industry, the book-to-bill ratio for North American days back in the equipments supplier has increased for a number of months now and stood at 1.26 in June. As mentioned earlier on the call Taiwan an area which would subcontractor than it typical early indicator for the market swing is growing strongly in fact in Q1, Q2 and Q3 and then finally we also see that market researchers such as Gardeners have recently increased their expectations for the year 2005. so taking all these times together and based on all these signs we expect that a second quarter marked to bottom of the current back in semiconductor cycle and that driven by a recovery in semiconductor back end our revenues will start to increase obviously in the third quarter in the 5% to 10% range, accordingly we expect our operational margin to continue to improve slightly. And then to conclude I would like to repeat and remind everybody that the focus here at ICOS is not really on the next quarter or the current quarter but on the mid-term outlook. We believe that our true challenge is to seize the abundant of the opportunities that we see for our inspection products as they enter existing markets and open up new ones. Therefore our focus is to invest in R&D as to strengthen our overall organization including sales and support and manufacturing. By doing so, we believe that we will emerge stronger from the current semiconductor cycle. That concludes my comments and I would now like to open the call for questions, operator?

Ladies and gentlemen, if you wish to register for question for today’s question and answer session, you will need to press the “*” and then the number “1” on your telephone. You will hear a prompt to acknowledge your request, if your request has been answered and you wish to withdraw your polling request, you may do so by pressing the “*” and then the number “2”. If you are using a speaker phone please pick up your handset before entering your request. One moment please, for the first question. Your first question is from Jim Ricchiuti with Needham and Company.

Thank you, good afternoon. I wondered if you could comment on a some of the few products and quickly on the Pin Grid Array products, what you see for the outlook for this 3D product, how – is there any sense on how bigger market this is?

Well thanks Jim, well the -- you know that we don’t really break up our products and our sales over the individual product lines, let alone for a particular applications like Pin Grid Arrays. Now Pin Grid Arrays is an important market, that it is one of the two ways in which microprocessors are typically build, that they are either built in Pin Grid Arrays or in Land Grid Arrays, now for us -- we are now the only Company that offers 3D, inspections for the both these applications and like I said, I believe that gives us a very strong possibility here. But in all honesty I'm not going to go into detail as to how large we believe this particular part of the market segment, this is we consider that information too sensitive or competitive purposes.

Okay, well there is clearly good overlap with your existing customer base, how [inaudible] have achieved so far?

Yes that is correct. You can also guess that the amount of potential customers for the product is quite limited, it's a quite dedicate product. So -- but the receipt of the product is very well impacting the market. It is doing its job already in the product or in the production line.

Okay, and just a follow-up, again and I'm not looking for specifics on product revenues but just qualitatively, how the flex tape system is doing and the outlook there, and just in general, what you are seeing in demand for you to sell that product?

Okay, well, I think I would like to make a distinction here between the shorten and the long-term; long-term we believe it's much more -- much more easy to forecast as we believe that all these products have substantial potential, the solar cell, lets start with that one, is currently in its growth limited by this supply of raw silicon but there is a tremendous demand for a solar cell in the world and we believe that there is a market that has a very helped the long-term growth and also one of the beauties off-course is that it's not linked to the semiconductor cycle as it's really more energy driven. So that is a market that we believe should certainly grow year-after-year for well many years to come. Off-course if you then look at this quarter and next quarter and that becomes a lot more difficult because then you get also into certain quantum's as to one dozen order coming and one is a delivery schedules and sometimes it's a bundled order into them. I can also say that if you really look very recently like I have said on the call Q1, Q2 there is no clear trend there and effect, it still happens to be what went up like component inspector with some what up in the first quarter, well that went down somewhat in the second quarter. In fact solar cells also went up in first quarter and went down a little bit in the second quarter. FTI is the other product that you mentioned, actually did the opposite. We have mentioned I believe one or two calls ago, that we are going through a little bit of a weaker period for FTI and that’s now picking up again, so that was weaker went down in Q1 picked up again in Q2. What is also important I think to mention is that if you look at Q3 that all the products that I mentioned so all the inspection systems and also solar cell are actually or I think we expect all of them to increase in the Q3, as part of this broader market recovery.

Okay, great and just from a competitive standpoint, both FTI and solar, do you have limited competition?

We have competition but, like I said, I believe we are in good shape. We have good products, we have a good worldwide sales and service network, we have good and high quality operations for manufacturing [inaudible], but of course we don't want to take competition too lightly either. We always say, there is no competition, there is no market. But I think we are in good shape.

Okay, thanks.

You are welcome.

Once again ladies and gentlemen, as a reminder to register for a question please press "*" then the number "1" on your telephone. Your next question is from Ray Kukreja with WR Hambrecht. Please go ahead with your question.

Thank you and good afternoon Antoon, congratulations on a very solid quarter. I have a few questions actually and I want to start by just sort of just trying to understand where the 5% to 10% growth that you mentioned in Q3 is going to come from, if you could sort of give us a qualitative sense of which sub segments are going to be the biggest contributors to that growth?

Okay, well first of all thanks for your nice comments and well I can give you a little bit color, in fact I already did a minute ago. In the third quarter we see infact all inspection systems to rise. We also expect solar cells to rise. The OEM prolix in they typically -- like a little bit in the cycle could still be going down a little bit. But obviously these are all expectations and it could turn out to be a little bit different but -- infact that, in any event that is the general picture that we see. It’s a quite broad based recovery, although we have to say that it’s not spectacular of course, we don’t expect extremely strong sequential growth for instance but we do see it, well found it on all product lines areas and so on.

Okay, thank you and I -- the second question I had was around the wafer inspection for the surface and the bump inspection that you compete amongst others against all this technology. Are you seeing any business pickup in that area given, there are all the sort of issues that August is facing in terms of it’s merger with Rudolph and KLA in the picture. Are you seeing customers wanting up to your products because of that?

That’s very difficult to me to say why customers talk to us or listen to us. What we can say is that’s we are working very hard in supporting that product, well first of all on the R&D side to increase it's features and expended potential use, of course also on the marketing and on the sales side we have a funnel of customers that we are working with. We are happy with the progress that we made there, that we make. We also -- and I think we all have to be realistic as to how quickly these things go. These are of course long sales cycles, the sale cycle of these kind of complex products takes easily six months and some times 12 months. So, but we are happy with our progress, but in all honesty, and if I can be very blunt in answering that, we don’t even care why customers would be listing to us and be interested in our product. We want him to listen and be the interested of course, but we believe from our side, that, it is because of the virtue of our products, of course.

Following that up, could you give us an update on the investments that you have been making in the front end defect inspection, what is the status of that?

I’m not really sure what you are referring to in all honesty Ray, because we haven’t really made investments in front end inspection. We -- if you are referring to the wafer inspection in general, because the focus of the wafer inspection infact really is on the backhand on the packaging in wafer format and that’s really the focus of that product and we haven’t really made specific investments in to the front end which really as we communicated is not our focus.

Yeah my apology there, must, I have mixed that up but with somebody else and finally I may have missed this in your call, did you give us a breakdown of revenue between subcons and IDMs for the quarter?

No, we did not and I have to say that we don’t have that number handy here but if you want we can get back to you with a little bit of that number. We've indicated earlier that it's roughly but this is very rough, it's little bit more IDM so probably around the 60% or 40% range but this could be off by someone. But if you want we can get back to you with a little bit more accurate number.

That will be helpful and that will be also--

Because you know what it's not something that we track for ourselves but we will get back to you.

Thank you.

Sir you’re welcome.

Your next question is a follow-up from Jim Ricchiuti with Needham and Company, please go ahead sir.

Thanks. I was just wondering if you could give a little bit more detail since it does appear to be a bit of a leading indicator how your business has grown in Taiwan over the last say two quarters, I assume was the March quarter up or down sequentially from Q4 and what kind of increase have you seen in the June quarter?

Okay.

If you have that, if no we could take offline?

Let me see we have, yeah in fact -- first of all I should say that Taiwan of course is a swing area, which means that it went down very strongly also in Q3 and Q4. And obviously from low numbers it's easy to grow quickly, but then yes in Q1, Q2 and Q3 we see very strong sequential growth, and when I say very strong I am talking about more than doubling to give you an idea, so it's really strong.

Okay, and if your customer there or if any sense that where they are I assume they are very high utilization rate or, but in terms of what they are expecting for the second half of the year I feel pretty comfortable about the outlook if they are booking if they are placing orders among those lines?

Well, that is correct, typically the subcontractors play well very closely on the ball or what the expression, there they -- what they do, they is really watch their volumes. They update that on a monthly or even weekly basis and when they see their volumes increase they know they can purchase equipments then install it very quickly so, that’s more or less the unit tracker if you want so, that is indeed the only explanation for this strong growth is indeed that the, that utilization rate is high and that the volumes are going up over this whole period.

Do you have any sense from your sales people what they are hearing from their customers as to where some of the -- what’s driving some of the end demand?

No we are hearing through our sales force that indeed inspection or the investments are expected to go up in the second part of the year so the volumes are expected to go up but in all almost especially with subcontractors we have very little idea on what the end user applications are in fact often these systems are used for various applications and are return over from one application to the other all the time so we really don’t have any view on that honestly.

Okay and one final question just with respect to the legal expense was it significant in the June quarter and do you see that increasing in the September quarter?

Well we gave the guidance last time of about 100,000 to 200,000 that we fell in that guidance and well we expect no major changes during the current quarter.

Okay, thank you.

You are welcome.

Your next question is from [Steve Shalarud] with [Falco] & Company.

Good afternoon Antoon. Nice quarter, increased sequentially. Just trying to get a general feel of where you are in the market penetration companies like RVSI going out of business earlier this year. Is that created any opportunities for you to penetrate market and to gain market share?

Yes. I think, I am not sure what to answer there I think we are all doing our best to performance well in the market as we can but the demise of one company creates other competitors of course and so like I said earlier in the call, if there is no competitor, there is no market there, I think we’ve commented on our market penetration before and I really don't have any additional comments that I can make on that today

Do you have stated market share in the past? And is there any goals going forward on that?

Yes, may I actually suggest sir? Because this is a question, we have indeed given all this information, so it looks like you are newer to the company?

Right.

So just we have a special --

That's fine.

I know we can -- you are in a little bit more on the background.

You do have our follow-up question from Ray Kukreja with WR Hambrecht.

Hi Antoon, I’m just wondering if you could give us a sense of any change in Euro, Euro pricing in the quarter, that you might have to offer to your customers given that the strengthening of the dollar, did it have any impact at all on the pricing?

Well we have a mixture of Eeuro and Dollar invoicing, the pricing didn’t really changed over the quarter. Of course if you calculate that back to Euro or Dollar you have a little bit or you have slight variations but, as such the prices didn’t really, didn’t really changed.

Okay, thank you.

You are welcome.

There are no further questions at this time, please proceed with your closing remarks if you have any sir.

Okay well, in essence I would just like everybody to – or to thank everybody for joining the call and I am looking forward to speaking to all of you again next quarter. Thank you.

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