科磊 (KLAC) 2005 Q3 法說會逐字稿

Welcome to the ICOS Vision Systems third-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 question-and-answer session. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded today, October 27, 2005. I would now like to turn the conference over to Jody Burfening.

Thank you, operator. This is Jody Burfening from Lippert/Heilshorn & Associates. Welcome to the ICOS Vision Systems third-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 today. If you have not yet received a copy, one 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 of ICOS to be materially different from (ph) (technical difficulty) future results, events (ph) 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.

With that, I would now like to turn the call over to Antoon. Good morning, Antoon.

Good morning, Jody, and thank you for the introduction. And to all the rest of you, also welcome on our third-quarter 2005 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 will be glad to take your questions.

Revenues for the three months ended September 30, 2005 were 19.7 million, representing an increase of approximately 22% over second-quarter revenue of 16.1 million, and a decrease of 20% compared to the 24.7 million reported for the third quarter of 2004.

Income from operations for the third quarter was EUR4.3 million, 68% higher than the second quarter's operating income of 2.7 million and 48% lower than the 8.3 million reported for the third quarter of 2004.

Net income for the third quarter was EUR3.3 million, or EUR0.31 per share, compared to net income of 2.1 million, or EUR0.20 per share, for the second quarter of 2005 and to a net income of 5.8 million, or EUR0.55 per share, for the third quarter of 2004.

Revenues for the nine months ended September 30, 2005 were EUR52 million, representing a decrease of 29% over 73 million for the same period in 2004. Income from operations for the first nine months was 9.4 million, compared to 24.2 million for the same period last year.

Finally, our net income for the first nine months was 7.1 million, or EUR0.67 per share, compared to net income of 17.1 million, or EUR1.62, per share for the first nine months of last year.

Our strong financial performance in the third quarter was driven by the market recovery, supplemented by an increase in new product shipments. During the last call, we indicated that we believed that the second quarter was a low point of the current cycle. We are happy to report that our estimate of the timing of the cycle was correct, but we have to admit that the recovery picked up steam quicker than we anticipated. Therefore, we increased our revenue guidance on September 28.

Before that, on September 24, we had announced our first large order for wafer inspectors for a total of EUR2.3 million. This order adds to the evidence that our strategy of intense R&D activity to develop new technologies and products and to expand our footprint in our industry is paying off. Our success with these initiatives continues to strengthen our leadership position in the market for inspection equipment for the semiconductor packaging industry.

As the variety and complexity of the packages is increasing, the demand for metrology and inspection equipment to control and improve the packaging processes is growing rapidly. As the market leader in this field, we are committed to the rapid expansion of this market and continue to strengthen our R&D efforts as well as our overall organization.

First-time buyers accounted for 15% of revenues during the third quarter. Those customers were mainly located in the U.S., Europe, and Southeast Asia, and were buying our wafer inspectors, solar cell inspection modules, and our new component inspector, the CI-T120. Sales of new product accounted for approximately 28% in the third quarter of 2005.

Early September at the Semicon trade show in Taipei, Taiwan, we introduced our new CI-T120 component inspector. This system is configured for high speeds and is the optimal choice for high-volume production of gull wing, BGA, CSB, and QFN devices. This new CI-T120 component inspector we believe is an example of our tradition of excellence and high-quality performance.

Our engineers continuously challenge themselves and look for improvements and relentlessly evaluate each part of our systems to determine which individual enhancements will improve the product's overall capabilities. As a result, the bar has been raised considerably and the new CI-T120 combines better inspection capabilities with higher speeds, greater reliability, and increased ease-of-use. Setting new standards in the industry, the CI-T120 ensures that ICOS will sustain its market leadership, so we believe.

As was the case in earlier quarters, our R&D spending continued to increase and will this year be approximately 25% higher than one year ago, clearly illustrating our strategy to expand our product portfolio and expand our markets. The R&D work was intense over all our product lines and was mainly focused on improving the capabilities of our various systems to expand their market potential.

The largest amount of our efforts continues to be spent on RCI, as illustrated by the introduction of our CI-T120 during the quarter. However, the largest increase in R&D efforts was spent on our wafer inspector product, as this product is growing quickly and has a large market potential. We expect several important product improvements and product introductions in the wafer inspector field in the next 6 to 12 months.

Finally, important R&D efforts continue to be spent on flex tape inspector and solar cell inspectors, as well as on technology developments for future generation products.

Then the competitive situation, we continue to have a very strong market share for our component inspector products, and with the introduction of the CI-T120, we believe that we continue our tradition of focusing on our customers' needs and on developing and delivering products and services that meet those needs. In combination with our strong sales and support network and our flexible operational model, we believe that we continue to be very competitive in this market.

On the wafer inspector, our sales pipeline is building up nicely and we are busy strengthening our sales and support organization to improve our market coverage. We believe that we are gaining market share and have strong technology in this field. Besides all the sales and support work and the R&D efforts, we are also ramping up the production of our wafer inspectors as we are currently capacity constrained.

Organization. The total number of employees stood at 287 full-time equivalent at the end of the third quarter of 2005, up from a level of 267 at the end of the second quarter of 2005. Our staff increased during the quarter to strengthen our organization and to support our multiple product portfolio. Most of the hiring in the third quarter happened in China, where we increased our operation staff to ramp up the production and to accommodate the growing demand for our products.

Further, we also added staff in both R&D to increase our development activities and in marketing and sales, to support our growing customer base. We expect additional hirings in the current quarter to continue to support our expanding product and customer needs.

Then the revenue breakdown per productline. Inspection systems accounted for 81% and inspection modules for 19% of third quarter revenues, comparing to 72 percent inspection systems and 28% inspection modules in the second quarter of 2005.

As indicated during the previous conference call, revenues for component inspectors, solar cell inspection modules, wafer inspectors, and flex tape inspectors all increased during the quarter. For next quarter, the picture is a little bit more mixed, with strong growth for component inspectors, including the new T series and the gravity-based G10 system, and continuous strong growth for our wafer inspector. Solar cell inspection modules and flex tape inspectors could be lower, but as mentioned before, such quarterly variations are to be expected, and individual orders and their timing may affect this picture.

The revenue breakdown per geographic area, during the third quarter of 2005 we realized 75% of our turnover in Asia, of which 14% in Japan and 61% in other areas of Asia. Further, 17% of our turnover was realized in Europe and 8% in the U.S. In the third quarter, all the growth was concentrated -- or most of the growth was concentrated in Asia, outside Japan, led by a very strong increase in Taiwan. As the recovery process progresses in the current quarter, we expect to see revenue growth in almost all areas and countries.

Let's then turn on to the financial information for the third quarter. On revenues of 19.7 million, we achieved a gross margin of 61.5% in the third quarter of 2005, compared to a gross margin of 60.2% in the previous quarter. Our gross margin is positively affected by the introduction of some new products and by increasing revenues. We expect that this strength will continue in the current quarter and therefore we again slightly increase our guidance for the gross margin in the fourth quarter to between 61 and 63%.

Our net R&D expenses remained flat at 2.7 million when compared to the previous quarter, and right in the middle of our guidance. Our R&D expenses benefited in both periods from grants of 190,000 in the third and 272,000 in the second quarter of 2005. We expect that our net R&D costs will not benefit from any grant during the fourth quarter and will be in the range of 3 to 3.2 million.

SG&A expenses increased to 5.1 million, compared to 4.3 million in the previous quarter, and higher than our guidance due to higher sales and increased activity levels. Based on the midpoint revenue guidance for the current quarter, we expect SG&A expenses to increase to between 5.4 and 5.6 million. But of course, this could vary with varying revenues.

The income from operations for the third quarter was 4.3 million, up from the 2.7 million reported in the previous quarter. We generated an operating margin of approximately 22%, up from 17% in the second quarter. We expect our operating margin to further improve in the next quarter.

During the third quarter, we incurred a foreign currency exchange loss of 43,000. We expect the impact of currency exchange effects to remain limited during the next quarters. Interest and other income increased to 223,000, up from 200,000 in the second quarter.

We incurred a tax of 1.2 million, or approximately 27% of income before taxes, compared to a tax of 565,000, or approximately 21% of income before taxes in the second quarter. As indicated before, our tax rate can vary with our geographical mix of sales and manufacturing, and we continue to expect tax rates in the mid-20s. Consequently, we realized a net gain for the third quarter of 2005 of 3.3 million, or basic earnings per share of EUR0.31.

Cash flow from operations in the third quarter was positive EUR4.3 million. The net cash flow from operations including changes in working capital amounted to 3.9 million. During the third quarter, we used 102,000 in investing activities and we spent net 142,000 for financing activities.

Let's now turn to the balance sheet. Cash balance stood at EUR50.9 million at the end of the third quarter, up from 47.2 million one quarter earlier. Accounts Receivable increased to 18 million from 17.3 at the end of the previous quarter. Days outstanding were 82 days at the end of the third quarter, down from 97% for the second quarter.

Inventories increased to 20.3 million at the end of the third quarter compared to an inventory level of 18.2 million at the end of the second quarter. The inventory split was 7.4 million raw materials, 7.7 million work in progresses, and 5.2 million finished goods. Stockholders' equity, finally, stood at an all-time high of 82 million, an increase of 4.3% versus one quarter earlier and 15% versus one year earlier.

So then the business outlook. During the third quarter, the semiconductor packaging industry started to recover strongly, and we expect this momentum to continue in the fourth quarter. Our order intake and order backlog are both increasing over the last few months and have improved our visibility.

For the fourth quarter we expect to see a powerful combination of ongoing market recovery and increasing sales for some of our new products, especially our wafer inspector. As a consequence, we expect to produce sequential revenue growth comparable with or better than the third quarter, so let's say anywhere between 20 and 30% sequentially.

Based on the guidance for gross margin and operating costs and tax rates given above, we expect our operating and net margins to increase accordingly. We are looking forward to what we believe will be a very exciting period in our history. As semiconductor devices are migrating from computers into portable devices that have to operate in harsher environments, the packaging industry is evolving fast, and as the market leader in this field, we are determined to provide our industry and our customers with the inspection and metrology tools to improve the quality and yield of their processes.

That concludes my comments. I would now like to turn the call back to the operator.

(OPERATOR INSTRUCTIONS) Frits de Vries, Rabo Securities.

Good afternoon, Antoon. I have a question about the wafer inspection tool. You mentioned in the conference call that you are now operating close to full capacity. Can you comment on that? Is that close to five units per quarter? And do you see room for a higher capacity level next year?

Yes, we are capacity constrained. It is normal. It is the first year that we are shipping this and building up, and we are at this point doubling the capacity. Of course that is capacity what I am talking about and that is not sales that is not a guidance. But we are increasing our capacity at this point from 2 systems to 4 systems per month.

Okay, thank you.

Eric de Graaf, Petercam.

Nice quarter. Good outlook. I have two questions. First of all, you were providing us with a lot of numbers. I missed one at some point -- your SG&A guidance for the fourth quarter. Can you please repeat that?

Yes, the SG&A guidance is 5.4 to 5.6, and that is of course assuming the midpoint of the sales guidance, which roughly is there 22 to 30%. So if you take about the middle of that, then the guidance for SG&A at that level is 5.4 to 5.6 million.

Okay. And in that SG&A, in the third quarter were there any costs for the Scanner case?

Well, there is some ongoing costs, but nothing out of the ordinary or no real big one-time. In fact, on the Scanner case I didn't make any comment because there is no real new elements. Of course there is the ongoing litigation that is going on. But no special outlay there.

So just the normal legal costs you are getting used to, unfortunately?

Yes, but we never will get used to them. That is something else.

Okay, one other question. If you talk about capacity constraints, I guess you're talking only about wafer inspections, not so much about, let's say, your normal products or the other products?

Yes, that is correct.

That is what I thought. Just to make sure. Thank you.

Wim Lewi, Fortis Bank.

Antoon, a question on the 3D wafer inspection, which was announced for the beginning of next year. I would like to know whether that is right on track and whether there were any pilot projects outstanding that you can have some feedback on?

Yes, that is still on track. We do not have a firm announcement or a firm date yet, but it is still on track. Well, I cannot really comment around specific projects there. I can comment though that we are more and more convinced that the 3D package or the 3D inspection is a very important market as there is a lot of -- well, I have already talked about the package evolution and things that are going on there.

But the 3D aspect we believe is becoming very important as the package stacking and bumping and all these kind of processes are coming online. And also as they are getting smaller and bumps are getting smaller and so on. So we are more and more convinced that it is an important market and we are getting ready for it as we planned.

Another question on actually just strong demands we have seen now over the third quarter and that you are predicting over the fourth quarter. I'd like to get some quality of where did it suddenly emerge from? Is it because there was some underspending CapEx spending in the back end foundry industry over the first half of the year and that they realized suddenly in August that they wouldn't actually get ready for the Christmas season? Also, your sentiment on how long or how sustainable this growth recovery is, especially into '06.

That is of course a very complex question with many aspects. But I think the first thing I'd like to say there is that during the whole cycle we have seen very good discipline in the industry. And that means that at this time the inventories are quite healthy and also the uptime. I'm always talking about the back end here, of course. The uptime is about 85%. So that is one element which is that we are talking about a healthy state of the industry and we have seen other times before, so I think it is important to mention that.

Then secondly, we do see quite healthy global demand. Just one number is for instance DCs that at this point are about 12.5% more in units than 2005. I guess a lot of that has to do with the world economy being in good shape and especially driven by -- or driven by countries like China, India, and so on, and the BRIC countries, that are definitely compensating or I believe more than compensating for potential slowing in the more traditional Western world.

Thanks for that.

(OPERATOR INSTRUCTIONS) Lee Simpson, Arete Research.

I noticed in the press release you've mentioned visibility is improving. So other than the wafer inspection contract that you have done, the healthy global demand you just mentioned, and the uptime and back end, is there anything really you can point to that gives you this improving conviction in your visibility?

Yes. There is basically the order intake that we see improving, and so the delivery time of some of these systems is getting a little bit longer. But also what we see is that either orders or forecasts from customers, especially the larger customers, give us forecasts, and they turn out -- of course they can change, but they do turn out to be relatively reliable overall. And so when you look at the picture in general, then you see that Q4 looks strong, as we indicated. And also in Q1, we already see that building up relatively nicely.

But of course that is not a guidance for Q1. We don't give a guidance, but that is what I mean with visibility into Q4 and even somewhat into Q1. And that is rather -- I would not say exceptional, but that is a good visibility in this industry.

Great. And with the move into the 3G of bond wafer inspection in '06, how long thereafter do you think it will be before you can address the LEDs and MEMS market?

Well, we are at this point already addressing these markets. Without going into too much details, but optoelectronics is one of the key markets and drivers for our wafer inspection systems at this point. And that of course also is a very interesting and growing market, and that is currently -- we are already addressing that market.

Great, thanks a lot.

There are further questions at this time. Please proceed with your presentation or any closing remarks.

All right. Well, I would just like to finish by thanking you all for joining and I'm looking forward to talking to you again next quarter. Thank you.

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