科磊 (KLAC) 2005 Q4 法說會逐字稿

Welcome to the ICOS Vision Systems quarter four 2005 earnings conference call.

[Operator Instructions]

As a reminder, this conference is being recorded to today, February 16, 2006. I would now like to turn the conference over to Ms. Jody Burfening. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone. Welcome to ICOS Vision Systems fourth quarter 2005 earnings conference call. With me 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 remind everyone that certain statements made by management during the course of this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of ICOS to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, those detailed in the company's reports 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.

Well good morning, Jody and thank you for the introduction. And to all the rest also good morning and welcome to our fourth quarter and fiscal year 2005 conference call. As usual, I will start by discussing our performance during the fourth quarter and the entire year. And then I will comment on the outlook for our business and after that, I will be glad to take your questions followed by the closing remarks.

Revenues for the three months ended December 31, 2005 were 28.6 million equal to our earlier indication and representing a 45% increase over the third quarter and 76% increase over the 16.3 million reported for the fourth quarter of 2004. Income from operations for the fourth quarter was 7.9 million compared to 4.3 million and 3.4 million in the third quarter of 2005 and fourth quarter of 2004 respectively.

Net income for the fourth quarter was 6.4 million or $0.61 eurocents per share compared to a net income of 3.4 million or $0.32 eurocents per share for the same quarter a year earlier. For the entire year of 2005, revenues amounted to 80.6 million, a decrease of 10% from 89.3 million in 2004. Operating profit amounted to 17.3 million compared to 27.5 million in 2004. And finally, net income in 2005 was 13.5 million or 1.28 euro per share compared to 20.5 million or 1.95 euro per share a year earlier.

The recovery in our industry, which started in the third quarter, continued to gain strength during the fourth quarter, bringing 2005 to a strong close. During the whole year, we took advantage of the industry slowdown to enhance and expand our product lines, to further consolidate our leadership position in the IC inspection market, and to expand our addressable market opportunities. In support of these initiatives, we further increased our research and development spending by 27% and we expanded overall organization.

Even with this higher spending and despite the market downturn, we delivered a solid performance in 2005, with an operating margin of 21.5%. Further careful working capital management helped to generate 9.6 million in cash from operating activities during the year, ending with 50.7 million in cash and cash equivalents. Finally, our stockholders' equity increased 22% during the year to 89.1 million.

First time buyers accounted for 80% -- I am sorry -- for 8% of revenues during the fourth quarter. These customers were mainly located in the US and in Europe and were buying mainly wafer inspectors. For the fiscal year 2005, new customers accounted for 11% of revenues and those customers were located around the world and buying mainly wafer inspectors, as well as component inspectors.

Then new products, sales accounted for approximately 37% in the fourth quarter of 2005 and 27% for the entire year. The majority of these sales were for the recently introduced CI-T120 system, which was very well received in the market. On several occasions, I have talked about the tremendous evolutions in our markets and how we're expanding our R&D efforts to improve our product offering.

Also during the fourth quarter, we increased our R&D spending, which is now more than 30% higher than one year ago. 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 continued to be spent on our components inspector. However, the largest increase in R&D effort 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 this year.

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

Then a few words about the competitive situation, we continue to have a strong market share for component inspector products, and with the introduction of the CI-T120, we that we have continued our tradition of focusing on our customers need 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, the situation is of course, different because we are a runner-up in this market. We believe those that we have strong technology in this field and we're busy adding he several major features to our wafer inspector to extend the market coverage of this product line. Our sales pipeline is building up nicely and we're also strengthening our sales and support organizations to improve our market coverage. It so happened to be that just this morning, we received another new order for wafer inspector from a new customer. So I thought I'd mention that on this call.

Then the organization, the total number of employees stood at 316 full-time equivalent at the end of year, up from a level of 287 at the end of the third 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 fourth quarter happened in China and Hong Kong, 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 the growing product and customer base. And in fact, we will continue to do so in the near future. The revenue breakdown then per product line Inspection systems accounted for 86% and inspection modules for 14% of fourth quarter revenues, comparing to 81% inspection systems and 19% inspection modules in third quarter of 2005.

The revenue breakdown per geographic area during the fourth quarter, we realized 80 percent of our turnover in Asia of which 7% in Japan and 73% in other areas of Asia. Further, 16% of our turnover was realized in Europe and 5% in US. In the fourth quarter, all the growth was concentrated in Asia outside Japan, led by a very strong increase in China, the Philippines, South Korea and Malaysia. As the recovery process progresses, we expect to see growth in almost all regions and countries and expect also to seek an increased contribution to our growth from the US and Japan.

Then, the financial information. On revenues of 28.6 million, we achieved a gross margin of 61.4% in the fourth quarter, essentially flat when compared to the 61.5% gross margin in the previous quarter. For the current quarter, we expect that our gross margin will continue to be between 61 and 63%.

Our net R&D expenses increased from 2.7 million in the third quarter to 3.3 million in the fourth quarter of 2005. R&D expenses in the fourth quarter did not benefit from any grants as opposed to a grant of 190,000, which we recorded in the third quarter of 2005. For this quarter, the first one of 2006, we expect R&D costs to be in the range of 3.3 million to 3.5 million.

SG&A expenses increased to 6.4 million compared to 5.1 million a quarter earlier, due to the sharply higher sales activity levels. Based on the assumed revenue increase in the quarter, we expect SG&A expenses to increase to between 6.7 million and 7 million. The income from operations for the fourth quarter was 7.9 million, up from 4.3 million reported in the previous quarter. We generated an operating margin of approximately 28%, up from 22% in the third quarter of 2005. Based on the guidance given above, we expect our operating margins to improve further in the current quarter.

During the fourth quarter of 2005, we incurred a foreign currency exchange loss of 98,000. And also in the next few quarters, we expect that the impact of currency exchange effects to remain limited. Interest and other income increased to 240,000, up from 223,000 in the third quarter. We incurred a tax of 1.6 million, or approximately 20% of income before tax, compared to 1.2 million, or 27% of income before tax, in the third quarter. As indicated before, our tax rate can vary with our geographical mix of sales and manufacturing, and we continue to expect average tax rates in the mid-20s.

Consequently, we realized a net gain for the fourth quarter of 2005 of 6.4 million, a basic earnings per share of 61 eurocents, and diluted earnings per share of 6 eurocents -- 60 eurocents, that is. Cash flow from operations in the quarter was positive, at 6.9 million, and despite a 45% sequential revenue increase and the corresponding work in capital increase the net cash flow from operations, including changes in working capital still remain positive at 105,000. During the fourth quarter, we further used 191,000 in investing activities, and we spent a net 146,000 for financing activities.

So let's then turn to the balance sheet. Cash balances stood at 50.7 million at the end of the first quarter of 2005, slightly down from 50.9 million the quarter before. Accounts receivable increased to 26.5 million from 18 million at the end of the previous quarter. Days outstanding remains virtually stable and stood at 83 days at the end of the fourth quarter compared to 82 days at the end of the third.

Inventories increased to 25.4 million at the end of the fourth quarter compared to an inventory level of 20.3 million at the end of the previous quarter. Expressed in day sales, actually, this inventory went down from 93 to 80%-- or 80 days, I'm sorry. The inventory split was 8.3 million raw materials, 11.8 million in work-in-progress, and 5.3 million finished goods. And then finally, stockholders' equity finished at an all-time high of 89.1 million, an increase of 90% versus one quarter earlier and 22% versus one year earlier.

So let's then go to the business outlook. But before going into the specific guidance, I would like to remind you that we are witnessing a continued evolution in the demand drivers for the semiconductor industry, as semiconductors are employed in an ever-increasing range of consumer-oriented applications, from cars to games to phones to digital TVs to digital audio players to even illumination LED -- LED illumination.

Many of these applications require special packages that can deal with a specific application and often the harsher environment in which they have to operate. These evolution drives the need for new packaging processes and for more advanced inspection equipment. And as the leading supplier of inspection equipment to the packaging industry, we are expanding our product offering to take advantage of these opportunities in the market and to provide our industry with the advanced inspection and metrology tools that they need.

So that's, of course, the somewhat longer-term view. When we then immediately look ahead to the current quarter, we continue to see a broad based demand for our product. And we expect sequential revenue growth of approximately 20%. Based on this revenue guidance, we expect to post the highest revenue in the company's history, approximately 10% higher in euro terms and 45% higher in dollar terms than the previous records that we set in the third quarter of 2000. With this revenue growth, we also expect to leverage operating expenses further, and we expect our operating margins to further improve.

Finally, let me tell you about the decision that was reached in the Board of Directors' meeting, where it was decided that the Board of Directors will ask from the General Assembly an authorization for a buyback -- a share buyback program. And the exact request is to buy up to 1 million shares back at any price between 1 eurocent and 100 euro per share.

I closed my last call by saying that we're looking forward to what we believe will be a very exciting period in our industry and in our history. This indeed describes our current experience with the unique combination of record-level activity in the IC inspection markets, combined with the new venture spirit and energy that comes with our new products and new markets.

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

Certainly. [Operator Instructions]

Your first question comes from Jim Ricchiuti with Needham and Company. Please go ahead, sir.

Thank you. Good afternoon, Antoon. A question on the inspection systems -- revenue for the quarter. Can you expand on that a little bit in terms of maybe providing a little bit of color as to how the business stacked up between flex tape, solar cell, and component inspectors?

I know you don't break it out, Antoon, but I wonder if you could just give us a little bit more color as to where you saw the demand? Also if you could -- on wafer inspection -- if you could just give us a little bit of information as to how the business came in during the quarter?

Right. Well, good morning to you Jim, and thank you for the question. Well, first of all, the division between inspection systems and inspection modules, we expected to be -- or to remain more or less constant. So the lion's share will continue to be inspection systems. Then if you zoom into the inspection systems, we indeed don't break it up.

What I do want to say is that to avoid all confusion that the component inspector by all means is our largest product line, and therefore, also has by far the largest impact on changes in the revenue. So I do not want to create the impression that all our sales will come from the other product lines, because what we're seeing is that really the CI and the whole market is picking up strongly.

The other products, WI definitely has the largest potential there as we've indicated before. It's growing rapidly, but for WI -- also for the rest of the product lines, we have to realize that the revenue levels are substantially less, of course, than the component inspector. And therefore, they are, well, more difficult to predict. Quantum's will have more effect, and you may even see more -- or it's to be expected that there is more variation, of course, quarter-to-quarter.

I hope that gives you some color, because we indeed consider breaking it down into these product lines as too sensitive information.

I understand. Can you perhaps tell us, looking at the WI business, how many new customers you added in Q4?

I'm sorry. We really don't provide that information. I've given you just the example of the order for a new customer that came in this morning, but just -- that's an anecdotal demonstration. We really don't -- or prefer not to give that information.

Okay. And then, in terms of your guidance for Q1, unusually strong, particularly given the Chinese New Year. Do you see any impact from that in the quarter?

It sounds like it's fairly broad based throughout Asia, as well as in the US and Europe. And it's difficult as always to talk about beyond the first quarter, but is there any sense as to how this first half of the year looks?

Well, I'm going to start by making a comment on seasonality, saying that if we carefully analyze our sales over the years, we really don't see any seasonality. I know there is a lot of talk about Christmas periods and even for a while in Chinese New Year and so on. If we look at our history, we really cannot find any seasonality. So even though it's the Chinese New Year quarter that also historically has not meant that it's slower quarter or a faster quarter, for that matter.

So then the second thing is, indeed, that the amount is broad based. It comes from all regions. And it's not really -- well, particular focal point. Having that -- said that, looking into the future -- well, we don't give a specific guidance per quarter. You know lot of the -- you know that our visibility is quite limited and it remains limited. So it's very difficult to predict quarter-over-quarter.

Also, what I can't say if we take a couple of steps back, then what we see is that the industry, or let me first say that the overall economy worldwide is doing quite well and obviously we're driven by sales of semiconductors worldwide. We see that the new markets are really picking up the slack, if there's any from the old world so to speak. And with the old world I mean here, the US and Europe, and maybe even Japan to certain degree.

So then there is strong or there is a good outlook for economic growth worldwide translating into a good demand for -- well, all kinds of products including semiconductors of course. We see that it is leading in to the semiconductor industry that it has well-behaved, so to speak, meaning that the inventory levels as well as the utilization rates are all under control. Inventory levels are very healthy. And then, also, the utilization rates are in the high 80s or even low 90s for the more advanced packaging applications.

And so we believe all that we're looking as a quite -- is at scientific Gardener's Day they believe that it's got to be a period within two or three years of growth. Obviously, I cannot look that far, but looking at this overall, well, world economy is in good shape and the semiconductor industry in good shape. It makes sense to me or I don't really see why certainly there would be a collapse, so to speak.

I think it makes sense to me when somebody says, "It looks like we're going to see an extended period of maybe not -- then on a spectacular but decent growth." The only thing I can say that makes sense to me. If you very specifically if you lean a little bit further and you see that, for instance, the books should grow both the US based and the worldwide based and improved again somewhat in December from after it come down a little bit for, I think, a couple months.

Also, the bookings -- the backend bookings are growing. Also they're nothing spectacular, but positive. So that's the general feel, I can give you. And then how we see the next, well, several quarters so to speak. But we know and I think we are all apart from a management point of view, it should always add to this that our management perspective of course is one of adapting to whatever will happen. And to make sure that if we need to sell double that we can do so. And if we have to sell nothing we still survive. It is a management point of view, but I hope that give you the general color that see a little bit longer term.

Okay. Thank you.

You are welcome.

[Operator instructions]

Your next question is a follow-up from Jim Ricchiuti with Needham & Company.

I do have a follow-up question on the Inspection Modules business. The sequential growth there was quite modest. And I wonder if you could elaborate on what happened there. Is that pricing pressure in the market, or perhaps some customers doing, some one there taking care of their vision needs internally?

Yes. I think there is in the module business there is some old business I would call it, some older OEM business that has a tendency overtime to go down. Obviously, there is also results of the cells that picks up the slack and the results of that is what you see and was in deed this modest growth. So that's basically why that growth is relatively modest because of some of the older OEM business.

Okay. And within the solar cell market, how would you characterize the level of activities that you're seeing?

That's very healthy, although I have to say it can really vary from quarter-to-quarter. Actually it's not very predictable because the quantity -- there also are large. But it is really -- she is doing nicely, and growing.

And just going back to the core business, the component inspector business. Are you seeing any change in the competitive landscape coming out of probably as high inspection?

No, not really.

Okay. Thank you very much.

You are welcome.

[Operator instructions].

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

All right. Well, we'd just like to thank everybody for joining us today. And I am looking forward to seeing all of you and hearing all you 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. Thank you.