科磊 (KLAC) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the ICOS Vision Systems fourth quarter 2006 and year 2006 results call. [Operator Instructions] This conference call is being recorded. On today's call we have Mr. Anton De Proft, the President and CEO from ICOS Vision Systems and also [Mr. Edwin Vandendriessche], Financial Manager. First of all I would like to hand off to Mr. Anton De Proft. Sir, please begin your meeting.

Well, thank you very much and welcome everybody to our conference call. As you might hear and I'm sure you will hear my voice has a little problem today. This is also the reason why Edwin Vandendriessche is joining me and I would like to give the word to Edwin to start the prepared remarks. Of course, after that we will both be happy to answer any of your questions. So Edwin, please go ahead.

Good afternoon to everybody. Let me first read the Safe Harbor statement. This conference call may contain projections and other forward-looking statements. While these projections and other statements represent our best current judgment, they are subject to risks and uncertainties that could cause results to vary. These risks and uncertainties, you can find them back in our annual report and in other filings with securities regulators. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect actual outcome may vary materially from those indicated. Let me turn now to the conference itself.

We will first discuss about the performance during the fourth quarter and the entire year 2006. Then we will comment on the outlook of our business and after that we will be glad to take questions followed by closing remarks.

Revenues for the three months ended December 31, 2006 were EUR21.5 million representing a 3% increase over the third quarter of 2006 and a 25% decrease from the 28.6 million reported in the fourth quarter of 2005. Income from operations for the fourth quarter of 2006 was EUR9,000 compared to 2.8 million and 7.9 million reported for the third quarter of 2006 and the fourth quarter of 2005 respectively. Net income for the fourth quarter of 2006 was EUR1.4 million or EUR0.13 per share.

Results for the fourth quarter of 2006 included 2.3 million write down of obsolete inventory, which the Company booked to reflect ongoing weak market conditions, the rapid transition to its next generation of products and a changing product mix. Excluding this charge, fourth quarter operating income was 2.3 million corresponding to a 10.5% operating margin and net income was 3.1 million or EUR0.29 per share.

In comparison net income was 3 million or EUR0.28 in the third quarter of 2006 and 6.4 million or EUR0.61 per share for the fourth quarter last year. Revenues for the entire year 2006 rose 31% to EUR105.6 million compared to 80.6 million revenues in 2005. Operating profit in 2006 amounted to EUR22 million compared to 17.3 in 2005.

And finally, our net income for 2006 was EUR20.3 million or EUR1.93 per share compared to a net income of 13.5 or EUR1.28 per share in 2005. Excluding the inventory write down mentioned earlier, the net income for 2006 would have been EUR22 million or EUR2.09 per share. Revenues for the fourth quarter were slightly above our guidance.

Consistent with our long-term policy we continued our investments in new product developments and maintained our level of R&D expenditures. This was particularly the case for our wafer inspection products, which continue to gain market acceptance. Despite the softening of the market and our continuous investments in R&D together with a one-time charge for obsolete inventory, we still maintained a positive operating margin, albeit it a modest one, but nevertheless illustrating the flexibility of our operational model. We generated 2.8 million cash from operating activities during the fourth quarter of 2006 ending the quarter and the year with EUR60.7 million in cash and cash equivalents. Stockholders' equity increased by 12% to EUR99.9 million and we repurchased EUR5.9 million of owned shared during the year 2006.

Turning to the customers and the new customers, first time buyers accounted for 10% of revenues during the fourth quarter. Those customers were mainly located in Japan and in the rest of Asia. For the fiscal year 2006 new customers accounted for 4% of revenues. Those customers were located around the world and were buying Component Inspectors, Wafer Inspectors and Solar Cell Modules. During the year we received several important awards including customers' awards like the Preferred Quality Supplier Award from Intel and the Regional Supplier Recognition Award from Texas Instruments as well as some awards which are based on industry wide surveys like the Ten Best Award and the Five Star Award from VLSI Research.

Then let's have a look at the new products. Sales of new products accounted for approximately 22% in the fourth quarter of 2006 and 45% for the entire year 2006. The majority of these sales were for our new Component Inspector, the T120, which was very well received in the market. During the fourth quarter of 2006 we saw a broad acceptance of our newest types of component inspectors including those designed for SD part applications.

As we mentioned several times during previous calls, it is our long-term policy to invest in future technologies and products, even during periods of softer demand. To illustrate this I can tell you that our R&D spending increased to 27% in 2005 and 32% in 2006. During the fourth quarter our R&D work remained intense over all our product lines with the highest absolute amount of R&D spend on our Component Inspectors to further improve the performance of the system and to expand its market applications. As one result we sold several inspectors for memory card inspection.

The other very important R&D effort is spent on our Wafer Inspector product line. our Wafer Inspector Teams are very busy expanding the functionality and the speed of our WI 2,000 and WI 3,000 systems as well as with numerous customer evaluations. We are especially pleased with the conversion rate of those customer evaluations, which have led to purchase orders from several new customers over the last three months despite difficult market conditions. Where we said this morning that we added in the last three months four new customers, we actually can say right now that we have five new customers. We had an extra PO in the course of this morning.

This evolution has further strengthened our belief and our commitment to this new product line. we have said during previous calls that sales cycles are very long for such complex products and that ramping up this product line would take many quarters. This is, of course, still the case but we believe that even under the current market conditions we should be able to ramp up this product line quarter after quarter during this year. We are also still working on the 300 millimeter [handler], which will further expand the market potential for this product line and for the development we are on track, on schedule.

To conclude these comments on our R&D efforts, we are spending the remaining portion of our R&D on improving and speeding up our Solar Cell Inspection Modules and on more generic technology development for future generation products.

We then turn to the competitive situation. We continue to have a strong market share for our Component Inspector products and with the introduction of our CI-T120 last year we believe that we have further consolidated that position. 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.

For the Wafer Inspector we are competing with more established players in this market. During previous calls we expressed our belief that we have strong technology in this field and, as we explained earlier during this call, this conviction is getting stronger and well supported from our increasing customer base.

Then we should have a look at the situation with the Scanner and the patent litigation. We have stepped up our efforts against them but let's first look at some history here. What we call the 2,000 case is actually the case started by Scanner for alleged patent infringement. This case was tried in March of 2005 and since then we are waiting for a ruling of the judge and that's still the case today.

Secondly, we initiated a case against Scanner in July 2005 before the same court seeking declaratory relief that certain new patents issued and assigned to Scanner and relating to the same technology are not infringed by our products. Furthermore, our suit seeks to enjoin Scanner from activities, which we believe constitute unfair competition. As we mentioned in the Press Release, we entered into a stipulation of dismissal of certain counts in December 2006 with the purpose to narrow the issues and disputes such as to focus resolution of the controversy and limit expenditure of resources. The court has allowed the motion for summary judgment, which allows to avoid the lengthy and expensive jury trial, the issues to which it was narrowed towards what we consider to be the basic elements from our side.

Then I said in the introduction that we stepped up the efforts. Well, on January 31st, 2007 we commenced a new action before the United States District Court, Southern District of New York, so the same court as in the previous cases seeking preliminary and permanent injunctive relief against Scanner to restrain them from claiming patent infringement against our customers. The action seeks a declaration that the Scanner patent portfolio is invalid because of lack of patentability, abuse of patent law and fraud on the Patent Office and also that the entire Scanner patent portfolio is unenforceable and not infringed. We are waiting for the judge in response in this matter. We believe that Scanner's threats and actions are totally baseless. We believe that Scanner has made wholly improper threats and such conduct could, in fact, subject Scanner to liability in the United States under that country's unfair competition laws. It is our opinion that Scanner is grasping at straws and attempting to use the threat of the unknown to gain leverage regardless of the legitimacy of their asserted position. We believe that it is our duty and that of the industry to defend ourselves against these threats and actions by Scanner. While we consider our position to be sound, litigation can be costly and time consuming and success, of course, cannot be assured.

We then will have a look at our organization. The total number of employees stood at 343 full-time equivalents at the end of the fourth quarter of 2006 and that is slightly down from a level of 345 at the end of Q3 2006. Our staff decreased slightly during the quarter as a result of a reduction in the work force of the Chinese factory in line with our current sales volume. However, we have increased our R&D staff, which will reach the total number of 100 for the first time and our worldwide sales and support teams mainly in support of our Wafer Inspector product line.

We also started an off shore development center in India through a subcontracting arrangement to expand our resources for software development as we further need to expand our software capabilities. We believe that this center in India will allow us to react quickly to market's requirements and to expand our software capabilities quickly in a flexible way. We currently have six people in that development center.

We then turn to the revenue breakdown per product line and per geographic area. First, per product line, Inspection Systems accounted for 83% and Inspection Modules for 17% of the fourth quarter revenues compared to 84% of Inspection Systems and 16% of Inspection Modules for Q3. During Q4 our Component Inspector sales dropped but this drop was more than compensated by the sales increase in Wafer Inspectors and Solar Cell Inspection Modules. For the first quarter of 2007 we expect revenues for all products to decline sequentially except for Wafer Inspectors, which we expect to continue this to increase.

Then the breakdown per geographic area during Q4 '06 we realized 78% of our turnover in Asia of which 4% in Japan and 75% in other areas of Asia. Further 20% of our turnover was realized in Europe and 1% in the U.S. During the fourth quarter we saw our revenues declining in most areas except in Taiwan, South Korea and Europe where we saw a rebound in our sales. For the current quarter we expect to see a fairly mixed picture with Europe, the U.S. and Japan to increase and the rest of Asia, so including Taiwan, to decrease.

Then we will look more in detail to the financials of Q4. As indicated in our previous conference call, the continuing tough market conditions and the unfavorable product mix led to a lower gross margin. In addition, these continuing weak market conditions triggered our evaluation and assessment of our global inventory levels and led to a one-time charge for obsolete inventory. The total impact of this one-time write-off during the fourth quarter is EUR2.3 million. The main reason for this write-off was the combination of the sudden and rapid market downturn, which started in the second quarter of last year and which continues until today, in combination with the introduction and very rapid market acceptance of our newest Component Inspector, the CI-T100. Consequently on the revenues of EUR21.5 million we achieved a gross margin of 45% in Q4. Excluding this one time charge our gross margin would have been 55.6% for the quarter in line with our earlier guidance.

For the current quarter we expect that the difficult market conditions and the unfavorable product mix will remain. As a result of all these elements, we expect that our gross margin may decrease somewhat further into the range of 53 to 56%. Looking further ahead, we believe that the larger product mix, including the increasing variety of product flavors within our product lines and the increased allocation of fixed costs, will have a tendency to make our gross margin somewhat more variable from quarter to quarter. We also believe that in the first quarter many of these elements are unfavorable calling for a lower guidance of our margin.

Our net R&D expenses in the fourth quarter amounted to EUR3.9 million or 18% of revenues. This spending level is historically high as a result of the investments in our Wafer Inspector product. Our R&D expenses benefited in the fourth quarter from a grant of EUR88,000. For Q1 2007 we will continue to do some hiring in R&D but we expect our costs to increase slightly within the range of EUR3.8 to EUR4 million following the fact that we will [forge] a benefit in the coming quarters from additional R&D grants, which were granted recently. In this guidance we take into account the grant of EUR165,000.

SG&A expenses increased to EUR5.8 million compared to 5.3 in the previous quarter. This increase was mainly caused by higher commissions as a consequence of higher sales and of the area mix. For the first quarter of 2007 we expect SG&A expenses to remain in the 5.6 to 5.9 million range, slightly higher as a consequence of higher legal expenses.

The income from operations for the fourth quarter was EUR900,000, down from 2.8 million reported in the previous quarter-- EUR9,000. Despite the one-time inventory write-off added on top of the current lower gross margins, we still were able to keep our operating margin positive illustrating again the effectiveness and flexibility of the operational business model. For the current quarter we expect our operating margin to increase again to normal healthy levels in accordance with our updated guidance on revenues and expenses.

During Q4 2006 we incurred a foreign currency exchange gain of EUR207,000. This is compared to an exchange gain of 63 in Q3 of 2006. We expect the impact of currency exchange effects to remain limited during the next quarters and interest and other income increased to 482,000, up from 394,000 in Q3 2006.

We incurred a tax benefit of EUR600,000 compared to a tax expense of [300,000] in Q3 '06. As indicated before, our tax rate can vary with our geographical mix of sales and manufacturing, especially when compared on a quarterly basis, and was influenced positively by the Belgium tax credits. For the first quarter of 2007 we expect a further favorable tax rate between 10 to 15%, but again this will vary from quarter to quarter depending geographical mix of sales and manufacturing. Consequently, we generated a net profit for Q4 of 2006 of EUR1.4 million or basic and diluted earnings per share of EUR0.13. For the entire year 2006 we realized a net profit of 20.3 million or basic earnings per share of EUR1.93.

Let's then turn to the cash flow information. Cash flow in Q4 defined as net income increased by non-cash items was positive at EUR1.1 million, while changes in working capital generated 1.7 million in cash resulting in a net cash flow from operations of EUR2.8 million. During Q4 we used 238,000 in investing activities, which comprises the final refurbishing of part of our premises in Belgium to house the Wafer Inspection group including additional equipment, tools and computers. Further during Q4 we used EUR2.7 million for financing activities. These financing activities include the repurchase of our own shares for which we have received the authorization at the Extraordinary General Assembly of Shareholders held on June 6, 2006. We purchased during Q4 2006 a total number of 85,074 shares for a total cash consideration of EUR2.5 million. This is an average price of EUR29.95 per share. Since the program has started we have now repurchased a total of 191,236 shares. We will continue to repurchase our own shares on a regular basis in 2007 taking into account that from January 1st on we even accelerated the repurchase program.

Now turning to the balance sheet, cash balances stood at EUR60.7 million at the end of Q4 '06 down from 61.2 million at the end of Q3. Accounts receivable decreased to EUR17.5 million from 23.5 million at the end of Q3 and DSOs decreased to 74 days in Q4 down from 100 days at the end of Q3. Inventories decreased to 23 million at the end of the fourth quarter compared to an inventory level of 26 at the end of Q3. The inventory split was 6.9 million raw materials, 10.9 work in progress and 5.2 million finished goods. Stockholder's equity decreased to 99.9 million at the end of the year from 102.3 million at the end of the third quarter. Year-over-year our stockholder's equity increased with 12%.

We have indicated above the reasons why we are upbeat about our longer-term prospects, especially the growth potential for our Wafer Inspector product line. However, we are going through a period of soft demand and we expect short-term market conditions to remain difficult. Therefore, we expect the demand for our Component Inspectors should weaken further during this quarter. On the other hand, the interest in our Wafer Inspector products should continue to thrive, but first quarter revenues will remain difficult to predict because, although we expect to ship the first Wafer Inspectors to several new customers in the quarter, timing of acceptance and revenue recognition is less certain. As a result, we expect the revenue in the first quarter to be 5% to 15% down from Q4 2006.

This concludes our comments and I would like now to open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Eric de Graaf, Petercam.

It's Eric de Graaf in Amsterdam this time. A couple of questions and I think I'll focus on Edwin because Anton doesn't sound too good. So financials, Edwin, could you give us an indication of the level of CapEx you expect for 2007?

Yes. When you look at 2006 with the installation of the Wafer Inspection room at the other site this was at the high end. This has been finished and so we will be back in that range of EUR1 to EUR1.5 million.

Okay and that's basically your let's say normal level if don't do anything wild in a given quarter?

That's right.

Or given year. Okay. Then another question on Scanner costs or Scanner legal costs, you mentioned some ongoing issues. Can you give an idea what amount you spent on legal issues in 2006 so that we have some idea what the impact is?

Well, in 2006 on this case we spent about EUR700,000 and this is down from 2005, but with everything that we have and the stepped up effort you might expect that it will be higher, but it's difficult to predict.

Yes, I know I can imagine and that's an ongoing process I'm afraid. Then on your Wafer Inspection, I get a clear impression from you and also in the past that the development or the-- I shouldn't say development-- the acceptance of your Wafer Inspection tools is moving ahead nicely. The difference in your guided range for the first quarter minus 5 or minus 15, should we see that that room is the difference of recognizing revenue for Wafer Inspection tools in the first quarter or is that not only depending on Wafer Inspection tools?

Well, to a large extent you can say that it's a function of that uncertainty indeed.

Okay and then relating to that, are you planning to come up with a separate reporting line for Wafer Inspection tools? I can imagine that they are rapidly reaching a significant part of your revenues. I think it's in general very interesting to have a feeling of how that separate business develops.

Well, as you know, that this is the last time that we are reporting under U.S. GAAP and next quarter will be under IFRS and, by the way, we will make sure that there's a smooth transition for all of your models and we will organize a meeting for that, but right now we have not made a decision on that point.

Okay I think that more or less-- oh no, there's one more question. You mentioned ongoing growth in R&D spending despite the more difficult times. I guess that the growth rate will be a little bit lower than in 2005 and 2006. I would not expect another 30% increase in R&D spending. Is that a fair assumption or should I look at that sort of numbers for '07 as well?

No, no, no. It is more to be expected that it will be flattish, maybe slightly up, but certainly not off-- we have our team together and here and there we will need to add some people, but it's basically together.

Okay, thank you very much.

Frits de Vries, Rabo Securities.

I'm sorry I couldn't make it this morning due to bad traffic conditions. Congratulations with the five new customers for the Wafer Inspector. Edwin, could you give us a feel about what type of customers they are? I gather they are for the semiconductor segment and are they memory related customers or logic customers?

Well, thank you and no problem that you were doing some tourism this morning in the traffic jams in Holland. First of all, it's geographically spread significantly in Japan, also Philippines and other areas and we noticed there that LEDs is quite important [lens] is important, but also semi. In terms of memories, bear in mind that a lot of that is bumped wafer for our WI-3000, but to have the full product offering we still need the [handler] for 300 millimeter and there we are on track. We expect that at somewhere in the middle of this year it will be finished.

Right and specifically this 300 millimeter is very important for the memory market, which as I'm sure you're aware, is all 300 millimeter.

Yes, absolutely and you mentioned that for Q1 sales will be higher for the Wafer Inspector versus Q4. Can you comment on how many tools were short in Q4?

Well, you know, Frits, that we are not-- for competitive reasons we are not giving those specifications.

Okay, fair enough, but can you perhaps give a feel about what you expect when I look at the ramp for the coming quarter for the full year 2007? Do you think it will continue or can you give us some flavor there or--?

Well, we have a pipeline of evaluations, which is pretty big, and we see with the evaluations that the conversion of customers is quite high and when-- of course, we don't have a full product portfolio yet so that will increase and be completed in the course of this year. So we expect indeed that this will continue to increase over the course of this year and bear in mind that we have always said that we believe that we are active in an addressable market of 4 to 500 million dollar, that most of the growth in that addressable is coming from Wafer Inspector. There we believe that it will become as big, at least as big, as our traditional market and we still that ambition to have an overall market share of 50%.

Frits, if I may add to that because if it was said in the prepared remarks but you may have missed them. We did say that we expect that sales of our Wafer Inspector product would increase quarter after quarter during the remainder of the year.

Okay. Perhaps a question about the Component Inspector, Edwin you mentioned that sales dropped there in Q4. Can you give a feel about what kind of drop? Is that 15% or slightly more than that?

Yes, that's roughly 10% and bear in mind that the specialty memory market was still strong in Q4. The others are correcting inventories, the other sectors, but in Q1 we also see on the memory market that it's going up.

Okay and one product was not mentioned was the Flex Tape business. Does that mean it was kind of flattish in Q4 or--?

Well Flex Tape, is to be honest, is somewhat disappointing. In 2006 we had in the sector significant excess capacity and so the customers we have hardly had major CapEx programs. A second element is that we estimated or re-estimated the market. Then we have, as a result of that exercise, the impression that the market size is smaller than we anticipated and so from all of that we have decided to, of course, to still continue to support this product, but not to start up new R&D efforts and actually we have moved away certain people to other areas on R&D and we will see how the market develops. Also, when the over capacity or excess capacity is done and go from there.

Okay.

We have clearly seen in our Company that, of course, our Component Inspector that is the very important product line for us with also expanding capabilities like the memory card business, like substrates and so on. And then we also see our growth in two other areas, which is Wafer Inspector and Solar Cell Inspection, which are both very interesting rapidly growing market segments and so we really do concentrate on these three product lines, clearly focus all our R&D efforts in order to well, be successful in these markets.

Yes, sure I can imagine that. Perhaps about the Solar market, can you give a feel how strong that was growing? Are we talking about 25% or so, 30% in Q4 and do you think that will continue or--?

Well, when we look at 2006 as a whole, this was a very significant increase for us compared to 2005. It was not a doubling, but close to doubling and so also in 2007 we expect further growth there, but again you know that ASPs are much slower, so in terms of absolute contribution this will always remain much smaller than TI and WI business.

Yes, absolutely. Let's see. Well, that was about it. Thank you and wish you well with your voice Anton.

[Operator Instructions] We appear to have no further questions at this time, so I'll hand the conference back to you. Thank you.

Thank you, everyone, for joining us today. We look forward to speaking with you again next quarter and have a nice-- it's maybe a little bit early for the weekend, but have a nice weekend. Bye-bye.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your line. Thank you.