科磊 (KLAC) 2007 Q2 法說會逐字稿

Good afternoon and welcome to ICOS Vision Systems' second-quarter 2007 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. And if you didn't, a copy has been posted to the Investor Relations section of the Company's website at www.icos.be.

Before starting the call, I would like to mention that certain statements made by management during the course of this conference call may constitute forward-looking statements. 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 with the regulatory authorities and its Annual Report.

Now I would like to turn the call over to Mr. Antoon De Proft.

Thank you, operator, and hello, everyone. Welcome to our second-quarter 2007 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, of course, to take your questions.

Revenues for the three months ended June 30 were EUR18.3 million, representing a decrease of 4.6% from the first-quarter revenues of EUR19.2 million, and a decrease of 38.6% from the EUR29.8 million reported for the second quarter of 2006.

Income from operations for the second quarter was EUR0.7 million, slightly higher than the first-quarter income from operations of EUR0.6 million and compared to the EUR8.4 million reported for the second quarter last year.

Net income for the second quarter was EUR1.1 million or EUR0.11 per share compared to net income of EUR1.6 million or EUR0.15 per share for the first quarter and EUR7.1 million or EUR0.67 per share for the second quarter of 2006.

Revenues for the six months ended June 30 were EUR37.4 million, representing a decrease of 40.7% over the EUR63.2 million reported for the same period in 2006. Income from operations for the first six months of 2007 was EUR1.3 million compared to EUR19.2 million for the same period last year. Net income for the first six months was EUR2.6 million or EUR0.26 compared to net income of EUR15.7 million or EUR1.49 per share for the first six months last year.

As we predicted, difficult market conditions continued during the second quarter. And as a result, our revenues slightly decreased with respect to the first quarter. Still, we are happy with our performance in the second quarter as we managed to increase the operating profit slightly as both our gross margin and operating margin improved. We also generated EUR7.3 million of cash from operations and spent EUR3.8 million on repurchasing Company shares.

First-time buyers accounted for as much as 16.5% of revenues during the second quarter of 2007. Those customers were mainly located in Japan and the rest of Asia and were buying Wafer Inspectors and Component Inspectors. The high percentage of first-time buyers illustrates our growing market penetration.

We received several important customer awards during the second quarter. First, for the third consecutive year, we received the Preferred Quality Supplier award from Intel. From PowerTech Technology, Inc., or PTI, we received the 2006 award that they present to their most valuable partners in recognition of delivery, constant service quality and outstanding contributions.

And finally, we received a 10 BEST award from VLSI Research, which is, in fact, the result of a worldwide customer survey. In fact, for the first time in our history, we won the 10 BEST award in two separate categories. We were awarded the 10 BEST award in the category of assembly equipment, as we had before, but as well in the category focused supplier of chipmaking equipment. And this latter category spans the whole semiconductor industry, including wafer process, process diagnostics, assembly, test and material handling. We are also proud to say that in this customer survey we received our highest marks for equipment up time and received the highest marks of all assembly awardees for cost of ownership.

Then the sale of new products accounted for approximately 12.8% in the second quarter. These new products include mostly Wafer Inspectors and new variants of the Component Inspectors. Consistent with our long-term policy during periods of weak market conditions, we continued our intense R&D efforts across all product lines and we spent 21% of revenues on R&D. We plan to keep the absolute number of R&D spending approximately flat. And we expect that as revenues for newly introduced product lines will continue to ramp, we will return to our historic range of approximately 12% R&D.

I would like to mention two particular projects that we worked on during this quarter. The first one is our 300 millimeter wafer handler, which we introduced during the SEMICON West show in San Francisco earlier this month. With this introduction, we can now offer our superior 2D and 3D image processing capabilities to memory markets and other high-volume markets.

The second project which I would like to mention is the [CI-T120S], and that is a special version of our Component Inspector dedicated to the inspection of the most advanced substrates. As system-in-a-package and flip-chip technologies advance, substrates are becoming much more critical and the inspection needs are expanding to highly equipped 3D measurements, combined with high-resolution surface measurements. We believe that our CI-T120S will be the most competitive system for advanced substrate inspection and we will officially introduce the system in September of this year.

The competitive situation, then -- we believe we continue to have a strong market share for our Component Inspector products and we believe that the introduction of the CI-T120S will further increase the potential market for this product family into the important growth market for advanced substrate inspection.

For the Wafer Inspector, I mentioned in previous calls that we are competing with more established players, but we believe to have strong technology in this field. Our strong image processing background, including our unequaled 3D metrology capabilities, and our 20-plus years of alignment experience, make us unique in applications such as wafer bumping and post-die inspection. Even without a 300 millimeter capability, we have rapidly gained market share in this market, with approximately one news customer per month during the first half. The newly introduced 300 millimeter handler will allow us to extend into high-volume market segments such as memory. And we believe that we're well-positioned to further gain market share in this rapidly growing market.

Finally, our solar cell inspection products enjoy a strong market share and we believe to be very competitive with respect to competing products, which are mostly captive or system integrators.

I gave you an update on the patent infringement litigation with Scanner Technologies during our last call. Since then, we received on May 22, 2007, a favorable verdict in our defense of the patent infringement action in the Federal Court for the Southern District of New York. Without going through the whole history of the case, the District Court determined that Scanner patents were not infringed by ICOS; that the Scanner patents are invalid because its alleged invention was obvious in view of prior art, and that included prior art -- ICOS technology; and thirdly, Scanner's patents are unenforceable due to inequitable [comments] before the U.S. Patent Office, since Scanner obtained expedited review of its patent applications based on misleading assurances that it had studied equipment and that its equipment infringed.

As part of the verdict, ICOS was also awarded attorney fees and has filed a motion to support the attorney fees. Currently we're waiting for judgment on the fees motion. Finally, Scanner has filed an appeal against the May 22 verdict.

The organization, then, the total number of employees stood at 342 full-time equivalents at the end of the second quarter, and that is, well, one down from the 343 full-time equivalents at the end of the first quarter. The number and spread of our personnel remains almost identical with respect to the last quarter. We continue to consolidate our R&D activity for solar cells in Belgium. And we are also planning to further extend our software development center in India.

Then the revenue breakdowns per product line -- first, inspection systems accounted for 81% and inspection modules for 19% in the second quarter, and that compares to 87% of inspection systems and 13% of inspection modules for the first quarter. This is mostly the result of strong growth in our solar cell product lines, for which the second quarter marked the highest revenues ever.

The sequential revenue decline in the second quarter was mostly caused by a decline in Component Inspector sales, reflecting difficult market conditions. The sales of the Wafer Inspector products were sequentially down just slightly, but that is a normal phenomenon, as the growth of the Wafer Inspector is unevenly spread over time and especially its revenue recognition is not easy to predict with sales of new products to new customers. So we also continue to expect the fluctuating growth path over the next quarters.

We expect the Component Inspector revenues to increase modestly in the third quarter. And then subject to the timing of the revenue recognition, we expect Wafer Inspector revenues to remain relatively flat before a steep growth in the fourth quarter. Finally, we expect solar cell inspection modules to continue to increase slightly.

We remind you, though, that the indications for product sales mix often depend on the individual orders and their timing and that they can change rapidly. The product sales mix also can vary substantially from quarter to quarter.

The revenue breakdown, then, per geographic area during the second quarter -- we realized 78% of the turnover in Asia, of which 7% was in Japan and 71% in the other areas. Further, 20% of the turnover was in Europe and 2% in the U.S.

During the second quarter, we saw revenues declining in most areas except in China and in the Singapore/Malaysia/Thailand area, where we saw a rebound in our sales. For the current quarter, we don't expect major shifts between the areas, with most areas growing slightly. But of course, here I have to say that we are zooming in, so these quantums can change, and that could change rapidly from quarter to quarter.

Then let's turn to the financial information. On revenues of EUR18.3 million, we achieved a gross margin of 53.5% in the second quarter compared to a gross margin of 52% in the first quarter. For the current quarter, we expect the gross margin to remain in the range of 51% to 54%. Our net R&D expenses in the second quarter amounted to EUR3.9 million or 21.1% of revenues. Our R&D expenses benefited in the second quarter from a grant of EUR165,000, and that is similar to the first quarter. For the third quarter, we expect a grant of approximately EUR300,000 and our R&D costs to decrease slightly to within the range of EUR3.7 to EUR3.9 million, of course.

SG&A expense decreased to EUR5.3 million compared to EUR5.5 million in the previous quarter. This decrease was mainly caused by lower general expenses in line with lower sales activities and lower legal expenses. For the third quarter, we expect legal costs to further decline and commissions to increase as a result of higher sales levels. Combining those effects, we expect SG&A expenses to remain within the range of EUR5.2 million to EUR5.5 million.

The operating profit for the second quarter was EUR656,000, just above the EUR604,000 reported in the previous quarter.

During the second quarter, we realized a net financial income of EUR527,000 compared to EUR544,000 of net financial income for the first quarter. So the financial income of EUR1 million for the second quarter included interest income of EUR495,000 and foreign currency exchange gains of EUR516,000. The financial expenses of EUR484,000 included interest income of EUR58,000 and foreign currency exchange loss of EUR425,000. We expect the impact of the net currency exchange effects to remain limited during the next quarters.

We incurred a tax expense of EUR103,000 compared to a tax benefit of EUR419,000 in the first quarter of 2007. As indicated before, our tax rate can vary with our geographical mix of sales and manufacturing, especially when you compare that on a quarterly basis. For the running quarter, we expect to continue to see a tax rate below 10%.

Consequently and as a result of all of that, we realized a net profit for the second quarter of 2007 of EUR1.1 million or basic earnings per share of EUR0.11.

Then the cash flow information -- in the second quarter, the cash flow, defined as net income increased by noncash items, was positive EUR1.5 million, while changes in working capital and provisions provided EUR5.7 million in cash, resulting in a positive net cash flow provided by operating activity of EUR7.3 million.

During the second quarter, we generated EUR103,000 from investing activities and we used EUR3.9 million for financing activities. These financing activities include the repurchase of our own shares for which we received the authorization of the Extraordinary General Assembly of Shareholders, held on June 6, 2006. We purchased during the second quarter a total number of 111,860 shares for a total cash consideration of EUR3.8 million at an average of EUR34.16 per share. Since the program has started, we have now repurchased a total of 394,736 shares. We will continue to repurchase our own shares on a regular basis in 2006. We received the renewal of the authorization for the repurchase of shares from the General Assembly held on June 2007.

So, then, the balance sheet -- cash balances stood at EUR59.6 million at the end of the second quarter, up from EUR56.2 million one quarter earlier. Accounts receivable decreased to EUR16.2 million from EUR22.1 million at the end of the previous quarter. Days outstanding decreased to 80 days, down from 104 days a quarter earlier.

Inventories decreased to EUR20.9 million compared to an inventory level of EUR22 million the previous quarter. The inventory split was EUR6.1 million raw materials, EUR9.5 million work and progress, and EUR5.3 million finished goods.

The stockholders' equity decreased to EUR94.5 million at the end of the second quarter from EUR97.6 million at the end of the first quarter.

So looking ahead, then, we see evidence that the industry is moving out of its recent trough. The market is recovering, but it is recovering relatively slowly, and it is gaining further strength. As a result, we expect our third-quarter revenues will be up modestly with respect to the second-quarter revenues.

That concludes my prepared remarks, and I would now like to open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). [Philip Blankensopp].

It's Philip Blankensopp of Reuters. Can you quantify what you mean by a modest improvement in the third quarter? And can you perhaps elaborate a little bit? It sounded like in the previous quarter, you were perhaps expecting perhaps a steeper improvement from the second half. It is a modest improvement, as you say. Maybe you can put that in numbers. And maybe it is looking too far ahead, but perhaps you have a view for the fourth quarter as well.

First of all, our guidance is strictly limited to the third quarter. I can try to give you some color behind that, but the guidance is strictly for the third quarter. I also have to say that as always, the visibility is low and the trend in the industry, I guess, is that it becomes lower and lower. It is very difficult to look very concretely into the future.

Having said all that, that is also why, modest this, we haven't really put numbers to that. But if you would -- and this is of course not specific guidance, but if you ask me what modest, what does that mean to you, because it can mean different things to different people, if I have to put a number on that, I will say in the 5% 10% range. But again, this is premature and this can really -- this is not the guidance range. But that gives you some indications.

For the fourth quarter, as far as what the overall market will do, that is difficult to say. We simply don't have the visibility. I guess the general expectation is for a market improvement. It is true, I guess, that -- you said that -- and as the industry in general was a little bit more bullish about the second half a little while ago than it is now, it looks like the recovery is there, but it is not aggressive. It is not steep. I think if I have to look for an explanation, I think it has to do with the short-term weakness that we see on the memory side, and that I think tempers a little bit the recovery speed.

So coming back, then, to the fourth quarter, I already said in the prepared remarks that I would say the bases are loaded for Wafer Inspector sales in the fourth quarter. So that is looking very positively there. And then what the rest of the market does, I don't have any specific guidance for, but of course that will be added to that, and then the overall sum of those two will determine what the market will do in the fourth quarter.

And it's fair to say you are more bullish looking forward for Wafer Inspectors than for your other products, which is Component Inspectors?

More bullish -- we are quite confident about our new products. Wafer Inspector is one of them. I think also in the prepared remarks, I explained about that and why we are really gaining good traction with our Wafer Inspector. Also, solar cell is doing very well. We will introduce in September the substrate inspection system, which we also believe will do well. So of course, new products that start from a small basis, or from close to zero, can grow much faster than the established markets or products with large market share can do. So from that point of view, we are more bullish, if you want, about our newer products.

I think for us, the most important thing -- we know this market is hard to predict and the visibility is limited, and I have said this several times. From a management point of view, it is a matter of being prepared for whatever the market throws at you, so to speak -- ramp up very quickly when it suddenly happens; make sure you are lean and mean when the market is soft. But then it is the investment in the future. And at this moment, like I said, we spent 21% on R&D, which obviously is a large number. And what is important to see is that the new products are really gaining traction and gaining market share.

What I also would like to add to that, though is we have to be realistic. When you look, for instance, at the Wafer Inspector and the acceptance of these products, the timelines here are relatively long. First of all, many of these customers, of course, are using other existing equipment. You have to convince them that your system is really better. Then they have to evaluate your system, test it and so on. And then you come to a purchase order.

You have, of course, your delivery time. And then you install that into the factory. But then you have to add, I would say, easily three months for full acceptance, because they need to teach all the wafers, for instance. They need to validate, need to run enough product through it. And only at that point, of course, can you recognize the revenue. And that is just for one system, of course. And then it takes, again, some time before -- well, you get the orders and then you can deliver the follow-up products.

So it is not something that can explode in one or two quarters. But it is clear that our roots are growing deeper by the day and that this product line is getting good traction. And so I am indeed quite bullish about the future and the future possibilities and capabilities and then end market potential of these products.

Yogesh Jadhav.

My name is Yogesh calling from Arete Research. I have two questions. First of all, I wanted to get an understanding of your guidance for the third quarter, the modest guidance for the third quarter. Would we understand from your back-end customers is that their second-quarter sales are going to be up 11% and they are guiding strongly for the third quarter and above? And according to that information, the CapEx plans have also not come down. So what is the impact -- what impact do you see on your order situation?

And second question I have is on the utilization rates. Can you maybe confirm the situation you're seeing with your back-end customers? Thank you.

Well, let's start with the utilization rates. They are high and they remain high. On the third-quarter guidance, I think you are talking about assembly subcontractors?

Yes, that is right.

I guess one thing you have to consider is that there is a general trend that some IDMs are shifting production to the subcontractors. And then of course we're looking at the overall market. So we're looking at the sum of them. And there's also a certain amount of shifting that is going on. And that, I think, may explain why you will see some higher numbers in the case of these people that are absorbing some of the capacity -- production capacity that has shifted to them from IDMs.

Yes. So I understand from this point that if the utilization rates are high and the capacity -- more capacity is needed as production has shifted, then ICOS should be seeing some more orders down the line, don't you think so?

Well, yes, we also are seeing market recovery. Like I said, the memory end of things seems, at least for the short term, a little bit weak, and that dampens the rate at which the market is recovering. But yes.

We're also, if you look at it, we're about four quarters into a correction here. The market fundamentals are still solid. So again, from a management point of view, I think things are looking quite good, and we will see how the recovery exactly unfolds. We are ready for it. And then I think things look quite good. But we know it is hard to predict exact timing quarter to quarter.

Steve Babureck.

Steve Babureck. Just a quick question regarding the Wafer Inspector. You did not disclose your market share in this market for Q2. Can you give us some indication regarding this?

I don't have the number ready here, and we did indeed not disclose it. But order of magnitude, I think we're looking around 10%.

So same as Q1?

Very similar, yes.

And regarding the solar cell business, you mentioned that it is going pretty strong. Can you give us also some market share numbers or at least the size of the market you address in this business?

Well, we don't disclose our individual market sizes. But it is -- I have said it before, it is an interesting niche. It is sizable, but it is not as big as Component Inspector or Wafer Inspector. The good news, it's growing fast -- it is growing 30%, 40% per year. And we are in a very good position to take advantage of that growth. I guess that gives you some color as to how big the market is.

And just one last question -- you mentioned the situation at the memory guys. Can you give us roughly, maybe, your exposure to the memory market and then in DRAM? And also, given all the front-end CapEx that these guys have been investing in over the last quarters, don't you expect a strong pickup in the back end due to the capacity expansion?

Well, when there is more chips that are turned out, that has to lead to a market -- to a stronger market. That relationship is quite clear. So all the capacity that is built up, that needs to lead to shipments one day. Of course that reasoning is correct. As far as making exact statements as to when that will happen and how exactly, how steep and so on, that is the same as visibility, which, unfortunately, we also don't have.

And regarding your exposure to the memory guys?

We are really a good friend of the industry, I would say, where we sell to all of them memory, logic, everything, with the same shares, I would say. So what that means is in certain periods, memory is much more important, maybe more than half of our sales, and other periods where memory is a little bit weaker; it goes down. But it is really, if you use the overall market ratios of memory versus other applications, you will be very close to what we do.

(OPERATOR INSTRUCTIONS). We appear to have no further questions. So I will hand the conference back to you.

All right. Well, thank you very much, operator. And also, I would like to thank you, everybody, for joining. And I am looking forward to speak to you next quarter. Thank you very much.

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