萬機儀器 (MKSI) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the MKS third quarter earnings conference call. At this time all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference please press the star, followed by the zero. As a reminder, this conference is being recorded today, Wednesday, October 16th, 2002.

I’d now like to turn the conference over to Miss [Joana Mays], Director of Investor Relations. Please go ahead, ma’am.

Thank you. Good afternoon, and welcome to our third quarter earnings conference call. By now you should have received a copy of our earnings release. If you did not, please go to our web site at www.mksinstrumetns.com, or you can call 978-975-2350, Extension 5524 after this call.

As a reminder, various remarks that we may make about future expectations, plans, and prospects for MKS constitute forward-looking statements for purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in this afternoon’s press release, and in the company’s annual report on Form 10-K for the fiscal year ended December 31st, 2001, and most recently quarterly report on Form 10-Q, each of which is on file with the SEC.

In addition, these forward-looking statements represent the company’s expectations only as of today. While the company may elect to update these forward-looking statements it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the company’s estimates or views as of any date subsequent to today.

Finally, I’d like to remind everyone that during the Q&A period each person will be limited to two questions initially. We will circle-back for further questions as time allows.

And now, I’d like to introduce John Bertucci, Chairman, Chief Executive Officer, and President of MKS.

Thanks Joana, and I wanted to thank everyone for joining our earnings conference call.

With me today is Ron Weigner, our Chief Financial Officer. I’ll give an overview of the third quarter, and then Ron will give a detailed review of the results. I’ll make some closing comments, and then we’ll answer your questions.

MKS third quarter revenues grew to 92 million, and slightly exceeded our guidance of 85 to 90 million. Third quarter sales for the semiconductor segment accounted for 73 percent of total sales, essentially the same as the first quarter. Third quarter sales to the thin film segment, which includes flat panel displays, increased sequentially by 25 percent to eight percent of total sales.

Turning to the highlights of the third quarter, we continued to identify opportunities at the leading edge of semiconductor processing technology. We introduced new integrated subsystems, achieved design wins in support of our customers’ ongoing technology transitions, and gained market share. Our product development strategy is targeted at high-growth opportunities as the industry transitions to 300 millimeter copper, low and high [K] dielectrics, and advanced process control.

Let me give you some examples of recent successes. The Pressure Measurement and Control Product Group gained market share in pressure measurement in the third quarter. Specifically, the enhanced measurement stability of our [etch manometer] products in actual manufacturing environments were a key factor in achieving new design wins. We also increased our [translucer] market share with design wins for our micro veritron high-pressured gas translucer at two major gas equipment OEMs.

Our Pressure Measurement and Control Group also introduced the significant new subsystem that integrate MKS core competencies and pressure measurement and control with control network electronics technology. It’s currently under evaluation by a major OEM for a critical process application. This is an example of how we leverage our broad process control technologies and deep application knowledge to engineer high-value solutions for our customers.

In materials delivery we worked with a customer to solve a complex process problem. The solution we provided, a new integrated flow control subsystem with unique patent pending technology, has been designed into 300 millimeter tools. Another new product, the [Alta] digital mass flow controller, continues to be well-accepted after its introduction in July at Semicon West. The Alta gained additional design wins on new platforms for thin film applications in the quarter. We also introduced the digital version of our dual pressure control integrated helium cooling subsystem which was qualified on its first tool in the quarter.

To accelerate the development and integration of subsystems we combined recently acquired product groups with complementary technology. For example, E&I, and ASTeX which provide power and plasma generation products prospectively were combined into the power and reactive gas product group by combining technologies for solid state power conversion in plasma management. We believe we can offer more highly integrated and higher value solutions to semiconductor OEMs and end users.

In the new power and reactive gas product group, the Astron family of reactive gas generation products continues to be designed into new tools. In the third quarter, the Astron I was designed into a major OEM’s latest flat panel display tools. E-market researchers predict substantial growth for the flat panel display segment.

Our new integrated ozone delivery system is now in production for customers who are using ultra high-purity ozone for the latest atomic layer deposition, or ALD processes. ALD is also projected to be a high-growth semiconductor process.

As the industry leader in reactive gas and plasma generation technology, MKS continues to develop intellectual property. And in the quarter we received an additional patent and filed multiple applications in this area. We achieved significant design wins for E&I, RF power generation products in etch applications at key OEMs in the quarter.

As customers look for greater advanced process control information from their plasma tools, E&I is particularly well-positioned to provide high accuracy metrology data with its [VI] probe product. We have received design wins for this product in the quarter, and began a number of new developments related to advanced customer applications.

In addition, our Colorado Springs Design Center continued to focus on providing the medical equipment industry with high power RF products for magnetic residence imaging, or MRI. A major MRI equipment manufacturer continues to be one of our top 10 customers.

Turning to back-end technology, the HPS product group won the tool hook-up business at two fabs in the quarter. A key consideration for these customers was MKS’ high quality and ability to deliver with short cycle time.

On the OEM side, integrated [affluent] management subsystems continued to be designed into customers’ tools. In several cases we’ve gained market share by providing complete one-stop solutions, fully integrated back-end component, core line subsystems from the chamber to the pump.

In the quarter we also combined recent acquisitions that enable our customers to perform e-diagnostic and advanced process control. This new control and information products organization continued its penetration of major OEMs in the quarter with additional system controllers and distributed IO racks installed for multiple applications.

In addition, TeNTA has been providing controller technology to integrate into new products introduced by MKS including pressure management subsystems, flow control subsystems, and RF monitoring subsystems. [ABs] and OEMs in the quarter continued to select IPC’s data collection and connectivity products. We are also integrating those information products with many of our other sensor products. For example, we have combined the IPC blue box data management module with our spectra process monitor for increased monitoring flexibility. By increasing our sensor products with our information technology we enable our customers to make more informed decisions that could increase their tool productivity.

We’re pleased to learn of a major fab customer that achieved a higher return on investment in the third quarter by using our Spectra process monitors to prevent significant yield losses. That customer’s ability to improve ROI has led to continued and expanded business. In the quarter we introduced our first combination gas analysis system which combines Spectra’s mass spectronomy based analysis equipment with unlined infrared base gas analysis equipment.

By combining complementary technologies for gas analysis MKS enables customers to monitor processes that they could not monitor before. We believe that the need for process monitoring, process analysis, and the [e-diagnostics] is likely to increase significantly as the industry continues to shift to finer lines with some larger and more valuable 300 millimeter wafers.

MKS continues to acquire technology and to develop products, and solve problems that enable us to gain market share. In early October, we acquired a small development company with technology that extends the platforms for our tool connectivity products that enable advanced process control. This acquisition complements our IP portfolio and enables us to propagate more advanced technology across our product groups.

As expected, our sequential quarterly growth slowed during the third quarter, and we believe this reflects lower industry forecast for semiconductor capital equipment spending for the fourth quarter of this year. In the third quarter we announced the planned consolidation of certain recently acquired manufacturing operations to improve our operating efficiency and leverage our lean manufacturing expertise. We also reduced our work force by about seven percent, and implemented a company-wide plan for employees to take up to 10 additional days off in the fourth quarter. These actions contributed to lowering our cash earnings per share to breakeven on revenues of 80 to 83 million. Our objective is to reduce our breakeven to approximately 75 million by the middle of next year.

Looking ahead, visibility for the fourth quarter is quite limited. It is possible that fourth quarter revenues could range from 65 to 75 million depending on the level of inventory adjustments made by our OEM customers. We continue to look closely at order activity levels, and will manage the business accordingly. In addition to working closely with our customers our focus is on cost control, cash management, and maintaining our strong balance sheet.

And now, Ron will discuss our financial results.

Thank you, John. And good afternoon, everyone.

Third quarter sales were 92.9 million, a seven percent increase compared to second quarter 2002 sales of 85.9 million, and a 73 percent increase compared to third quarter 2001 sales of 53.2 million.

On a pro forma basis including the acquisition of E&I sales increased by 40 percent year-over-year. On a cash basis EPS basis and excluding special items we essentially broke-even in the third quarter with a net cash loss of $8,000. This compares to second quarter 2002 breakeven cash EPS, net cash earnings of 182,000, and third quarter 2001 net cash loss of 5.7 million or 15 cents per share on approximately 37.8 million shares outstanding.

Looking at the revenue mix, as John mentioned, third quarter sales to semiconductor OEMs and end users remained essentially flat at 73 percent of total sales. Thin film sales increased by 25 percent to eight percent of total sales, from seven percent in the second quarter. Sales to other markets were essentially flat at 19 percent of total sales. Our top 10 customers accounted for approximately 53 percent of third quarter sales compared to 55 percent of second quarter sales. Applied Material continued to be our largest customer representing 25 percent of third quarter sales, compared to 27 percent in the second quarter. Combined sales to Applied and one of its subcontractors who was also a customer of MKS represented approximately 28 percent of third quarter sales, compared to 31 percent in the second quarter.

Looking at the geographic sales mix third quarter sales to U.S. customers were sequentially flat at 63 percent of total sales, compared to 68 percent in the second quarter of 2002. Sales to Asia increased by 23 percent sequentially to 25 percent of total sales, compared to 22 percent in the second quarter. This increase is primarily due to higher flat panel related sales to Japanese OEMs and end users, as well as higher penetration at fabs and semiconductor OEMs. Sales to Europe increased by 22 percent sequentially to 12 percent of third quarter sales, from 10 percent in the second quarter, partially as a result of higher sales of our environmentally benign [Liquizone] product for wet wafer cleaning applications.

Gross margin was essentially unchanged at 34.5 percent in the third quarter, compared to 34.6 percent in the second quarter, and 30.3 percent in the third quarter of 2001. Gross margin was affected by higher than normal quarterly costs for obsolete and excess inventory, as well as warranty upgrades.

Third quarter R&D spending remained at 14 percent of sales in the third quarter, or 12.7 million compared to 12.1 million in the second quarter. As John mentioned, we introduced a number of new integrated subsystems in the quarter, and worked closely with our customers on new programs.

SG&A expenses decreased slightly to 20.5 million, or 22.2 percent of third quarter sales, compared to 20.7 million or 24.1 percent of sales of second quarter sales. Amortization of intangible assets decreased to 3.8 million in the third quarter, compared to 4.1 million in the second quarter.

During the quarter we recorded the restructuring and asset impairment charge of 2.4 million. This charge includes a restructuring charge related to the previously announced seven percent work force reduction and consolidation of certain manufacturing operations. And an impaired asset charge related to certain non-performing assets previously purchased by an acquired MKS company.

In the third quarter we reduced our worldwide work force to 2,168 from 2,313 at the end of the second quarter. The cost savings related to the work force reduction and additional time off is expected to lower fourth quarter break-even sales on a cash basis which excludes amortization charges related to acquisitions to between 80 and 83 million. As John mentioned, our objective is to reduce our breakeven to approximately 75 million by the middle of next year.

Income from litigation settlement reflects proceeds received related to a previously announced 4.2 million dollar jury award in a patent infringement lawsuit.

In other expense we recorded a 4.1 million asset impairment charge related to an impaired note receivable from the sale of certain, non-strategic assets sold in August of 2001. As we discussed last quarter, our tax rate includes increased benefits related to foreign operations, and was 45 percent for the third quarter, compared to 48 percent for the second quarter.

To recap, the third quarter of 2002 GAAP loss was seven cents per share, and net cash per share was at breakeven excluding special items.

Turning to the balance sheet, cash and investments for the third quarter increased to 128.9 million compared to approximately 121 million in the second quarter. The increase in cash primarily relates to reduction in the accounts receivables and inventories and 4.2 million in proceeds from the settlement of the patent infringement lawsuit.

We reduced accounts receivable by 2.6 million to 52.2 million in the third quarter from 54.8 million in the second quarter. Days sales outstanding for the third quarter improved to 52 days, compared with 58 days in the second quarter. As a result of our continued focus on cash flow, inventory turns for the third quarter improved sequentially 2.9 turns from 2.6 turns, and inventory decreased sequentially to 83 million from 88 million. We are continuing our efforts to improve inventory turns.

Capital expenditures decreased sequentially from 2.6 million to 1.6 million in the third quarter, and were primarily for manufacturing and test equipment for new products. In 2002 we estimate capital expenditures will not exceed $10 million.

Depreciation was 3.9 million for the third quarter, compared to 3.8 million for the second quarter. We estimate depreciation expenses for 2002 will be between $16 million and $17 million. The decrease in other assets in the third quarter represents the write-off of an impaired note receivable for certain non-strategic assets that we sold in August 2001.

As John mentioned, given the outlook for a significantly softer demand, we estimate that fourth quarter shipments could decrease by approximately 20 to 30 percent sequentially, and revenues could range from 65 to 75 million, depending upon the level of inventory adjustments made by our OEM customers. On a pro forma basis this represents a revenue increase of eight to 25 percent year-over-year. Based on this lower sales volume and reduced cost, fourth quarter gross margin could range from 28 to 32 percent. As we mentioned before, fourth quarter projections include the affect of our employees taking up to 10 extra days off during the fourth quarter.

We are continuing to reduce our material costs and as a result of consolidating certain recently acquired manufacturing operations we expect to improve our operating efficiencies over the next several quarters. We estimate that fourth quarter R&D spending could decrease slightly from 12.7 million to a range of 11.5 to 12.5 million, primarily as a result of the cost savings actions we took in September. SG&A expenses could also decrease slightly from 20.5 million to a range of $19 to $20 million. Amortization of acquired and intangible assets which is excluded from our cash earnings is estimated to be approximately 3.8 million in the fourth quarter.

We assumed the tax benefit of 45 percent for purposes of computing the estimated net cash loss per share. Based on our estimated sales range the fourth quarter net cash loss per share could range from six cents to 12 cents based on approximately 51.5 million basic shares outstanding. However, in spite of projected operating loss at this estimated sales range we expect as a result of lower working capital requirements and reduced capital spending our net cash position could increase as much as five million in the fourth quarter.

This concludes our financial discussion, and I will turn the call back to John.

Thank you, Ron.

Despite this pause in capital equipment spending our strategy has not changed. Our strong balance sheet enables us to continue to invest in increasing our market and technology leadership. Our track record in integrating technologies and process knowledge into unique subsystems continues to differentiate MKS and to enable our customers to realize value. We remain positive about the industry and our long-term growth prospects.

Ron and I will now take your questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Caller Instructions.)

Our first question comes from Brett Hodess, please go ahead.

Good afternoon. John, I was wondering if you could talk a little bit – you know, clearly you’ve given us some guidance for the fourth quarter, but if you could talk a little bit more about the decline in revenues in terms of is it coming from certain product areas and certain types of OEMs, or is it broad-based? Also the up tick that you saw in the thin film side driven by flat panel and some of the other things there, does that look like that portion of the business will hold-up better than the semi side in your visibility at this point?

Okay. You know, as to the first question, the decline we’re seeing is pretty broad-based across our product lines. There’s not a particular area that stands-out. And it is in our major semiconductor market. Flat panel and thin film, particularly flat panel, the projections there that we’ve seen show a continued strong business in that. It is, it represented about eight percent of our business in the third quarter. That percentage could increase in the fourth quarter, depending on what the other sales turn out to be.

And the second question I had was in the quarter that just ended, the revenues were a little bit above your, the upper end of your guidance. Was it good from that standpoint. Gross margins were pretty flat sequentially. Were there items that were holding gross margins from improving more?

Yes, as I mentioned, they would have improved to about 36 percent that we, as we, at the high end of the guidance that we gave last quarter, Brett. But there were some charges in there this quarter for obsolete inventory related to some specific products, and some warranty upgrades. So that was the difference between reaching our target of 36 and staying level at 34.5.

Yes, I apologize. I remember you saying that, Ron. Thank you.

Our next question comes from Fred Wolf. Please go ahead.

Can you talk a little bit about the flat panel display business? We’ve heard indications that that may be softening over the last few weeks. Has there been any change in that business? I know it’s been a very strong business for you.

Yes, well, that business is – I would say, I would call it lumpy. It doesn’t, it is because of the volume of it, it isn’t like some of the mainstream business that we have that is more statistical. It does come in lumps. It represents business for a number of the product groups, and so far we haven’t seen that, Fred, but I can’t really judge it because as I said, it is lumpy.

Okay, great. Thank you.

You’re welcome.

Our next question comes from Ted [Byrd]. Please go ahead.

Hi. Could you talk about the channel inventories, or the inventory levels at the OEM customers? Are these building up again, with, [Novelle] said their shipments are going to decline 26 percent this quarter. And I imagine other OEMs might have similar type of outlooks that you sell into. Is there a build-up going on?

Well, I think the build-up went on in the second quarter and the beginning of the third quarter. And I believe those inventories are being taken down now. And that reflects what we’re seeing in our order rate.

Okay, and can you tell me about the pricing pressure. I know that the OEMs are trying to reduce their costs and their suppliers more aggressively, and some of the comments that we’ve heard in the industry are that the pricing pressures is intensifying for components is that something consistent with your products or NSO? Or is it centered on certain areas more than others?

Well, yes, I think in any kind of a period like this there’s a lot of pressure on pricing, and we put a lot of pressure on our suppliers for, on pricing also. I think this is coming directly from the device manufacturers themselves, right down through the food chain. And we are certainly not immune to it. Either our customers or our suppliers, so I think the whole industry is experiencing that.

And what it means is we have to find suppliers who are, and our long-term suppliers to work with lower costs, lower prices, do things differently, do things better, do things more efficiently. And we are certainly working on that. We are helping some of our suppliers to be leaner than they are. And it’s – I think that would be a constant theme in the industry.

How much of that fourth quarter revenue decline is – I mean is there any way to quantify it for pricing versus units?

No, not really. Because some pricing changes don’t take place until later, until 300 millimeter comes in. It’s too complex to really put a number on that. But you know, in total in the mix, it wouldn’t be more than a few percent I wouldn’t expect.

Okay.

But that’s just a guess.

And then going back to the inventories, one last question on that. Where do you see your inventories in the current quarter? I think you mentioned you’re going to generate some cash by working down some capital?

Obviously, Ted, we expect that they will go down, but a lot of that will depend on what the ultimate shipments are for the quarter.

And the mix.

And the mix. So our target is to reduce them again this quarter, but I think we’ll have to wait and see how the mix and the volume turns-out.

Okay, all right. Thanks a lot.

Our next question comes from Mark Fitzgerald. Please go ahead.

Thank you. A couple of items here. Intangibles in the quarter, can you give us what that was on the balance sheet?

I don’t have the exact number in front of me. I think it was …

So there were a couple of other numbers I was looking …

Yes, we will get it here.

Or as well as the cash from operations?

Intangibles are 72 million, and the goodwill is 258 million.

258, okay. And cash from operations in the quarter?

We haven’t actually gone through that calculation. We just looked at the cash on a total cash flow at this point.

Okay. Is it fair to say that it’s negative, though?

Well, it depends, if you excluded the special items it would be positive because we’ve had the depreciation in the cash earnings, and also we have the decrease in receivables and inventory.

Okay.

But most likely to be positive. We haven’t actually gone through the calculation.

Okay, and where’s that trend giving you guidance for the fourth quarter?

Trend for?

Cash for operations? I suppose if you don’t have it for this quarter, it’s tough to say for the next, huh?

Well, we actually, when we looked at what our range of sales would be and what our working capital requirements would be, what other sources of funds would be coming in from tax refunds, et cetera, and that’s how we came-up with an estimate that next quarter I think we could – our total cash position could increase by about five million, up to five million. Again, that will depend on where we are within that sales range.

Okay.

So I think the long and short of that is that we don’t expect to utilize any significant cash here in the next quarter.

Okay. But what I’m really trying to get at, these items, that, more towards the operational side of it. But …

Well, on the operations side, depending on what the inventory change and receivable change is, if you, we projected a loss, an earnings loss, so we have to see what those changes would be to give, whether or not on an operating basis we have a cash loss or not. It could be a small cash loss, it could be a breakeven on an operating basis. It depends on what we can take the inventory down by and the receivables.

Okay, and on the R&D line, are you guys pretty committed to holding R&D in this kind of $11, $12 million level going forward, no matter what the revenue base is?

I don’t think you ever, never say never.

But in terms of your planning process today, is that $11, $12 million the range you think at going forward?

We would like to keep it in that range. If we possibly can do that. It depends on – and what we see going forward in future quarters. We’ll have to – nothing is sacrosynch I guess.

Okay. Thank you.

Our next question comes from Kevin [Vassely]. Please go ahead.

Yeah, hi. It’s Kevin Vassely from Thomas Weisel. Can you guys comment on what your cycle times on average for your products are right now?

You mean from order to shipment?

Yeah.

Well about 25 to 30 percent of it is turns, just simultaneous order and shipment, delivery for just-in-time delivery.

Okay.

And typical for most of the instrumentation is five to 10 days, and for the more complicated systems, subsystems it may be up to six or eight weeks.

Is that at all changed since the second quarter? Any of those lengths?

No.

Okay.

They might be a little faster as we go-forward.

Okay. Okay, thanks.

Our next question comes from Robert Mayer, please go ahead.

Hi. Is there any further granularity you can give us in terms of, you know weakness out of the semi-equipment side going forward? Any particular product types that are weaker than others, or is this generally across-the-board? Or can you just give us a little more granularity if possible?

Our product type or customer product type?

Customer product type, or your product type, either way?

No, we really can’t discuss customer products.

Well, how about by your type then?

And I think as I said before it seemed to be pretty much broadly based.

Okay, in terms of the visibility of what you’re getting, going forward – [audio] – just hold-on a second. Sorry. In terms of what you’re getting going forward out of the customers, what has the sort of normal lead-time or the normal projection time been cut-down to? Or what sort of visibility are you getting out of your customer base currently?

Well, we get the same visibility that we always get.

So it hasn’t been cut-back. And have they made any statements of, you know, we’re going to burn-off a little inventory here or there? Are there any other things that lead you to, you know, to make the statement that you may see some inventory burn? Has that been sort of a stated position?

No, you would assume if shipment levels are down that work-in-process inventories will also go down, and that demand will go down.

Okay, so no specific …

It’s just the math. There’s – no, we’re not talking about anything specific in any specific OEM.

Okay.

Our final question comes from Susan Crossley. Please go ahead.

Hi, John. Hi, Ron.

Hi.

Susan Crossley from Wells Fargo. You know, my question really pursues some of the things that Ted was asking you about. And that’s on the gross margin side. And then, you know, if I go back and look at previous tough times, you know, maybe the December and ’01 quarter, the March ’02 quarter where revenues were lower than what you’re guiding us to for the coming quarter. You know, back then your gross margin was bouncing between 28 and 32 percent. So when you look at the delta, you know, I mean what’s caused that delta in gross margin? Is it purely pricing? Or is it, there’s something on the integration side that I’m missing, or?

Actually, Susan, if you go back to Q3 and Q4 of last year, when our sales were, MKS sales were about 53 or 50 million we were only doing about 30 or 28 percent gross margin back then. And as you mentioned, that this quarter we would have been at 36 percent. You know, we have given guidance that we would be at about 36 percent at 90 million, but there was only – that ended up at 34.5 percent for this quarter because of some obsolete and other inventory charges that were a little bit above our normal quarterly charge. So …

And if you look at the next quarter, the guidance that Ron gave for Q4, were you referring more to that?

Yes, exactly.

Well, that’s pretty much in line with what we had …

In the trough, yeah. And in the trough we were like at 28 to 30 percent. We’ve never really been much below that, so.

Right. I’m just concerned that if your revenues were to get down to 50 or 53 million that your gross – I mean the implication is that your gross margin would be …

Well, we have another – we’ve added several companies since then.

Right. So this is what I’m getting at. I mean this is my question. You know, how much of this is pricing – I mean do I have to worry that all of this is pricing pressure? Or do I, or should I assume that all of this is company integration? You know, I’m not.

The fix – I think if you look at the – we don’t break-out the cost of goods into material, labor, and overhead. You do see that the SG&A is higher because of the integration of these – because of the infrastructure that we’ve added. The more fixed portion of the infrastructure. So yeah, the infrastructure is higher and the potential revenues from that infrastructure is higher, and the breakeven is higher.

Yeah, yeah, I mean I – I mean I don’t want to beat a dead horse. I guess I worry, because when you say, you know, maybe pricing pressure will account for a few percent of the sequential decline in revenues in the December quarter I mean that – you know a few percent per quarter will, you know, it really starts to hurt after about one quarter. I mean.

Well, there’s the other side of the gross margin is what we do, the other side of the revenue, the price side is the cost side, and what we do in cost reduction.

Uh-huh.

So that impacts margin also.

Yeah, so …

It’s not a simple question, and there’s not a simple answer to it. It depends on a number of things that we execute on. But.

As you know, as we introduce some of the new integrated products, you know, we try to target higher margins on newer products. So there’s always things, you know, that offset each other as you go forward.

Okay. All right. Well, thank you very much.

You’re welcome.

There’s an additional question from Jim Covello. Please go ahead.

Hi, good afternoon. Just one quick question. It’s kind of a big picture thing. But can you guys give us any kind of tangible evidence of the kind of progress you’re making on mitigating some of this pricing pressure, by adding value around the process chamber? I know it’s a concept that you guys have described very well in theory. And I was hoping that, you know, given the pricing pressure that we’re seeing in the industry today you could give us some tangible evidence that some of the strategies that you’re pursuing might help mitigate some of that pricing pressure, actually gaining traction? Thanks a lot.

Okay, well, I don’t want to get very tangible about that for competitive reasons. But it’s certainly clear that if we have an integrated product, and that uses a number of our components, those components are looked at differently than if we were supplying those components individually, or if all of those components went out to bid, simply because we’re integrating those into a complete subsystem. That is, it’s just, that’s the way it is with subsystems. So I, there are examples, then I would have – if I got into that I would have to get into pricing and cost, and the rest of it, and I’m not going to go there.

That’s fair. Maybe I can ask it a little bit of a different way. I mean is it working? In other words, I mean would pricing be even more difficult if not for the value you’re adding around the process chamber?

Well, we assume so, yes. I mean we haven’t done that analysis. So I don’t know how to answer that question, Jim. You know, it’s just, the amount of business we get from subsystems is certainly that the margin from subsystems is higher than the margin on some of the individual components.

Fair enough, thanks a lot.

You’re welcome.

We have a follow-up question from Fred Wolf. Please go ahead.

Two follow-up questions. One is can you give us the proportion of integrated products in the quarter? And secondly, which is another way of looking at this gross margin issue, have you changed your target gross margins for the next peak, when things hopefully get better, whenever that occurs?

We’ve reported the integrated subsystem sales only annually, and last year it was 17 percent, and the previous year it was about 10. And so we won’t be giving that quarterly, but we will do an annual analysis. And we are still – our long-term model is still to be, given the right fixed costs, and variable cost structure, we believe that we can still achieve our target of 46 to 48 percent gross margins.

Great, thank you.

You’re welcome.

We have a follow-up question from Ted Byrd. Please go ahead.

Hi, thanks. With the – I think the IPC was a full part of the September quarter. What – I don’t recall how much that contributed? If it was … I’m sorry.

We don’t report that.

I was just wondering what the quarter revenues were if you strip-out IPC for September over June?

We don’t report those numbers, Ted.

Okay, you can’t report the growth rate. Okay. And on …

It was small.

Small, okay. And just a couple of clarifications. The tax rate that you guided to for the fourth quarter?

45 percent.

And then what was the headcount change again? Or what were the two headcount figures that you gave?

Just a second.

One of them I think was …

It was a change of about 170 …

Yes, it was – it went to 2,168 from 2,313 at the end of last quarter.

Okay, and what was it at the peak, roughly do you have that?

At which peak?

Well, I guess it may have been maybe the fourth quarter of 2000 or somewhere around there?

Well, we have to eliminate all of the acquisitions, you mean?

Yeah, that’s true. Okay.

Can’t do that.

Fair enough. Okay, thank you very much.

You are welcome.

We have a follow-up question from Mark Fitzgerald. Please go ahead.

John, does optical CD metrology make any sense, as people look for this for [insitu] applications for you guys? Or is that too far afield from your core expertise?

It’s not really something we’ve looked at.

Okay. So this kind of whole insitu metrology market, not a big avenue for acquisitions, or in-house development?

Yeah, for composition we have interest in that. We have interest. If not, not for a CD.

Okay. thank you.

You are welcome.

We have a follow-up question from Kevin Vassely. Please go ahead.

Yeah, hi. Are you getting, any of you – well, maybe a better way to ask the question, are any new design wins that you’re getting in power in 200 millimeter? Or are they all 300 millimeter?

Well, let’s see. Yes, there are some 200 millimeter wins, yes. Mostly it’s 300 millimeters.

Was the etch application, the one you mentioned in the opening remarks, 200 or 300?

Most of the design wins we talked about, Kevin, are 300 millimeters. There aren’t 200 millimeters designs being done.

Okay, okay. Great, thank you.

You are welcome.

Our final question comes from Ali Irani. Please go ahead.

Good afternoon, gentlemen. This is Peter Wright, actually, asking a question for Ali Irani. I guess I have two. First of all, a follow-up on the design wins. I guess if you could quantify that, other than in etch, if there was any other significant design wins during the quarter? And I know that you guys have limited, you know, visibilities as it is primarily a turns business. But if you could comment, as well, as to the trend of the quarter month-to-month, and I guess it’s only 16 days past. But – and with your guidance I think you gave a little bit of this. But what, I guess what the month-over-month trend was during the quarter?

During Q3 the, it started out high and slowed-down.

Great, and for the design wins?

And for design wins, are you referring to a specific product?

Well, you commented for E&I. I guess if you could break it out for each of the businesses that would be great?

No, we don’t get into accounting business. You know, there are so many design wins, and chambers, and different chambers and so on, that it’s become so difficult to do that. We are – our hit rate on the design wins is high. We keep track of that.

How about number of new customers?

Well, there aren’t many new customers in the semiconductor equipment business.

Medical?

And we sell to pretty much everyone in the industry. The total customer base is about 4,000. But brand-new, new names in that, relatively small. There are always new startups coming along in various markets. I mean we sell pressure instruments, and flow instruments in a whole range of industries. That’s 20 percent or more of our business, 22 percent of our business was outside of semi. There are a number of new customers in that doing interesting things. I don’t have a count of the number of those, or of the dollar volume of that. Is there something more specific that you were getting at?

No, I think that …

I’m not trying to be evasive, I’m just trying to understand what you’re asking?

Right. No, I think that’s good. Thanks so much.

Okay.

There are no further questions. Please continue.

Well, I’d just like to thank you all for being with us this afternoon on this call. As I’ve said, we intend to continue to invest in increasing our market and technology leadership. And we look forward to speaking with you the next time, and hopefully we’ll see this pause in the equipment business begin to turn in the not too distant future. Hopefully, within the next several quarters. Thank you.

Ladies and gentlemen, this concludes the MKS third quarter earnings conference call. If you’d like to listen to a replay of today’s conference call please dial 303-590-3000, followed by the access number of 498988. Once again, if you’d like to listen to a replay of today’s conference call please dial 303-590-3000, followed by the access number of 498988. Thank you for using ACD Teleconferencing. You may now disconnect.