萬機儀器 (MKSI) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the MKS’s first quarter 2003 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, Thursday, April 17, 2003.

I would now like to turn the conference over to Ms. Jonna Manes, the Director of Investor Relations. Please go ahead.

Thank you. And welcome to our first quarter earnings conference call. By now you should have received a copy of our earnings release. If you did not, please go to our Website at www.MKSInstruments.com, or you can call 978-975-2350, extension 5524 after this call.

As a reminder, various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the safe harbor provisions 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 the company's annual report on form 10-K for the fiscal year ended December 31, 2002, which is on file with the SEC.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. And therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call we'll be referring to non-GAAP financial measures. These measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Investor Relations section of our website under the heading "quarterly earnings releases."

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

Now I'd like to introduce John Bertucci, President of MKS.

Thanks Jonna, and thanks to everyone for joining us. With me is Ron Weigner, our Chief Financial Officer. I'll give an overview, and Ron will review the financial results. I'll make some closing comments, and then we'll answer your questions.

Looking at the first quarter of 2003, our revenues of approximately $73m were at the low end of our guidance, while gross margin of approximately 35% was above our guidance. Margin improvement in the quarter was primarily due to cost reduction initiatives.

You may recall that in the third quarter of 2002, we announced plans to consolidate certain manufacturing facilities during the first half of 2003. Some of the consolidation took place in the first quarter, and the balance will occur during the remainder of 2003. In addition, we continued to manage costs in the quarter by controlling operating expenses and taking mandatory time off.

We also continued to implement strategies to increase our opportunities for growth in the next upturn. For example, we are building application expertise in intellectual property which we believe are the corner stones of market leadership into our products.

We are integrating more components into process management subsystems and delivering them to our customers. We're working more closely with OEM fab customers and fab customers who are beginning to apply E-diagnostics and advanced process control, or APC technologies to improve tool productivity.

Improving our operational effectiveness is an ongoing initiative. And we continue to work on reducing material costs, improving processes, and shortening our time to market.

Now I'd like to review some highlights of the first quarter. As you know, our products are used to control most semiconductor front-end processes. We continually look to apply our expertise to new and emerging applications.

In the first quarter, we penetrated the lithography application at a major OEM with an important design win for our pressure measurement subsystem. At the same time, we continued to make end roads in high growth atomic layer deposition or ALD processes for the broad array of products as our customers began shipping new tools for advanced dielectric and barrier applications. And we continued to deliver control in information products that enable our OEM and fab customers to roll out their programs for E-diagnostics and APC.

These unique high-value data management products provide customers with a continuous data stream to pinpoint problems on the tool which reduces their trouble shooting time and the necessary hardware replacements. Finally, our process monitoring subsystems continued their penetration of several markets as customers look to maximize their yield and minimize scrap.

Turning to specific product line successes in the quarter, in the instruments and control systems area, a major OEM selected in advance MKS control subsystem that integrates digital technology with measurement and control for interconnect applications. We also gained design wins on two etch tools as OEM customers chose a new digital version of one of our integrated subsystems for flow control.

We expanded our connectivity offerings in the quarter. We introduced a new web-based product, a remote monitor unit, or RMU, which allows customers to web-enable traditional analog or simple digital instruments. This general purpose product is application in semiconductor thin film and general industrial markets as customers look to retrofit existing installations on their production floor to make them web-compatible.

We continued to integrate our digital information products with our sensors. For example, we integrated the blue box data management module with our process monitors which allows customers to more easily access process data over the fab network. We are supporting our customers' adoption of these information management products with specialized teams of application experts who are familiar with our end users' process needs.

In the quarter, we also saw continued strength in process monitoring as a major customer selected our process monitor or a new ion implantation application. In power and reactive gas, our new high-capacity astron reactive gas generator product was selected for next generation flat panel display and 300 millimeter applications. This product provides ultra high clean rates and related productivity benefits.

In addition, our ozone systems for ALD continued to gain acceptance with shipments to multiple OEMs. The latest version of our ozone delivery subsystems is designed for manufacturers who are using ultra high purity ozone for ALD processing of high K dielectrics.

Substantial growth is predicted for the use of ALD and semiconductor manufacturing. And we're also seeing increased demand for our power delivery products in the quarter the spectrum RF generator continued to generate significant orders in etch CVD and DVD coding applications.

In vacuum technology, we continued to see end user upgrades of process tools with our effluent management subsystems which use the latest digitally controlled they were mow management technology from MKS. Our penetration of the biopharmaceutical department continued in the quarter with design wins for both components and subsystems.

In markets outside of semiconductor, two of our top ten customers in the quarter are major suppliers of thin film equipment for flat panel displays. The flat-panel display market is expected to grow rapidly in the next few years and dominate the replacement market for computer monitors and television sets. The new generation of processing equipment is required for each generation of larger flat-panel displays.

We continue to provide the medical equipment industry with high power RF products for leading edge MRI equipment. MKS supplies several MRI manufacturers and in the first quarter one MRI equipment manufacturer was a top-ten customer, and another was among the top 20. We continue to be a major subsystems supplier to the analytical instrument market where one customer's also among the top ten.

Looking forward, second quarter revenues could range from $73m to $78m. Given our strategic cost reduction initiatives, we believe there's opportunity for ongoing but gradual margin improvements as our plans are implemented.

And now I'll turn it over to Ron to discuss our financial results.

Thank you, John. And good afternoon, everyone. First quarter 2003 sales of $72.8m were up 23% over first quarter 2002 sales of $59.1 m and down 6% compared to fourth quarter 2002 sales of $77.6m. The first quarter 2003 GAAP net loss was $7.4m, or 14 cents per share compared to the fourth quarter 2002 GAAP net loss of $19.2m, or 37 cents per share.

The fourth quarter of 2002 included a non-cash charge of $13.4m, or 26 cents per share, or the reversal of MKS' net deferred tax assets. The first quarter 2003 pro forma net loss, which excludes the amortization of intangibles related to acquisitions was $3.7m, or 7 cents per share.

Fourth quarter 2002 pro forma net loss excluding the non-cash deferred tax charge was $3.5m, or 7 cents per share. However, these results are not comparable because the fourth quarter included a deferred tax benefit and no deferred tax benefit was recorded in the first quarter.

I would also like to point out that despite a $4.8m reduction in revenues in the first quarter of 2003 versus the fourth quarter of 2002, our operating loss excluding amortization of intangibles decreased to $3.6m in the first quarter compared to $7m in the fourth quarter. This improvement is a result of improved gross margins and reduced operating expenses resulting from cost reduction initiatives including manufacturing consolidation and tightened expense control.

Our market mix did not change substantially from the fourth quarter. First quarter sales to semiconductor OEM and end users were 68% compared to 69% of total sales in the fourth quarter. First quarter thin film sales were unchanged at 9% of total sales. Sales to other markets were 23% in the first quarter compared to 22% in the fourth quarter.

Our top ten customers accounted for 46% of first quarter sales, unchanged from the fourth quarter. Applied Materials continue to be our largest customer at 17% of first quarter sales compared to 20% of sales in the fourth quarter. Combined sales to applied and one of its subcontractors who's also a customer of MKS were 20% of sales in the first quarter compared to 21% of sales in the fourth quarter. Our top ten customers include four customers in thin film and other markets.

First quarter sales to U.S. customers were 59% compared to 57% in the fourth quarter. Sales to Asia were 28% compared to 29% in the fourth quarter, sales to Europe were 13% compared to 14% in the fourth quarter.

Gross margin improved to 34.9% in the first quarter compared to 32.3% in the fourth quarter. Improvement was primarily due to a reduction in manufacturing overhead and other costs in the quarter as we consolidated certain manufacturing operations and took other cost reduction initiatives. We also took up to ten days of mandatory time off at our U.S. locations in the first quarter.

First quarter R&D spending decreased to $11.2m or 15.4% of sales compared to $12.2m, or 15.7% of sales in the fourth quarter. The cost reduction primarily reflected lower engineering project costs.

First quarter SG&A expenses decreased $17.8m, compared to $19.6m in the fourth quarter and primarily reflected lower compensation costs and other expense reduction initiatives. Amortization of intangible assets was $3.8m.

In the first quarter or worldwide work force decreased to 2,024 from 2,040 at the end of the fourth quarter. Our first quarter taxed expense was approximately $300,000 and represents taxes on state and foreign income.

Turning to the balance sheet, our financial position remains strong. Total cash investments for the first quarter decreased slightly to $142.1m from $144.7m in the fourth quarter. Cash and investments net of debt were $112.8m compared to $114.5m in the fourth quarter.

Accounts receivable totaled approximately $49.5m in the first quarter compared to $45.5m in the fourth quarter. Days outstanding for the first quarter were 62 days compared with 53 days in the fourth quarter. The difference in day sales outstanding was due to the timing of shipments during the respective quarters.

Inventory levels decreased to 72.4m from 73.2m in the fourth quarter, and first quarter inventory turns were 2.6 compared to 2.9 turns in the fourth quarter, reflecting the lower level of shipments. Capital expenditures of $1.7m in the first quarter were primarily for production and test equipment related to new products. Depreciation of $3.8m for the first quarter was unchanged from the fourth quarter.

Looking forward, we estimate that second quarter revenues could range from $73m to $78m. Therefore, we are again scheduling up to ten days of mandatory time off in the second quarter. Based on this sales volume range second quarter gross margin could range from 34% to 36%.

We estimate that total operating expenses in the second quarter could increase slightly. R&D spending could be a little higher so that we don't miss opportunities that we've identified. Second quarter R&D spending could range from $11.4m to $11.9m.

SG&A expenses could range from $18m to $18.5m. Amortization of acquired intangible assets, which is excluded from our pro forma earnings is estimated to be approximately $3.8m in the second quarter.

Net-interest income for the second quarter could be approximately $300,000. We estimate our income tax expense for the second quarter could be approximately $300,000, which represents taxes on state and foreign income. Based on our estimated sales range and including anticipated reduced costs associated with up to ten mandatory days off, the second quarter GAAP net loss could range from 10 cents to 15 cents per share.

Excluding amortization of acquired intangible assets which we estimate at $3.8m, the pro forma net loss could range from 3 cents to 8 cents per share based on approximately 51.5 million basic shares outstanding. In the second quarter, our net cash position may remain relatively stable.

This concludes the financial discussion. Now I'd like to turn the call back to John.

Thank you, Ron. Despite this leveling in capital equipment spending, our strategy has not changed. We believe that our breadth of technology and depth of application expertise differentiates us and strengthens our position for the next upturn.

Ron and I would now like to take your questions.

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question and answer session. If you have a question, please press the star followed by the 1 on your push-button phone. If you'd like to decline from the polling process, press star followed by the 2. If you're using speaker equipment, you will need to lift the hand set before pressing the numbers. Please limit yourself to one question and one follow-up question per queue.

Our first question comes from Brett Hodess with Merrill Lynch. Please go ahead.

Hi. Good afternoon. A couple of questions. First, if the quarter just ended, can you give us a little bit of feel for -- or how things are going right now, anyways, for the mix of business if it's continuing to be similar to what you had or you're starting to see some of the other businesses flat panel and some of the thin film sides pick up relative to semi?

Well, as we indicated, the flat panel business -- the semi business is down as a percent of our if total business.

Yeah.

And flat-panel was relatively flat, or up a percent. And then other business was up about 1%. And that's basically the pattern we've seen. I believe that looking at Q4 into Q1, those ratios seemed to have been holding through that pattern even from Q3 to Q4 and into Q1.

I guess to ask it better, as you see the revenue rise a little bit here on the guidance for 2Q, does the rise come from other businesses or does it come from semi as well?

Well, we don't really project that mix, Brett, it's more of an issue there are a lot of dynamics going on with various product lines and OEMs and end users, and this estimate is our estimate of that overall without looking at a particular market trend or segment of the market.

Okay. And then secondly, when you look at the OEM forecast at this point, given what you gave us generally but are the OEM forecasts generally improving at this point, John, or are they -- they're stable, or declining? Can you give us a feel of what your most recent indications are?

Well, overall levels for what we see for the OEMs is relatively flat. We don't see a big trend pattern one way or the other.

Okay. And then my final question, on the margin side, have you continued to do the cost reductions and what not, it sounds like from the list of items you gave us at the beginning of new products and design wins and what not, integrated systems, are you starting to see in the sort of weaker times a more mix shift to your more advanced newer products that might help impact the margins more favorably as well?

Well, for a lot of these, as you know, with design wins, it takes some time for them to actually be realized as revenues. But there are some of the integrated products, integrated subsystems that were certainly sold in the past quarter. We have not been reporting that mix annually. But there's more and more momentum in that direction. And the other point that Ron made is that the consolidation is helping to reduce the manufacturing overhead. That's also certainly a factor in the margins. As much as mix.

It's just going to be an ongoing, gradual process, Brett, to improve the margins.

Our next question comes from Jim Covello with Goldman Sachs. Please go ahead.

Good afternoon. Thanks so much. You made an interesting comment on the ALD market earlier on. Could you talk a little bit about the market growth of ALD and then how that could impact MKS? Thanks so much.

Well, ALD market, I believe, some of the VLSI and other projections of that are certainly high double digits. Now, for MKS, it's particularly relevant for ozone systems. I can't really give you an estimate of what that means in dollar terms for our growth, but it's certainly one of those applications that's of interest to us, and I can't really tell you specifically what the dollar amount of that would be. It's just one of those markets that is growing, and it requires gases and ozone and control systems.

Terrific. Maybe one quick follow-up. Should we be reading anything into the fact that AMET declined as a percentage this quarter or is that more of a mix shift of what they were doing more than anything this quarter? Thanks.

I think if you look at it overall, it was 21% versus 20% when you take into account the sub suppliers and we're only taking into account one major system or sub tier supplier or AMET. There are others that they have, and we have not been including them. So I think it's just within the range of the dynamics of the quarter and movement in and out during the quarter. I don't see any other significance to it than that.

Our next question comes from Jay Deahna with JP Morgan. Please go ahead.

Thank you very much. Good afternoon.

Hi.

My question relates to integrated sub systems. Do you get the sense that you're on track to deliver a higher percentage of revenues from the products that you classify as integrated subsystems this calendar year versus last? And do you get the sense that given all the head count reductions and cost reductions among your customer base, that their willingness to engage with you and work with the development and designing process for your integrated subsystems is what you would have expected towards the end of last year going into this year, or has it slowed down somewhat?

Well, as we stated, our goal has been to get into the up to 30% or so of our revenues from integrated subsystems. And where we find that with our expertise we can provide a solution to a yield problem or a throughput or downtime problem, there's certainly customers who are willing to work with us, and we work with them. And that can be OEMs, and it can also be end users. So there is a mix of customers involved with that. Not just the OEM customers who may be outsourcing, but also end users who have yield difficulties or other problems.

Yeah, that's why I said that maybe R&D spending might be up a little bit, Jay, that R&D spending might be up a little bit next quarter.

Okay. So you're not seeing a noticeable reluctance of your customers not willing to allocate resources to working with you on this sort of thing?

No. I think most of the work on our part in that, it's the definition of the issue that may be -- that they work on, but we're providing the solution and the design.

Okay. And then the follow-up I had is, you mentioned, I guess, an increasing rate of adoption with E-diagnostics or some activity there, APC and what not, you mentioned it previously -- briefly in your introductory remarks. Can you expand on that a little bit?

Well, there are -- the blue box that I talked about is from one of the acquisitions that we made last year, and we're finding that that's very useful for being able to -- that along with the -- well, it's I.P.T. along with tenta and equipnet provide us with the capability to get a lot of information from the sensors and act waiters and other devices on it is tool and provide those in a meaningful way to the fab network.

And along with the software that we've developed for our process monitoring instruments, the process "I," we've created a good platform for being able to get information from the tool to software applications packages which aren't necessarily our packages at all, but other party providers. That's where we're headed and that's where we're seeing some interest in some revenues.

Our next question comes from Stuart Muter with Adams, Harkness & Hill. Please go ahead.

Good afternoon. A couple of questions. One, I know you kind of talked about this a little bit, but are you seeing some strength specifically from the data storage industry?

In data storage, we are in the power business. That's one area. We supplied that to that industry. We haven't traditionally had not broken that out. We're looking at doing that, but we called it part of our thin film market. But we certainly have seen some progress there with our power delivery products in the DVD market.

Okay. And in terms of -- just hypothetically speaking, your revenues are flattish around here for a couple of quarters. Do you think you could be at the break-even point in, say, Q3, or would it be more like Q4?

Well, I think we've said on this call that if we were at the high end of the range, that we would be very close to break even with just a slight loss. So break even at this point is in the high 70s, and our goal is to continue to bring that down, Stuart. So obviously, depending on how the sales come in.

It depends, some of that depends on mix, also.

Okay. Thank you.

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

Yes. Good afternoon, gentlemen. I was hoping if you could qualify for us the weekly bookings? Would it be fair to say that at this point they've stabilized? And as a second follow-up question, I was hoping you could comment a little bit about pricing pressure and how the subsystems have helped come around that?

First, we don't comment on weekly bookings or trends like that. We can't do that. We can talk to you quarter to quarter because that's kind of information we give, and I think we've provided that for you.

On pricing pressures, we stated before there's always pressure particularly in the downturn. You have fewer nodes of purchasing going on with end users. I think that puts pressure on the whole supply chain, and we certainly have felt that. And we also end up passing some of that pressure along to our suppliers. So I think it's a part of what occurs during a down cycle, I think.

Gentlemen, let me ask the first question a little bit differently. Would it be fair to say that your visibility has been improving through the quarter, or that your visibility is still spotty?

Well, I can't really comment on where we are this quarter, or what's happening this quarter. We have provided, however, our estimate for what we believe will be our revenues this quarter. And it's pretty much consistent with what our revenues were last quarter. What we're seeing is basically we've seen this leveling out. That may be what you're looking for. That's basically what we've been seeing as a leveling out over this quarter.

Okay. Great. Thank you.

Ladies and gentlemen if there are any additional questions, please press the star followed by the 1 at this time. As a reminder, if you're speaker equipment, you will need to lift the hand set before pressing the numbers.

Our next question comes from Ali Irani with CIBC World Markets. Please go ahead.

I got the first follow-up. I was hoping you could talk a little bit about the design activity out there. I know it's a gray area and a gray zone, but are you seeing the design activity at the OEMs pick up again as we go into 90 nanometer, and are there any opportunities there? And are you seeing the competition out there toughen out and come out with new products or generally you see this as kind of a stale environment?

We never saw any drop-off in design activity. I don't think at any period over the last several years. And there are always competitors and working on new designs and looking at the new platforms being worked on, and so it's up to us to be close to our customer and working close with the customer which is what we're doing. And providing the solutions, the problems that we have, and of course, our breadth of product lines and applications expertise is very helpful in that in us being able to be a strong competitor in that design activity.

Thanks.

We have time for one final question.

Our final question comes from Kevin Vassily with Thomas Weisel partners. Please go ahead.

Yeah, hi. Question on inventory. You've done a pretty good job at outlining the cost reduction measures you guys are taking through this downturn. I wondered if you have any -- or can share any thoughts on inventory management goals, if, in fact, you think something better than 2-plus turns of your inventory every year is achievable and kind of what the dynamics as you go through some of this restructuring are that could help impact that? Thanks.

Well, the 2.6 times or 2.9 times on inventory turns is not world class at all, and that's not where we've been in the past, and that's not what you're target is. The difficulty is in this kind of environment it is and as we work on reducing costs, it's difficult in general just to reduce the overall level of the inventories. It's hard to cut the input off. So our target is much higher turnover. Inventory turnover, 5, 6 times turns at least. I believe Ron, at our peak, we achieved be 7 times, I believe.

Seven times.

Seven times.

And also there's still an opportunity, even at this level of business, to possibly reduce the inventory in absolute dollars which obviously increases the turn which generates cash. So there is opportunity.

Just kind of a follow-up to that thought, as you have broadened the product line, does it make turning the inventory a little more difficult for you? Should that not have that much of an impact?

Well, broadening the product line also increased the total served markets.

Oh, clearly.

In our revenues. And so they're all related, the revenues and the product lines that we've acquired. There are opportunities in the other direction for cost reduction, which ultimately leads to inventory reduction. Because of some commonality of parts and use of same suppliers, larger volume purchasers purchasing from higher volume, lower cost suppliers.

So there are opportunities there. We're working all those opportunities. That's where we're looking at obviously always trying to reduce material costs, reduce cycle times, reduce lead times from our suppliers, our own lead times so that we ultimately end up with lower inventory rates.

Great. Okay. Thank you.

You're welcome.

Gentlemen, there are no further questions at this time. Please continue.

Well, I'd just like to thank all of you for being with us this afternoon. I know it's the beginning of a holiday weekend here, and we do appreciate your time, and we look forward to your continued interest in MKS. Thank you very much.

Thank you.

Ladies and gentlemen this concludes the MKS first quarter 2003 earnings conference call. If you'd like to listen to a replay, dial 303-590-3000 and enter the access number of 531-834. Once again, if you'd like to listen to a replay, you may dial 303-590-3000 and enter the access number of 531-834. Thank you for participating. You may now disconnect.