萬機儀器 (MKSI) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the MKS Instruments first quarter of 2004 earnings conference call. (Caller instructions)

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

Good afternoon 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 web site 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 future expectations, plans, and prospects for MKS constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those in 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 31, 2003, 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. We’ll circle back for further questions as time allows.

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

Thanks, Jonna and thanks to everyone for joining us today. With me is Ron Weigner, our CFO. I’ll give an overview of the first 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.

I’m pleased to report another strong quarter that exceeded our guidance. Sales were $133m and we continued to see margin expansion. GAAP earnings were $12.7m or $0.23 per diluted share and non-GAAP earnings, which exclude amortization of acquired intangibles and special items, were almost $17m or $0.31 per diluted share. Gross margin increased to 41% in the first quarter of 2004 from 37% in the fourth quarter of 2003.

Our 31% sequential revenue growth in this quarter also exceeded our 25% sequential growth rate in the fourth quarter. These back to back quarters represent a growth rate of 63%, as semiconductor capital equipment spending ramped over the six months. I’m pleased with the performance of our team, our operations, supply chain management, and our suppliers in delivering quality products on time during this ramp.

As you know, MKS is primarily a turns business with short lead times. Our shipments typically reflect current production rates of OEMs. During the ramp, our customers’ orders have included a requirement for increased work in process in addition to requirements for increased production levels. We believe this effect of filling the pipeline is now behind us. Going forward, we expect our shipments will more closely reflect the ongoing production rate of our customers.

Although we have already achieved impressive growth, we see a lot of opportunity ahead. We expect our sequential quarterly growth rate to continue at a rate consistent with or higher than the growth of the semiconductor capital equipment industry. Published reports say that capacity utilization is approaching 100% for leading edge technology. A high number of 200mm tools are still being brought on line, which leaves the potential for growth in 300mm tools and more capital equipment is needed at 300mm to support more process steps as geometry shrinks.

MKS is in an excellent position to participate fully in this semiconductor capital equipment spending cycle. By surrounding the process chamber, MKS is positioned with the broadest portfolio of best in class products and integrated subsystems for precise process control. Our development of new products and strategic acquisitions doubled our served available market to $1.5b in 2001 and that market is forecast by industry market researchers to double again to $3b in 2005.

Our objective is to grow faster than our served market. As device dimensions shrink and wafer size increases, wafers become more valuable at each step of the process and capital equipment investment needs increase. So it’s increasingly important for fabs to improve manufacturing productivity and return on invested capital.

Our products and subsystems enhance our customers’ up time, yield, and throughput by enabling precise real time process control and the means to optimize advanced manufacturing processes, which ultimately reduces device cost and enhances profitability. Our strategy is to gain market share around the chamber with advanced, reliable products that improve our customers’ productivity.

Our results show that we are executing on our strategy. In the first quarter, we posted strong results across all product areas. In instruments and control systems, we continued to secure design wins in Asia, due to the superior accuracy and repeatability of our high-pressure gas transducers. Acceptance is growing for our web-enabled products that provide real time access to sensor information.

We made significant share gains in the area of flow control with our advanced web-based piMFC Mass Flow Controller and after launching the first web-based residual gas analyzer, we are already starting to see revenues for this key 300mm process-monitoring product.

MKS continues to advance to state of the art in providing products that enhance e-diagnostics and advance process control. We gained business on new and installed tools with our chamber controller in the quarter, as we continued to support expanding OEM e-diagnostics capabilities. We’re launching a high-performance version of our industry standard Blue Box Communications Manager to provide faster data collection and sensor integration.

Our power and reactive gas products continue to surpass our expectations in gaining market share. For example, during the downturn, we positioned MKS for major design wins with highly integrated RF power systems. With the ramp underway, we are seeing orders accelerate with particular strength in CVD applications. As the ramp continues, our stationing in microwave power supplies for resist strip applications is evident, with major orders in shipments to OEMs in the first quarter.

Our ozone systems are participating in the growth of ALV processing and we received additional orders for ozone subsystems used in liquid cleaning applications this quarter. We provide a full range of products for flat panel display equipment across all our product lines. Our strength in this high-growth sector of the thin-film market contributed revenue gains in the first quarter.

We continued to see strong OEM demand for our ASTRON Reactive Gas Generators for chamber cleaning in flat panel display applications. ASTRON generators were selected for large panel tools and we expect orders to remain strong for some time, as demand for larger liquid crystal displays and consumer electronics continues to increase.

In the vacuum products area, we’re gaining increased vacuum components business directly with fabs as installation activity increases and as process solutions demonstrate their ability to improve productivity. Our new MEMS-based Vacuum Gauges are also gaining acceptance in semiconductor and non-semiconductor markets.

In addition to semiconductor and thin-film markets, we participate in other markets such as the medical equipment, defense, high-energy physics, and industrial markets. Compared to the prior year first quarter, our growth was 14% in these markets, significantly greater than gross domestic product and our growth in semiconductor and thin-film markets was 104% over the same period.

Finally, as I mentioned earlier, we continued to execute well in the quarter. We continued to reduce material costs and despite the rapid ramp we maintained a high level of on-time delivery performance, with minimal operational disruption. Looking ahead, we expect that our sequential revenue growth could range from 10% to 15% or $146m to $153m in the second quarter.

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

Thank you, John and good afternoon, everyone.

First quarter 2004 net sales was $133m. We’re above the high end of our guidance as a result of strong demand from OEM and flat panel display customers. First quarter sales were up 31% sequentially from $101.8m and up 83% from $72.8m in the prior year first quarter.

GAAP net earnings for the first quarter of 2004 were $12.7m or $0.23 per diluted share, compared to net earnings of $2.1m or $0.04 per diluted share in the fourth quarter of 2003 and a net loss of $7.4m or $0.14 per basic share in the prior year first quarter.

On an operating or non-GAAP basis, first quarter 2004 earnings were $16.8m or $0.31 per diluted share, compared to fourth quarter 2003 earnings of $5.9m or $0.11 per diluted share and a first quarter 2003 loss of $3.7m or $0.07 per basic share. First quarter 2004 non-GAAP earnings excluded amortization of acquired intangibles of $3.7m and a restructuring charge of $437,000.

Looking at market mix, sales to semiconductor OEMs and end users were up 38% sequentially and represented 78% of sales in the first quarter, compared to 74% in the fourth quarter of 2003. Thin-film sales, which include equipment for flat panel display, data storage, and architectural glass increased by 35% sequentially and continue to represent 8% of sales, with flat panel sales remaining strong in the quarter.

Sales to other markets were flat sequentially and represented 14% of sales, compared to 18% in the fourth quarter. Our top ten customers accounted for 49% of first quarter sales, compared to 44% in the fourth quarter. Applied Materials continued to be our largest customer at 20% of sales, an increase from 19% in the fourth quarter.

Previously, we provided our percent of sales to a major subcontractor of Applied who is also a customer. Beginning this quarter, we will provide our percent of sales to all semiconductor equipment subcontractors who ship to all major semiconductor OEMs. Sales to subcontractors that are supplying the semiconductor equipment industry totaled 13% of sales in the first quarter. Also, a major manufacturer of medical imaging equipment continued to be one of our top ten customers.

Looking at the first quarter geographic mix, sales to US customers were up 39% sequentially and were 64% of total sales, compared to 60% in the fourth quarter. Sales to Asia were also strong, particularly in Japan, Korea, and Taiwan and were up 25% sequentially, representing 27% of sales compared to 29% in the fourth quarter. Sales to Europe were flat sequentially and were 9% of sales, compared to 11% in the fourth quarter.

As our business outlook improved, we began restoring compensation to normal patterns to offset the mandatory time off, salary reductions, wage freezes and curtailment of bonuses taken during the downturn. Compared to the fourth quarter, we incurred $2.4m of additional expense related to these factors.

These additional expenses impacted gross margin, R&D, and SG&A in the quarter by approximately $650,000 and $1.1m respectively. Gross margin continued to improve. It increased to approximately 41% in the first quarter from 37% in the fourth quarter. This improvement resulted from higher volumes and the effect of our ongoing programs to find lower cost sources of materials, offset somewhat by compensation restoration.

First quarter R&D spending increased somewhat to $14.3m or 11% of sales, compared to approximately $12.9m or 13% of sales in the fourth quarter. This $1.4m increase resulted from higher staffing levels, restored compensation and increased project costs. We are increasing spending to take advantage of new opportunities in applications for power and reactive gas.

First quarter SG&A expenses increased to $20.2m or 15% of sales, compared to $17.5m or 17% of sales in the fourth quarter. Of the $2.6m increase, $1.1m is related primarily to restored compensation. You may recall that that $1.2m of favorable items reduced fourth quarter SG&A from 18% to 17% of sales.

Restructuring charges for the quarter were $437,000 as we finished consolidating our facility in Connecticut and sublet a previously vacated facility in California. As we announced on April 5th, we moved our corporate headquarters to the Power and Reactive Gas Products facility in Wilmington, Massachusetts, which is one of our larger operating facilities. This move makes better use of office space in Wilmington. It also provides us additional space in Andover and Methuen for future expansion of pressure control, flow control products, and to accommodate the online technology operations that moved from Connecticut to Massachusetts.

Taxes on state and foreign income totaled $3.2m on higher than expected foreign income. You may recall that our federal income tax rate is minimal because of the special non-cash deferred tax charge taken in the fourth quarter of 2002.

Our worldwide workforce increased to 2,384 from 2,144 at year-end, primarily as a result of adding direct labor, mostly on a contract basis, to support the increased level of shipments. As I mentioned, we also increased R&D staffing.

Turning to the balance sheet, during the month of January we completed a stock offering with net proceeds of $33m. Including the proceeds of the offering, total cash and investments increased by approximately $38m to $181m as of March 31. Total debt was $31m.

DSO for the first quarter increased to 60 days from 59 days in the fourth quarter, because of strong shipments in the month of March. First quarter inventory turns improved to 3.3 from 3.1 turns in the fourth quarter.

Capital expenditures of $4.4m in the first quarter were primarily for investments in manufacturing test equipment and for consolidation of our IT infrastructure. We estimate capital expenditures for 2004 could total approximately $15m. Depreciation was $3.2m for the first quarter.

Because we are primarily a turns business with a small backlog, we primarily rely on current order rates and internal forecasts to provide guidance. Looking forward, we estimate that second quarter revenues could increase sequentially by 10% to 15% and range from $146m to $153m. Gross margin is expected to range from 41% to 42% in the second quarter.

We expect improvement from incremental sales volume and continued reduction of material costs. This improvement could be offset somewhat by a shift in product mix in the quarter from market share gains. In addition, it could be offset somewhat by lower absorption of manufacturing overhead in inventory. Looking forward, we expect to see continuous improvement in gross margin as we continue to work on materials, cost reduction, yield improvements, and warranty cost reductions.

Second quarter R&D spending could remain relatively flat and range from $14m to $14.5m. Second quarter SG&A expenses could increase to a range of $21.5m to $22m, primarily due to higher professional fees, variable compensation, and patent litigation. Amortization of acquired intangible assets is estimated to be approximately $3.7m in the second quarter. Net interest income for the second quarter is expected to increase to $400,000.

We estimate income tax expense for state and foreign income taxes could range from $4m to $5.1m in the second quarter. We expect that our effective tax rate for 2004 will be 20%. However, this excludes the effect of a possible restoration of previously written off deferred tax assets. Based on these assumptions, second quarter GAAP net earnings could range from $16m to $20m or $0.29 to $0.36 per share, based on 56 million diluted shares outstanding. On a non-GAAP basis, which excludes amortization of intangible assets of $3.7m, earnings can range from $20m to $24m or $0.35 to $0.43 per share.

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

Thank you, Ron. Let me just say that we are pleased to report another quarter of profitable growth and we are confident about our ability and capacities to support higher demand going forward. Ron and I will now take your questions.

Thank you, sir. (Caller instructions) One moment, please, for the first question. Our first question comes from Brett Hodess with Merrill Lynch. Please go ahead.

Good afternoon, guys.

Hi.

Hi Brett.

I was wondering, since the revenues, as you mentioned, Ron, are really a function of the run rates that you’re seeing from the customers, could you talk a little bit about what the profile of orders has been as you ran through the quarter and as we come into the quarter here? Has it been pretty stabily rising?

Yeah. Brett, we saw that orders were rising throughout the quarter, so we finished the quarter very strong with orders in the month of March.

And that trend continues into April, giving you the confidence?

We have a favorable trend right at the moment. Yes.

Okay, very good and then secondly, I was wondering if you could update us on the outsourcing to lower-cost suppliers and whatnot. Where you stand in that process so far and when you think you’ll be into that in terms of gross margins relative to where they are today and where they might be later in the year?

Uh-huh. Well, we’re continuing, as we’ve said, to work on lower-cost sources of materials both in the US and outside of the US and I would say that we’re -- about 30% of the materials are being sourced from lower cost sources. But we’re still continuously working on that and it’s, I think, a process that we’ll continue for a long, long time.

However, looking at what our objectives are, we had said in the past that our objective would be to get, as we approached our prior peak quarter revenues, to approach the peak margins that we had achieved in 2000 with all acquisitions all in and at that point we had margins in the mid-forties. That was really anticipating, when we did that and estimated that, we were basing that on our expectation that we would be hitting prior peak revenues sometime around 2005.

That may be occurring, as we’ve guided even for this second quarter. That may be occurring much earlier and that means that we would not be at those peak margins at the previous peak revenues, simply because we’re still working on these cost reductions. So, it is going to be into the fourth quarter and into the first quarter of 2005 we would expect to be achieving those kinds of margins, if we hit our objectives on cost reduction.

Yeah. We believe there is still a lot of opportunity to do that and we’re pretty confident that we will continue to see cost reductions in material purchases.

Thank you.

Okay.

Our next question comes from Ben Pang with JP Morgan. Please go ahead.

Hi, a couple of questions here. You talked about the gross margins could be offset by a change in the product mix. Is that because of different product lines or is that 200mm or 300mm? Can you give a little bit of color on that? And also, when you talked about your served available market, the opportunity in ’05, could you give us an idea of which product lines are growing the fastest, such as flat panel display or some of the e-diagnostics things that you guys are working on? Could you just give us a little bit of flavor behind that? Thanks a lot.

Okay. All right. On mix, we were talking about product mix, not market mix and there are product lines where we have taken market share and working on continuing market share. And I believe that what Ron said is that as we get the mix of some of those products, which are more competitive, they may have an impact on our margins.

Is that because of some pricing that you guys are giving to gain the share?

Yes. It’s for competitive reasons. Yes.

Okay. Okay.

As far as served available markets are concerned, we’re looking at those markets not so much by end use as by application and by our product area. Our market’s share are really product market areas, so it would be defined as the instrumentation products, power and reactive gas products, information products, and so on. It’s that market, which is broken out by VLSI and VLSI forecast and that’s the market we’re talking about, not the end use.

Thanks a lot.

Okay.

Our next question comes from Stuart Muter with RBC Capital Markets. Please go ahead.

Thank you, good afternoon and nice quarter, a question for John. You’ve had a pretty substantial ramp in Q4 and Q1. How’s your supply chain holding up?

So far so good. I did commend our people in operations, and the people who run our supply chain management activities, for the job they did in going through this ramp. We have a very professional group there and very pleased with how that’s worked out.

We’ve gotten suppliers and worked with suppliers over many years, in many cases, and have made them lean as our operations are lean and that lean manufacturing capability that we have, I think, is really beginning to show in periods like this in an up-ramp.

John, were you impacted by any expediting charges as this ramp really took effect pretty quickly?

No. There were no significant expediting issues that we had. No.

No.

Excellent and a quick question on product lines. In terms of magnetic data storage, how’s the outlook for that?

Let’s see. Magnetic data storage, they’re at a little more granularity than we would normally comment on and as you know, all of that thin-film area, the total is about 8% of our sales. Flat panel is about half of that. So, magnetic data storage would be in the order of a few percent of total sales and I really can’t comment on the trend of that, except to say that we have had some design wins in a couple of key areas there. But I really can’t tell you what the trend is of that, Stuart.

Fair enough. Thank you.

Okay.

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

Good afternoon, thanks so much, just staying on the gross margin topic first. If I look at incremental gross margins from March to June of in the low 50% kind of range, what kind of incremental gross margin drop should we be expecting throughout the rest of the year? Kind of staying at that same level, accelerating a little bit, decelerating a little bit? That would be helpful. Thanks.

Yeah. Well, we wouldn’t want to see it decline from that. It should be stabile in that area.

And within that range.

In the 48% to 53% range, somewhere in there.

I think it would be a reasonable target.

That’s helpful. Thank you. In terms of the share count, share counts have been picking up a little bit, is that just as a result of the equity offering and/or should we expect that to continue in the next couple of quarters?

This quarter it was primarily as a result of the equity offering where we had 1.3 million shares that we sold during the quarter. And it would only increase modestly, going forward, as a result of exercise of stock options or the employee stock purchase plan.

Thanks for that one and then a final one. Your inventory levels at your customers you alluded I think, in the beginning, to the fact that you think that your customers have kind of caught up on fairly extraordinarily low levels of inventory. So you think you’re running at a more normalized rate at this point. Any concerns or any thoughts about inventory build to customer or are you comfortable with that?

No. I think the only build is to the extent that if you have a production rate at let’s say 100, just to use an example, and you go to 180 and you have a three-week lead time. You’ve got to add work in process simply to fill the pipeline and if the production rates drop from 180 down to a lower level, then there would be excess work in process that has to be worked off.

So it’s really pipeline inventory. It isn’t finished goods inventory or raw material inventory that we have any concern about or that I was referring to. It’s simply that it’s just the nature of the manufacturing process that work in process increases and decreases as the production schedule increases and decrease.

Great. Thanks so much.

You’re welcome.

Our next question comes from Tim Summers with Stanford Financial Group. Please go ahead.

Yeah, thank you. Ron, you had mentioned that revenue to your subcontractors in the quarter was 13% of revenue.

That’s right.

What was that percent in the fourth quarter of ’03?

Actually we don’t have that available to really make a comparison at this time. We’re just going to start reporting that beginning this year. Because we think it’s more meaningful to do that, because there are just so many of these subcontractors that now supply all of the OEMs, we think its good information to give.

Okay.

And in the aggregate, as opposed to just how it relates to one major OEM.

Yeah. The problem we had, Tim, is that some of - in fact most of - the subcontractors supply to more than one of the OEMs and so it’s very difficult to sort out from their sales which OEM it’s going to. It’s much easier just -- so we decided we would just look at total revenues to the total subcontractor base.

So we’ll give that out going forward.

Okay and --

Just for a little flavor on it, I would guess that it would have been in the 10% range.

It would have been less last year. Yeah.

Okay and Ron, when do you anticipate MKS will start paying Federal tax or, alternately, what do you think your 2005 tax rate would be?

Well, as far as providing for Federal income taxes, that’s something that we have to evaluate on a quarterly basis, going forward, based on the fact and circumstances of our actual income that we are achieving and what our outlook looks like.

So, we’ll evaluate that over the next couple of quarters and determine whether or not it makes sense to restore the deferred tax asset or a portion of that back to the balance sheet. But in a normalized situation, going into 2005, I think you could estimate that our tax rate would be at effectively about 31% on the 2005 income before tax.

Okay, great. Thanks, Ron.

Our next question comes from Kevin Vassily with Susquehanna Financial Group. Please go ahead.

Yeah, hi, good afternoon.

Hi.

You mentioned earlier that you received some share gains in your MFC product lines. Is that with any specific OEM or is this the result of the work you may be doing with end manufacturers? Thanks.

Well, just for competitive reasons, I won’t comment on any specific OEMs where we’re gaining share. But it has been directly with OEMs and not from end user pull through.

Okay. So, it would be designed into, as the standard MFC, for a particular process tool?

Yes.

Okay, great. Okay. Thanks.

You’re welcome.

Our next question comes from Mark Fitzgerald with Banc of America Securities. Please go ahead.

Can you give us an idea of how much material is the COGS here and what’s going on in terms of some of the pricing trends there?

No. We don’t break out the COGS, Mark.

Okay.

Although we have made statements in the past that certainly material is the highest portion of the COGS. And what was the part [inaudible] --?

[Crosstalk]

I guess what I’m trying to get at is that we’re starting to see some price inflation in things like stainless steel and that type of stuff. And so I’m a bit curious, given your guidance that you’re going to get your costs down, how you do it in the face of material costs going up.

Well, there’s still plenty of room there. There are contracts that we have on raw materials, raw material costs. We’ve looked at the impact of that and we’ve taken that into account in our projections.

Okay. But in terms of getting better gross margins, getting your costs down, I assume you’re projecting you can reverse those trends it sounded like, from your opening comments.

Yes. In total, we’re talking about. In total our costs, our gross margin, we will get our material costs down, yes, but there are more than just -- it’s material cost, it’s warranty costs, it’s yield. There are a number of aspects. There are more integrated subsystems, which tend to have higher gross margins. So, in general, we’re talking about the overall gross margin being or the COGS reducing or gross margin going up through those efforts.

Is it fair to say then that those cost reductions wouldn’t come from the material side of the business or you’re not planning to see them from the materials side of the business?

No, they will come from all of those.

They come from direct materials or indirect materials.

You know, most of these materials are processed. So the raw material cost itself could increase, but that doesn’t necessarily have a significant impact on the total material cost.

Okay and is there any ability to pass price cost increases on to customers at this point or is that just not the environment right now?

It’s certainly not in the environment we’ve been in for some time. Our tendency has been, as I think it has been in all of electronics, to work on reducing our costs and doing things more productively and reducing our costs and therefore obtaining margins through cost reduction. Not through getting price increases.

Okay and just one last question. Do you have price agreements with your big OEMs at this point that go for an extended period of time or is that pricing open?

No, there are agreements with most of the major OEMs, as a matter of fact with all the major OEMs and they have varying time periods.

Okay. Thank you.

You’re welcome.

Our next question comes from Ben Pang with JP Morgan. Please go ahead.

Hi. I just have a couple of follow-ups. Is your head count stabile? Can you give us some guidance on what’s going on over there?

Well, as I said, Ben, the increase in the head count this quarter primarily related to temporary help that we needed in manufacturing to keep up with the increased demand and we did have some increase in our engineering people. But going forward, we would only hire additional temporary people in manufacturing primarily to keep up with manufacturing demands. Don’t expect to see any other significant increases in non-direct manufacturing labor.

Okay and another follow-up is in the current environment right now with the equipment, a pretty high level of shipments, is there still a lot of activity going on in terms of qualifying for new products? What is the environment over there like? Is it pretty stabile? Do you still see a lot of runoffs for getting into new products?

Yes. There are certainly runoffs in new modules. You know shrinks are still going on. Improvements are still going on. Technology is changing. Materials are changing. And that’s an ongoing process and so there’s always development work going on and there are always the opportunities for design wins. So, that effort has not slowed down at all in this ramp.

So do you expect, I guess, some of the R&D to also continue to go up as your sales creep up as well or was that a onetime situation here?

I would expect that we’ll see it creep.

Okay.

It depends on opportunities. Certainly, as a percent of sales, our objective, our model has been to have R&D spending at about 8% of sales.

Okay. Thanks a lot.

Uh-huh.

You’re welcome.

(Caller instruction reminder). Our next question comes from Robert Stern with Needham and Company. Please go ahead.

Good afternoon.

Hi.

You know, over the past several years, you made a number of acquisitions in the e-diagnostics area and also in process monitoring, things like FTIR and I think when you acquired a lot of these companies they had relatively small revenue streams. And I’m wondering to what extent they’re going to become significant in the current upturn and whether you could give us some idea of the percentage of your revenues they could become. What percentage of systems are going out with FTIR, map spec, and e-diagnostics or you know, just give us a little color on how you see it progressing over this cycle?

Okay. Yes, you’re correct. If we take all our acquisitions back to the year 2000, most of those things that had to do with e-diagnostics and process monitoring were very small. They will be more significant and are more significant now and we expect them to continue to be. That was the basis of our interest in them in the first place, because we could see that in the road maps for semiconductor technology.

I can’t give you a percentage of new systems that have e-diagnostics. Certainly the communications, the Blue Box, is becoming more common. FTIR products and RGA’s are still less common, but as wafers get more valuable there’s certainly more potential for their use. So, we don’t break out what percent of sales any of the products are, for competitive reasons, but we do expect all of those products to be a more significant part of our product mix as we go forward.

How about can you give us a sense of what are the key applications for FTIR and RGA and are there specific applications for the Blue Box or is that just general?

Well, the applications -- I won’t talk about FTIR for competitive reasons. For RGA’s, one of the most common applications would be on cluster tools where we’re looking for photo resist, a fingerprint of photo resist before a deposition process. Let say you might have a cleaning process to clean or strip the resist and then you look for photo resist before the wafer goes on to the next process step. That would be a typical example.

And what was the other part of the question?

On the Blue Box.

Oh yes.

Is there some particular place in the fab where that’s being used or is it just general?

That typically would be on any process that has process sensors, a number of process sensors that you’d like to monitor, so it’s pretty pervasive.

Okay and I have just one more question on the expense increases that you did in the first quarter to restore compensation to normal. Were those numbers for the entire quarter, so that we can use that as a baseline or was that a partial quarter and it will be bigger in the second quarter?

No, no. That was really just the incremental step from the fourth quarter to the first quarter. So, going forward, Rob, it would be a much lessor amount. It would just be just general wage increases to the remaining people who are due their increases throughout the year.

But I mean, that $2.4m that occurred in the first quarter, so that should just repeat another $2.4m plus?

No, no, no, because that included, for example, in the fourth quarter we had mandatory time off, people were on the wage cuts and so forth, so the increment all came in the first quarter. So, going forward, it would just be normal increments for wage increases and just variable compensation, so you would not have a $2m increment in the second quarter.

Okay. All right. Thank you very much.

You’re welcome.

We have time for one final question. Our last question comes from Tim Summers with Stanford Financial Group. Please go ahead.

I just wanted to know, was there what I would call a significant jump in legal expenses Q1 over Q4 or do you anticipate that occurring in the second quarter over the first quarter?

I think that the fourth quarter and first quarter were similar in legal expense, but we would expect higher expense in the second quarter and even into the third quarter, as we expect litigation to go to trial, at this point, we expect, in July.

Okay. Thank you.

You’re welcome.

Mr. Bertucci, please continue with any closing comments you may have.

Okay, fine. Well, thank you very much. Well, that concludes our comments. We’d just like to thank you for joining us today and for your continued interest in MKS. Thank you very much.

Ladies and gentlemen, this concludes the MKS Instruments first quarter of 2004 earnings conference call. If you would like to listen to a replay of today’s conference, you may dial 303-590-3000 and enter the access number of 574745. Thank you for participating. You may now disconnect. 11