萬機儀器 (MKSI) 2004 Q2 法說會逐字稿

Thanks for joining us today for MKS Instruments second quarter 2004 earnings conference call. At this time all participants are in a listen only mode. Following today's presentation instructions will be given for the questions and answer session. If anyone needs assist at anytime during the conference please press the star followed by the 0. As a reminder this conference is being recorded today Tuesday July 20, 2004. I would now like to turn the conference over to Ms. Jonna Manes, Director of Investor Relations. Please go ahead.

Thank you and good afternoon. And welcome to our second 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 978-284-4045 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 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 10K for the fiscal year ended December 31, 2003; and most recent quarterly report on form 10Q 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 2 questions. We will circle back for further questions as time allows. And now I'd like to introduce John Bertucci, Chairman and Chief Executive Officer of MKS.

Thanks Jonna, and thanks everyone for joining us today. With me is Ron Weigner our Chief Financial Officer. I'll give an overview of the second 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. Our second quarter results were within our guidance. Sales increased 14% sequentially to 152 million. GAAP earnings were approximately 21 million or 38 cents per diluted share and nonGAAP earnings which include the amortization of acquired intangibles and special items were approximately 20 million or 37 cents per share.

Our 14% sequential sales increase comes on top of a 31 increase in the first quarter, a 25% increase in the fourth quarter of 2003 for a growth rate of 86% from the third quarter of 2003. This reflects the success of our strategy of leveraging a broad portfolio of process control solutions for semiconductor and thin-film processes.

It also reflects our success in delivering the technical solutions and service performance that our customers require and I want to congratulate the MKS team on another quarter of strong performance. In the second quarter we continued to penetrate higher growth semiconductor processes such as HDPCVD. According to the VLSI research HDPCVD is expected to grow at a 20% compounded annual growth rate through 2008 compared to 16% for total wafer-fab equipment. Our Astron reactive gas generator was selected for remote plasma chamber cleaning based on its excellent operating performance. This success which follows the selection of our Spectrum RF power subsystem process manometers and control systems enhances our strong position in HDPCVD. ALD is the fastest growing semiconductor process with a 51% compounded annual growth rate through 2008.

In the second quarter our success in supplying our technologies to ALD continued as our RGA were selected to monitor this leading edge application for depositing mono-layers of materials. The industry continues its drive for higher device functionality through smaller geometries. We continue to see increased interest in the use of ozone for ALD and for other processes.

Ozone is an environmentally friendly alternative to many semiconductor process chemicals. It is one of the strongest oxidants and we generate it at point of use and provide the precise concentration required for the process. We are the share leader in ozone generation for ALD of High-K dialectrics. Samsung selected our ozone generator integrated subsystem last year and we have been provided ozone subsystems with high concentration and flow rates to OEM's of Samsung.

We are positioned to grow as ALD processes proliferate with a move to smaller geometries. In the second quarter we also received follow on orders for new pressure controllers and for our field tested pressure insensitive mass flow controller as the industry shifts toward MFC's and away from thermal based MFCs. Our Ethernet enabled piMFC integrates pressure and flow control and information management technology into one compact device.

As wafers become more valuable fabs are increasingly focused on improving manufacturing yield and return on invested capital. Fabs and OEMs require secure access to real time data to better understand and improve equipment performance. We expect dependence on process monitoring and control and data collection products to increase and to claim a higher percentage of the bill of materials going forward.

We're very well positioned to support this growing requirement. Last week at SEMICON West we showcased several new web based products that enabled digital connectivity. They ranged from a mass flow verifier that provides insitu on the run calibration of MFCs to a new family of residual gas analyzers for real-time monitoring and control in multiple tool and process environments. We also introduced TOOLweb a scalable sweep of hardware and software products.

With its open architecture users can remotely access and integrate data from multiple sources to diagnose sensor or tool level problems in real-time and perform e-diagnostics in advance process control. We are having significant success in the area of process information management. Several customers have selected our Blue Box Communications Manager for installation on tools to enable e-diagnostics including problems encountered at tool installation and start up.

The Blue Box provides TOOLweb's tool level conductivity which enables OEMs to provide better e-diagnostic service to their fab customers. Fabs can also use TOOLweb. Process engineers can collect sensor data for fault detection and identification of major contributors to a process anomaly.. TOOLweb's open architecture and scalable implementations has generated a lot of interest and we should see significant opportunities ahead.

Looking beyond semiconductor capital equipment we participate in other diverse markets that contributed to our growth in the second quarter. In the medical equipment market we were selected to provide leading edge solid state power amplifiers to a major MRI customer. In the area of high energy physics we won our second major contract in the past 12 months for process monitoring.

We are selected to equip a second high energy physics synchrotron facility in Europe with our new family of web enabled residual gas analyzers which we featured at SEMICON West. In other government and environmental markets our gas analysis products were selected for chemical agent detection and for combustion and emissions testing. And our process monitoring equipment was selected for use in fuel sale manufacturing.

In summary, we are delivering technical leadership across our product groups to diverse markets and we are encouraged by the acceptance of our new product offerings. Looking ahead to the third quarter we believe that we are in what I've described as a third inning stretch as shipments of 200 mm tools are absorbed and prior to the anticipated ramp of equipment for strategic 300 mm fabs. Therefore we currently expect that our third quarter revenues could be flat to up and range from 150 to 155 million.

Looking beyond the third quarter, we see opportunity for growth particularly at 300 mm where our product development and acquisition strategies have been focused. Pore power and reactive gas are required for larger wafer surfaces and more process monitoring and information are required for yield enhancement. With greater breadth and depth in process control around the chamber we are providing more solutions for improving customers' manufacturing productivity as their process steps increase. I believe we're in an excellent position to capture an increasing share of future semiconductor capital equipment spending. And now I'll turn it over to Ron to discuss our financial results.

Thank you, John and good afternoon everyone. As John mentioned our second quarter 2004 financial results were within our guidance. Net sales increased 14% sequentially to 151.6 million as a result of strong demand from our semiconductor OEM customers. GAAP net earnings for the second quarter 2004 were 20.9 million or 38 cents per diluted share compared to net earnings of 12.7 million or 23 cents per diluted share in the first quarter.

In the second quarter GAAP net income included 5.4 million of other income. Primarily from the collection of a note receivable written off in 2002. On an operating or nonGAAP basis second quarter 2004 earnings were 20.3 million or 37 cents per diluted share compared to first quarter 2004 earnings of 16.8 million or 31 cents per diluted share.

Second quarter 2004 nonGAAP earnings excluded amortization of acquired intangibles of 3.7 million and other income of 5.4 million. Looking at the market mix, sales to semiconductor OEMs and end users were up 16% sequentially and represented 79% of sales in the second quarter compared to 78% in the first quarter. Thin-film sales which include equipment for flat panel display, data storage and architectural glass increased by 7% sequentially and remained at 8% of sales in the second quarter.

Sales to other markets were up 5% sequentially and represented 13% of sales compared to 14% in the first quarter. Our top 10 customers accounted for 53% of second quarter sales compared to 49% in the first quarter. Sales to Applied Materials, our largest customer, increased by 27% in the second quarter and represented 22% of total sales up from 20% in the first quarter.

Sales to subcontractors that are supplying the semiconductor equipment industry decreased by 9% in the second quarter and totaled 10% of sales compared to 13% in the first quarter. A major manufacturer of medical imaging equipment continued to be 1 of our top 10 customers. Looking at the second quarter geographic sales mix, sales to U.S. customers were up 29% sequentially reflecting strong sales to our semiOEM customers and were 68% of total sales compared to 64% in the first quarter.

Sales to Asia were down 5% sequentially and represented 23% of sales compared to 27% in the first quarter. The decrease was primarily the result of an inventory adjustment by a non-Japanese OEM. Sales to Europe increased by 18% sequentially and represented - - and remained at 9% of total sales.

Gross margin for the second quarter was approximately 41% unchanged compared to the first quarter. In the second quarter, incremental gross margin on increased revenue was 39% compared to 53% in the first quarter. The decrease in incremental gross margin was a result of the shift in product mix and 2.5 million in additional costs resulting from increases in warranty costs, scrap, and lower absorption of manufacturing overhead.

Without these costs incremental gross margin would have been 52% and gross margin would have been 42%. The scrap issue and the lower absorption of manufacturing overhead are now behind us. And we are addressing warranty costs by doing additional stress testing of legacy products and developing higher reliability designs on new products. With the diversity of our product line, shifts in product mix can have some effect on gross margin which is difficult to estimate at the beginning of a quarter.

Second quarter R&D and spending increased somewhat to take advantage of new opportunities and applications for power and reactive gas products. R&D spending was 14.6 million or 10% of sales in the second quarter compared to 14.3 million or 11% of sales in the first quarter. Second quarter SG&A expenses remained at 15% of total quarterly sales.

The 700,000 increase over our guidance of 22 million was primarily related to foreign exchange losses on the Yen. Other income was approximately 5.4 million primarily represents the collection of a note receivable that had been written off in 2002. Taxes on state and foreign income totaled 5.3 million or 20% of income before tax.

There is minimum federal tax expense because of the utilization of our net operating loss carry forward is taken in the first quarter of 2002. Our worldwide work force increased by 5% to 2515 from 2384 primarily as a result of adding manufacturing to support the increased level of shipments. We also increased R&D staffing to support new opportunities in applications for power and reactive gas products. Turning to the balance sheet, cash and investments increased by approximately 18 million to 199 million. And total debt was 32 million. Resulting in 167 million in net cash as of June 30th.

Cash from operations provided approximately 13 million of the 18 million in the second quarter. Day sales outstanding for the second quarter decreased to 54 days from 60 days in the first quarter as monthly shipments increased at a lower rate compared to the first quarter. Second quarter inventory turns improved to 3.4 from 3.3 turns in the first quarter.

Capital expenditures of 4.8 million in the second quarter were primarily for investments and manufacturing equipment and for consolidating our IT infrastructure. Capital expenditures in the first half were 9.2 million and we estimate that they can total approximately 16 million in 2004. Depreciation was 3.3 million for the second quarter and we expect it to be 14 million for the full year.

Looking forward, we currently expect third quarter sales to remain in the same range as our second quarter sales and range from 150 to 155 million consistent with our view of a third inning stretch. Gross margin in the third quarter could range from 41% to 42%. Looking beyond the third quarter we expect to see gradual improvement in gross margin by continuing to work on material cost reductions, yield improvement and warranty cost reductions.

Third quarter R&D spending could remain steady and range from 14.3 to 14.9 million. Third quarter SG&A expenses could increase slightly to a range of 22.6 to 23.4 million which reflects higher expected legal fees for patent litigation and higher marketing costs. Amortization of acquired intangible assets is expected to be approximately 3.7 million in the third quarter.

Net interest income for the third quarter is expected to increase to 400,000. We expect our effective tax rate for the third quarter should be approximately 20%. However, this excludes the effect of a possible restoration of our previously written off deferred tax asset. These assets could be restored in the future. If they are restored in the third quarter, our GAAP income could increase by approximately $6 million.

In the quarter after this asset is restored we expect that our normalized tax rate could be 31%. Based on these assumptions third quarter GAAP earnings could range from 17 million to 18.7 million or 31 to 34 cents per share based on 55.5 million diluted shares outstanding. On a nonGAAP basis which excludes amortization of intangible assets of 3.7 million earnings can range from 20.7 to 22.4 million or 37 cents to 40 cents per share. This concludes our financial discussion and I will turn the call back to John.

Thank you, Ron. I'd just like to add that once again, our quarterly financial results show that our strategy is being successfully implemented as we deliver the technical solutions and service performance that our customers require. 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. If you have a question, please press the star followed by the 1 on your push button phone. If you would like to decline from the polling process please press the star followed by the 2. You will hear a 3 tone prompt acknowledging your selection. If you are using speakerphone equipment you will need to lift the hand set before pressing the numbers. One moment please for our first question. Our first question is from Brett Hodess. Please state your company name followed by your question.

Merrill Lynch. Good afternoon. John, a couple of questions. Could you when you look at the third inning stretch that you're talking about here if we look at the ship - - there's only been a few of your customers that have reported already but they're talking about shipment rates that are up over a little bit over 10% for the third quarter. So do you think it's possible that they might be holding a little bit of inventory of your products at this point to explain a little slower growth for you versus what some of them have said?

Yeah, I think first of all you have to look at the last 3 quarters where if you look at our shipments to the semiconductor industry itself, and just isolate that from the total. I said our total was up 86% but our total - - our sales to semiconductor were up 118%. And I believe front end was - - I believe the estimate from the results we saw today from the book to bill analysis was about 57% increase over that 3 quarter period. So there's obviously - - we have market penetration, we have products that are following 300 mm, we have - - we could have share gain. And we also have the pipeline effect where as the production rates go up, the work in process inventories have to increase just simply given the lead times that it takes for an OEM to manufacture their product.

As - - as the growth rate's more normalize then we approach the rates of the OEMs. And can in fact see a lower growth rate than the OEM simply because - - not because the work in process is being used up but because there's no further growth in the work in process. So I think that explains what we see from our point of view. We've had we've had the pipeline filling effect going on. So we've grown faster than the industry. And now we approach the growth of the industry. And can even drop below it momentarily or quarterly depending on what happens with their production rates. Also, we are not - - if you're talking about - - I don't know if you're talking about revenues or shipments or SAB 101 numbers but we obviously are just going directly by shipments to the OEMs and have a very little SAB 101 effect on our numbers

That's very clear. The second question on the gross margin items in the quarter I understand the scrap issues and the warranty costs. The lower fixed cost absorption was that because you had a mix that caused some facilities to operate below what you thought as it shifted to other facilities by product line? Or why would they be given the largest sequential increase in revenues to have some absorption issues?

No, what it is is Brad is the sequential increase in inventory is now at a lesser rate. So less overhead is being absorbed into the inventory compared to the previous quarter. So there's a less favorable variance there.

Just an accounting --

Just the accounting. So as the inventories begin to level that would go away.

Got it. And then my final question was, when you are looking at some of the other end markets that you went over in the beginning and you gave us some of the different growth rates for thin-film at 7% and other at 5% how do you see them trending in this coming quarter? You said the third inning stretch shouldn't really affect them as much as it does, the semiconductor side given that that's being effected by the switch from the 200 to 300 mm sort of investing.

Yes, that's right. And it's -- it's hard to break those all out by market because they are a smaller percent of our business. Particularly the non -- non-semi non thin-film is very difficult to estimate. It's much more lumpy than the rest of the business. So our estimate is based on basically a bottoms up forecast from the sales force and if it isn't broken out necessarily into each of the product groups or I'm sorry each of the market areas.

Okay. Very good. Thank you.

You're welcome

Thank you our next question is from Jay Deanha Please state your company name followed by your question.

JP Morgan. A couple of things. Ron, I didn't quite catch your discussion on SG&A that was a little higher than I thought it would be

Yeah we said that the reason for that Jay, that it was about 700,000 above our guidance was because of an exchange loss of the Japanese Yen.

Okay. And can you repeat what your top 10 customers were as a percentage and what your head count is?

Yeah. Top 10 were 53%. Let me get the head count for you. The head count numbers were 2515 2515 and that was up 5% from 2384.

Okay. And then in terms of the second wave reacceleration, whatever, the fourth inning and beyond, what can we expect kind of a sequential revenue growth rate reacceleration in the fourth quarter sustainable into the early part of next year? What are you thinking on that?

Well, I think that that - - that depends on -- on what we see from the OEMs. And as you know, our lead times and our business is a turns business so our visibility on much beyond the third quarter is limited. What we're expecting is that we would see 300 mm from the number of fabs that are being followed that would be equipped in - - estimated to be equipped in 2000 - - later in 2004 and 2005 we would expect to see some acceleration. But because of the lead times, it's difficult for us to put a growth value on that.

Last question. In your 3Q shipments do you see a mix shift of 300 mm starting to emerge even though your revenues are flattish?

Yeah, we've seen that actually beginning in the second quarter. So we're expecting that we'll see that and we will see some of that 300 mm shift going on in this quarter.

Great. Thank you.

Jay, I just might add that in many cases it's difficult for us to tell whether we're dealing with 200 mm or 300 mm in many cases because we're using the same products.

Thank you. Our next question is from Robert Stern please state your company name followed by your question.

Needham and Company. You talked about the mix shift that occurred in the June quarter. And you mentioned that at least part of it was due to the shift towards 300 mm. Is it - - can you elaborate on what else was shifting in that mix? And was the 300 mm mix shift responsible in any way for the margin for the gross margin result?

No. We didn't say that the mix shift - - the margin was an effect of mix shift of 300 mm. I believe that it was some of the product mix which could be independent of 300 mm. That mix shift I think was relatively small

Relatively small because Rob, as I said, just the 2.5 million there incremental cost brought the marginal revenue back up to about 52 or 53 compared to - - so about a percentage point of different in marginal revenue due to mix.

And your accounts receivable didn't go up very much in the quarter? Was that just due to good collections or was there a - -?

No, as I said, Rob, it was due to the fact that during the second quarter shipments increased at a little bit lesser rate throughout the quarter than they did in the first quarter.

Thank you.

Thank you. Our next question is from Avinash Kant. Please state your company name followed by your question.

Avinash Kant from Adams, Harkness. Hi John and Ron.

Hi.

Hi.

The question I had was you saw Asia weaken a little bit on a quarter to quarter basis in Q2. In the quidance that you are giving for Q3 what kind of assumptions do you have from Asia, dividend numbers?

We don't break out the guidance by geographic area

But would you expect it to come back or stay at these levels?

As I said, we don't break it out, so - - but we would expect that it would be - - that it typically is in the 27% to 29% range.

And you expect it to be in that range right in Q3?

We don't forecast that. We don't give guidance on geographic mix

Perfect. And do you also talk about dividend revenues coming from 300 mm?

No. For the reason I stated that earlier and that is some of our products are used for both 200 mm and 300 mm and 200 mm to 300 mm bridge tools and so it's difficult to break that out and we don't do that.

Thank you.

Thank you. Our next question is from Stuart Muter. Please state your company name followed by your question

Thank you. Thanks, obviously a capital market. A quick question for Ron. Did you mention that OEM subcontractors revenues decreased 9% sequentially? Did I catch that right?

That's correct.

Could you maybe elaborate you or John on on what occurred there? Do you think that's the pipeline effect working there?

I think that could be the case, yes,Stuart.

Okay. And

Yeah, because some of them are up and some are down so I think it is the pipeline effect.

And obvious - - you know, the increase in revenues from the subcontractors had increased over the previous 2 - - in the first quarter of the year and in Q4 so I think there was that pipeline effect.

Okay. Very good. And a question kind of more of a longer term model question. John, you spent a fair bit of time talking about the potential of process monitoring and control. Typically that should be higher margin business, so as that becomes a greater percentage of revenues could you expect gross margins long-term to trend upwards?

Well, that's part of the product mix I guess that Ron talked about and the - - in total what we're doing and looking at - - what we're looking at to get to our model gross margin numbers is - - are the things that Ron mentioned. That is decreasing the warranty cost through more reliable products, sourcing more and more material from lower cost areas and also manufacturing yield improvements. So - - and the mix issue will - - it plays into that, but I wouldn't pull out any one particular product area and say that's going to effect the margins one way or another.

Okay. Fair enough. Thank you.

Thank you our next question is from James Covello please state your company name followed by your question

Hi there Amanda [Hayley] in for Jim Covello from Goldman Sachs. You talked a little bit about your penetration into some of the higher growth segments of the semi market like ALD. Can you talk about which product segments you expect to drive gross outside of the semi market over the longer term? Thank you.

Well, the major areas for us outside of semi are - - is the medical electronics area and that is our power supplies for the MRI business. That's a key area and equipment for flat panel display of thin-film. Flat panel represents about half of our thin-film sales. And the medical market is now more than half of our other sales. Those are 2 of the key areas.

Great. That's helpful. Thank you. And then what was - - what kind of triggers are you looking for to restore the tax - - the written off tax assets?

Well, it's the -- according to the accounting rules it's a judgmental factor that determines when you bring that asset back on the books but generally speaking you have to show some period of profitability and the outlook for the future has to look profitable. So we'll just evaluate it, what our cumulative income is. And then what we project our income to be in the future to make sure that that income is sufficient enough to utilize that asset

Thank you. Can I sneak in 1 more? This is again on the third inning and beyond topic. You're you know it seams like you're pretty confident that 300 mm is going to drive growth after the third quarter I understand you're looking at the fab build out picture is that the big picture you're looking at that's kind of giving you that level of confidence? Am I missing anything else?

No, that's correct. That's the view that we have of it. Yes.

Thank you so much.

Thank you. Our next question is from Ali Irani. Please state your company name followed by your question.

CIBC World Markets, gentlemen I would like to talk about the margins. And you know at this point in the cycle one would expect with your mix shifts through the downturn towards power supplies towards some of the intelligent products for yield monitoring and toward subsystems, that you'd start seeing upside in margins rather than even without the 1-time events you know the margins that you would have had. And I looked back at 1999 and your margins in the first half of 1999 were equal or better at much lower revenues. So what really is it going to take to see MKS margins come up towards the higher 40s percent? Or is it just not possible given the level of white boxing deals that are happening? Or is it just a product mix transition issue towards a new product, towards 300 mm? I'm just trying to get confidence towards the margin outlook for the next 6 quarters. Thank you.

Well, it's what I said. I think that what we do have a more complex mix of products when we do get into some of the other product areas that we've entered. Some of the areas that we've entered are really 300 mm oriented and there's been certainly a lot of development in those product areas. And those products have - - are beginning to come to market so we'll see the benefit of those as we get into 300 - - more and more of a 300 mm mix.

But, as I said, the real issues are lower cost sourcing of materials. And we still have a number of legacy products in which we are sourcing - - going to low-cost countries for sourcing, yield improvement and warranty cost reduction. I think they're the major issues for us getting to the margins that we've modeled.

Given the --

It's - - sorry. As we had said, we expect it to be at these revenue levels some time about a year from now. And for us to implement what we've had to implement and have been implementing in cost reduction takes time. We've gone through this several iterations in conference calls. And it's the same issue that we are still in the middle of 2004 at revenue levels that we expected to see in the middle of 2005. When we would have many of the introductions that we're talking about, many of the cost reductions that we are putting into place have - - would have been accomplished. We're hitting those revenues now with legacy products.

Okay. So what - - it sounds like you're saying, John, that there were some duplication of costs to ensure the ram. And I'm wondering if, and appreciate it, I'm also wondering if given the breadth of the products you have right now, a new degree of ERP or operations management is a necessary to predict and try to address these mix shifts. Because we were hoping certainly that with the improvement in mix towards some of the new products your margins would go up. And not stay flat. And so I'm trying to get again confidence what it would take for the margins to go up again.

I think I just answered that question.

So just the timing? Just time is the answer?

That's correct.

Okay. Thank you.

Thank you. If there are any additional questions please press the star followed by the 1 at this time. And if you are using speakerphone equipment you will need to lift the handset before pressing the numbers. We have a follow-up question from Jay Deanha please go ahead with your question.

Thank you. Ron, looking at the upper end of your gross margin guidance for the third quarter 42%, that is in line with the - - what your gross margin would have been had you not had the $2.5 million in there. Right? Right?

That's correct. Pretty close.

Right. Okay. Now, of that $2.5 million, how much of that can we assume will continue? I presume that the scrap will go away. Does the warranty go away the excess warranty?

I can't break that out but you know. But as John mentioned, we're working on initiatives that we expect will reduce our warranty costs going forward. The scrap is behind us and the lower absorption of overhead is behind us. It's difficult sometimes to predict what warranty costs will be going forward. But we certainly expect it's going to decrease.

Okay. And then on your SG&A, you indicated that there's some incremental legal expenses involved in your guidance for the third quarter?

That's correct.

Is your foreign exchange expect similar back down to where it was similar to when you gave your second quarter quidance?

It will be more normalized going into the third quarter

Okay. Now should we assume in a continuing cycle environment that SG&A will actually trend higher from the third quarter level? Or will it at some point will legal come out and you can actually have a little downtick there in absolute dollars?

Well it's possible that the legal costs could go down if we - - it's possible legal costs could go down. And that we can leverage the SG&A going forward which is minimum increases.

Okay, and how long do you think the legal expenses will last? How many quarters?

We're hoping it will be this quarter. Q3 only, but we can't guarantee that.

Okay.

We have a suit going on now. Also, the Sarbanes-Oxley has an effect and the audit fees and Sarbanes fees are also significant and they're built into our SG&A estimates.

And then the last question is as you move your mix more towards 300 mm do you see a noticeable shift in demand for Blue Box? Or is that you know with your installed base activity in there less known?

I would expect that to increase.

Okay. And are you starting to see that materialize in 3Q?

Yes. That's right.

Okay. I don't know, did anybody ask you what subsystem were as a percentage of revenues in 3Q?

No but we're aren't reporting it quarterly at this point. We're only reporting that annually.

Okay. Terrific. Thank you John.

Thank you. There are no additional questions gentlemen please continue with any closing comments

Well that concludes our comments and I'd like to thank you all for joining us today and for your continued interest in MKS.

Ladies and gentlemen, this concludes the MKS Instruments second quarter 2004 earnings conference call. If you would like to listen to a replay of today's conference please dial, 303-590-3000 followed by access number 11001249. Once again, that is 303-590-3000 followed by access number 11001249. Once again, we thank you for your participation. Have a pleasant evening and at this time you may disconnect.