萬機儀器 (MKSI) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to MKS Instruments first quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded today, Tuesday, April 26th of 2005.

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

Thank you. 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 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 10-K for the fiscal year ended December 31st, 2004, 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.

And 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 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 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.

Our sales of $127 million and non-GAAP operating earnings of $0.15 per share exceeded our guidance for the quarter. Our gross margin improved by 1.9%, to 38.7% on sales that were down 2.6% sequentially. MKS is primarily focused on delivering value to semiconductor capital equipment manufacturers and device manufacturers. With our broad technology portfolio, our products are on most semiconductor processes. We have invested in technologies that are essential for improving manufacturing productivity as the semiconductor industry migrates to new materials, thinner layers and smaller circuit dimensions on larger wafers.

We work with OEMs and fabs to provide process monitoring and process control solutions for these new industry challenges.

In the first quarter we continued to develop products that enhance the performance and productivity of process tools, and to work with semiconductor customers on next generation opportunities. We continue to have success at the leading edge, where utilization rates are higher. We are participating in many customer evaluations of our products, including subsystems that integrate multiple technologies, and I've been very pleased with our success.

In the first quarter we gained orders for a number of new products that enhance semiconductor tool performance and productivity. Multiple customers selected our new TOOLweb enabled residual gas analyzer for in-situ monitoring of 300-millimeter processes to reduce troubleshooting time and unnecessary hardware replacements.

The new ASTRON High Flow was selected by a major OEM for its high flow rates for chamber cleaning, which provides related productivity benefits to device manufacturers. New versions of ASTRON are under evaluations at OEMs and end users and are performing well in chamber cleaning and advanced stripping applications.

We also gained new orders for our LIQUOZON ozonated water delivery subsystems and we continued to ship our high concentration ozone generator subsystems for next generation Atomic Layer Deposition processes.

In the Power area, we've begun shipping our DC Power Generators, following a design win at a major customer. And in the Controls area we also achieved success with our Remote Monitor Unit, equipped with sensor integration, which allows semiconductor thin film and general industrial customers to web-enable traditional analogue or simple digital instruments to increase tool data availability and monitor up-time.

Recently, VLSI Research published 2004 market share data for its critical subsystems sector. Our served market share in the critical subsystem sector has increased every year since 2000, when our share was 26.9%, and we're pleased that 2004 was no exception. Our market share increased from 32.6% in 2003, to 34.5% in 2004, on share gains in pressure-based MFCs, Power and Reactive Gas, Ozone and Integrated Subsystems. At the same time, we maintained our high share in Pressure and Pressure Control.

We continued to find opportunities in other markets in the first quarter. These include thin film processing applications, such as flat panel displays, data storage and architectural glass, medical equipment, biopharmaceutical manufacturing, industrial manufacturing and a range of government and environmental applications.

Looking ahead, based on current customer order patterns, we estimate that second quarter sales could remain relatively steady and range from $124 to $129 million, and non-GAAP operating earnings could range from $0.14 to $0.17 per share.

Our visibility is limited because of our short lead times, making it difficult to estimate business levels beyond the current quarter. However, we tend to reflect broad industry trends, because we provide a range of solutions to semiconductor OEMs and fabs and or process monitoring and control products are on most front-end processes. Based on some recently published industry spending forecast and surveys, we are cautiously optimistic about the outlook for the balance of this year.

Looking longer term, we continue to see a growing need for our process monitoring and control technology in semiconductor and other end-user markets. We continue to believe that an increasing percent of the semiconductor capital spending dollar will be invested in process monitoring and control. Semiconductor devices with smaller dimensions, new interconnect materials and thinner layers of material are more challenging to manufacture. More complex processes require more process steps, which increase the value of individual wafers and require more capital equipment.

Device manufacturers want to increase efficiency and improve uptime, yield and throughput of these more complex processes on 300-millimeter tools. With our broad technology portfolio, we are well-positioned to address these requirements.

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

Thank you, John, and good afternoon everyone. First quarter sales of $127.4 million, which exceeded our guidance, were down 2.6% from the fourth quarter, and down 4.2% compared to the year ago period.

First quarter 2005 GAAP net earnings were $5.5 million, or $0.10 per diluted share. Fourth quarter GAAP net earnings of $24.1 million, or $0.44 per diluted share, included a tax benefit of $16.7 million, or $0.31 per share from the reversal of a previously established valuation allowance against net deferred tax assets. Excluding this adjustment, fourth quarter earnings were $7.4 million, or $0.14 per diluted share. First quarter 2004 GAAP net earnings were $12.7 million, or $0.23 per diluted share.

On an operating basis, which excludes amortization of acquired intangible assets and special items, first quarter 2005 non-GAAP earnings totaled $8 million, or $0.15 per diluted share. This compares to $11.1 million, or $0.20 per diluted share in the fourth quarter of 2004, and $16.8 million, or $0.31 per diluted share in the first quarter of 2004.

When comparing GAAP and non-GAAP earnings, keep in mind that the first quarter 2005 tax rate was 31%, compared to 20% in the first quarter of 2004. In 2004 we had a lower tax rate, as we utilized net operating loss carry-forwards.

Comparing the first quarter of 2005 to the fourth quarter of 2004, our percentage of sales to semiconductor customers was essentially flat at 72% of sales. Sales to semiconductor OEMs decreased to 61% of total sales, and sales to device manufacturers increased to 11%, from 8% of total sales.

Thin film sales, which include equipment for flat panel display and data storage, remained at 8% of total sales. The percentage of sales to other markets was essentially flat at 20% of sales.

Our top 10 customers represented 47% of first quarter sales, compared to 49% in the fourth quarter. Sales to Applied Materials, our largest customer, represented 15% of first quarter sales, compared to 18% in the fourth quarter.

Sales to subcontractors that supply major semiconductor equipment customers were 7% of first quarter sales, compared to 8% in the fourth quarter.

Geographically, we saw strong sales growth in Europe and continued demand in Asia, while sales in North America slowed on lower demand from semiconductor OEMs. Sales to Europe grew to 12% of first quarter sales, up from 8% in the fourth quarter. Sales to Asia remained at 27% of total sales. Sales to US customers represented 61% of first quarter sales, down from 66% in the fourth quarter.

As you know, our goal is to continue to source low-cost materials and reduce fixed costs to improve our profitability. Gross margin was 38.7% in the first quarter, compared to 36.8% in the fourth quarter. The improvement in gross margin primarily reflects changes in product mix and lower direct manufacturing costs.

R&D spending increased by approximately $700,000, to $14.5 million, or 11.4% of sales, primarily as a result of higher payroll taxes that typically increase in the first quarter and then trend downward, and the higher project material costs. We expect that R&D expenses could be $100,000 to $300,000 lower in the second quarter.

SG&A expenses increased by $2.3 million, to $23.8 million, or 18.7% of first quarter sales. Approximately $1.5 million of the increase was related to increased compensation expense, primarily as a result of higher payroll taxes and fringe benefits in the first quarter. Approximately $800,000 of the increase was related to the net effect of other costs, such as business insurance, foreign exchange and professional fees, some of these which are expected to be lower in the second quarter. We expect SG&A expenses could be $800,000 to $1.4 million lower in the second quarter.

As a result of a consolidation at our Berlin, Germany facility, we incurred a restructuring charge of $454,000 in the first quarter, for severance and other costs. Our tax rate was 31% in the first quarter of 2005.

Our worldwide workforce decreased by 2%, to 2,273, from 2,319 in the fourth quarter, primarily as a result of adjusting direct labor to lower shipment levels.

Now I'll turn to the balance sheet. We continue to maintain a strong cash position. Cash and investments increased by $7 million, to $248 million, while cash and investments net of debt increased by $10 million, to $219 million. Cash from operations was $10 million. Days sales outstanding were 59 days. Inventory decreased slightly and inventory turns were 3.2.

Capital expenditures of $2.8 million in the first quarter were primarily for investments in a new ERP system and manufacturing test equipment. We expect the capital expenditures could total $10 million in 2005. Depreciation the first quarter was $3 million. Depreciation could total $12 million in 2005.

As John said, because of our short lead times, our visibility is limited. Based on our current customer order patterns, we expect second quarter 2005 sales could remain essentially flat and range from $124 to $129 million. At these revenue levels and depending on mix and other factors, gross margin could range from 38 to 39%.

We expect that operating expenses could decrease by $900,000, to $1.7 million in the second quarter. R&D spending could range from $14.2 million to $14.4 million, and SG&A expenses could range from $22.4 million to $23 million.

Amortization of acquired intangible assets is estimated to remain at approximately $3.7 million. We estimate that our tax rate could remain at 31%.

Based on these assumptions, second quarter GAAP net earnings could range from $5.6 million to $7.2 million, or $0.10 to $0.13 per diluted share on 55.5 million shares outstanding. Operating or non-GAAP earnings, which exclude amortization of intangible assets of $3.7 million, could range from $7.7 to $9.4 million, or $0.14 to $0.17 per diluted share.

This concludes our financial discussion and I'll now turn the call back to John.

Thank you, Ron. And we'd now like to take your questions.

(OPERATOR INSTRUCTIONS.) Brett Hodess.

Hi, this is Tom Disley(ph), with Merrill Lynch. Could you talk a little bit about the pricing environment? A lot of the OEMs lately have talked about a more fierce environment than they've seen in a long time. I'm just wondering if it's filtered down to you guys?

Well, I think that there's always some price pressure. We do have agreements with most of the OEMs that have established pricing for some period of time. And so, it's not a daily issue, but it certainly occurs.

Okay. And maybe if you just talked about a few of the trends in the non-semi business and what you might expect over the next couple of quarters?

Well, you know, we don't breakout our forecast by market in that way. The semi business is lumpy enough. The non-semi business is even lumpier. So it's very difficult to make those projections, and we have never done that, Tom.

Okay. But just looking at next quarter, would you expect the semi to stay at roughly the same percentage of the mix?

As I said, we don't forecast the mix.

Philip Lee.

Hi, guys, Philip Lee, JP Morgan. Two questions. One is, I'm not sure if you guys gave out the integrated subsystems as a percentage of sales? And the second question is, could you elaborate a little more on the reason for the gross margin upside, the better mix and the lower manufacturing costs?

The integrated subsystems, we reported that for last year. We reported that annually and we reported it at 25% for 2004, up from about 20% in 2003. And the other part of your question was the breakout of the gross margin?

Just if you could elaborate more on the better mix and where the lower costs were from?

Well, we said direct cost, that would be material and labor. And the mix is simply, it's difficult at the beginning of any quarter to project what the product mix will be and there are differences in margins from one product type to another, which we don't forecast. So, it depends on that particular customer's ordering patterns during the quarter.

Okay, so it's not really the customer base like semiconductors versus something else, it's more like power systems versus load controllers?

It could be that. It can also be geographic. It's just [total] product mix. There are different products in different areas and so on and we don't break all that out.

Avinash Kant.

Good afternoon. You seem to have seen quite a bit of strength from Europe in the current quarter. Does that seem sustainable or do you expect to be flattish going forward?

Well, a number of things happened in the first quarter in the sales in Europe that I think were probably a little extraordinary for the quarter. So, they may have been one-time, or not necessarily one-time, but as I said, there is a lumpiness to the business if you look at any particular geographic area, particularly a smaller area, where a smaller percent of our sales are from Europe. And so when a lot of good things happen at once, that can have an effect like that. And I think that's what we're looking at.

And have you seen any cancellations or push-outs recently?

No, we really don't experience that. Most of what's ordered from us is ordered just in time. Basically it's same day delivery or very short lead times. So I think you would see that much more from the OEMs, seeing things pushed out. In our case what happens is our customers just simply wouldn't pull on their pull systems if their demand went down.

And final question, do you think at the OEMs do you have any significant inventory of your products at this time or it's pretty normal?

We don't have any indication that there's anything out of the ordinary, either too much or too little. I think over this last cycle, I think the discipline has been very good throughout the supply chain, and I think we've seen much less--because cycle times have reduced, I think there's been much less in the pipeline and much less of this issue of over-inventory in any particular part of the pipeline. So, we don't have any feeling that there's a huge excess of in-process inventory.

There'll always be an adjustment to in-process inventories, up or down, to just reflect production rates. But other than that effect, no, we don't see anything extraordinary.

Jim Covello.

Hi, Goldman Sachs. Thanks very much and congratulations on good execution. A couple of questions. I know you don't provide quantitative segment guidance, but could you give us some qualitative ideas if there's any expected difference in the semiconductor versus thin film business?

No, we don't really see any significant changes here. It takes a lot to change these percentages in one direction or another. Thin film is a relatively small percent of the total business, and it takes a lot to make that much higher or much lower. So, just qualitatively, we don't see any big changes in market mix.

That's helpful, thank you. A couple of quick follow-ups. A couple of your big semi equipment OEM customers have guided shipments down now and you all are guiding revenues flat. And this is an issue that came up with one of your competitors that reported last week. Can you help give us some ideas why that might be the case? I'm sure there's a lot of reasonable explanations.

Well, I think first, the world doesn't really work in quarters and the production rates don't really operate in quarters. We have a broad product mix and we have new products that have been introduced that are on more leading edge technologies. There are [spares] and upgrades and so on. And so, it's very difficult to try to correlate any particular OEM behavior to our revenues. I think if you look at that pattern over time, it's very difficult. Obviously, over time it correlates, but quarter-to-quarter I think you see large differences.

Okay. And maybe my final question if I could. You referenced a couple of surveys or studies that make you feel somewhat optimistic about the second half of the year. Could you help us understand what they are? And if that is just a CapEx rollup for the year, do you worry at all that somebody's CapEx budgets from your customers' customers may be a little front-half loaded and any kind of impact that might have? That's all for me. Thanks very much.

Okay. Well, that is the debate, isn't it? And there are two camps on that and I guess we're in the more optimistic camp than in the bearish camp, I guess, Jim.

Stuart Muter.

Thanks, RBC Capital Markets. Good afternoon. John, first a question on the thin films business, is there any strength particular to data storage or flat panel? Could you help us understand that?

The thin film business, as a percent of our business, was pretty much flat. I think it went from 8% of our sales to 7%. So that was a decrease. I think in dollar terms, probably a 13% decrease, although it's a small percent of our total sales. But in absolute terms, I think it was a decrease in that magnitude.

That market, again, we're dealing with quarters. Things don't necessarily fall into these quarterly patterns neatly. And I don't have a good estimate of what that might be, but I think it takes a lot for it to be much different than in that 7 or 8% range and I don't see that changing this quarter.

Okay, maybe asked a different way, are you seeing particular strength out of data storage or flat panel? Is there anything that is noteworthy in that segment?

Not that we've seen, no. Not that I'd have any indication of.

Okay, fair enough. And another question, in terms of the integrated subsystem as a percentage of revenues, have you done any work to estimate at what point it would flatten out in terms of a percentage? I mean, it's grown over the last few years quite nicely, but do you think there's a limit, you know, is it 40% or is it 50% of revenues?

I think in the last call we may have discussed that. And it's not from a firm analysis, but I believe that I said that I thought is could possibly get into the 40% range. But I didn't think it could get into the 60% range, because we get into--at that point we get to a situation where we're not really making integrated products, but we would be doing subcontract assembly. So I think there's a natural barrier there in that 40% range, perhaps 50% range. I'd say it's in that. That's just a feel number. It's not out of deep analysis.

Okay, thank you, and nice job on the bottom line.

(OPERATOR INSTRUCTIONS.) Tim Summers.

Stanford Financial Group, thank you. Just a housekeeping question, Ron. What's the share count that we should be using for the second quarter?

55.5 million we used, Tim.

Why is it jumping up 1 million shares?

Well, we have our ESPP cycle will be ending in the second quarter. Additionally, some stock options might be exercised, so we have to estimate what that impact might be.

Okay, thanks. And just as a follow-up, regarding the upside in revenue in the first quarter, was that due to a specific customer or specific program, or did you just see the general level of business better than expected through the quarter or did you happen to see some Bluebird business come in at the end of the quarter? Thanks.

It was really nothing at the end of the quarter. As we mentioned, Europe was stronger than normal. That was brought out. There were higher sales to the end-users than typical. But there was nothing--because of the short lead times, as we go through the quarter it's difficult to say whether one area's really going up or down significantly. But there was nothing really outstanding.

Tom Disley.

Hi, Tom Disley again. You talked about success at the leading edge. Is this simply 300-millimeter business and do you think your market share has grown in 300-millimeter?

Well, it's 300-millimeter and smaller geometry, which would obviously, be 300-millimeter in most cases.

Okay. But is it a subset of 300-millimeter or is it all 300--?

No, we've--I think for competitive reasons, I'll just stop there.

Okay. So, in general, at 300-millimeter, do you think your share has gone up?

As I referenced the VLSI, the last survey that came out from VLSI, our market share has been increasing since 2000 in the critical subsystems area, that segment. And the increase in this last year was about, I believe, almost 2%, [1.5] increase in our share. And that is specifically 300-millimeter.

I think as I've talked about before, a number of the acquisitions we made have virtually no 200-millimeter business. So we're seeing, I think, some of the benefits of some of those acquisitions we made that were really geared to 300-millimeter and we're not participating in the 200-millimeter area.

Okay. And then, is the breakeven still around 100 million?

Just slightly over that, yes.

Tim Summers.

Hi. Thanks. I'm sure I'm reading too much into this, but I've listened to a lot of MKS conference calls over the years and I don't recall you guys ever giving at least qualitative guidance beyond one quarter out. And in your press release you kind of are saying you're optimistic about the second half of the year. Am I reading too much into that or are you trying to make a statement here?

I think that we certainly are not making any forecast for what those quarters will be, and optimism, I guess, is in the eye of the beholder, Tim. Because I think if you look at some of the more recent forecasts there have been increases in the forecast, but they may have been projections of being down 10% and now the thought is they may be down 3% capital spending for the year, or could have been flat and now up 2%. So we're not talking about major things.

I think what we're really trying to say there is we didn't see anything falling off the edge of a cliff here.

Steven Pelayo.

Fulcrum Global Partners. Is there any market share shift going on at your largest customer here? I thought it was interesting that your applied revenues were down about 19% quarter-over-quarter, versus Advanced Energy is up about 17% or so. I realize one quarter doesn't make a trend, but was there some inventory building, you think coming out of yours of [share shifting]? Any way to explain that?

I think if you look at the previous quarter it was just the opposite effect, if you look at Q4. I think that there are differences in inventory level in different products, different product mix and so on. I don't think you can read anything into that. We're not aware of any kind of shift going on, other than what I mentioned earlier, again, about the VLSI numbers, which show that over the long-term trend here and the two-year trend is that our market share is up.

Saniel Devtarter(ph).

Yes, [Unintelligible] World Capital Management. In your cautious optimism, do you think who is driving that, is it the semi guys or the non-semi [unintelligible] your business and if then the same, is it the foundries or the IDMs or the memory people?

Well, we didn't break all of that out, but I think the projections for capital spending covered both the IDMs and the foundries and didn't break it out into memory and logic and so on. But since semiconductor is a high percentage of our business, it's obviously that statement is based as much on semi--more on semi than on non-semi.

And it's based on--some of that is based on the fact that we do have a lot of new products and we are working--our products are working more on the leading edge, where there is higher utilization.

Okay Management, I'm going to turn the conference back over to you for any closing remarks you may have.

Thank you very much. Well, that does conclude our comments and I'd just like to thank you all for joining us on the call today and for your continued interest in MKS. Thank you.

Ladies and gentlemen, that concludes the MKS Instruments first quarter earnings conference call. If you would like to listen to a replay of today's conference, you may dial in at 303-590-3000 and enter the access code of 11027307 and then followed by the pound sign.

Thank you for participating in today's conference. You may now disconnect.