萬機儀器 (MKSI) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MKS Instruments Q4 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, Thursday, February 16, 2006.

I would now like to turn the conference over to Mr. Ron Weigner, Vice President and Chief Financial Officer of MKS Instruments. Please go ahead, sir.

Good morning and thank you for joining our earnings conference call.

Earlier this morning, we released our financial results for the fourth quarter of 2005, and you can access this release at our Web site, www.MKS Instruments.com.

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 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 today's press release and in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2004 and most recent quarterly reports on Form 10-Q, each of which is on file with the SEC. In addition, these forward-looking statements represent the Company's expectations only as of today. While the Company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the Company's estimate 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 will circle back for further questions as time allows.

Now, I'd like to turn the call over to Leo Berlinghieri, Chief Executive Officer and President.

Thanks, Ron, and thanks to everyone for joining us this morning. I will give an overview of the quarter and the outlook, then Ron will give a detailed review of the financial results and our guidance. Then we will answer your questions.

I'm pleased to report that our fourth-quarter sales and earnings exceeded guidance. Sales increased by 5% sequentially to 129 million, and non-GAAP operated earnings increased to $0.22 per share.

Early in the fourth quarter, we had expected customer order patterns to remain stable, but bookings from semiconductor OEMs, their contract manufacturers and semiconductor fabs picked up as the fourth quarter unfolded. MKS, one of the largest providers of semiconductor capital equipment subsystems, process control solutions and components -- a major portion of the fourth-quarter sales growth can be attributed to increased sales of our power and reactive gas products, which are achieving new levels of product performance. The increased sales of these products reflects our strength in microwave power-generators (indiscernible) resist strip applications, the performance of our RF power generators, and our innovative new R*evolution remote plasma source. The R*evolution improves process performance by providing high-efficiency on-wafer processing at higher rates than conventional sources. It has been adopted by a major fab for an ashing process -- also gained higher sales of ASTRON reactive gas generators for chamber cleaning.

In the area of our integrated ozone subsystems, we moved into production at a world-class device manufacturer, which has expanded our participation in high-growth, atomic layer deposition processes. We have the technology to meet the evolving the requirements of ALD. Customers are evaluating our precursor deliver and control and process monitoring solutions for this high-growth process. ALD is currently estimated to grow at 39% compounded annual growth rate through 2010.

Fourth-quarter sales also reflected higher sales of vacuum process solutions that incorporate our latest technology for effluent management. These process solutions reduce particle contamination to increase tool uptime and throughput.

Speaking of improving productivity, in the quarter, our new tool Web RGA was selected for additional semiconductor and thin-film manufacturing applications, including high brightness cellphone displays. Tool Web RGA monitors process integrity in real time and provides real-time process management to minimize the costs and yield impact of tool downtime. One major fab has implemented a new policy to run wafers only when the tool Web RGA is online.

Our position in non-semiconductor markets remained strong in the quarter. In the medical equipment market, our high-power RF power amplifier was selected for leading-edge 3 tesla MRI equipment at a new Asian medical equipment customer. Sales of our new high-speed gas analyzer increased as we continued to penetrate the combustion market. Major engine manufacturers use this analyzer to monitor exhaust emissions at more efficient, higher speeds than ever before.

MKS continues to evolve as a process control company by integrating and investing in market-leading technologies that improves process performance and productivity. Through these strategies, MKS can move up the value chain and grow faster.

We integrate technologies and process expertise into subsystems to create a higher-value solution and a competitive advantage. With this strategy, we typically can increase functionality, reduce costs, displace competitors, gain share, and extend our market leadership. In 2005, sales of integrated subsystems increased to 27% of the total sales and from 25% in 2004. Our goal is for these value-added subsystems to represent 40% of total sales.

We acquired technologies to expand our process control solutions for semiconductor customers and extend our reach to blue-chip end-users with advanced processes in other markets. Our technology portfolio increased in the fourth quarter when we announced plans to acquire Ion Systems and Umetrics. Both companies are technology leaders. With these technologies, our total available market is estimated to grow from 2.2 billion in 2005 to 4 billion in 2010. Ion Systems' ionization technology manages electrostatic charges and reduces particle attraction to control process contamination, which complements our process monitoring and control technologies. As processes and devices become more complex, contamination has emerged as a major barrier for yield improvement in next-generation semiconductor, flat-panel display, data storage and other high-tech processes. Problems related to particulate and chemical contamination in the process environment typically doubled at each technology node as geometry shrinks. Ionization technology has been adopted by 300mm fabs and is now being offered on 300mm semiconductor capital equipment. It provides an expanded opportunity for MKS to improve the yield of increasingly complex devices.

Process faults are also becoming more challenging to detect and classify. Umetrics' multivariate data analysis and modeling software converts process data into usable information for fault classification and yield improvement. This acquisition expands our partnership with Umetrics beyond our previous exclusive license agreement to enable advanced process control. Through our modular tool Web platform, we combined MKS and third-party process sensors for data collection, integration, data storage and visualization, with Umetrics multivariate analysis in modeling software. Because Umetrics' software is also used in pharmaceutical and petrochemical markets, this acquisition expands MKS' penetration in those markets.

Now, let me comment on the outlook. We have broad exposure to the semiconductor equipment companies and the near-term outlook for equipment demand is definitely improving. Major OEMs recently reported strong bookings and guided for their bookings to increase next quarter. As you know, with our short lead times, a majority of our business is booked and shipped in the same quarter, limiting our forward visibility. However, based on our current customer order patterns, we expect first-quarter shipments and sales to range from 160 to 165 million. While it is not clear how 2006 will unfold, MKS is well positioned for a cyclical upturn with our technology leadership, strong product portfolio, and short lead times. We have the resources across our global infrastructure to work closely with our customers as we respond to increased demand.

Now, I will turn it over to Ron to discuss our financial results.

Thank you, Leo, and good morning, everyone.

Fourth-quarter 2005 sales increased to 129.2 million, up 5% compared to 122.5 million in the third quarter, primarily as a result of increased sales to semiconductor OEMs and semiconductor fabs. Fourth-quarter 2005 GAAP net earnings increased to 12.1 million, or $0.22 per diluted share, compared to 7.2 million or $0.13 per diluted share in the third quarter.

On an operating basis and excluding amortization of acquired intangible assets and special items, fourth-quarter 2005 non-GAAP earnings increased to 12.1 million or $0.22 per share compared to 9.2 million or $0.17 per share in the third quarter. Sales of semiconductor OEMs and end-users increased by 11% in the fourth quarter. Sales of semiconductor OEMs increased to 61% of total sales from 58% in the third quarter, and sales to device manufacturers increased to 12% compared to 11% in the third quarter.

Thin-film sales, which include flat-panel and data storage, were 7% of fourth-quarter sales, and sales to other markets represented 20%.

Looking at the geographic mix, sales to U.S. customers reflected strong OEM demand and represented 65% of sales compared to 64% in the third quarter. Sales to Asia represented 25% of fourth-quarter sales, and sales to Europe represented 10%, compared to 26 and 10% respectively in the third quarter. Sales to Applied Materials, our largest customer, increased to 21% of fourth-quarter sales. Sales to contract manufacturers for semiconductor OEMs also increased and remained at 5% of total sales. Our top 10 customers represented 51% of total sales, compared to 47% in the third quarter.

Gross margin increased to 40% in the fourth quarter from 38.9% in the third quarter. This improvement primarily reflected the effect of incremental volume, favorable product mix, and continued cost reductions. R&D spending decreased somewhat to 13 million or 10.1% of sales. This sequential decrease reflected the timing of rescheduled projects and lower project-related cost.

SG&A expenses increased sequentially to 23.8 million, or 18.4% of sales. This increase primarily represents initial depreciation expense related to our new ERP system, the first phase of which was implemented in the fourth quarter, and higher professional fees.

In the fourth quarter, we reported 3 million of income from a litigation settlement related to a favorable settlement of a patent-infringement lawsuit related to our plasma generator products, which was settled on October 3.

The tax rate for the quarter of 29% includes the effect of higher-than-estimated foreign tax benefits for the year 2005.

Our worldwide workforce remains stable at 2,270, compared to 2,268 in the third quarter.

Our strong capital structure provided flexibility to grow the Company and acquire market-leading technologies for improving process improvement and productivity. We continued to maintain a strong cash position in the fourth quarter. Cash and investments increased sequentially by approximately 20 million to 293 million. Cash and investments, net of debt, increased by approximately 24 million to 269 million. Cash from operations totaled approximately 24 million and totaled 64 million for the year.

Days Sales Outstanding were 58 days in the fourth quarter, compared to 56 days in the third quarter. Inventory turns increased to 3.2 times as a result of higher sales volume.

Capital expenditures of 2.9 million in the fourth quarter were primarily from manufacturing of test equipment. Depreciation in the fourth quarter was 3.3 million.

Beginning in the first quarter, our financial results will include the effect of our two recent acquisitions and stock-based compensation. We expect that stock-based compensation and cost of sales, R&D, SG&A could total approximately $0.03 per share after-tax in the first quarter and could total approximately $0.04 per share after-tax for the remainder of 2006. As Leo mentioned, based on current customer order patterns, we expect that sales could increase sequentially and range from 160 to 165 million in the first quarter. This estimate includes organic growth plus approximately 9 to 10 million in incremental revenue related to inclusion of Ion Systems and Umetrics acquisitions, which were acquired on January 3.

First-quarter gross margin could increase in range from 41 to 42%, which reflects the benefits of higher sales volume, including recent acquisitions, continued cost reduction efforts, and includes the effect of an anticipated less-favorable product mix in the quarter compared to the fourth quarter of last year, and also higher payroll taxes normally incurred in the fourth quarter, and stock based compensation.

Looking beyond the first quarter, we see opportunities to improve gross margin by approximately 300 basis points in 2006. Our goal is to continue to reduce our costs by transitioning products selectively to low-cost regions, increasing benefits from global material sourcing, and reducing other material-related expense manufacturing-related expenses. We are also focused on improving product reliability to reduce warranty cost. Through these cost-reduction initiatives, increased sales of integrated products, and favorable changes in product mix, we could achieve approximately a 300 basis point improvement in gross margin by the fourth quarter of this year, assuming a constant sales volume.

We expect higher operating expenses in the first quarter and in the year, primarily as a result of the two acquisitions and stock-based compensation expense. In addition, first-quarter operating expenses normally include higher payroll taxes. Therefore, first-quarter R&D spending is expected to range from 17.7 million to 18.1 million, which also reflects higher project-related expense related to specific customer and market opportunities. First-quarter SG&A expense is expected to range from 29.3 million to 29.7 million. Amortization of acquired intangible assets is estimated to be 5.3 million in the first quarter of 2006, compared to 3.1 million in the fourth quarter as a result of the acquisitions we completed on January 3. In future quarters, we estimate the amortization expense would be approximately 4.4 million.

As a result of the two acquisitions, we expect to have an IP R&D charge in the first quarter of approximately 700,000. Net interest income in the quarter is expected to be approximately 1.7 million. We estimate that our tax rate could be approximately 31% for 2006.

Based on these assumptions, first-quarter GAAP net earnings could range from 9.4 million to 11.1 million or $0.17 to $0.20 per diluted share on approximately 55.3 million shares outstanding. Operating or non-GAAP earnings, which exclude amortization of intangible assets, special items and stock-based compensation, could range from 14.9 million to 16.6 million, or $0.27 to $0.30 per share. Non-GAAP earnings, including stock-based compensation, could range from $0.24 to $0.27 per share.

So, this concludes the financial discussion. Now, I'd like to turn the call back to Leo.

Thanks, Ron.

Based on the positive outlook for fab and foundry spending, the strong pace of current orders from semiconductor OEMs and end-users, our success at key customers and our acquisition of key technologies, we are encouraged about the outlook for the quarter and beyond.

Ron and I will now take your questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer process. (OPERATOR INSTRUCTIONS). Brett Hodess.

Merrill Lynch. Ron, the 300 basis points gross margin improvements through the year -- that's from the first-quarter level of 41 to 42%?

That's correct, Brett.

Okay.

Because you have to start with that as a base because that includes Ion and Umetrics, and also includes a small impact of the stock-based compensation.

Based on that starting point for gross margins, including Ion and Umetrics, it looks like those businesses are probably at least at your sort of average gross margin, or maybe on the higher end. Is that a correct assumption?

We don't give the gross margins out by product, but I think, as we previously said, that these acquisitions were accretive immediately.

The other question I wanted to ask was given the strength in the order pattern from your large semi OEMs, and what that -- and taking into account what Leo's comments were, it appears that, with a 20-plus% type of order pattern, that's going to drive at least teens type of shipment growth into the second calendar quarter as well this year. In the past, your revenues have tracked the shipment order -- the shipment patterns of your major OEMs very closely. Is there any reason to believe that that would change, or do you think that that pattern is still pretty intact?

Brett, this is Leo. Thanks. Good morning. As far as the second quarter goes, we don't comment that far out because of the lead times, but we are optimistic seeing the order pattern the way it is.

Then my last question was, we heard from Applied last night also that, on the flat-panel side, that they had a little bit of a lull going into the beginning of the year and are expecting a strong outlook further on. In your other businesses, your flat-panel side, are you seeing that similar pattern?

I think, in general, flat-panel tends to be spiky more than consistent, because it's not as many tools in flat-panel, so they tend to be a little more spikier.

Yes, it was slightly down in the fourth quarter. As Leo says, just kind of spikey.

Okay. Then I guess I actually had one last question. On the R&D front, you know, with the jump sequentially, you mentioned there were two impacts. One is obviously the new businesses and one is some project-related besides just some of the stock comp or whatever it is in there.

Yes, and then we had some lower expense -- and then the fourth-quarter expenses were abnormally low; there was time off, and we deferred some projects that we expected to happen but now those will happen in the first quarter, so you kind of get -- it more exaggerates the increase.

So if you look beyond that through the rest of the year, should we start to see a plateau, up or down? Can you give us some feel, given the spikey nature of the R&D -- (multiple speakers)?

Well, you know, we're going to continue to invest in projects that we think make sense, and we're going to look on our investment and make sure we are investing the proper amount for the expected return, so we will continue to evaluate what the proper level of spending should be.

Thank you.

Jay Deanha.

JP Morgan, thank you. A couple of questions -- the first one is are you gaining noticeable share in the power side of things, in particular with CVD? Did that have an impact on your fourth-quarter results?

The second question is do you envision any rapid ramp issues for your company, or maybe other smaller suppliers getting behind the curve, which could slow down your ability to execute to your guidance?

Yes, Jay, thanks. As far as -- I don't know if the comment was "significant share" or I couldn't quite remember the adjective you used, but you know, I think we have so many different product areas that we are always gaining and doing something in either share growth or new products. So I think we commented that we felt positive about our position in power and reactive gas products, and certainly there's some product areas that we are gaining share.

As Leo said, that was -- one of those products contributed to most or a lot of the growth in the fourth quarter.

I was most interested in CVD. Is there any discernible evidence that you've picked up some decent design wins in the CVD area?

Well, I don't think we would comment too much at specific product areas, but I think, in general, the power reactive gas product group had a significant contribution to the performance this quarter, and a portion of that is attributed to market share gain.

The second question you had was did we anticipate or do we anticipate any issues related to rapid ramp, or is that where you were going with that, Jay?

Yes. In other words, are there going to be any internal issues dealing with the rapid ramp? Then the second part of the question was could some of your expected shipments get delayed because other, maybe smaller suppliers aren't keeping up with your customers' demands?

Okay. As far as anything we anticipate, it's always a challenge in this industry, as you know, to ramp up with it, and we've been pretty successful. We're pretty pleased with our operational excellence, so I don't anticipate anything at this point in time.

As far as -- I think what you're referring to is can the rest of the supply chain supporting the industry have an impact to us? You know, that's a potential every time we go through a ramp, but I don't think it's affected us in the past and I don't anticipate anything going forward here.

For a lot of these suppliers, we've had long-term relationships, and the last time that there was a cyclical ramp, we were able to maintain our on-time deliveries with an 80% increase in volume over three quarters.

Okay, and then two quick ones -- after being kind of quiet for quite some time, you popped out two acquisitions there all of a sudden. Is this some sort of a sign that you guys are going to get more aggressive and that we could see little acquisitions on a regular basis here going forward? Then the last question is what are your OEM customers, on the semiconductor equipment side, telling you in terms of their expectations for the sustainability of this cycle?

On the first one, relative to acquisitions, you know, I think we commented that we are always open and looking at what's available, what makes sense as a business. We don't time them in spurts or space them out any particular way, so it's really based on what's available, what we think makes sense and run our business that way. It just happens to be that two were announced together.

Relative to the OEM expectations, I mean what we're hearing is very similar to what they've reported -- is that order rates will continue to grow in the second quarter, first quarter, so we are hoping that this continues for a little while. But there's no long-range information I think at this point.

Robert Maire.

Needham & Company. Congrats on the nice uptick here. Two questions -- we've heard from [Lamme] and [Amed] that there were some changes in their manufacturing process. Lamme is talking about shipping modules to customers and having them do final test and assembly at customer site, and [Amed] talked last night about building product on a generic basis and then customizing it closer to I guess final ship time and such. How does that change your relationship there? It seems like the industry is moving towards things of this sort. Does that change your relationship, change your leadtimes, your ability to guide you? Can you give us a little flavor on that?

Sure, Robert. Thanks. I will say this -- the comment you made about modules shipping to customers and being assembled there, we've heard that for a number of years. This is probably not new; it's probably been five-plus years that there have been discussions about that in the industry, so maybe the more it gets discussed, the more realistic it becomes. But it usually happens gradually, and I don't anticipate there would be anything unusual. There's nothing right now that we can anticipate that would be unusual.

Your second part of the question was related to sort of a vanilla system and then customizing?

Yes. Well, Applied is basically talking about building up a system closer to final spec, I guess without the final customer specific customization until the very last minute, so I guess the ability to build up the inventory or build up systems without customizing early on in the process.

Okay. Well, I think from -- I can comment on how we would view that. It's probably pretty positive in the sense of, we would rather get the real demand for something and be able to ship it. Our leadtimes are short enough that I don't think that would have much of an impact to us, but anytime you can tie the demand in the supply chain to what's really needed, I think the whole supply chain is better off for it.

The last question kind of relates to a question asked by Jay. It appears, from what we've heard, that this current upturn is substantially better than the last upturn or two that were more like blips. This feels more like the late '90s or something like that, where we have a longer, sharper upturn. Would you say, number one, is that accurate? Number two, how is visibility coming out of your OEM customers? I guess leadtime on that visibility -- are they a little bit off guard with the strength of this, or is this proceeding more like we've seen in past cycles?

Well, I guess to the comment is this different than the last two blips, I think we were saying the same thing in the last two blips that you mentioned, so I don't really know what -- much beyond that.

As far as visibility, we get about the same visibility and it's limited with our leadtimes. You know, we look at really the next 12, 13 weeks, so nothing unusual, both in visibility, and I don't see anything unusual right now. We're happy with what we're hearing out there, but beyond that, it's hard to tell, as you know.

I guess what I was trying to get at is do your OEM customers exhibit any more confidence in their projections or leadtimes that they're putting out to you that would indicate that it's more than the most previous upturn, which was a little bit more short-lived?

Yes, I think that's very difficult to answer with a degree of confidence. Because as I said, every one of these blips start out with the same level of confidence, so I think it's hard to tell which one you're in until you get past it. Then you can look back and see.

Edward White.

It's Ed White from Lehman Brothers. Can you talk about some of the key factors that will help you drive your integrated subsystems mix from 27% to 40%? What do you need to do to get that done? What are some of the key factors there?

Thanks, Ed. Good morning. I think, as far as integrated subsystems, I don't think it's much different than what we have been on track and doing. As you know, we are up to about 27% of the revenue in integrated subsystems. As we design new products, we keep that in mind, so some of those new products are actually designed as integrated subsystems.

As we do acquisitions, we look at technology opportunities where we can combine technologies and combine those into integrated subsystems. As processes evolve, there are new requirements and new needs to satisfy those processes. You know, often, an integrated subsystem enables a process either to run more efficiently or more cost effectively, or lower costs or higher productivity. So you know, I think there are probably three different ways that we look at that. It's really an ongoing activity. So the longer you keep at it, the more you creep up the percent of volume of integrated subsystems. And the more pieces that we have in technology, the more opportunities we have.

Okay. Then secondly, can you talk a little bit about Ion Systems and Umetrics from a competitive standpoint? What competitive edge do you think it will give you or that perhaps others won't be able to offer?

Well, I think, in the area of fault-detection and classification with Umetrics, it really gives us the capability to move faster. You know, having a licensing agreement to distribute and utilize is different than having the company and technology as part of it. So we have control over the speed of design, over what activities we engage with with customers. I think that gives us a competitive advantage than just used -- integrating the product itself with our products.

On the Ion Systems side, they are a leader in this business, in flat panel and data storage and semiconductor, so I think -- and as the ionization gets integrated into semiconductor equipment tools, I think our position and relationships with the semiconductor OEMs gives an ability to leverage that. So I think both of those help us in a competitive way that may be different than just stand-alone businesses they have or other competitors with us.

Okay, great. Thank you.

Stuart Muter.

This is [Mahesh Sangareria] at RBC Capital Markets.

So, I was wondering if you can provide a little bit more color on Ion Systems and Umetrics acquisition. You said 9 to $10 million in revenues. How much is this adding to your R&D and SG&A? How will it grow? Does it grow more like just (indiscernible) semi or slower or faster than that?

Well, as far as the cost structure is concerned, we don't give out the details of the cost structure, but in addition to what Leo said about Umetrics, you know, about half of their business is in other markets, such as medical and so forth, especially very strong in Europe. You know, we would expect that, for example, that Umetrics would grow faster than the industry because, as Leo mentioned, we would have control over the development of the software that would be used to improve productivity on new tools, as well as existing tools. Also, on Ion, as Leo also mentioned, where they are just starting to look at putting some of those -- some of their product right on the tool immediately -- right now, most of it's in the fabs but now some of the OEMs are looking at putting their equipment right on the tool.

Also, I think one of the key factors in both of those product areas is that, as [geometry] shrinks, process control becomes more important, static control, contamination control becomes more important. So those are factors to me that say that will drive faster than just industry growth. There's a change in need, both in particles, contamination and fault-detection and classification for process management. So, we would believe that they would grow faster in the long run.

Yes.

So just to follow up on the first question, if I compare your numbers to March '05 quarter and your guidance, your revenue is increasing 30 million but your R&D and SG&A remains at pretty much the same percent level, so if you can help a little bit, how come you're not getting that operating leverage -- what is -- and you're indicating that you don't see a substantial decrease in those expenses.

Well, first of all, remember that the expenses you're looking at in the first quarter of this year do include some amounts for stock-based compensation, which was not included last year. Also, as I say, we're just looking at -- when we're looking at R&D, we're looking at ways of maximizing the return on that investment and we will just continue to evaluate what is the proper level of spending in that area.

Okay, thank you.

Part of it is just due to the restructuring. It might be a different ratio of development to gross margin on acquisitions than there is in the base business, so that's -- but you might end up with the desired operating profit.

Okay, thank you.

Tim Summers.

It's Stanford Financial Group. Good morning. Ron, you had mentioned in your discussion, about the second quarter -- I'm sorry, the first-quarter gross margin, a factor including less favorable product mix. Is that a customer-specific issue or can you amplify a little bit on that?

Yes, generally speaking, there are some of them that are customer-specific. For example, there might be certain products that we've done for a customer, from a customer relationships point of view, that might have a substantial portion of pass-through materials, which might give us a lower margin. Depending upon the demand for that or whether we continue to go on with that type of program and product for that customer can have an impact on the margin. So that's what I was primarily referring to.

So this is something that could reverse itself at some point in the future?

Absolutely, absolutely. It kind of changes from quarter to quarter. So that was some of the major impact in the Q1 margin, where I said it would be less favorable than Q4 as far as the mix was concerned.

On the warranty costs, can you give us an idea of what the issues are that you are trying to address now and how you intend to address them over 2006?

Well, as far as warranty costs, we have a focus on quality and reliability on an ongoing basis, and we had talked recently, probably in the last six months about new lines of power supplies that will be more reliable and give us ability to have lower-cost and better performance to customers. We will continue those type of things. You know, work on design for reliability, fewer components, some of the capital that Ron talks about in terms of testing and burn-in -- (multiple speakers).

Investing a lot in capital equipment for testing.

So you're not addressing an issue that has arisen in the past three or four months; this is just an ongoing change in process to hopefully drive down those expenses longer-term?

That's correct.

Right.

Okay, great. Thanks, Leo and Ron.

Chris Schott.

This is Chris Schott of Banc of America Securities. I had a couple of questions. One is, with your Ion Systems acquisition, what is the product strategy going forward? Is it going to be a stand-alone product or is it going to be bundled with your existing product lines?

The product itself is a stand-alone product that sells primarily to fabs and end-users inside their actual facility, installed in the facility. There's a trend with 300mm moving that to on tools for both data storage, flat-panel and semiconductor. But there's also an opportunity to look at complementary-type technologies. We have the ability to integrate communications and information and process control on the Ion products. But we would look at all of those avenues; there's not one specific way to address that because there's a need for it as a stand-alone product as well.

The last call, you guys mentioned that your goal was to get 44% gross margin is probably like a 155 to 160 million revenue run rate. Obviously, under the current infrastructure, you guys are guiding to a 44% margin by the end of the year. What do you think the revenue run-rate would be at that level?

Repeat that question again?

What is your revenue run-rate? (indiscernible) you guys reached your target of 44% gross margin?

I said that, from the first quarter, where we are expecting a gross margin of between 41 and 42%, that, on the same volume by the fourth quarter, that we would expect that we could achieve approximately a 300 basis point improvement in that margin. So basically what we're saying is, you know, on about 160 million, maybe by the fourth quarter, we could get to around 44% on that same volume.

Okay. Just one last question is what do you think is your sort of available market on the semi side?

Our total available market in 2005 was over 2 billion.

On the semiconductor side?

In total.

Steven Pelayo.

Just one clarification and one question here. Were there any Umetrics revenues in the December quarter?

No, there were not.

(multiple speakers) question was when I exclude the 10 million and I guess in revenue you guys are talking about from the two acquisitions in the March quarter, I guess you get about 15% or so organic growth, quarter-over-quarter. We've heard, during the quarter, that the major OEMs were querying the supply chain to make sure that they were ramp-ready. I'm curious. Is that 15% organic growth capacity-constrained in any way?

Well, the answer to the first question is that we completed those acquisitions, Steve, on January 3, so there were no revenues or any expenses related to those acquisitions in the fourth quarter. It all began in the first quarter. Leo, I don't know you've already addressed I think the ramp -- (multiple speakers).

I think we're looking at somewhere close to 20% organic growth.

It's more like 18, 20%.

So I don't see anything that's constraining that at all.

I was just wondering. Could it have been higher if you guys were constrained? I'm just curious if you guys could have ramped more. Is the issue really that -- would the OEMs would like to ramp even harder but that you guys just can't meet those demand (indiscernible).

No, our leadtimes are fairly short, so we don't get the total quarter; we're not sitting there with a total quarter to be able to say what's constrained or what's not, but certainly feel comfortable that we can meet the customer demands and almost 18, 20% growth without any constraints.

That's great, guys. Congrats. Take Care.

Thank you. There are no further questions; please continue.

Okay. Well, thank you. This concludes our comments. Thank you for joining us on the call today and for your continued interest in MKS. Have a good day.

Thank you. Ladies and gentlemen, that concludes the MKS Instruments Q4 earnings conference call. You may now disconnect. Thank you for using AT&T teleconferencing.