萬機儀器 (MKSI) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MKS Instruments third quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn our conference over to Jonna Manes, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning and thank you to everyone for joining our earnings conference call. Earlier today we released our financial results for the third quarter of 2006. You can access this release at our website, www.mksinstruments.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 Reform Act of 1995. Actual results may differ materially from those indicated by these forward looking statement as a result of various important factors, including those discussed in today's press release and in the Company's annual report on form 10K for the fiscal year ended December 31, 2005, 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 statement should not be relied upon as representing the Company's estimates or views as of any date subsequent to today. Finally, during the Q&A period we ask that you limit your questions to two per firm. We will circle back for further questions as time allows. And now I like to turn the call over to Leo Berlinghieri, Chief Executive Officer and President of MKS.

Thanks, Jonna, and thanks to everyone for joining us this morning. Ron Weigner, our Chief Financial Officer, is also with me. I'll give an overview of the third quarter and the outlook and Ron will give a detailed review of the financial results and our guidance. Then we will answer your questions. Today I'm pleased to report record quarterly results on both semiconductor and non-semiconductor markets. Third quarter sales reached an all time high of $205.5 million, which is a 68% increase over last year's third quarter and a 4% sequential quarterly increase. Our profitability also climbed in the quarter with GAAP net income of $0.50 per diluted share and non-GAAP net earnings of 56% [sic - see Press Release] per diluted share. We are on the way to record performance in 2006. Nine months sales were up 53%, GAAP net income increased 202% and non-GAAP net earnings increased 199% in 2006 over 2005.

In the semiconductor market, third quarter fab sales were particularly strong in Korea and Taiwan. We continue to bring value to fabs as we focus on enabling higher productivity. Our growth demonstrates the need for process controlled technologies at smaller geometries and shows our strong competitive position in 300mm applications. As you know, fabs are facing more challenges as they shift to 65 and 45 nanometer for advanced applications, such as memory devices. Advanced processes with more steps increase the risk of process errors and yield improvement is a must to meet production cost targets. It's not enough to just collect data anymore, fab managers are expecting process predictability. We are delivering solutions to optimize fab process performance and productivity. Our TOOLweb hardware and software converts process data into useful information and analyzes data in real-time, not only to detect but to predict and avoid process faults and improve yields.

In the third quarter we continue to see solid fab interest in this TOOLweb platform. Again this quarter we received repeat orders for TOOLweb residual gas analyzers, including orders from a world class fab in Asia. These analyzers aid in predicting and preventing process problems ranging from contaminate presence to tool component failure. Another TOOLweb sensor, our new digital Baratron, was selected for use in flash memory production because it provides additional critical performance data which can improve process yields. Demand for our vacuum subsystems and products increased in the third quarter at major fabs. Several key fabs are adopting our process specific solutions for affluent management to reduce chemical particular contamination and increase tool uptime in fab productivity. Sales of vacuum components for tool hook-ups continued strong in the quarter and we expect this business to remain strong with over 10 new 300mm fabs currently anticipated in 2007. Our sales to semiconductor OEM's represented 59% of third quarter sales. We are well positioned at all major semiconductor OEM's and our critical subsystems are used in almost all front-end processes.

For example, we are very well positioned on etch equipment for memory devices. On the last call I announced that a major Japanese OEM had selected our RF generators and dual frequency match work for the next generation critical etch tool for 300mm in very small geometries. We began to ship these RF power systems in the third quarter. We are also the RF power supplier of choice on the latest etch platform at a key US OEM. I know you have heard me talk about the early adoption of our new revolution integrated remote plasma source by a major Asian OEM for a gnashing process. Once again, quarterly sales increased for revolution, which generates reactive gas species at higher than conventional levels and increases on wafer processing performance. As major OEM's look to integrate value added processing steps with etch processing, we see even more opportunity ahead for revolution's high performance technology.

In the quarter OEM orders remain strong for our ultrahigh concentration ozone delivery systems used in atomic layer deposition, ALD. ALD precisely controls the film thickness of Dram device layers and ozone is the precursor of choice for ALD. We expect to expand penetration in ALD, which is forecast to growth over 30% through 2010. Very thin films require extremely precise generation delivery and control of process gases, which are core competencies for MKS. Our new products for ALD optimize the way these technologies will work together. We continue to focus on gaining share in thin film in non-semiconductor markets and our committment to expand this business is paying off. Over the last eight quarters, sales to thin film and other non-semiconductor markets have grown by 85% to $63 million or 30% of our sales for the third quarter 2006. Our 14% sequential quarterly growth rate shows our progress penetrating these markets, which still have significant growth potential.

Let me give you some examples. We are applying FTIR technology for monitoring gas composition in semiconductor processes to the combustion and emissions market to help internal combustion engine manufacturers design and test engines that meet increasingly strict environmental pollution control requirements. To serve this combustion market, our new high speed MultiGas analyzer measures multiple gas species from engine emissions in real-time. MultiGas sales continue to increase in the third quarter as automobile and heavy equipment manufacturers continue to invest to meet new diesel engine emission test requirements in the U.S. and in Europe by 2010. We're exploring new channels for our analyzers and we believe our share of this market could grow from a small base in 2006 to reach $12 to $15 million over the next few years. We believe this technology has many applications and we're developing products to expand our emissions market opportunity. In the alternative energy market, we won a large order in the third quarter for Baratron pressure measurement instruments to monitor gas pressures in power generation plants.

We are applying TOOLweb data acquisition process monitoring and fault detection technology to advanced industrial applications that require precise quality control.. For example, global manufacturers of consumable medical supplies can use this process monitoring technology, called SenseLink QM, to avoid shipping defective products. In this quarter we began installing this real-time quality monitoring system on injection molding equipment for consumable medical supplies around the world. We see opportunities to improve process and product quality with SenseLink QM in this and other markets with strict quality control standards. In another medical application we achieved record sales to our key medical equipment customers in the quarter as we continue to adapt our RF power technology for the latest generation of MRI equipment. In the growing solar energy market we gained a design win in DC power and we continue to provide other products for critical process parameters, including pressure transducers, match flow controllers and process monitoring systems.

In the flat panel display market customer adoption of our integrated sub-systems for liquid ozone delivery has exceeded our expectations. Third quarter sales of these systems remain strong for both traditional and emerging display applications. Flat panel display manufacturing requires the critical step of surface cleaning over large substrate sizes. These subsystems provide fast chemical reaction rates to reduce clean times and increase throughput. Our ozone subsystems are recognized as high performance environmentally preferred solutions for surface cleaning. In the third quarter liquid ozone subsystem sales increased to a world class Korean manufacturer for traditional flat panel displays. This business is in addition to systems sold to this manufacturer for organic LEDs that are used in LCD TVs and automotive lighting. We are excited about the growth opportunities for liquid ozone delivery in flat panel and organic LED.

In early October we announced the acquisition of Novax, a provider of electrostatic charge monitoring technology for semiconductor, data storage, telecommunication, medical device and other technology driven markets. We expect this acquisition to expand our penetration in these advanced process environments. Particle contamination from electrostatic charge attraction can cause damage in wafer manufacturing and other advanced processes. There is a need for continuous real-time electrostatic charge monitoring to increase manufacturing yields. We plan to integrate Novax sensor technology and data acquisition software with Ion Systems' ionization technology to detect and control electrostatic charge. This integrated system can provide optimized closed loop measurement and control of electrostatic attraction and discharge. Novax technology and operations will be integrated into Ion Systems which could provide modest cost synergies.

Looking ahead we're optimistic about our long term opportunities resulting from our solutions to improve productivity at fabs, our design wins on next generation equipment at OEM's and our success at leveraging our technology in multiple markets. Our outlook for the fouth quarter anticipates variations in major customers' order patterns in semiconductor and non-semiconductor markets. Considering these expected fluctuations, we anticipate that the fourth quarter sales could range from $190 to $200 million. At the midpoint of our guidance, our sales for 2006 would be approximately $778 million or more than 50% growth over 2005. Our results demonstrate that we're executing on our growth strategies and we're encouraged by the long-term outlook. Now l will turn it over to Ron to discuss our financial results.

Thank you, Leo, and good morning, everyone. Third quarter 2006 results exceeded our expectations and set a new record for MKS, as we continue to provide solutions to semiconductor and non-semiconductor markets. Sales reached $205.5 million, which is a 68% increase over last year's third quarter sales of $122.5 million and a 4% increase over last quarter's sales of $198.4 million. Our third quarter market mix reflects our on going success in increasing our value to end users with productivity solutions and leveraging our technologies in diverse markets. Sales to semiconductor device manufacturers increased by 4% sequentially to 11% of total sales. Sales to semiconductor OEM's decreased by 1% to 59% of total sales. As Leo said, we are succeeding in expanding our business in thin film and non-semiconductor markets. Thin film sales, including flat panel and data storage, increased by 7% and represented 8% of total sales. Sales to other non-semiconductor markets increased by 17% and represented 22% of total sales.

Looking at the geographic mix, sales in Asia represent increase by 12% sequentially on higher demand from OEM and fab customers, especially in Korea and Taiwan, and represented 26% of total sales. Sales in Europe increased by 9% and remained at 9% of total sales. Sales in the U.S. remain steady at 65% of total sales. Sales to our top ten customers remain fairly constant at 49% of total sales. Sales to our largest customer, Applied Materials, increased slightly and were 21% of total sales. Sales to contract manufacturers of applied and other semiconductor OEM's were lightly lower sequentially and remained at 7% of total sales. In the third quarter gross margin increased to 44.1%. The sequential quarterly increase of 50 basis points primarily resulted from higher sales volume and cost reductions. Operating expenses, excluding amortization, increased by $3 million sequentially.

R&D spending was $18 million or 8.7% of sales and SG&A expenses were $33 million or 16.1% of sales. Approximately half of the increase in SG&A was related to foreign exchange expense associated with the rising dollar and the remaining half represented increased cost for incentive compensation resulting from higher than expected performance for the year and increases in other administrative expenses. The tax rate for the third quarter of 26% reflected a net tax benefit of $1.6 million that was primarily attributable to certain discreet tax matters related to our international operations. Excluding this one time benefit, the tax rate for the third quarter was 30%, which adjusts our estimated tax rate for 2006 to 32%. As a result of increased sales volume, improved margins and the tax benefit, GAAP net income increased by 287% to $27.9 million or $0.50 per diluted share on 56.1 million shares outstanding in the third quarter of 2006 from $7.2 million or $0.13 per diluted share in the third quarter of 2005, and by 15% compared to $24.4 million or $0.44 per diluted share in the second quarter of 2006.

Third quarter 2006 GAAP net income included stock based compensation expense of $2.5 million or $0.04 per share net of tax. Non-GAAP net earnings, which exclude amortization of acquired and tangible assets, special items and stock based compensation expense, increased by 243% to $31.4 million or $0.56 per diluted share from $9.2 million or $0.17 per diluted share in the third quarter of 2005 and by 8% compared to $29.1 million or $0.52 per diluted share in the second quarter of 2006. Our worldwide workforce decreased to 2,865 people from 2,897 people in the second quarter. Now I'll turn to the balance sheet. We continue to generate cash from operations, which total $32 million for the quarter and $55 million year-to-date. Cash and investments increased sequentially by approximately $29 million to $269 million net of debt totaling $240 million. Day sales outstanding were 56 days in the third quarter and inventory turns remain at 3.5 turns. Capital expenditures were $2.9 million in the third quarter and depreciation was $3.8 million.

As Leo said, we anticipate that fourth quarter sales could range from $190 to $200 million based on fluctuations, expected fluctuations in major customers' order patterns in semiconductor and non-semiconductor markets. We continue to work on initiatives to improve gross margin. Even though our sales volume could be slightly lower in the fourth quarter, we anticipate that gross margin could range from 43% to 44%. We expect operating expenses to remain fairly stable, R&D expenses could range from $17.5 million to $17.9 million and SG&A expenses could range from $32.8 million to $33.2 million. Amortization of acquired and tangible assets is estimated to remain at $4 million. Net interest income in the quarter is expected to be approximately $2 million and we estimate our tax rate for the fourth quarter 2006 could be 32%. We expect stock based compensation expense to remain at $0.04 per share in the fourth quarter.

Based on these assumptions, fourth quarter GAAP net income could range from $20.7 million to $24.1 million, or $0.37 to $0.43 per diluted share on approximately 56.5 million shares outstanding. Non-GAAP net earnings, which exclude amortization of acquired and tangible assets, special items and stock based compensation, could range from $25.3 million to $28.7 million or $0.45 to $0.51 per diluted share. So this concludes the financial discussion. Now let me turn the call back to Leo.

Thank you, Ron. I would just like to add that our quarterly results demonstrate that we are expending our penetration in semiconductor in other key markets by delivering the technical solutions that our customers require. We'll now take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Jay Deanha. Please state your company name followed by your question.

Hi, JP Morgan. Leo could you give us a little more color on what you're talking about when you say variations in customer order patterns in the fourth quarter? And also what are you looking at in terms of '07 growth potential, is your semi business going to be slower than your non-semi business or vice versa? Thanks.

As far as order fluctuation, I guess the only point there is that from quarter to quarter we have both demand and mixed fluctuations. So we are just anticipating that, as we mentioned, I think, last quarter, that certainly the growth rate anticipation, even back last quarter, we expected based on our guidance was lower. And again we are just saying that that looks like a slightly lower again. No specific data around that. And the second question, Jay, I'm sorry?

Your outlook for '07 between semis and non-semis for your business, does one look growthier than the other at this point?

As you know with our turns business we are giving guidance for the next quarter and certainly nothing extremely unusual in both of those areas.

Thanks.

Our next question comes from Robert Maire. Please state your company followed by your question.

Needham and Company. What are you getting from your semi equipment OEM's? Would you suggest this is more of a trimming of inventories or sort of trying to match inventories to order levels or is this more of a just a little bit of softening in the overall volume of the market going forward? Could you give us a little more insight as to that?

Robert, I think as we mentioned in the first couple of quarters, we get a natural increase with growth from just general work in process inventories that would increase. That will flatten out as their production rates flatten out. So we won't get that added benefit. But there's really nothing significant that we're hearing from the key customer side in terms of changes. And again, remember with our lead times, we don't get lots of visibility and you don't want to forecast. If you do get lost of visibility you don't put a lot of credence in it, especially with the short lead times and cycle times we have. I think we're just seeing that we have had tremendous growth both in the industry and certainly MKS has taken advantage of that and that growth rate is slowing down. And as we see it slow down I don't know if we've ever gotten it perfect, but we see it flattening out to basically slightly down is what we are looking at.

So I take that as not being an inventory correction but more of a correction as to the ongoing level of business. Is that -- ?

Certainly not from anything we have gotten directly from customers. I haven't heard inventory being brought up. And I usually ask and we look at their data as well. I don't think any key customer is talking about an inventory issue or correction to us.

Okay. And one other question, in terms of as your mix of the non-semi business gets higher, what type of margins in general does the non-semi carry versus the semi, is that typically a higher margin business, or similar margin or is it a little bit mixed? Can you give us some sense as to that.

Robert, there may be a little better margin in the non-semi business. It depends on the customer, the application, the volumes they do. But I think when you look at the operating profit it's roughly the same as semi. So they may be better margins, but remember in some of the semi there is a lot of leverage in some of the SG&A to very large semiconductor OEM's. So I think the end result is very similar. I wouldn't expect a significant shift in results as there're more non-semi.

Great, thank you.

You're welcome.

Our next question comes from Jim Covello. Please state your company name followed by your question.

Good morning this is Amanda Hindlian in for Jim Covello, Goldman Sachs. This is actually probably a follow up question to what Robert Maire just asked, which is the growth in the non-semi business has just been tremendous over the past couple of quarters and I am curious to get a better understanding as we think about the top-line as to what kind of an intermediate term target percentage we should be thinking about for those businesses and what kind of a buffer you think those businesses can help you get if there is a bigger correction on the semiconductor side of the business?

Tough question to answer Amanda and I'll tell you why. We have over 4,000 active customers and if you were to narrow down the semi piece of that and exclude it, that probably represents another 3, 900 customers or 3,500 customers. So we are in a lot of markets with a lot of customers and it's really difficult to look at a number and say this market is going to grow X and we're a piece of it. Also, in some of the non-semi markets we are only in a portion of the products that we provide or in a portion of that market, so you just can't look at a market growth and project some numbers, it depends what type of processing in that market. I think if you looked at sort of the historical numbers, we're growing a little faster the last several quarters then the historical numbers. Part of that is a focus on non-semi business. But to to be able to give you a number six months from now or a year from now would be pretty difficult.

Okay, that's fair. And then my second question is have you -- there's been some chatter about a slow down in LCD spending. Are you seeing that at all in your businesses in Q4?

As far as the flat panel -- remember now that's a fairly small percentage of our total business. So even though we may see that, again with various customers' markets we may see a little bit of that go down and something go up, but it usually doesn't have a significant impact because it is not a very large percentage of the total business. But in general, certainly what we've heard in terms of general market information is that there has been a slow down, I think that is why you are asking the question, and we would see something as a result of that. It depends, we could have new penetration in LCD, as I mentioned, in a couple of areas in particular ozones. We might see it down in one product area and up in another. I don't think we have seen any major fluctuations in that, but I think we've all read that that seems to be a little softer than it was six or eight months ago.

Sure. Okay, thank you so much.

You're welcome, thank you.

Our next question comes from Brett Hodess. Please state your company name followed by your question.

Good morning, Leo, Merrill Lynch. Couple of questions. Can you talk a little bit about how progress is going with integrated solutions at this point? And a couple of points, is it progressing in terms of the percentage mix that you expect and are you still -- are the integrated products still driving some margin leverage?

Good morning, thanks Brett. As far as integrated solutions, we report that once a year. Certainly I think over the last five years it's gone from about 11% of the revenue to almost 27% of the revenue. It continues to look very strong. We continue to develop products, some of the ALD products. When I've talked about our really integrated solutions as well, it's combining technologies. So I would expect that we see continued growth in that area. I think we have talked about a target of up to 40% over the long range for integrated solutions as a percent of revenue. I think we are still working on that target, Brett.

And the follow on to that is as you get a higher percentage of these, I'm correct in assuming that these are more proprietary because competitors don't have the technologies. And do you get better longer visibility on them or sort of a better forecast from your customers since they may be more proprietary and there's not easy second sources?

I'm not sure exactly what you mean by proprietary, but I think what they are is they offer a much more competitive solution in the marketplace, if that's what you mean by proprietary. We prefer to extend those across the market as opposed to targeting any very specific applications or a customer. So for pressure and sensitive MFC, for an example, that's an integrated product, but we'd expect to sell that across the marketplace as the market moves to a need for MFC's that have multiple calibrations and multiple gases in the cals.. So I don't think necessarily of it as a proprietary product, but I think as a competitive differentiator, I guess.

I didn't mean proprietary to a specific customer. I just meant that you competitors can't necessarily match the product very easily since it incorporates a number of technologies that you have that most of your competitors typically don't have all those technologies.

You're absolutely correct there. That is the key part of the strategy is to utilize the technology portfolio we have to combine technologies to get value added solutions that bring customers more value but also make it more difficult for the competition to compete.

Great, thank you.

You're welcome.

Our next question comes from Stuart Muter. Please state your company name followed by your question.

Yes, good morning. RBC Capital Markets. First a question on the real-time electrostatic discharge product potential. When do you see that product coming out and do you see a potential to actually retrofit some fabs with that product.

Good morning, Stuart. The sensors that Novax provides, those products today are beginning to be sold to the fabs. So what our strategy is is really today the fabs are the ones that had to do the integration, so they would buy an ionization system and they would buy sensors and they would do the integration. We believe by having both of those technologies we can do the integration and bring some value added to those customers. It won't be necessarily a change over or a retrofit because those have existed in the more recent fabs. So I think it's really our way of combining that technology to bring a higher value to the fabs and not have to have them deal with the integration.

Leo, would you share with us what you think that market opportunity is if you do the integration.

It's relatively small today. Typically the fabs have just required in the past a electrostatic management in terms of reduction of the charge. What they are finding as they go to smaller and smaller geometries, they really would like the sense what the charge is and do more closed loop control of that. So it's a relatively small base and we think as geometries shrink and the need to minimize particles in charge, it has growth opportunity. I can't give you a number I can put my finger on right now. I'm sorry, Stuart.

Okay, fair enough. Sounds like a good opportunity, thank you.

You're welcome.

Our next question comes from Tim Summers. Please state your company name followed by your question.

Hi, it's Stanford Financial Group. Thanks for taking my question, guys. Your guidance for revenue in the fourth quarter is down about 3% to 6%. Can you characterize the degree of slow down between semi and non-semi in the fourth quarter?

As I said earlier, when you're talking those volumes and the number of customers, I would expect that it would be primarily in the semi area. Obviously that is the area. We talked a little bit about flat panel slowing down in general in the marketplace. We're just trying to give our best estimate at this time what we think that number is. I can't give you specifics around that, Tim.

So it's more heavily weighted to the semi versus non-semi?. And within the semi group, Leo or Ron, are there any customers or products geographic regions showing either notable strength or weakness?

No. As we said Asia was particular strong for us this quarter, especially Korea. So I think we expect that that would continue strong in Asia.

And, Tim, I'd like to clarify one point. I wouldn't expect non-semi to go down. I would expect it up. It's usually not -- it's certainly not on a cycle with anything else. And so we are expecting that non-semi would continue to grow.

And just a quick follow up. You have got close to $5 a share in cash on the balance sheet, what do you think the level of cash is necessary to run your business on a day-to-day basis?

Obviously, it's a lot less than that on a day-to-day basis. Kind of general rule of thumb is our cash position right now is maybe say about one-third of our sales, which is something we're relatively comfortable with because, as you know, we have been in an acquisitive company. And for example, just at the beginning of this year we spent $100 million in cash on some smaller acquisitions and I think we're looking at earmarking some of that cash to do future smaller acquisitions.

Okay thank you.

Our next question comes from Vishal Shah. Please state your company name followed by your question.

Yes, Lehman Brothers. I had a question on your semiconductor business. If you look at your OEM customers and if you exclude AMAT, which is your biggest customer, which process areas do you have more exposure to -- is it PVD or [Ratch] or CVD?

I think, Vishal, in front-end processes we're almost involved in every one of those. Obviously, some of those processes have less opportunities for us then just based on the product offerings that we have. But in general, I don't think there is one that you would say, gee, we put our eggs in this process, all our eggs in this basket. We have products pretty well penetrated in all those processes. So I wouldn't see one that is so significantly different than the other in terms of risk or opportunity.

If I were to follow up on the previous question. If you say non-semi business in Q4 will be up sequentially, that would assume -- that would imply that the OEM business is down almost 8% to 10% sequentially in Q4. Now most of the OEM customers have guided to up shipments in Q4. And granted their inventory levels are high, they are looking at up shipments in Q1 as well. So given that backdrop, what's happening that is causing revenues from OEM's to decline in such a large [speed]?

I don't know if we've said revenues from OEM's will decline, but I think if you -- the last couple of quarters what we talked about is as we grew 50%, and obviously a lot of that was with the OEM's, there's a natural increase in inventory for them, not excess inventory but just a right sizing of the inventory if the same number of weeks are kept. So we get some benefit out of that. That's why I don't think we will see the equipment market growing 40% or 50%, but we will have gotten some of that through market share gains, some of that through that pipeline normalization. Eventually that slows down a little bit. So I think we are in that period that it slows down. And then also our lead times are short, but there is still a cycle time in the equipment companies that could be anywhere from eight to 12 weeks. So they're going to buy product in advance of the quarter or shipments sometimes eight to 12 weeks, so there's that aspect of offset. So this quarter would be covering probably more of the - through the first quarter for them on most of it.

And then lastly your fab sales in Q4 will they be up or down sequentially?

I can't tell you exactly. Just that overall we expect that the range will be $190 to $200.

Okay, great. Thank you.

You're welcome.

Our next questions comes from Daniel Berenbaum. Please state your company name followed by your question.

Good morning. Susquehanna Financial Group. Maybe going back to something you said earlier. You talked about at the mid point to Q4 guidance '06 revenue will be up more than 50% over '05. Can you help us understand a little bit better how much of that is organic. In other words, just from continuing product lines that you had at the end of '05? How much of that is additional from acquisitions that you did? And then how much of that revenue was added by sort of product synergies, combinations of products from the acquisitions in the core business? Can you just give us some kind of flavor there?

The organ growth year-over-year we estimate, Dan, was about 42% or so year-over-year. It's hard to quantify how much of that growth was in the new products. I don't -- it's not really --. We do look at the number of products that we introduced over the last several years and we do measure that as a percent of our current revenue. And that's one measure that we use to determine how we're turning our technology over. I think we're hitting our desired targets there.

Okay. And then maybe just a follow up on that a little bit. You have obviously done pretty well on the gross margin improvement piece. How much of that has been just improvements of sort of the core business and how much of that has been by bringing in incremental higher gross margin products?

As Leo said, we typically have a little bit higher gross margins in the non-semi business. So obviously that has helped some to improve the margin. But certainly we do have other cost initiatives going on, such as sourcing materials in low cost countries and we're still in the process of transitioning some of our manufacturing to low cost countries. And we have other initiatives going on for existing products to lower their costs. As we have said before, on a relatively fixed volume, we would expect that we could see our gross margin over several quarters gradually improve by maybe 150 to 200 points. For example, if we are at 200 million right now at 44% gross margin with over three or four quarters, we could expect that to get to maybe 45% to 46% range and then maybe a 9% R&D and a 16% SG&A on that fixed volume, getting to around an operating income of 20% to 21% including stock based compensation and then excluding stock based compensation it would be an operating income around 22% to 23%.

Okay, great, that's very helpful, thanks.

Our next question comes from Jenny [Uhn]. Please state your company name followed by your question.

Hi, good morning, JPMorgan. Could you give us a breakdown of your subcomp expense allocated to [cause], R&D and SG&A?

I don't have that breakdown in front of me. The total pretax stock based compensation was $3.7 million but the majority of that is in operating expensing.

Did your pro forma tax rate come down a little bit?

Yes it did, it had been 33% in the prior two quarters and, as I mentioned, it was 30% this quarter. That is the result of us re-estimating our estimated tax for the year because we have now have higher income in low tax countries which is effecting or reducing our rate to 32%.

Okay, thank you.

Our final question comes from Tim [Crowe]. Please state your company name followed by your question. Value Holdings.

With Emerson's holdings down from 18 million shares earlier in the year to about 5 million now -- .

I think they had 12 million to start. I think they are down about 4 million right now.

Okay. Would you consider buying that stock to remove the overhang? It would be materially accretive. You would still have over $100 million in cash after the repurchase. And given the depressing affect Emerson's sales have had on the stock over the course of the year, a repurchase would seem like a good way to enhance shareholder value.

Certainly we can't comment what our plans would be but certainly have thought of that.

My calculation show it would add $0.08 a share, which would probably be better than any acquisition you might find.

That is the immediate return. It's a question of what the acquisition would return.

My second question is related to stock compensation. The awards seem to be spinning out of control, up 17% sequentially. And then in the second quarter they were 24% higher than the first quarter awards. Will you please review your criteria for granting stock.

I'm not clear with that. We did have a sequential increase in our stock compensation expense from the second quarter from the first quarter because we did some grants in February in the first quarter . But we haven't done anything significant as far as stock based compensation since then. And also when you look at our stock based compensation as a percent of our EPS, it's about an 8% dilution, which certainly is in range with others in our industry.

Well that may be true, but if I look at your ratio of total options to diluted shares of 10%, that's very high for a public company. Thank you.

We have no further questions at this time.

Okay. Well that concludes our comments and thank you for joining us on the call this morning and for your continued interest in MKS, thanks again.

Ladies and gentlemen, this does conclude our conference. You may now disconnect Thank you for your participation and please have a pleasant day.