萬機儀器 (MKSI) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MKS Instruments fourth quarter earnings conference call. During today's presentation all parties will be in listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference call is being recorded today, Thursday, February 7th of 2008.

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

Thank you. Good morning, and thank you for joining our earnings conference call. Earlier this morning we released our financial results for the fourth quarter and full year 2007. 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, Section 27A of the Security Act and Section 21E of the Securities Exchange Act. 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 10K for the fiscal year ended December 31st, 2006, and most recent quarterly report on Form 10Q, each of which is on file with the SEC.

In addition, these forward-looking statements represent the company's expectations only as of today. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the company's estimation or views as of any date subsequent to today. We ask that you limit questions to two per firm and we will circle back as time allows. Now, I'd like to turn the call over to Leo Berlinghieri, Chief Executive Officer and President of MKS.

Thanks, Jonna, and good morning, everyone. Thanks for joining us this morning. I'll give an overview of the fourth quarter and the year, our strategies and outlook. Ron Weigner, our Chief Financial Officer, will review our financial results and guidance. And then we will open the call up for your questions.

I'm pleased to report that fourth quarter sales of $184 million and nonGAAP earnings of $0.33 per share exceeded both our third quarter sales and Q4 guidance. We enter the fourth quarter with concerns about the near term outlook, based in part on semiconductor, OEM and industry projections about the downturn in capital equipment spending. As it turned out our OEM business was better than expected although down 6% quarter over quarter. The decline in sales to OEMs however was offset by higher sales to fabs in nonsemiconductor markets quarter over quarter.

As we noted in the third quarter fab sales can be lumpy. Fourth quarter sales to fabs increased 19% on higher demand from Asian fabs especially in Korea. Our growth demonstrates that we are executing on our strategy to increase fab penetration. We are convinced that fabs will need to improve uptime, yield and through put to meet cost targets as they transition to smaller geometries and new materials. We are providing solutions to improve productivity in addition to service and spares. Our gas analysis and data management and analysis technologies detect process contamination, analyze process variation and resolve process problems that impact yield. We also work with fabs to upgrade tools and process solutions that reduce contamination for improved yield and higher through put.

In the fourth quarter we achieved 10% sales growth in nonsemiconductor markets as demand increased in solar and flat panel display markets, greenhouse gas emissions and monitoring and other analytical applications with project based spending. Solar and flat panel display markets provide a lot of opportunity for MKS. Most of our technology for semiconductor processes can be applied with little or no modification in these adjacent markets with similar thin-film processes. This strategy allows us to leverage our technology for higher growth opportunities while reducing the impact of semiconductor cyclicality, Our fourth quarter sales continue to demonstrate that our strategy is working.

We continue to focus on cost reduction in the fourth quarter including staffing levels and discretionary spending, although we increased our investment in R&D as planned. In addition nonGAAP earnings reflected lower sequential gross margin, the impairment of an investment and a higher tax rate for the quarter. Ron will discuss this in more detail later. We ended 2007 with sales close to our record sales in 2006. Consistent with our growth strategy we grew our nonsemiconductor business to 32% of total sales in 2007 from 30% in 2006 and you may recall 27% in 2005.

Our sales to OEMs were down only 5% year over year after 51% growth in 2006. Some of our innovative solutions for OEMs are integrated sub systems where we combine technologies into critical sub systems to optimize performance, reduce the footprint or enhance field installation. Integrated sub systems represented 24% of total sales in 2007 compared to 26% in 2006. Most of our integrated sub systems are sold to OEMs so the year over year change reflected the decrease in our OEM business and included the discontinuation of a bill to print integrated sub system.

In 2007 lower sales to OEMs were essentially offset by higher sales to fabs in nonsemiconductor markets, the same pattern we saw in the fourth quarter. Sales to fabs grew by 4% year over year and sales to nonsemi markets grew by 8%. We intensified our focus on high growth markets and I am pleased that we almost tripled our sales to the solar market to approximately $17 million in 2007. We also grew our sales for gas analysis in monitoring by approximately 160% in 2007, as we gained market share in the combustion analysis. These environmentally focused markets in solar energy and greenhouse gas emissions monitoring represent small, but high growth sectors of our business and we see more opportunity going forward.

We are well positioned with our critical technology for the global solar energy market. reducing the cost of solar energy is required to make solar competitive in the years ahead and our technology can improve process control and reduce manufacturing cost. We are excited about opportunities in other markets, where manufacturers need to improve yield as process complexity increases. They may need higher performance and more precise control for the next generation products or more analysis to meet tougher standards or regulatory requirements. As process challenges increase in diverse markets we are positioned to grow faster because we have a broad range of market leading technology.

Our technology portfolio and technology leadership enable us to take advantage of opportunities to solve process problems as they arise. While the semiconductor capital equipment spending cycle did impact our growth, we believe that the steps we took in 2007 will strengthen MKS for the next upturn and for opportunities in nonsemiconductor markets. In 2007, we increased our R&D investment to improve productivity for chamber cleaning and to continue our leadership in this technology. We expanded our market penetration at semiconductor fabs and in high growth markets for our solar energy production and greenhouse gas emissions monitoring. We intensified our focus on other emerging applications for our technologies including homeland security and organic light emitting diodes, OLEDs, technology for the next generation flat panel displace. We transitioned our China manufacturing to a new facility in Shenzhen, with 35% more square footage for future manufacturing requirements

We acknowledge Yield -- we acquired Yield Management Software to combine with our process centers, data collection and integration hardware and realtime fault detection and classification software. This combination provides a comprehensive offering for generating, collecting and analyzing process data and correlating the data to wafers, chambers and tools all across the fab. We continue to invest in IT, and implemented the second phase of worldwide ERP system to help us manage and scale our business. We generated a record $119 million in cash that allowed us to be optimistic about stock buy backs and technology acquisition. We expect to capitalize on favorable market trends going forward. We believe these actions strengthened our competitive advantage and prepared MKS for future opportunities.

Looking ahead into 2008, the outlook remains uncertain. Some semiconductor industry analysts are forecasting a 10% to 15% decrease in capital equipment spending. We typically grow faster than our core served market by increasing our market share and our product content on tools. In addition, we are demonstrating that we are executing on our growth strategy in nonsemi markets which could help offset a drop in our semi business. Our solar and flat panel equipment bookings were stronger in the fourth quarter. This may be a sign that industry forecasters are right and that flat panel is recovering and could be strong in 2008.

In solar we are providing solutions to customers for problems that range from chamber cleaning to process monitoring, and we believe that more of our semi technology can be leveraged to solar over time. We expect that our solar sales could double or even triple in 2008 if the market is as we anticipate. So our solar, flat panel, gas analysis and other nonsemi business could provide the potential for $45 million to $55 million incremental business in 2008. This incremental growth would be consistent with our goal of 10% to 20% growth in our nonsemi business. We are quite optimistic about our long-term growth opportunities. We remain cautious about the near term with market conditions still unclear.

Looking ahead to the first quarter, we expect that sales could remain fairly steady and range from $180 million to $190 million. Our visibility is limited and we will continue to monitor semiconductor market conditions and adjust our cost as required, as we pursue our strategies for long-term growth. Now I'll turn the call over to Ron to discuss our financial results and expand on our guidance.

Thank you, Leo. Good morning, everyone. As Leo stated 2007 sales of $780.5 million were approximately the same as 2006 sales of $782.8 million. Lower sales to semiconductor OEMs were offset by higher sales to semiconductor fabs and nonsemiconductor markets. As a result of slightly lower gross margin and increased investment in R&D and information technology our GAAP net income decreased 8% to $86.4 million or $1.51 per diluted share compared to $94.2 million or $1.68 per diluted share in 2006. NonGAAP net earnings decreased 7% to $95.6 million or $1.67 per diluted share compared to $102.3 million or $1.83 per diluted share in 2006. Gross margin was primarily affected by mix and other costs, including higher charges for excess inventory as a result of flattening sales and slightly higher overhead costs which were offset by lower warranty costs in 2007. We continue to increase our investment in R&D to support development of products for next generation tools and technology to improve end customer production yields. We also increased IT spending to a comparable level required to support current and future initiatives to implement and maintain our global ERP system.

Fourth quarter sales of $184.1 million were 2% higher compared to third quarter sales of $181 million. Sequentially a 19% increase in sales to semiconductor fabs and an 8% increase in sales related to our other markets was offset by a 6% decrease of sales OEMs. In the fourth quarter sales to OEMs represented 52% of sales, sales to fabs 12%, and sales to other markets 36%. Geographically fourth quarter sales in Asia increased by 20% sequentially as a result of increased demand from OEM and fab customers, especially in Korea, and represented 30% of total sales. Sales in the U.S. decreased by 5% and totaled 58% of total sales. Sales in Europe decreased by 4% sequentially and represented 12% of total sales. Sales for our top 10 customers were 45% of total sales compared to 47% in the third quarter. Sales to our largest customer, Applied Materials, decreased to 18% from 20% of total sales in the third quarter. Sales to contract manufacturers of Applied and other semiconductor OEMs decreased 24% sequentially and represented 5% of total sales.

Fourth quarter gross margin was 41.3% compared to 42.3% in the third quarter. The decrease reflects the fact that third quarter overhead costs included benefits from increased vacation time and lower charges for excess inventory compared to the fourth quarter. R&D expense was slightly above our guidance and increased by $1.2 million to $18.4 million compared to the third quarter, primarily due to increase in staffing and project material cost. SG&A expenses decreased $200,000 sequentially to $32.3 million, which was approximately $1.4 million less than our guidance. A favorable reduction $1.5 million in Q3 SG&A for foreign exchange and a one-time adjustment for stock-based compensation, the fourth quarter SG&A decrease represented approximately $1.1 million of lower IT spending in the fourth quarter as we completed the conversion of two major locations to our global ERP system, and a $600,000 decrease in other expenses partially offset by a $1.5 million increase in foreign exchange and stock-based compensation compared to the third quarter.

The in process R&D charge of $900,000 is related to our acquisition of Yield Dynamics during the quarter. Cash and investments at December 31st total $324 million. At December 31st we held $5 .7 million of asset back securities which were AAA when purchased and went into default. These securities have value, but because of a liquid market their future value is uncertain at this time. In the fourth quarter we recorded a $1.5 million charge related to a possible devaluation of these securities. During the quarter we repurchased approximately 2.8 million shares of common stock for $52 million in cash at an average price of $18.44 per share. Year-to-date we repurchased approximately 4.8 million shares for approximately $101 million at an average price of $21.17 per share under the two year, $300 million buyback program authorized by the Board of Directors on February 12, 2007. This contributed to the reduction of diluted shares outstanding in the fourth quarter to 55.9 million shares from 57.5 million shares in the third quarter. Actual shares outstanding as of December 31st were 54.3 million.

We expect to continue to generate cash and to be opportunistic about our future use of cash, the timing amount of any shares to be repurchased under this program will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions, and the program may be discontinued at any time. NonGAAP earnings which excluded amortization of acquired and tangible assets were $18.6 million or $0.33 per diluted share compared to $22 million or $0.38 per diluted share in the third quarter of 2007. The decrease is primarily attributable to increased R&D and a less favorable tax rate. The tax rate for the quarter was 32.7% compared to 28% for the year. The higher rate in the fourth quarter was the result of higher percentage of revenue in higher tax rate countries.

Our work force decreased to 2,860 people worldwide from 2,886 people as of September 30th, excluding 64 additional employees of Yield Dynamics. We continue to generate cash from operations which totaled $34.1 million for the quarter and a record $119.1 million for the year. Cash and investments decreased by $40 million in the fourth quarter to $324 million at year end or $304 million net of debt. The primary uses of cash were for stock repurchase and the acquisition of Yield Dynamics. Day sales outstanding decreased to 54 days in the fourth quarter from 58 days in the third quarter and inventory turns increased to 2.8 times from 2.6 times. Capital expenditures of $3.7 million in the quarter were primarily for test equipment, and capital expenditures for the year were $15.1 million, which includes approximately $6.8 million primarily for leasehold improvements for our new China facility. Depreciation totaled $3.8 million for the quarter and $14.5 million for the year.

As Leo stated we anticipate that first quarter sales could range from $180 million to $190 million based on current quarterly run rates and expectation for major semi and nonsemi customers. At this sales volume we anticipate gross margin could range from 41% to 42%. We expect operating expenses to increase slightly reflecting operating expenses related to Yield Dynamics and increased employee fringe benefits and payroll taxes. R&D expense could range from $19.1 million to $19.5 million and SG&A expenses could range from $34.1 million to $34.7 million. Amortization of acquired intangible assets is estimated at $3.4 million. Net interest income in the quarter is estimated to be approximately $2.6 million.

Our tax rate for 2008 is estimated at 30%. If the R&D tax credit is reinstated our tax rate would remain comparable to 2007 at 28%. Given these assumptions, first quarter GAAP net income could range from $13.2 million to $17.1 million or $0.24 to $0.31 per diluted share on approximately 55.1 million shares outstanding. First quarter nonGAAP net earnings could range from $15.4 million to $19.3 million or $0.28 to $0.35 per diluted share. In this uncertain economic environment we will continue our efforts to improve gross margin and monitor and minimize operating expense levels. This concludes our discussion, and we will now take your questions.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. (OPERATOR INSTRUCTIONS) And our first question comes from Brett Hodess with Merrill Lynch, please go ahead.

It is actually Joe [Harick] with [Gutterman] Research. A couple things. Leo, what are you guys doing in terms of looking at (inaudible) Six Sigma to improve your overall continuous improvement processes and what do you expect the benefits to be in terms of through put your plan?

Well, first of all I think we're one of the earlier adopters of lien manufacturing at least in this space. So as far as -- almost all of our plants other than sometimes a new acquisition is already set up in flow lines and lien manufacturing, all the practices of total quality. I think where we see the most leverage is really in our low cost region sourcing and manufacturing and we have talked about that on numerous occasions. But there's still leverage in terms of moving more material to low cost country and there's still leverage to have more of the manufacturing of low cost country. Those would have more leverage than anything going on in lien since we've been involved with lien manufacturing for more than 10 or 15 years.

And a follow-up to that question. What metrics are you using in your manufacturing process to measure success? Are you looking at [RONA] or how are you judging yourself against competition or even against your fellow peers to measure yourself -- your success? And in terms of going forward for the 2008 what systems and solutions are you going to be putting in place to accelerate continuous improved initiatives. I know you mentioned you're at the second phase implementing your ERP system, is that going to be applicable to initiatives? And can you expand on some of that.

So we keep it to two questions to everyone, I think I'll just answer the one you talked about in terms of what are we doing relative to measuring our manufacturing capability. I think one of the things we look at as moving materials to low cost country is we measure purchase price variance as a measure of improvement in cost, the other is obviously productivity measures that we have internally. So thanks very much for your question.

Thank you. Next question comes from Jim Covello with Goldman Sachs, please go ahead.

Good morning guys, thanks so much. I'm sorry if I missed it, I don't think I did. The break down of the revenue guidance between semi and other.

Yes, we didn't break that out, Jim. I think Leo gave an estimate for the year, what he thought we would do in the other markets.

Well, certainly Jim, we didn't give an estimate in the guidance, but I think when I talked about what potentially we could grow in 2008 for incremental revenue, and I think that's just an indicator of sort of -- we don't know yet where semi is obviously, because no one seems to know exactly where that is. And we don't really give guidance beyond the first quarter, but we don't break down guidance relative to markets.

Can we assume that the first quarter guidance assumes some kind of difficulties in the semi market?

Absolutely.

Oh, yes, absolutely.

Okay. So the reason for the good revenue guidance is the fact that you're seeing the benefit in the other markets that's offsetting the weakness in the semi side.

Right, getting some offset.

Appreciate that, thank you.

Although Jim, let me just say that I don't think we see anything unusual in the first quarter compared to the fourth quarter in semi. That doesn't mean they're exactly the same, but I wouldn't read that, I just don't know where your question was heading, but it certainly doesn't mean that there's something significant, some significant change in semi, just point that out.

Okay. Thank you.

You're welcome.

And your next question comes from Tim Summers with Stanford Research, please go ahead.

Hi, thanks for taking my question. Could we get a little bit more detail on this piece of Korean business that came into the fourth quarter? Were you expecting it going into the fourth quarter? And was it equipment or was it service? And then is this business expected to continue as we go into the first quarter then through '08? Thanks.

Tim, thanks for the question. It was equipment and it was not expected as early as it came in the fourth quarter. And we get some type of forecast that's rolling, so it's repetitive -- with a customer that gets repetitive business, so we absolutely are expecting more of it, but we have got more of it in the past, too, so I don't think there's anything unusual there, just that we hadn't anticipated an order in the fourth quarter.

Okay. And since I get two questions, let me ask number two. On Yield Dynamics, did that have any material impact on revenue and earnings in the fourth quarter? And what should we be assuming about its incremental benefit going forward?

First of all, Tim, it didn't really have any material impact in the fourth quarter. There were some additional -- we did acquire them at the beginning of December, so there was a small amount of operating expenses that were included in the fourth quarter expenses. But going forward, I think as we have said, the real value of acquiring Yield is that this will allow us the opportunity to sell a complete package of hardware and software to improve productivity. So to look at the financial impact of Yield on itself is really not doing justice to the value that we think it will bring to the company.

Yes, and I would say certainly on its own doesn't have a huge impact across the total business.

Right, it's relatively neutral and it's small. And we said it's about 64 people that were added as a result of that acquisition.

Okay, thank you.

Thank you. And we have time for one final question. And our last question comes from C.J. Muse with Lehman Brothers, please go ahead.

Yes, good morning. Thank you for taking my question. First off I'd love to follow up on a couple previous questions on the semi business. You've been running around $18 million to $22 million the last three quarters, I guess, you had that somewhat of a surprise in terms of Korea coming in in December. How sustainable is that business given the current environment, how should we be thinking about that? Should we be tracking utilization rates, unit volumes, can you give us a little help in modeling that out for 2008?

Yes, C.J., I guess first of all I didn't understand what the $18 million to $20 million, I thought I heard something about $18 million to $20 something million.

$18 million to $22 million is what I'm modeling June, September, December for the semi business. The nonOEM business.

You're talking about fab semi business?

Yes, exactly.

I don't know if you caught my answer to the previous question that the order in Korea was not necessarily all related to fab, but related to hardware, and repetitive, which is typically more equipment OEM based.

Yes. Oh, so that flowed through into the OEM side?

That's correct.

Okay.

And so I think you asked the question if we thought it was repetitive and it is because it's been repetitive.

And there was some business to a fab as well.

But I guess if we could just isolate to semi makers in terms of how to think about that trajectory in 2008.

Well, I think the direct sales to the fab is less cyclical obviously than the sales to the OEMs. We're typically tied to unit volume, there's a part of the business that service and spares, so that's absolutely tied to the use of the product in production, which typically related to utilization and unit volume. And then we do have some capital items which are more in the analysis area that are sold directly to fabs or ozone, that can have a little more impact of sort of the capital side of the business. And then we do focus on upgrades and improvement as we talked about, which usually aren't as affected as with the cycles as well. So I think to just give you a number to put on for 2008, I can't give you that number. I just -- I think you can look at sort of the history where we report fab sales, and you get an idea that it's roughly been in that, I think it was maybe 9% to 10% a few years ago and it was up to 12% this year. So I can give you an indicator, it's not going to jump 10% of the revenue. It's a 1% or 2% at best, I think.

Got you. Okay. Then I guess my second question, given the strength in the nonsemi businesses, can you talk about what impact that will have on your gross margins?

Well, as you know the gross margin already affects that mix of business. So we expect gross margins it could have somewhat of a favorable impact, but I wouldn't call it significant, C.J., so -- but certainly I think it could have a small positive impact on gross margin compared to semi.

Yes. There may be higher operating expenses, as you know that the semi OEMs there's a large consumer of who we sell to, and so there are lower operating expenses sometimes offsetting the lower margins, so you may get a little bit of gross margin, but you may have slightly higher operating expenses. So I don't think it changes your model. Not significantly. I think it's more relative to the growth than anything else.

Yes. Thank you.

You're welcome.

Thank you. We actually have time for some more questions, it comes from Tim Summers from Stanford Research, please go ahead.

Hi. Yes. On the flat panel business can you give us an idea of what you have seen from your OEM customers in the last 60 days? How steep is the ramp looking as we go into 2008? And how do you see your flat panel business doing qualitatively through '08? Thanks.

As you know Tim, probably what the last six or plus quarters or eight prior to the fourth quarter flat panel was down quite a bit. The fourth quarter was a strong quarter for flat panel and the indication is that it should be a good 2008 based both on customers and external forecast. I think the VLSI forecast has it at 20% plus growth year-over-year, if I remember correctly.

Exactly. I think it's around 25%.

Okay, thanks.

Next question comes from [Jen He Yuen] with JPMorgan, please go ahead.

Hi, good morning. What's the tone among your OEM customers and is it evenly spread out?

Jen He, I'm not sure what you mean by evenly spread out, but I guess to mean the tone reflects the announcements they make and the information that gets shared publicly as well as what they tell us. They share a lot of detailed demand information that keeps -- is constantly being refreshed So it's very difficult to get sort of the overall tone. But I think the 10% to 15% reduction in capital spending seems to be consistent with some of the comments that have been made on conference calls like this with some of our major customers. So I think that's probably the best indicator of what's happening in general to them. And then we look at specific tools and things of that nature to pull up our forecast.

Are they all seeing the same 10%, 15% weakness or some kind of --

I -- It doesn't -- I don't think everyone is saying the same thing.

Why do you think that is?

I think everybody has different fabs that they're aligned with. I think it depends on which fabs or which type of devices might have the most significant impact and those OEMs that primarily sell equipment into those fabs would be more impact than another type of device that some other OEM is selling to. So I think for us usually we're not dependent on one type of device or one OEM and we plan to keep it that way. So that's -- we tend to look at sort of the overall industry trends as opposed to maybe one customer.

Okay. If we could squeeze in one more, are you considering any shut downs or what would you need to see before you would do something like that?

Well, as Ron and I both commented the last few quarters, we did take action and have shut downs during the third quarter and the fourth quarter. We haven't planned or announced any for the fourth quarter as the business -- first quarter, I'm sorry.

First quarter.

As we saw our business recover a bit in the fourth quarter and it looks like it will stay that way at least for the first quarter. So nothing planned, but we take that as normal action as we things slow down.

Okay, great, thank you.

You're welcome.

Thank you. And management, I'm showing that there are no further questions. I'll turn it back to you for closing comments.

Great. Thank you for joining us on the call this morning. And as you can see we continue to open up opportunities and markets with our broad portfolio of technology. Thanks for your interest in MKSI, and this will conclude our comments.

Thank you. Ladies and gentlemen, we thank you again for your participation for today's conference call. And at this time you may disconnect.