萬機儀器 (MKSI) 2008 Q1 法說會逐字稿

Welcome to the MKS Instruments first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Thursday, April 24, 2008. I would now like to turn the conference over to Ms. Jonna Manes, Director of Investor Relations.

Thank you. Good morning, and thank you for joining our earnings conference call this morning. Earlier this morning we released our financial results for the first quarter of 2008. You can access this release at our Web site, 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 Securities 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 10-K for the fiscal year ended December 31, 2007, which is on file with the SEC. In addition, these forward-looking statements represent the Company's expectations only as of today. While the Company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the Company's estimates or views as of any date subsequent to today.

We ask that you limit questions to two per firm, and we will circle back as time allows.

Now I will turn the call over to Leo Berlinghieri, Chief Executive Officer and President of MKS.

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

I'm pleased to report that we started 2008 with another quarter of sequential growth. After a stronger-than-expected fourth-quarter sales, first-quarter sales increased by 5% sequentially to $193 million, and exceeded the high-end of our guidance. We delivered strong operating performance on the higher sales volume, and non-GAAP earnings increased to $0.39 per share, which also exceeded our guidance.

With our broad technology portfolio, we enable advanced processes and solve process problems in many markets. Our first-quarter growth was driven by increased demand in semiconductor, solar and flat panel display markets.

One of our goals is to continue to grow faster than our core served market in wafer fab equipment. Our first-quarter sales demonstrate that we continue to make progress. Sales to semiconductor OEMs grew 11% sequentially, primarily from two OEMs who we believe had end customer-specific demand for tools that have high MKS content.

Demand for our process critical technology was strong across all of our product groups. With strong product penetration at all major OEMs, we are well-positioned when fabs select tools.

In the quarter we were impacted by the slowdown in fab capital spending. Sales to fabs were flat sequentially, after 19% growth in the fourth quarter. Our position with key fab customers remains strong, and we see opportunity ahead when they increase capital spending and look to improve productivity. In addition to service and spares, we provide upgrades, retrofits and other solutions for process challenges.

For example, fabs are having success in improving yield by using our residual gas analyzers that detect photoresist residue before it can damage the wafer. We expect to see continued growth in adoption of this technology in future quarters.

More than a third of our first-quarter sales were to non-semiconductor markets. Our strategy is to leverage our technology portfolio in key markets with higher growth opportunities, such as solar and flat panel, and to provide specific process technology in many other markets. Our results for the last several quarters demonstrate that we are executing this strategy.

First-quarter sales to the solar market grew to almost 6 million as we provided technology, both thin film and silicon substrate solar processes. Our growth in solar may not be linear every quarter. Today we have nearly 60 solar customers across the US, Europe, Japan and China. Our solar market penetration is increasing, and we believe we are on track to double or even triple our 2007 solar sales of 17 million this year.

For example, our technology for process chamber cleaning is becoming more critical as thin film solar cells and flat panel displays increase in size. Large solar cells and flat panels require larger process chambers, which can take longer to clean. In the first quarter, we saw increased demand in solar and flat panel markets for our ASTRON reactive gas generators. ASTRON generates high flow rates of atomic fluorine to accelerate cleaning time and reduce downtime. ASTRON is just one of our technologies to improve uptime yield and throughput and reduce manufacturing costs.

Our opportunity in solar is increasing as solar cell production shifts to thin film processes to reduce cost per watt and make solar energy competitive. Industry analysts estimate that thin film solar cells represented about 10% of the total cell output in 2007. They say by 2015, thin film solar cells could be 20% of a much larger base.

We are benefiting from the transition to thin film processes, where we can leverage more of our technology. We are winning business as silicon substrate-based solar manufacturers diversify and shift to thin film processes, and as new thin film players enter the solar market.

For example, as thin film solar shifts from R&D pilot lines to full-scale production, manufacturers require higher process efficiency. Our technology can help them reach their cost and panel efficiency targets.

Our market leadership is also a competitive advantage. For example, thin film amorphous silicon lines use a plasma enhanced deposition -- or what's called PECVD -- processes to deposit active layers in the solar cell. PECVD processes require more RF power generators. We are a leader in RF power and we are winning solar business with RF power generators. Solar is a rapidly growing market and is becoming a significant part of our non-semiconductor business.

We also serve other markets, where opportunities range from high-growth emerging applications to industrial applications with more stable revenues. For example, we provide solutions for greenhouse gas analysis and other energy and environmental monitoring applications that range from fuel cells to homeland security. The outlook for this business is promising.

So is our outlook in the biopharm market, where we leverage our designs for semiconductor vacuum components, control instruments and subsystems in biopharm processes. The high-growth potential and diversity of our non-semiconductor business helps to mitigate semiconductor cyclicality and limits our risk of relying on specific customers or markets.

Our business in other markets can be lumpy, but we continue to see opportunity. As we said last quarter, we believe the solar, flat panel and other non-semi markets could provide 45 to $55 million of incremental sales in 2008. These incremental sales would be consistent with our goal of 10 to 20% growth in our non-semi business long-term.

Our first-quarter revenues exceeded our guidance in an uncertain market environment. Because MKS is a turns business, our visibility is quite limited. Industry analysts are forecasting further declines in semiconductor capital equipment spending in 2008, and we are seeing a more challenging environment. We are optimistic about our long-term growth opportunities in semiconductor and non-semiconductor markets.

In the second quarter, while we expect growth in solar and flat panel display markets, we expect a decline in our semiconductor business. We expect the second-quarter sales to range from 170 to $180 million. With this lower revenue outlook, we're taking additional actions to reduce our costs, including taking a week shutdown. As OEMs shorten their leadtimes to their customers, OEM order patterns to suppliers can change quickly. We are monitoring semiconductor market conditions closely, and we will continue to align our costs with the overall business outlook for 2008.

Now I will turn the call over to Ron to discuss our financial results and to expand on our guidance.

Than you, Leo, and good morning, everyone. As Leo said, first-quarter sales increased sequentially, primarily as a result of increased sales to semiconductor OEMs, which we believe may be related to end customer demand for specific tools that have high MKS product content. First-quarter GAAP net income increased 34% sequentially to 20.4 million, or $0.39 per share. Non-GAAP net earnings increased 11% sequentially to 20.6 million, or $0.39 per share.

Turning to the detailed financial results, first-quarter sales of 193.4 million increased 5% compared to fourth-quarter sales of 184.1 million. Sales to semiconductor OEMs increased 11%. Sales to fabs and other markets in total were essentially flat. However, sales to the solar and flat panel markets increased sequentially. In the first quarter, sales to OEMs represented 55% of sales, sales to fabs 11%, and sales to other markets 34%.

Geographically, sales were strong in the US and Europe. After a strong fourth quarter, sales to Asia decreased, primarily as a result of lower sales to a major semi OEM and fabs. Sales in the US were 64% of total sales, sales in Europe were 13%, and sales in Asia were 23%.

Sales to our top 10 customers were 43% of total sales. Sales to our largest customer, Applied Materials, increased to 20% of total sales from 18% in the fourth quarter. Sales to contract manufacturers of Applied and other semiconductor OEMs remained at 5% of total sales.

First-quarter gross margin improved sequentially to 42.3%. The 100 basis point sequential increase primarily reflects the effect of volume increase and lower overhead cost.

As we planned, R&D expense increased by approximately 900,000 sequentially to 19.2 million, due to increases in staffing and new product development projects. SG&A expenses were 31.7 million and included a $2.7 million foreign exchange gain related to a onetime legal entity consolidation of some of our international subsidiaries. Excluding this foreign exchange gain, SG&A expense would have been 34.4 million, at the midpoint of our guidance.

At March 31st we held securities that had an original cost of $5.7 million which were AAA-rated when purchased and subsequently went into default. In the fourth quarter we recorded a $1.5 million charge related to the anticipated reduction in value of these securities. As a result of continued deterioration of the credit markets, these securities further declined in value, and we recorded an additional charge of 1.2 million, which reduces the book value of these securities to $3 million. Currently, we do not own any securities that we believe would be subject to impairments in fair value.

Our tax rate for the quarter was 29%. Non-GAAP earnings, which excluded amortization of acquired intangibles and the foreign exchange gain, as I mentioned previously, were 20.6 million, or $0.39 per diluted share, on 52.6 million shares, compared to 18.6 million, or $0.33 per diluted share, on 55.9 million shares in the fourth quarter of 2007.

During the quarter we continued our stock repurchase program and repurchased approximately 3.5 million shares of common stock for $65.3 million in cash at an average purchase price of $18.81 per share. This contributed to the reduction of diluted shares outstanding in the first quarter to 52.6 million shares. Actual shares outstanding were 50.9 million as of March 31st. Since our two-year 300 million share buyback program was authorized on February 12, 2007, we have repurchased approximately 8.3 million shares for approximately $166 million at an average price of $20.18 per share through March 31, 2008. We expect to continue to generate cash and to be opportunistic about our future use of cash. The timing and amount of any shares to be repurchased under the 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.

Our workforce as of March was 2970 people. We continued to generate cash from operations, which totaled 23 million for the quarter. Cash and investments decreased by 47 million to 277 million, or 252 million net of debt. The primary use of cash was for the stock repurchase. Days sales outstanding were 57 days in the first quarter, and inventory turns were 2.9. Capital expenditures of 3.3 million in the quarter were primarily for test equipment. Depreciation totaled 3.6 million for the quarter.

With the current business environment as Leo described, we anticipate that second-quarter sales could range from 170 to $180 million. We anticipate that gross margin could range from 40 to 41% at these lower sales volumes. As we continue to develop next-generation products, R&D expense could range from 18.8 to $19.2 million.

Primarily as a result of our annual compensation adjustment at the end of the first quarter, our SG&A expenses are expected to range from 35.2 million to $35.8 million. Amortization of acquired intangible assets is estimated at $2 million. Net interest income for the quarter, second quarter, is estimated to be approximately $1.2 million.

Our tax rate for 2008 is estimated at 30%. If the R&D tax credit is reinstated, our tax rate would remain flat to 2007 at 28%. Given these assumptions, second-quarter GAAP net income could range from 9.4 million to $13 million, or $0.18 to $0.25 per diluted share, on approximately 52 million shares outstanding. Second-quarter non-GAAP earnings could range from 10.4 million to $14 million, or $0.20 to $0.27 per diluted share.

The level and duration of decreased sales to the semiconductor market is uncertain at this time. We will continue to take initiatives to manage gross margin and control operating expenses. As Leo mentioned, we are taking a one-week shutdown in the second quarter, and we have taken actions to reduce or defer nonessential spending. However, for the longer-term it is important to invest in R&D projects that will provide future revenue growth, and to also (inaudible) a support structure to enable growth for the long term. We will continue to monitor current and expected future revenue trends and take prudent actions to control costs.

This concludes our discussion, and we will now take your questions.

(OPERATOR INSTRUCTIONS). Brett Hodess, Merrill Lynch.

Leo, in the quarter you obviously had surprisingly strong semiconductor business. As you mentioned, it was two particular OEMs that have a lot of MKS product on their system. Do you continue to see a rich mix like that, even in a slower environment? Because if you look at your sequential decline that you're projecting for the next quarter, it's a lot less than the shipment declines that your OEM customers have talked about already.

I think we, obviously, have been able to grow share over time, and that's always been the objective. And we showed some results that can demonstrate that over the long-term. So I don't know what exactly the mix will be. We don't know in advance what the leadtimes that we have and some of the leadtimes even the OEMs have, what that mix will be. But I think we expect a drop in semi OEMs, but we would expect some makeup in some of the non-semi business. Certainly with overall guidance being declined, we're expecting the semi OEMs to be deeper than any growth we could get in some other markets.

Don't forget, as I mentioned, 55% of our sales are direct to the OEMs. So it's not the whole total.

The second question I have was, given where the gross margins are looking like this quarter, 40 to 41% on that kind of revenue drop, if we look back, that's not that much of a drop really; it's sort of in the range you were at back at those revenue run rates last year. So, is the move to manufacturing in China starting to have some impact in keeping your margins from having that much decline? Or are there other cost offsets in the actual cost of goods sold?

Certainly it's one of the factors that helps us reduce some of our cost of goods sold. But certainly as you know, last year we made progress in reducing our warranty expense, and we're taking initiatives to reduce redundant and/or unnecessary overhead expenses as well. And to a lesser extent, as you know, it's more challenging to reduce purchase material costs, but we're still making some modest progress in those areas as well. So it's a combination of things that will help us on the margin side.

Thanks a lot.

CJ Muse, Lehman Brothers.

I guess what I'm trying to get at with the first question is where we think we could bottom on your overall semi business. Back in '05 you were at 85 million. This quarter it looks like you're around 128 million. Considering where you have taken share and where you penetrated new accounts, where do you think that business could bottom, given the current run rate that you're seeing right now and the visibility you have right now?

I think all we can probably comment on in terms of visibility -- because, obviously, from an order standpoint we don't have that much visibility -- I think all we can comment on is what you hear each of the OEM customers on their calls, and what the forecasters are saying. And it sounds like it's somewhere in the range, from what I've heard in the last week or two, somewhere in the range of 10 to 25%. I haven't heard anything beyond that yet, either short-term or long-term. So I can't give you a specific number. I know that range is pretty broad, but I think that's what we're hearing externally and with customers. That range is pretty broad right now.

I guess moving over to display, can you give a little bit more color on the trajectory there of revenues, and the linearity that you expect throughout the year?

Most of that business in displays is, obviously, to a few major OEMs in that business. And it really depends on their ordering patterns. So, I think the reason displays can be lumpy is they may tend to order depending on where they're building product; how they're having it manufactured; where they're having it manufactured; whether they're going to buy and send it; whether they need it immediately. So it's really difficult to comment on lumpiness in the display side of the business. I commented on it in the solar, because we do have a combination of end users and OEMs placing orders that are reasonable size, and those things can be more lumpy. What we see in the flat panel is really growth for the year. After two years of decline, we started seeing it in the fourth quarter. I think we commented on it around the third quarter for the fourth-quarter call. And in fact, the last two quarters have been very strong, and we're hoping that continues. It certainly -- the external forecasters believe it will.

As we mentioned, our business was up this quarter because of the flat-panel. And it was probably up about 5 or 6 million or so sequentially, compared to fourth quarter.

Last question from me. Budgets right now from panel makers are up 60-plus% this year. If I look at what you talked about in terms of solar, and assume that type of uplift in display, then that 45 to 55 million that you talked about of incremental revenues from other businesses would appear to be solely coming from solar and display. Is that the right way to think about it?

I think you've got -- we've got a number of non-semi businesses, including medical, including biopharm, including some very typical industrial markets that are more stable. And I think we would expect some of those markets, if the economy slows down, may slow down with them. So there could be some drop. So I wouldn't necessarily say those are the only two. I think we point them out because they probably have the most significant growth opportunities in the next quarter or so, or two.

Thank you.

Jay Deanha, JPMorgan.

First on solar. In terms of your customer base in solar, do you have design wins or volume business with all three of the turnkey thin film solar equipment suppliers, specifically Applied, [Alvak] and Oerlikon.

We have business with all three of those. In that group of 60, I think you would identify all -- the ones on your list would all be on that list. But then, there may be some that haven't made the list yet because they're either new start-ups in solar, or converting from some other technology to solar.

And do you also have exposure to the cadmium telluride First Solar business?

We have some in that area.

More importantly, if I look across your product line, obviously, you have a very broad and very deep product line. I'm just kind of curious with in particular the thin film solar equipment suppliers, do you have opportunities for new design wins for potentially higher ASP products that you're not currently designed into, such as power products?

I think as the size of the chambers get larger, and certainly as solar customers invest more in productivity improvement, we have that opportunity. And we're starting to see some of that. I think in atomic fluorine generators, there's opportunities for larger chambers. They're looking to add chamber clean, and that's a trend, beginning of a trend. So that would bring a higher ASP product to that. Some of the RF power is in higher powers, which would provide that opportunity. I would believe there's opportunity for higher ASP in some of those areas.

So basically what I'm getting at is I'm wondering if you have an opportunity for larger revenue per tool down the line with some of your existing solar customers.

I think that's true.

Lastly, in terms of once these major thin film solar factories start coming up, as this year unfolds, and in particular next year, what kind of direct to the factory opportunity do you see, kind of like your direct to the chipmaker business right now? Which probably isn't really very much this year, I would think. And how does the integrated subsystem business get impacted by solar?

if I understood, Jay, correctly, what might happen in direct sales to solar manufacturers going forward (multiple speakers) do with fabs for semiconductor. I think certainly RGAs can be used in solar, and they've demonstrated they have been successful at some places. So we have an opportunity. Those typically would not sell to an OEM.

The yield management software, as you start thinking about solar manufacturers looking to improve yields, I don't know how much investment previously they had made in yield management software, but we believe there's some opportunity there. With the acquisition of YDI, we think there may be some opportunities in that area, as we also have the Umetrics acquisition we did with multivariate analysis. We believe there's an opportunity for that. There may be cases for -- most of the ASTRONs and RF powers would be sold directly.

The other exception would be, because this is a relatively new and growing market, like semiconductor use to be years ago, some of the fabs are still building their own equipment. And so, we have had opportunities, and we continue to see opportunities, to sell MKS subsystems, or instruments, or components directly to the fab as they build their own tools. I think they feel there's some proprietary knowledge they have in producing panels, and that they've opted to build their own tools. So that certainly is the other possibility. It's a little different 30 years ago, what we did with the fabs, but I think that there's some opportunity for that. It could be very large as well; it depends on how long they continue to do that.

Thank you very much.

Jim Covello, Goldman Sachs.

If we could look out three to five years, pro forma, what do you think your mix of business is semi versus non-semi? And then, within the non-semi, what does that look like? If you could talk about what that would mean for margin implications. Thanks.

We probably can't answer your question quite the way you would like to have it answered, which would be complete. I guess what we can say is we have played around with models of a 60/40 semi/non-semi. But without really -- and you know, it seems like nobody can predict one year in the semi business. I'm not sure how they predict three to five. So I don't even know what we use for a basis to give you an answer.

If semi were to slow down completely, then maybe 60/40 is too much semi. I don't know. Based on at least projections, we've talked about maybe a 60/40 split would be reasonable. If solar were to pick up and stay strong, and maybe one of these markets in Homeland Security or greenhouse gases, as people get more and more concerned about the environment, were to takeoff, maybe it's higher. But, I don't think it's going to be -- I don't think we're sitting here planning a 40/60 semi/non-semi. So I would say that's probably the best answer I can give you today.

Thank you.

Edwin Mok, Needham & Company.

First, I might have missed you on your guidance. Did you guys give color in terms of how much non-semi business you expect for the coming quarter?

No. I think what we commented on is we expected the OEMs to go down, and we expected that the solar and flat panel would be up sequentially. But we didn't give that level of detail.

That's fine. The second question is more strategic. MKS has done a good job in terms of acquisition and leveraging acquisition to grow. I was just curious, given that solar and LCD are growing right now, and solar looks like it will have a longer growth trajectory, any thought about acquisition related to that area? And if so, what kind of technology would be a good fit for that?

I can't comment specifically on any particular market or technology we'd be looking at, interested or not. I guess I would comment on it this way. Our focus has been around technology, obviously. So we're always looking at possibilities of good, solid technology companies. And because our objectives are always to grow faster in our core served markets, we're looking for companies that have higher growth potential going forward than maybe historically they've had.

Obviously, semi has been a great market to bring in acquisitions, and consolidate and integrate, and has given some competitive advantage, I believe, in its greater products as well, and also leveraging the infrastructure, like sales and service and manufacturing. I think we would continue to look, and I don't think we would exclude non-semi markets in those areas.

I would caution, though, it's very uncertain today who is going to win in the solar -- you've got a lot of solar players out there. As I mentioned, in a relatively small market, we have 60 customers we're dealing with, with a lot of different technologies. And I think it's very unclear who is winning. So we'd be very careful, but anything is a possibility, I would say.

That's all I had. Thanks.

Jay Deanha.

Looking forward into 2Q, can you give a sense as to what the percentage decline is embedded into your guidance for semiconductor, and what the change is for flat panel and solar? Just trying to get some granularity on your revenue guidance.

I can't give you those details at this point. We have -- our forecast is made from the bottom-up. There's some overlap in some areas. It's tough enough to separate all the information at the end of a quarter; in the forecast, it becomes even a little more difficult. I think all I can comment is, obviously, the OEMs being up was a bit of a surprise for us as high as they were, when we they thought our guidance was a little lower for the first quarter. We absolutely expect that the OEMs will be down, and some of the non-semi could be down as well. But we believe flat panel and solar will be up sequentially. Some of the other non-semi that's more traditional industrial markets could be down, just based on the economy being a little sluggish.

It's pretty clear to us that Applied in particular, but also Oerlikon and [Alvak], are talking about a pretty sharp ramp of shipping their machines starting later this year, but in particular next year. So it looks to me like the opportunity in thin film for subsystems is reasonably decent now, but really starts to hit a more significant ramp later this year and into next year. Is that congruent with what you're expecting?

I think the comment we had about the double or tripling of the solar business, at 6 million times 4, that wouldn't double nor triple it. So, I think we're in line with -- there has to be higher growth in the second half of the year than there was in the first quarter, at least. So we would be consistent with that.

Thank you very much.

There are no further questions at this time. I'll turn it back to management for any closing remarks.

Thank you again, everyone, for joining us on the call this morning. While we expect to see a decrease in our semiconductor business in the second quarter, as we commented on, we're optimistic about our long-term growth opportunities in non-semi and semi markets as we continue to execute on the growth strategies we discussed. Thank you for your interest in MKSI. This concludes our comments.

Thank you, sir. Ladies and gentlemen, that does conclude the MKS Instruments first-quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000, using the access code of 11111743, followed by #. ACT would like to thank you for your participation. You may now disconnect.