萬機儀器 (MKSI) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MKS Instruments Second Quarter Earnings Conference Call on the 24th of July, 2008.

Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS.)

I will now hand the conference over to Ms. Jonna Manes, Director of Investor Relations. Please go ahead, madam.

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

Earlier this morning, we released our financial results for the second quarter of 2008. 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 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, and most recent quarterly report on Form 10-Q, which are 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.

And now, I'll turn the call over to Leo Berlinghieri, Chief Executive Officer and President of MKS.

Thank you, Jonna, and good morning, everyone.

Thanks 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 for your questions.

Despite a declining market for semiconductor capital equipment, our second quarter results were within the range of our guidance. Sales totaled $171 million and non-GAAP earnings were $0.21 per share.

I'm pleased to report that our solar and thin film businesses continued to ramp in the quarter, and total non-semiconductor sales grew by 17% to 45% of total sales.

You may remember that MKS had a good first quarter with double-digit sequential growth in the semiconductor market. Capital equipment spending in this market weakened in the second quarter. However, our market diversity lessened the impact of this cyclical downturn.

During the quarter, major semiconductor OEMs guided for capital equipment spending reductions of up to 35% in 2008. Considering that our sales to OEMs and their subcontractors increased 11% in the first quarter, it's not surprising that these sales declined 30% second quarter. Our second quarter sales to fabs showed a moderate sequential decrease of 8%.

Despite a softer semiconductor business environment, technology transitions are continuing. These transitions are more challenging to our customers as line width shrink and as processes become more complex and more process steps in new materials.

We see opportunity to provide more precise control with higher value products to increase our content on tools. We are pleased with our progress in several evaluations and adoptions of new products and expect to be well-positioned to gain share as the market recovers.

Our product development strategy is to provide solutions that enable OEMs and fabs to drive process performance and improved productivity. For example, our breadth of technology allows us to integrate multiple technologies into sub-systems that increase tool performance.

We are also developing products for the semiconductor market that we can leverage into other key markets. For example, we are generating higher flow rates of atomic fluorine to increase process chamber cleaning efficiency, shorten cycle time and increase weight for throughput.

This cleaning technology is also critical in flat panel and solar markets because larger process chambers for larger panels require more cleaning time. These atomic fluorine generators with higher flow rates bring higher value to our customers and increase our content per tool.

We also see opportunities to add value by integrating process control software with yield management software and/or sensors which could help fabs fingerprint their good processes and prevent yield losses if process data is exceeding limits. We believe this technology will be transferable to other markets.

For several years now, we've demonstrated our success at growing our non-semiconductor business. Our strategy is to leverage our broad technology portfolio in key markets with higher growth opportunities. Our goal is to achieve a compounded annual growth rate of at least 15% in our non-semiconductor business. We achieved our goal in the first half of 2008 over the first half of 2007.

Solar is a rapidly growing market and is becoming a significant segment of our non-semiconductor business. Second quarter solar sales grew to $13 million and more than doubled over the first quarter. In the first half of 2008, our solar sales of $19 million exceeded our total solar sales in 2007.

We provide technology to more than 60 solar customers for thin film and silicon substrate solar processes. These customers range from pure play solar companies to semiconductor OEMs and fabs diversifying into solar. Many of these customers already use our technology to improve semi process productivity.

Typically, our products for thin film semiconductor processes can be applied with little or no modification to thin film solar processes. For example, with our strong share in semiconductor process chamber cleaning and the need to clean large thin film solar panels, we are seeing a strong demand for ASTRON atomic fluorine generators in the solar market.

Also, I'm pleased to report that, in the second quarter, we began shipping RF power generators for thin film, PECVD solar processes after gaining a key design win at an end user solar fab. We expect these pilot systems to be followed by production systems later in 2008 and into 2009. Depending on the timing of this and other solar orders, we expect that our solar sales could grow to between $45 million and $50 million in 2008.

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. We benefit from this transition to thin film processes because we can leverage more of our technology portfolio.

And 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.

The solar market represents a long-term opportunity for MKS. VSLI Research estimates that the solar equipment market could grow at a 36% compounded rate from 2008 to 2010. We are particularly excited about our opportunities in amorphous thin film solar where the growth rate is higher than crystal and silicon and where our dollar opportunity is three to four times greater.

If solar continues to grow as the forecasters predict, we currently estimate our solar business could reach $125 million to $150 million by the end of 2010.

We are also leveraging our technology in other non-semi applications. I've talked about how we apply our gas technology to monitor and test greenhouse gases and engine emissions. We adapt this technology to monitor other environments, and we won a contract that expands our penetration in the Homeland Security market.

In the second quarter, we received an initial for [Air God] gas analyzers under a contract to be worth several million dollars over the next few months. Air God can detect and analyze many gases quickly, which is essential for monitoring chemical warfare agents in various environments.

Although the Homeland Security market represents a small percentage of our total sales, we're encouraged by our success as we continue to diversify our business.

We are quite optimistic about our long-term growth outlook. However, we remain cautious in the near-term. The decline in semiconductor capital equipment spending has been sharp, and we expect some incremental weakness in the semiconductor business in the third quarter.

Our total sales could range from $155 million to $165 million. With this revenue outlook, we will continue to control our costs, including taking a week shutdown in the third quarter.

We are encouraged that some OEMs have reported their belief that we are nearing the bottom of this cycle. However, they also believe if there's an upturn in fourth quarter orders, it could be modest. Therefore, we'll be looking closely at our order activity, and we'll manage the business accordingly.

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

Than you, Leo, and good morning, everyone.

Second quarter sales of $171 million decreased 12% sequentially, primarily as a result of weakened demand for semiconductor capital equipment. After an 11% sequential increase in sales to semiconductor OEMs in the first quarter, sales to semiconductor OEMs decreased 30% sequentially.

However, this was partially offset by a 17% sequential increase in sales to non-semiconductor markets, primarily driven by growth in sales to the solar and thin film markets. Also, in this quarter, sales to semiconductor fabs decreased 8% sequentially.

Second quarter GAAP net income was $9.2 million, or $0.18 per share, compared to $20.4 million, or $0.39 per share, in the first quarter of 2008. Non-GAAP net earnings were $10.5 million, or $0.21 per share, compared to $20.6 million, or $0.39 per share, in the first quarter of 2008.

In the second quarter, sales to non-semiconductor markets were 45% of total sales. Sales to semiconductor OEMs represented 43% of sales and sales to semiconductor fabs were 12%.

Geographically, as a result of decreased sales to semiconductor OEMs, sales in the US decreased 20% to 57% of total sales. Sales to Europe, which include significant non-semiconductor content, increased 12% and represented 17% of total sales. Sales to Asia remained essentially flat and were at 26% of sales.

Sales to our top 10 customers decreased 23% sequentially and were 36% of total sales. Sales to our largest customer, Applied Materials, remained at 20% of total sales, which includes solar and flat panel sales. Sales to contract manufacturers of key semiconductor OEMs decreased 36% sequentially to 4% of total sales.

Second quarter gross margin decreased sequentially to 41.2% from 42.3%. The sequential change primarily reflects the effect of the reduced sales volume, product mix and reduced sales to OEMs.

R&D expense increased sequentially to $20.5 million, primarily due to increased project expenses and planned increases in staffing to primarily support development efforts for next-generation capital equipment.

SG&A expenses of $35.1 million increased slightly sequentially from $34.4 million in the first quarter, excluding a $2.7 million foreign exchange gain in that quarter related to a one-time legal entity consolidation of some of our international subsidiaries.

As a result of our revised forecast for income in low-tax countries, we now estimate that our tax rate for 2008 could be approximately 31% instead of 30% as previously estimated. Defective tax rate of 35% for the second quarter reflects the year-to-date catch-up effect of this revised forecast.

The projected 2008 rate does not include a research and development tax credit. If the credit is reinstated, our tax rate for 2008 would be approximately 29%.

We continue to generate cash from operations, which totaled $15 million for the quarter. Cash and investments decreased by $17 million to $260 million, or $236 million net of debt. The primary use of cash was for stock repurchase.

During the quarter, we continued our stock repurchase program and repurchased approximately 1.6 million shares of common stock for $36.7 million in cash at an average purchase price of $23.18 per share. This contributed to the reduction of diluted shares outstanding in the second quarter to 50.9 million shares. The actual shares outstanding were 49.7 million as of June 30th.

Since our two-year $300 million share buyback program was authorized on February 12, 2007, we have repurchased approximately 9.8 million shares for approximately $203 million at an average price of $20.66 per share through June 30, 2008.

We expect to continue to generate cash and to be opportunistic about our future use of cash. We will continue to evaluate the best use of cash as we consider future buyback options and needs that may arise from our ongoing review of acquisition opportunities.

Our workforce at June 30th was 2,940 people. Days sales outstanding were 58 days in the second quarter, and inventory turns were 2.6 times. Capital expenditures of $2.4 million in the quarter were primarily for test equipment. Depreciation totaled $3.6 million for the quarter.

For the third quarter, considered some continued weakened demand for semiconductor capital equipment, we estimate that sales could range from $155 million to $165 million. We anticipate that gross margin could range from approximately 40% to 41% at these sales volumes.

As we continue our investment in next-generation products, R&D expense could range from $19.9 million to $20.3 million. SG&A expenses are expected to decrease approximately $800,000 and could range from $34 million to $34.6 million. Amortization of acquired and tangible assets is estimated at $2 million. Net interest income for the quarter is estimated at approximately $1.6 million.

Given these assumptions, third quarter GAAP net income could range from $4.6 million to $8.2 million, or $0.09 to $0.16 per share on approximately 51 million shares outstanding. Third quarter non-GAAP net earnings could range from $6.1 million to $9.7 million, or $0.12 to $0.19 per share.

The timing of a turnaround for semiconductor capital equipment is uncertain at this time. We will continue to take initiatives to manage our gross margins and control operating expenses.

As Leo mentioned, we are taking a one-week shutdown in the third 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 also to maintain 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'll now take your questions.

Operator?

Thank you. (OPERATOR INSTRUCTIONS.) One moment, please, for the first question.

Thank you. Brett Hodess, please state your company name followed by your question.

Good morning. Merrill Lynch.

Leo, given that the midpoint of the guidance is down about 7% or so sequentially, do you expect the non-semi businesses to still be up sequentially which implies that maybe your semi businesses, probably the OEM stuff, is down sort of double-digit somewhere in the teens?

Brett, as you know, we probably had, as we came into the year, somewhere close to $240 million, $250 million in non-semi. And we've been talking certainly about solar and flat panel and other thin film being high growth, as well as some of the other areas. There are still pieces of that semi business, a large portion, that also is affected by the general economy.

So, just calculating, we definitely see non-semi up, specifically in the solar/flat panel thin film areas and some other areas, but there are also other pieces of that business that, if the economy slows down, can be impacted.

So, we see a deeper reduction in semi, as we heard at SEMICON, as some of the OEMs reported. Third quarter could be another decrease in orders, which generally means several months later before we see that effect in shipments.

So, should things flatten out or go up slightly in orders in the fourth quarter, then we'd expect that trend to change and start seeing business increase on the shipment side.

But, I think right now we'd expect to see the solar thin film and some of the other non-semi up, but I wouldn't necessarily say all the non-semi will be up and categorize that way since, as you know, we have a large content in analytical. We have some project areas in the physics area.

So, semi will be down, but there could be some segments of the non-semi that could also be down.

Okay.

And just a quick follow-on. So, the gross margin guidance is pretty stable, really, on the revenue drop in the coming quarter. And I'm wondering, that gross margin stability, is that mostly coming from the cost actions, or are you seeing favorable mix? In other words, some of the non-semi businesses that'll still be a bit stronger, like FPD and solar, does that help at all?

Yes. To answer your question on that, Brett, is both cases. We are taking actions to reduce our overhead spending and also we're getting a little bit more favorable mix, which is helping the margin presently.

All right. Thank you.

Thank you. Jay Deahna, please state your company name followed by your question.

The company is JPMorgan. Thank you.

Good morning, Leo. A couple of questions here for you. On your comment that solar could be $125 million to $150 million, you said by late 2010. What does that mean, an annualized run rate at the end of 2010 or for the full year?

And then, the second question is do you get the sense that as you roll through 3Q that the inventory levels of your components in the semi equipment channel will be corrected to what you would consider a cyclically low level?

And then, lastly, I've got a follow-on on solar, and I'll come back with that in a second.

Okay.

Jay, on the solar side of the business, yes, I think we're looking at the potential is that, for the year, it could be up that $125 million, $150 million, not necessarily a run rate by the end of the year, but through that year. So, I think that's certainly an estimate.

On the inventory level side, I think we've talked about, in the upturns, we get the OEMs who are buying for their shipments as well as building their WIP to the right level for the level of shipments. On the downturn, they're consuming inventory.

And I think you're talking about are they done consuming inventory sometime in the third quarter? Theoretically, the way it should work is you should be consuming inventory early in the decreases. So, I think if the OEM schedules don't continue to decrease, then the inventory adjustments should slow down or bottom out shortly after that.

So, it's when the rates continue to decrease as we go through these cycles that they have to make another adjustment, consuming more inventory. So, if we're hearing that Q3 is the bottom of the cycle and if the rates going forward for the OEMs are looking flat to up, then I believe we should be through most of that decrease, assuming they have the right planning systems in place.

And I think I've always mentioned the wild card is usually the subcontractors because they aren't necessarily as sophisticated yet as the OEMs have been, and they do get a lot of drive from their OEM customers as things start turning around. So, it depends how they behave as well.

But, I feel that most of that happens as they adjust their schedules downward. Usually, they consume the material they have first, and then buy. So, the expectation would be if we're through the decreasing schedules, then we're through the inventory adjustments.

So, kind of applying that template to the now, if you're shorter lead time customers, like the Applieds, [Navalises] and [LAMs] of the world, see some sort of a modest uptick in fourth quarter orders, then that scenario, in theory, would probably play out in late 3Q, early 4Q? Is that sort of the (inaudible - multiple speakers)?

I think that's reasonable. I think that's a very reasonable assumption.

Okay.

And the last question I had is if you look at your thin film business, the solar panel market is 90%-something SESI and 7% [KDTL] and amorphous is less than 1% of the market at this point in the ballgame.

But, can you kind of characterize how your sales into thin film progressed in 2Q versus 1Q, and how do you see thin film playing out over the next year or so, in particular amorphous?

Okay.

I'm not sure I can answer it exactly the way you want the answer because I'm not sure exactly what the question is. But, I think if it's related to how in Q2 did that mix of business-- I don't have that mix exactly that way, but I can tell you that I believe that the increase was driven more by amorphous thin film than the other areas.

But, I can say that in most cases over the year, so far, and as we got towards the end of last year, we saw demand up from almost all of those 60 or so plus customers.

So, it isn't driven solely by that, but I would say that the growth-- and as we said earlier, that that amorphous thin film offers us more ability to sell more of our portfolio to those customers in amorphous thin film.

And the PECVD power supply win and the pilot units that we were shipping, happening in Q2, that would have been driving it. And I'd expect that, as we go forward, we're going to get higher growth out of that.

So, I think that's the optimism, that amorphous thin film should grow faster, and we have more content. Therefore, as we see the growth being fueled, we should see a fuel by that. Hopefully, that answers your question.

Yes.

I was just wondering if your market intelligence suggests that amorphous silicon is cost effective and should be a volume runner over time in solar.

I think it's unclear today in terms of what's going to be effective when you look at-- there's probably three or four elements of effectiveness-- the panel, cost to produce, the efficiency of the panel, and then the whole integration and installation.

And so, I'm not ready to call what's the most effective yet, for sure.

Okay, thanks.

Thanks.

Thank you. CJ Muse, please state your company name followed by your question.

Yes, good morning. Lehman Brothers. Thank you for taking my question.

I guess the first one is you talked about your view for 15% CAGR in your non-semi business. And I guess I was hoping you could drill down to calendar '09 and whether you're comfortable with that type of growth rate considering what you discussed in terms of potential macro overhang for the non-FPD, non-solar business, as well as the fact that it looks like CapEx for FPD will be rolling over next year. So, your thoughts there would be greatly appreciated.

Well, a couple of things. I think at SEMICON West, the tone on flat panel was not as positive as it had been prior to the show. I think there were some concerns about what 2009 will look like. So, I think that's a wild card, which probably makes me less comfortable in making a prediction exactly for 2009.

But, I think-- and the point I made earlier about a large part of the non-semi business is also in other, more fragmented markets, whether it be analytical, whether it be in medical, whether it be in pharmaceutical. Some of those have higher growth rates. We're in some automotive areas. Some of them have lower growth rates.

So, I think without really knowing what the total economy is going to do and how it's going to effect those markets-- I think we feel comfortable that you should expect at least a 15% sort of run rate in growth on our non-semi business.

There's nothing right now that has us concerned about 2009 in terms of whether that will be 15% or not. But, I don't think we're ready to say it's exactly 15% and you can hang your hat on it.

Got you, great.

And then, I guess, moving to your semi and OEM business, you talked about some guys talking down 35% CapEx. If that were to be the case, what would you think you would do relative to that number in terms of outperformance/underperformance?

That's a good question.

I think-- well, one of the things that we have a pretty good track record of is usually outperforming, even though the comment I made earlier about the inventory adjustments.

So, you have-- if the business is going down, you get consumptions of their inventory. They're going to consume more of their WIP in raw materials inventory, the need to replace it.

On the other hand, we've got design wins going on at the same time, and we've got this factor of more complex processes, more process steps and new products.

So, I would expect since we've had a multiple year trend of over five, six, seven years of growing faster and shrinking less, that I expect that that would continue next year or this year as well. I think 2006-- I think we grew over 50% in semi, and that's not what the semi equipment spend was.

So, I think-- and if you look at five, six, seven-year track record, we're always growing faster and we're shrinking less. So, I would expect that to continue. Even though that wild card of the inventory adjustment plays in there, I think it's being offset by the integrated subsystems that have higher value, the need for more complex instrumentations, software and other products.

So, I think that balance is more in our favor than decreasing faster.

Got you.

And just the last question to clarify. Ron, did you say the tax rate would now be 31% for the year?

Yes, it would be, as a result of lower income in countries that have reduced tax rates.

Okay.

And then, looking to '09, we should think a similar level unless we get the R&D tax credit reinstated?

Well, I would think maybe more 30% for '09 as we get back to a more normal type of--.

--Mix--.

--Mix--.

--Semiconductor mix.

Yes.

I think as the semiconductor mix comes back, it probably gets more normalized.

Yes.

Okay.

And then, I guess with the R&D credit, if that's reinstated--?

--That's about--.

--That number-- that would be 27%, 28%?

That'd be 28%. It's about 2% for the R&D.

Okay, great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS.) Thank you, ladies and gentlemen. (OPERATOR INSTRUCTIONS.)

Thank you, madam, we seem to have no further questions. Please continue.

Okay. Well, thanks for joining us on the call this morning.

To recap, while MKS is facing semiconductor industry challenges today, we're optimistic about our long-term growth opportunity as we apply our breadth of technology to solve problems in diverse markets.

Thank you for your interest in MKSI, and this concludes our comments.

Thank you. Ladies and gentlemen, this concludes today's MKS Instruments Second Quarter Earning Conference Call. Thank you for participating. You may now disconnect.