萬機儀器 (MKSI) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MKS Instruments third quarter earnings conference call. (OPERATOR INSTRUCTIONS) This conference is being recorded, Wednesday, October 22, 2008.

At this time, I would like to turn the conference over to Ms. Jonna Manes, Director, 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 third quarter 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, all of 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. And now I'll turn the call over to Leo Berlinghieri, Chief Executive Officer and President of MKS.

Thanks, Jonna and good morning everyone. Thank you for joining us on the call this morning. I'll give an overview of the third quarter, our growth strategies and outlook. Ron Weigner, Chief Financial Officer, will review our financial results and guidance and then we'll open the call for your questions. Despite an increasingly difficult environment, we generated third quarter results within our range of guidance. We continue to penetrate the high growth solar market and this progress reduced the impact of lower spending for semiconductor capital equipment in the cyclical downturn. Third quarter sales declined 8% sequentially to $157 million and non-GAAP earnings were $0.18 per share. Our cash position remains strong. We generated $19 million in cash from operations and finished the quarter with $257 million in cash and investments. Demand for semiconductor capital equipment continued to soften in the third quarter as the industry faced challenges that included oversupply in memory devices, lower spending by fabs and lack of foundry investment. Our sales to semiconductor OEMs declined 10% sequentially as the market conditions weakened. In this period of softer demand, we are focusing on solutions for next generation tools that make OEM and fab customers successful and increase our dollar content. Our position at key OEMs remains strong and we are pleased that several new products are performing well during customer valuations.

As you know, technology transitions don't stop during a downturn. Fabs face process challenges because smaller device dimensions require new materials in more layers of material. OEMs are looking for enabling technology to solve these challenges and we are providing this technology. For example, process contamination has a large impact on yield at smaller feature sizes. In 2008, we are seeing growing market acceptance of dissolved ozone for wet cleaning at feature sizes of 45 nanometer and below. Traditional chemical recipes for cleaning leave surface crystals that reduce yield. Dissolved ozone ensures a clean, crystal-free surface that improves yield and it's an alternative that is more environmentally friendly. Our liquid ozone systems deliver accurate, high purity ozone concentrations for efficient, reliable cleaning. Demand for our liquid ozone systems has gained traction every quarter in 2008, including the third quarter. Turning to our fab business in the quarter, foundries have postponed capital equipment spending and a number of other fab projects have bee delayed. We provide some capital equipment directly to fabs and foundries in addition to upgrades, spare parts and service. But the decrease in spending for capital equipment, our third quarter sales to these device manufacturers, declined 15% sequentially.

In other markets, our sales to the solar market grew by 27% quarter-over-quarter. At the same time, sales to thin film and flat panel display markets declined 11%, so we saw our site decline in the overall sales to non-semi markets in the quarter. I am pleased with our success in penetrating the high growth solar market. Solar was our largest single market outside of semiconductors in the third quarter. It represented almost 25% of the non-semiconductor sales. Our solar sales grew to a record high of $17 million in the third quarter. We've already doubled our 2007 solar sales this year and we're on track for $40 to $50 million in solar sales in 2008. We serve a broad base of over 100 solar customers and the list continues to grow as the investment in solar energy gains momentum. Our customers range from pure-play solar companies to semiconductor OEMs and fabs that are diversifying into thin film solar processes and demonstrating process repeatability. Our solar market strategy is like our strategy in semi. We focus on understanding process and customer requirements to see how we can apply or integrate our technologies to enable processes or improve productivity. We target to be the main supplier of process critical technology for customers who have the broadest market reach and growth opportunity in the processes we support. And we sell to all customers in the market from emerging start-ups to established leaders. Our top solar customer in the quarter is one of the world's largest solar cell manufacturers. Earlier this year, this Asian customer awarded us a key design win for our RF power systems to manufacture thin film amorphous silicon solar cells. In the third quarter, we continue to provide these power systems for this customer's first solar fab, which has just started mass production. This customer has announced plans to build a new solar fab by March 2010, to boost its output capacity four-fold and gain market share in thin film solar as demand for renewable energy grows. A large percentage of our solar sales are to OEMs to improve process efficiency on thin film deposition tools. For example, large solar panels are targeted for large scale applications such as solar farms and these large panels are manufactured in large process Chambers. We are seeing more thin film amorphous silicon OEMs adopt our astron atomic fluorine generators to clean large solar panel chambers rapidly and efficiently. We also see an opportunity for this cleaning technology in crystal and silicon solar processes, where process chambers are smaller, but process costs are higher. We believe our atomic fluorine cleaning technology can improve efficiency and reduce costs versus manual cleaning methods used today. We're excited about the expanding opportunities for cleaning with atomic fluorine generators in the solar market, just as we are seeing the dissolved ozone technology in the semiconductor manufacturing.

VLSI research estimates that solar equipment market could grow at 36% from 2008 to 2010 and thin film processes will grow faster than crystal and silicon processes. Solar cell production is shifting to thin film from crystal and silicon to reduce cost per watt and make solar energy competitive. Independent market research confirms that amorphous silicon thin film is the fastest growing solar process with a forecasted 63% growth rate in the same two-year period. Our dollar opportunity is highest in amorphous silicon and three to four times greater than in crystal and silicon, because we can leverage more of our semi technology in this adjacent thin film solar process. If solar continues to grow, as forecasters predict, we currently estimate our solar business could reach $125 to $150 million by the end of 2010. Before we turn to the outlook, I want to talk about cost reduction actions we have taken in the current environment. With declining semiconductor industry demand, we reduced discretionary spending and took a week shutdown as planned. As the environment grew more challenging in the quarter, we took additional actions, including a work force reduction and salary reduction for executive officers and directors. Turning to the outlook, given the current challenging macro environment, we expect continued weak demand for semiconductor capital equipment and lower overall sales to non-semiconductor markets. Therefore, we expect our fourth quarter sales could decline and range from $130 to $140 million, with income above break-even. We will take two weeks of shutdown over the holidays. We are continuing to review our costs and we will do what is prudent to reduce costs in this uncertain environment without risking key opportunities for growth. We remain quite optimistic about our long-term growth opportunity and as our technologies continue to gain acceptance in semiconductor, solar and other markets. Now, I'll turn the call over to Ron to discuss our financial results and expand on our guidance.

Thank you, Leo. And good morning, everyone. Third quarter sales of $157.4 million decreased 8% sequentially, primarily a result of continued weakness in the semiconductor equipment market. Sales to other markets included a 27% sequential increase in sales to our solar customers, but this was offset by lower sales to flat panel, medical and other non-semi markets. Sequentially, sales to OEMs decreased 10%. Sales to semiconductor fabs decreased 15%, and sales to other markets decreased 5%. Third quarter GAAP net income was $6.8 million or $0.14 per share compared to $9.2 million, or $0.18 per share in the second quarter of 2008. Non-GAAP net earnings were $8.9 million or $0.18 per share compared to $10.5 million or $0.21 per share in the second quarter of 2008. In the third quarter, sales to non-semiconductor markets were 47% of total sales. Sales to semiconductor OEMs represented 42% of sales and sales to semiconductor fabs were 11%. Geographically as a result of decreased sales to semiconductor OEMs, sales in the US decreased 13% to 54% of total sales. Sales to Asia increased 7%, reflecting increased sales to our solar customers and represented 30% of total sales. Sales to Europe decreased 14% to 16% of sales. Sales to our top 10 customers decreased 6% sequentially and were 37% of total sales. Sales to Applied Materials, which include solar and flat panel, decreased 15% sequentially and represented 18% of total sales. Sales to contract manufacturers of key semiconductor OEMs decreased 32% sequentially to 3% of sales. As a result of the continued softening and an outlook for slower than expected recovery, we reduced our head count in the third quarter to 2,547 people. Third quarter gross margin decreased sequentially to 40% from 41.2%. During the quarter we sized direct labor head count to reflect the lower sales volume, the sequential change in gross margin primarily reflects the effect of product mix with fixed volume costs being a higher percent of sales. As a result of head count reduction, a one-week shutdown and reductions in discretionary spending, our total operating expenses decreased to $53 million. R&D expenses decreased $1 million sequentially to $19.5 million and SG&A expenses decreased $1.6 million sequentially to $33.5 million.

Also, during the quarter we sold and recognized a gain of approximately 500,000 on securities previously written down. Currently we do not own any other securities that we believe would be subject to an impairment in fair value. Our normalized tax rate for the third quarter was 23%, not including the benefit of recently extended federal R&D credits. The effect of the retroactive credit will be reported in the fourth quarter. The effective tax rate for the third quarter was 31% as a result of discreet items related to statue of limitation, expirations and discreet items related to state tax credits. We continued to generate cash from operations, which totaled $19 million in the quarter, cash and investments decreased by $3 million to $257 million or $238 million net of debt. The primary use of cash was for stock repurchase. During the quarter we purchased approximately 616,000 shares for $13.8 million in cash at an average price of $22.36 per share. Actual shares outstanding were $49.1 million shares as of September 30. Since our two-year $300 million share buyback program was authorized on February 12, 2007, we have repurchased approximately 10.4 million shares for approximately $217 million at an average price of $20.76 per share through September 30, 2008. We expect to continue to generate cash and to be opportunistic about the future use of cash. We will continue to evaluate the best use of cash as we consider the business outlook and other factors. Day sales outstanding were 60 days and we decreased the inventory in this quarter by 10 million and inventory turns increased to 2.7 times. Capital expenditures of $3.8 million in the quarter were primarily for test equipment and lease hold improvements. Depreciation totaled $3.6 million for the quarter.

Major semiconductor OEM customers have estimated that semiconductor capital equipment spending could be down as much as 35% in 2008. Our strategy has been offset the cyclicality of the semiconductor market by participating in high growth non-semi markets and as a result of this, we estimate that our sales could -- will decrease approximately 16% in 2008, assuming the midpoint of our fourth quarter guidance. We estimate that our 2008 sales to other markets could be between $280 and $290 million, which is an increase of about 90% since 2005 and a 13% increase compared to 2007. Looking at the fourth quarter, we believe that the demand outlook will continue to soften and we estimate that sales could range from $130 to $140 million. As Leo mentioned, we are taking two weeks of shutdown in the fourth quarter and we are taking continued actions to reduce or defer non-essential spending. The timing of a turn around for semiconductor capital equipment is uncertain at this time. We are closely monitoring current and expected future revenue trends and will take prudent actions to control costs. We continue to size our direct labor capacity for the expected lower sales volume. We that expect gross margin could range from 38% to 39% at these sales volumes. At current times, we expect operating expense will decrease in the fourth quarter and could range from $50.7 million to $51.7 million. We expect R&D expenses could decrease and range from $18.7 to $19.1 million. SG&A expenses will decrease and could range from $32 million to $32.6 million. Amortization of acquired intangible assets is estimated at $2 million. Net interest income for the quarter is estimated at approximately $1million.

As I mentioned, income tax in the fourth quarter will include the benefit of the extension of the federal research and development tax credit for 2008. We estimate that our normalized tax rate for Q4 will be approximately 23%. GAAP income tax expense for the fourth quarter will include the full year benefit of the R&D credit extension for 2008 of approximately $2.6 million. Therefore, we estimate that our actual tax expense for Q4 could range from a benefit of $3.4 million at the low end of the guidance to a benefit of $1.8 million at the high end of the guidance. We estimate that the credit will reduce our normalized rate for 2008 by 2% to approximately 27%. Given these assumptions, fourth quarter GAAP net income could range from a $0.5 million to $4.5 million, or $0.01 to $0.09 per share based on $50 million shares outstanding. Fourth quarter non-GAAP net earnings could range from approximately break-even to $3.5 million, or $0.00 to $0.07 per share. Now, this concludes our discussion and we'll now take your questions.

Thank you, sir. Ladies and gentlemen, we'll now begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question's from the line of Jay Deahna with JP Morgan. Please go ahead.

Thanks very much. You guys continued to run a tight ship, and nice job on solar. Leo, since the end of the September quarter -- last couple of weeks or so, have you seen a change in tone at all, stabilization in the forecast or continued weakness in the forecast from semi? And I was kind of shocked at the percentage decline in your contract manufacturing business to semi OEMs. So, that was down 30-something percent in the quarter. Do you think you're getting to the point now where you're sort of looking at kind of a maintenance level of equipment demand so that the shipments to the semi OEMs can sort of stabilize in 1Q versus 4Q, or is it still a slippery slope and too hard to tell?

Jay, thanks for the comments. It -- I think it's too hard to tell so far. You know, it's changed so far each quarter and I don't think anything is stabilized enough that we can get some kind of indication of what's going to happen beyond this quarter yet. I think that the, the contract manufacturers, one of the things that we commented on a few of the calls is that when there have been questions around inventory and things like that, I've always mentioned that the contract manufacturer is usually a wild card. As you know, as the equipment companies change their bill schedules, they need to consume inventory. If we're dealing directly with them, we that adjustment. If we're dealing through a contract manufacturer they have their adjustment of inventory so, they have always been the wild card we've talked about. I suspect -- I don't have any, you know, specific numbers, but I suspect some of that is them adjusting their inventories. As you know, they work on fairly thin margins and inventory can be a great cost to them. So, that's my suspicion of what probably happened there. I don't think there's anything that's different in the dynamics of the business relative to the actual demand in the equipment. I think as far as, so far, you know, obviously we've adjusted the guidance based on what we've seen is the trend, so I think the guidance sort of reflects the answer to the question of how -- are things stabilizing or not. We've got a lower guidance than the previous quarter, which to us says it didn't stabilize from Q3.

Okay, and then a follow-up is can you expect to continue to see double-digit percentage sequential growth in solar for the next several quarters? And in particular, as amorphous for silicon starts to transition in tandem junction where there's 4-CBD clusters per fab instead instead of one?

I think there, where we have -- we've talk about the content being so much higher. A lot of it depends on each customer and the timing of their project spend. I think, you know, if I think about it over sort of the long run, and I don't look at exactly a quarter beginning and end, my answer would be, yeah, we expect to see continued growth over the quarters, but when you're dealing with -- when you get to that larger quantity within a customer, the timing of one month could make a difference, whether it's one quarter or the next in terms of when they need their product. And I think that certainly there are new lines of production in amorphous silicon. So, how well they can get those lines up and running, how long they can get that equipment in and utilize it I think will play a role in some of that timing. So, I think in general we expect that the solar will continue to grow, but, you know, from quarter to quarter, some of that timing may affect it here or there.

Okay, and then the last one, that big thin film customer you mentioned in Asia, what type of thin film was that?

That was amorphous thin film.

Thank you.

Thank you. Our next question comes from the line of Brett Hodess with Merrill Lynch. Please go ahead.

Good morning. Leo, you know, as Jay mentioned, you did have a very good cost control in the quarter and so I'm wondering, you know, as you look into the downturn here, given the gross margin guidance in the quarter, how much more room do you think you have if revenues stay down and this low level or maybe even a little bit lower to take costs down and, you know, where do you think break-even is now? If you can give us some color on that.

Well, you know, Brett, as given here in the guidance, we're saying our break-even at present is about $130 million. And certainly we have a list of action items that we could take to further reduce our cost structure. It probably wouldn't be -- some of those are -- could have a fairly good impact, but it wouldn't be appropriate to discuss those actions on this call until we actually take any actions to further reduce costs.

But you could, talked it lower --

We could take it lower than the $130 and right now our cash break-even is about $120.

Okay, and then second question, when you look at your sales, you know, directly to the semi OEMs, Leo, you commented that you usually see some inventory correction and (inaudible) you know, as things slow down. We've been in a weak environment for quite a while. Is your sense that there's still inventory reduction going on at your direct customer -- your direct OEM customers, or are you just seeing the actual demand, you know, pull at this point?

Well, I thought that was the case last quarter. And I think a lot of it depends on stabilization of their schedule. So, what we were -- if you remember what everybody was talking about last quarter was sort of a bottoming of orders and a stabilization of output or sales in the fourth quarter and then maybe some growth in the first quarter, it seems like a long time ago, but as -- if their schedules decrease, which, you know, I think there's some question mark of whether their schedules decrease in the fourth quarter and when they recover, each time they decrease, there's an opportunity to consume inventory and make that adjustment before things stabilize where we get that little bump up. So, you know, I -- we probably have more to go is my guess before that trickles back up again.

Okay, great. Thank you.

You're welcome. Thanks.

Thank you. Our next question comes from the line of Jim Covello with Goldman Sachs. Please go ahead.

Hello, this is Kate [Kablarski] for Jim Covello. I have a couple of questions. First question is on the Q4 revenue guidance. I just wanted to get a sense of how you think about it in terms of your semi business versus the non-semi businesses.

In what way? In terms of, we -- one of the comments is that we'd expect -- obviously we expect semi to decrease fairly significantly and we mentioned that -- Ron had mentioned on the call that he thought also non-semi would go down as well. And I think part of that is we obviously have some growth non-semis -- some high growth non-semi areas, but we also have 200 to -- 280 to 290 million per year of non-semi. There's a large portion of that that could be affected by the macroeconomic conditions. And so, with this environment that we've been in -- and I think our belief is that some of those projects will be delayed and there will be reduction there. So, overall, we expect both semi and non-semi down, but obviously semi, we would expect to be down more.

And then the solar business, should that -- I mean, that should continue to grow next quarter?

We would expect it to continue to grow, but the comment I made on the previous question was that as you get into some of these larger orders, which give you the ability to grow two and three times year-over-year, the timing of those orders can change by a month or two and affect whether it's in one quarter or the next.

Okay. That makes sense. And just as you think about your solar revenues over the next couple of quarters, are those primarily coming from your existing customers, and are those -- do you have pretty good visibility in terms of, you know, their buildout plans, et cetera, or are you anticipating some new customers there as well?

Well, probably we have -- I'm just going to guess that we have one of the most diverse and extensive customer bases in solar. We have over 100 customers in solar, so there probably aren't many that we don't know about and aren't selling to. We're constantly trying to gain content on those solar tools, with design wins, getting our next generation tool. And because we provide so many different products in the market, it's hard to just say, you know, we look at their bill plan and we know exactly what's going to happen. There are a lot of customers that are solar and semi customers or solar and some other technology customers, and they don't place their orders or forecast based on that. They place it somewhat by part number or some estimates. So, you know, we can't see it that way, but we're fairly confident. Unless something really happens to the overall solar market, we're well positioned and really we're in the mode of how do you get more share and how do you make sure that you get designed into those most significant customers. That's where we put a lot of our relationship and development efforts to when we do have to do any kind of modification. That's really the focus -- is really to make sure we're on every tool of every solar customer.

Okay, and then curious, have you seen sort of the credit environment impact any of your customers' ability to order and that sort of playing a role in some of the declines we're seeing in the orders?

No, that hasn't been an issue for us as far as credit of any of our major customers, although we certainly are mindful that it could be an issue and we're keeping an eye out on that. And as far as our suppliers, it's the same thing. You know, one of the things that we've done to mitigate any issues with a lot of our suppliers is that we -- our objective has been not to be more than 30% of their business, so I don't think there's substantial risk there either for us.

Yes, I would also say that if you look at the fact that the primary decline in semi have been major OEMs, those major OEMs have quite healthy balance sheets for cash. So, I wouldn't anticipate even going forward, at least with those major customers that credit crunch or tightening would have any impact. It may affect smaller customers probably, but I don't see it affecting the majority of the customer base.

Okay, and just a quick housekeeping question on the tax rate. What should we be thinking about for 2009?

I would use the -- as I mentioned, the same as I mentioned, our 27%, which was our rate for 2008.

Okay. Thank you.

Thanks.

Thank you. Our next question comes from the line of C.J. Muse with Barclays. Please go ahead.

Yes, good morning. Thank you for taking my question. I guess first off, on the solar front, great sequential number, but I seem to recall you guys talking about at least $50 million plus and now you're guiding kind of $40, $50 million for the year. So, I'm wondering, have you seen, you know, small push-outs here that are moving out into the first half of '09 causing that reduction?

Yes, no, C.J., we have been -- I thought we've been pretty consistent with that $40 to $50 million number relative to revenue in 2008.

Okay.

So, I'm not quite sure why you'd have a different impression, but that's sort of been the number we put out at the beginning of the year and have kind of stuck with it.

Sounds good. I guess moving--

And (inaudible) second question is we haven't seen any pushouts or anything like that.

Okay. I guess looking into 2009 and the current state of affairs for the FPD market, when you add up your solar and your FPD, and I've got that running at about 100 million for counter '08, do you think that can grow in combination in 2009 and if so, what kind of magnitude do you see?

Can you repeat the question again? I just want to make sure I understand it correctly before I answer it.

I guess what I'm trying to get at, is with display likely weakening next year, but solar growing, can the two combined grow year-over-year in calendar '09?

Yes, I think they can. We talked about our flat panel business being somewhere in the couple to 3% or 4% range depending on what quarter. So, I mean first of all, the second half of the year, front panel, you know, flat panel has been pretty much non-existent. So, you're not talking about a great 2008 versus 2009 in FPD, but you're talking about a great solar year in 2008. And so, I think you'd still expect a combination of those to grow.

Okay, and then I guess just to follow that, what about for total non-semi, considering the current macro backdrop impacting the non-solar businesses. Do you think that can grow in calendar '09?

If I knew that answer, I would be in the market at the right place.

It can't hurt asking.

No.

And I guess the last question for me is when you think about now the changing mix in your business, and I don't know if you want to think about the next two quarters or looking out to all of calendar '09, but how should we think about the impact there on your gross margins?

Well, I think what we've commented in the past is obviously the semi -- the big semi OEMs probably have the best pricing because just by sheer volume of what they buy. And there's probably lower gross margins on the OEMs, especially in semi. But also your operating costs are lower there. Your sales costs and those type of things, you're getting the a lot more revenue out of the resources required. So, I think, you know you -- maybe you trade off a little bit of gross margin, but you might end up with a little higher operating expenses. So, I think at the end of the day, if you look at it from an operating profit standpoint, I don't think you would see a significant shift in that end of it.

Got you. I lied. Sorry, let me just squeeze in one last question. In terms of the weakness in the semi business that you enjoyed in September and you're guiding to in December, is that primarily foundry-related in terms of their cutbacks in utilization, or is that across the board with all customers?

I think it's more in general and, again, our products are very difficult to pinpoint relative to a semi market segment or fab segment because, again, we're selling the same part to -- whether it's -- we don't know whether that part's going to go to a memory or whether it's going to go to a foundry or whether it's going to go to a logic device. But I think in general it's just been a reduction in spending and, you know, fewer customers investing.

Thank you.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS) And there are no further questions at this time. I would like to turn it back to management for any closing remarks.

Thank you. Thanks for joining us on the call this morning. Thank you for your interest and we look forward to seeing you at one of the several upcoming investor conferences. This concludes our comments.

Thank you, sir. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation and for using ACT teleconferencing. You may now disconnect.